UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number: 0-28668
_______________________________________________________________
TELCO COMMUNICATIONS GROUP, INC.
Exact name of registrant as specified in its charter)
______________________________________________________________
Virginia 54-1674283
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4219 Lafayette Center Drive, Chantilly, Virginia 20151-1209
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 631-5600
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the Registrant (1) had filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ___
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 18, 1997 was approximately $166,839,689 (based upon
the closing price of the Registrant's Common Stock on the Nasdaq National Market
on such date.) The number of shares outstanding of the Registrant's Common
Stock, as of the close of business on March 18, 1997 was 33,062,662 shares.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Shareholders for the
fiscal year ended December 31, 1996 are incorporated by reference into Parts II
and IV hereof, as specifically set forth in Parts II and IV.
(2) Portions of the Registrant's definitive Proxy Statement filed in
connection with its Annual Meeting of Shareholders to be held May 15, 1997, are
incorporated by reference in Part III, as specifically set forth in Part III.
Exhibit Index on Page 30
<PAGE>
TELCO COMMUNICATIONS GROUP, INC.
Form 10-K
For the fiscal year ended December 31, 1996
Table of Contents
Part I Page
Item 1. Business 4
Item 2. Properties 21
Item 3. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 23
Executive Officers of the Registrant 24
Part II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 26
Item 6. Selected Financial Data 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 28
Part III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners
and Management 28
Item 13. Certain Relationships and Related Transactions 28
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 29
Index to Exhibits 30
Signatures 35
<PAGE>
PART I
Item 1. Business
Telco Communications Group, Inc., a Virginia corporation formed in 1993,
and its wholly owned subsidiaries (collectively "Telco" or "the Company") 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 "dial around" or "casual calling" because customers can use the
Company's services at any time without changing their existing long distance
carrier. The Company markets its residential long distance services through
marketing subsidiaries under two brands, each with a unique CIC Code: Dial &
Save (CIC Code 10457) and the Long Distance Wholesale Club ("LDWC") (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
December 1996, the Company provided long distance services to approximately 2.6
million customers (switched access lines) in 48 states and the District of
Columbia. All dial around operations are conducted through marketing
subsidiaries that are referred to collectively as the Consumer Division.
Although dial around has been in existence since the mid-1980s, only
recently have companies such as Telco aggressively pursued 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 dial around 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.
The Company bills its dial around 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 dial around customers. The
Company has agreements with LECs, including all of the Regional Bell Operating
Companies ("RBOCs"), that cover substantially all 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, Inc. ("Tel Labs"), a wholly owned
telecommunications billing company started in 1991 by Telco's Chairman of the
Board.
Since the Company's existing customer base is primarily residential, the
majority of calls are handled during off-peak evening and weekend periods. In
order to increase its volume of call traffic, Telco has begun to sell its
daytime capacity on a wholesale basis to other long distance carriers and in
addition has created a Commercial Sales Division ("CSD") to target business and
carrier customers. As of December 31, 1996, CSD had opened 22 sales offices and
employed approximately 220 sales personnel. For the fourth quarter of 1996,
CSD's revenues were $9.3 million, or approximately 7.8% of the Company's
consolidated revenues.
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; Austin, Texas and Las Vegas, Nevada.
Additionally, the Company is installing a DEX 600E switch in the New York City
metropolitan area which is expected to be made operational during the first half
of 1997 and has taken receipt of an eighth switch to be installed later in 1997
in a yet undetermined location.
In August 1996, a total of 6,325,000 shares of the Company's common stock
("Common Shares") were sold in an initial public offering ("IPO") at $14 per
share. Existing stockholders sold 1,644,000 Common Shares, and 4,681,000 Common
Shares were sold by the Company which resulted in net proceeds to the Company of
approximately $60.0 million, after deducting the expenses of the offering.
Concurrent with the IPO, the Company acquired Tel Labs in exchange for 593,334
Common Shares. 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 and
General Counsel and two employees of Tel Labs.
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 Common Shares. In connection with the
transaction, options issued pursuant to the LDWC stock option plan were
converted into options to purchase 291,842 Common Shares under the Company's
Amended and Restated 1994 Stock Option Plan.
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 recent
report issued by the Federal Communications Commission (the "FCC"), together
accounted for approximately 81% of the $72 billion in aggregate revenues
generated by all U.S. long distance carriers in 1995. Other long distance
carriers, some with national transmission and marketing capabilities, accounted
for the remainder of the market. The three largest long distance providers 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 ("BOCs") and divided the country into 201 local
access and transport areas ("LATA") (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 long distance service, or service
between LATAs ("interLATA"). 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 prices to that provided to AT&T and with the
opportunity to be selected by customers as a preferred long distance service
provider ("equal access").
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 commenced a preceeding to
reform the rules governing interstate access charges which is designed to foster
a more efficient pricing of access, competition for access services, and to
reflect the development of local services prompted by the 1996
Telecommunications Act.
Thus, judicial, legislative and regulatory 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 customers 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. 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 CIC Codes, in April 1994 the FCC
initiated a proceeding on the issue and concluded that the expansion of CIC
Codes is important because it increases access to the public switched telephone
network by both end users and carriers. The FCC tentatively proposed to expand
codes from 10XXX to a 101XXXX format, with a transition period of six years,
during which both formats could be utilized. Under the FCC's proposal, after
expiration of the transition period only the 101XXXX codes will be utilized. The
FCC has not yet acted upon its proposal to finally determine 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 were required to be filed with the FCC by May
21, 1996. It is not known when the FCC will take final action in this
proceeding. However, all of the 10XXX CIC Codes have been allocated. Since
March 31, 1995, Bell Communications Research, Inc., the administrator of the
North American Numbering Plan, has been issuing 101XXXX codes.
The 1996 Telecommunications Act removed the restrictions concerning the
provision of long distance service by the RBOCs and GTE Operating Companies
("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.
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 public service commissions.
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 Consumer Division's Dial Around 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, the development of dial around advertising targeting existing and former
customers, specific affinity groups and the creation of new dial around products
and services. 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 1997 the Company intends
to continue its re-marketing efforts in the contiguous 48 states and the
District of Columbia, including the ten western states in which the Company
began marketing in late 1996 and January 1997.
Expand CSD to enhance the growth prospects of the Company and to optimize
the use of the network. CSD's sales strategy is to build its sales force,
including direct and independent sales representatives and telesales marketing
agents targeting commercial and carrier 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. The Company completed its national network
in the third quarter of 1996 with the deployment of its Las Vegas, NV switch.
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 both overall traffic
volume and business-driven daytime traffic in order to balance the existing
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 dial around
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. During December 1996,
Tel Labs, the Company's wholly owned billing subsidiary, processed approximately
94 million call records. The Company believes that accurate and sophisticated
information systems are key to growth and success in the telecommunications
industry. Tel Labs provides the support that will enable the Company to grow its
existing customer base and to provide new products and services to its
residential and commercial customers, including the provision of direct bills to
commercial customers. Such products and services may also include the resale of
local exchange services, internet services, voice mail, FAX broadcast, paging,
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 Consumer Division's marketing of dial around
services. The Company intends to expand its customer base by adding business
customers through CSD. A discussion of the Company's service offerings and
residential and commercial marketing follows.
Consumer Division. The Company markets its residential dial around services
through marketing subsidiaries under the Dial & Save and Long Distance Wholesale
Club brand names. The two brands are differentiated by rate structure and
marketing approach, and the Company believes that its dual brand strategy
heightens market penetration by broadening customer exposure to dial around and
appealing to different segments of the population. 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 typically offers its customers savings off of the basic
direct dialed "1 plus" rates charged by AT&T, MCI and Sprint. Recently, the
Consumer Division also introduced a flat rate per minute product with a monthly
fee. Approximately 99% of the Company's total customers were residential
customers at December 31, 1996. Customers who prefer to access the 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 customers regular
monthly local telephone bill.
The Company markets its residential services primarily through direct mail
pieces that seek to educate potential customers regarding dial around 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 Company mail
solicitation. 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 rate and grow overall market penetration. In addition, the
Company also utilizes other media to supplement direct mail.
The Company typically has 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.
<PAGE>
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 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.
Commercial Sales Division. In order to provide an additional distribution
channel for the Company's telecommunications products and services, the Company
implemented a plan during 1996 to build a direct commercial sales force. In
April 1996, the Company hired Stephen G. Canton as the President of its newly
formed CSD as part of the Company's plan to sell voice, data and enhanced
telecommunications services to business customers. By December 1996, the Company
had opened 22 regional sales offices and employed approximately 220 sales
personnel in 13 states to market these services. Sales personnel will market the
Company's services through personal contacts which emphasize customer service,
term plans, network quality, value-added services, reporting, rating and
promotional discounts. The expenses associated with the growth of CSD are
expected to reduce net income at least through 1997.
Current products offered by the Commercial Sales Division include long
distance, calling card, 800/888 services, call accounting and enhanced billing
services and dedicated T-1. 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 service
type, call type, originating number, account code, area code, country code,
time-of-day and most frequently called numbers.
The Company also markets basic long distance services on a presubscribed
basis to small business customers through telemarketing campaigns. As of
December 31, 1996, CSD employed approximately 37 people in its telesales group.
CSD also sells transmission capacity and services to other long distance
carriers. The Company believes that the combination of the Company's nationwide
network and Tel Labs' data processing resources provides an avenue of 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, the 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.
The Company is positioning itself to resell local exchange services and,
accordingly, has filed or intends to file applications in all 50 states seeking
authorization to resell local exchange telecommunications products and services.
As of March 18, 1997, local exchange resale authorization has been obtained from
21 states.
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 December 1996, the Company's customer telesales and service
department personally responded to approximately 230,000 customer inquiries and
service calls.
As of December 31, 1996 the Company employed approximately 245 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 two 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 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 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-tasked 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 PM proprietary 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 key to growth and success in the telecommunications industry. The Company
has dedicated substantial resources to its information systems and believes that
the strong growth of its dial around business is largely attributable to the
existence of the 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 December 1996, Tel Labs processed
approximately 94 million call records for 20 telecommunications companies,
including the Company. 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 substantially all 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.
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 a nationwide 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 48 states and the District
of Columbia. 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 CIC 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
remotely monitor the Company's entire network 24 hours a day, 7 days a week,
from its two Network Control Centers located in Chantilly, Virginia and Austin,
Texas. 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.
Switching Facilities. The Company currently operates six DSC DEX 600S, 600
and 600E digital telecommunications switches in Fort Lauderdale, Florida;
Davenport, Iowa; Chattanooga, Tennessee; Austin, Texas; Washington, D.C. and Las
Vegas, Nevada. Additionally, the Company is installing a DEX 600E switch in
metropolitan New York City which is expected to be operational in 1997 and has
acquired an eighth switch for a yet-to-be-determined location. 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 42,420 equipped ports.
The Company's DEX 600 switches can be expanded to a configuration with 30,720
equipped ports while the Company's four DEX 600E switches can be expanded to a
configuration with 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 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 five of the Company's switches.
Additional DACS systems are expected to be installed on the remaining
operational switches by the end of 1997. 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 dial around 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 dial around 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.
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 Public
Service Commissions ("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 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, and at last search RBOCs
have announced their intention to request permission from the FCC to enter the
long distance market in one or more of their state markets. The legislation
provides for certain safeguards to protect against anti-competitive 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 arms length and 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 anti-competitive
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 nations' 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 still in the process of conducting a
large number of proceedings 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 granted by state utility
commissions.
FCC Interconnection Orders. As required by the 1996 Telecommunications Act,
in August 1996, the FCC adopted new rules implementing certain provisions of the
1996 Telecommunications Act (the "Interconnection Orders"). These rules are
designed to implement the pro-competitive, deregulatory national policy
framework of the new statute by removing or minimizing the regulatory, economic,
and operational impediments to competition for facilities-based and resold local
services, including switched local exchange service. Although setting minimum,
uniform, national rules, the Interconnection Orders also rely heavily on states
to apply these rules and to exercise their own discretion in implementing a
pro-competitive regime in their local telephone markets.
The Interconnection Orders are primarily important to the Company at this
time insofar as they establish the basis for the cost to the Company of
providing resold local services. Consistent with the 1996 Telecommunications
Act, the Interconnection Orders require incumbent LECs to offer their
telecommunications services at retail prices minus avoided costs. The
Interconnection Orders also requires, among other things, that intraLATA
presubscription (pursuant to which LECs must allow customers to choose different
carriers for intraLATA toll service without having to dial extra digits) be
implemented no later than February 1999.
Petitions seeking reconsideration of one or more aspects of the
Interconnection Orders have been filed with the FCC and are pending. Also,
Interconnection Orders have been appealed to various U.S. Court of Appeals.
These appeals have been consolidated into proceedings currently pending before
the U.S. Eighth Circuit Court of appeals. Certain of the rules adopted in the
Interconnection Orders, including rules that concern the pricing of local
services such as resold local service, have been stayed by the Court pending
resolution of the appeal. Although a number of state regulatory Commissions have
voluntarily adopted pricing rules similar to those mandated in the
Interconnection Orders, there can be no assurance of how the Interconnection
Orders will be implemented or enforced, or what effect they will have on
competition within the telecommunications industry, generally, or on the
competitive position of the Company, specifically. Nonetheless, the Company
believes the trend toward increased competition and deregulation of the
telecommunications industry will be accelerated by the 1996 Tele-communications
Act and subsequent developments.
Federal. The FCC has classified the Company as a non-dominant
inter-exchange 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.
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 is, however, still classified as a dominant carrier for
international services.
Currently, the Company maintains two types of tariffs on file with the FCC
containing the rates, terms and conditions of its services. One governs
interstate service and the other governs international service. (As is required,
the Company obtained authority from the FCC prior to providing international
services.) Changes to either tariff can be made on one-day notice, without need
for cost support. The 1996 Telecommunications Act, however, grants the FCC the
authority to "forbear" from regulating any provider or service if the agency
determines that it is in the public interest to do so. In an exercise of its
"forbearance authority," the FCC has recently issued an order changing this and,
following a transition period which is currently scheduled to conclude in
November 1997, nondominant carriers will no longer be able to file tariffs with
the FCC concerning their interstate long distance services. (International
services will continue to be tariffed.) In lieu of tariffs, nondominant carriers
such as the Company will be required to maintain at their offices, and to
provide to customers or regulators upon request, information concerning their
long distance services.
The FCC order eliminating tariffs has been appealed to the U.S. Court of
Appeals for the District of Columbia. That appeal is pending. The court has
stayed the FCC's order pending the resolution of the appeal. The appellants
argue that tariffing establishes a legally binding relationship between carriers
and customers, and that detariffing eliminates certainty with regard to those
relationships. They also argue that detariffing imposes costs upon carriers
because carriers will need to enter into alternative forms of legally binding
relationships with customers. There can be no assurance of whether the appeal
will be successful or, if successful, what effect it may have on the Company.
However, if mandatory detariffing ultimately takes effect, the Company, like
other long distance companies, would likely incur some additional costs in
establishing legally binding relationships with customers.
The 1996 Telecommunications Act mandated several other important federal
regulatory developments. The first concerns universal service. As required by
the 1996 Telecommunications, a joint board of federal and state regulators were
convened to consider possible changes to the FCC's existing universal service
support mechanisms - mechanisms designed to ensure affordable telephone service
is available to all customers, including low-income consumers - in light of the
pro-competitive paradigm for local competition established by the 1996
Telecommunications Act. In November 1996, the FCC initiated a proceeding to
examine universal service issues, and has received comment on the proposals set
forth by the joint board. Any decision is expected to comply with the policy
principles for preservation and advancement of universal telephone service set
forth in the Act: quality service, affordable rates, access to advanced
services, access to service in rural and high-cost areas, specific and
predictable support mechanisms, equitable and non-discriminatory contribution to
support mechanisms, and access to advanced telecommunications for schools,
health care providers, and libraries. An initial decision is expected in May
1997. It is uncertain how any decision might affect the Company.
Another issue that may affect the Company is access charge reform. Access
charges are charges imposed by LECs on long distance providers for access to the
local exchange network, and are designed to compensate the LEC for its
investment in the local network. In addition to economic considerations, when
adopted in 1984, at the time AT&T was required to divest the BOCs, access
charges rates reflected public policy considerations related to universal
service and the desirability of low local rates. Interstate access charges are
regulated by the FCC and intrastate access charges are regulated by the state
public service commissions. As required by the 1996 Telecommunications Act, in
December 1996, the FCC issued an order which, among other things, requested
comment on a number of access charge reform issues designed to foster efficient
pricing of access, competition for access services, and to reflect the
development for local services prompted by the 1996 Telecommunications Act. The
FCC has also sought comment on whether Internet service providers and other
information service providers should be subject to access charges. An initial
decision is expected in May 1997. It is uncertain how any decision might affect
the Company.
An additional issue that may affect the Company relates to the manner in
which carriers will be required to compensate payphone owners when a payphone is
used to originate a long distance call. The 1996 Telecommunications Act requires
carriers to compensate payphone owners on a per call basis. In Orders issued in
September and October of 1996, the FCC imposed a compensation scheme that called
for certain carriers, including the Company, to compensate payphone owners a
flat amount per month for one year before transitioning to a per call
compensation system. This flat rate compensation scheme would effectively
require the Company to pay for services it does not receive. The Company and
other carriers such as AT&T, have appealed these decisions to the U.S. Court of
Appeal for the District of Columbia. The appeal is pending. There can be no
assurance of whether the appeal will be successful or, if successful, what
effect it may have on the Company.
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 as dominant carriers. 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. As a result of the Act, incumbent local exchange
carriers have recently been afforded a degree of pricing flexibility in setting
interstate access charges where adequate competition is perceived to exist. In
January 1997, the FCC issued an order streamlining the process by which
incumbent LECs file tariffs for switched and special access services. The new
streamlined rules allow LECs to change tariffs on no more than 15-days notice.
The shortened notice periods adopted by the FCC may prompt LECs to file tariffs
containing discriminatory and anti-competitive rates. It is unclear whether the
order will be subject to reconsideration or appeal and, if not, what effect it
may have on the Company.
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 and anticipated local
exchange 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 local and long distance 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 has received the necessary FCC authorization and state
certificate and tariff approvals to provide interstate and intrastate long
distance service in 48 states and the District of Columbia. In addition, the
Company has received the necessary authorization to provide local exchange
telecommunications service in 21 states as of March 18, 1997. Applications are
pending for multiple subsidiaries for additional state certifications. Although
the Company intends and expects to 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 to market 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 used to market the 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 the 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 filed an opposition to the others application, they commenced
discussions to resolve the matter. In December 1996, however, the Company was
named as a defendant in litigation brought by An Apple A Day, Inc. d/b/a Dial
and Save ("Apple"), a company involved in telephone order sales of electronic
equipment. The suit claims that the new logo design accompanied by the words
"Dial & Save" is confusingly similar to a trademark held by Apple so as to
constitute trademark infringement and violations of related laws. The Company
believes it has strong defenses to Apple's claims including that the marks and
markets at issue are dissimilar. See "Item 3 - Legal Proceedings." 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 commercial product line. The
Company filed registration applications to obtain trademarks for the phrase
"Prime Business" and for its logo in 1995. The registration was granted in
September 1996.
EMPLOYEES
As of December 31, 1996, the Company has approximately 603 full-time
employees, 8 part-time employees, and approximately 185 workers who are employed
through various temporary agencies. The temporary agency workers are CSRs 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.
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements which express the
current beliefs and expectations of Telco's management, but are subject to a
number of known and unknown risks that could cause actual results to differ
materially from those projected or implied in the forward-looking statements in
this press release. Among the risks, factors and uncertainties that could cause
actual results to differ materially from those referred to above are: the
Company's ability to maintain its current pace in attracting and retaining
customers, the development of price competition in the long distance industry,
an increase in rates for access and transmission facilities, the costs
associated with the continued expansion of the Company's Commercial Sales
Division and the ability of the Company to integrate the pending acquisition of
the Advantis assets and to generate the anticipated earnings and cash flow.
Item 2. Properties
The Company currently leases approximately 36,327 square feet of space for
its corporate headquarters at 4219 Lafayette Center Drive, 4215 Lafayette Center
Drive and 4200 Pleasant Valley Road in Chantilly, Virginia, pursuant to various
agreements. See "Certain Transactions- Leases of Real Property from Affiliate of
Shareholder." The average monthly rent (not including electricity) as of March
1997 is approximately $28,906. 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 also houses the Company's Washington,
D.C. Commercial Sales Division. The monthly rental for this space as of December
1996 is approximately $25,651. 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 27,432 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 Sales Division
is currently utilizing temporary office space in twenty-one of its twenty-two
existing locations. The Company expects to secure longer term office space in
1997.
<PAGE>
Item 3. Legal Proceedings
In December 1996, Telco Communications Group, Inc. and Long Distance
Wholesale Club (LDWC) became involved in a civil action, AT&T Corp. v. Telco
Communications Group, Inc. and Long Distance Wholesale Club, pending in the
United States District Court for the District of New Jersey. In this litigation,
AT&T claims that Long Distance Wholesale Club advertisements that consumers can
save up to 50% off AT&T's basic rates are false and misleading under federal and
state law. AT&T seeks treble damages, statutory attorneys' fees and costs, and
an injunction. The Company denies the allegations in this litigation and is
vigorously defending against them, including that all disclosures are clearly
contained in LDWC's advertisements and that it is possible for consumers in any
geographic location of the United States to place calls that will achieve up to
a 50% savings. Toward that end, the Company is preparing to stipulate the
transfer of its own false advertising and tortious interference claims against
AT&T, presently pending in the United States District Court for the Eastern
District of Virginia, to the District of New Jersey for consolidation with
AT&T's action. The Company also plans to file additional counterclaims against
AT&T based on AT&T's advertising which the Company believes contains a variety
of misleading and deceptive statements. The Company could be found liable for
damages and an injunction might issue against future use of the LDWC
advertisements, although such advertisements are no longer in use.
On December 31, 1996, Apple filed suit against the Company in the United
States District Court for the Eastern District of Maryland alleging trademark
and tradename infringement, unfair competition, false designation of origin,
federal trademark dilution, trade dress dilution and violations of Missouri
common law. According to the complaint, Apple holds a Dial and Save service mark
for telephone order services in the field of electronic equipment. Apple alleges
that the Company's use of a Dial & Save logo and tradename in connection with
its sale to consumers of long distance service infringes Apple's mark. Apple
seeks an injunction against the Company's further use of the Dial & Save logo
and name, disgorgement of all profits made from use of the Dial & Save logo and
name, damages for loss of sales, loss of good will and damage to reputation,
trebling of damages and payment of attorneys fees and costs. The Company denies
the allegations and is vigorously defending against them, including on the
grounds, among others, that there is no competitive proximity of the electronic
equipment that Apple sells and the long distance service that the Company offers
and no likelihood of, or actual, confusion regarding the seller, and therefore
the source, of each. If the Company is found to have infringed Apple's mark,
and/or to have liability for Apple's other claims, then it may be found liable
to Apple in whole, or in part, for damages of the nature sought by Apple.
On May 8, 1995, the Company, and its subsidiary, Dial & Save of Nevada,
Inc., filed suit against Central Telephone Company-Nevada, d/b/a Sprint/Central
Telephone Company-Nevada, a division of the Central Telephone Company, Sprint,
Inc., et al, in the District Court of Clark County, Nevada. The suit includes
claims for breach of contract, promissory and equitable estoppel, unfair trade
practices, and breach of the duty of good faith and fair dealing, all in
violation of the laws of Nevada. The Company and its subsidiary seek an order
for temporary injunctive relief preventing the defendant from denying possession
of certain commercial real property in Las Vegas to the Company and its
subsidiary and compelling the defendant to execute and honor a commercial real
property lease with the Company, as well as compensatory and punitive damages,
attorneys fees and costs.
In related litigation, on May 5, 1995, Central Telephone Company-Nevada,
d/b/a Sprint/Central Telephone Company-Nevada, a division of the Central
Telephone Company, filed suit against the Company in the United States District
Court for the District of Nevada. The suit includes claims for negligent and/or
malicious omission or concealment of material facts, conversion of personal
property and trespass to chattel in violation of the common laws of Nevada, in
connection with certain commercial real property and telecommunications
facilities owned by the plaintiff in Las Vegas, Nevada. The plaintiff seeks
damages and a declaratory judgment specifying the respective rights of the
plaintiff and the Company regarding occupancy of the commercial real property
and use of the telecommunications facilities in Las Vegas, and requiring the
Company to present any complaint against the plaintiff to the FCC prior to
bringing any court action. The Company denies the allegations, intends to defend
vigorously against them and has filed the suit described above the against the
plaintiff.
On March 14, 1997, Frontier Corporation and Frontier Communication
Services, Inc. filed suit against the Company, and three (3) of the Company's
employees, in the United States District Court for the Southern District of
Indiana, alleging breach of contract, tortious interference with contractual
relations and tortious interference with prospective economic relations. The
plaintiffs allege that three (3) of the Company's employees, who were employed
formally by the plaintiffs, left the employ of plaintiffs, joined the Company,
and thereafter solicited on behalf of the Company plaintiffs' employees, and
plaintiffs' customers, in breach of written agreements between the plaintiffs
and the employees, and in violation of the common laws of Indiana. The
plaintiffs also allege that the Company breached a written agreement between the
Company and the plaintiffs in which the Company agreed not to allow solicitation
of the plaintiffs' employees or customers by the Company's employees who were
formerly employed by the plaintiffs. The plaintiffs seek an injunction
preventing the Company and the three (3) employees from breaching their
respective written agreements with plaintiffs and preventing the Company from
aiding or abetting the employees in breach of the employees' written agreements
with the plaintiffs; an accounting and disgorgement of all profits made by the
Company and the employees arising from the breach of the written agreements with
the plaintiffs; a declaratory judgment that the Company and the employees have
breached their respective written agreements with the plaintiffs, and have
tortiously interfered with the plaintiffs' existing contractual and prospective
economic relations; damages for breach of contract and interference with
plaintiffs' existing contractual and prospective economic relations; and payment
of attorneys' fees, and costs. The Company denies the allegations and intends to
defend vigorously against them.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
Executive Officers of the Registrant
The following table sets forth, as of March 18, 1997, certain information
regarding the Company's executive officers and certain other significant
employees.
Name Age Position
- -------------------------------------------------------------------------------
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 48 President-Consumer Division and Director
Stephen G. Canton 41 President-Commercial Division
Bryan K. Rachlin 40 Chief Operating Officer, Secretary and
General Counsel
Nicholas A. Merrick 34 Chief Financial Officer, Treasurer and
Vice President
Natalie J. Marine-Street 28 Executive Vice President
Janet D. Anastasi 50 Vice President and Corporate Controller
Mark J. Stodter 37 Vice President-Electronic Data Processing
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.
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 financing and merger and
acquisition transactions involving companies in the telecommunications industry.
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.
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.
<PAGE>
PART II
Item 5.Market for the Registrant's Common Equity and Related Shareholder Matters
The Common Shares are traded on the Nasdaq National Market under the symbol
"TCGX". The following table sets forth, on a per share basis, the range of the
high and low sales price information of the Common Shares as reported by the
Nasdaq National Market, for the periods indicated.
1996
High Low
Third Quarter (from August 9, 1996) $19 1/2 $14
Fourth Quarter $19 1/4 $15
As of March 18, 1997, the closing price of the Common Shares as reported by
the Nasdaq National Market was $20.38. As of March 18, 1997, there were
approximately 2,877 registered holders of Common Shares.
The Company has never paid any dividends. 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.
Recent Sales of Unregistered Securities
On March 19, 1996, options to acquire 425,000 Common Shares were issued to
Mr. Merrick at an exercise price of $7.53 per share.
On April 1, 1996, Bonita Anderson, James Sznadjer, Dennis Jarman and Mr.
Rachlin exchanged their options in LDWC for options to acquire 25,511; 51,021;
113,267 and 102,043 Common Shares, respectively, under the Company's Stock
Option Plan.
On April 1, 1996, the Company issued 5,102,125 Common Shares in exchange
for the remaining minority interest in LDWC.
On April 4, 1996, options to acquire 1,062,500 Common 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 Common Shares 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 Common
Shares at a weighted average exercise price of $0.44 per share.
On August 9, 1996, Ms. Marine-Street exercised options to purchase 169,575
shares at a weighted average exercise price of $1.76 per share.
Each issuance of securities described above was made in reliance on the
exemption from the 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 6. Selected Financial Data
The information called for by Item 6 is incorporated herein by reference to
page 10 of the Registrant's Annual Report to Shareholders for the year ended
December 31, 1996 (the "1996 Annual Report").
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The information called for by Item 7 is incorporated herein by reference to
pages 11 through 15, inclusive, of the 1996 Annual Report.
Item 8. Financial Statements and Supplementary Data
The information called for by Item 8 is incorporated herein by reference to
pages 16 through 30, inclusive, of the 1996 Annual Report.
With the exceptions of the aforementioned information and the additional
information incorporated by reference in Parts II and IV hereof, the 1996 Annual
Report is not deemed to be filed as part of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 10 and Item 401 of Regulation S-K as to
the Directors of the Company, and the information required by Item 405 of
Regulation S-K, is incorporated herein by reference to the Company's definitive
proxy statement dated April 8, 1997 to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A in connection with the Company's Annual
Meeting of Shareholders to be held on May 15, 1997 (the "Proxy Statement").
Item 11. Executive Compensation
The information required by Item 11 is incorporated herein by reference to
the Proxy Statement, except for the sections entitled "Board Report on Executive
Compensation" and "Performance Graph" which shall not be deemed to be
incorporated herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated herein by reference to
the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated herein by reference to
the Proxy Statement.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements:
The following consolidated financial statements of the Company are
included in Part II, Item 8 (which incorporates information by
reference to the 1996 Annual Report):
Consolidated balance sheets as of December 31, 1996 and
December 31, 1995.
Consolidated statements of income and retained earnings for
the years ended December 31, 1996, December 31, 1995 and
December 31, 1994.
Consolidated statements of cash flows for the years ended
December 31, 1996, December 31, 1995 and December 31, 1994.
Notes to Consolidated Financial Statements and Independent
Auditors' Report.
2. Financial Statement Schedules:
Independent Auditors' Report
3. Exhibits: See Exhibit Index on pages 30 to 34.
The Registrant hereby agrees to furnish the Commission a copy
of each of the indentures or other instruments defining the
rights of security holders of the long-term debt securities of the
Registrant and any of its subsidiaries for which consolidated or
unconsolidated financial statements are required to be filed.
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the quarter ended
December 31, 1996.
(c) Refer to Item 14 (a) (3) above for Exhibits required by Item 601 of
Regulation S-K.
(d) Schedules other than set forth in response to Item 14(a)(2) above
for which provision is made in the applicable accounting regulations of
the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been
omitted.
<PAGE>
TELCO COMMUNICATIONS GROUP, INC.
EXHIBIT INDEX
Exhibit Number Exhibit Description
- --------------------------------------------------------------------------------
*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.
- --------------------------------------------------------------------------------
*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
- --------------------------------------------------------------------------------
*10.7 Agreement between Nevada Bell and Telco Development Group
of Delaware, Inc. for Billing and Collection Services dated
September 3, 1995
<PAGE>
Exhibit Number Exhibit Description Page
- ---------------- ---------------------------------------------------------------
*10.8 Agreement for Interstate Billing and Collection Services
Agreement between New England Telephone and Telegroup
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
- --------------------------------------------------------------------------------
**~10.15 Agreement for the Provision of Billing and Collection
Services for Clearing Agents between US 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)
- --------------------------------------------------------------------------------
*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)
- --------------------------------------------------------------------------------
*10.29 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 and
Henry G. Luken, III dated as of July 10, 1996
- --------------------------------------------------------------------------------
*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
- --------------------------------------------------------------------------------
10.43 Credit Agreement between Telco Communications Group, Inc.
and NationsBank of Texas, N.A. as Administrative Lender and
Lenders, dated December 20, 1996
- --------------------------------------------------------------------------------
10.44 Carrier Agreement between AT&T Corp. and Telco
Communications Group, Inc., dated December 23, 1996
- --------------------------------------------------------------------------------
~10.45 Network Purchase Agreement between Advantis and Telco
Network Services, Inc., dated March 11, 1997
- --------------------------------------------------------------------------------
10.46 Lease Agreement between Telco Communications Group, Inc.
and Frederic C. Stein, dated May 1, 1996 (Fort Lauderdale,
Florida Switch Site)
- --------------------------------------------------------------------------------
10.47 Lease Agreement between Telco Communications Group, Inc.
and Hudson Telegraph Associates, dated September 26, 1996
(New York, New York Switch Site)
- --------------------------------------------------------------------------------
11.1 Schedule of Computation of Earnings Per Share
- --------------------------------------------------------------------------------
13.1 Portions of the Telco Communications Group, Inc. Annual
Report to Shareholders for the year ended December 31, 1996
- --------------------------------------------------------------------------------
21.1 Subsidiaries of Telco Communications Group, Inc.
- --------------------------------------------------------------------------------
23.1 Independent Auditors' Consent
- --------------------------------------------------------------------------------
27.1 Financial Data Schedule
- --------------------------------------------------------------------------------
* Incorporated by reference from the Company's Registration Statement on
Form S-1 (Commission File No. 333-05857)
~ Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment and filed separately with the Commission.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TELCO COMMUNICATIONS GROUP, INC.
/s/Donald A. Burns
By: __________________________
Donald A. Burns
President and Chief Executive Officer
March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Date
/s/Henry G. Luken, III
__________________ ________
Henry G. Luken, III
Chairman of the Board and Director
/s/Donald A. Burns
_____________________ ________
Donald A. Burns
Vice Chairman of the Board, President,
Executive Officer and Director (Principal
Chief Executive Officer)
/s/Thomas J. Cirrito
_____________________ ________
Thomas J. Cirrito
President of Consumer Division and Director
/s/Robert W. Ross
______________________ ________
Robert W. Ross
Director
/s/Gary L. Nelson
______________________ ________
Gary L. Nelson
Director
/s/Nicholas A. Merrick
______________________ ________
Nicholas A. Merrick
Chief Financial Officer and Treasurer
(Principal Financial Officer)
/s/Janet A. Anastasi
______________________ ________
Janet D. Anastasi
Vice President and Corporate Controller
- ------------------------------------------------------------------------------
$100,000,000
CREDIT AGREEMENT
Among
TELCO COMMUNICATIONS GROUP, INC.
And
NATIONSBANK OF TEXAS, N.A.
as Administrative Lender
and
LENDERS
Dated as of December 20, 1996
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
$100,000,000
TELCO COMMUNICATIONS GROUP, INC.
TABLE OF CONTENTS
ARTICLE I. DEFINITIONS
1.01. Definitions ........................................... 1
1.02. Accounting and Other Terms............................ 23
ARTICLE II. THE LOAN FACILITY
2.01. The Loans.............................................. 23
2.02. Making Advances........................................ 24
2.03. Evidence of Debt for Borrowed Money.................... 26
2.04. Optional Prepayments................................... 26
2.05. Mandatory Prepayments.................................. 27
2.06. Repayment.............................................. 28
2.07. Interest............................................... 28
2.08. Default Interest....................................... 29
2.09. Continuation and Conversion Elections.................. 29
2.10. Fees................................................... 30
2.11. Reduction of Commitment................................ 30
2.12. Funding Losses......................................... 31
2.13. Computations and Manner of Payments.................... 32
2.14. Yield Protection; Changed Circumstances................ 33
2.15. Use of Proceeds........................................ 36
2.16. Collateral and Collateral Call......................... 36
2.17. Replacement Lenders.................................... 36
ARTICLE III. LETTERS OF CREDIT
3.01. Issuance of Letters of Credit.......................... 37
3.02. Letters of Credit Fee.................................. 37
3.03. Reimbursement Obligations.............................. 38
3.04. Lenders' Obligations................................... 39
3.05. Administrative Lender's Obligations.................... 39
ARTICLE IV. CONDITIONS PRECEDENT
4.01. Conditions Precedent to Closing and the Initial Advance.40
4.02. Conditions Precedent to All Advances and Letters
of Credit........................................... 42
<PAGE>
ARTICLE V. REPRESENTATIONS AND WARRANTIES
5.01. Representations and Warranties......................... 43
5.02. Survival of Representations and Warranties............. 50
ARTICLE VI. GENERAL COVENANTS
6.01. Preservation of Existence and Similar Matters.......... 50
6.02. Business; Compliance with Applicable Law.............. 51
6.03. Maintenance of Properties.............................. 51
6.04. Accounting Methods and Financial Records............... 51
6.05. Insurance.............................................. 51
6.06. Payment of Taxes and Claims............................ 51
6.07. Visits and Inspections................................. 52
6.08. Payment of Debt for Borrowed Money..................... 52
6.09. Use of Proceeds........................................ 52
6.10. Indemnity.............................................. 52
6.11. Environmental Law Compliance........................... 53
6.12. Interest Rate Protection Agreements.................... 54
6.13. Acquisitions, Generally................................ 54
ARTICLE VII. INFORMATION COVENANTS
7.01. Quarterly Financial Statements and Information......... 55
7.02. Annual Financial Statements and Information;
Certificate of No Default............................ 55
7.03. Compliance Certificates................................ 55
7.04. Copies of Other Reports and Notices.................... 55
7.05. Notice of Litigation, Default and Other Matters........ 56
7.06. ERISA Reporting Requirements........................... 57
ARTICLE VIII. NEGATIVE COVENANTS
8.01. Financial Covenants.................................... 58
8.02. Debt for Borrowed Money................................ 59
8.03. Liens.................................................. 60
8.04. Investments............................................ 61
8.05. Liquidation, Disposition or Acquisition of Assets,
Merger, New Subsidiaries............................. 62
8.06. Guaranties; Contingent Liabilities..................... 63
8.07. Restricted Payments.................................... 63
8.08. Affiliate Transactions................................. 65
8.10. Compliance with ERISA.................................. 65
8.11. Capital Stock.......................................... 65
8.12. Sale and Leaseback..................................... 65
8.13. Sale or Discount of Receivables........................ 66
8.14. Limitation on Restrictive Agreements................... 66
<PAGE>
ARTICLE IX. EVENTS OF DEFAULT
9.01. Events of Default...................................... 66
9.02. Remedies upon Default.................................. 71
9.03. Cumulative Rights...................................... 72
9.04. Waivers................................................ 72
9.05. Performance by Administrative Lender or any Lender..... 72
9.06. Expenditures........................................... 72
9.07. Control................................................ 72
ARTICLE X. THE ADMINISTRATIVE LENDER
10.01. Authorization and Action.............................. 73
10.02. Administrative Lender's Reliance, Etc................. 73
10.03. NationsBank of Texas, N.A. and Affiliates............. 74
10.04. Lender Credit Decision................................ 74
10.05. Indemnification by Lenders............................ 74
10.06. Successor Administrative Lender....................... 74
ARTICLE XI. MISCELLANEOUS
11.01. Amendments and Waivers................................ 75
11.02. Notices............................................... 76
11.03. Parties in Interest................................... 78
11.04. Assignments and Participations........................ 78
11.05. Sharing of Payments................................... 79
11.06. Right of Set-off...................................... 79
11.07. Costs, Expenses, and Taxes............................ 80
11.08. Rate Provision........................................ 80
11.09. Severability.......................................... 81
11.10. Exceptions to Covenants............................... 81
11.11. Counterparts.......................................... 81
11.12. GOVERNING LAW; WAIVER OF JURY TRIAL................... 82
11.13. ENTIRE AGREEMENT...................................... 82
<PAGE>
TABLE OF SCHEDULES AND EXHIBITS
SCHEDULES
---------
Schedule 4.01(d) - Subsidiaries Whose Capital Stock is Pledged
Post-Closing
Schedule 4.01(n) - Assets other than Capital Stock owned by the Borrower
Schedule 5.01(a) - Jurisdictions of Qualification, Ownership and
Capital Structure - Borrower
Schedule 5.01(f) - Non-Compliance with FCC or any applicable PUC
Schedule 5.01(h) - Existing Litigation
Schedule 5.01(r) - Description of Pledged Stock
Schedule 8.02 - Existing Debt and Liabilities
Schedule 8.03 - Existing Liens
Schedule 8.04 - Existing Investments
Schedule 8.07 - Permitted Restricted Payments
Schedule 11.02 - Lender Addresses
EXHIBITS
--------
Exhibit A - Form of Revolving Note
Exhibit B - Form of Swingline Note
Exhibit C - Form of Compliance Certificate
Exhibit D - Form of Borrowing Notice
Exhibit E - Form of Conversion/Continuation Notice
Exhibit F - Form of Assignment and Acceptance
Exhibit G - Form of Guaranty of Subsidiaries
Exhibit J - Form of Pledge Agreement
<PAGE>
- ------------------------------------------------------------------------------
$100,000,000
TELCO COMMUNICATIONS GROUP, INC.
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is dated as of December 20, 1996, among TELCO
COMMUNICATIONS GROUP, INC., a Virginia corporation (the "Borrower"), the
Lenders (as defined below) and NATIONSBANK OF TEXAS, N.A., as a Lender and
Administrative Lender.
BACKGROUND.
WHEREAS, Borrower and Administrative Lender have agreed to enter into a
Credit Agreement which provides for one revolving loan facility in the amount
of $100,000,000 (which such loan facility shall also include a letter of
credit availability of not more than $5,000,000 and a swingline facility of
not more than $5,000,000), so long as the total outstanding exposure does not
exceed $100,000,000.
AGREEMENT.
NOW, THEREFORE, for valuable consideration hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I. DEFINITIONS
1.01. Definitions. As used in this Agreement, the following terms have
the respective meanings indicated below (such meanings to be applicable
equally to both the singular and plural forms of such terms):
"Advance" means an advance made by a Lender to the Borrower pursuant to
Section 2.01 hereof, which shall include both Swingline Advances and Revolving
Advances.
"Affiliate" means a Person that directly, or indirectly through one or
more intermediaries, Controls or is Controlled By or
<PAGE>
is Under Common Control with another Person.
"Administrative Lender" means NationsBank of Texas, N.A., in its capacity
as Administrative Lender hereunder, or any successor Administrative Lender
appointed pursuant to Section 10.06 hereof.
"Agreement" means this Credit Agreement, as hereafter amended, modified,
increased, extended, restated or supplemented from time to time.
"Annualized EBITDA" means, on any date of determination, the product of
(a) EBITDA, for the most recently completed two fiscal quarters immediately
preceding the date of determination, times (b) two.
"Applicable Law" means (a) in respect of any Person, all provisions of
Laws of Tribunals applicable to such Person, and all orders and decrees of all
courts and arbitrators in proceedings or actions to which the Person in
question is a party and (b) in respect of contracts made or performed in the
State of Texas, "Applicable Law" also means the laws of the United States of
America, including, without limiting the foregoing, 12 USC Sections 85 and 86,
as amended to the date hereof and as the same may be amended at any time and
from time to time hereafter, and any other statute of the United States of
America now or at any time hereafter prescribing the maximum rates of interest
on loans and extensions of credit, and the laws of the State of Texas,
including, without limitations, Articles 5069-1.04 and 5069-1.07(a), Title 79,
Revised Civil Statutes of Texas, 1925, as amended ("Art. 1.04"), and any other
statute of the State of Texas now or at any time hereafter prescribing maximum
rates of interest on loans and extensions of credit; provided however, that
pursuant to Article 5069-15.10(b), Title 79, Revised Civil Statutes of Texas,
1925, as amended, the Borrower agrees that the provisions of Chapter 15, Title
79, Revised Civil Statutes of Texas, 1925, as amended, shall not apply to the
Advances hereunder.
"Applicable Margin" means, (a) with respect to LIBOR Advances, 1.625% per
annum, and (b) with respect to Base Advances, 0.625% per annum provided that,
the Applicable Margin will be adjusted as set forth in the last paragraph of
this definition to the following per annum percentages applicable in the
following situations:
<PAGE>
Base Advance LIBOR Advance
Applicability Percentage Percentage
- ------------- ----------- -------------
(i) If the Total 0.625% 1.625%
Leverage Ratio is
greater than or equal to
2.00 to 1.00
(ii) If the Total 0.500% 1.500%
Leverage Ratio is less
than to 2.00 to 1.00
but is greater than or equal
to 1.50 to 1.00
(iii) If the Total 0.250% 1.250%
Leverage Ratio is less
than 1.50 to 1.00
but is greater than or equal
to 1.25 to 1.00
(iv) If the Total 0.000% 1.000%
Leverage Ratio is less
than 1.25 to 1.00
but is greater than or equal
to 1.00 to 1.00
(v) If the Total 0.000% 0.875%
Leverage Ratio is less
than 1.00 to 1.00
but is greater than or equal
to 0.75 to 1.00
(vi) If the Total 0.000% 0.750%
Leverage Ratio is less
than 0.75 to 1.00
The Applicable Margin payable by the Borrower shall be subject to reduction or
increase, as applicable and as set forth in the table above, on a quarterly
basis according to the performance of the Borrower and Subsidiaries of
Borrower as tested by the Total Leverage Ratio. Except as set forth in the
following sentence, any such increase or reduction in the Applicable Margin
provided for herein shall be effective three Business Days after receipt by
Administrative Lender of the applicable financial statements and corresponding
Compliance Certificate. If financial statements and
<PAGE>
a Compliance Certificate of the Borrower setting forth the Total Leverage
Ratio are not received by the Administrative Lender by the date required
pursuant to Sections 7.01 or 7.02 hereof, the Applicable Margin shall be
determined as if the Total Leverage Ratio exceeds 2.00 to 1.00 until such time
as such financial statements and Compliance Certificate are received. For the
final quarter of any fiscal year of the Borrower, the Borrower may provide the
unaudited financial statements of the Borrower, subject only to year-end
adjustments, for the purpose of adjusting the Applicable Margin.
"Application" means any stand-by letter of credit application delivered
to Administrative Lender for or in connection with any stand-by Letter of
Credit pursuant to Article III hereof, in Administrative Lender's standard
form for stand-by letters of credit.
"Art. 1.04" has the meaning specified in the definition of "Applicable
Law".
"Assignment and Acceptance" means an assignment and acceptance entered
into by a Lender and an Eligible Assignee, and accepted by Administrative
Lender, in the form of Exhibit F hereto.
"Auditor" means Deloitte & Touche, L.L.P. or other independent certified
public accountants selected by the Borrower and acceptable to Administrative
Lender.
"Authorized Officer" means, with respect to the Borrower and its
Subsidiaries, the President, Chief Executive Officer, Chief Financial Officer,
Chief Operating Officer or General Counsel of the Borrower.
"Bank Affiliate" means the holding company of any Lender, or any
wholly-owned direct or indirect subsidiary of such holding company or of such
Lender.
"Base Advance" means an Advance bearing interest at the Base Rate.
"Base Rate" means a per annum interest rate equal to the lesser of (a)
the Highest Lawful Rate, and (b) the sum of the Applicable Margin plus the
higher of (i) a fluctuating rate per annum as shall be in effect from time to
time announced or published by NationsBank of Texas, N.A. as its prime rate,
and
<PAGE>
which may not necessarily be the lowest interest rate charged by NationsBank
of Texas, N.A., and (ii) the Federal Funds Rate in effect at such time plus
.50%.
"Borrowing" means a borrowing of the same Type made on the same day.
"Borrowing Notice" has the meaning set forth in Section 2.02(a) hereof.
"Business Day" means a day on which banks are open for the transaction of
business as required by this Agreement in Dallas, Texas and New York, New York
and, with respect to any LIBOR Advance, a domestic business day in London,
England and a day on which commercial banks are open for international
business in London, England (including dealings in United States dollar
deposits), and as otherwise relevant to the determination to be made or the
action to be taken.
"Capital Expenditures" means capital expenditures, as defined in
accordance with GAAP.
"Capital Leases" means capital leases and subleases, as defined in
accordance with GAAP.
"Capital Stock" means, as to any Person, the equity interests in such
Person, including, without limitation, the shares of each class of capital
stock of any Person that is a corporation and each class of partnership
interests (including without limitation, general, limited and preference
units) in any Person that is a partnership.
"Change in Control" means, with respect to the Borrower, the occurrence
of any one of the following events: (a) any "person" or "group" (as such terms
are defined in Section 13(d) or 14(d) of the Exchange Act) is or becomes, in
one or more series of transactions (as a result of the acquisition or issuance
of securities, or otherwise), the beneficial owner, directly or indirectly, of
more than (i) 30% of the common Capital Stock of the Borrower, or (ii) 30% of
the voting power of the Borrower entitled to vote in the election of members
of the board of directors of the Borrower, or (b) at any time during any
fiscal year of the Borrower after the appointment of the fifth director of the
Borrower no later than March 31, 1997, the number of directors of the Borrower
shall have been increased such that the number of newly created positions
<PAGE>
constitutes a majority of the Board of Directors of the Borrower, or (c) at
any time during any fiscal year of the Borrower a majority of the members of
the full Board of Directors of the Borrower shall have resigned or been
removed or replaced, provided that, a director who has resigned or is replaced
during any year shall not be included in any determination of whether a Change
in Control has occurred pursuant to this clause (ii) to the extent such
director is replaced by a successor director elected by a majority of those
directors who are directors at the commencement of such year.
"Closing Date" means the date hereof.
"Code" means the Internal Revenue Code of 1986, as amended, and any
reference to any provision of the Code shall include all successor provisions
thereto.
"Collateral" has the meaning ascribed thereto in Section 2.16(a) hereof.
"Commitment" means $100,000,000 as reduced pursuant to Section 2.11
hereof.
"Commitment Fee" means the fee described in Section 2.10(b) hereof.
"Communications Act" means, collectively, the Communications Act of 1934,
as amended by the Telecommunications Act of 1996, and as further amended, and
the rules and regulations promulgated thereunder, as from time to time in
effect.
"Compliance Certificate" means a certificate of an Authorized Officer in
the form of Exhibit C hereto, (a) certifying that such individual has no
knowledge that a Default or Event of Default has occurred and is continuing,
or if a Default or Event of Default has occurred and is continuing, a
statement as to the nature thereof and the action being taken or proposed to
be taken with respect thereto, (b) setting forth detailed calculations with
respect to the covenants described in Section 8.01 hereof and (c) certifying
to the appropriate Applicable Margin.
"Consequential Loss" with respect to (a) the Borrower's payment of all or
any portion of the then-outstanding principal amount of a LIBOR Advance on a
day other than the last day of the related Interest Period, including, without
limitation, payments
<PAGE>
made as a result of the acceleration of the maturity of a Note, (b) subject to
Administrative Lenders' prior consent, a LIBOR Advance made on a date other
than the date on which the Advance is to be made according to Section 2.02(a)
or Section 2.09 hereof to the extent such Advance is made on such other date
at the request of the Borrower, or (c) any of the circumstances specified in
Section 2.04 hereof on which a Consequential Loss may be incurred with respect
to LIBOR Advances, means any loss, cost or expense incurred by any Lender as a
result of the timing of the payment or Advance or in liquidating,
redepositing, redeploying or reinvesting the principal amount so paid or
affected by the timing of the Advance or the circumstances described in
Section 2.04 hereof, which amount shall be the sum of (i) the interest that,
but for the payment or timing of Advance, such Lender would have earned in
respect of that principal amount, reduced, if such Lender is able to
redeposit, redeploy, or reinvest the principal amount, by the interest earned
by such Lender as a result of redepositing, redeploying or reinvesting the
principal amount plus (ii) any expense or penalty incurred by such Lender by
reason of liquidating, redepositing, redeploying or reinvesting the principal
amount. Each reasonable determination by each Lender of any Consequential
Loss is, in the absence of manifest error and after delivery to the Borrower,
presumptive evidence of the validity of such claim.
"Contingent Liability" means, as to any Person, any obligation,
contingent or otherwise, of such Person guaranteeing or having the economic
effect of guaranteeing any Debt or obligation of any other Person in any
manner, whether directly or indirectly, including without limitation any
obligation of such Person, direct or indirect, (a) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Debt or to
purchase (or to advance or supply funds for the purchase of) any security for
the payment of such Debt, (b) to purchase Property or services for the purpose
of assuring the owner of such Debt of its payment, or (c) to maintain the
solvency, working capital, equity, cash flow, fixed charge or other coverage
ratio, or any other financial condition of the primary obligor so as to enable
the primary obligor to pay any Debt or to comply with any agreement relating
to any Debt or obligation, but excluding endorsement of checks, drafts and
other instruments in the ordinary course of business, provided that
"Contingent Liability" shall not include (i) trade accounts payable that are
not treated as debt under GAAP as determined by the Auditors, and required
minimum amounts under the Borrower's operating agreements, in each case for
goods and services arising in the ordinary course of business, (ii) current
accrued
<PAGE>
liabilities that (A) are not treated as debt under GAAP as determined by the
Auditors and (B) arise in the ordinary course of business, (iii) Taxes owed by
the Borrower and its Subsidiaries and (iv) amounts owed under employment
agreements of the Borrower and its Subsidiaries.
"Continue," "Continuation" and "Continued" each refer to the continuation
pursuant to Section 2.09 hereof of a LIBOR Advance from one Interest Period to
the next Interest Period.
"Control" or "Controlled By" or "Under Common Control" mean possession,
direct or indirect, of power to direct or cause the direction of management or
policies (whether through ownership of voting securities, by contract or
otherwise); provided that, in any event (a) any Person which beneficially owns
--------
(i) 10% or more (in number of votes) of the securities having ordinary voting
power for the election of directors of a corporation shall be conclusively
presumed to control such corporation and (ii) 10% or more of the interest in
capital or profits of a partnership shall be conclusively presumed to control
such partnership, and (b) no Person shall be deemed to be an Affiliate of a
corporation solely by reason of his being an officer or director of such
corporation.
"Controlled Group" means, as to any Person, all members of a controlled
group of corporations and all trades or businesses (whether or not
incorporated) which are under common control with such Person and which,
together with such Person, are treated as a single employer under Section
414(b), (c), (m) or (o) of the Code.
"Conversion or Continuance Notice" has the meaning set forth in Section
2.09(b) hereof.
"Current Ratio" means, for the Borrower and its consolidated Subsidiaries
on any date of determination, the ratio of (a) current assets determined in
accordance with generally accepted accounting principles, minus the sum of (i)
accounts receivable of the Borrower and its Subsidiaries that are not Eligible
Accounts, plus (ii) cash/marketable securities (excluding cash being held in
escrow which directly offsets liabilities for Taxes that are reflected as
current liabilities on the Borrower's consolidated balance sheet), plus (iii)
loans or advances to shareholders and/or employees of the Borrower and its
Subsidiaries, to (b) current liabilities of the Borrower and its Subsidiaries
(without duplication) (excluding, in the third year after the Closing Date,
the amount of the Borrowings maturing), provided that, for purposes
<PAGE>
of the determination of such ratio, financial information shall be calculated
as if all assets acquired on any date during the period of determination were
acquired on the first day in such period of determination, and all assets sold
on any date during the period of determination were sold on the first day in
such period of determination.
"Debt" means all obligations, contingent or otherwise, which in
accordance with GAAP are required to be classified on the balance sheet as
liabilities, and in any event including (without duplication) (a) Capital
Leases, (b) Contingent Liabilities that are required to be disclosed and
quantified in notes to consolidated financial statements in accordance with
GAAP, (c) liabilities secured by any Lien on any Property, regardless of
whether such secured liability is with or without recourse, and (d)
installment payment non-compete agreements, provided that "Debt" shall not
include (i) trade accounts payable that are not treated as debt under GAAP as
determined by the Auditors, and required minimum amounts under the Borrower's
operating agreements, in each case for goods and services arising in the
ordinary course of business, (ii) current accrued liabilities that (A) are not
treated as debt under GAAP as determined by the Auditors and (B) arise in the
ordinary course of business, (iii) Taxes owed by the Borrower and its
Subsidiaries and (iv) amounts owed under employment agreements of the Borrower
and its Subsidiaries.
"Debt for Borrowed Money" means, as to any Person, at any date, without
duplication, (a) all obligations of such Person for borrowed money, letters of
credit (or applications for letters of credit) or other similar instruments,
(b) all obligations of such Person evidenced by bonds, debentures, notes or
other similar instruments, (c) all obligations of such Person to pay the
deferred purchase price of property or services, and (d) installment payment
non-compete agreements, provided that "Debt for Borrowed Money" shall not
include (i) trade accounts payable that are not treated as debt under GAAP as
determined by the Auditors, and required minimum amounts under the Borrower's
operating agreements, in each case for goods and services arising in the
ordinary course of business, (ii) current accrued liabilities that (A) are not
treated as debt under GAAP as determined by the Auditors and (B) arise in the
ordinary course of business, (iii) Taxes owed by the Borrower and its
Subsidiaries and (iv) amounts owed under employment agreements of the Borrower
and its Subsidiaries.
<PAGE>
"Debtor Relief Laws" means applicable bankruptcy, reorganization,
moratorium, or similar Laws, or principles of equity affecting the enforcement
of creditors' rights generally.
"Default" means any event specified in Section 9.01 hereof, whether or
not any requirement in connection with such event for the giving of notice,
lapse of time, or happening of any further condition has been satisfied.
"Distribution" means, as to any Person, (a) any declaration or payment of
any distribution or dividend (other than a stock dividend) on, or the making
of any pro rata distribution, loan, advance, or investment to or in any holder
of, any partnership interest or shares of Capital Stock or other equity
interest of such Person (or the establishment of a sinking fund or otherwise
setting aside of funds for any such purpose), or (b) any purchase, redemption,
or other acquisition or retirement for value of any shares of partnership
interest or Capital Stock or other equity interest of such Person (or the
establishment of a sinking fund or otherwise setting aside of funds for any
such purpose).
"EBITDA" means, for the Borrower and its Subsidiaries, for any period of
determination, the sum of (a) net income for such period, plus (b)
amortization for such period, plus (c) depreciation for such period, plus (d)
Interest Expense for such period, plus (e) Income Tax Expense for the Borrower
and its Subsidiaries for such period.
"Eligible Accounts" means, at any date, all billed accounts receivable
due to the Borrower from all
(a) LECs other than (i) accounts more than 90 days past the date on which
the related billing information for the Borrower rated calls is
transmitted to such LEC, (ii) accounts the liability for which has been
disputed by the LEC, (iii) accounts owing from any LEC that shall take or
be the subject of any action or proceeding under any bankruptcy,
insolvency or other Debtor Relief Law, and (iv) accounts, the full and
timely collection of which the Administrative Lender in its good faith
judgment, believes to be doubtful, and
(b) other commercial customer accounts other than (i) accounts more than
90 days past the invoice date, (ii) accounts the liability for which has
been disputed and not resolved within 35 days from the date the Borrower
receives notice of such dispute (provided that, accounts more than 90
<PAGE>
days past the invoice day are still excluded pursuant to subsection (i)
above), (iii) accounts owing from any customer that shall take or be the
subject of any action or proceeding under any bankruptcy, insolvency or
other Debtor Relief Law, and (iv) accounts, the full and timely
collection of which the Administrative Lender in its good faith judgment,
believes to be doubtful; provided, further that (A) if the commercial
customer is rated in excess of BBB by Moody's Investors Services, Inc.,
or Baa2 by Standard & Poor's Ratings Group, a Division of McGraw-Hill,
Inc., such account shall be deemed to be an Eligible Account for that
portion of the account receivable equal to or less than 20% of all
commercial customer accounts receivable in the aggregate that qualify
under subsection (b) of this definition, or (B) if the commercial
customer is unrated or rated equal to or less than BBB by Moody's
Investors Services, Inc. or Baa2 by Standard & Poor's Ratings Group, a
Division of McGraw-Hill, Inc., such account shall be deemed to be an
Eligible Account for that portion of the account receivable equal to or
less than 10% of all commercial customer accounts receivable in the
aggregate that qualify under subsection (b) of this definition.
"Eligible Transferee" means (a) any Lender, (b) a commercial bank
organized under the laws of the United States, or any state thereof, and
having total assets in excess of $1,000,000,000; (c) a commercial bank
organized under the laws of any other country which is a member of the
Organization for Economic Cooperation and Development, or a political
subdivision of any such country, and having total assets in excess of
$1,000,000,000, provided that such bank is acting through a branch or agency
located in the country in which it is organized or another country which is
described in this clause; and (d) the central bank of any country which is a
member of the Organization for Economic Cooperation and Development.
"Environmental Claim" means any written notice by any Tribunal alleging
liability for damage to the environment, or by any Person alleging liability
for personal injury (including sickness, disease or death), resulting from or
based upon (a) the presence or release (including sudden or non-sudden,
accidental or non-accidental, leaks or spills) of any Hazardous Material at,
in or from property, whether or not owned by the Borrower or any of its
Subsidiaries, or (b) circumstances forming the basis of any violation, or
alleged violation, of any Environmental Law.
<PAGE>
"Environmental Laws" means the Comprehensive Environmental Response,
Compensation, and Liability Act (42 U.S.C. 9601 et seq.) ("CERCLA"), the
Hazardous Material Transportation Act (49 U.S.C. 1801 et seq.), the Resource
Conservation and Recovery Act (42 U.S.C 6901 et seq.), the Federal Water
Pollution Control Act (33 U.S.C. 1251 et seq.), the Clean Air Act (42 U.S.C.
7401 et seq.), the Toxic Substances Control Act (15 U.S.C. 2601 et seq.),
and the Occupational Safety and Health Act (29 U.S.C. 651 et seq.) ("OSHA"),
as such laws have been or hereafter may be amended or supplemented, and any
and all analogous future federal, or present or future state or local, Laws.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rulings and regulations issued thereunder, as from time to
time in effect.
"ERISA Affiliate" means any Person that for purposes of Title IV of ERISA
is a member of the controlled group of the Borrower or any Obligor, or is
under common control with Borrower or any Obligor, within the meaning of
Section 414(c) of the Code, and the regulations and rulings issued thereunder.
"ERISA Event" means (a) a reportable event, within the meaning of Section
4043 of ERISA, unless the 30-day notice requirement with respect thereto has
been waived by the PBGC, (b) the issuance by the administrator of any Plan of
a notice of intent to terminate such Plan, pursuant to Section 4041(a)(2) of
ERISA (including any such notice with respect to a plan amendment referred to
in Section 4041(e) of ERISA), (c) the withdrawal by the Borrower, any
Subsidiary of the Borrower, or an ERISA Affiliate from a Multiple Employer
Plan during a Plan year for which it was a substantial employer, as defined in
Section 4001(a)(2) of ERISA, (d) the failure by the Borrower, any Subsidiary
of the Borrower, or any ERISA Affiliate to make a payment to a Plan required
under Section 302 of ERISA, (e) the adoption of an amendment to a Plan
requiring the provision of security to such Plan, pursuant to Section 307 of
ERISA, or (f) the institution by the PBGC of proceedings to terminate a Plan,
pursuant to Section 4042 of ERISA, or the occurrence of any event or condition
that constitutes grounds under Section 4042 of ERISA for the termination of,
or the appointment of a trustee to administer, a Plan.
"Event of Default" means any of the events specified in Section 9.01 of
this Agreement, provided there has been satisfied any requirement in
connection therewith for the giving of notice, lapse of time, or happening of
any further condition.
<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time.
"FCC" means the Federal Communications Commission, or any governmental
agency succeeding to the functions thereof.
"Federal Funds Rate" means, for any period, a fluctuating interest rate
per annum equal for each day during such period to the weighted average of the
rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, as published for such day
(or, if such day is not a Business Day, for the next preceding Business Day)
by the Federal Reserve Bank of Dallas, or, if such rate is not so published
for any day which is a Business Day, the average of the quotations for such
date on such transactions received by Administrative Lender from three federal
funds brokers of recognized standing selected by it.
"Fee Letter" means that certain Fee Letter, dated the Closing Date,
between the Borrower and the Administrative Lender, and all other fee letters
executed among the Borrower or any Lender[s], as such letters may be amended,
modified, substituted, replaced, or increased from time to time.
"GAAP" means generally accepted accounting principles applied on a
consistent basis. Application on a consistent basis shall mean that the
accounting principles observed in a current period are comparable in all
material respects to those applied in a preceding period, except for new
developments or statements promulgated by the Financial Accounting Standards
Board and other changes in accounting methods permitted by generally accepted
accounting principles.
"Guarantors" means each Subsidiary of the Borrower existing on the
Closing Date or formed or acquired by the Borrower or any direct or indirect
Subsidiary of the Borrower from time to time thereafter.
"Guaranty" means a guaranty executed by any Person of the obligations of
another Person, or any agreement by which such Person assumes, guarantees,
endorses, contingently agrees to purchase or provide funds for the payment of,
or otherwise becomes liable upon, the obligation of any other Person, or
agrees to maintain the net worth or working capital or other financial
condition of any other Person, or otherwise assures any creditor or
<PAGE>
such other Person against loss, including, without limitation, any comfort
letter, or take-or-pay contract and shall include without limitation, the
contingent liability of such Person in connection with any application for a
letter of credit, provided that "Guaranty" shall not include (i) trade
accounts payable that are not treated as debt under GAAP as determined by the
Auditors, and required minimum amounts under the Borrower's operating
agreements, in each case for goods and services arising in the ordinary course
of business, (ii) current accrued liabilities that (A) are not treated as debt
under GAAP as determined by the Auditors and (B) arise in the ordinary course
of business, (iii) Taxes owed by the Borrower and its Subsidiaries and (iv)
amounts owed under employment agreements of the Borrower and its Subsidiaries.
"Hazardous Materials" means all materials subject to any Environmental
Law, including without limitation materials listed in 49 C.F.R. 172.101,
Hazardous Substances, explosive or radioactive materials, hazardous or toxic
wastes or substances, petroleum or petroleum distillates, asbestos, or
material containing asbestos.
"Hazardous Substances" means hazardous waste as defined in the Clean
Water Act, 33 U.S.C. 1251 et seq., the Comprehensive Environmental Response
Compensation and Liability Act as amended by the Superfund Amendments and
Reauthorization Act, 42 U.S.C. 9601 et seq., the Resource Conservation
Recovery Act, 42 U.S.C. 6901 et seq., and the Toxic Substances Control Act,
15 U.S.C. 2601 et seq.
"Highest Lawful Rate" means at the particular time in question the
maximum rate of interest which, under Applicable Law, any Lender is then
permitted to charge on the Obligations. If the maximum rate of interest
which, under Applicable Law, any Lender is permitted to charge on the
Obligations shall change after the date hereof, the Highest Lawful Rate shall
be automatically increased or decreased, as the case may be, from time to time
as of the effective time of each change in the Highest Lawful Rate without
notice to the Borrower. For purposes of determining the Highest Lawful Rate
under Applicable Law, the applicable rate ceiling shall be (a) the indicated
rate ceiling described in and computed in accordance with the provisions of
Section (a)(l) of Art. l.04; or (b) provided notice is given as required in
Section (h)(l) of Art. 1.04, either the annualized ceiling or quarterly
ceiling computed pursuant to Section (d) of Art. 1.04; provided, however, that
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at any time the indicated rate ceiling, the annualized ceiling or the
quarterly ceiling, as applicable, shall be less than 18% per annum
<PAGE>
or more than 24% per annum, the provisions of Sections (b)(1) and (2) of such
Art. l.04 shall control for purposes of such determination, as applicable.
"Income Tax Expense" means the aggregate Taxes accrued by the Borrower
and its Subsidiaries for the relevant period of determination.
"Insufficiency" means, with respect to any Plan, the amount, if any, of
its unfunded benefit liabilities within the meaning of Section 4001(a)(18) of
ERISA.
"Interest Coverage Ratio" means, on any date of determination for the
Borrower and its consolidated Subsidiaries, the ratio of (a) EBITDA for the
most recently completed four fiscal quarters minus income taxes actually paid
for the most recently completed four fiscal quarters to (b) Interest Expense,
actually paid for such period, provided that, for the purposes of any
determination of such ratio, financial information shall be calculated as if
all assets acquired on any date during the period of determination were
acquired on the first day in such period of determination, and all assets sold
on any date during the period of determination were sold on the first day in
such period of determination.
"Interest Expense" means, for the Borrower and its Subsidiaries on a
consolidated basis, all interest expense and commitment fees incurred with
respect to Total Debt of the Borrower and the Subsidiaries of the Borrower
whether accrued or paid, all fees or expenses with respect to letters of
credit, bankers' acceptances or similar facilities, excluding interest
actually paid-in-kind.
"Interest Period" means, with respect to any LIBOR Advance, the period
beginning on the date the Advance is made or continued as a LIBOR Advance and
ending one, two, three or six months thereafter (as the Borrower shall
select), provided, however, that:
(a) the Borrower may not select any Interest Period that ends after
any principal repayment date unless, after giving effect to such
selection, the aggregate principal amount of LIBOR Advances having
Interest Periods that end on or prior to such principal repayment date,
shall be at least equal to the principal amount of Advances due and
payable on and prior to such date;
<PAGE>
(b) whenever the last day of any Interest Period would otherwise
occur on a day other than a Business Day, the last day of such Interest
Period shall be extended to occur on the next succeeding Business Day,
provided, however, that if such extension would cause the last day of
such Interest Period to occur in the next following calendar month, the
last day of such Interest Period shall occur on the next preceding
Business Day; and
(c) whenever the first day of any Interest Period occurs on a day
of an initial calendar month for which there is no numerically
corresponding day in the calendar month that succeeds such initial
calendar month by the number of months equal to the number of months in
such Interest Period, such Interest Period shall end on the last Business
Day of such succeeding calendar month.
"Interest Rate Protection Agreement" means an interest rate swap, cap,
collar or similar interest rate protection agreement between the Borrower and
any Lender.
"Investment" means any acquisition of all or substantially all of the
assets of any Person, or any direct or indirect purchase or other acquisition
of, or a beneficial interest in, any Capital Stock or other securities of any
other Person, or any direct or indirect loan, advance (other than (i) advances
to employees for moving and travel expenses, (ii) drawing accounts, (iii)
deposits and advances made to contractors, vendors and others in the ordinary
course of business, (iv) earnest money deposits, good faith deposits and
similar deposits made in connection with Permitted Acquisitions, and (v)
similar expenditures in the ordinary course of business), or capital
contribution to or investment in any other Person, including without
limitation the incurrence or sufferance of Debt or accounts receivable of any
other Person that are not current assets or do not arise from sales to that
other Person in the ordinary course of business.
"Law" means any constitution, statute, law, ordinance, regulation, rule,
order, writ, injunction, or decree of any Tribunal.
"LEC" means a local exchange carrier.
"Lenders" means the lenders listed on the signature pages of this
Agreement, and each Eligible Transferee which hereafter
<PAGE>
becomes a party to this Agreement pursuant to Section 11.04 hereof or pursuant
to an amendment to this Agreement, so long as each is owed any portion of the
Obligation or is obligated to make any Advance hereunder.
"Lending Office" means, with respect to each Lender, its branch or
affiliate, (a) initially, the office of each Lender, branch or affiliate
identified as such on Schedule 11.02 hereto, and (b) subsequently, such other
office of each Lender, branch or affiliate as each Lender may designate to the
Borrower and Administrative Lender as the office from which the Advances of
each Lender will be made and maintained and for the account of which all
payments of principal and interest on the Advances and the Commitment Fee will
thereafter be made. Lenders may have more than one Lending Office for the
purpose of making Base Advances and LIBOR Advances.
"Letter of Credit Commitment" means, on any date of determination, an
amount equal to the lesser of (a) $5,000,000 and (b) the Commitment minus all
outstanding Advances.
"Letters of Credit" means the irrevocable standby letters of credit
issued by Administrative Lender under and pursuant to Article III hereof, as
each may be amended, modified, substituted, increased, replaced, renewed or
extended from time to time.
"LIBOR Advance" means an Advance bearing interest at the LIBOR Rate.
"LIBOR Lending Office" means, with respect to each Lender, the office
designated as its "LIBOR Lending Office" below its name on Schedule 11.02
--------------
hereto, or such other office of Lender or any of its affiliates hereafter
designated by notice to the Borrower and Administrative Lender.
"LIBOR Rate" shall mean, for any LIBOR Advance for any Interest Period
therefore, a rate per annum equal to the lesser of (a) the Highest Lawful Rate
and (b) the sum of (i) the Applicable Margin, plus (ii) the rate per annum
(rounded upwards, if necessary, to the nearest one-one hundredth (1/100th) of
one percent (1%)) appearing on Telerate Page 3750 (or any successor page) as
the London interbank offered rate for deposits in United States dollars at
approximately 11:00 a.m. (London time) two Business Days prior to the first
day of such Interest Period. If for any reason such rate is not available,
the term "LIBOR Rate"
<PAGE>
shall mean, for any LIBOR Advance for any Interest Period therefor, the rate
per annum (rounded upwards, if necessary, to the nearest one-one hundredth
(1/100th) of one percent (1%)) appearing on Reuters Screen LIBO page as the
London interbank offered rate for deposits in United States dollars at
approximately 11:00 a.m. (London time) two Business Days prior to the first
day of such Interest Period for a term comparable to such Interest Period;
provided, however, if more than one rate is specified on Reuters Screen LIBO
- -------- -------
Page, the applicable rate shall be the arithmetic mean of all such rates.
"License" means, as to the Borrower, or any Subsidiary of the Borrower,
any license, permit, consent, certificate of need, authorization,
certification, accreditation, franchise, approval, or grant of rights by, or
any filing or registration with, any Tribunal or third Person (including
without limitation the FCC or any applicable PUC) necessary for such Person to
own, build, maintain, or operate its business or Property.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien,
or charge of any kind, including without limitation any agreement to give or
not to give any of the foregoing, any conditional sale or other title
retention agreement, any lease in the nature thereof, and the filing of or
agreement to give any financing statement or other similar form of public
notice under the Laws of any jurisdiction (except for the filing of a
financing statement or notice in connection with an (a) operating lease or (b)
the true consignment of goods to the Borrower or any Subsidiary of the
Borrower as consignee).
"Litigation" means any proceeding, claim, lawsuit, arbitration, and/or
investigation conducted by or before any Tribunal or arbitrator, including
without limitation proceedings, claims, lawsuits, and/or investigations under
or pursuant to any environmental, occupational, safety and health, antitrust,
unfair competition, securities, Tax, or other Law, or under or pursuant to any
contract, agreement, or other instrument.
"Loan Papers" means this Agreement, the Notes, the Pledge Agreement, the
Subsidiary Guaranties, the Fee Letter[s], financing statements, any Interest
Rate Protection Agreement and related documents entered into by the Borrower
with any Lender or any Bank Affiliate, all Letters of Credit, all Applications
and all other agreements between the Borrower or any Subsidiary of the
Borrower and the Administrative Lender related to any Letter of Credit,
<PAGE>
other fee letters, Assignment and Acceptances, post-closing letters, and all
other documents, instruments, agreements, or certificates executed or
delivered from time to time by any Person in connection with this Agreement or
as security for the Obligations hereunder, granting Collateral or otherwise,
as each such agreement may be amended, modified, substituted, replaced or
extended from time to time.
"Majority Lenders" means any combination of Lenders having at least
51.00% of the aggregate amount of outstanding Advances hereunder, provided,
however, that if no Advances are outstanding, such term means any combination
of Lenders having Specified Percentages equal to at least 51.00%, and further
provided that, so long as there exists more than one Lender, in no event shall
the number of Lenders included in Majority Lenders be less than two.
"Material Adverse Effect" means, with respect to the Borrower or any of
its Subsidiaries, a material adverse effect on the properties, business,
prospects, operations or condition (financial or otherwise) of such Persons,
taken as a whole, or the ability of such Person to perform its obligations
under the Loan Papers or the Material Contracts, in each case to which it is a
party.
"Material Contract" means (a) the TDD Billing Agreement, (b) any contract
or other agreement, written or oral, of the Borrower or any of its
Subsidiaries involving monetary liability of or to any such Person in an
amount in excess of $5,000,000 per annum, and (c) any other contract or
agreement written or oral, of the Borrower or any of its Subsidiaries the
failure to comply with which could reasonably be expected to have a Material
Adverse Effect; provided that Material Contract shall not include any contract
or agreement terminable by the Borrower or any of its Subsidiaries in
accordance with its terms upon notice of thirty days or less without liability
for further payment other than a nominal penalty.
"Maturity Date" means the earlier of December 31, 1999 or three years
from the date of execution of this Agreement, whichever is earlier, or such
earlier date on which the total amount of outstanding Obligations are due and
payable (including, without limitation, whether by acceleration, scheduled
reduction of the Commitment to zero, or mandatory or voluntary commitment
reduction of the Commitment to zero).
<PAGE>
"Maximum Amount" means the maximum amount of interest which, under
Applicable Law, a Lender is permitted to charge on the Obligations.
"Multiemployer Plan" means a multiemployer plan, as defined in Section
4001(a)(3) of ERISA, to which the Borrower, any Subsidiary of the Borrower, or
any ERISA Affiliate is making or accruing an obligation to make contributions,
or has within any of the preceding five plan years made or accrued an
obligation to make contributions, such plan being maintained pursuant to one
or more collective bargaining agreements.
"Multiple Employer Plan" means a single employer plan, as defined in
Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the
Borrower, any Subsidiary of the Borrower, or any ERISA Affiliate and at least
one Person other than the Borrower, any Subsidiary of the Borrower, and any
ERISA Affiliate, or (b) was so maintained and in respect of which the
Borrower, any Subsidiary of the Borrower, or any ERISA Affiliate could have
liability under Section 4064 or 4069 of ERISA in the event such plan has been
or were to be terminated.
"Net Proceeds" means the gross cash proceeds received by the Borrower or
any Subsidiary of the Borrower in connection with or as a result of (a) any
asset sale not in the ordinary course of business, minus (so long as each of
the following are estimated in good faith by the management of the Borrower
and certified to the Lenders in reasonable detail by an Authorized Officer)
(i) actual taxes estimated in good faith by the Borrower's board of directors
incurred as a result of such sale (after giving effect to all tax benefits
available to the Borrower or such Subsidiary), and (ii) reasonable and
customary transaction costs payable by the Borrower or any Subsidiary of the
Borrower that are related to such sale and payable to a Person other than an
Affiliate of the Borrower and its Subsidiaries.
"Network Facilities" means the network of digital facilities and capacity
owned or leased by the Borrower or any of its Subsidiaries.
"Note" means each Note of the Borrower evidencing Advances hereunder,
substantially in the form of Exhibit A hereto with respect to Advances made
under the Revolving Loan and Exhibit B hereto with respect to Advances made
under the Swingline Loan, together with any extension, renewal or amendment
thereof, or substitution therefor.
<PAGE>
"Obligations" means all present and future obligations, indebtedness and
liabilities, and all renewals and extensions of all or any part thereof, of
the Borrower and each Obligor to Lenders and Administrative Lender arising
from, by virtue of, or pursuant to this Agreement, any of the other Loan
Papers and any and all renewals and extensions thereof or any part thereof, or
future amendments thereto, all interest accruing on all or any part thereof
and reasonable attorneys' fees incurred by the Administrative Lender for the
preparation of this Agreement and consummation of this credit facility,
execution of waivers, amendments and consents, and in connection with the
enforcement or the collection of all or any part thereof, and reasonable
attorneys' fees incurred by the Lenders in connection with the enforcement or
the collection of all or any part of the Obligations during the continuance of
an Event of Default, in each case whether such obligations, indebtedness and
liabilities are direct, indirect, fixed, contingent, joint, several or joint
and several. Without limiting the generality of the foregoing, "Obligations"
includes all amounts which would be owed by the Borrower, each other Obligor
and any other Person (other than Administrative Lender or Lenders) to
Administrative Lender or Lenders under any Loan Paper, but for the fact that
they are unenforceable or not allowable due to the existence of a bankruptcy,
reorganization or similar proceeding involving the Borrower, any other Obligor
or any other Person (including all such amounts which would become due or
would be secured but for the filing of any petition in bankruptcy, or the
commencement of any insolvency, reorganization or like proceeding of the
Borrower, any other Obligor or any other Person under any Debtor Relief Law).
"Obligor" means (a) the Borrower, (b) each Subsidiary of the Borrower,
(c) each other Person liable for performance of any of the Obligations and (d)
each other Person the Property of which secures the performance of any of the
Obligations.
"PBGC" means the Pension Benefit Guaranty Corporation, or any successor
agency or entity performing substantially the same functions.
"Permitted Acquisition" means acquisitions
(a) by the Borrower or any Subsidiary of the Borrower of all or
substantially all of the Capital Stock of any Person, or
<PAGE>
(b) by any Subsidiary of the Borrower of all or substantially all of
the assets of any Person, or
(c) by the Borrower or any Subsidiary of the Borrower of less than
substantially all of Capital Stock of any Person (including participating
in a joint venture which qualifies as a "Subsidiary" of the Borrower as
defined in this Agreement), or by any Subsidiary of the Borrower of less
than substantially all of the assets of any Person, so long as the
aggregate cash amount paid by the Borrower over the term of this
Agreement for all such acquisitions in this subsection (c) shall not
exceed $10,000,000,
so long as in the aggregate for all such acquisitions set forth in (a), (b)
and (c) above:
(i) the total consideration (including, without limitation,
cash, stock, assumed debt and/or guarantees for acquisitions) does
not exceed $300,000,000 in the aggregate over the term of this
Agreement and
(ii) the cash portion of all such acquisitions does not exceed
$50,000,000 over the term of this Agreement,
provided that, in any such case, if less than 50% of the total consideration
for any acquisition is paid in Capital Stock of the Borrower, then the cash
portion of the total consideration shall be limited to (A) $25,000,000 in the
aggregate in any fiscal year, if the Total Leverage Ratio (on a pro forma
basis after giving effect to such acquisition) is less than or equal to 1.25
to 1.00 (but still subject to the aggregate $50,000,000 limitation set forth
above), or (B) $15,000,000 in the aggregate in any fiscal year, if the Total
Leverage Ratio (on a pro forma basis after giving effect to such acquisition)
is greater than 1.25 to 1.00 (but still subject to the aggregate $50,000,000
limitation set forth above), and
provided further, that to the extent the Borrower consummates any public
equity offering for common Capital Stock of the Borrower and so long as there
exists no Default or Event of Default both before and after giving effect
thereto, (A) the $300,000,000 limit set forth above shall be increased by the
net cash proceeds of such equity offering actually received by the Borrower,
and (B) so long as the Leverage Ratio is less than 1.25 to 1.00 both before
and after giving effect to such transaction the cash portions permitted
<PAGE>
under subsection (ii) above may be increased by the net cash proceeds of such
equity offering actually received by the Borrower, and
provided further, that to the extent the Borrower reinvests Net Proceeds from
asset sales in accordance with the terms of Section 2.05(a) hereof, such Net
Proceeds shall be excluded from the monetary limitations set forth in this
definition.
"Permitted Liens" means, as applied to any Person:
(a) any Lien in favor of the Lenders to secure the Obligations
hereunder;
(b) (i) Liens on real estate for real estate Taxes not yet delinquent,
(ii) Liens created by lease agreements, statute or common law to secure the
payments of rental amounts and other sums not yet due thereunder, (iii) Liens
on leasehold interests created by the lessor in favor of any mortgagee of the
leased premises, and (iv) Liens for Taxes, assessments, governmental charges,
levies or claims that are being diligently contested in good faith by
appropriate proceedings and for which adequate reserves shall have been set
aside on such Person's books, but only so long as no foreclosure, restraint,
sale or similar proceedings have been commenced with respect thereto;
(c) Liens of carriers, warehousemen, mechanics, laborers and materialmen
and other similar Liens incurred in the ordinary course of business for sums
not yet due or being contested in good faith, if such reserve or appropriate
provision, if any, as shall be required by GAAP shall have been made therefor;
(d) Liens incurred in the ordinary course of business in connection with
worker's compensation, unemployment insurance or similar legislation;
(e) Easements, right-of-way, restrictions and other similar encumbrances
on the use of real property which do not interfere with the ordinary conduct
of the business of such Person;
(f) Liens in respect of judgments or awards for which appeals or
proceedings for review are being prosecuted and in respect of which a stay of
execution upon any such appeal or proceeding for review shall have been
secured, provided that (i) such Person shall have established adequate
reserves for such judgments or awards, (ii) such judgments or awards shall be
fully insured and the insurer shall not have denied coverage, or (iii) such
judgments or awards
<PAGE>
shall have been bonded to the satisfaction of the Majority Lenders; and
(g) Any Liens existing on the Closing Date which are described on
Schedule 8.03 hereto, and Liens resulting from the refinancing of the related
Debt for Borrowed Money, provided that the Debt for Borrowed Money secured
thereby shall not be increased and the Liens shall not cover additional assets
of the Borrower, or any such Subsidiary.
"Person" means an individual, partnership, joint venture, corporation,
trust, Tribunal, unincorporated organization, and government, or any
department, agency, or political subdivision thereof.
"Plan" means a Single Employer Plan or a Multiple Employer Plan.
"Pledge Agreement" means the Pledge Agreement of even date herewith,
executed by the Borrower and any Subsidiary of the Borrower, granting a Lien
on Capital Stock of each of the Borrower's Subsidiaries constituting Pledged
Stock as security for the Obligations, substantially in the form of Exhibit J
hereto, as such agreement may be amended, modified, renewed or extended from
time to time, and "Pledge Agreement" shall also include each such pledge
agreement pledging the Capital Stock of the Subsidiaries of the Borrower
listed on Schedule 4.01(d) hereto, and all other Subsidiaries of the Borrower
created or acquired from time to time, and all amendments, modifications,
renewals and extensions to any thereof.
"Pledged Stock" means all of the Capital Stock of all of the Subsidiaries
of the Borrower.
"Prohibited Transaction" has the meaning specified in Section 4975 of the
Code or Section 406 of Title I of ERISA.
"Property" means all types of real, personal, tangible, intangible, or
mixed property, whether owned or hereafter acquired in fee simple or leased by
the Borrower and its Subsidiaries.
"Pro Rata" means, as to any Lender, in accordance with its percentage of
the aggregate amount of outstanding Advances;
<PAGE>
provided, however, that if no Advances are outstanding, such term means in
- -------- --------
accordance with such Lender's Specified Percentage.
"PUC" means any state regulatory agency or body that exercises
jurisdiction over the rates or services or the ownership, construction or
operation of any Network Facility or long distance telecommunications systems
or over Persons who own, construction or operate a Network Facility or long
distance telecommunications systems, in each case by reason of the nature or
type of the business subject to regulation and not pursuant to laws and
regulations of general applicability to Persons conducting business in such
state.
"Quarterly Date" means the last Business Day of each March, June,
September and December during the term of this Agreement.
"Ratable" means, as to any Lender, in accordance with its Specified
Percentage.
"Refinancing Advance" means any Advance which is used to pay the
principal amount (or any portion thereof) of an Advance at the end of its
Interest Period and which, after giving effect to such application, does not
result in an increase in the aggregate amount of outstanding Advances.
"Release Date" means the date on which the Notes have been paid, all
other Obligations due and owing have been paid and performed in full, and the
Commitment has been terminated.
"Restricted Payments" means (a) any direct or indirect Distribution,
dividend or other payment on account of any equity interest in, or shares of
Capital Stock or other securities of, the Borrower and its Subsidiaries (or
the establishment of any sinking fund or otherwise the setting aside of any
funds with respect thereto); (b) any management, consulting or other similar
fees, or any interest thereon, payable by the Borrower or any of its
Subsidiaries to any Affiliate of the Borrower, or to any other Person other
than an unrelated third party (or the establishment of any sinking fund or
otherwise the setting aside of any funds with respect thereto), but
specifically excluding full time employment contracts; and (c) loans or
advances to employees and/or shareholders of the Borrower and its
Subsidiaries, except advances to such employees for moving and travel expenses
in the ordinary course of business.
<PAGE>
"Revolving Advance" means any Advance made under the Revolving Loan.
"Revolving Loan" means the loan made by a Lender pursuant to Section
2.01(a) of this Agreement.
"Rights" means rights, remedies, powers, and privileges.
"Single Employer Plan" means a single employer plan, as defined in
Section 4001(a)(15) of ERISA, other than a Multiple Employer Plan of the
Borrower.
"Solvent" means, with respect to any Person, that on such date (a) the
fair value of the Property of such Person is greater than the total amount of
liabilities, including without limitation Contingent Liabilities of such
Person, (b) the present fair salable value of the assets of such Person on a
going concern basis is not less than the amount that will be required to pay
the probable liability of such Person on its debts as they become absolute and
matured, (c) such Person does not intend to, and does not believe that it
will, incur debts or liabilities beyond such Person's ability to pay as such
debts and liabilities mature, and (d) such Person is not engaged in business
or a transaction, and is not about to engage in business or a transaction, for
which such Person's Property would constitute an unreasonably small capital.
"Special Counsel" means the law firm of Donohoe, Jameson & Carroll, P.C.,
Dallas, Texas, or such other individual or firm acting as special counsel to
Administrative Lender, as designated by Administrative Lender from time to
time.
"Specified Percentage" means, as to any Lender, the percentage indicated
beside its name on the signature pages hereof, or as adjusted or specified in
any Assignment and Acceptance or in any amendment to this Agreement.
"Subsidiary" of any Person means any corporation, partnership, joint
venture, trust or estate of which (or in which) 50% or more of:
(a) the outstanding Capital Stock having voting power to elect a
majority of the Board of Directors of such corporation (irrespective of
whether at the time Capital Stock of any other class or classes of such
corporation shall or might have voting power upon the occurrence of any
contingency),
<PAGE>
(b) the interest in the capital or profits of such partnership or
joint venture, or
(c) the beneficial interest of such trust or estate,
is at the time directly or indirectly owned by such Person, by such Person and
one or more of its Subsidiaries or by one or more of such Person's
Subsidiaries.
"Subsidiary Guaranty" means the Guaranty, executed by each Subsidiary of
the Borrower, guarantying payment and performance of the Obligations,
substantially in the form of Exhibit G attached hereto, as such agreement may
---------
be amended, modified, renewed or extended from time to time, and each
subsequent Guaranty in the form of Exhibit G here to executed by any newly
---------
acquired or created Subsidiary of the Borrower, as each such agreement may be
amended, modified, renewed or extended from time to time.
"Swingline Advance" means an Advance made under the Swingline Loan
bearing interest at a per annum rate equal to the lesser of (a) the Highest
Lawful Rate and (b) the sum of the Base Rate plus the Applicable Margin.
"Swingline Commitment" means the lesser of (a) $5,000,000 and (b) the
Commitment, minus the sum of (i) all outstanding Advances (both Swingline
Advances and Revolving Advances), plus (ii) all outstanding Letters of Credit,
plus (iii) all reimbursement obligations under Article III hereof.
"Swingline Lender" means NationsBank of Texas, N.A.
"Swingline Loan" means the loan made by the Swingline Lender pursuant to
Section 2.01(b) hereof.
"Taxes" means all taxes, assessments, imposts, fees, or other charges at
any time imposed by any Laws or Tribunal.
"TDD" means Telco Development Group of Delaware, Inc., a Delaware
corporation, 100% of the Capital Stock of which is owned by the Borrower.
"TDD Billing Agreement" means the Billing and Information Management
Service Agreement dated as of January 2, 1996 between TDD and the Borrower (as
the same may be amended supplemented, modified or replaced from time to time
and including any similar
<PAGE>
agreements entered into between TDD and the Borrower during the term of this
Agreement) pursuant to which TDD will, upon submission to it of billing
information for Borrower rated calls and in exchange for certain processing
and other fees therein specified, process such billing information and act as
the Borrower's agent to collect accounts receivable due to the Borrower from
one or more LECs.
"Total Debt" means all Debt for Borrowed Money of a Person which would be
shown on a balance sheet in accordance with GAAP, including, without
limitation, (a) Capital Lease obligations, (b) Debt of any other Person
secured by a Lien on the property of the Borrower or any Subsidiary of the
Borrower, (c) Contingent Liabilities and (d) Withdrawal Liability.
"Total Leverage Ratio" means, on any date of determination, the ratio of
(a) Total Debt of the Borrower and its Subsidiaries (without duplication) on
such date, to (b) Annualized EBITDA; provided that, for purposes of this
calculation, financial information will be calculated as if all assets
acquired on any date during the period of determination for Annualized EBITDA
were acquired on the first day of such period of determination, and all assets
sold on an date during such period were sold on the first day in such period.
"Tribunal" means any state, commonwealth, federal, foreign, territorial,
or other court or government body, subdivision, agency, department,
commission, board, bureau, or instrumentality of a governmental body.
"Type" refers to the distinction between Advances bearing interest at
the Base Rate and LIBOR Rate.
"UCC" means the Uniform Commercial Code as adopted in the State of Texas
on the Closing Date.
"Withdrawal Liability" has the meaning given such term under Part I of
Subtitle E of Title IV of ERISA.
1.02. Accounting and Other Terms. All accounting terms used in this
Agreement which are not otherwise defined herein shall be construed in
accordance with GAAP on a consolidated basis for the Borrower and its
Subsidiaries, unless otherwise expressly stated herein. References herein to
one gender shall be deemed to include all other genders. Except where the
context otherwise
<PAGE>
requires, (a) definitions imparting the singular shall include the plural and
vice versa and (b) all references to time are deemed to refer to Dallas time.
ARTICLE II. THE LOAN FACILITY
2.01. The Loans.
(a) Revolving Loan. Each Lender severally agrees, on the terms and
subject to the conditions hereinafter set forth, to make Advances to the
Borrower on a Business Day during the period from the Closing Date to the
Maturity Date, in an aggregate principal amount not to exceed at any time
outstanding such Lender's Specified Percentage of the difference between the
Commitment and the sum of (i) all outstanding Swingline Advances, plus (ii)
the face amount of all outstanding Letters of Credit, plus (iii) reimbursement
obligations under Article III hereof. Subject to the terms and conditions of
this Agreement, the Borrower may borrow, repay and reborrow the Advances;
provided, however, that at no time shall the sum of (i) all outstanding
Revolving Advances, plus (ii) the face amount of all outstanding Letters of
Credit, plus (iii) reimbursement obligations under Article III hereof, plus
(iv) all outstanding Swingline Advances ever exceed the Commitment.
(b) Swingline Loan. Subject to the conditions set forth in this
Agreement, the Swingline Lender in its individual capacity agrees to make
Swingline Advances to the Borrower from time to time prior to the Maturity
Date in the aggregate principal amount at any one time outstanding not to
exceed the Swingline Commitment; provided, that the sum of all outstanding
Swingline Advances plus all outstanding Revolving Advances, plus the face
amount of all outstanding Letters of Credit plus reimbursement obligations
shall not exceed the Commitment. Subject to the foregoing, the Borrower may
borrow, repay and reborrow Swingline Advances at any time prior to the
Maturity Date.
(c) Mandatory Revolving Advances. The Swingline Lender may, in its sole
discretion on any date that is five days after the date of such Swingline
Advance, give notice to the Lenders on any Business Day that such outstanding
Swingline Advance shall be converted to a Revolving Advance (provided that
such notice shall be deemed to have been automatically given upon the exercise
of any of the remedies provided in Section 9.02 hereof) or upon the occurrence
of a Default or an Event of Default under Section 9.01
<PAGE>
hereof, in which case a Revolving Advance (each such Advance being herein
referred to as a "Mandatory Borrowing") shall be made on the immediately
succeeding Business Day from all Lenders pro rata based on each Lender's
Specified Percentage, and the proceeds of such Revolving Advance shall be
applied directly to repay such outstanding Swingline Advance. Each Lender
hereby irrevocably agrees to make a Revolving Advance upon one Business Day's
notice pursuant to each Mandatory Borrowing in the amount and in the manner
specified in the preceding sentence and on the date specified in writing by
the Swingline Lender notwithstanding (i) that the amount of the Mandatory
Borrowing may not comply with any minimum amount for Borrowings otherwise
required hereunder, (ii) whether any conditions specified in Article IV hereof
are then satisfied, (iii) whether a Default or an Event of Default then
exists, (iv) the date of such Mandatory Borrowing and (v) the aggregate amount
of the Commitment at such time.
If any Mandatory Borrowing cannot for any reason be made on the date
otherwise required above (including, without limitation, as a result of the
commencement of a proceeding under the Bankruptcy Code with respect to the
Borrower), each Lender hereby agrees that it shall forthwith purchase (as of
the date on which the Mandatory Borrowing would otherwise have occurred, but
adjusted for any payments received from the Borrower on or after such date and
prior to such purchase) from the Swingline Lender such participations in the
outstanding Swingline Advances as shall be necessary to cause the Lenders to
share in such Swingline Advances ratably based upon its Specified Percentage
of the Commitment (determined before giving effect to any termination of the
Revolving Commitment); provided that (i) all interest payable on the Swingline
Advance shall be for the account of the Swingline Lender until the date as of
which the respective participation is required to be purchased and, to the
extent attributable to the purchased participation, shall be payable to the
participating Lender from and after such date and (ii) at the time any
purchase of participations pursuant to this sentence is actually made, the
purchasing Lender shall be required to pay the Swingline Lender interest on
the principal amount of the participation purchased for each day from and
including the day upon which the Mandatory Borrowing would otherwise have
occurred to but excluding the date of payment for such participation, at the
overnight Federal Funds Rate for the first three days and at the rate
otherwise applicable to Revolving Advances hereunder for each day thereafter.
<PAGE>
2.02. Making Advances.
(a) Each Borrowing of Advances shall be made upon the written notice of
the Borrower, received by Administrative Lender not later than (i) 10:00 a.m.
three Business Days prior to the date of the proposed Borrowing, in the case
of Revolving Advances which are LIBOR Advances and (ii) 10:00 a.m. on the date
of such Borrowing, in the case of Revolving Advances or Swingline Advances
which are Base Advances. Each such notice of a Borrowing (a "Borrowing
Notice") shall be by telecopy or telephone, promptly confirmed by letter, in
substantially the form of Exhibit D hereto specifying therein:
(i) the date of such proposed Borrowing, which shall be a
Business Day;
(ii) if such Advance is to be a Revolving Advance, the Type of
Advances of which the Borrowing is to be comprised;
(iii) the amount of such proposed Borrowing which, (A) in the
case of Advances, shall not exceed the unused portion of the Commitment,
(B) shall, in the case of a Borrowing of Base Advances under the
Revolving Loan, be in an amount of not less than $100,000 or an integral
multiple of $50,000 in excess thereof (or any lesser amount if such
amount is the remaining undrawn portion under the Commitment), (C) shall,
in the case of a Borrowing under the Revolving Loan of LIBOR Advances, be
in an amount of not less than $500,000 or an integral multiple of
$100,000 in excess thereof, or (d) in the case of a Borrowing of
Swingline Advances, any dollar amount; and
(iv) if the Borrowing under the Revolving Loan is to be
comprised of LIBOR Advances, the duration of the initial Interest Period
applicable to such Advances.
If the Borrowing Notice fails to specify the duration of the initial Interest
Period for any Borrowing comprised of LIBOR Advances, such Interest Period
shall be three months. Administrative Lender shall promptly notify Lenders of
each such notice. Each Lender shall, before 1:00 p.m. on the date of each
Advance under the Revolving Loan hereunder (other than a Refinancing Advance),
make available to Administrative Lender, at
<PAGE>
its office at NationsBank Plaza, 901 Main Street, Dallas, Texas 75202, such
Lender's Specified Percentage of the aggregate Advances to be made on that day
in immediately available funds.
(b) Unless any applicable condition specified in Article IV has not been
satisfied, Administrative Lender will make the funds promptly available to the
Borrower (other than with respect to a Refinancing Advance) by either (i)
wiring such amounts pursuant to any wiring instructions, or (ii) depositing
such amount in the account of the Borrower at the Administrative Lender, in
each case as specified by the Borrower to the Administrative Lender in
writing.
(c) After giving effect to any Borrowing, (i) there shall not be more
than five different Interest Periods in effect and (ii) the aggregate
principal amount of outstanding Advances, Letters of Credit, and reimbursement
obligations under Article III shall not exceed the Commitment.
(d) No Interest Period applicable to any Advance shall extend beyond the
Maturity Date.
(e) Unless a Lender shall have notified Administrative Lender prior to
the date of any Revolving Advance that it will not make available its
Specified Percentage of any Revolving Advance, Administrative Lender may
assume that such Lender has made the appropriate amount available in
accordance with Section 2.02(a) hereof, and Administrative Lender may, in
reliance upon such assumption, make available to the Borrower a corresponding
amount. If and to the extent any Lender shall not have made such amount
available to Administrative Lender, such Lender and the Borrower severally
agree to repay to Administrative Lender immediately on demand such
corresponding amount together with interest thereon, from the date such amount
is made available to the Borrower until the date such amount is repaid to
Administrative Lender, at (i) in the case of the Borrower, the Base Rate, and
(ii) in the case of such Lender, the Federal Funds Rate.
(f) The failure by any Lender to make available its Specified Percentage
of any Revolving Advance hereunder shall not relieve any other Lender of its
obligation, if any, to make available its Specified Percentage of any
Revolving Advance. In no event, however, shall any Lender be responsible for
the failure of any other Lender to make available any portion of any Revolving
Advance.
<PAGE>
(g) The Borrower shall indemnify each Lender against any Consequential
Loss incurred by each Lender as a result of (i) any failure to fulfill, on or
before the date specified for the Advance, the conditions to the Advance set
forth herein or (ii) the Borrower's requesting that an Advance not be made on
the date specified in the Borrowing Notice.
2.03. Evidence of Debt for Borrowed Money.
(a) The Advances made by each Lender shall be evidenced by a Note in
the amount of such Lender's Specified Percentage of the Commitment in effect
on the Closing Date; provided, however, that Swingline Advances shall be
evidenced by a Note evidencing the Swingline Loan payable to the Swingline
Lender in the amount of $5,000,000.
(b) Administrative Lender's and each Lender's records shall be
presumptive evidence as to amounts owed Administrative Lender and such Lender
under the Notes and this Agreement.
2.04. Optional Prepayments.
(a) The Borrower may, upon at least two Business Days prior written
notice to Administrative Lender stating the proposed date and aggregate
principal amount of the prepayment, prepay the outstanding principal amount of
any Advances in whole or in part, together with accrued interest to the date
of such prepayment on the principal amount prepaid without premium or penalty
other than any Consequential Loss; provided, however, that in the case of a
prepayment of a Base Advance, the notice of prepayment may be given by
telephone by 10:00 a.m. on the date of prepayment. Each partial prepayment
shall, in the case of Base Advances under the Revolving Loan, be in an
aggregate principal amount of not less than $100,000 or a larger integral
multiple of $50,000 in excess thereof and, in the case of LIBOR Advances, be
in an aggregate principal amount of not less than $500,000 or a larger
integral multiple of $100,000 in excess thereof, and in the case of Base Rate
Advances under the Swingline Loan, no minimum shall apply. If any notice of
prepayment is given, the principal amount stated therein, together with
accrued interest on the amount prepaid and the amount, if any, due under
Section 2.12 and Section 2.14 hereof, shall be due and payable on the date
specified in such notice unless the Borrower revokes its notice, provided
that, if the Borrower revokes its notice of prepayment prior to such date
specified, the Borrower shall reimburse the Administrative Lender for the
account of all
<PAGE>
Lenders for all Consequential Losses suffered by each Lender as a result of
the Borrower's failure to prepay. A certificate of each Lender claiming
compensation under this Section 2.04(a), setting forth in reasonable detail
the calculation of the additional amount or amounts to be paid to it hereunder
shall be presumptive evidence of the validity of such claim.
(b) No prepayments of Advances made solely pursuant to this Section 2.04
shall cause the Commitment to be reduced. Subject to Section 2.13(f) hereof,
the Administrative Lender shall apply such prepayment as designated by the
Borrower.
2.05. Mandatory Prepayments.
(a) Asset Sales. To the extent that the Borrower or any of its
Subsidiaries consummates any sale of any asset or any of its Properties other
than in the ordinary course of business, then the Borrower and its
Subsidiaries shall immediately use the Net Proceeds of any such transaction to
repay the Obligations in the following order (i) first the principal amount of
all Swingline Advances until payment in full (together with all accrued
interest thereon), (ii) and then Revolving Advances hereunder (together with
all accrued interest thereon), provided that, so long as there exists no
Default or Event of Default prior to and after giving effect to any such sale
or disposition, the Borrower may reinvest the Net Proceeds of all such sales
and dispositions in acquisitions in accordance with the terms of Section
8.05(b) hereof so long as (A) the Borrower certifies to the Administrative
Lender at the time of its receipt of all such Net Proceeds that such Net
Proceeds are intended to be used within 12 months after the date of such sale
or disposition to acquire telecommunication assets in accordance with the
terms of this Agreement to be owned by a wholly owned Subsidiary of the
Borrower, which certification shall set forth in general terms the plans for
acquiring such telecommunication assets (including, to the extent possible,
identification of the telecommunication assets to be acquired and the status
of any negotiations), (B) to the extent any such Net Proceeds are held by the
Borrower in excess of one year, the Borrower shall immediately prepay the
Obligations as set forth above, and (C) to the extent there exists at any time
an Event of Default prior to the consummation of any such acquisition, the
Borrower shall immediately prepay the Obligations as set forth above. All
prepayments made pursuant to this Section 2.05(a) shall be applied to reduce
outstanding Advances.
<PAGE>
(b) Mandatory Prepayments, Generally. Any prepayments made pursuant to
this Section 2.05 shall be first applied to Base Advances under the Swingline
Loan, then to Base Advances under the Revolving Loan, and then to LIBOR
Advances, without premium or penalty, except the Borrower must pay together
with any such prepayments, any Consequential Losses.
2.06. Repayment.
(a) LIBOR Advances. The principal amount of each LIBOR Advance is
due and payable on the last day of the applicable Interest Period, which
principal payment may be made by means of a Refinancing Advance (subject to
the other provisions of this Agreement).
(b) Commitment Reduction. On the date of a reduction of the
Commitment pursuant to Section 2.11 hereof, the aggregate amount of
outstanding Revolving Advances in excess of such Commitment as reduced shall
be immediately due and payable, and the aggregate amount of outstanding
Swingline Advances in excess of the Swingline Commitment as reduced shall be
immediately due and payable (neither of such principal repayments may be made
by means of Refinancing Advances).
(c) Repayments, Generally. Any repayments made pursuant to this
Section shall be applied in accordance with Section 2.13(f) hereof, without
premium or penalty, except the Borrower must pay together with any such
prepayments, any Consequential Losses.
2.07. Interest. Subject to Section 2.08 and Section 11.08 hereof,
the Borrower shall pay interest on the unpaid principal amount of each Advance
from the date of such Advance until such principal shall be paid in full, on
the outstanding (a) Swingline Advances at the Base Rate as set forth in
subsection (i) below, and (b) Revolving Advances at either the Base Rate or
LIBOR Rate as set forth in subsection (i) or (ii) below, as selected by the
Borrower in accordance with Section 2.02 hereof and as follows:
(i) Base Advances. Base Advances shall bear interest at a rate
per annum equal to the Base Rate as in effect from time to time. If the
amount of interest payable in respect of any interest computation period
is reduced to the Highest Lawful Rate and the amount of interest payable
in respect
<PAGE>
of any subsequent interest computation period would be less
than Maximum Amount, then the amount of interest payable in respect of
such subsequent interest computation period shall be automatically
increased to the Maximum Amount; provided that at no time shall the
aggregate amount by which interest paid has been increased pursuant to
this sentence exceed the aggregate amount by which interest has been
reduced pursuant to this sentence.
(ii) LIBOR Advances. LIBOR Advances shall bear interest at the
rate per annum equal to the LIBOR Rate applicable to such Advance.
(iii) Payment Dates. Accrued and unpaid interest on Base
Advances shall be paid quarterly in arrears on each Quarterly Date and on
the Maturity Date. Accrued and unpaid interest in respect of each LIBOR
Advance shall be paid on the last day of the appropriate Interest Period
and on the date of any prepayment or repayment of such Advance; provided,
however, that if any Interest Period for a LIBOR Advance exceeds three
months, interest shall also be paid on the date which falls three months
after the beginning of such Interest Period.
2.08. Default Interest. During the continuation of any Event of
Default, the Borrower shall pay, on demand, interest (after as well as before
judgment to the extent permitted by Law) on the principal amount of all
Advances outstanding and on all other Obligations due and unpaid hereunder at
a per annum rate equal to the lesser of the (a) the Highest Lawful Rate and
(b) the Base Rate plus 2%. LIBOR Advances shall not be available for
selection by the Borrower during the continuance of an Event of Default.
2.09. Continuation and Conversion Elections.
(a) The Borrower may upon irrevocable written notice to
Administrative Lender and subject to the terms of this Agreement:
(i) elect to convert, on any Business Day, all or any portion of
outstanding Revolving Advances which are Base Advances (in an aggregate
amount not less than $500,000 or an integral multiple of $100,000 in
excess thereof) into LIBOR Advances; or
(ii) elect to convert at the end of any Interest Period
therefor, all or any portion of outstanding Revolving
<PAGE>
Advances which are LIBOR Advances comprised in the same Borrowing (in an
aggregate amount not less than $100,000 or an integral multiple of
$50,000 in excess thereof) into Base Advances; or
(iii) elect to continue, at the end of any Interest Period
therefor, any Revolving Advances which are LIBOR Advances;
provided, however, that if the aggregate amount of outstanding LIBOR Advances
comprised in the same Borrowing shall have been reduced as a result of any
payment, prepayment or conversion of part thereof to an amount less than
$500,000, the LIBOR Advances comprised in such Borrowing shall automatically
convert into Base Advances at the end of each respective Interest Period.
(b) The Borrower shall deliver a notice of conversion or continuation
(a "Conversion or Continuation Notice"), in substantially the form of Exhibit
E hereto, to Administrative Lender not later than 10:00 a.m. (i) three
Business Days prior to the proposed date of conversion or continuation, if the
Revolving Advances or any portion thereof are to be converted into or
continued as LIBOR Advances; and (ii) on the Business Day of the proposed
conversion, if the Revolving Advances or any portion thereof are to be
converted into Base Advances.
Each such Conversion or Continuation Notice shall be by telecopy or
telephone, promptly confirmed by letter, specifying therein:
(i) the proposed date of conversion or continuation;
(ii) the aggregate amount of Revolving Advances to be converted
or continued;
(iii) the nature of the proposed conversion or continuation; and
(iv) the duration of the applicable Interest Period.
(c) If, upon the expiration of any Interest Period applicable to LIBOR
Advances, the Borrower shall have failed to select a new Interest Period to be
applicable to such LIBOR Advances or if an Event of Default shall then have
occurred and be continuing, the
<PAGE>
Borrower shall be deemed to have elected to convert such LIBOR Advances into
Base Advances effective as of the expiration date of such current Interest
Period.
(d) Notwithstanding any other provision contained in this Agreement,
after giving effect to any conversion or continuation of any Advances, there
shall not be outstanding Advances with more than five different Interest
Periods.
2.10. Fees.
(a) Facility Fee. Subject to Section 11.08 hereof, the Borrower
shall pay to Administrative Lender (for the sole account of Administrative
Lender) an origination and facility fee as set forth in any Fee Letters.
(b) Commitment Fee. Subject to Section 11.08 hereof, the Borrower
shall pay to Administrative Lender for the Ratable account of Lenders a
commitment fee (the "Commitment Fee") on the average daily amount of the
difference between (i) the Commitment and (ii) the sum of (A) all outstanding
Revolving Advances and (B) the face amount of all outstanding Letters of
Credit, at the per annum rate of 0.25%, payable in arrears on each Quarterly
Date commencing with the first Quarterly Date after the Closing Date, and
continuing until the Maturity Date.
(c) Other Fees. Borrower shall pay to Administrative Lender and the
Lenders such other fees as set forth in any Fee Letter addressed to the
Administrative Lender or any Lender.
2.11. Reduction of Commitment.
(a) Mandatory Termination of the Commitment. The Commitment shall be
reduced to zero and terminate on the Maturity Date.
(b) Mandatory Reduction Due to Asset Sales. The Commitment shall be
reduced automatically in an amount equal to 100% of the Net Proceeds received
by Borrower or any of its Subsidiaries from the sale of assets other than in
the ordinary course of business, provided that, so long as there exists no
Default or Event of Default both before and after giving effect to such sale
or disposition, the Borrower may reinvest the Net Proceeds of all such sales
and dispositions in acquisitions permitted by Section 8.05(b) hereof and the
Commitment will not be reduced so long as (A) the Borrower certifies to the
Administrative Lender at the time of its
<PAGE>
receipt of all such Net Proceeds that such Net Proceeds are intended to be
used within 12 months after the date of such sale or disposition to acquire
telecommunication assets in accordance with the terms of this Agreement to be
owned by a wholly owned Subsidiary of the Borrower, which certification shall
set forth in general terms the plans for acquiring such telecommunication
assets (including, to the extent possible, identification of the
telecommunication assets to be acquired and the status of any negotiations),
(B) to the extent any such Net Proceeds are held by the Borrower in excess of
one year, the Commitment shall immediately and automatically reduce by such
amount as set forth above, and (C) to the extent there exists at any time an
Event of Default prior to the consummation of any such acquisition, the
Commitment shall be immediately and automatically reduced in the amount of
such Net Proceeds.
(c) Voluntary Commitment Reductions. The Borrower may from time to
time, upon notice to Administrative Lender not later than 1:00 p.m., five
Business Days in advance, terminate in whole or reduce in part the Commitment,
as designated by the Borrower; provided, however, that the Borrower shall pay
the accrued interest and the applicable accrued Commitment Fee on the amount
of such reduction and all amounts due, and any partial reduction shall be in
an aggregate amount which is an integral multiple of $5,000,000.
(d) Commitment Reductions, Generally. To the extent outstanding
Advances exceed the Commitment after any reduction thereof, the Borrower shall
repay, on the date of such reduction, any such excess amount and all accrued
interest thereon, the applicable Commitment Fee on the amount of such
reduction and all amounts due. Once reduced or terminated, the Commitment may
not be increased or reinstated.
2.12. Funding Losses. The Borrower may prepay the outstanding
principal balance of any Advance, in full at any time or in part from time to
time in accordance with the terms of Section 2.04 hereof, provided, that as a
condition precedent to the Borrower's right to make, and any Lender's
obligation to accept, any such prepayment, each such prepayment shall be in
the amount of 100% of the principal amount to be prepaid, plus accrued unpaid
interest thereon to the date of prepayment, plus any other sums which have
become due to Administrative Lender and Lenders under the Loan Papers on or
before the prepayment date but have not been paid, plus (subject to Section
11.08 hereof) any Consequential Loss.
<PAGE>
The Borrower agrees that each Lender is not obligated to actually
reinvest the amount prepaid in any specific obligation as a condition to
receiving any Consequential Loss, or otherwise.
2.13. Computations and Manner of Payments.
(a) The Borrower shall make each payment hereunder and under the
other Loan Papers not later than 1:00 p.m. on the day when due in same day
funds (by wire transfer or otherwise) to Administrative Lender, for the
account of Lenders unless otherwise specifically provided herein, at
Administrative Lender's office at NationsBank Plaza, 901 Main Street, Dallas,
Texas 75202, for further credit to the account of Telco Communications Group,
Inc. No later than the end of each day when each payment hereunder is made,
the Borrower shall notify Loan Operations at (214) 508-9192 or such other
Person as Administrative Lender may from time to time specify.
(b) Unless Administrative Lender shall have received notice from the
Borrower prior to the date on which any payment is due hereunder that the
Borrower will not make payment in full, Administrative Lender may assume that
such payment is so made on such date and may, in reliance upon such
assumption, make distributions to Lenders. If and to the extent the Borrower
shall not have made such payment in full, each Lender shall repay to
Administrative Lender forthwith on demand the applicable amount distributed,
together with interest thereon at the Federal Funds Rate, from the date of
distribution until the date of repayment. The Borrower hereby authorizes each
Lender, if and to the extent payment is not made when due hereunder, to charge
the amount so due against any account of the Borrower with such Lender.
(c) Subject to Section 11.08 hereof, interest on LIBOR Advances under
the Loan Papers shall be calculated on the basis of actual days elapsed but
computed as if each year consisted of 360 days. Subject to Section 11.08
hereof, interest on Base Advances, the Commitment Fee and other amounts due
under the Loan Papers shall be calculated on the basis of actual days elapsed
but computed as if each year consisted of 365 or 366 days, as applicable.
Such computations shall be made including the first day but excluding the last
day occurring in the period for which such interest, payment or Commitment Fee
is payable. Each determination by Administrative Lender or a Lender of an
interest rate, fee or commission hereunder shall be presumptive evidence of
the validity of such claim. All payments under the Loan Papers shall be made
in United States dollars, and without setoff,
<PAGE>
counterclaim, or other defense.
(d) Whenever any payment to be made hereunder or under any other Loan
Papers shall be stated to be due on a day other than a Business Day, such
payment shall be made on the next succeeding Business Day, and such extension
of time shall be included in the computation of interest or fees, if
applicable; provided, however, if such extension would cause payment of
interest on or principal of LIBOR Advances to be made in the next following
calendar month, such payment shall be made on the next preceding Business Day.
(e) Reference to any particular index or reference rate for
determining any applicable interest rate under this Agreement is for purposes
of calculating the interest due and is not intended as and shall not be
construed as requiring any Lender to actually obtain funds for any Advance at
any particular index or reference rate.
(f) Notwithstanding anything in this Agreement to the contrary, all
payments received by the Administrative Lender from the Borrower shall be
applied as follows:
(i) Except as stated in Section 2.05 hereof, so long as there then
exists no Event of Default, the Administrative Lender shall apply all
such payments as between the Revolving Loan and the Swingline Loan as
directed by the Borrower and, in the absence of any direction by the
Borrower, first to any amounts due and payable under the Swingline Loan,
and secondly to reduce the outstanding Advances under the Revolving Loan
in accordance with each Lender's Specified Percentage.
(ii) If there then exists an Event of Default, notwithstanding any
direction by the Borrower, the Administrative Lender shall apply all such
payments received by it from the Borrower to reduce the Revolving Loans
and the Swingline Loans ratably in accordance with each Lender's
percentage of all outstanding Advances, provided that, for purposes of
determining the total of Revolving Advances, all Swingline Advances shall
be treated as if such Advances have been converted to Revolving Advances,
whether such conversion had occurred or not.
<PAGE>
2.14. Yield Protection; Changed Circumstances.
(a) If any Lender determines that either (i) the adoption, after the
date hereof, of any Applicable Law, rule, regulation or guideline regarding
capital adequacy and applicable to commercial banks or financial institutions
generally or any change therein, or any change, after the date hereof, in the
interpretation or administration thereof by any Tribunal, central bank or
comparable agency charged with the interpretation or administration thereof,
or (ii) compliance by any Lender (or Lending Office of any Lender) with any
request or directive made after the date hereof applicable to commercial banks
or financial institutions generally regarding capital adequacy (whether or not
having the force of law) of any such authority, central bank or comparable
agency has the effect of reducing the rate of return on such Lender's capital
as a consequence of its obligations hereunder to a level below that which such
Lender could have achieved but for such adoption, change or compliance (taking
into consideration such Lender's policies with respect to capital adequacy) by
an amount reasonably deemed by such Lender to be material, then from time to
time, within fifteen days after demand by such Lender, the Borrower shall pay
to such Lender such additional amount or amounts as will adequately compensate
such Lender for such reduction. Each Lender will notify the Borrower of any
event occurring after the date of this Agreement which will entitle such
Lender to compensation pursuant to this Section 2.14(a) as promptly as
practicable after such Lender obtains actual knowledge of such event;
provided, no Lender shall be liable for its failure or the failure of any
other Lender to provide such notification. A certificate of such Lender
claiming compensation under this Section 2.14(a), setting forth in reasonable
detail the calculation of the additional amount or amounts to be paid to it
hereunder and certifying that such claim is consistent with such Lender's
treatment of similar customers having similar provisions generally in their
agreements with such Lender shall be presumptive evidence of the validity of
such claim. Each Lender shall use reasonable efforts to mitigate the effect
upon the Borrower of any such increased costs payable to such Lender under
this Section 2.14(a).
(b) If, after the date hereof, any Tribunal, central bank or other
comparable authority, at any time imposes, modifies or deems applicable any
reserve (including, without limitation, any imposed by the Board of Governors
of the Federal Reserve System), special deposit or similar requirement against
assets of, deposits with
<PAGE>
or for the amount of, or credit extended by, any Lender, or imposes on any
Lender any other condition affecting a LIBOR Advance, the Notes, or its
obligation to make a LIBOR Advance, or imposes on any Lender any other
condition affecting a Letter of Credit; and the result of any of the foregoing
is to increase the cost to such Lender of making or maintaining its Letter of
Credit, LIBOR Advances, or to reduce the amount of any sum received or
receivable by such Lender under this Agreement or under the Notes, the Letters
of Credit or reimbursement obligations by an amount deemed by such Lender, to
be material, then, within five days after demand by such Lender, the Borrower
shall pay to such Lender such additional amount or amounts as will compensate
such Lender for such increased cost or reduction. Each Lender will (i) notify
the Borrower of any event occurring after the date of this Agreement that
entitles such Lender to compensation pursuant to this Section 2.14(b), as
promptly as practicable after such Lender obtains actual knowledge of the
event; provided, no Lender shall be liable for its failure or the failure of
any other Lender to provide such notification and (ii) use good faith and
reasonable efforts to designate a different Lending Office for LIBOR Advances,
of such Lender if the designation will avoid the need for, or reduce the
amount of, the compensation and will not, in the sole opinion of such Lender,
be disadvantageous to such Lender. A certificate of such Lender claiming
compensation under this Section 2.14(b), setting forth in reasonable detail
the computation of the additional amount or amounts to be paid to it hereunder
and certifying that such claim is consistent with such Lender's treatment of
similar customers having similar provisions generally in their agreements with
such Lender shall be presumptive evidence of the validity of such claim. If
such Lender demands compensation under this Section 2.14(b), the Borrower may
at any time, on at least five Business Days' prior notice to such Lender (i)
repay in full the then outstanding principal amount of LIBOR Advances, of such
Lender, together with accrued interest thereon, or (ii) convert the LIBOR
Advances to Base Advances in accordance with the provisions of this Agreement;
provided, however, that the Borrower shall be liable for the Consequential
- -------- --------
Loss arising pursuant to those actions.
(c) Notwithstanding any other provision of this Agreement, if the
introduction of or any change in or in the interpretation or administration of
any Law shall make it unlawful, or any central bank or other Tribunal shall
assert that it is unlawful, for a Lender to perform its obligations hereunder
to issue or maintain Letters of Credit, make LIBOR Advances or to continue to
fund or maintain LIBOR Advances hereunder, then, on notice thereof and
<PAGE>
demand therefor by such Lender to the Borrower, (i) each LIBOR Advance will
automatically, upon such demand, convert into a Base Advance, (ii) the
obligation of such Lender to make, or to convert Advances into, LIBOR Advances
shall be suspended until such Lender notifies Administrative Lender and the
Borrower that such Lender has determined that the circumstances causing such
suspension no longer exist, and (iii) the obligation of such Lender to make or
maintain Letters of Credit shall be suspended until such Lender notifies
Administrative Lender and the Borrower that such Lender has determined that
the circumstances causing such suspension no longer exist.
(d) Upon the occurrence and during the continuance of any Default or
Event of Default, (i) each LIBOR Advance will automatically, on the last day
of the then existing Interest Period therefor, convert into a Base Advance and
(ii) the obligation of each Lender to make, or to convert Advances into, LIBOR
Advances shall be suspended.
(e) If any Lender notifies Administrative Lender that the LIBOR Rate
for any Interest Period for any LIBOR Advances will not adequately reflect the
cost to such Lender of making, funding or maintaining LIBOR Advances for such
Interest Period, Administrative Lender shall promptly so notify the Borrower,
whereupon (i) each such LIBOR Advance will automatically, on the last day of
the then existing Interest Period therefor, convert into a Base Advance and
(ii) the obligation of such Lender to make, or to convert Advances into, LIBOR
Advances shall be suspended until such Lender notifies Administrative Lender
that such Lender has determined that the circumstances causing such suspension
no longer exist and Administrative Lender notifies the Borrower of such fact.
(f) Failure on the part of any Lender to demand compensation for any
increased costs, increased capital or reduction in amounts received or
receivable or reduction in return on capital pursuant to this Section 2.14
with respect to any period shall not constitute a waiver of any Lender's right
to demand compensation with respect to such period or any other period,
subject, however, to the limitations set forth in this Section 2.14.
(g) The obligations of the Borrower under this Section 2.14 shall
survive any termination of this Agreement, provided that, in no event shall
the Borrower be required to make a payment under this Section 2.14 with
respect to any event of which the Lender making such claim had knowledge more
than twelve months prior to
<PAGE>
demand for such payment.
(h) Determinations by Lenders for purposes of this Section 2.14 shall
be presumptively correct. Any certificate delivered to the Borrower by a
Lender pursuant to this Section 2.14 shall include in reasonable detail the
basis for such Lender's demand for additional compensation and a certification
that the claim for compensation is consistent with such Lender's treatment of
similar customers having similar provisions generally in their agreements with
such Lender.
(i) Notwithstanding any other provision of this Agreement, no Lender
not organized under the Laws of the United States or any State (or which has a
Bank Affiliate not organized under the Laws of the United States or any State)
shall be entitled to compensation pursuant to this Section 2.14 with respect
to any amount which would otherwise be due under this Section 2.14 but which
is the result of an act of a Tribunal of the country in which such Lender or
Bank Affiliate is organized.
2.15. Use of Proceeds. The proceeds of the Advances shall be
available (and the Borrower shall use such proceeds) solely (a) on the Closing
Date, to refinance existing indebtedness of the Borrower, (b) for Permitted
Acquisitions, (c) for Capital Expenditures permitted under the terms of this
Agreement, (d) for working capital and (e) for other lawful corporate
purposes.
2.16. Collateral and Collateral Call.
(a) Collateral. Payment of the Obligations will be secured by (i) a
first perfected security interest in 100% of the Capital Stock of the
Subsidiaries of the Borrower and (ii) Guaranties of the Obligations by each
Guarantor (collectively, together with all other Properties or assets of the
Borrower, Subsidiaries and other Persons securing the Obligations from time to
time, the "Collateral"). The Borrower agrees that it will, and will cause its
Subsidiaries to execute and deliver, or cause to be executed and delivered,
such documents as the Administrative Lender may from time to time reasonably
request to create and perfect a first Lien for the benefit of the
Administrative Lender and the Lenders in the Collateral.
(b) Collateral Call. The Borrower agrees upon the creation,
formation or acquisition of any direct or indirect Subsidiary of the Borrower,
to immediately pledge 100% of the Capital Stock of
<PAGE>
any such Subsidiary to secure the Obligations, pursuant to a pledge agreement
substantially in the form of Exhibit J hereto, and to promptly deliver to the
Administrative Lender all certificates or other documentation evidencing 100%
of such Capital Stock and, if such Capital Stock is stock of a corporation,
together with stock powers executed in blank.
2.17. Replacement Lenders. At any time within sixty days after (a)
any payment by the Borrower of any amount pursuant to Section 2.14 hereof that
the Borrower reasonably deems to be material, or (b) any failure of any Lender
to make any Advance under Section 4.02 hereof that each other Lender has made,
the Borrower, by writing addressed to the Administrative Lender and each
Lender that requested the payment of such amount or refused to make an
Advance, may nominate or propose an Eligible Transferee that is willing to
become the assignee of the Commitment and other obligations of such Lender (a
"Replacement Lender") pursuant to Section 11.04 hereof, and within fifteen
Business Days after receipt of such proposal from the Borrower, each such
Lender shall execute and deliver to the Administrative Lender an Assignment
and Acceptance of its entire Commitment in favor of the proposed Replacement
Lender in accordance with Section 11.04 hereof unless, prior to the expiration
of such period, the Administrative Lender shall have notified the Borrower and
such Lender that the proposed Replacement Lender is not reasonably acceptable
to the Administrative Lender; provided, that in no event will (i) any Lender
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be required to enter into an Assignment and Acceptance at a price less than
par plus accrued interest and prorated fees and other costs due hereunder to
the effective date thereof, (ii) the Administrative Lender or any Lender be
obligated to assist the Borrower in identifying any Eligible Transferees that
are willing to become such a Replacement Lender or (iii) any such assignment
be required if consummation conflicts with any Applicable Law. The remedy
provided herein is in addition to, and not in lieu of any other rights or
remedies, in law or equity, that the Borrower may have against a Lender in
connection with any breach of this Agreement referenced in this Section.
ARTICLE III. LETTERS OF CREDIT
3.01. Issuance of Letters of Credit. The Borrower shall give the
Administrative Lender not less than five Business Days prior written notice of
a request for the issuance of a Letter of Credit, and the Administrative
Lender shall promptly notify each
<PAGE>
Lender of such request. Upon receipt of the Borrower's properly completed and
duly executed Applications, and subject to the terms of such Applications and
to the terms of this Agreement, the Administrative Lender agrees to issue
Letters of Credit on behalf of the Borrower in an aggregate face amount not in
excess of the lesser of (a) Letter of Credit Commitment and (b) the remainder
of the Commitment minus the sum of all outstanding Advances plus the aggregate
face amount of all outstanding Letters of Credit. No Letter of Credit shall
have a maturity extending beyond the earliest of (i) the Maturity Date, or
(ii) one year from the date of its issuance, or (iii) such earlier date as may
be required to enable the Borrower to satisfy its repayment obligations under
Section 2.06 hereof. Subject to such maturity limitations and so long as no
Default or Event of Default has occurred and is continuing or would result
from the renewal of a Letter of Credit, the Letters of Credit may be renewed
by the Administrative Lender in its discretion. The Lenders shall participate
ratably in any liability under the Letters of Credit and in any unpaid
reimbursement obligations of the Borrower with respect to any Letter of Credit
in their Specified Percentages. The amount of the Letters of Credit issued
and outstanding and the unpaid reimbursement obligations of the Borrower for
such Letters of Credit shall reduce the amount of Commitment available, so
that at no time shall the sum of (i) all outstanding Advances in the
aggregate, plus (ii) the aggregate face amount of all outstanding Letters of
Credit, plus (iii) (without duplication) all outstanding reimbursement
obligations related to Letters of Credit, exceed the Commitment, and at no
time shall the sum of all Advances by any Lender made plus its ratable share
of amounts available to be drawn under the Letters of Credit and the unpaid
reimbursement obligations of the Borrower in respect of such Letters of Credit
exceed its Specified Percentage of the Commitment.
3.02. Letters of Credit Fee. In consideration for the issuance of
each Letter of Credit, the Borrower shall pay to (a) the Administrative Lender
for its sole account, an application and processing fee in the amount of the
higher of (i) $300.00 and (ii) the product of 1/8th of 1% multiplied by the
face amount of such Letter of Credit on each Letter of Credit, due and payable
on the date of issuance of each Letter of Credit, and (b) the Administrative
Lender for the account of the Administrative Lender and the Lenders in
accordance with their Specified Percentages, a per annum fee for each Letter
of Credit equal to the higher of (i) $300.00 and (ii) the product of the
Applicable Margin for LIBOR Advances in effect on the date of issuance of each
such Letter of
<PAGE>
Credit multiplied by the face amount of each such Letter of Credit. Each fee
for each Letter of Credit under subsection (b) above shall be due and payable
to the Administrative Lender quarterly as it accrues, on each Quarterly Date
during the term of the Letter of Credit and on the expiration or renewal
and/or extension of each such Letter of Credit, beginning with the first such
Quarterly Date after the issuance of each Letter of Credit and ending on the
expiration date of each such Letter of Credit.
3.03. Reimbursement Obligations.
(a) The Borrower hereby agrees to reimburse Administrative Lender
immediately upon demand by Administrative Lender, and in immediately available
funds, for any payment or disbursement made by Administrative Lender under any
Letter of Credit. Payment shall be made by the Borrower with interest on the
amount so paid or disbursed by Administrative Lender from and including the
date payment is made under any Letter of Credit to and including the date of
payment, at the lesser of (i) the Highest Lawful Rate, and (ii) the sum of the
Base Rate in effect from time to time plus 2% per annum; provided, however,
that if the Borrower would be permitted under the terms of Section 2.01,
Section 2.02 and Section 4.02 to borrow Advances in amounts at least equal to
their reimbursement obligation for a drawing under any Letter of Credit, a
Base Advance by each Lender, in an amount equal to such Lender's Specified
Percentage, shall automatically be deemed made on the date of any such payment
or disbursement made by Administrative Lender in the amount of such obligation
and subject to the terms of this Agreement.
(b) The Borrower hereby also agrees to pay to Administrative Lender
immediately upon demand by Administrative Lender and in immediately available
funds, as security for their reimbursement obligations in respect of the
Letters of Credit under Section 3.03(a) hereof and any other amounts payable
hereunder and under the Notes, an amount equal to the aggregate amount
available to be drawn under Letters of Credit then outstanding, irrespective
of whether the Letters of Credit have been drawn upon, upon an Event of
Default. Any such payments shall be deposited in a separate account
designated "Telco Special Account" or such other designation as Administrative
Lender shall elect. All such amounts deposited with Administrative Lender
shall be and shall remain funds of the Borrower on deposit with Administrative
Lender and may be invested by Administrative Lender as Administrative Lender
shall determine. Such amounts may not be used by Administrative Lender
<PAGE>
to pay the drawings under the Letters of Credit; however, such amounts may be
used by Administrative Lender as reimbursement for Letter of Credit drawings
which Administrative Lender has paid. If any amounts in the Telco Special
Account shall have been deposited upon the occurrence of an Event of Default
only and such Event of Default shall have been subsequently cured or waived
and no other Event of Default exists, the Borrower shall be relieved of its
obligations under this Section 3.03(b) until an Event of Default once again
occurs. During the existence of an Event of Default but after the expiration
of any Letter of Credit that was not drawn upon, the Borrower may direct the
Administrative Lender to use any cash collateral for any such expired Letter
of Credit, if any, to reduce the amount of the Obligations. Any amounts
remaining in the Telco Special Account, after the date of the expiration of
all Letters of Credit and after all Obligations have been paid in full, shall
be repaid to the Borrower promptly after such expiration and such payment in
full.
(c) The obligations of the Borrower under this Section 3.03 will
continue until all Letters of Credit have expired and all reimbursement
obligations with respect thereto have been paid in full by the Borrower and
until all other Obligations shall have been paid in full.
(d) The Borrower shall be obligated to reimburse Administrative Lender
upon demand for all amounts paid under the Letters of Credit as set forth in
Section 3.03(a) hereof; provided, however, if the Borrower for any reason
fails to reimburse Administrative Lender in full upon demand, whether by
borrowing Advances to pay such reimbursement obligations or otherwise, the
Lenders shall reimburse Administrative Lender in accordance with each Lender's
Specified Percentage for amounts due and unpaid from the Borrower as set forth
in Section 3.04 hereof; provided, however, that no such reimbursement made by
the Lenders shall discharge the Borrower's obligations to reimburse
Administrative Lender.
(e) The Borrower shall indemnify and hold Administrative Lender or any
Lender, its officers, directors, representatives and employees harmless from
loss for any claim, demand or liability which may be asserted against
Administrative Lender or such indemnified party in connection with actions
taken under the Letters of Credit or in connection therewith (INCLUDING LOSSES
RESULTING FROM THE NEGLIGENCE OF ADMINISTRATIVE LENDER OR SUCH INDEMNIFIED
PARTY), and shall pay Administrative Lender for
<PAGE>
reasonable fees of attorneys (who may be employees of Administrative Lender)
and legal costs paid or incurred by Administrative Lender in connection with
any matter related to the Letters of Credit, except for losses and liabilities
incurred as a direct result of the gross negligence or willful misconduct of
Administrative Lender or such indemnified party. If the Borrower for any
reason fails to indemnify or pay Administrative Lender or such indemnified
party as set forth herein in full, the Lenders shall indemnify and pay
Administrative Lender upon demand, in accordance with each Lender's Specified
Percentage of such amounts due and unpaid from the Borrower. The provisions
of this Section 3.03(e) shall survive the termination of this Agreement.
3.04. Lenders' Obligations. Each Lender agrees, unconditionally and
irrevocably to reimburse Administrative Lender (to the extent Administrative
Lender is not otherwise reimbursed by the Borrower in accordance with Section
3.03(a) hereof) on demand for such Lender's Specified Percentage of each draw
paid by Administrative Lender under any Letter of Credit. All amounts payable
by any Lender under this subsection shall include interest thereon at the
Federal Funds Rate, from the date of the applicable draw to the date of
reimbursement by such Lender. No Lender shall be liable for the performance
or nonperformance of the obligations of any other Lender under this Section.
The obligations of the Lenders under this Section shall continue after the
Maturity Date and shall survive termination of any Loan Papers.
3.05. Administrative Lender's Obligations.
(a) Administrative Lender makes no representation or warranty, and
assumes no responsibility with respect to the validity, legality, sufficiency
or enforceability of any Application or any document relative thereto or to
the collectibility thereunder. Administrative Lender assumes no
responsibility for the financial condition of the Borrower and its
Subsidiaries or for the performance of any obligation of the Borrower.
Administrative Lender may use its discretion with respect to exercising or
refraining from exercising any rights, or taking or refraining from taking any
action which may be vested in it or which it may be entitled to take or assert
with respect to any Letter of Credit or any Application.
(b) Except as set forth in subsection (c) below, Administrative Lender
shall be under no liability to any Lender, with respect to anything the
Administrative Lender may do or
<PAGE>
refrain from doing in the exercise of its judgment, the sole liability and
responsibility of Administrative Lender being to handle each Lender's share on
as favorable a basis as Administrative Lender handles its own share and to
promptly remit to each Lender its share of any sums received by Administrative
Lender under any Application. Administrative Lender shall have no duties or
responsibilities except those expressly set forth herein and those duties and
liabilities shall be subject to the limitations and qualifications set forth
herein.
(c) Neither Administrative Lender nor any of its directors, officers, or
employees shall be liable for any action taken or omitted (whether or not such
action taken or omitted is expressly set forth herein) under or in connection
herewith or any other instrument or document in connection herewith, except
for gross negligence or willful misconduct, and no Lender waives its right to
institute legal action against Administrative Lender for wrongful payment of
any Letter of Credit due to Administrative Lender's gross negligence or
willful misconduct. Administrative Lender shall incur no liability to any
Lender, the Borrower or any Affiliate of the Borrower or Lender in acting upon
any notice, document, order, consent, certificate, warrant or other instrument
reasonably believed by Administrative Lender to be genuine or authentic and to
be signed by the proper party.
ARTICLE IV. CONDITIONS PRECEDENT
4.01. Conditions Precedent to Closing and the Initial Advance. The
obligation of each Lender to sign this Agreement and to make the initial
Advance is subject to receipt by the Administrative Lender of each of the
following, in form and substance satisfactory to the Administrative Lender,
with a copy (except for the Notes) for each Lender:
(a) A loan certificate of the Borrower certifying as to the accuracy
of its representations and warranties in the Loan Papers, certifying that no
Default or Event of Default has occurred, and including a certificate of
incumbency with respect to each Authorized Officer, and including (i) a copy
of the Articles of Incorporation of the Borrower and each of its Subsidiaries,
certified to be true, complete and correct by the secretary of state of each
such Person's respective state of incorporation, (ii) a copy of the By-Laws of
the Borrower and each of its Subsidiaries, as in effect on the Closing Date,
(iii) a copy of the resolutions
<PAGE>
of the Borrower and each of its Subsidiaries authorizing them to execute,
deliver and perform this Agreement, the Notes and the other Loan Papers to
which each of them is a party, (iv) a copy of each Material Contract of the
Borrower and each Subsidiary of the Borrower, certified to be true, complete
and correct by an Authorized Officer, and (v) a copy of a certificate of good
standing and a certificate of existence for the Borrower's and each of its
Subsidiaries' state of incorporation and each state in which they are or
should be qualified to do business;
(b) duly executed Notes, payable to the order of each Lender and in
an amount for each Lender equal to its Specified Percentage of the Commitment;
(c) a duly executed Note, payable to the order of the Swingline
Lender in the principal amount of $5,000,000;
(d) duly executed and completed pledge agreement by the Borrower and
any Subsidiary of the Borrower, substantially in the form of the Pledge
Agreement, pledging not less than 100% of the Capital Stock of each Subsidiary
of the Borrower (other than the nine Subsidiaries of the Borrower listed on
Schedule 4.01(d) hereto), to the Administrative Lender on behalf of Lenders to
secure the Obligations, together with the Pledged Stock being pledged on the
Closing Date and stock powers duly executed in blank by the Borrower;
(e) a duly executed and completed Subsidiary Guaranty of the
Obligations executed by each of the Subsidiaries of the Borrower;
(f) all other Loan Papers to be delivered on the Closing Date duly
executed and completed, dated as of the Closing Date;
(g) UCC-11 searches of the Borrower and all of its Subsidiaries in
each state in which any such Person is operating, together with copies of all
financing statements filed against the Borrower or any Subsidiary of the
Borrower, as debtor;
(h) opinions of (i) corporate counsel to the Borrower and each
Subsidiary of the Borrower, addressed to the Administrative Lender on behalf
of the Lenders and in form and substance satisfactory to the Lenders, dated
the Closing Date and (ii) special FCC, PUC and telecommunications counsel to
the Borrower and each Subsidiary of the Borrower in form and substance
satisfactory to the Lenders, dated the Closing Date;
<PAGE>
(i) copies of insurance binders or certificates covering the assets
of the Borrower and each of its Subsidiaries, and meeting the requirements of
Section 6.05 hereof;
(j) reimbursement for Administrative Lender of its reasonable fees
and expenses and for Special Counsel's reasonable fees and expenses rendered
through the date hereof;
(k) evidence that all corporate proceedings of the Borrower and each
Subsidiary of the Borrower taken in connection with the transactions
contemplated by this Agreement and the other Loan Papers shall be reasonably
satisfactory in form and substance to the Lenders and Special Counsel; and the
Lenders shall have received copies of all documents or other evidence which
the Administrative Lender, Special Counsel or any Lender may reasonably
request in connection with such transactions;
(l) copies of the following financial statements for the Borrower and
its consolidated Subsidiaries, as of and for the period ended December 31,
1995 and September 30, 1996; (i) balance sheets as of the end of such period,
and (ii) statements of income and changes in cash for such period; all in
reasonable detail and certified by an Authorized Officer to the best of his
knowledge to present fairly in all material respects the consolidated
financial position of the Borrower and its consolidated Subsidiaries and the
results of operations for the period then ended and, except as noted therein,
to be in accordance with GAAP (other than footnotes thereto);
(m) a duly completed Compliance Certificate evidencing no Default or
Event of Default as of the Closing Date;
(n) all operating assets of the Borrower must be transferred to the
Subsidiaries of the Borrower (subject to those assets listed on Schedule
4.01(n) hereto), and the Borrower shall be primarily a holding company for the
stock of the Subsidiaries of the Borrower; and
(o) in form and substance satisfactory to the Lenders and Special
Counsel, such other documents, instruments and certificates as the
Administrative Lender or any Lender may reasonably require in connection with
the transactions contemplated hereby, including without limitation the status,
organization or authority of the Borrower or any Subsidiary of the Borrower,
and the enforceability of and security for the Obligations.
<PAGE>
4.02. Conditions Precedent to All Advances and Letters of Credit.
The obligation of each Lender to make each Advance hereunder (except each
Refinancing Advance) and the obligation of the Administrative Lender to issue
any Letter of Credit shall be subject to the further conditions precedent that
on the date of such Advance or such issuance of such Letter of Credit:
(a) All of the representations and warranties of the Borrower under
this Agreement shall be true and correct at such time in all material
respects, both before and after giving effect to the application of the
proceeds of the Advance or the issuance of the Letter of Credit, except those
representations and warranties that specifically speak as of a particular
date;
(b) The incumbency of the Authorized Officers shall be as stated in
the certificate of incumbency delivered in the Borrower's loan certificate
pursuant to Section 4.01(a) or as subsequently modified and reflected in a
certificate of incumbency delivered to the Administrative Lender. The Lenders
may, without waiving this condition, consider it fulfilled and a
representation by the Borrower made to such effect if no written notice to the
contrary, dated on or before the date of such Advance or the issuance of such
Letter of Credit, is received by the Administrative Lender from the Borrower
prior to the making of such Advance or such Letter of Credit;
(c) There shall not exist a Default or an Event of Default hereunder
and none shall exist as a result of making any such Advance or such Letter of
Credit, and the Administrative Lender shall have received written or
telephonic certification thereof by an Authorized Officer (which
certification, if telephonic, shall be followed promptly by written
certification);
(d) No event shall occurred that could have a Material Adverse Effect
since November 13, 1996;
(e) In the case of each Letter of Credit, Borrower shall have
delivered to the Administrative Lender a duly executed and complete
Application acceptable to Administrative Lender; and
(f) The aggregate outstanding Advances, after giving effect to such
proposed Advance, plus the sum of the face amount of all outstanding Letters
of Credit plus all reimbursement obligations under Article III hereof, shall
not exceed the Commitment.
<PAGE>
ARTICLE V. REPRESENTATIONS AND WARRANTIES
5.01. Representations and Warranties. The Borrower hereby represents
and warrants to each Lender as follows:
(a) The respective jurisdictions of incorporation and percentage
ownership of the Subsidiaries of the Borrower on the Closing Date and listed
on Schedule 5.01(a) hereto are true and correct. Each of the Borrower and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its state of organization. Each of the Borrower
and its Subsidiaries has the corporate power and authority to own its
properties and to carry on its business as now being and hereafter proposed to
be conducted. Each of the Borrower and its Subsidiaries is duly qualified, in
good standing and authorized to do business in each jurisdiction in which the
character of its Properties or the nature of its business requires such
qualification or authorization, except where the failure to so qualify would
not have a Material Adverse Effect.
(b) The Borrower has corporate power and has taken all necessary
corporate action to authorize it to borrow hereunder. Each of the Borrower
and its Subsidiaries has corporate power and has taken all necessary corporate
action to execute, deliver and perform the Loan Papers to which it is party in
accordance with the terms thereof, and to consummate the transactions
contemplated thereby. Each Loan Paper has been duly executed and delivered by
the Borrower or such Subsidiary executing it. Each of the Loan Papers to
which the Borrower, and its Subsidiaries are party is a legal, valid and
binding respective obligation of the Borrower or such Subsidiary, as
applicable, enforceable in accordance with its terms, subject, to enforcement
of remedies, to the following qualifications: (i) equitable principles
generally, and (ii) bankruptcy, insolvency, liquidation, reorganization,
reconstruction and other similar laws affecting enforcement of creditors'
rights generally (insofar as any such law relates to the bankruptcy,
insolvency or similar event of the Borrower or any Subsidiary of the
Borrower).
(c) The execution, delivery and performance by the Borrower and its
Subsidiaries of the other Loan Papers to which they are respectively a party,
and the consummation of the transactions contemplated thereby, do not and will
not (i) require any consent or approval not already obtained, (ii) violate any
Applicable Law, (iii) conflict with, result in a breach of, or constitute a
default
<PAGE>
under the articles of incorporation or by-laws of the Borrower or any
Subsidiary of the Borrower, or under any material License, indenture,
agreement or other instrument, to which the Borrower or any Subsidiary of the
Borrower is a party or beneficiary of, or by which they or their respective
Properties may be bound, or (iv) result in or require the creation or
imposition of any Lien upon or with respect to any property now owned or
hereafter acquired by the Borrower or any Subsidiary of the Borrower, except
Permitted Liens.
(d) The Borrower and its Subsidiaries are primarily engaged in the
operation of long distance telephone service and pursuing activities related
thereto.
(e) On the Closing Date, all material Licenses have been duly
authorized and obtained, and are in full force and effect. The Borrower and
its Subsidiaries are and will continue to be in compliance in all material
respects with all provisions thereof. On the Closing Date, no material
License is the subject of any pending or, to the best of the Borrower's
knowledge, threatened challenge or revocation. After the Closing Date, no
material License is the subject of any pending or, to the best of the
Borrower's knowledge, threatened challenge or revocation, which such event
could have a Material Adverse Effect. The Borrower and its Subsidiaries are
not required to obtain any material License that has not already been obtained
from, or effect any material filing or registration that has not already been
effected with, the FCC, any applicable PUC or any other federal, state or
local regulatory authority in connection with the execution and delivery of
this Agreement or any other Loan Paper, or the performance thereof (other than
any enforcement of remedies by the Administrative Lender on behalf of the
Lenders), in accordance with their respective terms, including any borrowings
hereunder.
(f) The Borrower and its Subsidiaries are in compliance in all
material respects with all material Applicable Laws. The Borrower and its
Subsidiaries have duly and timely filed all reports, statements and filings
that are required to be filed by any of them under the Communications Act, and
are in all material respects in compliance therewith, including without
limitation the rules and regulations of the FCC and each applicable PUC.
Except as set forth on Schedule 5.01(f) hereto, as of the Closing Date, the
---------------
Borrower is not aware of any event or circumstance constituting noncompliance
(or any Person alleging noncompliance) with any rule or regulation of the FCC
or any applicable PUC. After the Closing
<PAGE>
Date, the Borrower is not aware of any event or circumstance constituting
noncompliance (or any Person alleging noncompliance) with any rule or
regulation of the FCC or any applicable PUC, which such event or circumstance
could have a Material Adverse Effect.
(g) On the Closing Date, the Borrower and its Subsidiaries have good
and indefeasible title to, or a valid leasehold interest in, all of their
material assets and Properties. After the Closing Date, the Borrower and its
Subsidiaries have good and indefeasible title to, or a valid leasehold
interest in, all of their material assets and Properties, in which any such
failure could have a Material Adverse Effect. None of their assets are
subject to any Liens, except Permitted Liens. No financing statement or other
Lien filing authorized by the Borrower or any Subsidiary of the Borrower
(except relating to Permitted Liens) is on file in any state or jurisdiction
that names the Borrower or any of its Subsidiaries as debtor or covers (or
purports to cover) any assets of the Borrower or any of its Subsidiaries. The
Borrower and its Subsidiaries have not signed any such financing statement or
filing, nor any security agreement authorizing any Person to file any such
financing statement or filing.
(h) On the Closing Date, except as reflected on Schedule 5.01(h)
hereto, there is no action, suit, proceeding or any other Litigation pending
against, or, to the best of the Borrower's knowledge, threatened against the
Borrower or any of its Subsidiaries, or in any other manner relating directly
and materially adversely to the Borrower, any of its Subsidiaries, or any of
their material Properties, in any court or before any arbitrator of any kind
or before or by any governmental body. On each date after the Closing Date on
which this representation is deemed to be made, there is no action, suit,
proceeding or any other Litigation pending against, or, to the best of the
Borrower's knowledge, threatened against the Borrower or any of its
Subsidiaries, or in any other manner relating to the Borrower, any of its
Subsidiaries, or any of their Properties, in any court or before any
arbitrator of any kind or before or by any governmental body, which could
reasonably be expected to have a Material Adverse Effect.
(i) All federal, state and other Tax returns of the Borrower and its
Subsidiaries required by law to be filed have been duly filed and all federal,
state and other Taxes, assessments and other governmental charges or levies
upon the Borrower, its Subsidiaries or any of their Properties, income,
profits and assets, which are
<PAGE>
due and payable, have been paid, except (A) those that are diligently
contested in good faith by the Borrower and for which a reserve has been
established in accordance with GAAP, and no Lien (other than a Permitted Lien)
has attached and no foreclosure, distraint, sale or similar proceedings have
been commenced, and (B) those Taxes that qualify under the terms of Section
6.06(ii) hereof.
(j) The Borrower has furnished or caused to be furnished to the
Lenders copies of its audited financial statements at December 31, 1995, which
are prepared in good faith and complete in all material respects and present
fairly in all material respects and in accordance with GAAP, the financial
position of the Borrower and its Subsidiaries as at such dates and the results
of operations for the periods then ended. The Borrower and its Subsidiaries
have no material liabilities, contingent or otherwise, nor material losses,
except as disclosed in writing to the Lenders prior to the Closing Date or as
disclosed on any subsequent financial statements. On the Closing Date after
giving effect to the Advances made on such date, each of the Borrower and its
Subsidiaries is Solvent.
(k) On the Closing Date, since the date of the most recent financial
statements delivered to the Lenders, no event or circumstances have occurred
or arisen that could have a Material Adverse Effect.
(l) None of the Borrower or its Controlled Group maintains or
contributes to any Plan other than those disclosed to the Administrative
Lender in writing. Each such Plan is in compliance in all material respects
with the applicable provisions of ERISA, the Code, and any other applicable
Federal or state law, rule or regulation. With respect to each Plan of the
Borrower and each member of its Controlled Group (other than a Multiemployer
Plan), all reports required under ERISA or any other Applicable Law to be
filed with any governmental authority, the failure of which to file could
reasonably result in liability of the Borrower or any member of its Controlled
Group in excess of $100,000, have been duly filed. All such reports are true
and correct in all material respects as of the date given. No such Plan of
the Borrower or any member of its Controlled Group has any accumulated funding
deficiency (as defined in Section 412(a) of the Code) (without regard to any
waiver granted under Section 412 of the Code), nor has any funding waiver from
the Internal Revenue Service been received or requested. None of the Borrower
or any member of its Controlled Group has failed to make any contribution or
pay any
<PAGE>
amount due or owing as required by Section 412 of the Code or Section 302 of
ERISA or the terms of any such Plan prior to the due date under Section 412 of
the Code and Section 302 of ERISA. There has been no ERISA Event or any event
requiring disclosure under Section 4041(c)(3)(C), 4068(f), 4063(a) or 4043(b)
of ERISA with respect to any Plan or trust of the Borrower or any member of
its Controlled Group since the effective date of ERISA. The value of the
assets of each Plan (other than a Multiemployer Plan) of the Borrower and each
member of its Controlled Group equaled or exceeded the present value of the
benefit liabilities, as defined in Title IV of ERISA, of each such Plan as of
the most recent valuation date using Plan actuarial assumptions at such date.
There are no pending or, to the best of the Borrower's knowledge, threatened
claims, lawsuits or actions (other than routine claims for benefits in the
ordinary course) asserted or instituted against, and neither the Borrower nor
any member of its Controlled Group has knowledge of any threatened Litigation
or claims against, (i) the assets of any Plan or trust or against any
fiduciary of a Plan with respect to the operation of such Plan, or (ii) the
assets of any employee welfare benefit plan within the meaning of Section 3(1)
or ERISA, or against any fiduciary thereof with respect to the operation of
any such plan. None of the Borrower or any member of its Controlled Group has
engaged in any prohibited transactions, within the meaning of Section 406 of
ERISA or Section 4975 of the Code, in connection with any Plan. None of the
Borrower or any member of its Controlled Group, nor has incurred or reasonably
expects to incur (A) any liability under Title IV of ERISA (other than
premiums due under Section 4007 of ERISA to the PBGC), (B) any withdrawal
liability (and no event has occurred which with the giving of notice under
Section 4219 of ERISA would result in such liability) under Section 4201 of
ERISA as a result of a complete or partial withdrawal (within the meaning of
Section 4203 or 4205 of ERISA) from a Multiemployer Plan, or (C) any liability
under Section 4062 of ERISA to the PBGC or to a trustee appointed under
Section 4042 of ERISA. None of the Borrower, any member of its Controlled
Group, or any organization to which the Borrower or any member of its
Controlled Group is a successor or parent corporation within the meaning of
ERISA Section 4069(b), has engaged in a transaction within the meaning of
ERISA Section 4069. None of the Borrower or any member of its Controlled
Group maintains or has established any welfare benefit plan within the meaning
of Section 3(1) of ERISA which provides for continuing benefits or coverage
for any participant or any beneficiary of any participant after such
participant's termination of employment except as may be required by the
Consolidated Omnibus Budget Reconciliation Act of
<PAGE>
1985, as amended ("COBRA") and the regulations thereunder, and at the expense
of the participant or the beneficiary of the participant, or retiree medical
liabilities. Each of the Borrower and its Controlled Group which maintains a
welfare benefit plan within the meaning of Section 3(1) of ERISA has complied
in all material respects with any applicable notice and continuation
requirements of COBRA and the regulations thereunder.
(m) The Borrower is not engaged principally or as one of its
important activities in the business of extending credit for the purpose of
purchasing or carrying any margin stock within the meaning of Regulations G,
T, U and X of the Board of Governors of the Federal Reserve System, and no
part of the proceeds of the Advances will be used to purchase or carry any
margin stock (as defined by Regulation U) or to extend credit to others for
the purpose of purchasing or carrying any margin stock. Not more than 25% of
the assets of the Borrower or any of its Subsidiaries are margin stock (as
defined by Regulation U), and none of the Pledged Stock or other Capital Stock
of the Subsidiaries of the Borrower is margin stock. None of the Borrower and
its Subsidiaries, nor any agent acting on their behalf, have taken or will
knowingly take any action which might cause this Agreement or any Loan Papers
to violate any regulation of the Board of Governors of the Federal Reserve
System or to violate the Exchange Act, in each case as in effect now or as the
same may hereafter be in effect.
(n) The Borrower and its Subsidiaries are in compliance with all of
the provisions of their articles of incorporation and by-laws. As of the
Closing Date, no event has occurred or failed to occur, which has not been
remedied or waived, the occurrence or non-occurrence of which constitutes, or
which with the passage of time or giving of notice or both would constitute,
(i) an Event of Default or (ii) a default by the Borrower or any of its
Subsidiaries under any Material Contract, or other material indenture,
agreement or other instrument, or any judgment, decree or order to which the
Borrower or any of its Subsidiaries is a party or by which they or any of
their material Properties is bound. After the Closing Date, no event has
occurred or failed to occur, which has not been remedied or waived, the
occurrence or non-occurrence of which constitutes, or which with the passage
of time or giving of notice or both would constitute, (i) an Event of Default
or (ii) a default by the Borrower or any of its Subsidiaries under any
Material Contract or other material indenture, agreement or other instrument,
or any judgment, decree or order to which the Borrower or any of its
Subsidiaries is
<PAGE>
a party or by which they or any of their material Properties is bound, that
could reasonably be expected to have a Material Adverse Effect.
(o) The Borrower is not required to register under the provisions of
the Investment Company Act of 1940, as amended. Neither the entering into or
performance by the Borrower of this Agreement nor the issuance of the Notes
violates any provision of such act or requires any consent, approval, or
authorization of, or registration with, the Securities and Exchange Commission
or any other governmental or public body of authority pursuant to any
provisions of such act.
(p) On the Closing Date, none of the Borrower nor any Subsidiary of
the Borrower has any actual knowledge or reason to believe that any substance
deemed hazardous by any applicable Environmental Law, has been installed on
any real property now owned by the Borrower or any of its Subsidiaries, except
(i) for hazardous substances the presence of which is not in violation of law
and (ii) as disclosed to the Lenders. After the Closing Date, none of the
Borrower nor any Subsidiary of the Borrower has any actual knowledge or reason
to believe that any substance deemed hazardous by any applicable Environmental
Law, has been installed in violation of law on any real property now owned by
the Borrower or any of its Subsidiaries except as disclosed to the Lenders and
which would not, in the reasonable judgment of the Borrower, have a Material
Adverse Effect. As of the Closing Date, the Borrower and its Subsidiaries are
not in violation of or subject to any existing, pending or, to the best of the
Borrower's knowledge, threatened investigation or inquiry by any governmental
authority or to any material remedial obligations under any applicable
Environmental Laws, and this representation and warranty would continue to be
true and correct following disclosure to the applicable governmental
authorities of all relevant facts, conditions and circumstances, if any,
pertaining to any real property of the Borrower and its Subsidiaries. After
the Closing Date, the Borrower and its Subsidiaries are not in violation of or
subject to any existing, pending or, to the best of the Borrower's knowledge,
threatened investigation or inquiry by any governmental authority or to any
material remedial obligations under any applicable Environmental Laws which
have cause a Material Adverse Effect, and this representation and warranty
would continue to be true and correct following disclosure to the applicable
governmental authorities of all relevant facts, conditions and circumstances,
if any, pertaining to any real property of the
<PAGE>
Borrower and its Subsidiaries. The Borrower and its Subsidiaries are not
required to obtain any permits, Licenses or similar authorizations to
construct, occupy, operate or use any buildings, improvements, fixtures, and
equipment forming a part of any real property of the Borrower or any
Subsidiary of the Borrower by reason of any applicable Environmental Laws,
except those that have been obtained. As of the Closing Date, the Borrower
and its Subsidiaries have no actual knowledge or reason to believe, after
reasonable investigation, that any hazardous substances or solid wastes have
been disposed of or otherwise released on or to the real property of the
Borrower or any of its Subsidiaries in violation of any applicable
Environmental Law. After the Closing Date, the Borrower and its Subsidiaries
have no actual knowledge or reason to believe, that any hazardous substances
or solid wastes have been disposed of or otherwise released on or to the real
property of the Borrower or any of its Subsidiaries, within the meaning of the
applicable Environmental Laws, except as disclosed to the Lenders and which
such disposal or release would not have a Material Adverse Effect.
(q) On the Closing Date, there is no Litigation, or, to the best of
the Borrower's knowledge, threatened Litigation or pending or threatened claim
of breach or default, with respect to any Material Contract, or any loan
agreement or document evidencing any Debt for Borrowed Money of the Borrower,
or its Subsidiaries that has not been disclosed to Lenders.
(r) All Pledged Stock and all Capital Stock of the Borrower and each
Subsidiary of the Borrower has been duly authorized and validly issued, and is
fully paid and nonassessable. The Capital Stock described on Schedule 5.01(r)
hereto constitutes all the issued and outstanding Capital Stock of the
Subsidiaries of the Borrower or the Subsidiaries of another Subsidiary, except
such shares that have been issued after the Closing Date, pledged to the
Administrative Lender to secure the Obligations and delivered to the
Administrative Lender together with stock powers executed in blank. No Person
has conversion rights with respect to, or any subscription rights, calls,
commitments or claims of any character for, or any repurchase or redemption
options relating to, the Pledged Stock or other Capital Stock of the
Subsidiaries of the Borrower, other than those that have been waived. The
Pledged Stock and the other Capital Stock of Borrower and the Subsidiaries of
the Borrower, when issued or sold, was either (i) registered or qualified
under applicable federal or state securities laws, or (ii) exempt therefrom.
<PAGE>
(s) No broker's, finder's or other fee or commission will be payable
by the Borrower (other than to the Lenders hereunder) with respect to the
making of the Commitment or the Advances hereunder. The Borrower agrees to
indemnify and hold harmless the Administrative Lender and each Lender from and
against any claims, demand, liability, proceedings, costs or expenses asserted
with respect to or arising in connection with any such fees or commissions.
(t) No event has occurred which permits (or with the passage of time
would permit) the revocation or termination of any material License, which
could result in the imposition of any restriction thereon of such a nature
that could reasonably be expected to have a Material Adverse Effect.
(u) To the best knowledge of the Borrower, as of the Closing Date,
the Borrower and its Subsidiaries have obtained all material patents,
trademarks, service-marks, trade names, copyrights, Licenses and other rights,
free from burdensome restrictions, that are necessary for the operation of
their business as presently conducted and as proposed to be conducted. After
the Closing Date, the Borrower and its Subsidiaries have obtained all patents,
trademarks, service-marks, trade names, copyrights, Licenses and other rights,
free from burdensome restrictions, that are necessary for the operation of
their business as presently conducted and as proposed to be conducted, except
those, the failure of which to obtain could not be reasonably expected to have
a Material Adverse Effect. The Borrower has filed the registration
application to obtain a trademark for its current logo design and to trademark
the words "Dial & Save". Nothing has come to the attention of the Borrower or
any of its Subsidiaries to the effect that (i) any process, method, part or
other material presently contemplated to be employed by the Borrower or any
Subsidiary of the Borrower may infringe any patent, trademark, service-mark,
trade name, copyright, License or other right owned by any other Person, or
(ii) there is pending or overtly threatened any claim or Litigation against or
affecting the Borrower or any Subsidiary of the Borrower contesting its right
to sell or use any such process, method, part or other material, which could
reasonably be expected to have a Material Adverse Effect. The Borrower and
each Subsidiary intend to vigorously defend the exclusive usage of the words
"Dial & Save".
(v) Neither this Agreement nor any other document, certificate or
statement which has been furnished to any Lender by
<PAGE>
or on behalf of the Borrower or any Subsidiary of the Borrower in connection
herewith contained any untrue statement of a material fact or omitted to state
a material fact necessary in order to make the statement contained herein and
therein not misleading at the time it was furnished. On the Closing Date,
there is no fact known to the Borrower and not known to the public generally
that could reasonably be expected to have a Material Adverse Effect, which has
not been set forth in this Agreement or in the documents, certificates and
statements furnished to the Lenders by or on behalf of the Borrower prior to
the date hereof in connection with the transaction contemplated hereby. On
each date after the Closing Date on which this representation is deemed to be
made, there is no fact known to the Borrower and not known to the public
generally that could reasonably be expected to have a Material Adverse Effect,
which has not been disclosed to the Lenders in writing.
(w) The Borrower is not, nor is any Subsidiary of the Borrower, a
party to any contractual relationship which is breached or in default solely
as a result of any change in the ownership, management or Board of Directors
of the Borrower, unless the Borrower has agreed to a substantially similar
provision in this Agreement.
5.02. Survival of Representations and Warranties. All
representations and warranties made under this Agreement and the other Loan
Papers shall be deemed to be made at and as of the Closing Date and at and as
of the date of each Advance, and each shall be true and correct in all
material respects when made. All such representations and warranties shall
survive, and not be waived by, the execution hereof by any Lender, any
investigation or inquiry by any Lender, or by the making of any Advance under
this Agreement.
ARTICLE VI. GENERAL COVENANTS
So long as any of the Obligations are outstanding and unpaid or the
Commitment or any Letter of Credit is outstanding (whether or not the
conditions to borrowing have been or can be fulfilled):
6.01. Preservation of Existence and Similar Matters.
(a) The Borrower shall, and shall cause each Subsidiary of the
Borrower to, preserve and maintain, or timely obtain and
<PAGE>
thereafter preserve and maintain (i) material rights, franchises,
authorizations, consents, privileges and all other material Licenses from
federal, state and local governmental bodies and any Tribunal (regulatory or
otherwise) which the Borrower or such Subsidiary deems reasonably necessary or
advisable to conduct its business in the ordinary course, and (ii) its
existence (except as permitted by Section 8.05 hereof); and
(b) The Borrower shall, and shall cause each Subsidiary of the
Borrower to, qualify and remain qualified and authorized to do business in
each jurisdiction in which the character of its Properties or the nature of
its business requires such qualification or authorization, except where the
failure to do so would not have a Material Adverse Effect.
(c) The Borrower shall at all times be registered under Section 12 of
the Exchange Act and required to make filings pursuant to Section 13 of the
Exchange Act and the rules promulgated thereunder.
(d) The Borrower and each Subsidiary shall at all times vigorously
defend the exclusive usage of the words "Dial & Save".
6.02. Business; Compliance with Applicable Law. The Borrower and its
Subsidiaries shall (a) engage primarily in the business of providing long
distance telephone service, and telecommunication activities related thereto,
and (b) comply in all material respects with the requirements of all
Applicable Law.
6.03. Maintenance of Properties. The Borrower shall, and shall cause
each Subsidiary of the Borrower to, maintain or cause to be maintained all
their material Properties necessary to the conduct of their business (whether
owned or held under lease) in reasonably good repair, working order and
condition, taken as a whole, and from time to time make or cause to be made
all appropriate repairs, renewals, replacements, additions, betterments and
improvements thereto. The Borrower shall maintain its existence as a holding
company, and shall cause all assets and Properties necessary for the operation
of the consolidated businesses to be owned and maintained by the Subsidiaries
of the Borrower, except those assets listed on Schedule 4.01(n) hereto.
6.04. Accounting Methods and Financial Records. The Borrower shall,
and shall cause each Subsidiary of the Borrower to, maintain a system of
accounting established and administered in
<PAGE>
accordance with GAAP, keep adequate records and books of account in which
complete entries will be made and all transactions reflected in accordance
with GAAP, and keep accurate and complete records of its respective assets.
The Borrower and each of its Subsidiaries shall maintain a fiscal year ending
on December 31.
6.05. Insurance. The Borrower shall, and shall cause each Subsidiary
of the Borrower to, maintain insurance from responsible companies in such
amounts and against such risks as shall be customary and usual in the industry
for companies of similar size and capability, but in no event less than the
amount and types insured as of the Closing Date. Each insurance policy shall
provide for at least 30 days' prior notice to the Administrative Lender of any
proposed termination or cancellation of such policy, whether on account of
default or otherwise.
6.06. Payment of Taxes and Claims. The Borrower shall, and shall
cause each Subsidiary of the Borrower to, pay and discharge all Taxes,
assessments and governmental charges or levies imposed upon it or its income
or Properties prior to the date on which penalties attach thereto, and all
lawful material claims for labor, materials and supplies which, if unpaid,
might become a Lien upon any of their Properties, except (i) those Taxes,
assessments and charges contested by the Borrower diligently in good faith,
and for which adequate reserves have been established in accordance with GAAP,
and (ii) those Taxes aggregating not more than $50,000 at any one time
outstanding with respect to which the Borrower in good faith did not believe
were due and owing to any jurisdiction, but with respect to each such Tax,
only for so long as two months after the Borrower becomes aware of such Tax
liability. Subject to exception (ii) in the preceding sentence, the Borrower
shall, and shall cause each Subsidiary of the Borrower to, timely file all
information returns required by federal, state or local Tax authorities.
6.07. Visits and Inspections. The Borrower shall, and shall cause
each Subsidiary of the Borrower to, promptly permit representatives of the
Administrative Lender or any Lender from time to time to (a) visit and inspect
the Properties of the Borrower and each Subsidiary of the Borrower as often as
the Administrative Lender or any Lender shall deem advisable, (b) inspect and
make extracts from and copies of the Borrower's and each Subsidiary of the
Borrower's books and records, and (c) discuss with the Borrower's and each
Subsidiary of the Borrower's directors, officers, employees and, after notice
to the Borrower,
<PAGE>
the auditors of Borrower, its business, assets, liabilities, financial
positions, results of operations and business prospects.
6.08. Payment of Debt for Borrowed Money. The Borrower shall, and
shall cause each Subsidiary of the Borrower to, pay its Debt for Borrowed
Money when and as the same becomes due.
6.09. Use of Proceeds. The Borrower shall use the proceeds of
Advances solely (a) on the Closing Date, to refinance existing indebtedness of
the Borrower, (b) for Permitted Acquisitions, (c) for Capital Expenditures
permitted under the terms of this Agreement, (d) for working capital and (e)
for other lawful corporate purposes.
6.10. Indemnity.
(a) The Borrower agrees to defend, protect, indemnify and hold
harmless the Administrative Lender, each Lender, each of their respective
Affiliates, and each of their respective (including such Affiliates')
officers, directors, employees, agents, attorneys, shareholders and
consultants (including, without limitation, those retained in connection with
the satisfaction or attempted satisfaction of any of the conditions set forth
herein) of each of the foregoing (collectively, "Indemnitees") from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, claims, costs, expenses and disbursements of any
kind or nature whatsoever (including, without limitation, the reasonable fees
and disbursements of counsel for such Indemnitees in connection with any
investigative, administrative or judicial proceeding, whether or not such
Indemnitees shall be designated a party thereto), imposed on, incurred by, or
asserted against such Indemnitees (whether direct, indirect or consequential
and whether based on any federal, state, or local laws and regulations), under
common law or at equitable cause, or on contract, tort or otherwise, arising
from or connected with the past, present or future operations of the Borrower
or its predecessors in interest, in any manner relating to or arising out of
this Agreement, the Loan Papers, or any act, event or transaction or alleged
act, event or transaction relating or attendant thereto, the making of any
participations in the Advances and the management of the Advances, INCLUDING
IN CONNECTION WITH, OR AS A RESULT, IN WHOLE OR IN PART, OF ANY NEGLIGENCE OF
ADMINISTRATIVE LENDER OR ANY LENDER (other than those matters raised
exclusively by a participant against the Administrative Lender or any Lender
and not the Borrower), or the use or intended
<PAGE>
use of the proceeds of the Advances hereunder, or in connection with any
investigation of any potential matter covered hereby, but excluding (i) any
claim or liability that arises as the result of the gross negligence or
willful misconduct of any Indemnitee, as finally judicially determined by a
court of competent jurisdiction and (ii) reimbursement for administrative
costs, amendment costs and other ordinary course of business costs incurred by
the Lenders in the administration of this loan facility (collectively, the
"Indemnified Matters").
(b) In addition, the Borrower shall periodically, upon request,
reimburse each Indemnitee for its reasonable legal and other actual expenses
(including the cost of any investigation and preparation) incurred in
connection with any Indemnified Matter. If for any reason the foregoing
indemnification is unavailable to any Indemnitee or insufficient to hold any
Indemnitee harmless with respect to Indemnified Matters, then the Borrower
shall contribute to the amount paid or payable by such Indemnitee as a result
of such loss, claim, damage or liability in such proportion as is appropriate
to reflect not only the relative benefits received by the Borrower and the
Borrower's stockholders on the one hand and such Indemnitee on the other hand
but also the relative fault of the Borrower and such Indemnitee, as well as
any other relevant equitable considerations. The reimbursement, indemnity and
contribution obligations under this Section shall be in addition to any
liability which the Borrower may otherwise have, shall extend upon the same
terms and conditions to each Indemnitee, and shall be binding upon and inure
to the benefit of any successors, assigns, heirs and personal representatives
of the Borrower, the Administrative Lender, the Lenders and all other
Indemnitees. This Section shall survive any termination of this Agreement and
payment of the Obligations.
6.11. Environmental Law Compliance. The use which the Borrower or
any Subsidiary of the Borrower intends to make of any real Property owned by
it will not result in the disposal or other release of any hazardous substance
or solid waste on or to such real Property in violation of any Environmental
Law. As used herein, the terms "hazardous substance" and "release" as used in
this Section shall have the meanings specified in CERCLA (as defined in the
definition of applicable Environmental Laws), and the terms "solid waste" and
"disposal" shall have the meanings specified in RCRA (as defined in the
definition of applicable Environmental Laws); provided, however, that if
CERCLA or RCRA is amended so as to broaden the meaning of any term defined
thereby,
<PAGE>
such broader meaning shall apply subsequent to the effective date of such
amendment; and provided further, to the extent that any other law applicable
to the Borrower, any Subsidiary of the Borrower or any of their Properties
establishes a meaning for "hazardous substance," "release," "solid waste," or
"disposal" which is broader than that specified in either CERCLA or RCRA, such
broader meaning shall apply. The Borrower agrees to indemnify and hold the
Administrative Lender and each Lender harmless from and against, and to
reimburse them with respect to, any and all claims, demands, causes of action,
loss, damage, liabilities, costs and expenses (including attorneys' fees and
courts costs) of any kind or character, known or unknown, fixed or contingent,
asserted against or incurred by any of them at any time and from time to time
by reason of or arising out of (a) the failure of the Borrower or any
Subsidiary of the Borrower to perform any obligation hereunder regarding
asbestos or applicable Environmental Laws, (b) any violation on or before the
Release Date of any applicable Environmental Law in effect on or before the
Release Date, and (c) any act, omission, event or circumstance existing or
occurring on or prior to the Release Date (including without limitation the
presence on such real Property or release from such real Property of hazardous
substances or solid wastes disposed of or otherwise released on or prior to
the Release Date), resulting from or in connection with the ownership of the
real Property, regardless of whether the act, omission, event or circumstance
constituted a violation of any applicable Environmental Law at the time of its
existence or occurrence, or whether the act, omission, event or circumstance
is caused by or relates to the negligence of any indemnified Person; provided
that, the Borrower shall not be under any obligation to indemnify the
Administrative Lender or any Lender to the extent that any such liability
arises as the result of the gross negligence or willful misconduct of such
Person, as finally judicially determined by a court of competent jurisdiction,
or for any event which is both not caused by the Borrower or any Subsidiary of
the Borrower and occurs after any foreclosure by the Lenders on any specific
Property. The provisions of this paragraph shall survive the Release Date and
shall continue thereafter in full force and effect.
6.12. Interest Rate Protection Agreements. If at any time after the
Closing Date (a) the 30-day LIBOR Rate exceeds 7.50% for a period of five
consecutive days and (b) the Total Leverage Ratio is equal to or greater than
2.00 to 1.00, within 30 days following the expiration of such five business
day period, the Borrower will enter into and thereafter maintain an Interest
Rate Protection
<PAGE>
Agreement in an amount not less than 50% of the aggregate outstanding
Advances, on terms acceptable to the Administrative Lender but providing for
interest rate protection for two years or until 30 days beyond the Maturity
Date, whichever is sooner. If Borrower enters into an interest rate cap
agreement, the interest rate related thereto shall not exceed 2% per annum in
excess of the then current treasury rate for the applicable hedge period.
6.13. Acquisitions, Generally. In connection with any Permitted
Acquisition made by the Borrower during the term of this Agreement, the
Borrower shall, (a) not less than ten Business Days prior to the proposed
acquisition date, deliver to Administrative Lender a detailed written
description of the proposed Permitted Acquisition in form reasonably
acceptable to the Administrative Lender, and (b) prior to the consummation of
the acquisition a statement certified by an Authorized Officer that (i) the
proposed transaction complies with the definition of Permitted Acquisition set
forth in Article I hereof and Section 8.05(b) hereof, and (ii) no Default or
Event of Default exists prior to or after giving effect to any requested
Advance or the consummation of such acquisition, or will exist upon
consummation of the proposed acquisition and related borrowings and
transactions, together with a Compliance Certificate computed after giving
effect to such acquisition and borrowings.
6.14. Marine-Street Loans. In connection with any loan made by
Borrower to Ms. Natalie Marine-Street to exercise options for the acquisition
of Capital Stock of Borrower pursuant to Section 11 of Ms. Marine-Street's
Employment Contract dated as of May 3, 1996 between the Borrower and Ms.
Marine-Street, the Borrower shall within five calendar days of any such loan
assign the pledge of such Capital Stock to Administrative Lender for the pro
rata benefit of Lenders, provided that such assignment shall not be made if
its is in contravention of Virginia law.
ARTICLE VII. INFORMATION COVENANTS
So long as any of the Obligations are outstanding and unpaid or the
Commitment or any Letter of Credit is outstanding (whether or not the
conditions to borrowing have been or can be fulfilled), the Borrower shall
furnish or cause to be furnished to each Lender:
7.01.Quarterly Financial Statements and Information. Within 45 days
after the end of each fiscal quarter, consolidated and consolidating balance
sheets of Borrower and its Subsidiaries
<PAGE>
as at the end of such quarter and the related consolidated and consolidating
statements of income and consolidated statements of changes in cash for such
quarter and for the elapsed portion of the year ended with the last day of
such quarter, all of which shall be certified by an Authorized Officer, to, in
his or her opinion, present fairly in all material respects, in accordance
with GAAP, the financial position and results of operations of the Borrower
and its Subsidiaries as at the end of and for such period, and for the elapsed
portion of the year ended with the last day of such period.
7.02. Annual Financial Statements and Information; Certificate of No
Default.
(a) Within the earlier of (i) 120 days after the end of each fiscal
year and (ii) such time as such financial statements are required to be filed
in accordance with the terms of the Exchange Act, a copy of (A) the
consolidated balance sheet of the Borrower and its Subsidiaries, as of the end
of the current and prior fiscal years and (B) consolidated statements of
earnings, statements of changes in shareholders' equity, and statements of
changes in cash as of and through the end of such fiscal year, all of which
are prepared in accordance with GAAP, and certified by independent certified
public accountants acceptable to the Lenders, whose opinion shall be in scope
and substance in accordance with generally accepted auditing standards and
shall be unqualified.
(b) As soon as available, but in any event within 60 days following
the end of each fiscal year, a copy of the annual consolidated operating
budget of the Borrower and its Subsidiaries for the succeeding fiscal year.
7.03. Compliance Certificates. At the time financial statements are
furnished pursuant to Section 7.01 and Section 7.02 hereof, a duly completed
Compliance Certificate evidencing no Default or Event of Default.
7.04. Copies of Other Reports and Notices.
(a) Promptly upon their becoming available, a copy of (i) all
material reports or letters submitted to the Borrower or any Subsidiary of the
Borrower by accountants in connection with any annual, interim or special
audit, including without limitation any report prepared in connection with the
annual audit referred to in Section 7.02 hereof, and any other comment letter
submitted to
<PAGE>
management in connection with any such audit, (ii) each financial statement,
report, notice or proxy statement sent by the Borrower or any Subsidiary of
the Borrower to stockholders generally, (iii) each regular or periodic report
and any registration statement or prospectus (or material written
communication in respect of any thereof) filed by the Borrower or any
Subsidiary of the Borrower with any securities exchange, with the Securities
and Exchange Commission or any successor agency, and (iv) all press releases
concerning material financial aspects of the Borrower or any Subsidiary of the
Borrower;
(b) Promptly upon becoming aware that (i) the holder(s) of any
note(s) or other evidence of indebtedness or other security of the Borrower or
any Subsidiary of the Borrower in excess of $250,000 in the aggregate has
given notice or taken any action with respect to a breach, failure to perform,
claimed default or event of default thereunder, (ii) any occurrence or
non-occurrence of any event which constitutes or which with the passage of
time or giving of notice or both could constitute a material breach by the
Borrower or any Subsidiary of the Borrower under any material agreement or
instrument other than this Agreement to which the Borrower or any Subsidiary
of the Borrower is a party or by which any of their Properties may be bound,
or (iv) any event, circumstance or condition which could reasonably be
expected to have a Material Adverse Effect, a written notice specifying the
details thereof (or the nature of any claimed default or event of default) and
what action is being taken or is proposed to be taken with respect thereto;
(c) Promptly upon receipt thereof, information with respect to and
copies of any notices received from the FCC, any applicable PUC or any other
federal, state or local regulatory agencies or any tribunal relating to any
order, ruling, law, information or policy that relates to a breach of or
noncompliance with the Communications Act or any law, rule or regulation of
any applicable PUC, or might result in the payment of money by the Borrower or
any Subsidiary of the Borrower in an amount of $250,000 or more in the
aggregate, or otherwise have a Material Adverse Effect, or result in the loss
or suspension of any material License or any Material Contract;
(d) Promptly upon the knowledge of an Authorized Officer of receipt
by the Borrower or any Subsidiary from any governmental agency, or any
government, political subdivision or other entity, of any material notice,
correspondence, hearing, proceeding or
<PAGE>
order regarding or affecting the Borrower, any Subsidiary of the Borrower, or
any of their Properties or businesses not in the ordinary course of business,
a copy of such notice, correspondence, hearing, proceeding or order;
(e) From time to time and promptly upon each request, such data,
certificates, reports, statements, documents or further information regarding
the assets, business, liabilities, financial position, projections, results of
operations or business prospects of the Borrower and its Subsidiaries that is
within the Borrower's control, as the Administrative Lender or any Lender may
reasonably request.
7.05. Notice of Litigation, Default and Other Matters. Prompt notice
of the following events after the Borrower has knowledge or notice thereof:
(a) The commencement of all proceedings and investigations by or
before the FCC, any applicable PUC, or any other governmental body, and all
other actions and proceedings in any court or before any arbitrator involving
claims for damages (including punitive damages) in excess of either $1,000,000
for any one proceeding or investigation, or $5,000,000 in the aggregate for
all such proceedings and investigations (after deducting the amount with
respect to the Borrower or any Subsidiary of the Borrower is insured), against
or in any other way relating directly to the Borrower, any Subsidiary of the
Borrower, or any of their Properties or businesses;
(b) Promptly upon the happening of any condition or event which
constitutes a Default, a written notice specifying the nature and period of
existence thereof and what action is being taken or is proposed to be taken
with respect thereto; and
(c) Any event which could have a Material Adverse Effect with respect
to the business, assets, liabilities, financial position, results of
operations or prospective business of the Borrower or any Subsidiary of the
Borrower.
7.06. ERISA Reporting Requirements.
(a) Promptly and in any event (i) within 30 days after the Borrower
or any member of its Controlled Group knows or has reason to know that any
ERISA Event described in clause (a) of the definition of ERISA Event or any
event described in Section 4063(a)
<PAGE>
of ERISA with respect to any Plan of the Borrower or any member of its
Controlled Group has occurred, and (ii) within 10 days after the Borrower or
any member of its Controlled Group knows or has reason to know that any other
ERISA Event with respect to any Plan of the Borrower or any member of its
Controlled Group has occurred or a request for a minimum funding waiver under
Section 412 of the Code with respect to any Plan of the Borrower or any member
of its Controlled Group, a written notice describing such event and describing
what action is being taken or is proposed to be taken with respect thereto,
together with a copy of any notice of event that is given to the PBGC;
(b) Promptly and in any event within two Business Days after receipt
thereof by the Borrower or any member of its Controlled Group from the PBGC,
copies of each notice received by the Borrower or any member of its Controlled
Group of the PBGC's intention to terminate any Plan or to have a trustee
appointed to administer any Plan;
(c) Promptly and in any event within 30 days after the filing thereof
by the Borrower or any member of its Controlled Group with the United States
Department of Labor, the Internal Revenue Service or the PBGC, copies of each
annual and other report (including Schedule B thereto) with respect to each
Plan;
(d) Promptly and in any event within 30 days after receipt thereof, a
copy of any notice, determination letter, ruling or opinion the Borrower or
any member of its Controlled Group receives from the PBGC, the United States
Department of Labor or the Internal Revenue Service with respect to any Plan;
(e) Promptly, and in any event within 10 Business Days after receipt
thereof, a copy of any correspondence the Borrower or any member of its
Controlled Group receives from the Plan Sponsor (as defined by Section
4001(a)(10) of ERISA) of any Plan concerning potential withdrawal liability
pursuant to Section 4219 or 4202 of ERISA, and a statement from the chief
financial officer of the Borrower or such member of its Controlled Group
setting forth details as to the events giving rise to such potential
withdrawal liability and the action which the Borrower or such member of its
Controlled Group is taking or proposes to take with respect thereto;
<PAGE>
(f) Notification within 30 days of any material increases in the
benefits of any existing Plan which is not a Multiemployer Plan, or the
establishment of any new Plans, or the commencement of contributions to any
Plan to which the Borrower or any member of its Controlled Group was not
previously contributing;
(g) Notification within three Business Days after the Borrower or any
member of its Controlled Group knows or has reason to know that the Borrower
or any such member of its Controlled Group has or intends to file a notice of
intent to terminate any Plan under a distress termination within the meaning
of Section 4041(c) of ERISA and a copy of such notice; and
(h) Promptly after receipt of written notice of commencement thereof,
notice of all actions, suits and proceedings before any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, affecting the Borrower or any member of its Controlled Group with
respect to any Plan.
ARTICLE VIII. NEGATIVE COVENANTS
So long as any of the Obligations are outstanding and unpaid or the
Commitment or any Letter of Credit is outstanding (whether or not the
conditions to borrowing have been or can be fulfilled):
8.01. Financial Covenants.
(a) TOTAL LEVERAGE RATIO. The Borrower shall not permit the Total
Leverage Ratio at any time during the term of this Agreement to be more than
2.50 to 1.00.
(b) INTEREST COVERAGE RATIO. The Borrower shall not permit the
Interest Coverage Ratio at any time during the term of this Agreement to be
less than 2.50 to 1.00.
(c) CURRENT RATIO. The Borrower shall not permit the Current Ratio
at any time during the term of this Agreement to be less than 1.50 to 1.00.
(d) CAPITAL EXPENDITURES. The Borrower shall not permit Capital
Expenditures paid by the Borrower and its Subsidiaries during any calendar
year set forth below in the aggregate to exceed the following amounts set
forth opposite such year:
<PAGE>
Year Amount
---- ------
1996 $14,000,000
1997 $20,000,000
1998 $14,000,000
1999 $16,000,000
provided that, in any year that the Borrower does not utilize the full amount
of Capital Expenditures available to it, such unused amount shall increase the
amount of the following year's permitted Capital Expenditure limitation, but
no such amount may be carried forward for more than one year.
8.02. Debt for Borrowed Money. The Borrower shall not, and shall not
permit any Subsidiary of the Borrower to, create, assume, incur or otherwise
become or remain obligated in respect of, or permit to be outstanding, or
suffer to exist any Debt for Borrowed Money, except:
(a) with respect to the Borrower and its Subsidiaries, Debt for
Borrowed Money under the Loan Papers;
(b) with respect to the Borrower, Debt for Borrowed Money described
on Schedule 8.02 hereto in the principal amounts and as such Debt for Borrowed
Money exists as of the Closing Date;
(c) provided that no Default or Event of Default exists or would
result from the incurrence thereof, any wholly owned Subsidiary may incur
secured Debt for Borrowed Money in the form of Capital Leases, so long as, on
the date of such incurrence for each such Capital Lease (and notwithstanding
any subsequent change in the formula set forth below):
(i) the aggregate of all such Debt for Borrowed Money for the
Borrower and all Subsidiaries of the Borrower plus the aggregate
outstanding Guaranties and Contingent Liabilities of the Borrower and the
Subsidiaries does not exceed the lesser of (A) $20,000,000 in the
aggregate for the Borrower and all of its Subsidiaries outstanding at any
one time, and (B) the product of the following equation, determined as of
the date of the incurrence or acquisition of such proposed Capital Lease:
<PAGE>
EBITDA for the four most recently completed fiscal quarters of the
Borrower (provided that, to the extent any acquisition as been
consummated by the Borrower or any Subsidiary of the Borrower during
the preceding four fiscal quarters, EBITDA will be determined as if
such acquisition was consummated on the first day of the first of
the four fiscal quarters included in such determinations times 2.50
(maximum leverage permitted under Section 8.01(a) hereof) times 10%;
(ii) any Capital Lease entered into by the Borrower or any
Subsidiary of the Borrower after the Closing Date must be for newly
acquired equipment and infrastructure; and
(iii) the amount of any Capital Lease acquired by the Borrower or
any Subsidiary of the Borrower in accordance with any acquisition
permitted by the terms of this Agreement shall be counted toward usage of
this basket provision; and
(d) provided that no Default or Event of Default exists or would
result from the incurrence thereof, with respect to the Borrower and the
wholly-owned Subsidiaries of the Borrower, Debt owed to each other.
8.03. Liens. The Borrower shall not, and shall not permit any
Subsidiary of the Borrower to, create, assume, incur, permit or suffer to
exist, directly or indirectly, any Lien on any of its assets or Properties,
whether now owned or hereafter acquired, except Permitted Liens and, so long
as no Default or Event of Default exists both before and immediately after
giving effect to such grant, Liens securing Debt for Borrowed Money under
Capital Leases of the Borrower permitted to be incurred under Section 8.02(c)
hereof. The Borrower shall not, and shall not permit any Subsidiary of the
Borrower to, agree with any other Person that it shall not create, assume,
incur, permit or suffer to exist or to be created, assumed, incurred or
permitted to exist, directly or indirectly, any Lien on any of its assets or
Properties, except
<PAGE>
with respect to negative pledges granted by the Borrower or any Subsidiary to
any LEC in any agreement between the Borrower and any LEC, so long as any such
agreements entered into after the Closing Date are similar to the terms and
conditions to those LEC agreements in existence on the Closing Date.
8.04. Investments. The Borrower shall not, and shall not permit any
Subsidiary of the Borrower to, make any Investment, except that the Borrower
may purchase or otherwise acquire and own:
(a) Marketable, direct obligations of, or guaranteed by, the United
States of America and maturing within 365 days of the date of purchase;
(b) Commercial paper issued by U.S. corporations that have a rating of
A-1/P-1 or better by Standard & Poor's Ratings Group, a Division of McGraw-Hill,
Inc. or Moody's Investors Service, Inc.;
(c) Certificates of deposit of domestic banks maturing within 365 days
of the date of purchase, which banks' debt obligations have one of the two
highest ratings obtainable from Standard & Poor's Ratings Group, a Division of
McGraw-Hill, Inc. or Moody's Investors Service, Inc.;
(d) Securities issued by U.S. corporations that have one of the two
highest ratings obtainable from Standard & Poor's Ratings Group, a Division of
McGraw-Hill, Inc. or Moody's Investors Service, Inc.;
(e) Investments in acquisitions permitted by Section 8.05(b) hereof, so
long as (i) the Capital Stock of each new Subsidiary is pledged to the Lenders
to secure the Obligations pursuant to a pledge agreement substantially
identical in form and substance to the Pledge Agreement, and (ii) each new
Subsidiary of the Borrower (A) is subject to the provisions hereof and (B)
immediately becomes a party to a Subsidiary Guaranty and any security
documents required by the Administrative Lender;
(f) Accounts receivable that arise in the ordinary course of business
and are payable on standard terms;
(g) Investments in existence on the Closing Date described on Schedule
8.04 hereto;
(h) so long as there exists no Default or Event of Default
<PAGE>
both before and after giving effect to any such Investment, Investments by the
Borrower in accounts receivable purchased from its customers in the ordinary
course of business in an aggregate amount outstanding at any one time not to
exceed the lesser of (i) $10,000,000, and (ii) 10% of accounts of the Borrower
on such date that meet all the qualifications of subsection (a) of the
definition of Eligible Accounts herein; and
(i) Investments constituting loans and advances to employees and/or
shareholders permitted by Section 8.07 hereof.
8.05. Liquidation, Disposition or Acquisition of Assets, Merger, New
Subsidiaries. The Borrower shall not, and shall not permit any Subsidiary of
the Borrower to, at any time:
(a) liquidate or dissolve itself (or suffer any liquidation or
dissolution) or otherwise wind up; or sell, lease, abandon, transfer or
otherwise dispose of all or any part of its assets, Properties or business
(other than in the ordinary course of business and other than assets that are
damaged or obsolete), provided that, (i) any Subsidiary of the Borrower can be
dissolved so long as a wholly-owned Subsidiary of the Borrower acquires all
such Subsidiary's assets, (ii) Borrower or any Subsidiary of the Borrower may
sell or otherwise dispose of any tangible or intangible assets or other
Properties so long as (A) there exists no Default or Event of Default both
before and after giving effect to such sale or disposition, (B) on the date of
consummation of any such sale or disposition, the aggregate gross proceeds of
all such sales (including, on a pro forma basis, the proposed sale) during the
period of four consecutive fiscal quarters ending on, or most recently ended
prior to, such date, would not exceed 10% of Annualized EBITDA for such period
and (C) the Net Proceeds of all such sales or dispositions are used to prepay
Advances and reduce the Commitment in accordance with the provisions of
Sections 2.05 and 2.11 hereof, and (iii) after delivery of prior written
notice to the Administrative Lender (but without requiring consent), any
wholly owned direct or indirect Subsidiary of the Borrower that has executed a
Subsidiary Guaranty of the Obligations hereunder may sell or transfer assets,
Property or business to any other wholly owned indirect or indirect Subsidiary
of the Borrower that has executed a Subsidiary Guaranty of the Obligations
hereunder;
(b) acquire any assets, Property or business of any other Person, or
participate in any joint venture, except (i) the Borrower and the Subsidiaries
of the Borrower may acquire assets
<PAGE>
and Property acquired in the ordinary course of business, (ii) provided that
no Default or Event of Default exists or would result therefrom and Borrower
complies fully with Sections 6.13 and 8.04(e) hereof, Permitted Acquisitions
may be consummated, and (iii) after delivery of prior written notice to the
Administrative Lender (but without requiring consent), any wholly owned direct
or indirect Subsidiary of the Borrower that has executed a Subsidiary Guaranty
of the Obligations hereunder may acquire assets, Property or business from any
other wholly owned indirect or indirect Subsidiary of the Borrower that has
executed a Subsidiary Guaranty of the Obligations hereunder;
(c) enter into any merger or consolidation, except that, so long as
there exists no Default or Event of Default and none is caused thereby, (i)
any wholly-owned Subsidiary of the Borrower can merge or consolidate into any
other wholly-owned Subsidiary of the Borrower, or so long as such transaction
is in connection with a Permitted Acquisition, into another Person, so long as
a wholly-owned Subsidiary of the Borrower is a survivor, or into the Borrower
so long as the Borrower is the surviving corporation, and (ii) another Person
may be merged into the Borrower or any wholly-owned Subsidiary of the Borrower
in connection with a Permitted Acquisition, so long as the Borrower or such
wholly-owned Subsidiary is the surviving corporation; or
(d) create or acquire any Subsidiary, except (a) as permitted by Section
8.04(e) hereof and Section 8.05(b) above, and (b) so long as (i) there exists
no Default or Event of Default both before and after giving effect to the
creation of any new wholly owned Subsidiary and the transfer of any assets to
such wholly owned Subsidiary, (ii) immediately upon the creation of any new
wholly owned Subsidiary, such Subsidiary shall become a signatory to a
Subsidiary Guaranty of the Obligations delivered to the Administrative Lender,
(iii) the Borrower immediately delivers all shares of Capital Stock of the new
wholly owned Subsidiary to the Administrative Lender together with stock
powers executed in blank, and (iv) the Borrower or any Subsidiary of the
Borrower owning any portion of the Capital Stock of any such new wholly owned
Subsidiary executes and delivers to the Administrative Lender a pledge
agreement pledging all such Capital Stock to secure the Obligations in form
substantially similar to the pledge agreement executed by the Borrower on the
Closing Date, the Borrower may create a new wholly owned Subsidiary of the
Borrower. Nothing in this Section 8.05(d) shall permit the Borrower or any
Subsidiary of the Borrower to create any Subsidiary that is not wholly owned.
<PAGE>
In connection with any asset sale permitted by this Section 8.05 or otherwise
consented to by the Lenders in accordance with the terms of this Agreement,
the Administrative Lender is hereby authorized by each Lender to (i) execute
any and all releases deemed appropriate by it to release such assets of the
Borrower and the Subsidiaries of the Borrower (including, without limitation,
Capital Stock owned by the Borrower and its Subsidiaries) constituting
Collateral from all Liens and security interests securing all or any portion
of the Obligations, (ii) return to the Borrower any such Collateral in the
possession of the Administrative Lender, and (iii) take such other action as
the Administrative Lender deems necessary or appropriate in connection with
such transaction and in furtherance of the effectuation thereof.
8.06. Guaranties; Contingent Liabilities. The Borrower shall not,
and shall not permit any Subsidiary of the Borrower to, at any time make or
issue any Guaranty, or assume, be obligated with respect to, or permit to be
outstanding any Contingent Liabilities, except (i) pursuant to the Loan Papers
and (ii) so long as there exists no Default or Event of Default both before
and after giving effect thereto, the Borrower may make or issue any Guaranty
or permit to be outstanding any Contingent Liability so long as the Borrower
is in compliance with Section 8.02(c) hereof.
8.07. Restricted Payments. The Borrower shall not, and shall not
permit any Subsidiary of the Borrower to, directly or indirectly declare, make
or pay any Restricted Payment; provided, however
(a) the Borrower or any wholly-owned Subsidiary of the Borrower
that has executed a Subsidiary Guaranty of the Obligations hereunder may
declare, make and pay Restricted Payments to the Borrower or any other
wholly-owned Subsidiary that has executed a Subsidiary Guaranty of the
Obligations hereunder,
(b) so long as
(i) there exists no Default or Event of Default both before
and after giving effect to any such Restricted Payment, and
(ii) the sum of the amount of such loan plus the aggregate
amount of all other shareholder and/or employee
<PAGE>
loans made under subsection (c) below (excluding the loan permitted
to exist under Section 8.07(e) below) outstanding at such time is
less than or equal to $5,000,000,
the Borrower may make a loan to Natalie Marine-Street in accordance with the
terms of that certain employment agreement, dated May 3, 1996, between the
Borrower and Ms. Natalie Marine-Street (the "Marine-Street Loan"),
(c) so long as
(i) there exists no Default or Event of Default both before
and after giving effect to any such Restricted Payment,
(ii) the Total Leverage Ratio is less than 1.25 to 1.00 after
giving effect to any such proposed Restricted Payment constituting
loans or advances to shareholders and/or employees, and
(iii) the sum of the amount of the Marine-Street Loan plus the
aggregate amount of all other loans and advances to shareholders
and/or employees made pursuant to this Section 8.07(c) outstanding
at such time (excluding the loan permitted to exist under Section
8.07(e) below) is equal to or less than $5,000,000,
the Borrower may declare, make and pay Restricted Payments constituting loans
or advances to shareholders and/or employees,
(d) so long as
(i) there exists no Default or Event of Default both before
and after giving effect to any such Restricted Payment,
(ii) the Total Leverage Ratio is less than 1.25 to 1.00 after
giving effect to any such proposed Restricted Payment, and
(iii) so long as such Restricted Payments are made pursuant to
agreements reached on an arm's length basis,
<PAGE>
the Borrower may declare, make and pay Restricted Payments
constituting Distributions in an aggregate amount from the Closing
Date until the Obligations have been paid in full not to exceed
$5,000,000,
provided that, the Borrower may repurchase Capital Stock of the
Borrower from (A) any deceased shareholder's estate or (B) any
shareholder that is a terminated employee in a maximum aggregate
amount of $2,000,000 over the term of this Agreement, if the Total
Leverage Ratio is equal to or more than 1.25 to 1.00 (but such
amount must still be included in reaching the $5,000,000 maximum
set forth in this subsection (d) above), and
(e) so long as there exists no Default or Event of
Default both before and after giving effect to any such Restricted
Payment, the Borrower may permit to exist Restricted Payments in
accordance with the terms of those agreements listed on Schedule
8.07 hereof as they exist on the Closing Date.
8.08. Affiliate Transactions. The Borrower shall not, and shall not
permit any Subsidiary of the Borrower to, at any time engage in any
transaction with an Affiliate, nor make an assignment or other transfer of any
of its assets or Properties to any Affiliate, on terms materially less
advantageous to the Borrower or any Subsidiary of the Borrower than would be
the case if such transaction had been effected with a non-Affiliate, except
for Restricted Payments permitted to be paid under Section 8.07 hereof.
8.10. Compliance with ERISA. The Borrower shall not, and shall not
permit any Subsidiary of the Borrower to, directly or indirectly, or permit
any member of its Controlled Group to directly or indirectly, (a) terminate
any Plan so as to result in any material (in the opinion of the Majority
Lenders) liability to the Borrower or any member of its Controlled Group, (b)
permit to exist any ERISA Event, or any other event or condition which
presents the risk of liability of the Borrower or any member of its Controlled
Group, (c) make a complete or partial withdrawal (within the meaning of
Section 4201 of ERISA) from any Multiemployer Plan so as to result in any
liability to the Borrower or any member of its Controlled Group, (d) enter
into any new Plan or modify any existing Plan so as to increase its
obligations thereunder except in the ordinary course of business consistent
with past practice which could result in any liability to the Borrower or any
member
<PAGE>
of its Controlled Group, or (e) permit the present value of all benefit
liabilities, as defined in Title IV of ERISA, under each Plan of the Borrower
or any member of its Controlled Group (using the actuarial assumptions
utilized by the PBGC upon termination of a plan) to exceed the fair market
value of Plan assets allocable to such benefits all determined as of the most
recent valuation date for each such Plan.
8.11. Capital Stock. The Borrower shall not, and shall not permit
any Subsidiary of the Borrower to (a) make or permit any transfer, assignment,
distribution, mortgage, pledge or gift of any shares of Pledged Stock or
Capital Stock of the Subsidiaries of the Borrower, except to another wholly
owned direct or indirect Subsidiary of the Borrower that has also executed a
Subsidiary Guaranty of the Obligations and (b) issue any Capital Stock.
8.12. Sale and Leaseback. The Borrower shall not, and shall not
permit any Subsidiary of the Borrower to, enter into any arrangement whereby
it sells or transfers any of its assets, and thereafter rents or leases such
assets.
8.13. Sale or Discount of Receivables. The Borrower shall not, and
shall not permit any Subsidiary of the Borrower to, directly or indirectly
sell, with or without recourse, for discount or otherwise, any notes or
accounts receivable.
8.14. Limitation on Restrictive Agreements. The Borrower shall not,
and shall not permit any Subsidiary of the Borrower to, enter into any
indenture, agreement, instrument, financing document or other arrangement
which, directly or indirectly, prohibits or restrains, or has the effect of
prohibiting or restraining, or imposes materially adverse conditions upon: (a)
the incurrence of indebtedness, (b) the granting of Liens, (c) the making or
granting of Guarantees, (d) the payment of dividends or Distributions, (e) the
purchase, redemption or retirement of any Capital Stock, (f) the making of
loans or advances or (g) transfers or sales of property or assets (including
Capital Stock) by the Borrower or any of its Subsidiaries. The Borrower shall
not, and shall not permit any Subsidiary of the Borrower to, enter into any
indenture, agreement, instrument, financing document or other arrangement
which, directly or indirectly, is breached or in default solely as a result of
any change in the ownership, management or Board of Directors of the Borrower,
unless the Borrower agrees to a substantially similar provision in this
Agreement.
<PAGE>
ARTICLE IX. EVENTS OF DEFAULT
9.01. Events of Default. Any one or more of the following shall be
an "Event of Default" hereunder, if the same shall occur for any reason
whatsoever, whether voluntary or involuntary, by operation of Law, or
otherwise:
(a) The Borrower shall fail to pay any (i) principal payable under
any Loan Paper on the date due; or (ii) any interest, fees or other amounts
payable within three days of the date due;
(b) Any representation or warranty made or deemed made by any Obligor
(or any of its officers or representatives) under or in connection with any
Loan Paper shall prove to have been incorrect or misleading in any material
respect when made or deemed made;
(c) The Borrower shall fail to perform or observe any term or
covenant contained in Section 7.05 hereof or in Article VIII hereof;
(d) Any Obligor shall fail to perform or observe any other term or
covenant contained in any Loan Paper, other than those described in Sections
9.01(a), (b) and (c) above, and such failure shall not be remedied within
thirty days following the earlier of the Borrower's knowledge of such failure
or notice from any Lender of the occurrence of such failure;
(e) Any of the following shall occur: (i) Any Loan Paper or material
provision thereof shall, for any reason, not be valid and binding on the
Obligor signatory thereto, or not be in full force and effect, or shall be
declared to be null and void; or (ii) the validity or enforceability of any
Loan Paper shall be contested by any Obligor; or (iii) any Obligor shall deny
in writing that it has any or further liability or obligation under its
respective Loan Papers; or (iv) any default or breach under any provision of
any Loan Papers shall continue after the applicable grace period, if any,
specified in such Loan Paper;
(f) Any of the following shall occur: (i) any Obligor shall make an
assignment for the benefit of creditors or be unable to pay its debts
generally as they become due; (ii) any Obligor shall petition or apply to any
Tribunal for the appointment of a trustee, receiver, or liquidator of it, or
of any substantial part of its
<PAGE>
assets, or shall commence any proceedings relating to any Obligor under any
Debtor Relief Laws; (iii) any such petition or application shall be filed, or
any such proceedings shall be commenced, against any Obligor, or an order,
judgment or decree shall be entered appointing any such trustee, receiver, or
liquidator, or approving the petition in any such proceedings, and such
petition or application shall be consented to or uncontested by such Obligor,
or if contested by such Obligor, shall not be dismissed within 60 days
following the filing of such petition or application; (iv) any final order,
judgment, or decree shall be entered in any proceedings against any Obligor
decreeing its dissolution; or (v) any final order, judgment, or decree shall
be entered in any proceedings against any Obligor decreeing its split-up which
requires the divestiture of a substantial part of its assets;
(g) Any of the following shall occur: (i) The Borrower or any other
Obligor shall fail to pay any Debt (other than Debt under the Loan Papers) in
an aggregate amount of $1,000,000 or more when due (whether by scheduled
maturity, required prepayment, acceleration, demand, or otherwise), and such
failure shall continue after the applicable grace period, if any, specified in
the agreement or instrument relating to such Debt; or (ii) the Borrower or any
other Obligor shall fail to perform or observe any term or covenant contained
in any agreement or instrument relating to any such Debt, when required to be
performed or observed, and such failure shall continue after the applicable
grace period, if any, specified in such agreement or instrument, and can
result in acceleration of the maturity of such Debt; or (iii) any such Debt
shall be declared to be due and payable, or required to be prepaid,
mandatorily redeemed or repurchased (other than by a regularly scheduled
required prepayment), prior to the stated maturity thereof; or (iv) there
shall exist a breach by any Person to one or more Material Contracts the
effect of which could reasonably be expected to have a Material Adverse
Effect;
(h) Any Obligor shall have any final judgment(s) outstanding against
it, and such judgment(s) shall remain unstayed, in effect, and unpaid for the
period of time after which the judgment holder may and may cause the creation
of Liens against or seizure of any of its Property;
(i) Any of the following shall have occurred: (i) Any ERISA Event
shall have occurred with respect to a Plan of the Borrower, and the sum of the
Insufficiency of such Plan and liabilities
<PAGE>
relating thereto is equal to or greater than $1,000,000 or (ii) the Borrower
or any ERISA Affiliate of the Borrower shall have committed a failure
described in Section 302(f)(l) of ERISA, and the amount determined under
Section 302(f)(3) of ERISA is equal to or greater than $1,000,000;
(j) The Borrower or any ERISA Affiliate of the Borrower shall have
been notified by the sponsor of a Multiemployer Plan that (A) it has incurred
Withdrawal Liability to such Plan in an amount that, exceeds $1,000,000 or
requires payments exceeding $1,000,000 per annum, or (B) such Plan is in
reorganization or is being terminated, within the meaning of Title IV of
ERISA, if as a result thereof the aggregate annual contributions to all
Multiemployer Plans in reorganization or being terminated is increased over
the amounts contributed to such Plans for the preceding Plan year by an amount
exceeding $1,000,000;
(k) Any Obligor shall be required under any Environmental Law (i) to
implement any remedial, neutralization, or stabilization process or program,
the cost of which would have a Material Adverse Effect, or (ii) to pay any
penalty, fine, or damages in an aggregate amount which would have a Material
Adverse Effect;
(l) Any of the following shall have occurred: (i) Any Property
(whether leased or owned), or the operations conducted thereon by any Obligor
or any current or prior owner or operator thereof (in the case of real
Property), shall violate or have violated any applicable Environmental Law, if
such violation would have a Material Adverse Effect; or (ii) such Obligor
shall not obtain or maintain any License required to be obtained or filed
under any Environmental Law in connection with the use of such Property and
assets, including without limitation past or present treatment, storage,
disposal, or release of Hazardous Materials into the environment, if the
failure to obtain or maintain the same would have a Material Adverse Effect;
(m) Any of the following shall have occurred:
(i) Any Loan Paper shall for any reason (other than pursuant to
the terms thereof) cease to create a valid and perfected first priority
Lien in the Collateral purported to be covered thereby (except as
permitted by the terms of this Agreement or consented to by the
Lenders); or
(ii) At any time after 182 days after the Closing
<PAGE>
Date and thereafter, less than 100% of the Capital Stock of all of the
Subsidiaries of the Borrower shall be subject to a first priority
perfected pledge to the Administrative Lender to secure the Obligations;
or
(iii) At any time after the Closing Date, less than 100% of the
Capital Stock of all of the Subsidiaries of the Borrower not listed on
Schedule 4.01(d) hereto shall be subject to a first priority perfected
pledge to the Administrative Lender on behalf of the Lenders to secure
the Obligations; or
(iv) At any time after 77 days after the Closing Date but prior to
182 days after the Closing Date, less than 100% of the Capital Stock of
all of the Subsidiaries of the Borrower (except any five of the
Subsidiaries of the Borrower listed on Schedule 4.01(d) hereto) shall be
subject to a first priority perfected pledge to the Administrative Lender
on behalf of the Lenders to secure the Obligations; or
(v) At any time after 122 days after the Closing Date but prior to
182 days after the Closing Date, less than 100% of the Capital Stock of
all of the Subsidiaries of the Borrower (except any two of the
Subsidiaries of the Borrower listed on Schedule 4.01(d) hereto) shall be
subject to a first priority perfected pledge to the Administrative Lender
on behalf of the Lenders to secure the Obligations; or
(vi) Less than 100% of the Capital Stock of any Subsidiary of the
Borrower listed on Schedule 4.01(d) hereto shall be subject to a first
priority perfected pledge to the Administrative Lender on behalf of the
Lenders to secure the Obligations two days or later after the Borrower or
such Subsidiary of the Borrower has received PUC approval to pledge such
Capital Stock; or
(vii) Any of the following shall occur:
(a) The Borrower or any Subsidiary of the Borrower shall fail
to receive PUC approval and all other approvals necessary to pledge
the Capital Stock of less than four of the following entities to the
Administrative Lender on behalf of the Lenders to secure the
Obligations:
<PAGE>
Dial & Save of Arkansas, Inc.
Dial & Save of Delaware, Inc.
Dial & Save of Tennessee, Inc.
Dial & Save of Washington, Inc.
Dial & Save of Louisiana, Inc.
Dial & Save of Minnesota, Inc.
Dial & Save of Nebraska, Inc.
Dial & Save of North Carolina, Inc. or
Dial & Save of West Virginia, Inc.
by 75 days after the Closing Date;
(b) The Borrower or any Subsidiary of the Borrower shall fail
to receive PUC approval and all other approvals necessary to pledge
the Capital Stock of less than seven of the following entities to
the Administrative Lender on behalf of the Lenders to secure the
Obligations:
Dial & Save of Arkansas, Inc.
Dial & Save of Delaware, Inc.
Dial & Save of Tennessee, Inc.
Dial & Save of Washington, Inc.
Dial & Save of Louisiana, Inc.
Dial & Save of Minnesota, Inc.
Dial & Save of Nebraska, Inc.
Dial & Save of North Carolina, Inc. or
Dial & Save of West Virginia, Inc.
by 120 days after the Closing Date;
(c) The Borrower or any Subsidiary of the Borrower shall fail
to receive PUC approval and all other approvals necessary to pledge
the Capital Stock of any entity listed below to the Administrative
Lender on behalf of the Lenders to secure the Obligations:
Dial & Save of Arkansas, Inc.
Dial & Save of Delaware, Inc.
Dial & Save of Tennessee, Inc.
Dial & Save of Washington, Inc.
Dial & Save of Louisiana, Inc.
Dial & Save of Minnesota, Inc.
Dial & Save of Nebraska, Inc.
Dial & Save of North Carolina, Inc. or
<PAGE>
Dial & Save of West Virginia, Inc.
by 180 days after the Closing Date;
(n) Any of the following shall have occurred: (i) A final
non-appealable order is issued by any Tribunal, including, but not limited to,
the FCC, any applicable PUC, or the United States Justice Department,
requiring Borrower to divest a substantial portion of its assets pursuant to
any antitrust, restraint of trade, unfair competition, industry regulation, or
similar Laws, or (ii) any Tribunal shall condemn, seize, or otherwise
appropriate, or take custody or control of all or any substantial portion of
the assets of Borrower;
(o) Any of the following shall have occurred if the effect thereof could
be reasonably expected to cause a Material Adverse Effect: (i) Any License
whether presently existing or hereafter granted to or obtained by Borrower or
any Subsidiary of the Borrower shall expire without renewal or be suspended or
revoked, or (ii) Borrower or any Subsidiary of the Borrower shall become
subject to any injunction or other order affecting or which may affect
Borrower's or a Subsidiary of the Borrower's present or proposed operations
under any such License;
(p) Any civil action, suit or proceeding shall be commenced against
Borrower, or any Subsidiary of the Borrower under any federal or state
racketeering statute (including, without limitation, the Racketeer Influenced
and Corrupt Organization Act of 1970)("RICO") and such suit shall be adversely
determined by a court of applicable jurisdiction, and which is either
non-appealable or which the Borrower or such Subsidiary has elected not to
appeal; or any criminal action or proceeding shall be commenced against the
Borrower, any Subsidiary of the Borrower under any federal or state racketeering
statute (including, without limitation, RICO);
(q) There shall occur a Change in Control of the Borrower;
(r) Any Litigation commenced against the Borrower or any Subsidiary of
the Borrower is adversely determined by a court of applicable jurisdiction,
which such Litigation is either non-appealable or which the Borrower or such
Subsidiary has elected not to appeal, and in either case, is reasonably
expected to have a Material Adverse Effect;
<PAGE>
(s) The Borrower or any Subsidiary of the Borrower shall fail to comply
in any respect with the Communications Act, or any rule or regulation
promulgated by the FCC or any applicable PUC, and such failure could
reasonably be expected to have a Material Adverse Effect; or any License or
authorization constituting authorizations, permits or licenses of the Borrower
or any Subsidiary of the Borrower material to the operation of the business of
the Borrower and its Subsidiaries, has expired or shall expire without having
been renewed or shall be canceled or impaired and such expiration,
cancellation or impairment could reasonably be expected to have a Material
Adverse Effect; or
(t) The Borrower or any Subsidiary shall fail to operate its business
for any period of time which, in the aggregate, could reasonably be expected
to have a Material Adverse Effect.
9.02.Remedies upon Default. If an Event of Default described in Section
9.01(f) shall occur with respect to any Obligor, the aggregate unpaid
principal balance of and accrued interest on all Advances shall, to the extent
permitted by applicable Law, thereupon become due and payable concurrently
therewith, without any action by Administrative Lender or any Lender, and
without diligence, presentment, demand, protest, notice of protest or intent
to accelerate, or notice of any other kind, all of which are hereby expressly
waived. Subject to the foregoing sentence, if any Event of Default shall
occur and be continuing, Administrative Lender may at its election, do any one
or more of the following:
(a) Declare the entire unpaid balance of all Obligations immediately due
and payable, whereupon it shall be due and payable without diligence,
presentment, demand, protest, notice of protest or intent to accelerate, or
notice of any other kind (except notices specifically provided for under
Section 9.01 hereof), all of which are hereby expressly waived (except to the
extent waiver of the foregoing is not permitted by applicable Law);
(b) Terminate the Commitment;
(c) Reduce any claim of Administrative Lender and Lenders to judgment;
(d) Demand (and the Borrower shall pay to Administrative Lender)
immediately upon demand and in immediately available funds, the amount equal
to the aggregate amount of the Letters of Credit
<PAGE>
then outstanding, irrespective of whether such Letters of Credit have been
drawn upon, all as set forth and in accordance with the terms of provisions of
Article III hereof. The Administrative Lender shall promptly advise the
Borrower of any such declaration or demand but failure to do so shall not
impair the effect of such declaration or demand; and
(e) Exercise any Rights afforded under any Loan Papers, by Law,
including but not limited to the UCC, at equity, or otherwise.
9.03. Cumulative Rights. All Rights available to Administrative
Lender and Lenders under the Loan Papers shall be cumulative of and in
addition to all other Rights granted thereto at Law or in equity, whether or
not amounts owing thereunder shall be due and payable, and whether or not
Administrative Lender or any Lender shall have instituted any suit for
collection or other action in connection with the Loan Papers.
9.04. Waivers. The acceptance by Administrative Lender or any Lender
at any time and from time to time of partial payment of any amount owing under
any Loan Papers shall not be deemed to be a waiver of any Default or Event of
Default then existing. No waiver by Administrative Lender or any Lender of
any Default or Event of Default shall be deemed to be a waiver of any Default
or Event of Default other than such Default or Event of Default. No delay or
omission by Administrative Lender or any Lender in exercising any Right under
the Loan Papers shall impair such Right or be construed as a waiver thereof or
an acquiescence therein, nor shall any single or partial exercise of any such
Right preclude other or further exercise thereof, or the exercise of any other
Right under the Loan Papers or otherwise.
9.05. Performance by Administrative Lender or any Lender. Should any
covenant of any Obligor fail to be performed in accordance with the terms of
the Loan Papers, Administrative Lender may, at its option, perform or attempt
to perform such covenant on behalf of such Obligor. Notwithstanding the
foregoing, it is expressly understood that neither Administrative Lender nor
any Lender assumes, and shall not ever have, except by express written consent
of Administrative Lender or such Lender, any liability or responsibility for
the performance of any duties or covenants of any Obligor.
9.06. Expenditures. The Borrower shall reimburse Administrative
Lender and each Lender for any reasonable sums spent
<PAGE>
by it in connection with the exercise of any Right under Section 9.05 hereof.
Such sums shall bear interest at the lesser of (a) the Base Rate (whether or
not in effect), plus 2.00% per annum and (b) the Highest Lawful Rate, from
five days after the date any Lender makes demand to the Borrower for
reimbursement of such amount until the date of repayment by the Borrower.
9.07. Control. None of the covenants or other provisions contained
in this Agreement shall, or shall be deemed to, give Administrative Lender or
any Lender any Rights to exercise control over the affairs and/or management
of any Obligor, the power of Administrative Lender and each Lender being
limited to the Rights to exercise the remedies provided in this Article;
provided, however, that if Administrative Lender or any Lender becomes the
owner of any partnership, stock or other equity interest in any Person,
whether through foreclosure or otherwise, it shall be entitled to exercise
such legal Rights as it may have by being an owner of such stock or other
equity interest in such Person.
ARTICLE X. THE ADMINISTRATIVE LENDER
10.01. Authorization and Action. Each Lender hereby appoints and
authorizes Administrative Lender to take such action as Administrative Lender
on its behalf and to exercise such powers under this Agreement and the other
Loan Papers as are delegated to the Administrative Lender by the terms of the
Loan Papers, together with such powers as are reasonably incidental thereto.
As to any matters not expressly provided for by this Agreement and the other
Loan Papers (including without limitation enforcement or collection of the
Notes), Administrative Lender shall not be required to exercise any discretion
or take any action, but shall be required to act or to refrain from acting
(and shall be fully protected in so acting or refraining from acting) upon the
instructions of Majority Lenders (or all Lenders, if required under Section
11.01 hereof), and such instructions shall be binding upon all Lenders;
provided, however, that Administrative Lender shall not be required to take
any action which exposes Administrative Lender to personal liability or which
is contrary to any Loan Papers or applicable Law. Administrative Lender
agrees to give to each Lender notice of each notice given to it by the
Borrower pursuant to the terms of this Agreement, and to distribute to each
applicable Lender in like funds all amounts delivered to Administrative Lender
by the Borrower for the Ratable or individual account of any Lender.
Functions of the Administrative Lender are administerial in nature
<PAGE>
and in no event shall the Administrative Lender have a fiduciary or trustee
relationship in respect of any Lender by reason of this Agreement or any Loan
Paper.
10.02. Administrative Lender's Reliance, Etc. Neither Administrative
Lender, nor any of its directors, officers, agents, employees, or
representatives shall be liable for any action taken or omitted to be taken by
it or them under or in connection with this Agreement or any other Loan Paper,
except for its or their own gross negligence or willful misconduct. Without
limitation of the generality of the foregoing, Administrative Lender (a) may
treat the payee of any Note as the holder thereof until Administrative Lender
receives written notice of the assignment or transfer thereof signed by such
payee and in form satisfactory to Administrative Lender; (b) may consult with
legal counsel (including counsel for the Borrower or any of its Subsidiaries),
independent public accountants, and other experts selected by it, and shall
not be liable for any action taken or omitted to be taken in good faith by it
in accordance with the advice of such counsel, accountants, or experts;
(c) makes no warranty or representation to any Lender and shall not be
responsible to any Lender for any statements, warranties, or representations
made in or in connection with this Agreement or any other Loan Papers;
(d) shall not have any duty to ascertain or to inquire as to the performance
or observance of any of the terms, covenants, or conditions of this Agreement
or any other Loan Papers on the part of any Obligor or its Subsidiaries or to
inspect the Property (including the books and records) of any Obligor or its
Subsidiaries; (e) shall not be responsible to any Lender for the due
execution, legality, validity, enforceability, genuineness, sufficiency, or
value of this Agreement, any other Loan Papers, or any other instrument or
document furnished pursuant hereto; and (f) shall incur no liability under or
in respect of this Agreement or any other Loan Papers by acting upon any
notice, consent, certificate, or other instrument or writing believed by it to
be genuine and signed or sent by the proper party or parties.
10.03. NationsBank of Texas, N.A. and Affiliates. With respect to
its Commitment, its Advances, and any Loan Papers, NationsBank of Texas, N.A.
has the same Rights under this Agreement as any other Lender and may exercise
the same as though it were not Administrative Lender. NationsBank of Texas,
N.A. and its Affiliates may accept deposits from, lend money to, act as
trustee under indentures of, and generally engage in any kind of business
with, any Obligor, any Affiliate thereof, and any Person who may do
<PAGE>
business therewith, all as if NationsBank of Texas, N.A. were not
Administrative Lender and without any duty to account therefor to any Lender.
10.04. Lender Credit Decision. Each Lender acknowledges that it has,
independently and without reliance upon Administrative Lender or any other
Lender, and based on the financial statements referred to in Section 5.01(j),
Section 7.01 and Section 7.02 hereof and such other documents and information
as it has deemed appropriate, made its own credit analysis and decision to
enter into this Agreement. Each Lender also acknowledges that it will,
independently and without reliance upon Administrative Lender or any other
Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking
or not taking action under this Agreement and the other Loan Papers.
10.05. Indemnification by Lenders. Lenders shall indemnify
Administrative Lender, Pro Rata, from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses, or disbursements of any kind or nature whatsoever which may be
imposed on, incurred by, or asserted against Administrative Lender in any way
relating to or arising out of any Loan Papers or any action taken or omitted
by Administrative Lender thereunder, including any negligence of
Administrative Lender; provided, however, that no Lender shall be liable for
any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses, or disbursements resulting from
Administrative Lender's gross negligence or willful misconduct. Without
limitation of the foregoing, Lenders shall reimburse Administrative Lender,
Pro Rata, promptly upon demand for any out-of-pocket expenses (including
reasonable attorneys' fees) incurred by Administrative Lender in connection
with the preparation, execution, delivery, administration, modification,
amendment, or enforcement (whether through negotiation, legal proceedings or
otherwise) of, or legal and other advice in respect of rights or
responsibilities under, the Loan Papers. The indemnity provided in this
Section 10.05 shall survive the termination of this Agreement.
10.06. Successor Administrative Lender. Administrative Lender may
resign at any time by giving written notice thereof to Lenders and the
Borrower, and may be removed at any time with or without cause by the action
of all Lenders (other than Administrative Lender, if it is a Lender). Upon
any such
<PAGE>
resignation, Majority Lenders shall have the right to appoint a successor
Administrative Lender with the prior written consent of the Borrower (which
shall not be unreasonably withheld), provided that, if there exists an Event
of Default that is continuing, no consent of the Borrower shall be required.
If no successor Administrative Lender shall have been so appointed and shall
have accepted such appointment within thirty days after the retiring
Administrative Lender's giving of notice of resignation, then the retiring
Administrative Lender may, on behalf of Lenders, appoint a successor
Administrative Lender, which shall be a commercial bank organized under the
Laws of the United States of America or of any State thereof and having a
combined capital and surplus of at least $50,000,000. Upon the acceptance of
any appointment as Administrative Lender hereunder by a successor
Administrative Lender, such successor Administrative Lender shall thereupon
succeed to and become vested with all the Rights and duties of the retiring
Administrative Lender, and the retiring Administrative Lender shall be
discharged from its duties and obligations under the Loan Papers, provided
that if the retiring or removed Administrative Lender is unable to appoint a
successor Administrative Lender, Administrative Lender shall, after the
expiration of a sixty day period from the date of notice, be relieved of all
obligations as Administrative Lender hereunder. Notwithstanding any
Administrative Lender's resignation or removal hereunder, the provisions of
this Article shall continue to inure to its benefit as to any actions taken or
omitted to be taken by it while it was Administrative Lender under this
Agreement.
ARTICLE XI. MISCELLANEOUS
11.01. Amendments and Waivers. No amendment or waiver of any
provision of this Agreement or any other Loan Papers, nor consent to any
departure by the Borrower or any Obligor therefrom, shall be effective unless
the same shall be in writing and signed by the Borrower and the Administrative
Lender with the consent of the Majority Lenders, and then any such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given; provided, however, that no amendment, waiver, or
consent shall (and the result of action or failure to take action shall not)
unless in writing and signed by all of Lenders and Administrative Lender,
(a) increase the Commitment, (b) reduce any principal, interest, fees, or
other amounts payable hereunder, or waive or result in the waiver of any Event
of Default under Section 9.01(a) hereof, (c) postpone any date fixed for any
<PAGE>
payment of principal, interest, fees, or other amounts payable hereunder,
(d) release any Collateral or guaranties securing any Obligor's obligations
hereunder, other than releases contemplated hereby and by the Loan Papers,
(e) change the meaning of "Specified Percentage" or the number of Lenders
required to take any action hereunder, change the definitions of "Commitment",
"Swingline Commitment", "Maturity Date", "Majority Lenders", or "Letter of
Credit Commitment", or (f) amend this Section 11.01. No amendment, waiver, or
consent shall affect the Rights or duties of Administrative Lender under any
Loan Papers, unless it is in writing and signed by Administrative Lender in
addition to the requisite number of Lenders.
11.02. Notices.
(a) Manner of Delivery. All notices communications and other
materials to be given or delivered under the Loan Papers shall, except in
those cases where giving notice by telephone is expressly permitted, be given
or delivered in writing. All written notices, communications and materials
shall be sent by registered or certified mail, postage prepaid, return receipt
requested, by telecopier, or delivered by hand. In the event of a discrepancy
between any telephonic notice and any written confirmation thereof, such
written confirmation shall be deemed the effective notice except to the extent
Administrative Lender, any Lender or the Borrower has acted in reliance on
such telephonic notice.
(b) Addresses. All notices, communications and materials to be given
or delivered pursuant to this Agreement shall be given or delivered at the
following respective addresses and telecopier and telephone numbers and to the
attention of the following individuals or departments:
(i) If to the Borrower:
Telco Communications Group, Inc.
4219 Lafayette Center
Chantilly, VA 22021
Telephone No.:(703) 631-5628
Telecopier No.:(703) 631-5688
Attention: Bryan Rachlin, Esq.
General Counsel
<PAGE>
With a copy to:
Swidler & Berlin
3000 K Street
N.W., Suite 300
Washington, D.C. 20007
Telephone No.:(202) 424-7586
Telecopier No.(202) 424-7643
Attention: John Klusaritz, Esq.
(ii) If to Administrative Lender:
NationsBank of Texas, N.A.
NationsBank Plaza
901 Main Street, 64th Floor
Dallas, Texas 75202
Telephone No.: (214) 508-2752
Telecopier No.: (214) 508-9390
Attention: Ms. Jennifer F. Zydney
Vice President
With a copy to:
Donohoe, Jameson & Carroll, P.C.
3400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270
Telephone No.:(214) 698-3814
Telecopier No.:(214) 744-0231
Attention: Melissa Ruman Stewart
(iii) If to any Lender, to its address shown opposite its signature
block on the signature pages hereto, or on any Assignment and Acceptance,
or at such other address or, telecopier or telephone number or to the
attention of such other individual or department as the party to which such
information pertains may hereafter specify for the purpose in a notice to the
other specifically captioned "Notice of Change of Address".
(d) Effectiveness. Each notice, communication and any material to be
given or delivered to any party pursuant to this Agreement shall be effective
or deemed delivered or furnished (i) if sent by mail, on the fifth day after
such notice, communication
<PAGE>
or material is deposited in the mail, addressed as above provided, (ii) if
sent by telecopier, when such notice, communication or material is transmitted
to the appropriate number determined as above provided in this Section 11.02
and the appropriate receipt is received or otherwise acknowledged, (iii) if
sent by hand delivery or overnight courier, when left at the address of the
addressee addressed as above provided, and (iv) if given by telephone, when
communicated to the individual or any member of the department specified as
the individual or department to whose attention notices, communications and
materials are to be given or delivered except that notices of a change of
address, telecopier or telephone number or individual or department to whose
attention notices, communications and materials are to be given or delivered
shall not be effective until received; provided, however, that notices to
Administrative Lender pursuant to Article II shall be effective when received.
The Borrower agrees that Administrative Lender shall have no duty or
obligation to verify or otherwise confirm telephonic notices given pursuant to
Article II, and agrees to indemnify and hold harmless Administrative Lender
and Lenders for any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, and expenses resulting,
directly or indirectly, from acting upon any such notice.
11.03. Parties in Interest. All covenants and agreements contained
in this Agreement and all other Loan Papers shall bind and inure to the
benefit of the respective successors and assigns of the parties hereto. Each
Lender may from time to time assign or transfer its interests hereunder
pursuant to Section 11.04 hereof. The Borrower may not assign or transfer its
Rights or obligations hereunder without the prior written consent of
Administrative Lender.
11.04. Assignments and Participations.
(a) Each Lender (an "Assignor") may assign its Rights and obligations as
a Lender under the Loan Papers to one or more Eligible Transferees pursuant to
an Assignment and Acceptance, so long as (i) each assignment shall be of a
constant, and not a varying percentage of all Rights and obligations
thereunder, (ii) each Assignor shall obtain in each case the prior written
consent of Administrative Lender and the Borrower, in each case such consent
not to be unreasonably withheld or delayed, provided that, in the event there
exists an Event of Default that is continuing, no consent of the Borrower
shall be required to make an assignment to any Person that qualifies under
either subsections (a), (b) or
<PAGE>
(c) of the definition of "Eligible Transferee" herein, (iii) each
Assignor shall in each case pay a $3,500 processing fee to Administrative
Lender and (iv) no such assignment is for an amount less than $5,000,000 (and,
if such assignment is a partial assignment, no Lender shall hold less than
$5,000,000 immediately after giving effect to any assignment). Assignments
and other transfers (except participations) with respect to each Lender's
participation in a given Letter of Credit may only be made with the prior
written consent of the Administrative Lender. Within five Business Days after
Administrative Lender receives notice of any such assignment, the Borrower
shall execute and deliver to Administrative Lender, in exchange for the Notes
issued to Assignor, new Notes to the order of such Assignor and its assignee
in amounts equal to their respective Specified Percentages of the Commitment.
Such new Notes shall be dated the effective date of the assignment. It is
specifically acknowledged and agreed that on and after the effective date of
each assignment, the assignee shall be a party hereto and shall have the
Rights and obligations of a Lender under the Loan Papers.
(b) Each Lender may sell participations to one or more Persons in all or
any of its Rights and obligations under the Loan Papers; provided, however,
that (i) such Lender's obligations under the Loan Papers shall remain
unchanged, (ii) such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations, (iii) such Lender
shall remain the holder of its Notes for all purposes of the Loan Papers,
(iv) the participant shall be granted the Right to vote on or consent to only
those matters described in Sections 11.01(a), (b), (c) and (d) hereof,
(v) Obligor, Administrative Lender, and other Lenders shall continue to deal
solely and directly with such Lender in connection with its Rights and
obligations under the Loan Papers and (vi) no such participation is for an
amount less than $5,000,000.
(c) Any Lender may, in connection with any assignment or participation,
or proposed assignment or participation, disclose to the assignee or
participant, or proposed assignee or participant, any information relating to
any Obligor furnished to such Lender by or on behalf of any Obligor.
(d) Notwithstanding any other provision set forth in this Agreement, (i)
any Lender may at any time create a security interest in all or any portion of
its Rights under this Agreement (including, without limitation, the Advances
owing to it and the Notes held by it) in favor of any Federal Reserve Bank in
<PAGE>
accordance with Regulation A of the Board of Governors of the Federal Reserve
System, (ii) no participant of any Lender may further assign or participate
any of its interest in the Loan Papers to any Person (except as may be
required by Law or a Tribunal having authority over such participant), and
(iii) no Lender (other than NationsBank of Texas, N.A.) may assign any of its
interest in the Loan Papers to any Person (except as may be required by Law or
a Tribunal having authority over NationsBank of Texas, N.A.).
11.05. Sharing of Payments. If any Lender shall obtain any payment
(whether voluntary, involuntary, through the exercise of any Right of set-off,
or otherwise) on account of its Advances in excess of its Pro Rata share of
payments made by the Borrower, such Lender shall forthwith purchase
participations in Advances made by the other Lenders as shall be necessary to
share the excess payment Pro Rata with each of them; provided, however, that
if any of such excess payment is thereafter recovered from the purchasing
Lender, its purchase from each Lender shall be rescinded and each Lender shall
repay the purchase price to the extent of such recovery together with a Pro
Rata share of any interest or other amount paid or payable by the purchasing
Lender in respect of the total amount so recovered. The Borrower agrees that
any Lender so purchasing a participation from another Lender pursuant to this
Section 11.05 may, to the fullest extent permitted by Law, exercise all its
Rights of payment (including the Right of set-off) with respect to such
participation as fully as if such Lender were the direct creditor of the
Borrower in the amount of such participation.
11.06. Right of Set-off. Upon the occurrence and during the
continuance of any Event of Default, each Lender is hereby authorized at any
time and from time to time, to the fullest extent permitted by Law, to set-off
and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at any time
owing by such Lender to or for the credit or the account of the Borrower
against any and all of the obligations of the Borrower now or hereafter
existing under this Agreement and the other Loan Papers, whether or not
Administrative Lender or any Lender shall have made any demand under this
Agreement or the other Loan Papers, and even if such obligations are
unmatured. Each Lender shall promptly notify the Borrower after any such
set-off and application, provided that the failure to give such notice shall
not affect the validity of such set-off and application. The Rights of each
Lender under this Section 11.06 are in addition to other Rights (including,
without
<PAGE>
limitation, other Rights of set-off) which such Lender may have.
11.07. Costs, Expenses, and Taxes.
(a) Notwithstanding anything to the contrary in Section 6.10 hereof, the
Borrower agrees to pay on demand (i) all costs and expenses of Administrative
Lender in connection with the preparation and negotiation of all Loan Papers,
including without limitation the reasonable fees and out-of-pocket expenses of
Special Counsel, (ii) all costs and expenses (including reasonable attorneys'
fees and expenses) of Administrative Lender in connection with any
interpretation, grant and perfection of any Lien, modification, amendment,
waiver, release of any Loan Papers, restructuring or work-out and (iii) all
costs and expenses (including reasonable attorneys' fees and expenses) of
Administrative Lender and each Lender in connection with any collection of any
portion of the Obligations or the enforcement of any Loan Papers during the
continuance of an Event of Default.
(b) In addition, notwithstanding anything to the contrary in Section
6.10 hereof, the Borrower shall pay any and all stamp, debt, and other Taxes
payable or determined to be payable in connection with any payment hereunder
(other than Taxes on the overall net income of Administrative Lender or any
Lender or franchise Taxes or Taxes on capital or capital receipts of
Administrative Lender or any Lender), or the execution, delivery, or
recordation of any Loan Papers, and agrees to save Administrative Lender and
each Lender harmless from and against any and all liabilities with respect to,
or resulting from any delay in paying or omission to pay any Taxes in
accordance with this Section 11.07, including any penalty, interest, and
expenses relating thereto. All payments by the Borrower or any Subsidiary of
the Borrower under any Loan Papers shall be made free and clear of and without
deduction for any present or future Taxes (other than Taxes on the overall net
income of Administrative Lender or any Lender of any nature now or hereafter
existing, levied, or withheld, or franchise Taxes or Taxes on capital or
capital receipts of Administrative Lender or any Lender), including all
interest, penalties, or similar liabilities relating thereto. If the Borrower
shall be required by Law to deduct or to withhold any Taxes from or in respect
of any amount payable hereunder (i) the amount so payable shall be increased
to the extent necessary so that, after making all required deductions and
withholdings (including Taxes on amounts payable to Administrative Lender or
any Lender pursuant to this sentence), Administrative Lender or any
<PAGE>
Lender receives an amount equal to the sum it would have received had no such
deductions or withholdings been made, (ii) the Borrower shall make such
deductions or withholdings, and (iii) the Borrower shall pay the full amount
deducted or withheld to the relevant taxing authority in accordance with
applicable Law. Without prejudice to the survival of any other agreement of
the Borrower hereunder, the agreements and obligations of the Borrower
contained in this Section 11.07 shall survive the execution of this Agreement,
termination of the Commitment, repayment of the Obligations, satisfaction of
each agreement securing or assuring the Obligations and termination of this
Agreement and each other Loan Paper.
11.08. Rate Provision. It is not the intention of any party to any
Loan Papers to make an agreement violative of the Laws of any applicable
jurisdiction relating to usury. In no event shall any Obligor or any other
Person be obligated to pay any amount in excess of the Maximum Amount. If
Administrative Lender or any Lender ever receives, collects or applies, as
interest, any such excess, such amount which would be excessive interest shall
be deemed a partial repayment of principal and treated hereunder as such; and
if principal is paid in full, any remaining excess shall be paid to the
Borrower or the other Person entitled thereto. In determining whether or not
the interest paid or payable, under any specific contingency, exceeds the
Maximum Amount, each Obligor, Administrative Lender and each Lender shall, to
the maximum extent permitted under Applicable Laws, (a) characterize any
nonprincipal payment as an expense, fee or premium rather than as interest,
(b) exclude voluntary prepayments and the effect thereof, and (c) amortize,
prorate, allocate and spread in equal parts, the total amount of interest
throughout the entire contemplated term of the Obligations so that the
interest rate is uniform throughout the entire term of the Obligations;
provided that if the Obligations are paid and performed in full prior to the
end of the full contemplated term thereof, and if the interest received for
the actual period of existence thereof exceeds the Maximum Amount,
Administrative Lender or Lenders, as appropriate, shall refund to the Borrower
the amount of such excess or credit the amount of such excess against the
total principal amount owing, and, in such event, neither Administrative
Lender nor any Lender shall be subject to any penalties provided by any Laws
for contracting for, charging or receiving interest in excess of the Maximum
Amount. This Section 11.08 shall control every other provision of all agree-
ments among the parties to the Loan Papers pertaining to the transactions
contemplated by or contained in the Loan Papers.
<PAGE>
11.09. Severability. If any provision of any Loan Papers is held to
be illegal, invalid, or unenforceable under present or future Laws during the
term thereof, such provision shall be fully severable, the appropriate Loan
Paper shall be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part thereof, and the remaining
provisions thereof shall remain in full force and effect and shall not be
affected by the illegal, invalid, or unenforceable provision or by its
severance therefrom. Furthermore, in lieu of such illegal, invalid, or
unenforceable provision there shall be added automatically as a part of such
Loan Paper a legal, valid, and enforceable provision as similar in terms to
the illegal, invalid, or unenforceable provision as may be possible.
11.10. Exceptions to Covenants. No Obligor shall be deemed to be
permitted to take any action or to fail to take any action that is permitted
as an exception to any covenant in any Loan Papers, or that is within the
permissible limits of any covenant, if such action or omission would result in
a violation of any other covenant in any Loan Papers.
11.11. Counterparts. This Agreement and the other Loan Papers may be
executed in any number of counterparts, all of which taken together shall
constitute one and the same instrument. In making proof of any such
agreement, it shall not be necessary to produce or account for any counterpart
other than one signed by the party against which enforcement is sought.
11.12. GOVERNING LAW; WAIVER OF JURY TRIAL.
(a) THIS AGREEMENT AND ALL OTHER LOAN PAPERS SHALL BE DEEMED TO BE
CONTRACTS MADE IN DALLAS, TEXAS, AND SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (WITHOUT GIVING EFFECT TO
CONFLICTS OF LAWS) AND THE UNITED STATES OF AMERICA. WITHOUT EXCLUDING ANY
OTHER JURISDICTION, THE BORROWER AGREES THAT THE FEDERAL COURTS OF TEXAS
LOCATED IN DALLAS, TEXAS, WILL HAVE JURISDICTION OVER PROCEEDINGS IN
CONNECTION HEREWITH. TO THE MAXIMUM EXTENT PERMITTED BY LAW, THE BORROWER
HEREBY WAIVES ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE
(WHETHER A CLAIM IN TORT, CONTRACT, EQUITY, OR OTHERWISE) ARISING UNDER OR
RELATING TO THIS AGREEMENT, THE OTHER LOAN PAPERS, OR ANY RELATED MATTERS, AND
AGREES THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A
JURY.
(b) THE BORROWER HEREBY WAIVES PERSONAL SERVICE OF ANY LEGAL
<PAGE>
PROCESS UPON IT. THE BORROWER AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON
IT BY REGISTERED MAIL (RETURN RECEIPT REQUESTED) DIRECTED TO THE BORROWER AT
ITS ADDRESS DESIGNATED FOR NOTICE UNDER THIS AGREEMENT AND SERVICE SO MADE
SHALL BE DEEMED TO BE COMPLETED FIVE DAYS AFTER DEPOSIT IN THE UNITED STATES
MAIL. NOTHING IN THIS SECTION 11.12 SHALL AFFECT THE RIGHT OF ADMINISTRATIVE
LENDER OR ANY LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY
LAW.
11.13. ENTIRE AGREEMENT. THIS AGREEMENT AND THE OTHER LOAN PAPERS
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENT OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
<PAGE>
IN WITNESS WHEREOF, this Credit Agreement is executed as of the date
first set forth above.
THE BORROWER:
TELCO COMMUNICATIONS GROUP, INC.
--------------------------------
By:
------------------------------
Its:
-----------------------------
ADMINISTRATIVE LENDER:
NATIONSBANK OF TEXAS, N.A., as
Administrative Lender
--------------------------------
By: Jennifer F. Zydney
Its: Vice President
LENDERS:
Specified Percentage: 65.00% NATIONSBANK OF TEXAS, N.A.,
individually as a Lender
Address:
901 Main Street
64th Floor
Dallas, Texas 75202 ---------------------------
By: Jennifer F. Zydney
Attn.: Jennifer F. Zydney Its: Vice President
Telephone:(214) 508-2752
Telecopy:(214) 508-9390
<PAGE>
Specified Percentage: 25.00% RIGGS BANK N.A.
Address:
6805 Old Dominion Drive
3rd Floor ---------------------------
McLean, VA 22101 By: Tai Pham
Its:
----------------------
Telephone:(703) 506-2764
Telecopy:(703) 506-2771
Specified Percentage: 10.00% MELLON BANK, N.A.
Address:
One Mellon Bank Center
Room 4440 /s/John M. Kailer
500 Grant Street ----------------------------
Pittsburgh, PA 15258-0001 By: John M. Kailer
Its: First Vice President
(Principal Accounting Officer)
Telephone:(412) 234-0015
Telecopy:(412) 234-6375
- ------------------------------------------------------------------------------
[AT&T Logo here] Version 1
- ------------------------------------------------------------------------------
CARRIER AGREEMENT
BETWEEN
AT&T CORP.
AND
TELCO COMMUNICATIONS GROUP, INC.
CONFIDENTIAL AND PROPRIETARY
between
AT&T and TELCO COMMUNICATIONS GROUP, INC.
<PAGE>
TABLE OF CONTENTS
Section 0 Signature Page
Section 1: General Terms and Conditions
Section 2: Eligibility of Customer
Section 3: Responsibilities of Customer
Section 4: Responsibilities of AT&T
Section 5: Services and Service Descriptions
Section 6: Service Rates, Terms and Conditions
2
CONFIDENTIAL AND PROPRIETARY
between
AT&T and TELCO COMMUNICATIONS GROUP, INC.
- ----------------- -------------
Customer's Initial AT&T Initials
<PAGE>
Section 0: SIGNATURE PAGE
--------------
THIS CARRIER AGREEMENT ("Agreement") is made and entered into as of the
last signature date below by and between AT&T Corp., a corporation organized
and existing under the laws of the State of New York and having an office at
295 North Maple Avenue, Basking Ridge, New Jersey 07920 ("AT&T") and Telco
Communications Group, Inc., having an office at 4219 Lafayette Center Drive,
Chantilly, VA 20151 ("Customer"). The terms and conditions herein constitute
an offer by Customer as of the date of Customer's signature below which may be
accepted only by AT&T's signature below. This Agreement shall become
effective when signed by both parties.
AT&T and Customer, acting through their duly authorized representatives,
hereby agree to the terms set forth in Sections 1 through 6 of this Agreement
as attached hereto.
TELCO COMMUNICATIONS GROUP, INC. AT&T CORP.
By /s/ Donald A. Burns By /s/ Ronald L. Tonge
-------------------------- ------------------------
Donald A. Burns Ronald L. Tonge
- ----------------------------- ----------------------------
Printed or Typed Name Printed or Typed Name
CEO Sales Vice President
- ----------------------------- -----------------------------
Title Title
December 23, 1996 January 13, 1997
- ----------------------------- -----------------------------
Date Date
3
CONFIDENTIAL AND PROPRIETARY
between
AT&T and TELCO COMMUNICATIONS GROUP, INC.
- ----------------- -------------
Customer's Initial AT&T Initials
<PAGE>
SECTION 1: GENERAL TERMS AND CONDITIONS
----------------------------
1.A. ASSIGNMENT. Customer may not assign this Agreement in whole or in
----------
part without the prior written consent of AT&T, which shall not be
unreasonably withheld. AT&T may, in its discretion, condition its consent to
such assignment upon the posting of an appropriate deposit by the assignee
pursuant to Paragraph 4.D. of this Agreement. AT&T reserves the right to deny
or revoke its consent to such assignment at any time if the assignee proves
unwilling or unable to meet the eligibility requirements of this Agreement, in
which event the Customer shall remain or again become responsible for
performance of all terms of this Agreement. This provision shall not affect
the Customer's right to resell Service. Further, any resale or assignment
shall not release the original Customer from its obligations under this
Agreement.
1.B. COMBINATION WITH OTHER SERVICES OR 0FFERS. This AT&T Carrier
-----------------------------------------
Agreement may not be used in conjunction with any other AT&T Carrier
Agreement, AT&T Contract Tariff, or promotions for any AT&T Services.
1.C. INDEPENDENT PARTIES. The relationship established by this Agreement
-------------------
shall in no way constitute AT&T (or its agents or employees) as a partner,
agent or fiduciary of Customer. The relationship established by this
Agreement shall in no way constitute the Customer (or their agents or
employees) as a partner, agent or fiduciary of AT&T. The provision of Service
described in this Agreement does not establish any joint undertaking, joint
venture, or fiduciary relationship between AT&T and Customer.
1.D. ACKNOWLEDGMENT OF RIGHT TO COMPETE. Customer acknowledges and
-----------------------------------
understands that it remains at all times solely responsible for the success
and profits of its business, and that AT&T makes no promises, warranties or
representations regarding the Customer's business success or prospects of
business success in connection with the provision of service pursuant to this
Agreement. Customer acknowledges and understands that AT&T will continue to
market AT&T services directly to the public and that such marketing may from
time to time bring AT&T into direct or indirect competition with Customer, or
to market its services to competitors of Customer. Customer acknowledges and
understands that nothing in this Agreement diminishes or restricts in any way
the rights of AT&T to engage in competition with Customer or to market its
services to competitors of Customer, or creates any cause of action in
Customer against AT&T whatsoever.
1.E. USE OF PROPRIETARY INFORMATION. In the event that either Customer or
-------------------------------
AT&T, in the course of performance of their obligations to each other under
this Agreement, obtains or receives proprietary information from the other, it
agrees to use such information only for the purpose of complying with its
obligations under this
4
CONFIDENTIAL AND PROPRIETARY
between
AT&T and TELCO COMMUNICATIONS GROUP, INC.
- ----------------- -------------
Customer's Initial AT&T Initials
<PAGE>
Agreement and not to use such information for its own marketing purposes.
Customer acknowledges that AT&T may use for its own marketing purposes any and
all information that it obtains from sources other than Customer, including
but not limited to information that AT&T may have regarding Customer's End-
Users as a result of the past or present sale or provision by AT&T of
telecommunications services or equipment to said End-Users.
1.F. FORCE MAJEURE. Neither party nor its affiliates, subsidiaries,
-------------
subcontractors, or parent corporation shall be liable in any way for delay,
failure in performance, loss or damage due to any of the following: fire,
strike, embargo, explosion, power blackout, earthquake, volcanic action,
flood, war, water, the elements, labor disputes, civil or military authority,
acts of God, acts of the public enemy, inability to secure raw materials ,
inability to secure products, acts or omissions of carriers, or other causes
beyond its reasonable control, whether or not similar to the foregoing.
1.G. SEVERABILITY. If any portion of this Agreement shall be found to be
------------
invalid or unenforceable, such portion shall be void and of no effect, but the
remainder of the Agreement shall continue in full force and effect unless the
Agreement fails of its essential purpose without the voided portion.
1.H. NOTICES. All notices, identifications, formal requests or other
-------
formal communications required or desired to be given in connection with this
Agreement, shall be in writing and shall be effective when delivered in
person, mailed by registered or certified post or sent by Telex or facsimile
("FAX") to the recipient party, unless the parties otherwise agree in writing.
Notice shall be addressed to the following:
If to AT&T: Attn: Carrier Solutions Sales
Virginia Rea, Sales Director
150 Morristown Road
Plaza 202
Bernardsville, New Jersey 07924
Phone: (908) 204-1114
Fax: (908) 204-1089
If to Customer: Attn: Contracts Administration
4219 Lafayette Center Drive
Chantilly, Virginia 22021
Phone: (703) 631-5615
Fax: (703) 803-3430
1.I. MODIFICATION AND WAIVER. This Agreement may be modified only by a
-----------------------
writing signed by both parties. The failure of a party to enforce any right
under
5
CONFIDENTIAL AND PROPRIETARY
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AT&T and TELCO COMMUNICATIONS GROUP, INC.
- ----------------- -------------
Customer's Initial AT&T Initials
<PAGE>
this Agreement at any particular point in time shall not constitute a
continuing waiver of any such right with respect to the remaining terms of
this Agreement, or the waiver of any other right under this Agreement.
1.J. COMPLIANCE WITH LAWS. Each party is responsible for its own
--------------------
compliance with all laws and regulations affecting its business, including but
not limited to the collection and remittance of all taxes and other levies
imposed by law.
1.K. CHOICE OF LAW. The domestic law of the State of New York, except its
-------------
conflict-of-laws rules, shall govern the construction, interpretation, and
performance of this Agreement.
1.L. CONFIDENTIALITY. The Terms, conditions, and rates contained in this
---------------
Agreement are confidential, and shall remain so unless and until it shall be
determined by AT&T that the Communications Act of 1934 (or any subsequent
legislation) and the regulations promulgated thereunder require the filing of
this Agreement with the Federal Communications Commission ("Commission"), or
unless the Commission orders the filing of this Agreement pursuant to
authority granted to the Commission by law or regulation. In such event, AT&T
shall file the Agreement within thirty days of its execution, or upon such
determination that filing is required, or upon being ordered by the Commission
to do so (whichever is later); provided, that AT&T nonetheless shall keep the
identity of Customer confidential unless required by law, regulation or the
Commission to disclose such identity. Absent such a filing requirement,
neither party shall disclose the terms or conditions of this Agreement to any
third party, nor issue any public statements relating to this Agreement
without the written consent of the other party, unless such disclosure or
statement is reasonably believed by the party to be compelled by governmental
authority. A disclosing party shall furnish reasonable prior notice to the
other party before making the statement or disclosure unless prohibited by law
from doing so.
1.M. DISPUTE RESOLUTION. If a dispute arises out of or relates to this
------------------
Agreement, or its breach, the parties agree to submit the dispute to a sole
mediator selected by the parties or, at any time at the option of a party, to
mediation by the American Arbitration Association ("AAA"), to be held in
Morristown, New Jersey. If not resolved by mediation, it shall be referred to
a sole arbitrator selected by the parties within thirty (30) days of the
mediation or, in the absence of such selection, to AAA arbitration which shall
be governed by the United States Arbitration Act and judgment on the award may
be entered in any court having jurisdiction. The arbitrator may not limit,
expand or otherwise modify the terms of this Agreement. The parties, their
representatives, other participants and the mediator and arbitrator shall hold
the existence, content and results of mediation and arbitration in confidence.
6
CONFIDENTIAL AND PROPRIETARY
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- ----------------- -------------
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<PAGE>
1.N. TRADE NAMES, TRADEMARKS, SERVICE MARKS AND REGISTERED MARKS. Neither
-----------------------------------------------------------
Customer nor AT&T shall use the other's trade names, trademarks or service
marks ("Marks") without the prior written approval of the other party.
Neither shall display or use the other's Marks, nor permit the same to be
displayed or used by third parties. Nothing in this Agreement creates in a
party rights in the marks of the other.
1.O. BUSINESS DOWNTURN/NETWORK OPTIMIZATION. In the event of a business
--------------------------------------
downturn beyond CUSTOMER's control, a corporate divestiture, or a network
optimization using other AT&T services, any of which significantly reduces the
volume of network services required by the CUSTOMER, with the result that
CUSTOMER will be unable to meet its revenue and/or volume commitments under
this Contract (notwithstanding CUSTOMER's best efforts to avoid such a
shortfall), AT&T and CUSTOMER will cooperate in efforts to develop a mutually
agreeable alternative proposal that will satisfy the concerns of both parties
and comply with all applicable legal and regulatory requirements. By way of
example and not limitation, such alternative proposals may include changes in
rates, nonrecurring charges, revenue and/or volume commitments, discounts, the
multi-year service period and other provisions. Subject to all applicable
legal and regulatory requirements, including the requirements of the Federal
Communications Commission and the Communications Act of 1934, AT&T will make
any Contract revisions necessary to implement such mutually agreeable
alternative proposal. This provision shall not apply to a change resulting
from a decision by CUSTOMER to transfer portions of its traffic or projected
growth to carriers other than AT&T. The CUSTOMER must give AT&T written
notice of the conditions it believes will require the application of this
provision. This provision does not constitute a waiver of any charges,
including shortfall charges, incurred by the CUSTOMER prior to the time the
parties mutually agree to amend or replace this Contract.
1.P. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of
----------------
the parties with respect to the subject matter hereof and supersedes all prior
written or oral agreements, proposals or understandings.
1.Q. DEFINITIONS. As used in this Agreement, the definitions set forth in
-----------
AT&T Tariff F.C.C. Nos. 1, 2, 9 and 11 shall apply except to the extent that
they are modified or supplemented as follows:
1.Q.1. END-USERS: Those persons or entities to which Customer
---------
provides service as a telecommunications common carrier utilizing the service
provided to Customer by AT&T pursuant to this Agreement.
1.Q.2. CIS: The date for commencement of installation of service
---
established pursuant to Paragraph 3.B. of this Agreement.
7
CONFIDENTIAL AND PROPRIETARY
between
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- ----------------- -------------
Customer's Initial AT&T Initials
<PAGE>
SECTION 2: REQUIREMENTS AND CERTIFICATION OF ELIGIBILITY
---------------------------------------------
2.A. ELIGIBILITY. The rates, terms and conditions herein are expressly
-----------
conditioned upon the Customer's meeting the following eligibility
requirements. Customer provides interexchange communications services as a
common carrier which certifies as follows:
2.A.1. Customer has obtained the required operating authority in all
states in which it conducts business, as well as all authority required
by the FCC for resale of telecommunications services, including but not
limited to authority required pursuant to Section 214 of the
Communications Act of 1934, 47 U.S.C. 214.
2.A.2. Customer complies and will continue to comply at all times with
all federal and state laws and regulations applicable to the sale and
provision of service to its customers, including but not limited to those
laws and regulations applicable to the authorization and proof of
authorization necessary to convert an End-Users former service to
Customer's service as the End-User's Primary Interexchange Carrier.
2.A.3. Customer has and uses its own carrier identification code
("CIC").
2.A.4. Customer shall terminate the Services provided in this Agreement
in an IXC switch owned and operated or leased and operated by Customer.
An IXC Switch is a telecommunications switch with the following
characteristics: (a) it is used for the transmission of calls that are
routed by a Local Exchange Carrier to the IXC Switch using Feature
Group D Access; (b) it is capable of interconnecting circuits or
transferring calling between circuits; (c) it has a maximum capacity of
not less than 100,000 access lines and (d) it is used by the Customer to
provide Common Carrier service to end users.
2.A.5. Customer has had a consistent on-time payment record with respect
to all telecommunications service to which it has subscribed with AT&T
for at least 24 consecutive months prior to the execution of this
Agreement. This requirement includes affiliates, parents, subsidiaries,
predecessors, successors and any entity owned 20% or more by any person
or entity which also has an ownership interest of 20% of more in
Customer.
2.A.6. Customer will utilize the Service offered hereunder only for
lawful purposes, including but not limited to resale of the Service or
components thereof. In the event that Customer resells the Service
provided hereunder, it will do so only under its own names, tradenames,
logos, trademarks or servicemarks. Customer will not publish or use any
advertising, sales promotions, press releases,
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<PAGE>
or other publicity matters which use AT&T corporate or trade names,
logos, trademarks, service marks, trade dress, or other symbols that
serve to identify and distinguish AT&T from its competitors (or which use
confusingly similar corporate or trade names, logos, trademarks, service
marks, trade dress or other symbols), and will not conduct business under
AT&T's corporate or trade names, logos, trademarks, service marks, trade
dress, or other symbols that serve to identify and distinguish AT&T from
its competitors (or under any confusingly similar corporate or trade
names, logos, trademarks, service marks, trade dress or other symbols).
Customer (including its agents, representatives and independent
contractors) will not indicate or imply to any person or entity that it
is AT&T which is selling or providing service to them or that it is
selling or providing such service to them jointly or in collaboration or
partnership with AT&T, or as the agent of AT&T.
2.A.7. Customer has had no complaints or proceedings brought against it,
within two months prior to its execution of this Agreement, by the FCC,
by any state public utilities commission, by any state Attorney General,
or by any other federal or state authority charging Customer with
misrepresenting its affiliation or relationship to AT&T or to any other
carrier whose service it has resold, and no such complaints or
proceedings are pending as of the Customer's execution of this Agreement.
2.B. TERMINATION OR LACK OF ELIGIBILITY. If at any time during the term
----------------------------------
of this Agreement, Customer fails to comply with any requirement for
eligibility contained in Paragraphs 2.A.1 through 2.A.7., above, such failure
shall constitute a material breach of this Agreement which shall entitle AT&T
to terminate this Agreement and the Service provided hereunder on fifteen (15)
days' written notice. Customer shall have the opportunity to cure such
failure during the fifteen (15) day period following such notice, and, if such
cure is demonstrated to the satisfaction of AT&T, no termination pursuant to
this Paragraph shall occur. In the event of such termination, Customer shall
indemnify, defend and hold harmless AT&T from any and all complaints, causes
of action or other claims brought against AT&T by any of Customer's End-Users
due to said termination.
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SECTION 3: RESPONSIBILITIES OF AT&T
------------------------
3.A. PROVISION OF SERVICE. Subject to its Correspondent Agreements and
--------------------
regulation by Federal and state authorities, AT&T shall provide Service in
accordance with its standard practices and procedures for the operation of its
network. Service shall be available 24 hours per day, seven days per week.
AT&T is responsible for the provision of Service from station to station, but
is not responsible for the quality of transmission or signaling on the
Customer's side of the interface at a Customer's premises. Service is
furnished subject to the availability of the service components required.
Customer acknowledges that it has been advised by AT&T that temporary capacity
constraints may exist in some areas with respect to the availability of
Interoffice Channels for ACCUNET T44.736 Service as described and defined in
AT&T Tariff F.C.C. No. 9. In the event that, during the term of this
Agreement, Customer orders services which are impacted by such constraints,
AT&T will provide Customer with a good-faith estimate of the availability date
of such services.
3.B. INSTALLATION. Upon execution of this Agreement AT&T shall establish
------------
a due date for commencement of installation of Service and confirm said date
with the Customer (CISD). A Customer may delay said due date for commencement
of installation when the Customer's written request for said delay is received
by AT&T prior to said due date, provided that the delay of said due date shall
not exceed 30 cumulative calendar days. AT&T will make every reasonable
effort to commence installation of Service by the due date, but Customer
acknowledges that in some cases a delay in commencement of installation may be
unavoidable. If commencement of installation is delayed for more than 45 days
beyond the due date, and such delay is not requested or caused in whole or in
part by the Customer, the Customer may cancel its order for Service pursuant
to this Agreement and shall not thereby be considered to have breached this
Agreement.
3.C. MAINTENANCE. AT&T shall maintain Service in conformity with its
-----------
standard network operating procedures.
3.D. LIMITATION OF LIABILITY. AT&T (INCLUDING ITS SUBSIDIARIES,
-----------------------
AFFILIATES, PREDECESSORS, SUCCESSORS AND ASSIGNS) MAKES NO WARRANTIES, EXPRESS
OR IMPLIED, AND SPECIFICALLY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO SERVICES OR PRODUCTS PROVIDED
PURSUANT TO THIS AGREEMENT. AT&T'S LIABILITY FOR SERVICE INTERRUPTIONS FOR
ANY SERVICE PROVIDED PURSUANT TO THIS AGREEMENT SHALL NOT EXCEED AN AMOUNT
EQUAL TO THE INITIAL PERIOD CHARGE PROVIDED FOR UNDER THIS AGREEMENT FOR THE
SERVICE AFFECTED. THIS LIMITATION OF LIABILITY SHALL
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APPLY REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT, WARRANTY,
STRICT LIABILITY, OR NEGLIGENCE (INCLUDING WITHOUT LIMITATION ACTIVE AND
PASSIVE NEGLIGENCE). IN NO EVENT SHALL AT&T BE LIABLE FOR CONSEQUENTIAL,
SPECIAL OR INDIRECT DAMAGES OR LOST PROFITS SUSTAINED BY REASON OF ITS
PERFORMANCE OF THIS AGREEMENT, OR FOR ANY FAILURE, BREAKDOWN, OR INTERRUPTION
OF SERVICE, WHATEVER SHALL BE THE CAUSE, FOR HOWEVER LONG IT SHALL LAST, AND
REGARDLESS OF WHETHER ANYONE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. AT&T SHALL HAVE NO LIABILITY FOR DAMAGES CAUSED (1) BY CUSTOMER'S
FAILURE TO PERFORM ITS RESPONSIBILITIES UNDER THIS AGREEMENT, OR (2) BY THE
ACTS OF THIRD PARTIES (INCLUDING WITHOUT LIMITATION CUSTOMER'S USERS OR END
USES). AT&T DOES NOT GUARANTEE OR MAKE ANY WARRANTY WITH RESPECT TO THE
SERVICE PROVIDED PURSUANT TO THIS AGREEMENT WHEN USED IN AN EXPLOSIVE
ATMOSPHERE. THIS AGREEMENT DOES NOT CREATE ANY CLAIM OR RIGHT OF ACTION, NOR
IS IT INTENDED TO CONFER ANY BENEFIT ON ANY THIRD PARTY, INCLUDING BUT NOT
LIMITED TO ANY USER OR END-USER OF CUSTOMER.
3.E. SERVICE, CHANNELS OR EQUIPMENT OF OTHERS. AT&T is not liable for
----------------------------------------
damages associated with service, channels, or equipment that it does not
furnish. AT&T does not provide Customer equipment.
3.F. NO PATENT OR SOFTWARE LICENSE. No license under patents or software
-----------------------------
copyrights (other than the limited license to use) is granted by AT&T or shall
be implied or arise by estoppel, with respect to Service offered under this
Agreement.
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SECTION 4: RESPONSIBILITIES OF CUSTOMER
----------------------------
4.A. PLACEMENT OF ORDERS, PAYMENT OF BILLS, AND COMPLIANCE WITH
----------------------------------------------------------
REGULATIONS. Customer is responsible for placing any necessary orders and for
- -----------
assuring that it, its Users and its End-Users comply with the provisions of
this Agreement and with all applicable federal and state laws and regulations.
4.B. BILLING; RESPONSIBILITY FOR PAYMENT. Customer is liable for all amounts
-----------------------------------
due AT&T hereunder, subject to the following. The Customer will receive a
single monthly bill for Service provided under this Agreement, regardless of
the number of Customer Premises, the bill will be sent to one location
designated by the Customer. Payment of charges is due upon presentation of a
bill unless a different due date appears on the face of the bill, in which
case payment shall be due on said date. Customer shall be solely
responsible for rendering of bills and collection of charges from its customers
and end-users. Failure of Customer to bill and collect charges from its
customers or end-users shall not excuse in whole or in part Customer's
responsibilities under this Agreement, including but not limited to the
responsibility to render to AT&T timely payment of charges.
4.C. INTERFACING AND COMMUNICATING WITH END-USERS. Interfacing and
--------------------------------------------
communicating with End-Users shall be the sole responsibility of Customer with
respect to any use that Customer may make of the service provided pursuant to
this Agreement to in turn provide service to other persons or entities. Such
interfacing and communicating shall include without limitation installation of
service, termination of service, placing of orders, billing and billing
inquiries, reporting of service outages and problems, collection of charges
and handling and resolution of all disputes.
4.D. DEPOSITS. AT&T may require the Customer, prior to or during the
--------
provision of service pursuant to this Agreement, to tender a deposit in an
amount to be determined by AT&T in its reasonable discretion to be held by
AT&T as a guarantee for the payment of charges; provided, that such deposit
shall not be fixed by AT&T at an amount exceeding six (6) times the MMRC for
all services provided pursuant to this Agreement. To determine the financial
responsibility of Customer and/or the specific amount of any deposit required,
AT&T may rely upon commercially reasonable factors to assess and manage the
risk of non-payment, including but not limited to payment history for
telecommunications service (including such service purchased from AT&T),
number of years in business, bankruptcy or insolvency history, current AT&T
account treatment status, financial statement analysis, and commercial credit
bureau rating. It shall be Customer's responsibility to provide to AT&T upon
request such information as is necessary for AT&T to determine the financial
responsibility of Customer, including but not limited to Customer's tax
returns, audited or unaudited financial statements and loan
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<PAGE>
applications. A deposit does not relieve Customer of the responsibility for
the prompt payment of bills on presentation or the due date appearing on the
face of the bills. In lieu of a cash deposit, AT&T will accept Bank Letters
of Credit and Surety Bonds which have been approved by AT&T. Interest will be
paid to a Customer for the period that a cash deposit is held by AT&T. The
interest rate used will be simple interest at the rate of six percent annually
unless a different rate has been established by the appropriate legal
authority in the state where the Service offering is located. The failure of
Customer to post a deposit as required by AT&T pursuant to this paragraph
shall constitute a material breach of this Agreement by Customer which shall
entitle AT&T to terminate this Agreement and the service provided hereunder
upon five (5) days written notice to Customer. When the service for which the
deposit has been required is discontinued, the deposit will be applied to the
final bill and any credit balance will be refunded to the Customer with
applicable interest accrued.
4.E. THE CUSTOMER'S USER OF SERVICE. Customer may use Service for any lawful
------------------------------
purpose consistent with the transmission and switching parameters of the
telecommunications network, and may resell its use (or the use of any part
thereof) to a third party in the normal course of the Customer's business,
subject to the following:
4.E.1. ABUSE - The abuse of Service is prohibited. The following
-----
activities constitute abuse:
4.E.1.A. Using Service to make calls that might reasonably be
expected to frighten, abuse, torment, or harass another, or
4.E.1.B. Using Service in such a way that it interferes
unreasonably with the use of Service or AT&T's network by others.
4.E.2. FRAUDULENT USE. The fraudulent use of, or the intended or
--------------
attempted fraudulent use of, Service is prohibited. The following
activities constitute fraudulent use:
4.E.2.A. Using Service to transmit any message or code, locate a
person, or otherwise give or obtain information, without payment for
Service,
4.E.2.B. Using or attempting to use Service with the intent to
avoid the payment, either in whole or in part, of any charges by any
means or device,
4.E.2.C. Using Service to carry calls that originate on the network
of a facilities-based interexchange carrier other than AT&T and
terminate disproportionately to locations for which the cost to AT&T
of terminating
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<PAGE>
switched access is above the average cost of terminating switched
access, based on the published access tariffs of local exchange
companies.
In any instance in which AT&T believes in good faith that there is
fraudulent use of Service as set forth above, AT&T may, immediately and
upon written notice to the Customer, and without liability on the part of
AT&T, restrict, suspend or discontinue providing Service.
4.E.3. INTERFERENCE, IMPAIRMENT OR IMPROPER USE. Customer may not use
Service in any manner that subjects AT&T or non-AT&T personnel to
hazardous conditions or results in an immediate harm to the AT&T network
or other AT&T services.
4.F. RIGHTS OF AT&T FOR MISUSE OF SERVICE BY CUSTOMER.
------------------------------------------------
4.F.1. In any instance in which AT&T determines that Customer is using
Service in violation of Paragraph 4.E.2., above, AT&T may, immediately
and upon written notice to the Customer, and without liability, restrict,
suspend or discontinue providing Service.
4.F.2. In any instance in which AT&T determines that Customer is using
Service in violation of Paragraph 4.E.3., above, AT&T may immediately
restrict Service on a temporary basis. In such cases, AT&T will make a
reasonable effort to give the Customer prior notice. In the event that
the Customer does not provide to AT&T within five (5) business days of
the temporary restriction of service acceptable proof that said violation
of Paragraph 4.E.3. has ceased and that appropriate measures have been
taken to prevent its recurrence, AT&T may immediately and without further
notice terminate service.
In addition to the remedies set forth in Sections 4.F., above, AT&T may, on
ten days written notice by certified U.S. Mail to the Customer, deny requests
for additional Service. If AT&T does not deny or restrict the Service
involved as permitted in this Section 4.F., and the Customer non-compliance
continues, AT&T shall retain the right to deny or restrict Service without
further notice.
4.G. ACCESS TO CUSTOMER'S PREMISES - The Customer is responsible for
-----------------------------
arranging premises access at any reasonable time so that AT&T personnel may
install, repair, maintain, inspect or remove Service components. Premises
access must be made available at a time mutually agreeable to the Customer and
AT&T.
4.H. DUTY TO INDEMNIFY AND DEFEND. Customer shall indemnify, defend, and
----------------------------
hold harmless AT&T and its directors, officers, employees, agents, parent,
subsidiaries,
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successors, and assigns from all claims, damages and expenses (including
reasonable attorneys' fees) arising out of or resulting from, in whole or in
part, the acts or omissions of Customer or its End-Users, their employees,
agents or contractors affiliated companies and their employees, agents or
contractors, including but not limited to claims for libel, slander, invasion
of privacy, or infringement of copyright arising from any communication and
claims for patent infringement arising from combining or using furnished by
AT&T in connection with facilities or equipment furnished by others. Customer
shall also indemnify, defend and hold AT&T harmless for all causes of action,
claims, liabilities or expenses asserted or incurred by any of Customer's
Users or End-Users arising out of any failure, breakdown, or interruption of
service provided to Customer by AT&T or to End-Users by Customer. Customer
shall indemnify, defend and hold AT&T harmless for all causes of action,
claims, liabilities or expenses asserted or incurred by Customer's End-Users
due to Customer's marketing efforts, including but not limited to Customer's
violation of laws and regulations applicable to the authorization and proof of
authorization necessary to convert an End-User's former service to Customer's
service as the End-User's Primary Interexchange Carrier. AT&T shall be
indemnified, defended, and held harmless by the Customer, Users and End-Users
against all claims, losses, or damages by any person relating to such Service
when used in an explosive atmosphere.
4.I. LOSS. The Customer is liable to AT&T for the replacement cost of
----
AT&T-provided equipment installed at the Customer's premises in the event of
loss of said equipment for any reason, including but not limited to theft.
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SECTION 5: SERVICES AND SERVICE DESCRIPTIONS
---------------------------------
5.A. DOMESTIC INTERSTATE SERVICES. The following domestic interstate
----------------------------
services are provide pursuant to this Agreement. The AT&T ACCUNET T1.5
Service - Carrier Services and AT&T ACCUNET T45 Services - Carrier Services
are provided pursuant to this Agreement when used in connection with Carrier
Services. Carrier Services are IOCs provided under this Agreement which must
terminate in an IXC Switch. An IXC Switch is a telecommunications switch with
the following characteristics: (a) it is owned and operated by the Customer;
(b) it has the capability to be used for the transmission of calls that are
routed by a Local Exchange Carrier to the IXC Switch using Feature Group D
access; (c) it is capable of interconnecting circuits or transferring calling
between circuits; (d) it has a capacity of at least 100,000 access lines; and
(e) it is used by Customer to provide Common Carriage service to end-users.
5.A.1. AT&T Private Line Services (as described and defined in AT&T
Tariff F.C.C. No. 9, as amended from time to time) consisting of:
a) AT&T ACCUNET T1.5 Service - Carrier Services (switch based)
b) AT&T ACCUNET T45 Service - Carrier Services (switch based)
c) Associated Function Connections, M-28 Multiplexing Office
Functions, Enhanced Diversity Routing and Avoidance, Echo
Canceling, and Specified Routing and Avoidance.
5.A.2. AT&T Local Channel Services (as described and defined in AT&T
Tariff F.C.C. No. 11, as amended from time to time) consisting of:
a) AT&T TERRESTRIAL 1.544 Mbps Local Channel Services
b) AT&T TERRESTRIAL 45 Mbps Local Channel Services
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SECTION 6: SERVICE RATES, TERMS AND CONDITIONS
-----------------------------------
6.A. SERVICE TERM. The term of this Agreement is 36 months beginning with
------------
the first day of the first full billing month or on the first day of the first
full billing month within 30 days of the customer's initial service date
(CISD) for the Services provided under this Agreement; there is no renewal
option.
6.B. MINIMUM VOLUME COMMITMENTS. Beginning in the tenth (10th) month
--------------------------
following the CISD, the undiscounted MINIMUM MONTHLY REVENUE COMMITMENT (MMRC)
for the AT&T Services provided under this Contract is $1,000,000 per month,
which will be satisfied by undiscounted recurring charges for the service
components as described in Section 5. If in any month the Customer fails to
meet the MMRC, the Customer will be billed $1,000,000.
6.C. USAGE RATES. The Contract Prices for the services provided pursuant
-----------
to this Agreement are as follows:
6.C.1. The monthly rates for Access Connections and Function
Connections are included in the rates for the IOCs provided under this
contract.
6.C.2. M-28 Multiplexing Office Function: $500 per month, when
connected to a T45 IOC or one or more T1.5 IOC.
6.C.3. Enhanced Diversity Routing
Enhanced Diversity Routing Monthly Charge Non-recurring Installation Charge
- -------------------------- -------------- ---------------------------------
T1.5 IOC $125.00 $400.00
T45 IOC $1,000.00 $1,000.00
6.C.4. Specified Routing and Avoidance
Specified Routing Non-recurring
and Avoidance Monthly Charge Installation Charge
- ----------------- -------------- -------------------
T1.5 IOC $3.30 per route mile $400.00
in excess of air mile
T45 IOC $42.00 per route mile $1,000.000
in excess of air mile
6.C.5. Echo Canceling: Echo Canceling for T1.5 IOCs at a charge of
$150.00 per IOC per month.
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6.C.6. Access Coordination Function: Rates are as specified in AT&T
F.C.C. Tariff No. 11, as amended from time to time.
6.C.7. The Contract Price for T45 Interoffice Channels shall be
$5,800.00 per month, if the length of the IOC is less than or equal to 100
miles.
6.C.8. The Contract Price for T45 Interoffice Channels shall be
$1,600.00 plus $42.00 per mile, if the length of the IOC is greater than 100
miles.
6.C.9. The Contract Price for T1.5 Interoffice Channels shall be $450.00
per month, if the length of the IOC is less than or equal to 100 miles.
6.C.10. The Contract Price for T1.5 Interoffice Channels shall be
$120.00 plus $3.30 per mile, if the length of the IOC is greater than 100
miles.
6.C.11. Notwithstanding 6.C.8., above, Customer may within 30 days of
CISD order up to eight (8) T45 IOCs with mileage less than 100 miles each, for
a fixed price of $3,600.00 per month each. Each circuit must remain in
service for the remainder of the contract term. These circuits must be
installed within six months of CISD. If customer disconnects any of these
IOCs prior to the end of the Contract term, he will be billed $2,200.00 times
the number of months installed. Other discounts, promotions, and other
waivers as described in 6.D.1. and 6.E.4. apply to these circuits.
6.D. DISCOUNTS. Discounts applicable to the services provided pursuant to
---------
this Agreement are as follows:
6.D.1. The Customer will receive a discount of 24% on T1.5 or T45
Interoffice Channels.
6.D.2. The Customer will receive discounts on other services provided in
this contract as follows: Enhanced Diversity Routing, Specified Routing and
Avoidance, M28 Multiplexing, each receive 18% discount. No discounts are
given for Echo Canceling.
6.E. ADDITIONAL DISCOUNTS, CREDITS, WAIVERS.
--------------------------------------
6.E.1. AT&T will provide the Customer the following waivers for the term
of the contract as specified below. The total combined amount of the credits
under Section 6.E. may not exceed a total of $3,000,000 for the Service Term.
6.E.2. AT&T will waive the Nonrecurring Installation charges for AT&T
Terrestrial 1.544 Mbps Local Channels, associated ACCUNET T1.5 Service Access
Connections, and Access Coordination Functions (ACF), provided: (1) service
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components are installed on or after CISD; (2) service components have not
been disconnected and reconnected after the CISD; (3) service components have
not previously been provided by AT&T, that is, service components provided by
another service provider or new growth, and (4) service components remain in
service for at least 24 months. If the Customer disconnects service
components before the end of 24 months of service, the Customer will be billed
for the waived and/or reimbursed charges.
6.E.3. AT&T will waive the recurring charges for each new Interoffice
Channel (IOC) for ACCUNET T45 Service for three months provided that such new
service components: (1) are ordered and installed on or after the CISD; (2)
have not been disconnected in the 6 months prior to CISD and reconnected after
the CISD; (3) have not previously been provided by AT&T in the 6 months prior
to CISD, that is, service components provided by another Interexchange CARRIER
or new growth; and (4) remain in service for at least 12 months. If a service
component is disconnected for any reason prior to the 12-month period, the
Customer will be billed for the amount of the waived recurring charges at the
time of disconnect.
6.E.4. AT&T will waive the recurring charges for each new Interoffice
Channel (IOC) for ACCUNET T1.5 Service for one month provided that such new
service components: (1) are ordered and installed on or after the CISD; (2)
have not been disconnected in the 6 months prior to CISD and reconnected after
the CISD; (3) have not previously been provided by AT&T in the 6 months prior
to CISD, that is, service components provided by another Interexchange Carrier
or new growth, (4) have a length of at least 100 miles, and (5) remain in
service for at least 12 months. If a service component is disconnected for
any reason prior to the 12-month period, the Customer will be billed for the
amount of the waived recurring charges at the time of disconnect.
6.E.5. AT&T will provide a credit of $19,000 to the Customer each month,
provided that AT&T has not extended its Points-of-Presence ("POPs") to
Customer's POPs in Ft. Lauderdale, Chattanooga, Washington, D.C., New York,
Davenport, Austin, and Las Vegas. Credits will cease at such time as AT&T has
extended its POPs to Customer's POPs in at least three (3) of the seven cities
listed. If Customer discontinues the Contract as described in 6.H, Customer
will be rebilled all credits at the time of discontinuance.
6.E.6. AT&T will provide a credit of $161,200 in the third month
following CISD. If Customer discontinues this Contract as described in 6.H,
Customer will be rebilled the credit at time of discontinuance.
6.E.7. Customer is currently receiving service under a Contract Tariff
14 arrangement. AT&T will provide a credit up to $1,050,000 for shortfall
charges, as required, to convert service under the CT14 arrangement to this
Agreement vehicle. This
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credit will be made based on conversion of all service being provided under
the current CT14 arrangement. Customer will not be rebilled the credit for
early termination.
6.E.8. AT&T will provide Customer a waiver of one month's discounted
recurring IOC charge for the IOCs ordered under this Contract, which are not
provisioned within 60 days of the initial due date for such IOC.
IOCs qualifying for this credit shall receive the waiver in the third
month following implementation.
No more than one IOC between any city-pair may qualify for this waiver
during each 12 months following CISD. No more than six IOCs may qualify
during each 12 months following CISD.
6.F. CLASSIFICATION, PRACTICES AND REGULATIONS. Except as otherwise
-----------------------------------------
provided in this Agreement, the terms, conditions, regulations and charges for
AT&T Services as set forth in AT&T Tariff F.C.C. No. 9; and for AT&T Services
as set forth in AT&T Tariff F.C.C. No. 11 apply, as these tariffs may be
amended from time to time.
6.H. DISCONTINUANCE WITHOUT TERMINATION LIABILITY. The Customer may
--------------------------------------------
discontinue this Agreement without incurring a Termination Charge as defined
in Paragraph 6.I., below, prior to the end of the Agreement Term, under the
following provisions:
6.H.1. The Customer replaces this Agreement with another AT&T Carrier
Agreement for AT&T Tariff F.C.C. Nos. 9 or 11 or equivalent Services with a
revenue commitment for such services which is equal or greater than the
revenue commitment for such services in this AT&T Carrier Agreement, and with
a term equal to or greater than the remaining terms of this AT&T Carrier
Agreement, but in no event less than 2 years.
6.H.2. The following conditions are met: (a) at least 24 months have
expired in the contract term; (b) cumulative undiscounted billing for the full
term of the Agreement equals or exceeds $36,000,000; and (c) the Customer
notifies AT&T in writing thirty days prior to such discontinuance of the
Customer's intent to discontinue this Agreement.
6.H.3. The following conditions are met: (a) in the Customer's sole
discretion, AT&T does not provide a suitable interconnection between the AT&T
network and the Customer's network by the end of the third month of the term
of the Agreement, and (b) the Customer notifies AT&T in writing prior to the
end of the fourth month of the term of the Agreement of the Customer's intent
to discontinue this Agreement, which discontinuance shall be effective within
thirty days after the date of such notice.
20
CONFIDENTIAL AND PROPRIETARY
between
AT&T and TELCO COMMUNICATIONS GROUP, INC.
- ----------------- -------------
Customer's Initial AT&T Initials
<PAGE>
6.I. TERMINATION CHARGE FOR DISCONTINUANCE PRIOR TO END OF AGREEMENT TERM.
--------------------------------------------------------------------
If the Customer discontinues this Agreement for any reason other than
specified above, or if AT&T terminates this Agreement or the service provided
pursuant to this Agreement due to Customer's breach of this Agreement, prior
to the expiration of the Agreement Term, the Customer will be billed for and
shall pay within 30 days a Termination Charge. If the Agreement is terminated
during the first year, the Termination Charges for AT&T Services will be an
amount equal to 100% of the MMRC times the number of months remaining in the
Service Term. If the Agreement is terminated during year two 92) or three
(3), the Termination Charges for AT&T Services will be an amount equal to 80%
of the MMRC times the number of months remaining in the Service Term.
21
CONFIDENTIAL AND PROPRIETARY
between
AT&T and TELCO COMMUNICATIONS GROUP, INC.
- ----------------- -------------
Customer's Initial AT&T Initials
------------------------------------------------------------------------
NETWORK PURCHASE AGREEMENT
dated as of March 11, 1997
between
ADVANTIS
and
TELCO NETWORK SERVICES, INC.
------------------------------------------------------------------------
<PAGE>
ARTICLE I
Defined Terms
-------------
1.01. Defined Terms................................................ 1
1.02. Other Definitions............................................ 6
1.03. Terms Generally.............................................. 7
ARTICLE II
Purchase and Sale
-----------------
2.01. Purchase and Sale............................................ 7
2.02. Delivery of Certificates and Other
Instruments of Transfer..................................... 8
2.03. Purchase Price............................................... 8
2.04. The Closing.................................................. 9
2.05. Third-Party Consents......................................... 9
2.06. Further Assurances........................................... 10
2.07. Risk of Loss................................................. 10
ARTICLE III
Assumption of Certain Liabilities
---------------------------------
3.01. Assumed Liabilities.......................................... 10
3.02. Liabilities Not Assumed...................................... 11
ARTICLE IV
Representations and Warranties of Seller
----------------------------------------
4.01. Organization................................................. 11
4.02. Authority.................................................... 11
4.03. Real Property and Improvements............................... 12
4.04. Personal Property............................................ 14
4.05. Intellectual Property Rights................................. 14
4.06. Contracts.................................................... 15
4.07. Litigation................................................... 15
4.08. Compliance with Laws......................................... 15
4.09. Sole Rights to Network....................................... 15
4.10. Licenses and Permits......................................... 16
4.11. FCC Compliance............................................... 16
4.12. Environmental Matters........................................ 17
4.13. Adequacy..................................................... 18
<PAGE>
4.14. No Brokers................................................... 19
4.15. Disclosure................................................... 19
4.16. Qwest Dedicated Capacity..................................... 19
ARTICLE V
Representations and Warranties of Purchaser
-------------------------------------------
5.01. Organization................................................. 20
5.02. Authority.................................................... 20
5.03. No Brokers................................................... 21
5.04. Ownership of Purchaser....................................... 21
5.05. Financial Capability......................................... 21
5.06. Limitation of Representations................................ 21
5.07. Completion of Due Diligence.................................. 21
ARTICLE VI
Further Covenants and Agreements
--------------------------------
6.01. Conduct of Business.......................................... 22
6.02. HSR Filing; Other Consents................................... 23
6.03. Access....................................................... 24
6.04. Satisfaction of Closing Conditions........................... 24
6.05. No Inconsistent Position..................................... 24
6.06. Retention of Tax Liabilities................................. 24
6.07. Post-Closing Services and Facilities......................... 25
6.08. Transition Arrangements...................................... 25
6.09. Notice of Assignment......................................... 25
ARTICLE VII
Conditions Precedent to Obligations of Purchaser
------------------------------------------------
7.01. Performance.................................................. 26
7.02. Authorization, Execution and Delivery of
Operative Agreements....................................... 26
7.03. No Default................................................... 26
7.04. Consents, etc.; Burdensome Conditions........................ 27
7.05. Governmental Rules........................................... 27
7.06. Standard Closing Documents................................... 28
7.07. Representations and Warranties............................... 28
7.08. Opinion of Counsel........................................... 28
7.09. No Material Adverse Change................................... 29
7.10. Schedules.................................................... 29
7.11. Estoppel Certificates........................................ 29
<PAGE>
7.12. Proceedings.................................................. 29
ARTICLE VIII
Conditions Precedent to Obligations of Seller
---------------------------------------------
8.01. Performance.................................................. 30
8.02. Authorization, Execution and Delivery of
Operative Agreements...................................... 30
8.03. No Default................................................... 30
8.04. Consents, etc.; Burdensome Conditions........................ 30
8.05. Governmental Rules........................................... 31
8.06. Standard Closing Documents................................... 31
8.07. Representations and Warranties............................... 32
8.08. Opinion of Counsel........................................... 32
8.09. Proceedings.................................................. 32
ARTICLE IX
Survival and Indemnification
----------------------------
9.01. Survival of Representations.................................. 33
9.02. Indemnification by Seller and Purchaser...................... 33
9.03. Notice, etc.................................................. 35
9.04. Reimbursement of Costs....................................... 35
9.05. Time Limitations............................................. 36
9.06. No Consequential Damages..................................... 36
9.07. Limitation on Remedies....................................... 36
ARTICLE X
Employment Matters
------------------
10.01. Offers of Employment........................................ 37
10.02. Payments by Seller.......................................... 37
10.03. Nonsolicitation............................................. 38
10.04. Contracting Arrangements for Employees...................... 38
ARTICLE XI
Termination
-----------
11.01. Termination of Agreement.................................... 39
<PAGE>
ARTICLE XII
Miscellaneous
-------------
12.01. Expenses.................................................... 41
12.02. Waiver of Jury Trial........................................ 41
12.03. Information for Tax Returns................................. 41
12.04. Amendments and Waivers...................................... 42
12.05. Transferability............................................. 42
12.06. Nonrecourse................................................. 43
12.07. Notices..................................................... 43
12.08. Remedies.................................................... 44
12.09. Applicable Law.............................................. 45
12.10. Jurisdiction; Consent to Service of
Process................................................. 45
12.11. Severability................................................ 46
12.12. Section Headings............................................ 46
12.13. Counterparts................................................ 46
12.14. Publicity................................................... 47
12.15. Entire Agreement............................................ 47
<PAGE>
SCHEDULES
Schedule 1.01(a) Excluded Assets
Schedule 1.01(b) Permitted Liens
Schedule 3.01(a) Assumed Contracts
Schedule 3.01(b) Other Assumed Liabilities
Schedule 4.03 Exceptions to Real Property
and Improvements
Schedule 4.04 Exceptions to Personal
Property
Schedule 4.05 Exceptions to Intellectual
Property Rights
Schedule 4.06 Exceptions to Contracts
Schedule 4.07 Litigation
Schedule 4.08 Exceptions to Compliance with
Laws
Schedule 4.09 Shared Facilities
Schedule 4.10 Exceptions to License and
Permit Applications
Schedule 4.11 FCC Compliance
Schedule 10.01 Voice Network Employees
EXHIBITS
Exhibit A Assets, Network
Part I--Real Property
Part II--Personal Property
Part III--Intellectual Property
Rights
Part IV--Contracts
Part V--Capacity
Part VI--Leased Circuits
Exhibit B Transition Plan
Exhibit C Opinion of Counsel for Seller
Exhibit D Form of Estoppel Certificate
Exhibit E Opinion of Counsel for Purchaser
Exhibit F Telco Flex Capacity
<PAGE>
NETWORK PURCHASE AGREEMENT dated as of
March 11, 1997 (this "Agreement"), between
ADVANTIS, a New York general partnership
("Seller"), and TELCO NETWORK SERVICES, INC., a
Nevada corporation ("Purchaser").
Purchaser desires to purchase and accept from Seller certain
assets, properties and other rights of Seller constituting a
telecommunications network, upon the terms and subject to the terms and
conditions set forth in this Agreement. Seller desires to sell and
assign such assets, properties and other rights to Purchaser.
NOW, THEREFORE, in consideration of the premises and the
respective agreements hereinafter set forth, the parties hereto agree as
follows:
ARTICLE I
DEFINED TERMS
-------------
1.01. DEFINED TERMS. The following terms, not defined
-------------
elsewhere in this Agreement, shall have the following meanings:
"ASSETS" shall mean all the assets, properties, easements,
Intellectual Property Rights, permits, licenses and other Contract
rights of Seller listed on Exhibit A, including the Dedicated Capacity
and the Qwest Dedicated Capacity, comprising the Network as it is
operated on the date of execution of this Agreement and on the Closing
Date but in any event excluding the Excluded Assets.
"BURDENSOME CONDITION" shall mean any action taken, or
credibly threatened, by or before any Governmental Authority or other
Person to challenge the legality of a matter, including (i) the pendency
of a governmental investigation (formal or informal), (ii) the
institution of any litigation, or the threat thereof, (A) seeking to
restrain, enjoin or prohibit the consummation of such matter, to place
any materially adverse condition or limitation upon such consummation or
to invalidate, suspend or require modification of any material provision
of any Operative Agreement or (B) challenging the acquisition of the
Network or (iii) the issuance of any temporary
<PAGE>
restraining order or any preliminary or final injunction having any of
the consequences described in clause (ii) or the issuance of any
subpoena, civil investigative demand or other request for documents or
information that is unreasonably burdensome in the reasonable judgment
of the applicable party.
"CAPACITY AGREEMENT" shall mean the Capacity Exchange and
Purchase Agreement dated as of March 14, 1991, as amended to date,
between SP, Qwest and MCI, including the MCI Letter Amendment.
"CONDUIT SALE AGREEMENT" shall mean the Agreement for Sale of
Installed Conduit System dated March 14, 1991, between Qwest and MCI, as
amended to date.
"CONFIDENTIALITY AGREEMENT" shall mean the Agreement for the
Exchange of Confidential Information dated December 4, 1996, between
Seller and Purchaser.
"CONSENT" shall mean consent, authorization, approval,
permission or waiver.
"CONTRACT" shall mean any contract, indenture, mortgage,
lease, license, deed, agreement or other legally binding arrangement or
understanding, whether written or oral, express or implied.
"DEDICATED CAPACITY" shall mean the telecommunications
capacity identified on Part V of Exhibit A provided by MCI to Seller
pursuant to the MCI Easement, the Capacity Agreement and the Conduit
Sale Agreement.
"D&RGW" shall mean Denver and Rio Grande Western Railroad
Company, a Delaware corporation.
"EXCLUDED ASSETS" shall mean the assets, properties and rights
listed and briefly described in Schedule 1.01(a).
"EXCLUDED LIABILITIES" shall mean all liabilities, obligations
and other commitments of Seller and its affiliates other than the
Assumed Liabilities.
"GOVERNMENTAL ACTION" shall mean any authorization, consent,
approval, order, waiver, exception, variance, franchise, permission,
permit or license of, or
<PAGE>
any registration, filing or declaration with, by or in respect of, any
Governmental Authority.
"GOVERNMENTAL AUTHORITY" shall mean any court, administrative
agency or commission or other governmental agency or instrumentality,
domestic or foreign, of competent jurisdiction.
"GOVERNMENTAL RULE" shall mean any statute, law, treaty, rule,
code, ordinance, regulation, license, permit, certificate or order of
any Governmental Authority or any judgment, decree, injunction, writ,
order or like action of any court or other judicial or quasijudicial
tribunal.
"GUARANTEE" shall mean the guarantee by Telco of Purchaser's
obligations hereunder.
"INTELLECTUAL PROPERTY RIGHTS" shall mean intellectual
property, including patents, patent applications, patent rights,
trademarks, trademark registrations, trademark applications, licenses,
service marks, business marks, brand names, trade names, all other names
and slogans embodying business or product goodwill (or both), copyright
registrations, mask works, copyrights (including copyrights in computer
programs, software, including all source code and object code,
development documentation, programming tools, drawings, specifications
and data), rights in designs, trade secrets, technology, inventions,
discoveries and improvements, know-how, proprietary rights, formulae,
processes, technical information, confidential and proprietary
information, and all other intellectual property rights, whether or not
subject to statutory registration or protection.
"LIEN" shall mean, with respect to any asset, (a) any
mortgage, deed of trust, lien, pledge, encumbrance, charge or security
interest in or on such asset and (b) the interest of a vendor or a
lessor under any conditional sale agreement, capital lease or title
retention agreement relating to such asset.
Any reference to any event, change or effect being "MATERIAL"
with respect to any Person means an event, change or effect which is or,
insofar as reasonably can be foreseen, in the future will be material to
the condition (financial or otherwise), properties, assets, liabilities,
earnings, capitalization, shareholders' equity, licenses or franchises,
businesses or operation of such Person.
<PAGE>
"MCI" shall mean MCI Telecommunications Corporation, a
Delaware corporation.
"MCI EASEMENT" shall mean the Easement Agreement originally
entered into as of November 9, 1987, as amended to date, by and among
SP, D&RGW, Qwest, Seller and MCI, including any Severance Agreement
entered into pursuant to Article XV thereof and the MCI Letter
Amendment.
"MCI LETTER AMENDMENT" shall mean the Tenth Amendment to the
MCI Easement dated November 4, 1993 among SP, D&RGW, Qwest, Seller and
MCI.
"NETWORK" shall mean the telecommunications network of Seller
consisting of the Assets listed on Exhibit A.
"OPERATIVE AGREEMENTS" shall mean this Agreement, the
Guarantee, the Real Property Contracts, the Qwest Release Agreement, the
Qwest Service Agreement and the license of certain Scheduled
Intellectual Property referred to in Section 4.05.
"PERMITTED LIENS" shall mean (i) mechanics', carriers',
workmen's, repairmen's or other like Liens arising from or incurred in
the ordinary course of business and securing obligations which are not
due or which are being contested in good faith (which contested Liens
are disclosed on Schedule 1.01(b)); (ii) Liens for Taxes which are not
due and payable or which may thereafter be paid without penalty or which
are being contested in good faith (which contested Liens are disclosed
on Schedule 1.01(b)); (iii) with respect to the Real Property, the
interests of the applicable head lessors, Qwest and Seller under the
leases, subleases, subsubleases and assignments included in the Real
Property Contracts or relating thereto and the liens permitted
thereunder, (iv) other imperfections of title or encumbrances, if any,
which imperfections of title or other encumbrances do not individually
or in the aggregate materially impair the continued use of the assets to
which they relate in connection with the operation of the Network by
Purchaser; and (v) the Liens described in Schedule 1.01(b).
"PERSON" shall mean any individual, firm, corporation, limited
liability company, partnership, trust, joint venture, Governmental
Authority or other entity, and
<PAGE>
shall include any successor (by merger or otherwise) of such entity.
"QWEST" shall mean Qwest Communications Corporation, formerly
Southern Pacific Telecommunications Company, a Delaware corporation.
"QWEST AGREEMENT" shall mean the Amended and Restated Asset
and Stock Purchase Agreement dated as of September 10, 1993 between
Seller, as purchaser, and Qwest, as seller.
"QWEST DEDICATED CAPACITY" shall mean the 2,742 DS-3 miles of
the capacity identified on Part V of Exhibit A between Los Angeles,
California, and Sacramento, California, provided and to be provided by
Qwest and the 18 DS-3 circuits into and out of the Dedicated Capacity in
Sacramento, California (the MCI point of presence), and Seller's
terminal facility located at 770 L Street in Sacramento, California, to
be provided by Qwest pursuant to the Qwest Release Agreement. The Qwest
Dedicated Capacity includes six DS-3 circuits on the San Jose,
California, to San Francisco, California, route segment which remain to
be provided by Qwest (the "Remaining Qwest Capacity").
"QWEST RELEASE AGREEMENT" shall mean the Termination and
Release Agreement dated as of March 10, 1997, between Qwest and Seller
relating, among other matters, to the termination of certain provisions
of the Qwest Agreement.
"QWEST SERVICE AGREEMENT" shall mean the Service Agreement
dated as of March 10, 1997, between Qwest and Seller relating to the
provision by Qwest of the Qwest Dedicated Capacity.
"REAL PROPERTY CONTRACTS" shall mean the subleases,
subsubleases, assignments of subleases and consents related to interests
in real property contemplated hereunder to be transferred to Purchaser
to be entered into by Purchaser and Seller at the Closing.
"REASONABLE COMMERCIAL EFFORTS", when required in connection
with a covenant of a party to this Agreement, shall not, except as
otherwise specifically required by the operative covenant, obligate such
party to make any unreimbursed expenditures other than routine
administrative costs and expenditures that would have been required of
such
<PAGE>
party in the absence of the actions required by such covenant.
"RELATED EMPLOYEES" shall mean the employees of Seller who are
primarily engaged in the maintenance and operation of the Network and
use of the Assets.
"SP" shall mean Southern Pacific Transportation Company, a
Delaware corporation.
"SP AGREEMENT" shall mean the Agreement dated November 5,
1993, among SP, D&RGW, Qwest and Seller.
"TAX" or "TAXES" shall mean any and all taxes, imposts,
duties, levies, charges, withholdings, fees or excises imposed by any
Governmental Authority, including any gross, adjusted gross or net
income tax, alternative or add-on minimum tax, franchise tax, gross
receipts tax, employment-related tax (including employee withholding,
employment, social security, workers' compensation, unemployment
compensation and employer payroll taxes), real or personal property tax,
tangible or intangible property tax, conveyance tax, value-added tax,
transfer tax, gains tax, net worth tax or sales or use tax, together
with any and all interest, penalties, additions to tax or additional
amounts imposed with respect to any of the foregoing.
"TELCO" shall mean Telco Communications Group, Inc., a
Virginia corporation.
1.02. OTHER DEFINITIONS. The following terms are defined in
-----------------
the Sections indicated:
Term Section
"Additional Purchase Price" 2.03(b)
"Antitrust Division" 6.02(a)
"Assumed Contracts" 3.01(a)
"Assumed Liabilities" 3.01
"Claims" 9.03
"Closing" 2.04
"Closing Date" 2.04
"Environmental Laws" 4.12
"Environmental Permits" 4.12
"FCC" 4.11(a)
"FTC" 6.02(a)
"Hazardous Substances" 4.12
"Improvements" 4.03(b)
<PAGE>
"Indemnitee" 9.02(a) and (b)
"Losses" 9.02(a)
"Personal Property" 4.04
"Purchase Price" 2.03(a)
"Real Property" 4.03(a)
"Scheduled Contracts" 4.06
"Scheduled Intellectual Property" 4.05
"Telco Flex Capacity" 2.03(b)
1.03. TERMS GENERALLY. The definitions in Sections 1.01 and
---------------
1.02 shall apply equally to both the singular and plural forms of the
terms defined. Whenever the context may require, any pronoun shall
include the corresponding masculine, feminine and neuter forms. The
words "include", "includes" and "including" shall be deemed to be
followed by the phrase "without limitation". All references herein to
Articles, Sections, paragraphs, Exhibits and Schedules shall be deemed
references to Articles, paragraphs and Sections of, and Exhibits and
Schedules to, this Agreement unless the context shall otherwise require.
Except as otherwise expressly provided herein, all terms of an
accounting or financial nature shall be construed in accordance with
generally accepted accounting principles, as in effect from time to
time.
ARTICLE II
PURCHASE AND SALE
-----------------
2.01. PURCHASE AND SALE. Upon the terms and subject to the
-----------------
conditions set forth in this Agreement, Seller agrees to sell, assign,
transfer, convey and deliver to Purchaser, and Purchaser agrees to
purchase and accept from Seller, at the Closing, all right, title and
interest of Seller in and to all the Assets; provided that certain
Intellectual Property Rights included in the Assets will either be
assigned to Purchaser or licensed to Purchaser on a nonexclusive, fully
paid-up basis, as described in Section 4.05. At the Closing, Purchaser
and Seller shall also enter into the Real Property Contracts with
respect to the terminal facilities as referred to in Part I of Exhibit A
and Schedule 4.03 or enter into other arrangements reasonably
satisfactory to Purchaser with respect to such terminal facilities or
substantially equivalent facilities. Seller's retained interest in such
terminal facilities as set forth in the Real Estate Contracts will not
be included in the Assets.
<PAGE>
2.02. DELIVERY OF CERTIFICATES AND OTHER INSTRUMENTS OF
-------------------------------------------------
TRANSFER. On the Closing Date, Seller shall deliver to Purchaser (a)
--------
such specific assignments, bills of sale, endorsements, leases,
subleases, subsubleases and other good and sufficient instruments of
conveyance and transfer as shall be effective to vest in Purchaser all
Seller's interest in all the Assets subject to the provisions respecting
Intellectual Property Rights and terminal facilities in Section 2.01 and
(b) copies of all general, financial and accounting records pertaining
to the Assets or the Network, records relating to Intellectual Property
Rights being transferred and other data used in connection with or
pertaining to the ownership, maintenance and operation of the Network
(but excluding Seller's specific customer records and other similar
materials pertaining to business activities of Seller that are not
necessary to the ownership, operation and maintenance of the Network).
2.03. PURCHASE PRICE. (a) In consideration of the
--------------
transfer to Purchaser of the Assets, Purchaser shall pay to Seller as
the purchase price the sum of $170,000,000 (the "Purchase Price"),
payable to Seller at the Closing by wire transfer of immediately
available funds to an account designated by Seller. Purchaser and
Seller shall use commercially reasonable efforts to agree upon an
allocation of the Purchase Price among the Assets prior to the Closing.
(b) In addition to the payment of the Purchase Price,
Purchaser shall pay to Seller as additional consideration the sum of
$5,000,000 (the "Additional Purchase Price") if, no later than 30 months
after the Closing, MCI has reconfigured Dedicated Capacity set forth in
Attachment 2 to Part V of Exhibit A (Flex Capacity-MCI) to at least 80%
of the city pairs (i.e., at least 57 of the 71 city pairs) identified on
Exhibit F (the "Telco Flex Capacity"). In determining whether a
reconfiguration counts in meeting the 80% test, the full DS-3
requirement on Exhibit F for that city pair must be met (e.g., in the
case of Washington-Baltimore 2DS-3s and in the case of
Washington-Charleston 1 DS-3)
but any existing Dedicated Capacity set forth in such
Attachment 2 will be deemed as reconfigured (e.g., in the case of New
York-Philadelphia the 3 DS-3s required would include those currently
provided). The Additional Purchase Price will be payable on the date 30
months following the Closing Date by wire transfer of immediately
available funds to an account designated by Seller. Purchaser and
Seller will each use reasonable
<PAGE>
commercial efforts to cause MCI to agree to the reconfiguration of the
required Dedicated Capacity set forth in such Attachment 2 to Telco Flex
Capacity by no later than 30 months following the Closing Date, and
Purchaser will take all action required under the Capacity Agreement,
including giving notices to MCI and providing any demand forecasts as
promptly as possible, to obtain reconfiguration to the Telco Flex
Capacity on a timely basis.
2.04. THE CLOSING. Upon the terms and subject to the
-----------
conditions set forth in this Agreement, the acquisition by Purchaser of
the Assets (herein called the "Closing") shall take place at 10:00 a.m.,
Chicago time, at 231 North Martingale Road, Schaumburg, Illinois, on the
later of the thirtieth calendar day following the date this Agreement is
executed and the third business day following the expiration or early
termination of all waiting periods under the HSR Act and the
satisfaction or waiver of the other conditions set forth in Articles VII
and VIII hereof, or at such other time, date and place as the parties
shall agree upon (the date of the Closing being herein referred to as
the "Closing Date").
2.05. THIRD-PARTY CONSENTS. To the extent that any Assumed
--------------------
Contract or Intellectual Property Rights for which assignment or license
to Purchaser is provided for herein is not assignable or licenseable
without the consent of another party, this Agreement and any other
Operative Agreement shall not constitute an assignment or license or an
attempted assignment or license thereof if such assignment or license or
attempted assignment or license would constitute a breach thereof.
Seller agrees to use reasonable commercial efforts to obtain the consent
of such other party to the assignment or license of any such Assumed
Contract or Intellectual Property Rights to Purchaser and any consent
required by Seller for the entry into of any Real Property Contract in
all cases in which such consent is or may be required therefor;
provided, however, Seller shall not be obligated to make any
unreimbursed expenditures in connection therewith (other than routine
administrative costs and any expenditures that would be required in
respect of any period ending on or prior to the Closing Date pursuant to
the terms of such Assumed Contracts or Intellectual Property Rights in
the absence of such assignment or license). If any such consent shall
not be obtained, Seller agrees to cooperate with Purchaser in any
reasonable arrangement designed to provide for Purchaser the benefits
intended to be assigned or licensed to Purchaser
<PAGE>
under the relevant Assumed Contract or Intellectual Property Rights or
created by the relevant Real Property Contract, including enforcement at
the cost and for the account of Purchaser of any and all rights of
Seller against the other party thereto arising out of the breach or
cancellation thereof by such other party or otherwise. If and to the
extent that such arrangement cannot be made, Purchaser shall not have
any obligation with respect to any such Assumed Contract, Intellectual
Property Rights or Real Property Contract. This Section 2.05 does not
diminish or constitute a waiver or modification of Seller's
representations and warranties as to the assignability of Contract
rights included in the Assets or of Purchaser's right pursuant to
Section 7.04 not to consummate the transactions contemplated by this
Agreement.
2.06. FURTHER ASSURANCES. (a) Seller agrees to use
------------------
reasonable commercial efforts to assist Purchaser in connection with the
reissuance or transfer to Purchaser of all permits or other Consents of
Governmental Authorities necessary for Purchaser's maintenance,
operation and use of the Network and the Assets.
(b) From and after the Closing, upon request of Purchaser,
Seller shall do, execute, acknowledge and deliver all such further acts,
assurances, deeds, assignments, transfers, conveyances and other
instruments and papers as may be reasonably required to sell, assign,
transfer, license, convey and deliver to and vest in Purchaser, and
protect Purchaser's right, title and interest in and employment of, all
the Assets intended to be sold, assigned, transferred, licensed,
conveyed and delivered to Purchaser pursuant to this Agreement, and as
otherwise may be appropriate to carry out the transactions contemplated
in this Agreement.
2.07. RISK OF LOSS. Until the Closing, any loss of or
------------
damage to the Assets from fire, casualty or any other occurrence shall
be the total responsibility of Seller.
ARTICLE III
ASSUMPTION OF CERTAIN LIABILITIES
---------------------------------
3.01. ASSUMED LIABILITIES. Upon the terms and subject to the
-------------------
conditions of this Agreement, Purchaser hereby assumes, effective as of
the Closing, and agrees to
<PAGE>
pay, perform and discharge when due, and indemnify Seller against and
hold it harmless from and after the Closing from the following
obligations and liabilities of Seller (herein called the "Assumed
Liabilities"):
(a) all obligations and liabilities of Seller arising
after the Closing Date under each Contract included in the Assets and
those other Contracts referred to in Schedule 3.01(a) (collectively, the
"ASSUMED CONTRACTS"); and
(b) the obligations and liabilities of Seller listed and
briefly described in Schedule 3.01(b).
3.02. LIABILITIES NOT ASSUMED. Purchaser will acquire the
-----------------------
Assets free and clear of all obligations and liabilities except as
provided in Section 3.01 or as otherwise provided in this Agreement.
Purchaser will not assume or be responsible for as a result of such
acquisition any other obligations or liabilities of Seller or any other
Persons of any kind, known or unknown, accrued, contingent or otherwise,
asserted or unasserted, including all such obligations or liabilities,
whenever asserted, existing as of the Closing Date or arising out of
events occurring or facts or circumstances existing as of or prior to
the Closing Date.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
----------------------------------------
Seller represents and warrants, as of the date hereof and as
of the Closing Date, to Purchaser as follows:
4.01. ORGANIZATION. Seller is validly existing as a New
York general partnership. Seller is duly qualified to do business in
each jurisdiction in which the ownership, leasing or operation of the
Network requires such qualification except where the failure so to
qualify would not have a material adverse effect upon the utilization of
the Network.
4.02. AUTHORITY. (a) Seller has full power and authority
under the partnership agreement pursuant to which it was created to
execute and deliver this Agreement and the other Operative Agreements
and instruments to be executed and delivered by Seller pursuant hereto
and to consummate
<PAGE>
the transactions contemplated hereby and thereby. All partnership acts
and other proceedings required to be taken by or on the part of Seller
to authorize such execution, delivery and consummation have been or
prior to the Closing will be duly and properly taken.
(b) This Agreement has been duly executed and delivered by
Seller and constitutes, and such other agreements and instruments when
duly executed and delivered by Seller will constitute, legal, valid and
binding obligations of Seller enforceable in accordance with their
respective terms except as enforcement may be limited by bankruptcy,
insolvency, reorganization and other laws of general application
relating to or affecting enforcement of creditors' rights and except
that the availability of equitable remedies, including specific
performance, is subject to the discretion of the court before which any
proceeding therefor may be brought.
(c) The execution and delivery by Seller of this Agreement
and the execution and delivery by Seller of such other agreements and
instruments and the consummation by Seller of the transactions
contemplated hereby and thereby will not in any material respect violate
any law, or conflict with, result in any breach of, constitute a default
(or an event which with notice or lapse of time or both would become a
default) under, or result in the creation of a Lien on any of the Assets
pursuant to, the partnership agreement of Seller or any indenture,
mortgage, lease, agreement or other instrument to which Seller is a
party or by which Seller or its properties or assets is bound.
(d) No Consent or other action of or filing with any
Governmental Authority is required for the execution and delivery by
Seller of this Agreement and the execution and delivery by Seller of
such other agreements and instruments or the consummation by Seller of
the transactions contemplated hereby or thereby, except for filings or
Consents required pursuant to the HSR Act and such other Consents,
actions or filings the lack of which individually or in the aggregate
would not have a material adverse effect upon the Network or Seller's
ability to consummate the transactions contemplated hereby.
4.03. REAL PROPERTY AND IMPROVEMENTS. (a) Part I of Exhibit
------------------------------
A contains a complete list of all real property and interests in real
property included in the Assets as of the date of this Agreement (the
"REAL PROPERTY"). Seller has good and insurable title in fee simple to
the Real Property listed in Part I of Exhibit A as being owned by it, in
each case free and clear of all Liens except for Permitted Liens and
except as described in Schedule 4.03. Seller
<PAGE>
is the lessee or sublessee of each of the leasehold estates listed in
Part I of Exhibit A as being leased or subleased by it and, except as
set forth in Schedule 4.03, is in possession of each of the premises
purported to be so leased or subleased and has good title to each of
such leasehold or subleasehold estates. Except as set forth in Schedule
4.03, there exists no asserted claim (including any Lien for Taxes)
which is adverse to the rights of Seller in any such leasehold or
subleasehold estate. Each such lease or sublease pursuant to which such
leasehold or subleasehold estate is purported to be granted is in full
force and effect without any default by Seller thereunder and, to the
best knowledge of Seller, without any default by any other party
thereto. Except as disclosed on Schedule 4.03, such leases or subleases
are the only leases or subleases of real property to which Seller is a
party pertaining to the Network. Schedule 4.03 includes a list of all
leases, subleases and other documents granting Seller's leasehold or
subleasehold interest in the Real Property (and the applicable
landlord's consent thereto), and true, complete and correct copies
thereof have been made available to Purchaser for its review. Except as
disclosed in Schedule 4.03, each such lease or sublease pursuant to
which Seller leases or subleases any premises pertaining to the Network
may be assigned or subleased to Purchaser without any restriction or
required Consent, or the necessary Consent has been obtained.
(b) The buildings, facilities and other improvements
located on the Real Property (the "Improvements") are and as of the
Closing will be in good operating condition and fit for operation in the
usual course of business, ordinary wear and tear excepted. The uses for
which the Improvements are zoned do not materially restrict, or in any
material manner impair, the use of the Improvements for purposes of the
operation and use of the Network and the construction of the
Improvements complies in all material respects with all applicable
building and zoning codes, ordinances and rules.
(c) Except as disclosed in Schedule 4.03, there is no
pending, or to the knowledge of Seller threatened, condemnation, eminent
domain or similar proceeding with respect to the Real Property or the
Improvements.
<PAGE>
4.04. PERSONAL PROPERTY. Part II of Exhibit A contains a
-----------------
complete list of all machinery, equipment and other personal property
owned, leased or used by Seller included in the Assets (the "Personal
Property"). The Personal Property is in good operating condition and
fit for operation in the usual course of business, ordinary wear and
tear excepted. Except as disclosed in Schedule 4.04, Seller has good
and marketable title to the Personal Property reflected in Part II of
Exhibit A as being owned by it, free and clear of all Liens, except for
Permitted Liens. Except as disclosed on Schedule 4.04, Seller is the
lessee of all the leasehold estates purported to be granted by the
leases reflected on Part II of Exhibit A, and its possession thereof has
not been disturbed, nor has any claim been asserted against Seller
(including any Liens for Taxes) adverse to its rights in such leasehold
estates. Except as disclosed in Schedule 4.04, each such lease or
agreement pursuant to which Seller leases any Personal Property may be
assigned to Purchaser without any restriction or required Consent or the
necessary Consent has been obtained.
4.05. INTELLECTUAL PROPERTY RIGHTS. Part III of Exhibit A
----------------------------
lists all the Intellectual Property Rights owned, licensed, leased or
otherwise used by Seller included in the Assets (the "SCHEDULED
INTELLECTUAL PROPERTY") and whether such Intellectual Property Rights
are owned by Seller or licensed or leased (and identifying the
respective licensor or lessor). Except as set forth on Schedule 4.05,
Seller owns or has the right to use, without payment to any other
Person, all Scheduled Intellectual Property. Except as disclosed in
Schedule 4.05, Seller is not obligated to pay any royalty to anyone
under any of the Scheduled Intellectual Property and all rights of
Seller therein and thereto are transferable to the Purchaser as herein
contemplated without any required Consent, or the necessary Consent has
been obtained. Except as disclosed in Schedule 4.05, upon the
consummation of the transactions provided for herein, Seller either will
have assigned, to the extent permitted, to Purchaser Seller's license to
use such Scheduled Intellectual Property (to the extent such property is
owned by a third Person) or licensed to Purchaser on a nonexclusive,
fully paid-up basis the Scheduled Intellectual Property (to the extent
such property is owned by Seller). Except as disclosed in Schedule
4.05, Seller does not have any knowledge of, and has not given or
received any notice of any pending conflict with, the rights of others
with respect to any Scheduled Intellectual Property in the jurisdictions
where the Network is located.
<PAGE>
4.06. CONTRACTS. Part IV of Exhibit A contains a complete
---------
list of all Contracts included in the Assets. Except as set forth on
Schedule 4.06, each Contract included in the Assets (collectively, the
"Scheduled Contracts") is in full force and effect and is a legal, valid
and binding agreement of Seller and, to the best knowledge of Seller,
of each other party thereto, enforceable in accordance with its terms;
Seller has performed or is performing all material obligations required
to be performed by it under the Scheduled Contracts and is not (with or
without notice or lapse of time or both) in breach or default in any
material respect thereunder; and, to the best knowledge of Seller, no
other party to any of the Scheduled Contracts is (with or without notice
or lapse of time or both) in breach or default in any material respect
thereunder. The copies of the Scheduled Contracts that have been made
available to Purchaser for its review include all Scheduled Contracts or
amendments thereto originally entered into by Seller and all
documentation provided to Seller relating to Scheduled Contracts that
were assigned to Seller pursuant to the Qwest Agreement and such copies
are, to Seller's best knowledge, true, complete and correct.
4.07. LITIGATION. Except as disclosed in Schedule 4.07,
----------
there is no action, suit, proceeding or investigation pending, or to the
knowledge of Seller threatened, against or by Seller relating to the
Network in any court or before any Governmental Authority or any
arbitrator of any kind. There is no outstanding judgment, order or
decree of any Governmental Authority or arbitrator applicable to Seller
which has or is likely to have an adverse effect on the maintenance,
operation and use of the Network.
4.08. COMPLIANCE WITH LAWS. Except as disclosed on Schedule
--------------------
4.08, Seller has complied in all material respects with all Governmental
Rules and licensing requirements applicable to the operation and use of
the Network, including any thereof relating to the sale and leasing of
telecommunications capacity.
4.09. SOLE RIGHTS TO NETWORK. (a) Except as set forth in
----------------------
Schedule 4.09, there are not any outstanding Contracts giving any Person
any present or future right which has not been waived (for example, the
right of first offer of MCI set forth in the Tenth Amendment) to require
Seller to transfer to any Person any ownership or possessory interest
in, or to grant any Lien on, any of the Assets
<PAGE>
except pursuant to this Agreement. Except as set forth on Schedule
4.09, there are no shared facilities or services which are used in
connection with the Network and with other operations of Seller.
(b) In each state in which any Assets are located (i)
Seller is not engaged in the business of selling such Assets or similar
assets and, as of the Closing Date, will not have engaged in other
transactions in which it shall have sold, either individually or in the
aggregate, a substantial amount of such Assets located in such state
within the twelve months prior to the Closing Date; or (ii) such Assets
constitute substantially all the operational assets of Seller in the
business in which such Assets are used in such state.
4.10. LICENSES AND PERMITS. (a) Seller has, or as disclosed
--------------------
on Schedule 4.10 has applied for and in due course expects to receive,
all licenses, permits and other governmental authorizations and
approvals required for the maintenance, operation and use of the Network
except where the failure to have such licenses and permits would not
have a material adverse effect on Seller's ability to maintain, operate
and use the Network. All licenses and permits held by Seller which are
material to the maintenance, operation and use of the Network are valid
and in full force and effect and there are not pending or, to the
knowledge of Seller, threatened any proceedings which could result in
the termination or impairment of any such license or permit which
termination or impairment would materially interfere with the
maintenance, operation or use of the Network, as presently maintained,
operated and used.
(b) To the best knowledge of Seller, the conduct of the
business operations of Seller does not subject Seller to regulation as a
common carrier.
4.11. FCC COMPLIANCE. (a) Except as disclosed on Schedule
--------------
4.11, the Network does not include any license, permit or authorization
issued by the Federal Communications Commission (the "FCC") or any other
Governmental Authority, the transfer or assignment of which would
require the approval of a Governmental Authority.
(b) The Network has been operated and maintained, and will
continue to be operated and maintained prior to Closing, in full
compliance with all Governmental Rules, including the rules and
regulations of the FCC, except where
<PAGE>
a failure to do so would not have a material adverse effect on the
Network or Seller's ability to operate the Network.
4.12. ENVIRONMENTAL MATTERS. To the knowledge of Seller,
---------------------
Seller is not in violation of any Environmental Laws applicable to the
Assets, and no material Lien has been attached to any real or personal
property of Seller included in the Assets pursuant to any Environmental
Laws nor are there any circumstances that could reasonably give rise to
such Lien; Seller's utilization of haulers and transporters to dispose
of any Hazardous Substance has been in material compliance with
Environmental Laws; there has been no disposal or release of any
Hazardous Substance by any Person on any property which at any time was
owned, operated or leased by Seller except in compliance with
Environmental Laws except for such instances of noncompliance that could
not reasonably be expected to give rise to a material adverse effect on
the Network or the Assets or a liability to Purchaser; there are no
sites, locations or operations included in the Assets or used in
connection with the Network at which Seller is currently undertaking, or
has completed, any remedial or response action relating to any such
disposal or release as required by Environmental Laws. Seller has
obtained, and is in compliance with, all permits, licenses,
authorizations, registrations and other Consents required by
Environmental Laws from any Governmental Authority applicable to the
Assets ("ENVIRONMENTAL PERMITS") except for such instances of
noncompliance that could not reasonably be expected to give rise to a
material adverse effect on the Network, and all such Environmental
Permits are transferable to Purchaser under the circumstances presented
by the transactions contemplated hereby. Seller has not received
written notice of any civil, criminal or administrative claims, actions,
suits, hearings, investigations or proceedings pending or threatened
that are based on any Environmental Laws applicable to the Assets.
The term "ENVIRONMENTAL LAWS" means any federal, state,
provincial, regional, territorial, municipal, local or foreign statute,
code, ordinance, rule and regulation (including the requirement to
register underground storage tanks), any permit, consent, approval and
license issued by an environmental regulatory agency, and any judgment,
order, writ, decree, injunction or other authorization, relating to:
(a) emissions, discharges, releases or threatened releases
of Hazardous Substances into the natural
environment, including into ambient air, soil, sediments, land surface
or subsurface, buildings or facilities, surface water, groundwater,
publicly-owned treatment works, septic systems or land;
(b) the generation, treatment, storage, disposal,
handling, manufacturing, transportation or shipment of Hazardous
Substances; or
(c) otherwise relating to the pollution or protection of
health or safety or the environment or to solid waste handling,
treatment or disposal.
The term "HAZARDOUS SUBSTANCES" means those materials
regulated by Environmental Laws, including (1) hazardous materials,
contaminants, constituents, hazardous wastes and hazardous substances as
those terms are defined in the following statutes and their implementing
regulations: the Hazardous Materials Transportation Act, 49 U.S.C.
9601 et seq., the Resource Conservation and Recovery Act, 42 U.S.C.
6901 et seq., the Comprehensive Environmental Response, Compensation and
Liability Act, as amended by the Superfund Amendments and
Reauthorization Act, 42 U.S.C. 9601 et seq., the Clean Water Act, 33
U.S.C. 1251 et seq., the Toxic Substances Control Act, 15 U.S.C.
7401 et seq., (2) petroleum, including crude oil and any fractions
thereof; (3) natural gas, synthetic gas and any mixtures thereof, (4)
asbestos and/or asbestos-containing material, (5) PCBs or PCB-containing
materials or fluids in excess of 50 parts per million, (6) any other
substance with respect to which any federal, state or local agency or
other Governmental Authority may require either an environmental
investigation or environmental remediation and (7) any other hazardous
or noxious substance, material, pollutant or solid or liquid waste that
is regulated by, or forms the basis of liability under, any
Environmental Laws.
4.13. ADEQUACY. On the Closing Date, the Network as it will
be conveyed to Purchaser will be operational in accordance with general
industry standards for the transmission of basic switched voice
communications traffic in the manner presently utilized by Seller and
will include facilities, equipment and other rights used to connect the
Network to points of presence and local exchange carriers. It is
understood, however, that the Network as conveyed will not include
certain components (such as leased lines) of the voice communications
network presently operated by Seller, but the exclusion of such
components will not adversely
<PAGE>
affect the functionality of the Network to be conveyed. If any item of
tangible personal property listed in Part II of Exhibit A is not
delivered to Purchaser on the Closing Date, or if Seller and Purchaser
agree that any additional item of tangible personal property should have
been listed in Part II of Exhibit A on the Closing Date (neither of
whose agreement will be unreasonably withheld), Seller agrees that it
shall provide to Purchaser either such item or an acceptable,
substantially equivalent substitute therefor as promptly as possible.
Nothing in this Section 4.13 shall be deemed a waiver of the rights of
Purchaser in Article VII or IX of this Agreement.
4.14. NO BROKERS. Seller has not incurred any liability
----------
for any broker's or finder's fees or commissions or similar payments in
connection with any of the transactions contemplated by the Operative
Agreements.
4.15. DISCLOSURE. Seller has not knowingly failed to
----------
disclose to Purchaser any facts material to the Network or the Assets.
To Seller's knowledge, no material representation or warranty by Seller
contained in this Agreement and no material statement contained in any
document, certificate, Exhibit or Schedule furnished or to be furnished
by Seller or on its behalf to Purchaser or any of its representatives
pursuant to any of the Operative Agreements or in connection with the
transactions contemplated hereby contains or will contain any untrue
statement of a material fact or omits or will omit to state any material
fact necessary, in light of the circumstances under which it was made or
will be made, in order to make the statements herein or therein not
misleading or necessary in order to fully and fairly provide the
information required to be provided in any such document, certificate,
Exhibit or Schedule.
4.16. QWEST DEDICATED CAPACITY. Qwest is providing the
------------------------
Qwest Dedicated Capacity (other than the Remaining Qwest Capacity) to
Seller and is obligated to provide the Remaining Qwest Capacity to
Seller as provided in the Qwest Release Agreement. The Qwest Release
Agreement is not being assigned to Purchaser except that Purchaser will
have the benefit of certain rights thereunder.
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASER
-------------------------------------------
Purchaser represents and warrants, as of the date hereof and
as of the Closing Date, to Seller as follows:
5.01. ORGANIZATION. Purchaser is a corporation duly
------------
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization.
5.02. AUTHORITY. (a) Purchaser has full corporate power and
---------
authority to execute and deliver this Agreement and the other Operative
Agreements and instruments to be executed and delivered by it pursuant
hereto and to consummate the transactions contemplated hereby and
thereby. All corporate acts and other proceedings required to be taken
by or on the part of Purchaser or its stockholders to authorize
Purchaser to execute, deliver and perform this Agreement and such other
agreements and instruments and to consummate the transactions
contemplated hereby and thereby have been duly and properly taken.
(b) This Agreement has been duly executed and delivered by
Purchaser and constitutes, and such other agreements and instruments
when duly executed and delivered by Purchaser will constitute, legal,
valid and binding obligations of Purchaser enforceable in accordance
with their respective terms except as enforcement may be limited by
bankruptcy, insolvency, reorganization and other laws of general
application relating to or affecting enforcement of creditors' rights
and except that the availability of equitable remedies, including
specific performance, is subject to the discretion of the court before
which any proceeding therefor may be brought.
(c) The execution and delivery by Purchaser of this
Agreement and the execution and delivery by Purchaser of such other
agreements and instruments and the consummation by Purchaser of the
transactions contemplated hereby and thereby will not violate any law,
or conflict with, result in any breach of, constitute a default (or an
event which with notice or lapse of time or both would become a default)
under, or result in the creation of a Lien on any of the properties or
assets of Purchaser pursuant to, the certificate of incorporation or
by-laws of Purchaser
or any indenture, mortgage, lease, agreement or other
<PAGE>
instrument to which Purchaser is a party or by which Purchaser or its
properties or assets are bound.
(d) No Consent or other action of or filing with any
Governmental Authority is required for the execution and delivery by
Purchaser of this Agreement and the execution and delivery by Purchaser
of such other agreements and instruments or the consummation by
Purchaser of the transactions contemplated hereby or thereby, except for
filings or Consents required pursuant to the HSR Act and such other
Consents, actions or filings the lack of which individually or in the
aggregate would not have a material adverse effect upon Purchaser's
ability to consummate the transactions contemplated hereby.
5.03. NO BROKERS. Purchaser has not incurred any liability
----------
for any broker's or finder's fees or commissions or similar payments in
connection with any of the transactions contemplated by the Operative
Agreements.
5.04. OWNERSHIP OF PURCHASER. Purchaser is a wholly-owned
----------------------
subsidiary of Telco Global Solutions Inc., which is a wholly-owned
subsidiary of Telco.
5.05. FINANCIAL CAPABILITY. Purchaser has the financial
--------------------
capability to pay the purchase price to be paid by it at the Closing and
to perform its other obligations hereunder.
5.06. LIMITATION OF REPRESENTATIONS. Anything herein or in
-----------------------------
any other Operative Agreement to the contrary notwithstanding, Purchaser
acknowledges that it is acquiring the Network without any representation
or warranty by Seller or any of its partners or other affiliates except
as expressly set forth herein and that neither Seller nor any of its
partners or other affiliates shall be deemed to have made any
representation or warranty, express or implied, as to the Assets, the
operation of the Network or otherwise, except as expressly set forth
herein. In furtherance of the foregoing, and not in limitation thereof,
Purchaser acknowledges that neither Seller nor any of its partners or
other affiliates has made any representation or warranty, express or
implied, with respect to the revenues or profitability of the operation
of the Network after the Closing.
5.07. COMPLETION OF DUE DILIGENCE. Purchaser has completed
---------------------------
its due diligence and business review with respect
<PAGE>
to all aspects of the Network, the Assets and the feasibility of the
operation of the Network as intended to meet the objectives of
Purchaser, and the results of such review are satisfactory to Purchaser
in all material respects. This Section 5.07 does not constitute a
waiver of any rights of Purchaser pursuant to Article VII or IX.
ARTICLE VI
FURTHER COVENANTS AND AGREEMENTS
--------------------------------
6.01. CONDUCT OF BUSINESS. (a) Except as otherwise
-------------------
expressly provided herein, from and after the date of this Agreement and
until the Closing, Seller shall (i) operate and maintain the Network in
the ordinary course of business consistent with past practice; (ii) use
reasonable commercial efforts to preserve the Assets and maintain the
integrity of the Network; (iii) use reasonable commercial efforts to
keep available the services of the Related Employees; (iv) not sell or
transfer any of the Assets without the prior written consent of
Purchaser, which shall not be unreasonably withheld; (v) not amend or
terminate any Contract constituting part of the Assets or waive any
default or breach thereunder without the prior written consent of
Purchaser, which shall not be unreasonably withheld; (vi) comply in all
material respects with the Assumed Contracts and Operative Agreements
and use reasonable efforts to cure any default or breach by Seller
thereunder and notify Purchaser upon receipt of notice of any default or
breach; and (vii) not, without the prior written consent of Purchaser,
enter into any other contract materially affecting the Network or the
Assets, such consent not to be unreasonably withheld. Seller will
promptly notify Purchaser of any material adverse effect on, or on the
value of, any of the Assets or the Network. From the date hereof to the
Closing, Seller will not take any action or engage in any transaction
which would render any of its representations and warranties inaccurate
in any material respect as of the date hereof or as of the Closing Date.
(b) In the event that Seller acquires assets or enters
into Contracts in the ordinary course of business after the date of
execution of this Agreement and prior to the Closing for use in the
Network and such assets or Contracts are of the type that would have
been included within the Assets if held by Seller on the date of
execution of this Agreement, Exhibit A will be amended on or prior
to
<PAGE>
the Closing Date to include such assets or Contracts as Assets. In
addition, such Exhibit will be amended to delete assets or Contracts
disposed of after the date of execution of this Agreement in accordance
with Section 6.01(a). No such amendment shall affect the Purchase
Price.
(c) Until the Closing, Seller shall maintain in full force
and effect all insurance policies presently in effect relating to the
Assets.
6.02. HSR FILING; OTHER CONSENTS. (a) As promptly as
--------------------------
possible, but in any event not later than ten days after the execution
hereof, Purchaser and Seller will cause their respective parents to each
file with the Federal Trade Commission (the "FTC") and the Antitrust
Division of the United States Department of Justice (the "Antitrust
Division") a premerger notification in accordance with the HSR Act with
respect to the sale of the Assets by Seller to Purchaser pursuant to
this Agreement. Each of Purchaser and Seller agrees to cause their
respective parents to furnish promptly to the FTC and the Antitrust
Division any additional information requested by either of them pursuant
to the HSR Act in connection with such filings and shall diligently
take, or cooperate in the taking of, all steps that are necessary or
desirable and proper to expedite the termination of the waiting period
under the HSR Act; provided, however, that no party shall be required to
comply with any Burdensome Condition. Purchaser and Seller (or their
parents) shall each be responsible for the payment of their own filing
fees required in connection with their respective filings.
(b) Each of Purchaser and Seller will use reasonable
commercial efforts to obtain or make at the earliest practicable date
and in any event before the Closing all other Consents, estoppel
certificates and filings required to be obtained by it or which may be
reasonably necessary to the consummation of the transactions
contemplated by this Agreement or which are reasonably requested by the
other party.
(c) On or prior to the Closing Date, Seller shall use its
reasonable commercial efforts to obtain all such Consents under any
indenture, loan agreement or security agreement to which Seller is a
party as are necessary to prevent a breach or violation of, or default
under, any such indenture, loan agreement or security agreement as a
result
<PAGE>
of the consummation of the transactions contemplated by this Agreement.
6.03. ACCESS. From the date hereof to and including the
------
Closing Date, Seller shall continue to afford to the officers,
employees, agents, attorneys, accountants and other authorized
representatives of Purchaser reasonable access, during normal business
hours, to the offices, plants, personnel, properties, Contracts, Assets,
books and records of Seller relating to the Network in order that
Purchaser may prepare for transition of ownership of the Assets on the
Closing Date and operation of the Network thereafter. Seller shall
furnish Purchaser such information with respect to the Assets and the
Network as Purchaser may from time to time reasonably request and Seller
shall cause its officers and employees to assist Purchaser and cause its
counsel, accountants, engineers and non-employee representatives to be
reasonably available to Purchaser for such purposes.
6.04. SATISFACTION OF CLOSING CONDITIONS. Between the date
----------------------------------
hereof and the Closing Date, Seller and Purchaser shall each use
reasonable commercial efforts to fulfill the conditions to its own
obligations hereunder and to cause its representations and warranties to
remain true and correct in all material respects as of the Closing Date.
6.05. NO INCONSISTENT POSITION. (a) Seller and Purchaser
------------------------
agree that they will not take any position with any taxing authority
which is not consistent with the Purchase Price allocation to be agreed
pursuant to Section 2.03 prior to the Closing.
(b) The parties acknowledge that the MCI Easement contains an
acknowledgement and agreement by SP and MCI that the provision of the
"Dedicated Capacity" as specified in the MCI Easement constitutes the
provision of long distance telecommunications services by MCI under a
long-term service contract.
6.06. RETENTION OF TAX LIABILITIES. Seller hereby agrees to
----------------------------
retain responsibility for, and agrees to pay when due (except while and
to the extent being contested in good faith), any and all Taxes of every
nature and description relating to the Network or the Assets for any
taxable period or portion of a taxable period which period or portion
ends on or prior to the Closing Date. In the event that Purchaser
reasonably determines that a Lien on
<PAGE>
the Assets (based upon unpaid Taxes payable by Seller under this
Agreement or by law) is imminent and notifies Seller accordingly, then,
unless Seller provides adequate protection (such as a bond or letter of
credit) reasonably satisfactory to Purchaser to ensure that there is no
risk to Purchaser's ownership of the Assets, at Purchaser's election,
and in Purchaser's sole discretion, Purchaser may pay any such Taxes on
Seller's behalf and Seller hereby agrees to reimburse Purchaser within
10 days after receiving notice thereof for any such Taxes so paid. The
provisions of this Section shall survive the termination of this
Agreement.
6.07. POST-CLOSING SERVICES AND FACILITIES. Purchaser
------------------------------------
agrees to provide capacity to Qwest as provided in Section 7(c) of the
Qwest Release Agreement on the terms and conditions provided in such
Section. Purchaser agrees to work in good faith with third party
service providers where required by Qwest with respect to the
utilization of conduit as provided in Section 4(b) of the Qwest Release
Agreement. The parties acknowledge that Seller has the right to assign
to Purchaser certain rights under the Qwest Release Agreement.
6.08. TRANSITION ARRANGEMENTS. Purchaser and Seller agree
-----------------------
that the Transition Plan annexed hereto as Exhibit B, which the parties
will amend in writing prior to the Closing to provide additional detail,
shall be implemented in connection with Seller's continued access to the
Network and Purchaser's assumption of management thereof during the
period referred to therein.
6.09. NOTICE OF ASSIGNMENT. On or prior to the Closing
--------------------
Date, Seller shall send a notice, in form and substance reasonably
satisfactory to Purchaser, to each other party to an Assumed Contract,
informing such party of the assignment of the rights of Seller under
such Assumed Contract to Purchaser and directing that any notices to
Seller under such Assumed Contract be provided to Purchaser.
<PAGE>
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER
------------------------------------------------
The obligations of Purchaser to effect the Closing hereunder
are, at the option of Purchaser, subject to the conditions precedent
that, at the Closing:
7.01. PERFORMANCE. Seller shall have performed and complied
-----------
in all material respects with each agreement, covenant and condition in
each Operative Agreement to which Seller is or is specified to be a
party, which agreement, covenant or condition is required to be
performed or complied with by Seller at or before the Closing. At the
Closing, Seller shall have sold, assigned, transferred, conveyed and
delivered to Purchaser all right, title and interest of Seller in and to
the Assets subject to the provisions respecting Intellectual Property
Rights and terminal facilities in Section 2.01 and shall have delivered
such specific assignments, bills of sale, endorsements, leases,
subleases, subsubleases and instruments of conveyance and transfer, in
form and substance reasonably satisfactory to Purchaser, as shall be
effective to vest in Purchaser title to and all the interest in the
Assets of Seller subject as aforesaid.
7.02. AUTHORIZATION, EXECUTION AND DELIVERY OF OPERATIVE
--------------------------------------------------
AGREEMENTS. Each party thereto (other than Purchaser) shall have duly
----------
authorized, executed and delivered each Operative Agreement to which
such Person is or is specified to be a party, and an executed
counterpart thereof shall have been delivered to Purchaser.
7.03. NO DEFAULT. Each Operative Agreement and material
----------
Scheduled Contract shall be in full force and effect without any event
having occurred or condition existing that constitutes, or with the
giving of notice or passage of time (or both) would constitute, a
default thereunder or breach thereof (except by Purchaser or any of its
affiliates) or would give any party thereto the right to terminate or
not to perform any obligation thereunder; and Purchaser shall have
received copies of the Qwest Release Agreement executed by Qwest which
constitutes the termination of its right of first offer relating to the
transfer of the Network and the Dedicated Capacity pursuant to the Qwest
Agreement and the waiver executed by MCI of its right of first offer
relating to the transfer of the Dedicated Capacity pursuant to the MCI
Letter Amendment.
<PAGE>
7.04. CONSENTS, ETC.; BURDENSOME CONDITIONS. (a) All
-------------------------------------
Governmental Actions, including the issuance or transfer of all permits
or other Consents of Governmental Authorities necessary for Purchaser's
ownership, maintenance, operation and use of the Network, required to be
taken, given or obtained in connection with the transactions
contemplated hereby shall (i) have been taken, given or obtained, (ii)
be in full force and effect and (iii) not be subject to any pending
proceedings or appeals, administrative, judicial or otherwise (and the
time for appeal shall have expired or, if an appeal shall have been
taken, it shall have been dismissed).
(b) All Consents of any other Person necessary in order to
consummate the transactions contemplated hereby, including the transfer
to Purchaser of the Contracts and Intellectual Property Rights included
in the Assets, or necessary for the maintenance, operation or use of the
Network, except for Consents in respect of Contracts or Intellectual
Property Rights that individually or in the aggregate are not material
to the maintenance, operation or use of the Network as maintained,
operated and used at the date of this Agreement, shall have been
obtained and shall be in full force and effect.
(c) The waiting period under the HSR Act shall have
expired or been terminated.
(d) No Burdensome Condition (other than a Burdensome
Condition which is subject to the indemnification by Seller pursuant to
Section 9.02(a)(iv)) shall exist with respect to Purchaser in connection
with the transactions contemplated hereby.
7.05. GOVERNMENTAL RULES. (a) No Governmental Rule shall
------------------
have been instituted, threatened, issued or proposed to restrain, enjoin
or prevent the transactions contemplated hereby or to invalidate,
suspend or require modification of any material provision of any
Operative Agreement.
(b) No change shall have occurred since the date of this
Agreement in any Governmental Rule that, in Purchaser's good faith
opinion, would make it illegal for Purchaser to consummate the
transactions contemplated hereby or subject Purchaser to any fine,
penalty or other liability under or pursuant to any Governmental Rule in
connection with any such transaction.
<PAGE>
7.06. STANDARD CLOSING DOCUMENTS. Purchaser shall have
--------------------------
received, with respect to Seller:
(a) certificates, dated the Closing Date, of the
secretary, assistant secretary or another appropriate authorized
signatory of Seller certifying:
(i) that a true and correct copy of the resolutions,
delegations or other written evidence of partnership action and, if
applicable, of the partners of Seller duly authorizing or ratifying the
execution, delivery and performance of the Operative Agreements to which
the partnership is or is specified to be a party and the consummation of
the transactions contemplated thereby, is attached to such certificate,
and as to the absence of other resolutions, delegations or other
partnership action relating thereto; and
(ii) as to the absence of proceedings for the merger,
consolidation, sale of all or substantially all the assets, dissolution,
liquidation or similar proceedings with respect to Seller;
(b) an incumbency certificate signed by an appropriate
officer or other authorized signatory of Seller dated the Closing Date
as to the signatures and titles of the officers or authorized
signatories of Seller executing any Operative Agreement and any other
documents delivered in connection with the Operative Agreements; and
(c) a certificate signed by an appropriate officer or
other authorized signatory of Seller dated the Closing Date certifying
that the conditions set forth in Sections 7.01, 7.02 and 7.07 (with
respect to Seller) have been satisfied by Seller.
7.07. REPRESENTATIONS AND WARRANTIES. The representations
------------------------------
and warranties set forth in Article IV shall be true and correct in all
material respects as of the date of this Agreement and at the Closing
with the same effect as if made at and as of the Closing.
7.08. OPINION OF COUNSEL. Purchaser shall have received an
------------------
opinion or opinions addressed to it, dated the Closing Date, of H. Carol
Bernstein, Vice President,
<PAGE>
Secretary and General Counsel of Seller, in the form of Exhibit C.
7.09. NO MATERIAL ADVERSE CHANGE. Since the date of
--------------------------
execution hereof, neither the Assets nor the Network shall have been
adversely affected in any material way by, or sustained any material
loss, whether or not insured, which has not been remedied by Seller to
Purchaser's reasonable satisfaction, as a result of, any fire, flood,
accident, explosion or other calamity or casualty or any strike, labor
disturbance, riot or act of God or the public enemy, and no condemnation
proceedings affecting any material portion of the Real Property and
Improvements shall have been commenced and the Seller shall not have
received notice of the proposed commencement of any such proceedings.
7.10. SCHEDULES. Purchaser shall have received amended
---------
Schedules as of a date no later than three business days before the
Closing Date reflecting any changes in the Schedules since the date of
execution of this Agreement, and each such amended Schedule shall be
reasonably satisfactory in form, substance and scope to Purchaser in all
material respects.
7.11. ESTOPPEL CERTIFICATES. Purchaser shall have received
---------------------
certificates from each party to the MCI Easement, dated within 20 days
of the Closing Date, pursuant to Section 16.04 of the MCI Easement, the
certificate from MCI to be substantially in the form attached hereto as
Exhibit D.
7.12. PROCEEDINGS. All partnership and legal proceedings
-----------
taken by Seller in connection with the transactions contemplated hereby
and all documents relating thereto shall be reasonably satisfactory in
form and substance to Purchaser and its counsel, and certified or other
copies of all relevant documents as Purchaser shall have reasonably
requested shall have been provided to Purchaser or its counsel.
<PAGE>
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
---------------------------------------------
The obligations of Seller to effect the Closing hereunder are,
at its option, subject to the conditions precedent that, at the Closing:
8.01. PERFORMANCE. Purchaser shall have performed and
-----------
complied in all material respects with each agreement, covenant and
condition in each Operative Agreement to which it is or is specified to
be a party, which agreement, covenant or condition is required to be
performed or complied with by Purchaser at or before the Closing.
8.02. AUTHORIZATION, EXECUTION AND DELIVERY OF OPERATIVE
---------------------------------------------------
AGREEMENTS. Each party thereto (other than Seller) shall have duly
----------
authorized, executed and delivered each Operative Agreement to which
such Person is or is specified to be a party, and an executed
counterpart thereof shall have been delivered to Seller. The Guarantee
shall have been duly authorized, executed and delivered by Telco and
shall be in form and substance satisfactory to Purchaser.
8.03. NO DEFAULT. Each Operative Agreement shall be in
----------
full force and effect without any event having occurred or condition
existing that constitutes, or with the giving of notice or passage of
time (or both) would constitute, a default under or breach of such
Operative Agreement (other than by Seller or any of its affiliates) or
would give any party to such Operative Agreement the right to terminate
or not to perform any obligation under such Operative Agreement.
8.04. CONSENTS, ETC.; BURDENSOME CONDITIONS. (a) All
-------------------------------------
Governmental Actions required to be taken, given or obtained in
connection with the transactions contemplated hereby shall (i) have been
taken, given or obtained, (ii) be in full force and effect and (iii) not
be subject to any pending proceedings or appeals, administrative,
judicial or otherwise (and the time for appeal shall have expired or, if
an appeal shall have been taken, it shall have been dismissed).
(b) All Consents of any other Person necessary or
advisable in order to consummate the transactions
<PAGE>
contemplated hereby shall have been obtained and shall be in full force
and effect.
(c) The waiting period under the HSR Act shall have
expired or been terminated.
(d) No Burdensome Condition shall exist with respect to
Seller in connection with any transactions contemplated hereby.
8.05. GOVERNMENTAL RULES. (a) No Governmental Rule shall
------------------
have been instituted, threatened, issued or proposed to restrain, enjoin
or prevent the transactions contemplated hereby or to invalidate,
suspend or require modification of any material provision of any
Operative Agreement.
(b) No change shall have occurred since the date of this
Agreement in any Governmental Rule that, in the good faith opinion of
Seller, would make it illegal for Seller to consummate the transactions
contemplated hereby or subject Seller to any fine, penalty or other
liability under or pursuant to any Governmental Rule in connection with
any such transaction.
8.06. STANDARD CLOSING DOCUMENTS. Seller shall have
--------------------------
received, with respect to Purchaser and Telco:
(a) a certificate, dated the Closing Date, of the
secretary, assistant secretary or another appropriate authorized
signatory of such entity certifying:
(i) that a true and correct copy of the charter and by-laws of
such entity is attached to such certificate;
(ii) that a true and correct copy of the resolutions,
delegations or other written evidence of corporate action, duly
authorizing or ratifying the execution, delivery and performance of the
Operative Agreements to which such entity is or is specified to be a
party and the consummation of the transactions contemplated thereby, is
attached to such certificate, and as to the absence of other
resolutions, delegations or other corporate action relating thereto; and
<PAGE>
(iii) as to the absence of proceedings for the merger,
consolidation, sale of all or substantially all the assets, dissolution,
liquidation or similar proceedings with respect to such entity;
(b) an incumbency certificate signed by an appropriate
officer or other authorized signatory of such entity dated the Closing
Date as to the signatures and titles of the officers or authorized
signatories of such entity executing any Operative Agreement and any
other documents delivered in connection with the Operative Agreement;
and
(c) a certificate signed by an appropriate officer or
other authorized signatory of Purchaser dated the Closing Date
certifying that the conditions set forth in Sections 8.01, 8.02 and 8.07
(with respect to Purchaser) have been satisfied.
8.07. REPRESENTATIONS AND WARRANTIES. The representations
------------------------------
and warranties of Purchaser set forth in Article V shall be true and
correct in all material respects as of the date of this Agreement and at
the Closing with the same effect as if made at and as of the Closing.
8.08. OPINION OF COUNSEL. Seller shall have received an
------------------
opinion or opinions addressed to it, dated the Closing Date, of Swidler
& Berlin, counsel for Purchaser and Telco, in the form of Exhibit E.
8.09. PROCEEDINGS. All corporate and legal proceedings
-----------
taken by Purchaser and Telco in connection with the transactions
contemplated hereby and all documents relating thereto shall be
reasonably satisfactory in form and substance to Seller and its counsel,
and certified or other copies of all relevant documents as Seller shall
have reasonably requested shall have been provided to Seller or its
counsel.
<PAGE>
ARTICLE IX
SURVIVAL AND INDEMNIFICATION
----------------------------
9.01. SURVIVAL OF REPRESENTATIONS. The representations,
---------------------------
warranties, covenants and agreements contained in this Agreement, and in
any agreements, certificates or other instruments delivered pursuant to
this Agreement, shall survive the Closing and shall remain in full force
and effect, regardless of any investigation made by or on behalf of any
party, but subject to all limitations and other provisions contained in
this Agreement including Section 9.05.
9.02. INDEMNIFICATION BY SELLER AND PURCHASER. (a) Subject
---------------------------------------
to the other provisions of this Article IX, Seller hereby agrees to
indemnify and hold harmless Purchaser (and its officers, directors,
employees, agents and representatives) (each an "Indemnitee") from and
against any and all Losses (as defined below) asserted against, imposed
upon or incurred by an Indemnitee arising from, based upon or caused by
any of the following:
(i) Excluded Liabilities;
(ii) any default by Seller in the performance of any of its
agreements or covenants set forth in any Operative Agreement;
(iii) any breach of a representation or warranty of Seller
contained in any Operative Agreement; and
(iv) *
provided, however, that Seller shall not have any liability under this
-----------------
Section 9.02 to the extent the liability or obligation arises as a
result of the operation of the Network after the Closing or any action
taken or omitted to be taken by any Indemnitee of Seller.
*Confidential Treatment Requested.
The redacted material separately filed
with the Commission.
<PAGE>
As used herein, the term "LOSSES" shall mean, collectively,
any and all claims, damages, liabilities, liens, losses or other
obligations whatsoever, together with costs and expenses, including
reasonable fees and disbursements of counsel (except as limited by
Section 9.03) and any consultants or experts and expenses of
investigation. Losses with respect to a representation or warranty
providing for a materiality threshold prior to breach shall include all
Losses in excess of $200,000 arising from, based upon or caused by a
breach of such representation or warranty, for the purposes of the
indemnification under this Article IX only, determined without reference
to the materiality threshold.
(b) Subject to the other provisions of this Article IX,
Purchaser hereby agrees to indemnify and hold harmless Seller (and its
partners, officers, directors, employees, agents and representatives)
(each an "Indemnitee") from and against any and all Losses asserted
against, imposed upon or incurred by such Indemnitee arising from, based
upon or caused by any of the following:
(i) Assumed Liabilities;
(ii) any default by Purchaser in the performance of any of its
agreements or covenants set forth in any Operative Agreement; and
(iii) any breach of a representation or warranty of Purchaser
contained in any Operative Agreement;
provided, however, that Purchaser shall not have any liability under
-----------------
this Section 9.02 to the extent the liability or obligation arises as a
result of the operation of the Network before the Closing or any action
taken or omitted to be taken by any Indemnitee of Purchaser.
(c) Seller and Purchaser shall not have any liability
under Section 9.02(a) or (b), as applicable, unless the aggregate of all
Losses for which such party would, but for this sentence, be liable
exceeds on a cumulative pre-tax basis an amount equal to $3,000,000 and
then only to the extent of any such excess. In addition, the aggregate
amount payable by an indemnifying party to its respective Indemnitees
pursuant to this Article IX shall not exceed $50,000,000.
Notwithstanding any other provision in this Article IX, the liability of
Seller under Section 9.02(a)(iv) shall not be subject to the
foregoing
<PAGE>
limitations on amount (i.e., $3,000,000 and $50,000,000) and shall apply
only to Losses consisting of costs and expenses incurred by Purchaser as
a party to the indemnified litigation, including all reasonable fees and
disbursements of counsel and any consultants or experts and expenses of
investigation, and any amounts which are due from Purchaser to plaintiff
as the result of a judgment in the litigation or a settlement thereof.
The limitations on amount also shall not apply to indemnification
pursuant to Section 9.02(a)(i) or 9.02(b)(i).
9.03. NOTICE, ETC. Each Indemnitee agrees to give the
-----------
indemnifying party prompt written notice of any action, claim, demand,
discovery of fact, proceeding or suit (collectively, "Claims") for which
such Indemnitee intends to assert a right to indemnification under this
Agreement. The indemnifying party shall have the right to participate
jointly with the Indemnitee in the Indemnitee's defense, settlement or
other disposition of any Claim. With respect to any Claim relating
solely to the payment of money damages and which would not result in the
Indemnitee becoming subject to injunctive or other relief or otherwise
adversely affect the business of the Indemnitee in any manner, and as to
which the indemnifying party shall have acknowledged in writing the
obligation to indemnify the Indemnitee in full hereunder without regard
to any monetary limitation on indemnification in Section 9.02(c), the
indemnifying party shall have the right to defend, settle or otherwise
dispose of such Claim, on such terms as the indemnifying party, in its
sole discretion, shall deem appropriate. If the indemnifying party
assumes such defense, the Indemnitee shall have the right to participate
in the defense thereof and to employ counsel, at its own expense,
separate from the counsel employed by the indemnifying party, it being
understood that the indemnifying party shall control such defense. The
indemnifying party shall be liable for the fees and expenses of counsel
employed by the Indemnitee for any period during which the indemnifying
party has not assumed the defense thereof. The indemnifying party shall
obtain the written consent of the Indemnitee prior to ceasing to defend,
settling or otherwise disposing of any Claim if as a result thereof the
Indemnitee would become subject to injunctive or other equitable relief
or the business of the Indemnitee would be adversely affected in any
manner.
9.04. REIMBURSEMENT OF COSTS. The costs and expenses,
----------------------
including reasonable fees and disbursements of counsel and expenses
of
<PAGE>
investigation, incurred by any Indemnitee in connection with any Claim
shall be reimbursed on a quarterly basis by the applicable indemnifying
party, without prejudice to the indemnifying party's right to contest
the Indemnitee's right to indemnification and subject to refund in the
event the indemnifying party is ultimately held not to be obligated to
indemnify the Indemnitee.
9.05. TIME LIMITATIONS. (a) Notwithstanding anything to
----------------
the contrary contained herein, the obligation of Seller and Purchaser to
indemnify their respective Indemnitees for any Loss shall, except as
otherwise provided below, terminate at 11:59 p.m., New York City time,
on the second anniversary of the Closing Date.
(b) The obligation of either party to indemnify for any
Losses based upon or caused by default in the performance of an
agreement or covenant set forth in an Operative Agreement required to be
performed after the Closing shall terminate on the second anniversary of
the Closing or, if later, the second anniversary of the date the other
party knew or should have known of the defaulting party's failure to
perform.
(c) The obligation of Seller or Purchaser to indemnify an
Indemnitee for any Losses based upon any Excluded Liabilities or Assumed
Liabilities, respectively, shall survive without any limitation as to
time.
(d) Claims for indemnification pending on, or asserted
prior to, the expiration of the applicable time period specified above
may continue to be asserted and indemnified against and the related
obligation to indemnify shall not terminate.
9.06. NO CONSEQUENTIAL DAMAGES. In no event will any
------------------------
indemnifying party be liable to an Indemnitee under this Article IX for
punitive damages, incidental damages or lost profits, lost savings or
any other special, indirect or consequential damages, even if such party
has been advised of the possibility of such damages, resulting from the
breach by it of any of its obligations under this Agreement.
9.07. LIMITATION ON REMEDIES. The rights of Purchaser and
----------------------
Seller to indemnification set forth in this Article IX shall be the sole
and exclusive remedy against Purchaser or Seller with respect to any and
all claims for
<PAGE>
damages with respect to the subject matter of the Operative Agreements,
in lieu of any and all other rights which they may have under the
Operative Agreements or otherwise with respect to the transactions
contemplated hereby.
ARTICLE X
EMPLOYMENT MATTERS
------------------
10.01. OFFERS OF EMPLOYMENT. At or prior to the Closing,
--------------------
Purchaser may, at its option, offer employment to any employees of
Seller listed on Schedule 10.01, which contains the names of employees
of Seller (other than certain senior executives) who are currently
employed supporting the voice network of Seller. Purchaser shall not be
under any obligation to offer employment to any employees of Seller
listed on Schedule 10.01 but shall notify Seller promptly upon
Purchaser's making of an offer. Such notification will include the
salary and location of any offer. In addition, Purchaser and Seller
agree to consult with each other on the employment start-date for any
employee of Seller hired by Purchaser. With respect to employees listed
in Schedule 10.01, the terms of any offers will be in the sole
discretion of Purchaser; provided, that Purchaser agrees to comply with
applicable employment law and will be responsible for its conduct and
any claims or actions resulting from the selection of, offers to or
hiring of employees of Seller that would expose Seller or Purchaser to
any damages, liabilities or other Losses as a result of Purchaser's
wrongful conduct in connection therewith.
10.02. PAYMENTS BY SELLER. (a) To the extent any employees
------------------
of Seller that may be hired by Purchaser at or subsequent to the Closing
are entitled to any accrued benefits through the date of hiring under
any employee benefit plans or arrangements of Seller, whether with
respect to retirement, medical and dental coverage, vacation pay, life
insurance, disability or otherwise, Seller shall be solely responsible
for the benefits and agrees to pay all amounts and make all
distributions due to such employees promptly in accordance with such
employees' terms of employment, including applicable benefit plans.
(b) In addition to matters funded by Seller pursuant to
Section 10.02(a), Seller shall retain responsibility for any and all
other liabilities relating to any of its employees hired by Purchaser,
which liabilities
<PAGE>
have been incurred, or arise from facts or events occurring, prior to
the Closing Date; provided, that Purchaser shall be responsible for any
and all liabilities relating to any employees of Seller whether or not
hired by Purchaser, to the extent arising from a breach of its
obligations in Section 10.01. To the extent Purchaser is required to
pay any such liabilities for which Seller retains responsibility, Seller
shall promptly reimburse Purchaser for the amount paid.
10.03. NONSOLICITATION. Prior to 12 months following the
---------------
Closing Date, Seller will not hire or solicit for employment any
individual hired by Purchaser pursuant to Section 10.01 without the
prior written consent of Purchaser.
10.04. CONTRACTING ARRANGEMENTS FOR EMPLOYEES. (a) In the
--------------------------------------
event that Purchaser has not hired all employees of Seller listed on
Schedule 10.01 but Purchaser wishes that the services of certain of such
employees are available to Purchaser during the period between the
Closing Date and December 31, 1997, Purchaser will identify such
employees to Seller. In such event Seller and Purchaser will enter into
a contracting arrangement whereby Seller will make the services of such
employees available to Purchaser (to the extent such employees remain
employed by Seller) as contract employees on a month to month basis
until December 31, 1997. Unless otherwise expressly agreed in the
transition plan contemplated by Section 6.08, Purchaser agrees to pay to
Seller an amount equal to 150% of the applicable monthly base salary of
each such employee for each month Seller provides such services.
(b) In addition, in the event Purchaser hires any employee of
Seller listed on Schedule 10.01 but Seller wishes that the services of
certain of such employees are available to Seller during the period
between the Closing Date and December 31, 1997, Seller will identify
such employees to Purchaser. In such event Purchaser and Seller will
enter into a contracting arrangement whereby Purchaser will make the
services of such employees available to Seller (to the extent such
employees remain employed by Purchaser) as contract employees on a month
to month basis until December 31, 1997. Unless otherwise expressly
agreed in the transition plan contemplated by Section 6.08, Seller
agrees to pay to Purchaser an amount equal to 150% of the applicable
monthly base salary of each such employee for each month Purchaser
provides such services.
<PAGE>
ARTICLE XI
TERMINATION
-----------
11.01. TERMINATION OF AGREEMENT. (a) Notwithstanding
------------------------
anything to the contrary in this Agreement, this Agreement may be
terminated and the transactions contemplated hereby abandoned at any
time prior to the Closing:
(i) by mutual written consent of Seller and Purchaser;
(ii) by Purchaser if there has been a material breach of any
representation, warranty, covenant or agreement contained
in any Operative Agreement on the part of Seller or if
any of the conditions set forth in Article VII shall have
become incapable of fulfillment and shall not have been
waived by Purchaser, provided that if such breach is
susceptible of cure, it has not been cured within 30 days
after written notice from Purchaser to Seller;
(iii)by Seller if there has been a material breach of any
representation, warranty, covenant or agreement contained
in any Operative Agreement on the part of Purchaser or if
any of the conditions set forth in Article VIII shall
have become incapable of fulfillment and shall not have
been waived by Seller, provided that if such breach is
susceptible of cure, it has not been cured within 30 days
after written notice from Seller to Purchaser;
(iv) by Seller or Purchaser if, in its reasonable opinion, a
Burdensome Condition (other than a Burdensome Condition which
is subject to the indemnification by Seller pursuant to
Section 9.02(a)(iv)) has been imposed on it with respect to
the transactions contemplated hereby;
(v) by Seller or Purchaser, in its sole discretion, (x) if the
Closing does not occur on or prior to June 30, 1997, other
than as a result of a breach by the party seeking termination
of its obligations hereunder, the Real Property Contracts (or
alternative arrangements reasonably satisfactory to Purchaser)
not having been executed or the Consents required pursuant to
the HSR Act or the Real Property
<PAGE>
Contracts (or such alternative arrangements) not having been
obtained; or (y) if the Closing does not occur on or prior to
September 30, 1997, other than as a result of a breach by the
party seeking termination of its obligations hereunder; or
(vi) by Purchaser if, prior to Closing, Assets constituting
tangible personal property are materially damaged and Seller
has not either provided a reasonably satisfactory replacement
therefor or made a payment or purchase price adjustment in an
amount sufficient to acquire a reasonably satisfactory
replacement; or by Purchaser or Seller if, prior to Closing, a
material default (other than by Seller) shall have occurred
with respect to Assets constituting Contracts or material
Assets constituting Contracts are no longer in full force and
effect.
provided, however, that the party seeking termination pursuant to clause
-----------------
(ii), (iii), (iv), (v) or (vi) is not in breach in any material respect
of any of its representations, warranties, covenants or agreements
contained in any Operative Agreement.
(b) In the event of termination by Seller or Purchaser
pursuant to this Section 11.01, written notice thereof shall forthwith
be given to the other party hereto and the transactions contemplated by
this Agreement shall be terminated, without further action by any party.
If the transactions contemplated by this Agreement are terminated as
provided herein (i) Purchaser shall return all documents and other
material received from Seller relating to the transactions contemplated
hereby, whether obtained before or after the execution hereof, to
Seller; and (ii) all confidential information received by Purchaser with
respect to the businesses of Seller shall be treated in accordance with
the Confidentiality Agreement which shall remain in full force and
effect notwithstanding the termination of this Agreement.
(c) If this Agreement is terminated and the transactions
contemplated hereby are abandoned as described in this Section 11.01,
this Agreement shall become null and
<PAGE>
void and of no further force and effect, except for the provisions of
Sections 12.01, 12.02, 12.06, 12.08, 12.14 and Articles IX and XI.
Nothing in this Section 11.01 shall be deemed to release any party from
any liability for any breach by such party of any of its
representations, warranties, covenants or agreements as set forth in the
Operative Agreements.
ARTICLE XII
MISCELLANEOUS
-------------
12.01. EXPENSES. Except as otherwise specifically provided
--------
in this Agreement, each party will pay its own expenses incident to this
Agreement and the transactions contemplated hereby, including legal and
accounting fees and disbursements. Any sales, transfer or other similar
Taxes or fees applicable to the conveyance and transfer from Seller to
Purchaser of the Assets, including transfer Taxes, recording and filing
fees and documentary stamp Taxes, shall be borne and paid by Purchaser.
12.02. WAIVER OF JURY TRIAL. Each party waives, to the
--------------------
fullest extent permitted by applicable law, any right it may have to a
trial by jury in respect of any litigation arising out of or relating to
the Operative Agreements. Each party (i) certifies that no
representative, agent or attorney of another party has represented,
expressly or otherwise, that such other party would not, in the event of
litigation, seek to enforce the foregoing waiver and (ii) acknowledges
that it has been induced to enter into the Operative Agreements by,
among other things, the mutual waivers and certifications set forth
above in this Section.
12.03. INFORMATION FOR TAX RETURNS. (a) If, in order
---------------------------
properly to prepare its Tax returns, other documents or reports required
to be filed with Governmental Authorities or its financial statements or
to fulfill its obligations hereunder, it is necessary that a party be
furnished with additional information, documents or records relating to
the Assets or the Network, and such information, documents or records
are in the possession or control of the other party hereto, such other
party agrees to use reasonable commercial efforts to furnish or make
available such information, documents or records (or copies thereof) at
the recipient's request, cost and expense.
<PAGE>
(b) Each party to this Agreement hereby agrees that it
shall cooperate with the other by executing and/or filing or causing to
be executed and/or filed any required documents (including any Tax
returns required to be filed with respect to the transactions
contemplated by this Agreement) and by making available to the other,
without limitation, all work papers, records and notes of any kind, at
all reasonable times, for the purpose of allowing the appropriate party
to complete Tax returns, respond to audits, obtain refunds, make any
determination required under this Agreement, verify issues and negotiate
settlements with Tax authorities or defend or prosecute Tax claims.
12.04. AMENDMENTS AND WAIVERS. (a) No failure or delay of
----------------------
a party to this Agreement in exercising any power or right hereunder
shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any
other or further exercise thereof or the exercise of any other right or
power. The rights and remedies of the parties hereunder are cumulative
and are not exclusive of any rights or remedies which the parties would
otherwise have. No waiver of any provision of this Agreement or consent
to any departure therefrom shall in any event be effective unless the
same shall be permitted by Section 12.04(b), and then such waiver or
consent shall be effective only in the specific instance and for the
purpose for which given. No notice or demand on either party to this
Agreement in any case shall entitle such party to any other or further
notice or demand in similar or other circumstances.
(b) Neither this Agreement nor any provision hereof may be
waived, amended or modified except pursuant to an agreement or
agreements in writing entered into by authorized signatories of the
parties hereto. To be effective, any consent, approval, notice, waiver
or demand required or permitted under this Agreement must refer
specifically to this Agreement and the provisions to which it relates,
describe with particularity any right or obligation consented to,
approved, waived or purported to be violated and demonstrate knowledge
of the consequences of the action so taken.
12.05. TRANSFERABILITY. The respective rights and
---------------
obligations of each party hereto shall not be assignable by such party
without the written consent of the other party
<PAGE>
hereto, except that prior to or after the Closing Purchaser may assign
its rights and obligations hereunder to Telco, or any direct or indirect
wholly owned subsidiary of Telco, if all the obligations of such
assignee hereunder are unconditionally guaranteed by Telco, and after
the Closing (a) Purchaser may assign its rights hereunder (but excluding
any right to indemnification pursuant to Article IX) to any transferee
of ownership of the Network (which shall not include any Person that
purchases telecommunications capacity from Purchaser but does not
acquire an ownership interest in the Network), (b) Seller may assign its
rights under this Agreement to its general partners or any affiliate
thereof and (c) Purchaser may assign its rights under this Agreement to
any successor of Purchaser in the event of a merger, consolidation,
liquidation or dissolution of Purchaser, if such assignee pursuant to
the foregoing clause (b) or (c) executes and delivers to the other party
hereto an agreement satisfactory in form and substance to such other
party under which such assignee assumes and agrees to perform and
discharge all the obligations and liabilities of the assigning party,
but any such permitted assignment shall not relieve the assigning party
of its obligations hereunder or any guarantor of such obligations. This
Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns. Nothing
herein expressed or implied is intended to confer upon any Person, other
than the parties hereto and their respective successors and permitted
assigns, any rights, remedies, obligations or liabilities under or by
reason of this Agreement, unless such Person is expressly stated to be
entitled to any such right, remedy or claim.
12.06. NONRECOURSE. Notwithstanding anything to the
-----------
contrary contained herein, no partner of Seller shall have any duty,
obligation or liability under or in respect of this Agreement as a
result of its status as a partner of Seller, nor shall any direct or
indirect owner of any such partner have any duty, obligation or
liability as a result of its direct or indirect beneficial ownership of
such partner; it being understood and agreed that all duties,
obligations and liabilities of Seller are expressly nonrecourse to the
respective direct and indirect beneficial owners.
12.07. Notices. Any notice, request or other document to be
-------
given hereunder to a party hereto shall be in writing and delivered by
hand, courier, overnight delivery
<PAGE>
service or registered or certified mail. Any notice or other
communication under this Agreement shall be deemed given when received
and shall be directed to the following address:
(a) If to Seller, addressed to it at:
231 North Martingale Road
Schaumburg, Illinois 60173
Attention of General Counsel
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, N.Y. 10019
Attention of Martin L. Senzel
(b) If to Purchaser, addressed to it at:
4219 Lafayette Center Drive
Chantilly, VA 20151-1209
Attention of Bryan K. Rachlin,
Chief Operating Officer
with a copy to:
Swidler & Berlin
3000 K Street, Suite 300
Washington, DC 20007-5116
Attention of John J. Klusaritz
Either party hereto may change its address for receiving notices,
requests and other documents by giving written notice of such change to
the other party hereto.
12.08. REMEDIES. Except as may otherwise be specifically
--------
provided herein, the rights and remedies of the parties hereunder are
cumulative and are not exclusive of any rights or remedies which the
parties hereto would otherwise have. Equitable relief, including the
remedies of
<PAGE>
specific performance and injunction, shall be available with respect to
any actual or attempted breach hereof.
12.09. APPLICABLE LAW. This Agreement shall be governed by
--------------
and construed in accordance with the internal laws of the State of New
York applicable to agreements made and to be performed entirely within
such State, without regard to the conflicts of law principles of such
State.
12.10. JURISDICTION; CONSENT TO SERVICE OF PROCESS. (a)
-------------------------------------------
Each party to this Agreement hereby irrevocably and unconditionally
submits, for itself and its property, to the jurisdiction of any New
York state court sitting in the County of New York or any Federal court
of the United States of America sitting in the Southern District of New
York, and any appellate court from any such court, in any suit, action
or proceeding arising out of or relating to this Agreement, or for
recognition or enforcement of any judgment resulting from any such suit,
action or proceeding, and each party hereby irrevocably and uncondi-
tionally agrees that all claims in respect of any such suit, action or
proceeding may be heard and determined in such New York state court or,
to the extent permitted by law, by removal or otherwise, in such Federal
court.
(b) It shall be a condition precedent to each party's right
to bring any such suit, action or proceeding that such suit, action or
proceeding, in the first instance, be brought in such New York state
court or, to the extent permitted by law, by removal or otherwise, in
such Federal court (unless such suit, action or proceeding is brought
solely to obtain discovery or to enforce a judgment), and if each of
such New York State court and Federal court refuses to accept
jurisdiction with respect thereto, such suit, action or proceeding may
be brought in any other court with jurisdiction; provided that the
foregoing condition precedent shall not apply to any suit, action or
proceeding by a party seeking indemnification or contribution pursuant
to this Agreement or otherwise in respect of a suit, action or
proceeding against such party if such suit, action or proceeding by such
party seeking indemnification or contribution is brought in the same
court as the suit, action or proceeding against such party.
(c) No party to this Agreement may move to (i) transfer any
such suit, action or proceeding from such New York State court or
Federal court to another jurisdiction, (ii) consolidate any such suit,
action or proceeding
<PAGE>
brought in such New York state court or Federal court with a suit,
action or proceeding in another jurisdiction or (iii) dismiss any such
suit, action or proceeding brought in such New York state court or
Federal court for the purpose of bringing the same in another
jurisdiction.
(d) Each party to this Agreement hereby irrevocably and
unconditionally waives, to the fullest extent it may legally and
effectively do so, (i) any objection which it may now or hereafter have
to the laying of venue of any suit, action or proceeding arising out of
or relating to this Agreement in any New York state court sitting in the
County of New York or any Federal court sitting in the Southern District
of New York, (ii) the defense of an inconvenient forum to the
maintenance of such suit, action or proceeding in any such court and
(iii) the right to object, with respect to such suit, action or
proceeding, that such court does not have jurisdiction over such party.
(e) Each party to this Agreement irrevocably consents to
service of process in the manner provided for the giving of notices
pursuant to this Agreement. Nothing in this Agreement shall affect the
right of any party to such agreement or instrument to serve process in
any other manner permitted by law.
12.11. SEVERABILITY. In the event any one or more of the
------------
provisions contained in this Agreement should be held invalid, illegal
or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein and therein
shall not in any way be affected or impaired thereby. The parties shall
endeavor in good-faith negotiations to replace the invalid, illegal or
unenforceable provisions with valid provisions the economic effect of
which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.
12.12. SECTION HEADINGS. The section headings and table of
----------------
contents contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this
Agreement.
12.13. COUNTERPARTS. This Agreement may be executed in
------------
multiple counterparts, each of which shall be deemed to be an original,
but all of which together shall constitute one and the same instrument.
<PAGE>
12.14. PUBLICITY. (a) Neither party shall issue any press
---------
release or make any other public announcement with respect to this
Agreement or the transactions contemplated hereby without obtaining the
prior written approval of the other party (which will not be
unreasonably withheld or delayed), except as may be required by
Governmental Rule or the regulations of any securities exchange. In the
event any such release or announcement is to be made because it is
required by a Governmental Rule or such regulations, such party shall
(or shall cause the Person required to issue the release or make the
announcement to) first (i) allow the other party reasonable time to
comment on such release or announcement in advance of its issuance and
(ii) use reasonable efforts to accept the reasonable and good faith
comments of the other party.
(b) Prior to the Closing, Purchaser shall not, without
Seller's prior written consent, consult any Persons that have been
identified to Purchaser by Seller as customers, vendors, clients,
prospects or other Persons with whom Seller has a business relationship
regarding such Person's relationship with Seller; provided, however,
Purchaser shall not be deemed to waive its right to be satisfied that
all conditions precedent to the Closing set forth in Article VII have
been satisfied.
(c) Except as required by Governmental Rule or the
regulations of any securities exchange, neither party will give a copy
of this Agreement to any Person which is not an affiliate of such party
or a partner, officer, director, employee, stockholder, agent,
representative or professional adviser to such party or affiliate,
without the prior written consent of the other party. The disclosing
party shall take reasonable actions to prevent any recipient of a copy
of this Agreement from providing a copy of this Agreement to any
additional Person without written consent.
12.15. ENTIRE AGREEMENT. This Agreement, the other
----------------
Operative Agreements and the Exhibits, Schedules, Appendices and
Attachments hereto and thereto and the Confidentiality Agreement
constitute the entire agreement of the parties with respect to the
subject matter thereof and
<PAGE>
supersede all prior written and oral agreements and understandings with
respect to such subject matter.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day and year first above
written.
ADVANTIS
/s/Patrick M. Kerin
by____________________________
Title:Executive Vice President
and CEO
TELCO NETWORK SERVICES, INC.
/s/Donald A. Burns
by__________________________
Title:Chief Executive Officer
and CEO
LEASE AGREEMENT
---------------
THIS LEASE entered into the dates hereinafter set forth between FREDRIC C.
STEIN, (hereinafter called the "Lessor") ,and TELCO COMMUNICATIONS GROUP, INC.,
a Virginia corporation, (hereinafter referred to as "Lessee").
WITNESSETH:
----------
The Lessor does by these presents lease and let unto the Lessee the real
property located in Broward County and commonly known as:
1526 N.W. 23rd Avenue
Fort Lauderdale, Florida 33311
Square footage of bay area is 4,105 S.F.+/-, which includes an office area.
TO HAVE AND TO HOLD the said leased property, including access parking
rights, for use as a facility for telecommunication facility for a lease term
of five (5) years from and after the commencement of the term as hereinafter
provided.
In consideration of the premises, it is mutually covenanted and agreed by
and between Lessor and Lessee as follows:
1. RENT CONSIDERATION: The Lessee shall pay Lessor as rent for the
------------------
demised premises and appurtenances rights the monthly sum of $2,052.50, plus
sales tax (presently 6%) in the amount of $123.15 per month, for a total
monthly rent of $2,175.65 for the first year. Commencing the second year of
this lease and each year thereafter, the rent shall be adjusted in accordance
with the Consumer Price Index (CPI), see paragraph 5 below. Rent is due on
--------------
the first day of each month without demand. The following amounts shall be
- ------------------------------------------
paid at execution of this Lease:
Total
Sales Tax Received
--------- --------
First Month's Rent $2,052.50 $123.15 $2,175.65
Security Deposit (Total Due) $3,263.47 N/A $3,263.47
--------
Total Received $5,439.12
2. PAYMENT OF RENT: If Lessee shall fail to pay any rent within (10)
---------------
days of its due date, then Lessee shall also pay to Lessor a late charge of
$100.00 if the rent is not paid within thirty days of its due date. If the
rent remains past due after the thirtieth day of its due date, then an
additional $400.00 late charge shall be assessed for each month that the rent
shall remain unpaid. Lessee understands that this paragraph does not imply a
grace period and that rent is due on the first day of each and every month.
Any payment of rent after such time shall create a default as defined in
Paragraph 24.
3. POSSESSION AND COMMENCEMENT OF TERM: Except as otherwise provided in
-----------------------------------
this Lease, Lessor shall deliver possession of the Leased Premises to Lessee
on May 1st, 1996. In the event Lessor fails to deliver the Leased Premises on
the commencement date because the Leased Premises are not ready for occupancy,
or because the previous occupant of said premises is holding over, or for any
other cause whatsoever, Lessor shall not be liable to Lessee for damages as a
result of Lessor's delay in delivering such premises, and Lessee shall have no
right to terminate the Lease, or content the validity of the Lease, and the
commencement date of the Lease shall be postponed until such time as the
Leased Premises are ready for Lessee's occupancy. However, if the Leased
Premises are not ready for Lessee's occupancy by July 1st, 1996, then Lessee,
with written notice to Lessor, shall have the right to terminate this Lease
with all monies deposited with Lessor refunded to Lessee, and Lease shall have
no further force or effect on the either party. This Lease shall be
contingent upon Lessor executing a "Certificate and Disclaimer of Record Owner
and any Mortgage of Real Estate" to be furnished from DSC Finance Corporation.
Said Certificate shall be furnished to Lessor prior to Lessor's execution of
this Lease.
4. OPTION TO RENEW: Lessor hereby grants to the Lessee, if Lessee is
not in default of this Lease, an option to renew this Lease for two (2)
additional five (5) year periods commencing from the base term expiration
<PAGE>
date as determined in Paragraph 3 above. Lessee is required to give Lessor a
one-hundred-eighty (180) day written notice prior to the expiration of the
base term of its intention to exercise each option to renew. The rent for the
option periods shall be the base term rent adjusted in accordance with the
Consumer Price Index, see Paragraph 5 below.
5. CONSUMER PRICE INDEX: The rent provide for herein shall be increased
--------------------
periodically in proportion to any increase in the Consumer Price Index. Upon
the commencement of each Lease Year following the first Lease Year, the total
Rent for the Leased Premises described in the Lease not yet paid prior to the
commencement of the Lease Year shall be increased, but never decreased, to the
dollar amount equal to the following expression:
CPI
2
X RD
---
CPI
1
However, in no event shall the increase be less than four percent (4%) or
above eight percent (8%) in any year period.
In interpreting this Section, the following definitions shall prevail:
a) Consumer Price Index shall equal the U.S. Department of Labor,
Consumer Price Index, for all urban consumers and revised CPI for urban wage
earner and clerical workers, U.S. Cities Average - all items 1982-84=100
published in the Monthly Labor Review of the United States Department of Labor
Statistics. If the Bureau of Labor Statistics shall change the method of
determining the Consumer Price Index, the formula for determining the rent
increase shall be altered or amended, if possible so as to continue the base
period and base figure, but in the event it shall be impossible to do so, or
in the event the Bureau of Labor Statistics shall cease to publish the said
statistical information, and is not available from any other source, public or
private, acceptable to both parties, then in any such events a new formula for
determining the rent increase shall be adopted by agreement between the
parties, or by arbitration if the parties are unable to agree, then a new
formula for determining the rent increase shall be adopted for the parties by
a board of arbitration, to consist of three (3) persons, one of whom shall be
chosen by the Lessor, one of whom shall be chosen by the Lessee, and the third
shall be chosen by the two so selected. If either of the parties shall fail
to select an arbitrator within sixty (60) days after actual receipt of notice
by the other party that an arbitrator has been selected, then a second
arbitrator may be selected by the other party. The board of arbitration shall
meet as soon as practical after the appointment and shall fix the formula for
determining the rent increase, and shall file a written report with the Lessor
and the Lessee signed by at least two (2) members of the board of arbitration
which shall be final and shall be binding upon both parties.
(b) CPI equals the Consumer Price Index for the month fourteen
1
(14) months prior to the commencement of the Lease Year. For purposes of
definition, March, 1995 is fourteen months prior to a lease year commencing in
May, 1996.
(c) CPI equals the Consumer Price Index for the month two (2)
2
months prior to the commencement of the Lease Year. For purposes of
definition, March, 1995 is two months prior to a lease year commencing May,
1995.
(d) "RD" equals the total amount of the Rent, as increased by all prior
adjustments, if any, pursuant to this Section, due during the entire Lease
Term not yet paid by Lessee upon the commencement of the Lease Year.
(e) If a Lease Year concludes during the twelve months preceding the
expiration of the Lease Term, the period between the Lease Year so concluding
and the expiration of the Lease Term shall be deemed to be a "Lease Year" for
the purpose of this Section, despite the fact that the period deemed to be a
Lease Year is less than twelve months in duration.
6. USE PROHIBITED: Lessee shall not use any portion of the premises for
--------------
purposes other than those specified hereinabove. All work shall be done
----------------------
within the premises, and no outside storage is permitted unless stipulated
- --------------------------------------------------------
herein.
<PAGE>
7. ACCEPTANCE OF PREMISES: Lessee acknowledges that Lessor has not made
----------------------
any representations or warranties with respect to the condition of the
premises, and neither Lessor or any assignee of Lessor shall be liable for any
latent or patent defect therein, subject to paragraph 8 below. Lessor hereby
assigns to Lesser all warranties made by others to Lessor with respect to
improvements on the premises and any other rights it may have against
contractors, suppliers or others with respect to negligence or faulty
performance in connection with the construction or repair of such
improvements. The taking of possession of the premises by Lessee shall be
evidence that the premises were in satisfactory condition at the time such
possession was taken.
8. LESSOR'S INITIAL REPAIRS: Lessor shall repair the demising wall
------------------------
between Bay #1526 and Bay #1522, correct any existing code violations and
delivered the premises to Lessee in "Broom-Clean" condition.
9. GROSS LEASE DEFINED: The expenses attributable to each party are as
follows:
(a) Real Property Taxes: The base year shall be 1995 and shall be
-------------------
paid by Lessor. Any increase subsequent to base year shall be the
responsibility of Lessee on a pro rata basis (8.26%) and shall be reimbursed
by Lessee to Lessor immediately upon invoicing by Lessor for such increase.
(b) Fire and Extended Coverage Insurance: The base year shall be
------------------------------------
1996 and shall be paid by Lessor. Any increase subsequent to base year shall
be the responsibility of Lessee on a pro rata basis (8.26%) and shall be
reimbursed by Lessee to Lessor within 30 days upon invoicing by Lessor for
such increase. Lessee covenants that it will do and/or will permit to be done
no act which will increase fire hazard or rate of fire insurance on demised
premises, or any property thereon; that it will obey all state and municipal
laws and regulations relating to fire hazards, fire protections, and
sanitation, and that it will commit no nuisance on the said premises. In the
event Lessee's sole use of the demised premises causes an increase in the
insurance premium, then Lessee shall be responsible for said increase, and
such increase shall be paid to Lessor immediately upon invoicing.
(c) Maintenance - Exterior: Exterior maintenance shall be paid by
----------------------
Lessor and shall include lawn, parking area, and entire exterior of building.
(For doors, see Paragraph (d) below). Lessee agrees, however, to instruct
employees to assist in "policing" the immediate area around the leased
premises, and both Lessee and its employees are prohibited from indiscriminate
littering which shall be a violation of this lease.
(d) Maintenance - Interior: Interior maintenance shall be paid by
----------------------
Lessee and shall include all electrical, plumbing, carpet cleaning, pest
control, air conditioning service and repairs, and maintenance of all doors in
leased bay.
10. UTILITIES AND TRASH HAULING:
---------------------------
(a) Trash Pickup: Lessee shall be responsible for its own trash
------------
receptacle and removal service.
(b) Water: Lessor shall provide water for Lessee's use at Lessor's
-----
own cost, except that water used by Lessee for any purpose other than
drinking, lavatory, or toilet purposes, including water used by Lessee for
supplementary air conditioning or supplementary refrigeration shall be paid
for by Lessee to Lessor at rates which shall be set by Lessor at approximately
the cost to Lessor.
(c) Electric: All electrical services shall be paid by Lessee on a
--------
separate meter.
(d) Any Other Utilities: All other utilities shall be paid Lessee.
-------------------
11. ELECTRICAL AND TELEPHONE SYSTEMS: Lessee's use of electrical energy
--------------------------------
in the premises shall not, at any time, exceed the capacity of any of the
electrical conductors and equipment in or otherwise serving the premises. In
order to insure that such capacity is not exceeded and to avert possible
adverse effects upon the buildings electrical service, Lessee shall not,
without Lessor's prior written consent in each instance, such consent not to
be unreasonably withheld, connect appliances or equipment to the building,
electric distribution system, telephone system, or make any alteration or
addition to the electric system of the premises existing on the commencement
date. Lessee's electrical usage under this lease contemplates only the use of
normal and customary business equipment. In the event Lessee installs any
equipment which uses substantial additional amounts of electricity, then
Lessee agrees that Lessor's consent is required before the installation of
such additional equipment. Lessee shall be solely liable for electrical and
telephone expenses relating to the premises, including changes or alterations,
if required. Lessor acknowledges that Lessee will be making substantial
improvements and alterations to the premises and agrees to allow Lessee to
make such improvements and alterations as long as
<PAGE>
Lessee submits all plans and specifications to Lessor for Lessor's approval,
which approval shall not be unreasonably withheld.
12. PERSONAL PROPERTY TAXES: Personal property taxes shall be paid by
-----------------------
Lessee (on inventory, furniture, fixtures and equipment, and so forth).
13. SIGNS: Lessee shall have the right to install or cause to be
-----
installed signs advertising its own business on the outside of the building in
areas wherein Lessee it situated. All signs are to be removed or painted over
at the end of the term or at the time it vacates the premises. Signs are at
Lessee's expense, and Lessee must comply with all government authorities
having jurisdiction. Lessee shall submit a sketch to Lessor for approval
before any signage is installed.
14. INSURANCE:
---------
Liability: During the lease term, Lessee shall maintain in force a
---------
policy of insurance insuring Lessor (additional-insured) and Lessee against
---
its liability for accidents on the leased premises with limits coverage of not
less than $1,000,000. coverage per occurrence for bodily injury and property
damage. Certificate of Insurance shall be furnished to Lessor reflecting said
coverage. Such certificate shall provide for a thirty (30) day written notice
to Lessor in the event of cancellation or material change in coverage.
15. INDEMNIFICATION BY LESSEE: Lessee shall indemnify and hold Lessor
-------------------------
and all superior lessors and superior mortgagees and his and their respective
partners, directors, officers, agents, employees and beneficiaries
(hereinafter collectively referred to as the "Lessor") harmless from and
against any and all claims from or in connection with:
(a) the conduct or management of the premises or any business
therein, or any work or thing whatsoever done, or any condition created (other
than by Lessor) in or about the premises during the term of this lease or
during the period of time, if any, prior to the commencement date that Lessee
may have given access to the premises;
(b) any act, omission or negligence of Lessee or any of its
subtenants or licensees or its or their partners, directors, offices, agents,
employees or contractors;
(c) any accident, injury or damage whatsoever (unless caused solely
by Lessor's negligence) occurring in, at, or upon the premises;
(d) any breach or default by Lessee in the full and prompt payment
and performance of Lessee's obligation under this Lease, together with all
costs, expenses and liabilities incurred in or in connection with each such
claim or action or proceeding brought thereon, including, without limitation,
all reasonable attorneys' fees and expenses. In case any action or proceeding
be brought against Lessor and/or superior lessor or superior mortgagee and/or
its or their partners, director, officers, agents and/or employees by reason
of any such claim, Lessee, upon notice from Lessor or such superior lessor or
superior mortgagee, shall resist and defend such action or proceeding (by
counsel reasonably satisfactory to Lessor or such superior lessor or superior
mortgagee).
16. NON-LIABILITY OF LESSOR: Neither Lessor nor any beneficiary, agent,
-----------------------
servant, or employee of Lessor, nor any superior lessor nor any superior
mortgagee shall be liable to Lessee for any loss, injury or damage to Lessee
or to any other person, or to its or their property, irrespective of the cause
of such injury, damage or loss, unless caused by or resulting from the
negligence of Lessor, his agents, servants or employees in the operation or
maintenance of the premises or the building, subject to the doctrine of
comparative negligence in the event of contributory negligence on the part of
Lessee or any of its subtenants or licensees or its or their employees,
agents, or contractors. Lessee recognizes that any superior mortgagee shall
not be liable to Lessee for injury, damage or loss caused by or resulting from
the negligence of Lessor. Further, neither Lessor, any superior lessor or
superior mortgagee, nor any partner, director, agent, servant, or employee of
Lessor shall be liable:
(a) for any such damage caused by other lessees or persons in, upon
or about the building, or caused by operations in construction of any private,
public, or quasi-public work;
(b) for consequential damages arising out of any loss of use of the
premises or any equipment or facilities therein by Lessee or any person
claiming through or under Lessee, unless provide negligent in performing their
duties through actions or inactions.
<PAGE>
17. TRADE FIXTURES AND EQUIPMENT OF LESSEE: All trade fixtures and
--------------------------------------
equipment which are installed or placed on the leased premises by or at the
expense of Lessee shall remain the property of the Lessee, and Lessee shall
have the right to remove same at any time when it is not in default in any way
of its agreements herein contained, except at the end of the lease term, any
improvements to the structure itself shall become the property of the Lessor.
18. BUILDING ADDITIONS AND RENOVATIONS: Lessee shall not renovate or
----------------------------------
alter the building structure in any manner without the prior consent of the
Lessor, which consent shall not be unreasonably withheld.
19. ROOF AND STRUCTURE: Lessee shall not attach any devices to the roof
------------------
members, roof deck or any portion of the building.
20. ASSIGNMENT AND SUBLETTING: Lessee may assign this lease or sublet
-------------------------
the premises, with the prior approval of the Lessor (said approval not to be
unreasonably withheld), but no such assignment or subletting shall relieve the
Lessee herein named of any of its obligations under this lease, and all
assignees or subtenants shall be bound by the terms and provisions of this
Lease. The sale of all or a controlling interest of stock of Lessee shall be
deemed to be an assignment or sublease for the purposes of this paragraph.
21. SUBORDINATION OF LEASEHOLD: Lessee agrees, upon request by Lessor,
--------------------------
to subordinate its leasehold interest to the lien of any bona-fide mortgage
that may be procured by Lessor on the leased premises, provided that the
mortgagee of such mortgage shall permit Lessee to remain in possession of the
leased premises as long as Lessee complied with and performs all of its
covenants and undertakings under this Lease.
22. DAMAGE BY FIRE OR OTHER CASUALTY: If the leased premises are
--------------------------------
damaged by fire or other casualty, the Lessee shall give immediate notice to
Lessor of such damage. If the damage shall amount to less than fifty (50%)
percent loss and damage to the leased building, the Lessor shall immediately
repair the damage and rebuild the building to substantially the same condition
as it was prior to the damage, completing same with all reasonable speed and
in all events within ninety (90) days from the date of the damage. If the
loss or damage to the leased building shall amount to fifty (50%) percent or
more, the Lessor shall have the option, such option to be exercised within
fifteen (15) days after the date of the damage, to either terminate this Lease
or repair the damage and rebuild the building, and if the latter option is
exercised, the Lessor agrees to repair the damage and rebuild the building to
substantially the same condition it was in prior to the damage, completing
same with all reasonable speed, and in all events within one hundred fifty
(150) days from the date of the damage. In the event of any such damage, the
rent payable under this Lease shall abate in proportion to the impairment of
the use that can reasonable be made of the leased premises until the property
can be rebuilt and repaired, and if the Lease is terminated as herein
provided, rent shall cease as of the date of the damage.
23. EMINENT DOMAIN: During the term of this Lease, in the event any
--------------
portion of the leased building is taken by eminent domain, or in the event
more than twenty (20%) percent of the area of the land on which access and
parking rights are hereby granted is taken by eminent domain, or in the event
by reason of taking by eminent domain the Lessee's operation of its business
or its access thereto shall be materially impaired, Lessee shall have the
right and option to terminate this Lease as of the date of taking by eminent
domain. Whether or not Lessee shall exercise such right and option, it shall
have and retain its right to compensation for business loss from the
condemning authority in the event of taking by eminent domain.
24. DEFAULT IN RENT PAYMENT: This Lease shall be in default in Lessee
-----------------------
shall:
(a) fail to pay any installment of base or additional rents or
other amount (not in dispute) when due and payable, whether or not such
payment shall have been demanded;
(b) fail to perform or comply with any of the other conditions or
agreements expressed or implied herein and fail to remedy such lack of
compliance within ten (10) days after notice from Lessor of such default;
(c) abandon, vacate, or not occupy the premises for fourteen (14)
consecutive days;
(d) liquidate or cease to exist, admit insolvency, seek relief
under any law for the relief of debtors, make an assignment for the benefit of
creditors or be the subject of a voluntary or involuntary petition in
bankruptcy or receivership, or in the event of any like occurrence which, in
the sole judgement of the Lessor, evidences the serious financial insecurity
of the Lessee, or if the estate hereby created shall be levied upon or taken
by execution
<PAGE>
or process of law, then and in any of such cases, regardless of any waiver or
consent to any earlier event of default, Lessor, at its option, may exercise
any and all remedies available to Lessor under law, all of such rights and
remedies to be cumulative and not exclusive, including, without limitation,
the following:
(1) a. Lessor may terminate this lease upon five (5) days'
written notice to Lessee, and this lease shall terminate on the date specified
therein, and Lessee shall quit and surrender the premises by said date and
remain liable as set forth below;
b. Lessor may enter upon the premises forthwith or at any
subsequent time without notice or demand (which notice or demand is hereby
expressly waived by Lessee) and thereby terminate the estate hereby created,
and expel Lessee and those claiming under it and remove their effects without
being guilty of any manner of trespass, and Lessee shall remain liable as set
forth below. Lessee further agrees that if Lessor shall cause Lessee's goods
or effects to be removed from the premises pursuant to the terms hereof or of
any court order, Lessor shall not be liable or responsible for any loss or
damage to Lessee's goods or effects, and the Lessor's act of so removing such
goods or effects shall be the act of and for the account of Lessee.
c. In the event of termination under Paragraphs (1)a. or
(1)b. above, Lessee shall pay to Lessor as current liquidated damages (i) the
base rent and additional rents and other amounts payable hereunder up to the
time of termination, and (ii) thereafter until the expiration of the then
current term hereof, whether or not the premises shall be relit and as and
when due in accordance with the provisions hereof, the base or additional
rents and other sums payable hereunder if this lease had remained in effect,
less the net proceeds to the Lessor of any reletting, including, without
limitation, all costs, fees and expenses of repossession, brokers,
advertising, attorneys, courts, repairing, cleaning, repainting, and
remodeling the premises for reletting (said costs and expenses shall not
exceed $8,000.00).
d. At any time after termination under Paragraphs (1)(a.
or 1(b). above, whether or not Lessor shall have collected any amounts under
Paragraph (1)c. above, Lessor shall be entitled, at Lessor's option, to obtain
from Lessee, who shall pay to Lessor on demand as liquidated damages, and in
lieu of amounts payable under Paragraph (1)c. above beyond the date of
Lessor's receipt of such liquidated final damages, either (i) an amount equal
to the present value to the Lessor of the lease as of the time of such demand,
or (ii) the amount, if any, which the aggregate base or additional rents and
other amounts which would be payable to Lessor if this lease remained in
effect for the balance of the then current term exceeds, as of the date of the
demand (i) the aggregate rent for the period ending on the same date as the
end of the then current rent of this lease on any reletting of the premises by
the Lessor, or (ii) if no reletting has occurred by the time of demand
hereunder, the lowest aggregate rent reserved for such period for a like
amount of space in the building.
e. Without waiving its rights to terminate at any time
under Paragraphs (1)a. and (1)b. above, Lessor may continue this lease in
effect for the remainder of the then current term or any extension, and Lessee
shall remain liable and obligated under all of the covenants and conditions
hereof during said period and shall pay as and when due the base and
additional rents and other amounts payable hereunder as if the Lessee had not
defaulted hereunder. In such event, Lessor may relet the premises for the
account of Lessee crediting the rent received on such reletting to amounts
owing by the Lessee hereunder. The Lessee hereby constitutes the Lessor its
attorney-in-fact to take any and all such actions necessary or incidental to
such reletting. Such continuance of this lease shall not constitute any
waiver or consent by the Lessor of or to said default or any subsequent
default.
(2) In addition to the foregoing remedies and regardless of
which remedies the Lessor pursues, Lessee covenants that it will indemnify
Lessor from and against any loss or damage directly or indirectly sustained by
reason of any termination resulting from any event of default as provided
above. Lessor's damages hereunder shall include, but shall not be limited to,
any loss of rent prior to or after reletting the premises, broker's
commissions, advertising costs, reasonable costs of repairing, cleaning,
repainting and remodeling the premises for reletting, moving and storage
charges incurred by Lessor in moving Lessee's property and effects, and legal
costs and reasonable attorney's fees incurred by Lessor in any proceedings
resulting from Lessee's default,
<PAGE>
collecting any damages hereunder, obtaining possession of the premises by
summary process or otherwise, or reletting the premises.
(3) In the event that any court or governmental authority
shall limit any amount which the Lessor may be entitled to recover under this
Paragraph, Lessor shall be entitled to recover the maximum amount permitted
under law. Nothing in the Paragraph shall be deemed to limit Lessor's
recovery from Lessee of the maximum amount permitted under law or of any other
sums or damages which Lessor may be entitled to so recover in addition to the
damages set forth herein.
(4) Nothing in this Paragraph shall be deemed to require the
Lessor to relet the premises or to take any other action with regard to the
premises, and the Lessor shall not be liable for any failure to relet, collect
rent, or take any other action with regard to the premises after termination
under Paragraph 1. or 2. above. Lessee hereby waives any right of redemption
which it may have by reason of Lessee's default or eviction hereunder.
(5) The parties hereto expressly agree that this lease and the
estate created hereby shall not continue or inure to the benefit of any
assignee, receiver or trustee in bankruptcy, except at the option of Lessor.
25. ACCESS FOR INSPECTION AND SHOWING: Upon reasonable notice to Lessee
---------------------------------
and during normal business hours, Lessor and its agents shall have the right
to enter and/or pass through the premises at any time or times to examine the
premises and to show them to actual and prospective Superior Lessors, Superior
Mortgagees, or prospective purchasers, mortgagees or lessors of the building.
During the period two (2) months prior to the expiration date of this lease,
Lessor and its agents may exhibit the premises to prospective lessees.
26. BREACH OF LEASE: If the Lessee shall fail to perform, or shall
---------------
breach any agreement of this lease (other than the agreement of the Lessee to
pay rent) of thirty (30) days after having been given a written notice
specifying the performance required, the Lessor may institute action in a
court of competent jurisdiction to terminate this lease or to compel
performance of this agreement. The prevailing party in that litigation shall
be paid by the losing party for all expenses of such litigation, including a
reasonable attorney's fee.
27. NOTICES: All rent payments and notices required to Lessor under
-------
this Lease shall be paid and given or mailed to:
RAUCH, WEAVER, MILLSAPS & CO.
871 East Commercial Boulevard
Fort Lauderdale, FL 33334
or to such other person or firm or at such other place as Lessor shall from
time to time specify in writing to Lessee. All notices given under this Lease
to Lessee shall be given or mailed to address of leased premises. Any such
notice properly mailed by United States mail, postage and fee prepaid and
certified-return receipt requested, shall be deemed delivered when receipted
for.
28. DELIVERING PREMISES: Lessee shall deliver the demised premises at
-------------------
the end of the lease term or extended term, if extended, in the same condition
as at the time of commencement of the lease term, except for ordinary wear and
tear.
29. QUIET ENJOYMENT: Lessor covenants that if Lessee shall pay
---------------
the rentals on time and perform its agreements hereunder, Lessor shall and
will protect and defend against any interference with the Lessee's use and
quiet enjoyment of the leased property during the term of this Lease.
30. REALTOR AND REALTOR FEES: Realtor is RAUCH, WEAVER, MILLSAPS & CO.
------------------------
by separate agreement. No obligation for fee exists on the part of Lessee.
31. RECORDING: This contract is not to be recorded, unless mutually
---------
agreed, in writing, by both parties hereto.
32. PARKING AND DRIVEWAYS: Parking shall not be designated; however,
---------------------
spaces are generally acknowledged to be available to Lessee in the adjacent
area to the leased building premises. Lessee shall not barricade the
driveways or parking areas in any manner and shall cooperate with other
tenants in the total complex. In the event of a dispute, Lessor reserves the
right to designate parking spaces.
33. OBSTRUCTION: Lessee shall neither obstruct the sidewalks or parking
-----------
lots in front of the building or the premises or the area around the building
or premises in any manner whatsoever.
34. SECURITY DEPOSIT: Lessee has deposited with Lessor the security
----------------
deposit in the amount set forth in Paragraph 1 herein for the performance of
each and every covenant and agreement to be performed by Lessee
<PAGE>
under this lease. Lessor shall have the right, but not the obligation, to
apply the security deposit in whole or in part as payment of such amounts as
are reasonably necessary to remedy Lessee's defaults in the payment of rent or
in the performance of the covenants or agreements contained herein. Lessee's
liability is not limited to the amount of the security deposit. In the event
that Lessee shall fully and faithfully comply with all of the terms,
provisions, covenants and conditions of this lease, the said security shall be
returned to Lessee within fifteen (15) days after the date fixed as the end of
the lease and after delivery to Lessor of entire possession of the demised
premises.
35. GENERAL: In referring to Lessee or Lessor, the singular shall
-------
include the plural, and the use of the masculine gender shall include all
genders. The covenants and agreements herein contained shall be binding upon
and endure to the benefit of the parties hereto and their respective heirs,
legal representatives, successors and assigns. This Lease shall constitute a
Florida contract and be construed according to the laws of that state.
36. DOING BUSINESS IN THE STATE OF FLORIDA: Lessee agrees to file the
--------------------------------------
necessary papers, if required, with the Secretary of State authorizing Lessee
to do business in Florida and shall accept "service" legally in Florida, if
"service" is required in the future.
37. HAZARDOUS WASTE: Lessee shall comply strictly and in all respects
---------------
with the requirements of the hazardous waste related regulations and with all
similar laws and regulations and shall notify Lessor immediately in the event
of any discharge or discovery of any hazardous substances at, upon, under or
within the leased property. Lessee shall promptly forward to Lessor copies of
all orders, permits, applications, or other communications and reports in
connection with any discharge or the presence of any hazardous substances or
any other matters relating to the hazardous waste laws or any similar laws or
regulations as they may affect the leased property.
No other agreement, written or verbal, exists unless attached and made a
part hereof.
IN WITNESS WHEREOF, the parties have executed this instruction under seal
the day, month and year hereinafter shown.
WITNESS: Lessor: FREDRIC C. STEIN
By:
- ---------------------------------- --------------------------
- ---------------------------------- Date: March , 1996
----
Lessee: TELCO COMMUNICATIONS
GROUP, INC.
By: /s/ Bryan Rachlin
-----------------------------
Title: General Counsel
-----------------------
Date: March 18, 1996
STANDARD FORM OF OFFICE LEASE
The Real Estate Board of New York, Inc.
Agreement of Lease, made this 26th day of September 1996, between HUDSON
TELEGRAPH ASSOCIATES, a New York limited partnership, having an address c/o
Williams Real Estate Co. Inc., 530 Fifth Avenue, New York, New York 10036
("Owner" or "Landlord") and TELCO COMMUNICATIONS GROUP INC., a Virginia
corporation, having an address at 4219 Lafayette Center, Chantilly, Virginia
20151 ("Tenant").
WITNESSETH: Owner hereby leases to Tenant and Tenant hereby hires from
Owner a portion of the twelfth (12th) floor as shown hatched on Exhibit A
annexed hereto, a portion of the lower mezzanine as shown hatched on Exhibit
A-1 annexed hereto ("Mezzanine Premises") and a portion of the basement as
shown hatched on Exhibit A-2 annexed hereto ("Basement Premises")
collectively, the "premises" or "demised premises") in the building known as
60 Hudson Street (the "Building"), in the Borough of Manhattan, City of New
York, for the term (the "Term") of approximately ten (10) years and six (6)
months, to commence on the date hereof (the "Commencement Date") and to expire
on march 31, 2007 (the "Expiration Date") (or until such Term shall cease and
expire as hereinafter provided), at the fixed annual rental rate (the "Fixed
Rent") of $246,050.00 per annum, subject to adjustment as hereinafter
provided, which Tenant agrees to pay in lawful month of the United States
which shall be legal tender in payment of all debts and dues, public and
private, at the time of payment, in equal monthly installments in advance on
the first day of each month during said term, at the office of Owner or such
other place as Owner may designate, without any set off or deduction
whatsoever, except that Tenant shall pay the first monthly installment(s) on
the execution hereof (unless this lease be a renewal).
In the event that, at the commencement of the term of this lease, or
thereafter, Tenant shall be in default in the payment of rent to Owner
pursuant to the terms of another lease with Owner or with Owner's predecessor
in interest, Owner may at Owner's option and without notice to Tenant add the
amount of such arrears to any monthly installment of rent payable hereunder
and the same shall be payable to Owner as additional rent.
The parties hereto, for themselves, their heirs, distributees,
executors, administrators, legal representatives, successors and assigns,
hereby covenant as follows:
Rent:
1. Tenant shall pay the rent as above and as hereinafter provided.
Occupancy:
2. Tenant shall use and occupy the demised premises for general
office purposes, and, to the extent permitted by the certificate of occupancy
for the Building, for telecommunications facilities and ancillary uses and for
no other purpose.
Tenant Alterations:
3. Tenant shall make no changes in or to the demised premises of any
nature without Owner's prior written consent. Subject to the prior written
consent of Owner, and to the provisions of this article, Tenant, at Tenant's
expense, may make alterations, installations, additions or improvements which
are non-structural and which do not affect utility services or plumbing and
electrical lines, in or to the interior of the demised premises by using
contractors or mechanics first approved in each instance by Owner. Tenant
shall, before making any alterations, additions, installations or
improvements, at its expense, obtain all permits, approvals and certificates
required by any governmental or quasi-governmental bodies and (upon
completion) certificates of final approval thereof and shall deliver promptly
duplicates of all such permits, approvals and certificates to Owner and Tenant
agrees to carry and will cause Tenant's contractors and sub-contractors to
carry such workman's compensation, general liability, personal and property
damage insurance as Owner may require. If any mechanic's lien is filed
against the demised premises, or the building of which the same forms a part,
for work claimed to have been done for, or materials furnished to, Tenant,
whether or not done pursuant to this article, the same shall be discharged by
Tenant within thirty days thereafter, at Tenant's expense, by payment or
filing the bond required by law. All fixtures and all paneling, partitions,
railings and like installations, installed in the premises at any time, either
by Tenant or by Owner on Tenant's behalf, shall, upon installation, become the
property of Owner and shall remain upon and be surrendered with the demised
premises unless Owner, by notice to Tenant no later than twenty days prior to
the date fixed as the termination of this lease, elects to relinquish Owner's
right thereto and to have them removed by Tenant, in which event the same
shall be removed from the premises by Tenant prior to the expiration of the
lease, at Tenant's expense. Nothing in this Article shall be construed to
give Owner title to or to prevent Tenant's removal of trade fixtures, moveable
office furniture and equipment, but upon removal of any such from the premises
or upon removal of other installations as may be required by Owner, Tenant
shall immediately and at its expense, repair and restore the premises to the
condition existing prior to installation and repair any damage to the demised
premises or the building due to such removal. All property permitted or
required to be removed, by Tenant at the end of the term remaining in the
premises after Tenant's removal shall be deemed abandoned and may, at the
election of Owner, either be retained as Owner's property or may be removed
from the premises by Owner, at Tenant's expense.
Maintenance and Repairs:
4. Tenant shall, throughout the term of this lease, take good care of
the demised premises and the fixtures and appurtenances therein. Tenant shall
be responsible for all damage or injury to the demised premises or any other
part of the building and the systems and equipment thereof, whether requiring
structural or nonstructural repairs caused by or resulting from neglect or of
Tenant, Tenant's subtenants, agents, employees, invitees or licensees, or
which arise out of any work, labor, service or equipment done for or supplied
to Tenant or any subtenant or arising out of the installation, use or
operation of the property or equipment of Tenant or any subtenant. Tenant
shall also repair all damage to the building and the demised premises caused
by the moving of Tenant's fixtures, furniture and equipment. Tenant shall
promptly make, at Tenant's expense, all repairs in and to the demised premises
for which Tenant is responsible, using only the contractor for the trade or
trades in question, selected from a list of at least two contractors per trade
submitted by owner. Any other repairs in or to the building or the facilities
and systems thereof for which Tenant is responsible shall be performed by
Owner at the Tenant's expense. Owner shall maintain in good working order and
repair the exterior and the structural portions of the building, including the
structural portions of its demised premises, and the public portions of the
building interior and the building plumbing, electrical, heating and
ventilating systems (to the extent such systems presently exist) serving the
demised premises. Tenant agrees to give prompt notice of any defective
condition in the premises for which Owner may be responsible hereunder. There
shall be no allowance to Tenant for diminution of rental value and no
liability on the part of Owner by reason of inconvenience, annoyance or injury
to business arising from Owner or others making repairs, alterations,
additions or improvements in or to any portion of the building or the demised
premises or in and to the fixtures, appurtenances or equipment thereof. It is
specifically agreed that Tenant shall not be entitled to any setoff or
reduction of rent by reason of any failure of Owner to comply with the
covenants of this or any other article of this Lease. Tenant agrees that
Tenant's sole remedy at law in such instance will be by way of an action for
damages for breach of contract. The provisions of this Article 4 shall not
apply in the case of fire or other casualty which are dealt with in Article 9
hereof.
Window Cleaning:
5. Tenant will not clean nor require, permit, suffer or allow any window in
the demised premises to be cleaned from the outside in violation of Section
202 of the Labor law or any other applicable law or of the Rules of the Board
of Standards and Appeals, or of any other Board or body having or asserting
jurisdiction.
Requirements of Law, Fire Insurance, Floor Loads:
6. Prior to the commencement of the lease term, if Tenant is then in
possession, and at all times thereafter, Tenant, at Tenant's sole cost and
expense, shall promptly comply with all present and future laws, orders and
regulations of all state, federal, municipal and local governments,
departments, commissions and boards and any direction of any public officer
pursuant to law, and all orders, rules and regulations of the New York Board
of Fire Underwriters, Insurance Services Office, or any similar body which
shall impose any violation, order or duty upon Owner or Tenant with respect to
the demised premises, whether or not arising out of Tenant's use or manner of
use thereof, (including Tenant's permitted use) or, with respect to the
building if arising out of Tenant's use or manner of use of the premises or
the building (including the use permitted under the lease). Nothing herein
shall require Tenant to make structural repairs or alterations unless Tenant
has, by its manner of use of the demised premises or method of operation
therein, violated any such laws, ordinances, orders, rules, regulations or
requirements with respect thereto. Tenant may, after securing Owner to
<PAGE>
Owner's satisfaction against all damages, interest, penalties and expenses,
including, but not limited to, reasonable attorney's fees, by cash deposit or
by surety bond in an amount and in a company satisfactory to Owner, contest
and appeal any such laws, ordinances, orders, rules, regulations or
requirements provided same is done with all reasonable promptness and provided
such appeal shall not subject Owner to prosecution for a criminal offense or
constitute a default under any lease or mortgage under which Owner may be
obligated, or cause the demised premises or any part thereof to be condemned
or vacated. Tenant shall not do or permit any act or thing to be done in or
to the demised premises which is contrary to law, or which will invalidate or
be in conflict with public liability, fire or other policies of insurance at
any time carried by or for the benefit of Owner with respect to the demised
premises or the building of which the demised premises form a part, or which
shall or might subject Owner to any liability or responsibility to any person
or for property damage. Tenant shall not keep anything in the demised
premises except as now or hereafter permitted by the Fire Department, Board of
Fire Underwriters, Fire Insurance Rating Organization or other authority
having jurisdiction, and then only in such manner and such quantity so as not
to increase the rate for fire insurance applicable to the building, nor use
the premises in a manner which will increase the insurance rate for the
building or any property located therein over that in effect prior to the
commencement of Tenant's occupancy. Tenant shall pay all costs, expenses,
fines, penalties, or damages which may be imposed upon Owner by reason of
Tenant's failure to comply with the provisions of this article and if by
reason of such failure the fire insurance rate shall, at the beginning of this
lease or at any time thereafter, be higher than it otherwise would be, then
Tenant shall reimburse Owner, as additional rent hereunder, for that portion
of all fire insurance premiums thereafter paid by Owner which shall have been
charged because of such failure by Tenant. In any action or proceeding
wherein Owner and Tenant are parties, a schedule or "make-up" of rate for the
building or demised premises issued by the New York Fire Insurance Exchange,
or other body making fire insurance rates applicable to said premises shall be
conclusive evidence of the facts therein stated and of the several items and
charges in the fire insurance rates then applicable to said premises. Tenant
shall not place a load upon any floor of the demised premises exceeding the
floor load per square foot area which it was designed to carry and which is
allowed by law. Owner reserves the right to prescribe the weight and position
of all safes, business machines and mechanical equipment. Such installations
shall be placed and maintained by Tenant, at Tenant's expense, in settings
sufficient, in Owner's judgement, to absorb and prevent vibration, noise and
annoyance.
Subordination:
7. This lease is subject and subordinate to all ground or underlying leases
and to all mortgages which may now or hereafter affect such leases or the real
property of which demised premises are a part and to all renewals,
modifications, consolidations, replacements and extensions of any such
underlying leases and mortgages. This clause shall be self-operative and no
further instrument of subordination shall be required by any ground or
underlying lessor or by any mortgagee, affecting any lease or the real
property of which the demised premises are a part. In confirmation of such
subordination, Tenant shall from time to time execute promptly any certificate
that Owner may request.
Property Loss, Damage Reimbursement Indemnity:
8. Owner or its agents shall not be liable for any damage to property of
Tenant or of others entrusted to employees of the building, nor for loss of or
damage to any property of Tenant by theft or otherwise, nor for any injury or
damage to persons or property resulting from any cause of whatsoever nature,
unless caused by or due to the negligence of Owner, its agents, servants or
employees. Owner or its agents will not be liable for any such damage caused
by other tenants or persons in, upon or about said building or caused by
operations in construction of any private, public or quasi public work. If at
any time any windows of the demised premises are temporarily closed, darkened
or bricked up (or permanently closed, darkened or bricked up, if required by
law) for any reason whatsoever including, but not limited to Owner's own acts,
Owner shall not be liable for any damage Tenant may sustain thereby and Tenant
shall not be entitled to any compensation therefor nor abatement or diminution
of rent nor shall the same release Tenant from its obligations hereunder nor
constitute an eviction. Tenant shall indemnify and save harmless Owner
against and from all liabilities, obligations, damages, penalties, claims,
costs and expenses for which Owner shall not be reimbursed by insurance,
including reasonable attorney's fees, paid, suffered or incurred as a result
of any breach by Tenant, Tenant's agents, contractors, employees, invitees, or
licensees, of any covenant or condition of this lease, or the carelessness,
negligence or improper conduct of the Tenant, Tenant's agents, contractors,
employees, invitees or licensees. Tenant's liability under this lease extends
to the acts and omissions of any sub-tenant, and any agent, contractor,
employee, invitee or licensee of any sub-tenant. In case any action or
proceeding is brought against Owner by reason of any such claim, Tenant, upon
written notice from Owner, will, at Tenant's expense, resist or defend such
action or proceeding by counsel approved by Owner in writing, such approval
not to be unreasonably withheld.
Destruction, Fire and Other Casualty:
9. (a) If the demised premises or any part thereof shall be damaged by fire
or other casualty, Tenant shall give immediate notice thereof to Owner and
this lease shall continue in full force and effect except as hereinafter set
forth. (b) If the demised premises are partially damages or rendered
partially unusable by fire or other casualty, the damages thereto shall be
repaired by and at the expense of Owner and the rent and other items of
additional rent, until such repair shall be substantially completed, shall be
apportioned from the day following the casualty according to the part of the
premises which is usable. (c) If the demised premises are totally damaged or
rendered wholly unusable by fire or other casualty, then the rent and other
items of additional rent as hereinafter expressly provided shall be
proportionately paid up to the time of the casualty and thenceforth shall
cease until the date when the premises shall have been repaired and restored
by Owner (or sooner reoccupied in part by Tenant then rent shall be
apportioned as provided in subsection (b) above), subject to Owner's right to
elect not to restore the same as hereinafter provided. (d) If the demised
premises are rendered wholly unusable or (whether or not the demised premises
are damaged in whole or in part) if the building shall be so damaged that
Owner shall decide to demolish it or to rebuild it, then, in any of such
events, Owner may elect to terminate this lease by written notice to Tenant,
given within 90 days after such fire or casualty, or 30 days after adjustment
of the insurance claim for such fire or casualty, whichever is sooner,
specifying a date for the expiration of the lease, which date shall not be
more than 60 days after the giving of such notice, and upon the date specified
in such notice the term of this lease shall expire as fully and completely as
if such date were the date set forth above for the termination of this lease
and Tenant shall forthwith quit, surrender and vacate the premises without
prejudice however, to Landlord's rights and remedies against Tenant under the
lease provisions in effect prior to such termination, and any rent owing shall
be paid up to such date and any payments of rent made by Tenant which were on
account of any period subsequent to such date shall be returned to Tenant.
Unless Owner shall serve a termination notice as provided for herein, Owner
shall make the repairs and restorations under the conditions of (b) and (c)
hereof, with all reasonable expedition, subject to delays due to adjustment of
insurance claims, labor troubles and causes beyond Owner's control. After any
such casualty, Tenant shall cooperate with Owner's restoration by removing from
the premises as promptly as reasonably possible, all of Tenant's salvageable
inventory and moveable equipment, furniture, and other property. Tenant's
liability for rent shall resume five (5) days after written notice from Owner
that the premises are substantially ready for Tenant's occupancy. (e) Nothing
contained hereinabove shall relieve Tenant from liability that may exist as a
result of damage from fire or other casualty. Notwithstanding the foregoing,
including Owner's obligation to restore under subparagraph (b) above, each
party shall look first to any insurance in its favor before making any claim
against the other party for recovery for loss or damage resulting from fire or
other casualty, and to the extent that such insurance is in force and
collectible and to the extent permitted by law, Owner and Tenant each hereby
releases and waives all right of recovery with respect to subparagraphs (b),
(d), and (e) above, against the other or any one claiming through or under
each of them by way of subrogation or otherwise. The release and waiver
herein referred to shall be deemed to include any loss or damage to the
demised premises and/or to any personal property, equipment, trade fixtures,
goods and merchandise located therein. The foregoing release and waiver shall
be in force only if both releasors' insurance policies contain a clause
providing that such a release or waiver shall not invalidate the insurance.
If, and to the extent, that such waiver can be obtained only by the payment of
additional premiums, then the party benefiting from the waiver shall pay such
premium within ten days after written demand or shall be deemed to have agreed
that the party obtaining insurance coverage shall be free of any further
obligation under the provisions hereof with respect to waiver of subrogation.
Tenant acknowledges that Owner will not carry insurance on Tenant's furniture
and/or furnishings or any fixtures or equipment, improvements, or
appurtenances removable by Tenant and agrees that Owner will not be obligated
to repair any damage thereto or replace the same. (f) Tenant hereby waives
the provisions of Section 227 of the Real Property Law and agrees that the
provisions of this article shall govern and control in lieu thereof.
Eminent Domain:
10. If the whole or any part of the demised premises shall be acquired or
condemned by Eminent Domain for any public or quasi public use or purpose,
then and in that event, the term of this lease shall cease and terminate from
the date of title vesting in such proceeding and Tenant shall have no claim
for the value of any unexpired term of said lease and assigns to Owner,
Tenant's entire interest in any such award. Tenant shall have the right to
make an independent claim to the condemning authority for the value of
Tenant's moving expenses and personal property, trade fixtures and equipment,
provided Tenant is entitled pursuant to the terms of the lease to remove such
property, trade fixtures and equipment at the end of the term and provided
further such claim does not reduce Owner's award.
Assignment, Mortgage, Etc.:
11. Tenant, for itself, its heirs, distributees, executors, administrators,
legal representative, successor and assigns, expressly covenants that it shall
not assign, mortgage or encumber this agreement, nor underlet, or suffer or
permit the demised premises or any part thereof to be used by others, without
the prior written consent of Owner in each instance. Transfer of the majority
of the stock of a corporate Tenant or the majority partnership interest of a
partnership Tenant shall be deemed an assignment. If this lease be assigned,
or if the demised premises or any part thereof be underlet or occupied by
anybody other than Tenant, Owner may, after default by Tenant, collect rent
from the assignee, under-tenant or occupant, and apply the net amount
collected to the rent herein reserved, but no such assignment, underletting,
occupancy or collection shall be deemed a waiver of this covenant, or the
acceptance of the assignee, under-tenant or occupant as tenant, or a release
of Tenant from the further performance by Tenant of covenants on the part of
Tenant herein contained. The consent by Owner to an assignment or
underletting shall not in any wise be construed to relieve Tenant from
obtaining the express consent in writing of Owner to any further assignment or
underletting.
Electric Current:
12. Rates and conditions in respect to submetering or rent inclusion, as the
case may be, to be added in RIDER attached hereto. Tenant covenants and
agrees that at all times its use of electric current shall not exceed the
capacity of existing feeders to the building or the risers or wiring
installation and Tenant may not use any electrical equipment which, in Owner's
opinion, reasonably exercised, will overload such installations or interfere
with the use thereof by other tenants of the building. The change at any time
of the character of electric service shall in no wise make Owner liable or
responsible to Tenant, for any loss, damages or expenses which Tenant may
sustain.
Access to Premises:
13. Owner or Owner's agents shall have the right (but shall not be obligated)
to enter the demised premises in any emergency at any time, and, at other
reasonable times, to examine the same and to make such repairs, replacements
and improvements as Owner may deem necessary and reasonably desirable to the
demised premises or to any other portion of the building or which Owner may
elect to perform. Tenant shall permit Owner to use and maintain and replace
pipes and conduits in and through the demised premises and to erect new pipes
and conduits therein provided they are concealed within the walls, floor, or
ceiling. Owner may, during the progress of any work in the demised premises,
take all necessary materials and equipment into said premises without the same
constituting an eviction nor shall the Tenant be entitled to any abatement of
rent while such work is in progress nor to any damages by reason of loss or
interruption of business or otherwise. Throughout the term hereof Owner shall
have the right to enter the demised premises at such reasonable hours for the
purpose of showing the same to prospective purchasers or mortgagees of the
building, and during the last six months of the term for the purpose of
showing the
<PAGE>
same to prospective tenants. If Tenant is not present to open and permit an
entry into the demised premises, Owner or Owner's agents may enter the same
whenever such entry may be necessary or permissible by master key or forcibly
and provided reasonable care is exercised to safeguard Tenant's property, such
entry shall not render Owner or its agents liable therefor, nor in any event
shall the obligations of Tenant hereunder be affected. If during the last
month of the term Tenant shall have removed all or substantially all of
Tenant's property therefrom Owner may immediately enter, alter, renovate or
redecorate the demised premises without limitation or abatement of rent, or
incurring liability to Tenant for any compensation and such act shall have no
effect on this lease or Tenant's obligations hereunder.
Vault, Vault Space, Area:
14. No Vaults, vault space or area, whether or not enclosed or covered, not
within the property line of the building is leased hereunder, anything
contained in or indicated on any sketch, blue print or plan, or anything
contained elsewhere in this lease to the contrary notwithstanding. Owner
makes no representation as to the location of the property line of the
building. All vaults and vault space and all such areas not within the
property line of the building, which Tenant may be permitted to use and/or
occupy, is to be used and/or occupied under a revocable license, and if any
such license be revoked, or if the amount of such space or area be diminished
or required by any federal, state or municipal authority or public utility,
Owner shall not be subject to any liability nor shall Tenant be entitled to
any compensation or diminution or abatement of rent, nor shall such
revocation, diminution or requisition be deemed constructive or actual
eviction. Any tax, fee or charge of municipal authorities for such vault or
area shall be paid by Tenant.
Occupancy:
15. Tenant will not at any time use or occupy the demised premises in
violation of the certificate of occupancy issued for the building of which the
demised premises are a part. Tenant has inspected the premises and accepts
them as is, subject to the riders annexed hereto with respect to Owner's work,
if any. In any event, Owner makes no representation as to the condition of
the premises and Tenant agrees to accept the same subject to violations,
whether or not of record.
Bankruptcy:
16. (a) Anything elsewhere in this lease to the contrary notwithstanding,
this lease may be canceled by Owner by the sending of a written notice to
Tenant within a reasonable time after the happening of any one or more of the
following events: (1) the commencement of a case in bankruptcy or under the
laws of any state naming Tenant as the debtor; or (2) the making by Tenant of
an assignment or any other arrangement for the benefit of creditors under any
state statute. Neither Tenant nor any person claiming through or under
Tenant, or by reason of any statute or order of court, shall thereafter be
entitled to possession of the premises demised but shall forthwith quit and
surrender the premises. If this lease shall be assigned in accordance with
its terms, the provisions of this Article 16 shall be applicable only to the
party then owning Tenant's interest in this lease.
(b) It is stipulated and agreed that in the event of the termination of
this lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any
other provisions of this lease to the contrary, be entitled to recover from
Tenant as and for liquidated damages an amount equal to the difference between
the rent reserved hereunder the unexpired portion of the term demised and the
fair and reasonable rental value of the demised premises for the same period.
In the computation of such damages the difference between any installment of
rent becoming due hereunder after the date of termination and the fair and
reasonable rental value of the demised premises for the period for which such
installment was payable shall be discounted to the date of termination at the
rate of four percent (4%) per annum. If such premises or any part thereof be
re-let by the Owner for the unexpired term of said lease, or any part thereof,
before presentation of proof of such liquidated damages to any court,
commission or tribunal, the amount of rent reserved upon such re-letting shall
be deemed to be the fair and reasonable rental value for the part or the whole
of the premises so re-let during the term of the re-letting. Nothing herein
contained shall limit or prejudice the right of the Owner to prove for and
obtain as liquidated damages by reason of such termination, an amount equal to
the maximum allowed b any statute or rule of law in effect at the time when,
and governing the proceedings in which, such damages are to be proved, whether
or not such amount be greater, equal to, or less than the amount of the
difference referred to above.
Default:
17. (1) If Tenant defaults in fulfilling any of the covenants of this lease
other than the covenants for the payment of rent or additional rent; or if the
demised premises become vacant or deserted; or if any execution or attachment
shall be issued against Tenant or any of tenant's property whereupon the
demised premises shall be taken or occupied by someone other than Tenant; or
if this lease be rejected under 235 of Title 11 of the U.S. Code (bankruptcy
code); then, in any one or more of such events, upon owner serving a written
fifteen (15) days' notice upon Tenant specifying the nature of said default
and upon the expiration of said fifteen (15) days, if Tenant shall have failed
to comply with or remedy such default, or if the said default or omission
complained of shall be of a nature that the same cannot be completely cured or
remedied within said fifteen (15) day period, and if Tenant shall not have
diligently commenced curing such default within such fifteen (15) day period,
and shall not thereafter with reasonable diligence and in good faith, proceed
to remedy or cure such default, then Owner may serve a written five (5) days'
notice of cancellation of this lease upon Tenant, and upon the expiration of
said five 95) days this lease and the term thereunder shall end and expire as
fully and completely as if the expiration of such five (5) day period were the
day herein definitely fixed for the end and expiration of this lease and the
term thereof and Tenant shall then quit and surrender the demised premises to
Owner but Tenant shall remain liable as hereinafter provided.
(2) If the notice provided for in (1) hereof shall have been given, and
the term shall expire as aforesaid; or if Tenant shall make default in the
payment of the rent reserved herein or any item of additional rent herein
mentioned or any part of either or in making any other payment herein
required, then and in any of such events Owner may without notice, re-enter
the demised premises either by force or otherwise, and dispossess Tenant by
summary proceedings or otherwise, and the legal representative of Tenant or
other occupant of demised premises and remove their effects and hold the
premises as if this lease had not been made, and Tenant hereby waives the
service of notice of intention to re-enter or to institute legal proceedings
to that end. If Tenant shall make default hereunder prior to the date fixed
as the commencement of any renewal or extension of this lease, Owner may
cancel and terminate such renewal or extension agreement by written notice.
Remedies of Owner and Waiver of Redemption:
18. In case of any such default, re-entry, expiration and/or dispossess by
summary proceedings or otherwise, (a) the rent shall become due thereupon and be
paid up to the time of such re-entry, dispossess and/or expiration, (b) Owner
may re-let the premises or any part or parts thereof, either in the name of
Owner or otherwise, for a term or terms, which may at Owner's option be less
than or exceed the period which would otherwise have constituted the balance of
the term of this lease and may grant concessions or free rent or charge a higher
rental than that in this lease, and/or (c) Tenant or the legal representatives
of Tenant shall also pay Owner as liquidated damages for the failure of Tenant
to observe and perform said Tenant's covenants herein contained, any deficiency
between the rent hereby reserved and/or covenanted to be paid and the net
amount, if any, of the rents collected on account of the lease or leases of the
demised premises for each month of the period which would otherwise have
constituted the balance of the term of this lease. The failure of Owner to
re-let the premises or any part or parts thereof shall not release or affect
Tenant's liability for damages. In computing such liquidated damages there shall
be added to the said deficiency such expenses as Owner may incur in connection
with re-letting, such as legal expenses, reasonable attorney's fees, brokerage,
advertising and for keeping the demised premises in good order or for preparing
the same for re-letting. Any such liquidated damages shall be paid in monthly
installments by Tenant on the rent day specified in this lease and any suit
brought to collect the amount of the deficiency for any month shall not
prejudice in any way the rights of Owner to collect the deficiency for any
subsequent month by a similar proceeding. Owner, in putting the demised premises
in good order or preparing the same for re-rental may, at Owner's option, make
such alterations, repairs, replacements, and/or decorations in the demised
premises as Owner, in Owner's sole judgement, considers advisable and necessary
for the purpose of re-letting the demised premises, and the making of such
alterations, repairs, replacements, and/or decorations shall not operate or be
construed to release Tenant from liability hereunder as aforesaid. Owner shall
in no event be liable in any way whatsoever for failure to re-let the demised
premises, or in the event that the demised premises are re-let, for failure to
collect the rent thereof under such re-letting, and in no event shall Tenant be
entitled to receive any excess, if any, of such net rents collected over the
sums payable by Tenant to Owner hereunder. In the event of a breach or
threatened breach by Tenant of any of the covenants or provisions hereof, Owner
shall have the right of injunction and the right to invoke any remedy allowed at
law or in equity as if re-entry, summary proceedings and other remedies were not
herein provided for. Mention in this lease of any particular remedy, shall not
preclude Owner from any other remedy, in law or in equity. Tenant hereby
expressly waives any and all rights of redemption granted by or under any
present or future laws in the event of Tenant being evicted or dispossessed for
any cause, or in the event of Owner obtaining possession of demised premises, by
reason of the violation by Tenant of any of the covenants and conditions of this
lease, or otherwise.
Fees and Expenses:
19. If Tenant shall default in the observance or performance of any term or
covenant on Tenant's part to be observed or performed under or by virtue of
any of the terms or provisions in any article of this lease, after notice and
upon expiration of (except in an emergency), then, unless otherwise provided
elsewhere in this lease, Owner may immediately or at any time thereafter and
without notice perform the obligation of Tenant thereunder. If Owner, in
connection with the foregoing or in connection with any default by Tenant in
the covenant to pay rent hereunder, makes any expenditures or incurs any
obligations for the payment of money, including but not limited to reasonable
attorney's fees, in instituting, prosecuting or defending any action or
proceeding, and prevails in any such action or proceeding then Tenant will
reimburse Owner for such sums so paid or obligations incurred with interest an
d costs. The foregoing expenses incurred by reason of Tenant's default shall
be deemed to be additional rent hereunder and shall be paid by Tenant to Owner
within ten (10) days of rendition of any bill or statement to Tenant therefor.
If Tenant's lease term shall have expired at the time of making of such
expenditures or incurring of such obligations, such sums shall be recoverable
by Owner, as damages.
Building Alterations and Management:
20. Owner shall have the right at any time without the same constituting an
eviction and without incurring liability to Tenant therefor to change the
arrangement and/or location of public entrances, passageways, doors, doorways,
corridors, elevators, stairs, toilets or other public parts of the building
and to change the name, number or designation by which the building may be
known. There shall be no allowance to Tenant for diminution of rental value
and no liability on the part of Owner by reason of inconvenience, annoyance or
injury to business arising from Owner or other Tenants making any repairs in
the building or any such alterations, additions and improvements.
Furthermore, Tenant shall not have any claim against Owner by reason of
Owner's imposition of such controls of the manner of access to the building by
Tenant's social or business visitors as the Owner may deem necessary for the
security of the building and its occupants.
No Representations by Owner:
21. Neither Owner nor Owner's agents have made any representations or
promises with respect to the physical condition of the building, the land upon
which it is erected or the demised premises, the rents, leases, expenses of
operation or any other matter or thing affecting or related to the premises
except as herein expressly set forth and no rights, easements or licenses are
acquired by Tenant by implication or otherwise except as expressly set forth
in the provisions of this lease. Tenant has inspected the building and the
demised premises and is thoroughly acquainted with their condition and agrees
to take the same "as is" and acknowledges that the taking of possession of the
demised premises by Tenant shall be conclusive evidence that the said premises
and the building of which the same form a part were in good and satisfactory
condition at the time such possession was so taken, except as to latent
defects. All understandings and agreements heretofore made between the
parties hereto are merged in this contract, which alone fully and completely
expresses the agreement between Owner and Tenant and any executory agreement
<PAGE>
hereafter shall be ineffective to change, modify, discharge or effect an
abandonment of it in whole or in part, unless such executory agreement is in
writing and signed by the party against whom enforcement of the change,
modification, discharge or abandonment is sought.
End of Term:
22. Upon the expiration or other termination of the term of this lease,
Tenant shall quit and surrender to Owner the demised premises, broom clean, in
good order and condition, ordinary wear and damages which Tenant is not
required to repair as provided elsewhere in this lease excepted, and Tenant
shall remove all its property. Tenant's obligation to observe or perform this
covenant shall survive the expiration or other termination of this lease. If
the last day of the term of this Lease or any renewal thereof, falls on
Sunday, this lease shall expire at noon on the preceding Saturday unless it be
a legal holiday in which case it shall expire at noon on the preceding
business day.
Quiet Enjoyment:
23. Owner covenants and agrees with Tenant that upon Tenant paying the rent
and additional rent and observing and performing all the terms, covenants and
conditions, on Tenant's part to be observed and performed, Tenant may
peaceably and quietly enjoy the premises hereby demised, subject,
nevertheless, to the terms and conditions of this lease including, but not
limited to, Article 31 hereof and to the ground leases, underlying leases and
mortgages hereinbefore mentioned.
Failure to Give Possession:
24. If Owner is unable to give possession of the demised premises on the date
of the commencement of the term hereof, because of the holding-over or
retention of possession of any tenant, undertenant or occupants or if the
demised premises are located in a building being constructed, because such
building has not been sufficiently completed to make the premises ready for
occupancy or because of the fact that a certificate of occupancy has not been
procured or for any other reason, Owner shall not be subject to any liability
for failure to give possession on said date and the validity of the lease
shall not be impaired under such circumstances, nor shall the same be
construed in any wise to extend the term of this lease, but the rent payable
hereunder shall be abated (provided Tenant is not responsible for Owner's
inability to obtain possession or complete construction) until after Owner
shall have given Tenant written notice that the Owner is able to deliver
possession in condition required by this lease. If permission is given to
Tenant to enter into the possession of the demised premises or to occupy
premises other than the demised premises prior to the date specified as the
commencement of the term of this lease, Tenant covenants and agrees that such
possession and/or occupancy shall be deemed to be under all the terms,
covenants, conditions and provisions of this lease except the obligation to
pay the fixed annual rent set forth in the preamble to this lease. The
provisions of this article are intended to constitute "an express provision to
the contrary" within the meaning of Section 223-a of the New York Real
Property Law.
No Waiver:
25. The failure of Owner to seek redress for violation of, or to insist upon
the strict performance of any covenant or condition of this lease or of any of
the Rules or Regulations, set forth or hereafter adopted by Owner, shall not
prevent a subsequent act which would have originally constituted a violation
from having all the force and effect of an original violation. The receipt by
Owner of rent and/or additional rent with knowledge of the breach of any
covenant of this lease shall not be deemed a waiver of such breach and no
provision of this lease shall be deemed to have been waived by Owner unless
such waiver be in writing signed by Owner. No payment by Tenant or receipt by
Owner of a lesser amount than the monthly rent herein stipulated shall be
deemed to be other than on account of the earliest stipulated rent, nor shall
any endorsement or statement of any check or any letter accompanying any check
or payment as rent be deemed an accord and satisfaction, and Owner may accept
such check or payment without prejudice to Owner's right to recover the
balance of such rent or pursue any other remedy in this lease provided. No
act or thing done by Owner or Owner's agents during the term hereby demised
shall be deemed an acceptance of a surrender of said premises, and no
agreement to accept such surrender shall be valid unless in writing signed by
Owner. No employee of Owner or Owner's agent shall have any power to accept
the keys of said premises prior to the termination of the lease and the
delivery of keys to any such agent or employee shall not operate as a
termination of the lease or a surrender of the premises.
Waiver of Trial by Jury:
26. It is mutually agreed by and between Owner and Tenant that the respective
parties hereto shall and they hereby do waive trial by jury in any action
proceeding or counterclaim brought by either of the parties hereto against the
other (except for personal injury or property damage) on any matters
whatsoever arising out of or in any way connected with this lease, the
relationship of Owner and Tenant, Tenant's use of or occupancy of said
premises, and any emergency statutory or any other statutory remedy. It is
further mutually agreed that in the event Owner commences any proceeding or
action for possession including a summary proceeding for possession of the
premises, Tenant will not interpose any counterclaim of whatever nature or
description in any such proceeding including a counterclaim under Article 4
except for statutory mandatory counterclaims.
Inability to Perform:
27. This lease and the obligation of Tenant to pay rent hereunder and perform
all of the other covenants and agreements hereunder on part of Tenant to be
performed shall in no wise be affected, impaired or excused because Owner is
unable to fulfill any of its obligations under this lease or to supply or is
delayed in supplying any service expressly or impliedly to be supplied or is
unable to make, or is delayed in making any repair, additions, alterations or
decorations or is unable to supply or is delayed in supplying any equipment,
fixtures, or other materials if Owner is prevented or delayed from so doing by
reason of strike or labor troubles or any cause whatsoever including, but not
limited, government preemption or restrictions or by reason of any rule, order
or regulation of any department or subdivision thereof of any government
agency or by reason of the conditions which have been or are affected, either
directly or indirectly, by war or other emergency.
Bills and Notices:
28. Except as otherwise in this lease provided, a bill, statement, notice or
communication which Owner may desire or be required to give to Tenant, shall
be deemed sufficiently given or rendered if, in writing, delivered to Tenant
personally or sent by registered or certified mail addressed to Tenant at the
building of which the demised premises form a part or at the last known
residence address or business address of Tenant of left at any of the
aforesaid premises addressed to Tenant, and the time of the rendition of such
bill or statement and of the giving of such notice or communication shall be
deemed to be the time when the same is delivered to Tenant, mailed, or left at
the premises as herein provided. Any notice by Tenant to Owner must be served
by registered or certified mail addressed to Owner at the address first
hereinabove given or at such other address as Owner shall designate by written
notice.
Services Provided by Owners:
29. As long as Tenant is not in default under any of the covenants of this
lease beyond the applicable grace period provided in this lease for the curing
of such defaults, Owner shall provide: (a) necessary elevator facilities on
business days from 8 a.m. to 6 p.m. and have one elevator subject to call at
all other times; (b) heat to the demised premises when and as required by law,
on business days from 8 a.m. to 6 p.m.; (c) water for ordinary lavatory
purposes, but if Tenant uses or consumes water for any other purposes or in
unusual quantities (of which fact Owner shall be the sole judge), Owner may
install a water meter at Tenant's expense which Tenant shall thereafter
maintain at Tenant's expense in good working order and repair to register such
water consumption and Tenant shall pay for water consumed as shown on said
meter as additional rent as and when bills are rendered; (d) said premises are
to be kept clean by Tenant at Tenant's sole expense, in a manner reasonably
satisfactory to Owner and no one other than persons approved by Owner shall be
permitted to enter said premises or the building of which they are a part for
such purpose. Tenant shall pay Owner the cost of removal of any of Tenant's
refuse and rubbish from the building; (e) if the demised premises are serviced
by Owner's air conditioning/cooling and ventilating system, air
conditioning/cooling will be furnished to tenant from May 15th through
September 30th on business days (Mondays through Fridays, holidays excepted)
from 8:00 a.m. to 6:00 p.m., and ventilation will be furnished on business
days during the aforesaid hours except when air conditioning/cooling is being
furnished as aforesaid. If Tenant requires air conditioning/cooling or
ventilation for more extended hours or on Saturdays, Sundays or on holidays,
as defined under Owner's contract with Operating Engineers Local 94-94A, Owner
will furnish the same at Tenant's expense. RIDER to be added in respect to
rates and conditions for such additional service; (f) Owner reserves the right
to stop services of the heating, elevators, plumbing, electric, power systems
or other services, if any, when necessary by reason of accident or for
repairs, alterations, replacements or improvements necessary or desirable in
the judgment of Owner for as long as may be reasonably required by reason
thereof. If the building of which the demised premises are a part supplies
manually operated elevator service, Owner at any time may substitute automatic
control elevator service and proceed diligently with alterations necessary
therefor without in any wise affecting this lease or the obligation of Tenant
hereunder.
Captions:
30. The Captions are inserted only as a matter of convenience and for
reference and in no way define, limit or describe the scope of this lease nor
the intent of any provisions thereof.
Definitions:
31. The term "office", or "offices", wherever used in this lease, shall not
be construed to mean premises used as a store or stores, for the sale or
display, at any time, of goods, wares or merchandise, of any kind, or as a
restaurant, shop, booth, bootblack or other stand, barber shop, or for other
similar purposes or for manufacturing. The term "Owner" means a landlord or
lessor, and as used in this lease mans only the owner, or the mortgagee in
possession, for the time being of the land and building (or the owner of a lease
of the building or of the land and building) of which the demised premises form
a part, so that in the event of a lease of said building, or of the land and
building, the said Owner shall be and hereby is entirely freed and relieved of
all covenants and obligations of Owner hereunder, and it shall be deemed and
construed without further agreement between the parties or their successors in
interest, or between the parties and the purchaser, at any such sale, or the
said lessee of the building, or of the land and building, that the purchaser or
the lessee of the building has assumed and agreed to carry out any and all
covenants and obligations of Owner, hereunder. The words "re-enter" and
"re-entry" as used in this lease are not restricted to their technical legal
meaning. The term "business days" as used in this lease shall exclude Saturdays,
Sundays and all days as observed by the State or Federal Government as legal
holidays and those designated as holidays by the applicable building service
union employees service contract or by the applicable Operating Engineers
contract with respect to HVAC service. Wherever it is expressly provided in this
lease that consent shall not be unreasonably withheld, such consent shall not be
unreasonably delayed.
Adjacent Excavation-Shoring:
32. If an excavation shall be made upon land adjacent to the demised
premises, or shall be authorized to be made, Tenant shall afford to the person
causing or authorized to cause such excavation, license to enter upon the
demised premises for the purpose of doing such work as said person shall deem
necessary to preserve the wall or the building of which demised premises form
a part from injury or damage and to support the same by proper foundations
without any claim for damages or indemnity against Owner, or diminution or
abatement of rent.
Rules and Regulations:
33. Tenant and Tenant's servants, employees, agents, visitors, and licensees
shall observe faithfully, and comply strictly with, the Rules and Regulations
and such other and further reasonable Rules and REGULATIONS as Owner or
Owner's agents may from time to time adopt. Notice of any additional rules or
regulations shall be given in such manner as Owner may elect. In case Tenant
disputes the reasonableness of any additional Rule or Regulation hereafter
made or adopted by Owner or Owner's agents, the parties hereto agree to submit
the question of the reasonableness of such Rule or Regulation for decision to
the New York office of the American Arbitration Association, whose
determination shall be final and conclusive upon the parties hereto. The
right to dispute the reasonableness of any additional Rule or Regulation upon
Tenant's part shall be deemed waived unless the same shall be asserted by
service of a notice, in writing upon Owner within fifteen (15) days after the
giving of notice thereof. Nothing
<PAGE>
in this lease contained shall be construed to impose upon Owner any duty or
obligation to enforce the Rules and REGULATIONS or terms, covenants or
conditions in any other lease, as against any other tenant and Owner shall not
be liable to Tenant for violation of the same by any other tenant, its
servants, employees, agents, visitors or licensees.
Security:
34. Tenant has deposited with Owner the sum of $0.00 as security for the
faithful performance and observance by Tenant of the terms, provisions and
conditions of this lease; it is agreed that in the event Tenant defaults in
respect of any of the terms, provisions and conditions of this lease,
including, but not limited to, the payment of rent and additional rent, Owner
may use, apply or retain the whole or any part of the security so deposited to
the extent required for the payment of any rent and additional rent or any
other sum as to which Tenant is in default or for any sum which Owner may
expend or may be required to expend by reason of Tenant's default in respect
of any of the terms, covenants and conditions of this lease, including but not
limited to, any damages or deficiency in the re-letting of the premises,
whether such damages or deficiency accrued before or after summary proceedings
or other re-entry by Owner. In the event that Tenant shall fully and
faithfully comply with all of the terms, provisions, covenants and conditions
of this lease, the security shall be returned to Tenant after the date fixed
as the end of the Lease and after delivery of entire possession of the demised
premises to Owner. In the event of a sale of the land and building or leasing
of the building, of which the demised premises form a part, Owner shall have
the right to transfer the security to the vendee or lessee and Owner shall
thereupon be released by Tenant from all liability for the return of such
security; and Tenant agrees to look to the new Owner solely for the return of
said security, and it is agreed that the provisions hereof shall apply to
every transfer or assignment made of the security to a new Owner. Tenant
further covenants that it will not assign or encumber or attempt to assign or
encumber the monies deposited herein as security and that neither Owner nor
its successors or assigns shall be bound by any such assignment, encumbrance,
attempted assignment or attempted encumbrance.
Estoppel Certificate:
35. Tenant, at any time, and from time to time, upon at least 10 days' prior
notice by Owner, shall execute, acknowledge and deliver to Owner, and/or to
any other person, firm or corporation specified by Owner, a statement
certifying that this Lease is unmodified and in full force and effect (or, if
there have been modifications, that the same is in full force and effect as
modified and stating the modifications) stating the dates to which the rent
and additional rent have been paid, and stating whether or not there exists
any default by Owner under this Lease, and, if so, specifying each such
default.
Successors and Assigns:
36. The covenants, conditions and agreements contained in this lease shall
bind and inure to the benefit of Owner and Tenant and their respective heirs,
distributees, executors, administrators, successors, and except as otherwise
provided in this lease, their assigns. Tenant shall look only to Owner's
estate and interest in the land and building, for the satisfaction of Tenant's
remedies for the collecting of a judgment (or other judicial process) against
Owner in the event of any default by Owner hereunder, and no other property or
assets of such Owner (or any partner, member, officer or director thereof,
disclosed or undisclosed), shall be subject to levy, execution or other
enforcement procedure for the satisfaction of Tenant's remedies under or with
respect to this lease, the relationship of Owner and Tenant hereunder, or
Tenant's use and occupancy of the demised premises.
IN WITNESS WHEREOF, Owner and Tenant have respectively signed and sealed this
lease as of the day and year first above written.
HUDSON TELEGRAPH ASSOCIATES
Witness for Owner: BY: PMFWH NEWCORP, INC., GENERAL PARTNER
- ---------------------------- By: /s/ John Deutsch
----------------------------
Name: John Deutsch
Title: Vice President
Witness for Owner: TELCO COMMUNICATIONS GROUP INC.
- ----------------------------- By: /s/ Bryan Rachlin
--------------------------------
Name: Bryan Rachlin
Title: COO
ACKNOWLEDGMENTS
CORPORATE OWNER
STATE OF NEW YORK ss.:
COUNTY OF
On this day of , 19 , before me personally came
to me known, who being by me duly sworn, did depose
and say that he resides in ; that he is the
of the corporation described in and which
executed the foregoing instrument, as OWNER; that he knows the seal of said
corporation; the seal affixed to said instrument is such corporate seal; that
it was so affixed by order of the Board of Directors of said corporation, and
that he signed his name thereto by like order.
------------------------------------
CORPORATE TENANT
STATE OF NEW YORK ss.:
COUNTY OF
On this day of , 19 , before me personally came
to me known, who being by me duly sworn, did depose
and say that he resides in ; that he is the
of the corporation described in and which
executed the foregoing instrument, as TENANT; that he knows the seal of said
corporation; the seal affixed to said instrument is such corporate seal; that
it was so affixed by order of the Board of Directors of said corporation, and
that he signed his name thereto by like order.
------------------------------------
INDIVIDUAL OWNER
STATE OF NEW YORK ss.:
COUNTY OF
On this day of , 19 , before me personally came
to me known and known to me to be the individual
described in and who, as OWNER, executed the foregoing instrument and
acknowledged to me that he executed the same.
---------------------------------------
INDIVIDUAL TENANT
STATE OF NEW YORK ss.:
COUNTY OF
On this day of , 19 , before me personally came
to me known and known to me to be the individual
described in and who, as TENANT, executed the foregoing instrument and
acknowledged to me that he executed the same.
---------------------------------------
<PAGE>
[Guaranty section stricken through]
RULES AND REGULATIONS ATTACHED TO AND
MADE A PART OF THIS LEASE
IN ACCORDANCE WITH ARTICLE 33.
1. The sidewalks, entrances, driveways, passages, courts, elevators,
vestibules, stairways, corridors or halls shall not be obstructed or
encumbered by any Tenant or used for any purpose other than for ingress or
egress from the demised premises and for delivery of merchandise and equipment
in a prompt and efficient manner using elevators and passageways designed for
such delivery by Owner. There shall not be used in any space, or in the
public hall of the building, either by any Tenant or by jobbers or others in
the delivery or receipt of merchandise, any hand trucks, except those equipped
with rubber tires and sideguards. If said premises are situated on the ground
floor of the building, Tenant thereof shall further, at Tenant's expense, keep
the sidewalk and curb in front of said premises clean and free from ice, snow,
dirt and rubbish.
2. The water and wash closets and plumbing fixtures shall not be used for
any purposes other than those for which they were designed or constructed and
no sweepings, rubbish, rags, acids or other substances shall be deposited
therein, and the expense of any breakage, stoppage, or damage resulting from
the violation of this rule shall be borne by the Tenant who, or whose clerks,
agents, employees or visitors, shall have caused it.
3. No carpet, rug or other article shall be hung or shaken out of any
window of the building and no Tenant shall sweep or throw or permit to be
swept or thrown from the demised premises any dirt or other substances into
any of the corridors or halls, elevators, or out of the doors or windows or
stairways of the building and Tenant shall not use, keep or permit to be used
or kept any foul or noxious gas or substance in the demised premises, or
permit or suffer the demised premises to be occupied or used in a manner
offensive or objectionable to Owner or other occupants of the building by
reason of noise, odors, and/or vibrations, or interfere in any way with other
Tenants or those having business therein, nor shall any bicycles, vehicles,
animals, fish, or birds be kept in or about the building. Smoking or carrying
lighted cigars or cigarettes in the elevators of the building is prohibited.
4. No awnings or other projections shall be attached to the outside walls
for the building without the prior written consent of Owner.
5. No sign, advertisement, notice or other lettering shall be exhibited,
inscribed, painted or affixed by any Tenant on any part of the outside of the
demised premises or the building or on the inside of the demised premise if
the same is visible from the outside of the premises without the prior written
consent of Owner, except that the name of Tenant may appear on the entrance
door of the premises. In thee vent of the violation of the foregoing by any
Tenant, Owner may remove same without any liability, and may charge the
expense incurred by such removal to Tenant or Tenants violating this rule.
Interior signs on doors and directory tablet shall be inscribed, painted or
affixed for each Tenant by Owner at the expense of such Tenant, and shall be
of a size, color and style acceptable to Owner.
6. No tenant shall mark, paint, drill into, or in any way deface any part
of the demised premises or the building of which they form a part. No boring,
cutting or stringing of wires shall be permitted, except with the prior
written consent of Owner, and as Owner may direct. No Tenant shall lay
linoleum, or other similar floor covering, so that the same shall come in
direct contact with the floor of the demised premises, and, if linoleum or
other similar floor covering is desired to be used an interlining of builder's
deadening felt shall be first affixed to the floor, by a paste or other
material, soluble in water, the use of cement or other similar adhesive
material being expressly prohibited.
7. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by any Tenant, nor shall any changes be made in existing
locks or mechanism thereof. Each Tenant must, upon the termination his
Tenancy, restore to Owner all keys of stores, offices and toilet rooms, either
furnished to, or otherwise procured by, such Tenant, and in the event of the
loss of any keys, so furnished, such Tenant shall pay to Owner the cost
thereof.
8. Freight, furniture, business equipment, merchandise and bulky matter of
any description shall be delivered to and removed from the premises only on
the freight elevators and through the service entrances and corridors, and
only during hours and in a manner approved by Owner. Owner reserves the right
to inspect all freight to be brought into the building and to exclude from the
building all freight which violates any of these Rules and Regulations of the
lease or which these Rules and Regulations are a part.
9. Canvassing, soliciting and peddling in the building is prohibited and
each Tenant shall cooperate to prevent the same.
10. Owner reserves the right to exclude from the building all persons who
do not present a pass to the building signed by Owner. Owner will furnish
passes to persons for whom any Tenant requests same in writing. Each Tenant
shall be responsible for all persons for whom he requests such pass and shall
be liable to Owner for all acts of such persons. Tenant shall not have a
claim against Owner by reason of Owner excluding from the building any person
who does not present such pass.
11. Owner shall have the right to prohibit any advertising by any Tenant
which in Owner's opinion, tends to impair the reputation of the building or
its desirability as a building for offices, and upon written notice from
Owner, Tenant shall refrain from or discontinue such advertising.
12. Tenant shall not bring or permit to be brought or kept in or on the
demised premises, any flammable, combustible, explosive, or hazardous fluid,
material, chemical or substance, or cause or permit any odors of cooking or
other processes, or any unusual or other objectionable odors to permeate in or
emanate from the demised premises.
13. If the building contains central air conditioning and ventilation,
Tenant agrees to keep all windows closed at all times and to abide by all
rules and regulations issued by Owner with respect to such services. If
Tenant requires air conditioning or ventilation after the usual hours, Tenant
shall give notice in writing to the building superintendent prior to
3:00 p.m., in the case of services required on weekdays, and prior to
3:00 p.m. on the day prior in case of after hours service required on weekends
or on holidays. Tenant shall cooperate with Owner in obtaining maximum
effectiveness of the cooling system by lowering and closing Venetian blinds
and/or drapes and curtains when the suns rays fall directly on the windows of
the demised premises.
14. Tenant shall not move any safe, heavy machinery, heavy equipment,
bulky matter, or fixtures into or out of the building without Owner's prior
written consent. If such safe, machinery, equipment, bulky matter or fixtures
requires special handling, all work in connection therewith shall comply with
the Administrative Code of the City of new York and all other laws and
regulations applicable thereto and shall be done during such hours as Owner
may designate.
15. Refuse and Trash. (1) Compliance by Tenant. Tenant covenants and
agrees, at its sole cost and expense, to comply with all present and future
laws, orders, and regulations of all state, federal, municipal, and local
governments, departments, commission and boards regarding the collection,
sorting, separation and recycling of waste products, garbage, refuse and
trash. Tenant shall sort and separate such waste products, garbage, refuse
and trash into such categories as provided by law. Each separately sorted
category of waste products, garbage, refuse and trash shall be placed in
separate receptacles reasonably approved by Owner. Such separate receptacles
may, at Owner's option, be removed from the demised premises in accordance
with a collection schedule prescribed by law. Tenant shall remove, or cause
to be removed by a contractor acceptable to Owner, at Owner's sole discretion,
such items as Owner may expressly designate. (2) Owner's Rights in Event of
Noncompliance. Owner has the option to refuse to collect or accept from
Tenant waste products, garbage, refuse or trash (a) that is not separated and
sorted as required by law or (b) which consists of such items as Owner may
expressly designate for Tenant's removal, and to require Tenant to arrange for
such collection at Tenant's sole cost and expense, utilizing a contractor
satisfactory to Owner. Tenant shall pay all costs, expenses, fines,
penalties, or damages that may be imposed on Owner or Tenant by reason of
Tenant's failure to comply with the provisions of this Building Rule 15, and,
at Tenant's sole cost and expense, shall indemnify, defend and hold Owner
harmless (including reasonable legal fees and expenses) from and against any
actions, claims and suits arising from such noncompliance, utilizing counsel
reasonably satisfactory to Owner.
- ------------------------------------
Address
Premises
- ------------------------------------
TO
- ------------------------------------
STANDARD FORM OF
OFFICE
LEASE
The Real Estate Board of New York, Inc.
Copyright 1994. All rights reserved.
Reproduction in whole or in
part prohibited.
- -------------------------------------
Dated 19
Rent Per Year
Rent Per Month
Term
From
To
Drawn by........................
Checked by......................
Entered by......................
Approved by.....................
- ----------------------------------------
<PAGE>
ENDNOTES TO LEASE DATED AS OF
SEPTEMBER 26, 1996 BETWEEN HUDSON
TELEGRAPH ASSOCIATES, AS LANDLORD,
AND TELCO COMMUNICATIONS GROUP INC.,
AS TENANT
(1) willful misconduct
(1A) for more than ten (10) days after written notice from Landlord
(2) the applicable grace period as provided in Article 17.
<PAGE>
RIDER TO LEASE DATED AS OF SEPTEMBER, 26, 1996 BETWEEN
HUDSON TELEGRAPH ASSOCIATES, AS LANDLORD, AND
TELCO COMMUNICATIONS GROUP INC., AS TENANT
If and to the extent that any of the provisions of this rider conflict or
are otherwise inconsistent with any of the printed provisions of this lease,
whether or not such inconsistency is expressly noted in this rider, the
provisions of this rider shall prevail.
37. Definitions
-----------
The following terms contained in this Article 37 shall have the meanings
hereinafter set forth as such terms are used throughout this lease, including
the exhibits, schedules and riders hereto (if any).
(A) "Base Tax Year" shall mean the tax calendar year 1997.
(B) "Base Year Taxes" shall mean the Real Estate Taxes as finally
determined for the Base Tax Year (to wit, the average of the Real
Estate Taxes as finally determined for the July 1, 1996 - June 30,
1997 and July 1, 1997 - June 30, 1998 tax fiscal years)
(C) "Subsequent Tax Year" shall mean any tax fiscal year commencing
after July 1, 1997.
(D) "Tenant's Proportionate Share" shall mean 1.34%.
(E) "Base Labor Month" shall mean January, 1997.
(F) "Multiplication Factor" shall mean 11,265.
(G) "Labor Rate Multiple" shall mean one (1).
(H) "Broker" shall mean Williams Real Estate Co. Inc.
(I) "Rent Commencement Date" shall mean April 1, 1997.
(J) "Law" shall mean any law, rule, order, ordinance, regulation or
requirement of any governmental authority having or asserting
jurisdiction or any order, rule, requirement or regulation of any
utility company, insurer of Landlord or the Board of Fire
Underwriters (or successor organization), whether now or hereafter
in effect, and all amendments thereto.
38. Rental Payments
---------------
(A) All payments other than Fixed Rent to be made by Tenant pursuant to
this lease shall be deemed additional rent and, in the event of any non-payment
thereof, Landlord shall have all rights and remedies provided for herein or by
law for non-payment of rent.
(B) All payments of Fixed Rent and additional rent (collectively,
"rent" or "rental") to be made by Tenant pursuant to this lease shall be made
by checks drawn upon a United States Bank.
(C) If Landlord receives from Tenant any payment less than the sum of
the Fixed Rent and additional rent then due and owing pursuant to this lease,
Tenant hereby waives its right, if any, to designate the items to which such
payment shall be applied and agrees that Landlord in its sole discretion may
apply such payment in whole or in part to any Fixed Rent, any additional rent
or to any combination thereof then due and payable hereunder.
(D) Unless Landlord shall otherwise expressly agree in writing,
acceptance of Fixed Rent or additional rent from anyone other than Tenant
shall not relieve Tenant of any of its obligations under this lease, including
the obligation to pay Fixed Rent and additional rent, and
<PAGE>
Landlord shall have the right at any time, upon notice to Tenant, to require
Tenant to pay the Fixed Rent and additional rent payable hereunder directly to
Landlord. Furthermore, such acceptance of Fixed Rent or additional rent shall
not be deemed to constitute Landlord's consent to an assignment of this lease
or a subletting or other occupancy of the demised premises by anyone other
than Tenant, nor a waiver of any of Landlord's rights or Tenant's obligations
under this lease.
(E) Landlord's failure to timely bill all or any portion of any
amount payable pursuant to this lease for any period during the Term shall
neither constitute a waiver of Landlord's right to ultimately collect such
amount or to bill Tenant at any subsequent time retroactively for the entire
amount so unbilled, which previously unbilled amount shall be payable within
thirty (30) days after being so billed.
39. Tax Escalation
--------------
(A) For purposes of this lease, "Real Estate Taxes" shall mean all
the real estate taxes and assessments imposed by any governmental authority
having jurisdiction over the Building and the land upon which it is located
("Land") (including specifically, but without limitation, so-called "BID"
taxes) or any tax or assessment hereafter imposed in whole or in part in
substitution for such real estate taxes and/or assessments.
(B) If the Real Estate Taxes for any Subsequent Tax Year during the
Term exceed the Base Year Taxes (as initially imposed, if not formally
determined when a payment is due pursuant to this Section (B)), Tenant shall
pay Landlord Tenant's Proportionate Share of such excess within thirty (30)
days after Landlord shall furnish to Tenant a statement (the "Tax Statement")
setting forth the amount thereby due and payable by Tenant. If Real Estate
Taxes are payable by Landlord to the applicable taxing authority in
installments, then Landlord shall bill Tenant for Tenant's Proportionate Share
of increased Real Estate Taxes in corresponding installments, such that
Tenant's payment is due not more than thirty (30) days prior to the date when
Landlord is obligated to pay the Real Estate Taxes to the applicable taxing
authority. If the actual amount of Real Estate Taxes is not known to Landlord
as of the date of Landlord's Tax Statement, then Landlord may nevertheless
bill Tenant for such installment on the basis of a good faith estimate, in
which event Tenant shall pay the amount so estimated within thirty (30) days
after receipt of such bill, subject to prompt refund by Landlord, or payment
by Tenant, upon a supplemental billing by Landlord once the amount actually
owed by Tenant is determined. Upon Tenant's request, Landlord shall provide
Tenant with a copy of the current tax bill used in the preparation of the Tax
Statement.
(C) If the Base Year Taxes ultimately are reduced to less than the
Real Estate Taxes initially imposed upon the Land and the Building for the
Base Tax Year, Tenant shall pay Landlord, promptly upon demand, any additional
amount thereby payable pursuant to Section (B) for all applicable Subsequent
Tax Years.
(D) If Landlord receives any refund of Real Estate Taxes for any
Subsequent Tax Year for which Tenant has made a payment pursuant hereto,
Landlord shall (after deducting from such refund all expenses incurred in
connection therewith) pay Tenant, if not in default hereunder, Tenant's
Proportionate Share of the net refund. Tenant shall pay Landlord Tenant's
Proportionate Share of the costs and expenses of any nature (including,
without limitation, consulting, appraisal, legal and accounting fees) incurred
by Landlord in connection with any tax protest or other proceeding or
arrangement leading or intending to lead to a reduction in Real Estate Taxes,
whether before or after the initial assessment thereof.
(E) If any Subsequent Tax year is only partially within the Term, all
payments pursuant hereto shall be appropriately prorated, based on the portion
of the Subsequent Tax Year which is within the Term. Except as limited by
Articles 9 and 10: (1) Tenant's obligation to make the payments required by
Sections (B), (C) and (D) shall survive the Expiration Date or any sooner
termination of this lease; and (2) Landlord's obligation to make the payments
required by Section (D) shall survive the Expiration Date or any sooner
termination of this lease pursuant to Articles 9 and 10.
<PAGE>
(F) Each Tax Statement given by Landlord pursuant to Section (B)
shall be binding upon Tenant unless, within thirty (30) days after its receipt
of such Tax Statement, Tenant notifies Landlord of its disagreement therewith,
specifying the portion thereof with which Tenant disagrees. Pending
resolution of such dispute, Tenant shall, without prejudice to its rights, pay
all amounts determined by Landlord to be due, subject to prompt refund by
Landlord (without interest) upon any contrary determination.
40. Expense Escalation
------------------
(A) For purposes of the formula and other provisions set forth in this
Article and elsewhere in this lease:
(1) "Rate" shall mean the minimum regular hourly wage rate, including
adjustments of every kind and nature (not including, however, so-called "fringe
benefits") prescribed for Porters (as hereinafter defined) for Class A office
buildings (or any successor category), pursuant to the present and any successor
agreement between the Realty Advisory Board on Labor Relations, Inc. (or any
successor thereto) and Local 32B - 32J of the Service Employees International
Union, AFL-CIO (or any successor thereto), covering the wage rates for Porters
in such buildings ("Agreement"), provided, however, that, (a) if, at any time
during the Term, regular employment of Porters occurs on days or during hours
when overtime or other premium pay rates are in effect pursuant to the
Agreement, "Rate" shall mean the average hourly wage rate, including adjustments
of every kind and nature (not including, however, so-called fringe benefits) for
the hours in a calendar week during which Porters are regularly employed (e.g.,
if, pursuant to the Agreement, the regular weekly employment of Porters is for
forty hours, at a regular hourly wage rate (not including so-called fringe
benefits), of $12.00 for the first thirty hours and an overtime hourly wage rate
(not including so-called fringe benefits), of $15.00 for the remaining ten
hours, the average hourly wage rate (not including so-called fringe benefits),
for the applicable period shall, before adjustment pursuant to the provisions of
Section (B), be the weekly wage rate of $510.00, divided by the number of
regular hours of employment, to wit, forty, or $12.75), and that, (b) if, at any
time during the Term, no Agreement exists, Rate shall mean the average minimum
regular hourly wage rate, including adjustments of every kind and nature (not
including, however, so-called fringe benefits) actually payable to Porters by
Landlord or the contractor performing cleaning services in the Building, or, if
no Porters are employed at the Building, such rate for Porters employed at Class
A office buildings (as such buildings are presently described in the Agreement).
(2) "Base Rate" shall mean the Rate in effect during the Base
Labor Month.
(3) "Porters" shall mean those employees engaged in the general
maintenance and operation of office buildings, classified as "Others" in the
current Agreement, who have been employed for twenty-five (25) years or more,
or failing such classification in any subsequent Agreement, the most nearly
comparable classification in such Agreement.
(B) In determining the Base Rate and/or the Rate on each applicable
occasion pursuant to this lease, the Base Rate and the Rate shall be
calculated on the basis of the number of hours that would be actually worked
by Porters during the applicable calendar year pursuant to the Agreement
assuming all time which Porters were entitled not to work, if all relevant
circumstances provided for in the Agreement occurred, actually was not worked
[e.g., if the Agreement is predicated on a 2,080 hour work year (40 hours X 52
weeks) and Porters are paid for the following time which they are entitled not
to work if all relevant circumstances provided for in the Agreement occur
(Vacation - 120 hours, Holidays - 88 hours, Birthday - 8 hours, Medical
Checkup - 16 hours, Sick Days - 80 hours, Disaster Day - 8 hours and Relief
Time - 148.5 hours), then the Base Rate and the Rat shall be calculated on the
basis of Porters actually working 1,611.5 hours (2,080 hours less 468.5
hours)].
(C) If, in any period during the Term, the Rate exceeds the Base Rate,
Tenant shall pay Landlord an amount ("Expense Escalation") equal to the
product of )1) the Multiplication Factor, multiplied by (2) the Labor Rate
Multiple, multiplied by (3) the amount by which the Rate exceeds the Base
Rate. The Expense Escalation shall be appropriately adjusted for any such
period which is only partially within the Term. The Expense Escalation shall
be payable
<PAGE>
in equal monthly installments, commencing with the first installment of Fixed
Rent due on or after the effective date of any increase in the Rate and
continuing thereafter until the effective date of any subsequent increase,
whereupon such installments shall be appropriately adjusted. Landlord shall
furnish Tenant with a statement itemizing Tenant's liability pursuant to this
subdivision whenever such liability arises or changes. Except as limited by
Articles 9 and 10, Tenant's obligation to make such payments shall survive the
Expiration Date or any sooner termination of this lease. Notwithstanding the
foregoing, if, by reason of any law, or any rule, order, regulation or
requirement of any governmental or quasi-governmental authority having or
asserting jurisdiction (collectively, "PW Law"), an increase in the Rate is
reduced or does not take effect, or increases in the Rate are limited or
prohibited, then, for the period covered by the PW Law ("Law Period"), the
Rate for purposes of this Article shall be deemed to increase by the same
percentage and for the same period as comprehended by the most recent increase
in the Rate prior to the effective date of the PW Law, which periodic increase
shall be deemed to continue throughout the Law Period.
(D) Each statement given by Landlord pursuant to Section (C) shall be
binding upon Tenant unless, within thirty (30) days after its receipt of such
statement, Tenant notifies Landlord of its disagreement therewith, specifying
the portion thereof with which Tenant disagrees. Pending resolution of such
dispute, Tenant shall, without prejudice to its rights, pay all amounts
determined by Landlord to be due, subject to prompt refund by Landlord
(without interest) upon any contrary determination.
(E) As used herein:
(1) "Fuel Cost" shall mean Landlord's cost for all fuel
(including steam and/or oil) used in the operation of the Building.
(2) "Electricity Cost" shall mean Landlord's cost for all
electricity used in lighting all the public and service areas of the Building
and operating all of the service facilities of the Building (as determined by
an independent electrical engineer or consultant selected by Landlord);
(3) "Utilities Cost" shall mean the sum of the Fuel Cost and the
Electricity Cost;
(4) "Base Utilities Cost" shall mean the Utilities Cost for the
initial Utility Year (i.e., 1997); and
(5) "Utility Year" shall mean each calendar year all or any part
of which falls within the Term.
(F) If the Utilities Cost for any Utility Year shall be greater than the
Base Utilities Cost, Tenant shall pay Landlord Tenant's Proportionate Share of
such excess ("Utilities Payment"). Any such liability shall be appropriately
prorated for the final Utility Year. Tenant's obligation to make such payment
shall survive the expiration or sooner termination of this lease.
(G) After the initial Utility Year, Landlord shall forward Tenant an
itemized statement ("Utilities Statement") of the Base Utilities Cost.
Thereafter, Landlord shall forward Tenant a Utilities Statement of the
Utilities Cost for the prior Utility Year and a computation of the amount
Payable by Tenant Pursuant to Section (F).
(H) With each installment of Fixed Rent payable during the second
Utility Year, Tenant shall pay Landlord, on account of the amount payable
pursuant to this Article for such Utility Year, Tenant's Proportionate Share
of the product of (i) five percent (5%) of the Base Utilities Cost, and (ii)
one-twelfth) (1/12). Such payments shall be deferred until Landlord forwards
the applicable Utilities Statement of Base Utilities Cost, whereupon tenant
promptly shall pay all deferred payments and thereafter commence such
payments.
(I) With each installment of Fixed Rent payable during and after the
third Utility Year, Tenant shall pay to landlord on account of the amount
payable pursuant to this Article for the then Utility Year.
<PAGE>
(1) until Landlord forwards the applicable Utilities Statement
for the preceding Utility Year, the amount of the monthly payment during
December of such preceding Utility Year; and
(2) after Landlord forwards the applicable Utilities Statement
for the preceding Utility Year, one-twelfth of the amount payable pursuant to
Section (F) for such preceding Utility Year.
(J) Once Landlord forwards the applicable Utilities Statement for the
preceding Utility Year, Landlord and/or Tenant, as the case may be, promptly
shall make appropriate payment to the other (without interest) of any amount
overpaid by Tenant or owing to Landlord for such Utility Year based on the
amount due pursuant to such Utilities Statement and amounts theretofore paid
by Tenant for such preceding Utility Year.
(K) Landlord's Utilities Statement for any Utility Year shall be
conclusive and binding upon Tenant unless within thirty (30) days after
receipt of such Utilities Statement, Tenant notifies Landlord that it disputes
the correctness of the Utilities Statement, specifying the respects in which
it is claimed to be incorrect. In the event of any such dispute, pending the
determination thereof, Tenant shall make payment in accordance with Landlord's
Utilities Statement, without prejudice to its position. If such dispute is
determined in Tenant's favor, Landlord shall forthwith pay Tenant (without
interest) the amount so overpaid by Tenant.
41. Abatement and Adjustments of Fixed Rent
---------------------------------------
Anything herein to the contrary notwithstanding:
(A) Provided this lease shall be in full force and effect and Tenant
shall not be in default hereunder beyond any applicable notice and grace
period, the Fixed Rent shall abate from the Commencement Date through the date
that is one day prior to the Rent Commencement Date; and
(B) Effective on April 1, 2002, the Fixed Rent shall be increased to
$268,200.00 per annum.
42. Electricity
-----------
(A) Landlord shall furnish up to ten (10) watts of electric current per
rentable square foot at a location designated by Landlord for Tenant's use in
the demised premises upon and subject to the terms and conditions set forth in
this Article 42. In bringing such current from such designated location to
the premises, Tenant shall use only such electrical contractors as are then on
the approved list for the Building. Any additional current required by Tenant
shall be provided by Landlord, if available, at a one time cost of $250.00 per
amp if provided during the twelve (12) month period after the date hereof, and
if later provided, then at Landlord's standard charge. If at any time during
the Term, whether before or after Tenant's power is increased or decreased,
Landlord reasonably determines that Tenant is not using any portion of the
electric capacity then servicing the demised premises, then Landlord shall
have the right to recapture any such power not then being used by Tenant
without compensation to Tenant. Tenant's consumption of electrical energy at
the demised premises shall be measured by submeters installed by Landlord at
Tenant's expense.
(B) (1) From and after the Commencement Date, Tenant shall purchase all
electric current consumed in or in connection with the demised premises from
Landlord or Landlord's designated agent and pay therefor an amount equal to
105% of Landlord's Average Cost (as hereinafter defined) applied to all
electricity consumed in or in connection with the demised premises during the
applicable billing period, as measured by the submeters in the demised
premises.
(2) "Landlord's Average Cost" for all purpose of this lease
shall be determined by dividing (y) the total dollar amount billed to landlord
for the Building by the public utility company providing electric current to
the Building (the "Utility Company") for the relevant billing period
(including, without limitation, all charges for "demand," fuel, "on-peak"
<PAGE>
and "off-peak" usage, "time of day" usage and any and all other relevant
adjustments and charges) by (z) the total kilowatt hours utilized by the
Building for such billing period.
(C) Where more than one submeter measures Tenant's consumption of
electricity, the service rendered through each submeter may be computed and
billed separately in accordance with the provisions hereof. Bills therefor
shall be rendered at such times as Landlord may elect and shall be payable on
demand as additional rent. In the event that such bills. are not paid within
thirty (30) days after the same are rendered, Landlord may, without further
notice, discontinue the service of electric current to the demised premises
without releasing Tenant from any liability under this lease and without
Landlord's agent incurring any liability for any damage or loss sustained by
Tenant by such discontinuance of service.
(D) Landlord shall not in any way be liable or responsible to Tenant for
any loss, damage or expense which Tenant may sustain or incur if either the
quantity or character of electric service is changed or is no longer available
or suitable for Tenant's requirements. Tenant's use of electric current shall
never exceed the capacity of existing feeders or risers to, or wiring
installations in, the Building and the demised premises. Any riser or risers
to supply Tenant's electrical requirements will, upon written request of
Tenant, be installed by Landlord at the sole cost and expense of Tenant if, in
Landlord's reasonable judgment, the same are necessary and will not cause
adverse damage or injury to the Building or the operation thereof or the
demised premises, cause or create a dangerous or hazardous condition, entail
excessive or unreasonable alterations, repairs or expense or interfere with or
disturb other tenants or occupants. In addition to the installation of such
riser or risers, Landlord will also, at the sole cost and expense of Tenant,
install all other equipment proper and necessary in connection therewith,
subject to the aforesaid terms and conditions. All of such costs and expense
shall be paid by Tenant to Landlord within fifteen (15) days after rendition
of any bill or statement to Tenant therefor.
(E) Landlord may discontinue such service of electric current upon sixty
(60) days' notice to Tenant without being liable to Tenant therefor or without
in any way affecting this lease or the liability of Tenant hereunder or
causing a diminution of Fixed Rent. Such discontinuance shall not be deemed
to be a lessening or diminution of service within the meaning of any law, rule
or regulation now or hereafter enacted, promulgated or issued. In the event
Landlord gives such notice of discontinuance, Landlord shall permit Tenant to
receive such service direct from the Utility Company, in which event Tenant
shall, at its own cost and expense, furnish and install all risers, service
wiring, switches and other equipment necessary for such installation and
required by the Utility Company and, at its own cost and expense, maintain and
keep in good repair all such risers, wiring, switches and equipment.
(F) Tenant shall make no alterations or additions to the electric
equipment and/or appliances presently installed in the demised premises
without the prior written consent of Landlord in each instance. Rigid conduit
only will be allowed.
(G) If any tax is imposed upon Landlord's receipt from the sale or
resale of electric energy to Tenant by any federal, state or municipal
authority, where permitted by law, Tenant's pro-rata share of such taxes shall
be paid by Tenant to Landlord.
(H) Anything in Section (B) to the contrary notwithstanding, if the
Commencement Date shall occur prior to the installation and proper calibration
of the submeters, then Tenant shall pay Landlord for Tenant's consumption of
electricity in the demised premises at the rate of $1,328.00 per month during
any period when construction is taking place in the demised premises or at the
rate of $2,656.00 per month from and after the date on which Tenant occupies
all or a portion of the demised premises for the conduct of business. In
addition, if during any time during the Term, it shall be determined that the
submeters servicing the demised premises were malfunctioning, Tenant shall pay
Landlord an amount reasonably estimated by Landlord's electrical consultant to
be the amount that would have been payable by Tenant had such malfunction not
occurred.
<PAGE>
43. Restrictions on Use
-------------------
(A) Notwithstanding anything to the contrary contained in Article 2,
Tenant shall use the Basement Premises for the installation of a 600 gallon
diesel tank only, and the Mezzanine Premises for the installation of a 350 kw
generator only and for no other purposes. The installation of the diesel tank
and the 350 kw generator, as provided in the foregoing sentence, shall be
subject to all applicable provisions of this Lease, including, without
limitation, Article 54.
(B) Anything in Article 2 and subsection A of this Article 43 to the
contrary notwithstanding, Tenant shall not use or permit all or any part of
the demised premises to be used for the: (1) storage for purpose of sale of
any alcoholic beverage in the demised premises; (2) storage for retail sale of
any product or material in the demised premises; (3) conduct of a
manufacturing, printing or electronic data processing business, except that
Tenant may operate business office reproducing equipment, electronic data
processing equipment and other business machines for Tenant's own requirements
(but shall not permit the use of any such equipment by or for the benefit of
any party other than Tenant); (4) rendition of any health or related services,
conduct of a school or conduct of any business which results in the presence
of the general public in the demised premises; (5) conduct of the business of
an employment agency or executive search firm; (6) conduct of any public
auction, gathering, meeting or exhibition; (7) conduct of a stock brokerage
office or business; or (8) occupancy of a foreign, United States, state,
municipal or other governmental or quasi-governmental body, agency or
department or any authority or other entity which is affiliated therewith or
controlled thereby.
(C) Tenant shall not use or permit all or any part of the demised
premises to be used in any manner that is inconsistent with a first class
office building or so as to impose any additional burden upon Landlord in its
operation.
(D) Tenant shall not obtain or accept for use in the demised premises
ice, drinking water, food, beverage, towel, barbering, boot blacking, floor
polishing, lighting maintenance, cleaning or other similar services from any
party not theretofore approved by Landlord (which party's charges shall not be
excessive). Such services shall be furnished only at such hours, in such
places within the demised premises and pursuant to such regulations as
Landlord prescribes.
44. Assignment. Etc.
---------------
Supplementing Article 11:
(A) Tenant shall neither: (i) publicly advertise for and/or assign,
sublet or permit the occupancy of all or any part of the demised premises at a
rental rate less than the rental rate at which Landlord is then offering to
lease comparable space in the Building; or (ii) assign this lease to or sublet
to or permit the occupancy of all or any part of the demised premises by any
other party which is then a tenant, subtenant, licensee or occupant of any
space in the Building or which has negotiated with Landlord for space in the
Building within the twelve (12) month period preceding the date of Landlord's
receipt of Tenant's Notice pursuant to Section (B) (nor shall Tenant accept an
assignment of a lease or sublet space from any tenant, subtenant, licensee or
occupant of any space in the Building). Tenant shall designate Williams Real
Estate Co. Inc. (or the then rental agent for the Building) as its exclusive
agent in connection with any subletting of all or any part of the premises or
any assignment of this lease.
(B) If Tenant wishes to assign this lease (a transfer of more than a
fifty percent (50%) beneficial interest in Tenant, whether such transfer
occurs at one time, or in a series of related transactions, and whether of
stock, partnership interest or otherwise, by any party in interest being
deemed an assignment of this lease), sublet all or any part of the demised
premises or permit the demised premises to be occupied by any other party,
Tenant shall first notify Landlord ("Tenant's Notice"), specifying the name of
the proposed assignee, subtenant or occupant, the name of and character of its
business, the terms of the proposed assignment, sublease or occupancy
(including, without limitation, the commencement and expiration dates thereof)
and current information as to the financial responsibility and standing of the
proposed assignee, sublessee or occupant and shall provide Landlord with such
other information as it reasonably requests. Tenant's Notice shall be
accompanied by a copy of the executed
<PAGE>
assignment, sublease or occupancy agreement and all related documents
involving the premises. If only a portion of the demised premises (not
constituting an entire floor of the Building) is to be so sublet or occupied,
Tenant's Notice shall be accompanied by a reasonably accurate floor plan,
indicating such portion. The portion of the demised premises to which such
proposed assignment, sublease or occupancy is to be applicable is hereinafter
referred to as the "Space." Upon Landlord's receipt of Tenant's Notice,
Landlord agrees not to unreasonably withhold its consent to the proposed
assignment or sublease.
(C) Anything herein to the contrary notwithstanding, Tenant may not
assign this lease or sublet all or any part of the demised premises prior to
the expiration of the first year of the Term.
(D) No assignment of this lease shall be effective unless and until
Tenant delivers to Landlord duplicate originals of the instrument of
assignment (wherein the assignee assumes the performance of Tenant's
obligations under this lease) and any accompanying documents.
(E) In the event of any such assignment, Landlord and the assignee may
modify this lease in any manner, without notice to Tenant or Tenant's prior
consent, without thereby terminating Tenant's liability for the performance of
its obligations under this lease, except that any such modification which, in
any way, increases any of such obligations shall not, to the extent of such
increase only, be binding upon Tenant.
(F) No sublease of all or any part of the demised premises shall be
effective unless and until Tenant delivers to Landlord duplicate originals of
the instrument of sublease (containing the provision required by Section (G))
and any accompanying documents. Any such sublease shall be subject and
subordinate to this lease.
(G) Any such sublease shall contain substantially the following
provisions:
(1) "In the event of a default under any underlying lease of all or
any portion of the premises demised hereby which results in the termination of
such lease, the subtenant hereunder shall, at the option of the lessor under
any such lease ("Underlying Lessor"), attorn to and recognize the Underlying
Lessor as landlord hereunder and shall, promptly upon the Underlying Lessor's
request, execute and deliver all instruments necessary or appropriate to
confirm such attornment and recognition. Notwithstanding such attornment and
recognition, the Underlying Lessor shall not (a) be liable for any previous
act or omission of the landlord under this sublease, (b) be subject to any
offset, not expressly provided for in this sublease, which shall have accrued
to the subtenant hereunder against said landlord, or (c) be bound by any
modification of this sublease or by any prepayment of more than one month's
rent, unless such modification or prepayment shall have been previously
approved in writing by the Underlying Lessor. The subtenant hereunder hereby
waives all rights under any present or future law to elect, by reason of the
termination of such underlying lease, to terminate this sublease or surrender
possession of the premises demised hereby.
(2) This sublease may not be assigned or the premises demised
hereunder further sublet, in whole or in part, without the prior written
consent of the Underlying Lessor."
(H) No assignment or sublease, whether or not consented to by Landlord
and whether or not any such consent is required, shall release Tenant from its
liability for the performance of Tenant's obligations hereunder during the
balance of the Term. Landlord's consent to any assignment or sublease shall
not constitute its consent to any (i) further assignment of this lease or of
any permitted sublease or (ii) further sublease of all or any portion of the
premises demised hereunder or under any permitted sublease. If a sublease to
which Landlord has consented is assigned or all or any portion of the premises
demised thereunder is sublet without the consent of Landlord in each instance
obtained, Tenant shall immediately terminate such sublease, or arrange for the
termination thereof, and proceed expeditiously to have the occupant thereunder
dispossessed.
(I) Tenant shall pay to landlord, promptly upon demand therefor, all
costs and expenses (including, without limitation, reasonable attorneys' fees
and disbursements) incurred
<PAGE>
by Landlord in connection with any assignment of this lease or sublease of all
or any part of the demised premises.
(J) If Landlord shall give its consent to any assignment of this lease
or to any sublease or if Tenant shall otherwise enter into any assignment or
sublease permitted hereunder, Tenant shall in consideration therefor, pay to
Landlord, as and when payable to Tenant (except with respect to an assignment
in connection with the bona-fide sale of Tenant's business):
(1) in the case of an assignment, fifty (SO%) percent of all sums
and other considerations paid to Tenant by the assignee for or by reason of
such assignment (including, but not limited to, sums paid for the sale of
Tenant's fixtures, leasehold improvements, equipment, furniture, furnishings
or other personal property, less the then fair market value thereof; and
(2) in the case of a sublease, fifty (50%) percent of the amount,
if any, by which (i) any rents, additional charges or other consideration
payable under the sublease to Tenant by the subtenant (including, but not
limited to, sums paid for the sale or rental of Tenant's fixtures, leasehold
improvements, equipment, furniture or other personal property, less the then
fair market value thereof) exceeds (ii) the Fixed Rent and additional rent
accruing during the term of the sublease in respect of the Space (at the rate
per square foot payable by Tenant hereunder) pursuant to the terms of this
lease.
(K) Anything in Article 11 or this Article 44 notwithstanding, subject
to all applicable provisions of this lease (including, without limitation,
Articles 2 and 43 and Sections (A)(i), (B), (D), (E), (F), (G), (H) and (I) of
this Article 44, but not including Sections (A)(ii), (C), or (J) of this
Article 44), Landlord's consent shall not be required to any assignment or
sublease to a subsidiary or parent of Tenant or a subsidiary of the parent of
Tenant, or to any parent or subsidiary of any of the above-mentioned parties.
45. Brokerage
---------
Tenant represents that it dealt only with the Broker as broker in
connection with this lease and Landlord shall pay the Broker's commission
therefor pursuant to separate agreement. Tenant shall indemnify Landlord
against all loss, damage, liability, cost and expense (including reasonable
attorney's fees) pertaining to any other brokerage commission or like
compensation which is based on alleged actions of Tenant or its agents or
representatives. Tenant's liability hereunder shall survive any expiration or
termination of this lease.
46. Building Directory
-------------------
(A) Landlord shall, upon Tenant's request, list on the Building's
directory ("Directory"), the names of Tenant, any other party occupying any
part of the demised premises pursuant hereto and their officers or employees,
provided the number of Directory lines so provided by Landlord does not exceed
Tenant's Proportionate Share of the Directory's capacity.
(B) The listing of any party's name other than Tenant's shall neither
grant such party any right or interest in this lease and/or the demised
premises nor constitute Landlord's consent to any assignment or sublease to or
occupancy by such party. Such listing may be terminated by Landlord at any
time, without prior notice. The initial listing(s) on the Directory shall be
provided by Landlord without charge to Tenant. Thereafter, Tenant shall pay
Landlord's standard fee for any work performed in connection with any
additions, deletions or changes to the Directory.
47. Exculpatory Clause
------------------
(A) Anything herein to the contrary notwithstanding, the liability of
Landlord and the partners of, or any other party which holds any interest in,
Landlord for negligence, failure to perform lease obligations or otherwise
under or in connection with this lease shall be limited to each of their
respective interests in the Land and Building. Tenant shall neither seek to
enforce nor enforce any judgment or other remedy against any other asset of
Landlord, any partner of Landlord or any party that holds any interest in
landlord.
<PAGE>
(B) In any claim made by Tenant against Landlord alleging that Landlord
has acted unreasonably where Landlord had an obligation to act reasonably,
Tenant shall have no right to recover damages from Landlord and Tenant's sole
and exclusive recourse against Landlord shall be an action seeking specific
performance of Landlord's obligation to act reasonably.
48. Submission to Jurisdiction. Etc.
-------------------------------
(A) This lease shall be deemed to have been made in New York County,
New York, and shall be construed in accordance with the laws of the State of
New York. All actions or proceedings relating, directly or indirectly, to
this lease shall be litigated only in courts located within the County of New
York. Tenant, any guarantor of the performance of its obligations hereunder
("Guarantor") and their respective successors and assigns hereby subject
themselves to the jurisdiction of any state or federal court located within
such county, waive the personal service of any process upon them in any action
or proceeding therein and consent that such process may be served by certified
or registered mail, return receipt requested, directed to Tenant and any
successor at Tenant's address hereinabove set forth, to Guarantor and any
successor at the address set forth in the instrument of guaranty and to any
assignee at the address set forth in the instrument of assignment. Such
service shall be deemed made two days after such process is so mailed.
(B) Whenever any default, request, action or inaction by Tenant causes
Landlord to incur attorneys' fees and/or any other costs or expenses, Tenant
agrees that it shall pay and/or reimburse Landlord for such fees, costs or
expenses (to the extent reasonable) within thirty (30) days after being billed
therefor.
(C) If any monies owing by Tenant under this lease are paid more than
fifteen (15) days after the date such monies are payable pursuant to the
provisions of this lease, Tenant shall pay Landlord interest thereon, at the
then maximum lawful rate, for the period from the date such monies were
payable to the date such monies are paid.
(D) The submission of this lease to Tenant shall not constitute an offer
by Landlord to execute and exchange a lease with Tenant and is made subject to
Landlord's acceptance, execution and delivery thereof.
49. Requests by Mortgagee or Others
-------------------------------
(A) If any present or prospective mortgagee of the Land, Building or
any leasehold interest therein requires, as a condition precedent to issuing
or extending its loan, the modification of this lease in such manner as does
not materially lessen Tenant's rights or increase its obligations hereunder,
Tenant shall not delay or withhold its consent to such modification and shall
execute and deliver such confirming documents therefor as such mortgagee
requires.
(B) If Landlord, in conjunction with any proposed sale or mortgaging
of all or any portion of the Land and Building or any leasehold interest
therein, requests the delivery of certified financial statements or other
information relating to the financial condition of Tenant, Tenant shall
deliver such certified financial statements or such other information within
ten (10) days after Landlord's written request therefor.
50. Delivery of Demised Premises
----------------------------
Supplementing Article 21, the demised premises shall be leased to Tenant
in their "as is" condition on the Commencement Date and Landlord shall not be
required to perform any work to prepare the demised premises for Tenant's
occupancy other than to construct a building standard demising wall and to
install a building standard suite door with reasonable diligence after the
Commencement Date. The taking of possession of the demised premises by Tenant
shall be conclusive evidence as against Tenant that, at the time such
possession was so taken, the demised premises and the Building were in good
and satisfactory condition.
<PAGE>
51. Insurance
---------
During the Term, Tenant shall pay for and keep in force general liability
policies in standard form protecting against any and all liability occasioned
by accident or occurrence, subject to customary exclusions, such policies to
be written by recognized and well-rated insurance companies authorized to
transact business in the State of New York. The minimum limits of liability
shall be a combined single limit with respect to each occurrence in an amount
of not less than $5,000,000 for injury (or death) and damage to property. If
at any time during the Term it appears that public liability or property
damage limits in the City of New York for buildings similarly situated, due
regard being given to the use and occupancy thereof, are higher than the
foregoing limits, then Tenant shall increase the foregoing limits accordingly.
Landlord shall be named as an additional insured in the aforesaid insurance
policies and the policies shall provide that Landlord shall be afforded not
less than thirty (30) days prior notice of cancellation of said insurance.
Tenant shall deliver certificates of insurance evidencing such policies. All
premiums and charges for the aforesaid insurance shall be paid by Tenant. If
Tenant shall fail to make such payment when due, Landlord may make it and the
amount thereof shall be repaid to Landlord by Tenant on demand and the amount
thereof may, at the option of Landlord, be added to and become a part of the
additional rent payable hereunder. Tenant shall not violate or permit to be
violated any condition of any of said policies and Tenant shall perform and
satisfy the requirements of the companies writing such policies.
52. Bankruptcy
----------
Without limiting any of the provisions of Articles 16, 17 or 18 hereof,
if, pursuant to the Bankruptcy Code of 1978, as the same may be amended,
Tenant is permitted to assign this lease in disregard of the obligations
contained in Articles 11 and 44 hereof, Tenant agrees that adequate assurance
of future performance by the assignee permitted under such Code shall mean the
deposit of cash security with Landlord in an amount equal to the sum of one
year's Fixed Rent then reserved hereunder plus an amount equal to all
additional rent payable under this lease for the calendar year preceding the
year in which such assignment is intended to become effective, which deposit
shall be held by Landlord, without interest, for the balance of the Term as
security for the full and faithful performance of all of the obligations under
this lease on the part of Tenant yet to be performed. If Tenant receives or
is to receive any valuable consideration for such an assignment of this lease,
such consideration, after deducting therefrom (A) the brokerage commissions,
if any, and other expenses reasonably incurred by Tenant for such assignment
and (B) any portion of such consideration reasonably designated by the
assignee as paid for the purchase of Tenant's property in the demised
premises, shall be and become the sole and exclusive property of Landlord and
shall be paid over to Landlord directly by such assignee. In addition,
adequate assurance shall mean that any such assignee of this lease shall have
a net worth, exclusive of good will, equal to at least fifteen (15) times the
aggregate of the Fixed Rent reserved hereunder plus all additional rent for
the preceding calendar year as aforesaid.
53. Local Law 5/Required Alterations
--------------------------------
Supplementing Article 6:
(A) All work performed or installations made by Tenant (or by Landlord
at Tenant's request and expense) in and to the demised premises shall be done
in a fashion such that the demised premises and the Building shall be in
compliance with the requirements of Local Law 5 of 1973 of The City of New
York, as heretofore and hereafter amended ("Local Law 5"). The foregoing
shall include, without limitation, (i) compliance with the
compartmentalization requirements of Local Law 5, (ii) relocation of existing
fire detection devices, alarm signals and/or communication devices
necessitated by the alteration of the demised premises, and (iii) installation
of such additional fire control or detection devices as may be required by
applicable governmental or quasi-governmental rules, regulations or
requirements (including, without limitation, any requirements of the New York
Board of Fire Underwriters) as a result of Tenant's manner of use of the
demised premises. In addition, Tenant shall cause the demised premises to be
connected to the Building "Class E" system and arrange to have the demised
premises and Tenant added to the "Class E" computer.
<PAGE>
(B) Landlord shall not be responsible for any damage to Tenant's fire
control or detection devices nor shall Landlord have any responsibility for
the maintenance or replacement thereof. Tenant shall indemnify Landlord from
and against all loss, damage, cost, liability or expense (including, without
limitation, reasonable attorneys' fees and disbursements/suffered or incurred
by Landlord by reason of the installation and/or operation of any such
devices.
(C) All work and installations required to be undertaken by Tenant
pursuant to this Article shall be performed at Tenant's sole cost and expense
and in accordance with plans and specifications and by contractors previously
approved by Landlord.
(D) The fact that Landlord shall have heretofore consented to any
installations or alterations made by Tenant in the demised premises shall not
relieve Tenant of its obligations pursuant to this Article with respect to
such installations or alterations.
(E) If any utility company or governmental or quasi-governmental
authority requires any work, installation or improvement to be made to the
Building in connection with any Alteration performed by Tenant, the
installation or operation of equipment or machinery in the demised premises or
for any other reason relating to Tenant's use or occupancy of the demised
premises, Tenant shall reimburse Landlord for the cost of such work,
installation or improvement on demand.
54. Tenant's Alterations
--------------------
(A) Tenant shall not make or perform, or permit the making or
performance of, any alterations, installations, improvements, additions or
other physical changes in or about the demised premises (collectively,
"Alterations") without Landlord's prior consent. Landlord agrees not
unreasonably to withhold its consent to any Alterations which are
nonstructural and which do not affect the Building's systems and facilities,
provided that such Alterations are performed only by contractors or mechanics
first approved by Landlord, do not affect any part of the Building other than
the demised premises (including, without limitation, the exterior thereof), do
not adversely affect any service required to be furnished by Landlord to
Tenant or to any other tenant or occupant of the Building and do not reduce
the value or utility of the Building. All Alterations shall be done at
Tenant's expense and at such times and in such manner as Landlord may from
time to time reasonably designate pursuant to the conditions for Alterations
prescribed by Landlord for the Building ("Alteration Regulations"). Prior to
making any Alterations, Tenant (i) shall submit to Landlord detailed plans and
specifications (including layout, architectural, mechanical and structural
drawings) for each proposed Alteration and shall not commence any such
Alteration without first obtaining Landlord's approval of such plans and
specifications, (ii) shall, at its expense, obtain all permits, approvals and
certificates required by any governmental or quasi-governmental bodies, and
(iii) shall furnish to Landlord duplicate original policies of worker's
compensation insurance (covering all persons to be employed by Tenant and
Tenant's contractors and subcontractors in connection with such Alteration)
and comprehensive public liability (including property damage coverage)
insurance in such form, with such companies, for such periods and in such
amounts as Landlord may reasonably require, naming Landlord and its agents as
additional insureds. Upon completion of such Alteration, Tenant, at Tenant's
expense, shall obtain certificates of final approval of such Alteration
required by any governmental or quasi-governmental bodies and shall furnish
Landlord with copies thereof and shall, within thirty (30) days of such
completion, deliver a set of final "as built" drawings to Landlord reflecting
the Alteration. All Alterations shall be made and performed in accordance
with the Alteration Regulations. All materials and equipment to be
incorporated in the demised premises as a result of all Alterations shall be
new and first quality. No such materials or equipment shall be subject to any
lien, encumbrance, chattel mortgage, title retention or security agreement.
Tenant shall not, at any time prior to or during the Term, directly or
indirectly employ, or permit the employment of, any contractor, mechanic or
laborer in the demised premises, whether in connection with any Alteration or
otherwise, if, in Landlord's sole discretion, such employment will interfere
or cause any conflict with other contractors, mechanics, or laborers engaged
in the construction, maintenance or operation of the Building by Landlord,
Tenant or others. In the event of any such interference or conflict, Tenant,
upon demand of landlord, shall cause all contractors, mechanics or laborers
causing such interference or conflict to leave the Building immediately.
<PAGE>
(B) No approval of any plans or specifications by Landlord or consent by
Landlord allowing Tenant to make any Alterations or any inspection of
Alterations made by or for Landlord shall in any way be deemed to be an
agreement by Landlord that the contemplated Alterations comply with any legal
requirements or insurance requirements or the certificate of occupancy for the
Building nor shall it be deemed to be a waiver by Landlord of the compliance
by Tenant of any provision of this lease.
(C) Tenant shall promptly reimburse Landlord for all reasonable and
customary fees, costs and expenses including, but not limited to, those of
attorneys, architects and engineers, incurred by Landlord in connection with
the review of Tenant's plans and specifications and inspecting the Alterations
to determine whether the same are being or have been performed in accordance
with the approved plans and specifications therefor and with all legal and
insurance requirements.
55. Estoppel Certificate
--------------------
Tenant, at any time, and from time to time, upon at least ten (10) days'
prior notice by Landlord, shall execute, acknowledge and deliver to Landlord,
and/or to any other person, firm or corporation specified by Landlord
("Recipient"), a statement certifying that this lease is unmodified and in
full force and effect (or, if there have been modifications, that the same is
in full force and effect as modified and stating the modifications), stating
the dates to which the Fixed Rent and additional rent have been paid, stating
whether or not there exists any default by Landlord under this lease, and, if
so, specifying each such default, and any other matters reasonably requested
by Landlord or the Recipient.
56. Holdover
--------
In the event Tenant shall hold over after the expiration of the Term, the
parties hereby agree that Tenant's occupancy of the demised premises after the
expiration of the Term shall be upon all of the terms set forth in this lease
except that Tenant shall pay as a use and occupancy charge for the holdover
period an amount equal to the higher of (A) an amount equal to two times the
pro rata Fixed Rent and additional rent payable by Tenant during the last year
of the Term; or (B) an amount equal to the then market rental value for the
demised premises, as established by Landlord's good faith estimate of such
market rental value.
57. Conditional Limitation
----------------------
In the event that four (4) times in any twelve (12) month period (A) a
default of the kind set forth in Section 17(1) shall have occurred or (B)
Tenant shall have defaulted in the payment of Fixed Rent or additional rent,
or any part of either, and Landlord shall have commenced a summary proceeding
to dispossess Tenant in each such instance, then, notwithstanding that such
defaults may have been cured at any time after the commencement of such
summary proceeding, any further default by Tenant within such twelve (12)
month period shall be deemed to be a violation of a substantial obligation of
this lease by Tenant and Landlord may serve a written ten (10) days' notice of
cancellation of this lease upon Tenant and, upon the expiration of said ten
(10) days, this lease and the Term shall end and expire as fully and
completely as if the expiration of such ten (10) day period were the day
herein definitely fixed for the end and expiration of this lease and the Term
and Tenant shall then quit and surrender the demised premises to Landlord, but
Tenant shall remain liable as elsewhere provided in this Lease.
58. Limitation on Rent
------------------
If on the Commencement Date, or at any time during the Term, the Fixed
Rent or additional rent reserved in this lease is not fully collectible by
reason of any federal, state, county or city law, proclamation, order or
regulation, or any direction of any public officer or body pursuant to law
(collectively, "Rent Law"), Tenant agrees to take such steps as Landlord may
request to permit Landlord to collect the maximum rents which may be legally
permissible from time to time during the continuance of such legal rent
restriction (but not in excess of the amounts reserved therefor under this
lease). Upon the termination of such legal rent restriction, Tenant shall pay
to Landlord, to the extent permitted by the Rent Law, an amount equal to (A)
the Fixed Rent and additional rent which would have been paid pursuant to this
lease but for
<PAGE>
such legal rent restriction, less (B) the Fixed Rent and additional rent paid
by Tenant to Landlord during the period such legal rent restriction was in
effect.
59. Acceptance of Keys
------------------
If Landlord or Landlord's managing or rental agent accepts from Tenant
one or more keys to the demised premises in order to assist Tenant in showing
the demised premises for subletting or other disposition or for the
performance of work therein for Tenant or for any other purpose, the
acceptance of such key or keys shall not constitute an acceptance of a
surrender of the demised premises nor a waiver of any of Landlord's rights or
Tenant's obligations under this lease including, without limitation, the
provisions relating to assignment and subletting and the condition of the
demised premises.
60. Definitions of "Landlord" and "Owner"
-------------------------------------
The terms "Owner" and "Landlord," whenever used in this lease (including,
without limitation, in Article 31), shall have the same meaning.
61. Landmark Designation
--------------------
Tenant acknowledges that the Building has been designated by the New York
City Landmarks Commission (the "Commission") as an historical landmark and, in
connection therewith, Tenant agrees that it shall comply with any rules,
regulations, building and/or construction restrictions of the Commission or
other entity having jurisdiction over the demised premises in connection
therewith.
62. Hazardous Materials
-------------------
(A) Tenant shall not cause nor permit "Hazardous Materials" (as defined
below) to be used, transported, stored, released, handled, produced or
installed in, or from, the demised premises, except that inflammable or
combustible (but not explosive) items may be brought into and used within the
demised premises as may be needed for the operation of normal office
equipment, so long as both in compliance with all Laws. The term "Hazardous
Materials" shall, for the purposes hereof, mean any flammable, explosives,
radio-active materials, hazardous wastes, hazardous and toxic substances or
related materials, asbestos or any material containing asbestos, or any other
substances or material, as defined by any present or future Law, including
without limitation, the Comprehensive Environmental Response Compensation and
Liability Act of 1980, as amended, the Hazardous Materials Transportation Act,
as amended, the Resources Conservation and Recovery Act, as amended, Superfund
Amendment and Reauthorization Act of 1986 and in the regulations adopted and
publications promulgated pursuant to each of the foregoing. In the event of a
breach of the provisions of this Article 62, Landlord, in addition to all of
its rights and remedies under this lease and pursuant to Law, may require
Tenant to remove any such Hazardous Materials from the demised premises or the
Building in the manner prescribed for such removal by all requirements of Law.
The provisions of this Article 62 shall survive the expiration or sooner
termination of this lease.
(B) If any Hazardous Material or friable asbestos (not including
asbestos floor tile, as to which Landlord shall have no responsibility) is
discovered in the demised premises which is not the responsibility of Tenant
as above provided and which is required by applicable law to be removed or
encapsulated, then, as Tenant's sole remedy, Landlord will, at Landlord's
expense and with reasonable promptness after Landlord is not fire thereof,
remove or encapsulate such Hazardous Material or friable asbestos in
accordance with Law.
63. Interconnections
----------------
(A) Subject to Landlord's prior approval, which will not be unreasonably
withheld, Tenant shall have the right to install and run both vertical and
horizontal communication interconnections, via conduit, wave guide and ceramic
duct, provided that such installation is performed in accordance with all
applicable Laws and the relevant provisions of this lease including, without
limitation, Articles 3, 6 and 54 and in accordance with plans and
<PAGE>
specifications previously approved by Landlord. Prior to any cable pulls
being installed through any conduits running through other tenant spaces,
Tenant shall present a copy of an agreement between Tenant and such other
tenant (reasonably satisfactory to Landlord) whereby such other tenant
consents to Tenant making the proposed connection or other installation.
(B) If Tenant makes use of an existing means of interconnection owned by
Landlord, Tenant shall pay:
(1) a Base Charge (one time charge) of $30.00 per foot; and
(2) a Monthly Charge, payable along with monthly installments of
Fixed Rent, as follows: 4" - $.80 per linear foot; 3" - $.60 per linear
foot; 2" - $.40 per linear foot: and 1" or less - $.30 per linear foot.
(C) If Tenant installs a new means of interconnection, Tenant shall pay
a Monthly Charge, payable along with monthly installments of Fixed Rent, as
follows: 4" - $.50 per linear foot; 3" - $.40 per linear foot; 2" - $.30 per
linear foot; and 1" or less - $.20 per linear foot.
(D) Tenant agrees that the charges set forth in subsections (B) and (C)
shall be effective as of the date of Landlord's approval of the applicable
installation and shall be increased by four (4%) percent each year commencing
on the first anniversary of the date of Landlord's approval of the applicable
installation and on each anniversary thereafter throughout the Term. If the
Term is extended or this lease is renewed, such charges during the renewal
term may, at Landlord's option, be increased to those then generally
prevailing in the Building.
(E) All interconnections shall conform to the following specifications:
(1) The conduit shall be supported a minimum of every 10 linear
feet.
(2) The conduit shall be tagged each 15 1inear feet, with letters
a minimum of 2-1/2 inches in height, as required by Landlord
in its approval letter.
(3) All penetrations of fire-rated partitions or slabs shall be
fire-stopped with a UL approved material of equal or greater
rating.
(4) Tenant shall inform the building manager on completion of the
installation for final inspection and approval.
(5) Tenant's sub-contractor must coordinate all work with the
building manager and other tenants affected by the work.
(6) All conduit shall be rigid conduit or elastic metal tubing.
Tenant acknowledges that the use of any other type of
conduit is inherently risky, particularly in an environment,
like the Building, which has very numerous conduit runs and
which will have many more. If, however, Tenant requests,
and Landlord permits, plastic flexible conduit (which will
be permitted, if at all, only for fiber cable), then Tenant
acknowledges that such installation will be at Tenant's sole
risk, and Tenant hereby agrees to indemnify Landlord and its
partners, and the respective directors, officers, agents and
employees of Landlord and its partners (collectively, the
"Landlord Parties"), and to hold the Landlord Parties
harmless, against and from all loss, damage, cost, liability
or expense (including, without limitation, reasonable
attorneys' fees and disbursements) suffered or incurred by
Landlord by reason of any claim arising from the
installation and/or use of any such conduit or any damage
resulting to any cable installed therein, whether or not
arising in whole or in part from the negligence of any
Landlord Party.
<PAGE>
64. Landlord's Access
-----------------
Supplementing Article 13, upon reasonable prior notice to Tenant (which
need not be in writing), except in an emergency when no notice shall be
required, Landlord and other tenants, licensees and occupants of the Building
shall have access to the Building shafts and conduits located within the
demised premises.
65. Miscellaneous
-------------
Landlord approves, in principle, subject to Tenant's compliance with all
applicable provisions of this lease, Tenant's installation of a FM-200 fire
suppression system in the demised premises.
<PAGE>
EXHIBIT A
[Diagram of portion of twelfth floor subject to lease]
<PAGE>
EXHIBIT A-1
[Diagram of portion of mezzanine subject to lease]
<PAGE>
EXHIBIT A-2
[Diagram of portion of basement subject to lease]
TELCO COMMUNICATIONS GROUP, INC.
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
WEIGHTED AVERAGE NUMBER OF COMMON 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:
For all periods presented prior to the initial public offering, outstanding
options for common stock granted within 12 months of the initial filing date of
the IPO have been included in the calculations of common and common equivalent
shares outstanding using the treasury stock method based on the initial public
offering price of $14 per share as the market price.
(in thousands, except per share data)
1994 1995 1996
Common Stock:
Shares outstanding beginning
of period 20,188 20,864 20,864
Shares issued during period, net (1) 217 - 2,127
SEC SAB 83 shares (2) 5,889 5,889 5,889
--------- -------- ---------
26,294 26,753 28,880
Common Stock Equivalents:
Options (3) 219 865 1,653
Warrants (4) 371 636 0
--------- ---------- --------
590 1,531 1,653
Weighted average number of 26,884 28,284 30,533
common shares
Net Income $2,006 $10,765 $22,877
Net Income per share $ 0.07 $ 0.38 $ 0.75
(1) Weighted average common shares issued,
net of repurchase of shares
(2) Common shares and employee options issued
June 14, 1995 to June 13, 1996 7,094
Less shares reacquired
under treasury stock method 1,205
---------
Net SAB 83 common shares 5,889
=========
(3) Options granted, less common shares reacquired under
treasury stock method, on a weighted average basis.
(4) Represents warrants held by Signet Media Capital Group to
purchase 636,158 common shares at a nominal exercise price,
which were exercised concurrent with the IPO.
<TABLE>
<CAPTION>
Selected Consolidated Financial Data
Years Ended December 31,
<S> <C> <C> <C> <C>
1993(1) 1994 1995 1996
(in thousands, except per share
and per minute of use amounts)
Statement of Operations Data:
Revenues, net $ 1,135 $ 44,707 $ 215,376 $ 428,552
Cost of services 993 27,736 133,728 252,036
Gross margin 142 16,971 81,648 176,516
Selling, general and
administrative 1,310 12,018 55,936 125,575
Depreciation and amortization 54 496 3,326 7,967
Operating income (loss) (1,222) 4,457 22,386 42,974
Interest expense 25 897 2,952 3,515
Other income (expense) -- 15 (92) 501
Provision for income taxes -- 1,432 7,531 16,394
Minority interest -- 137 1,046 689
Net income (loss) $ (1,247) $ 2,006 $ 10,765 $ 22,877
Net income (loss) per share $ (0.05) $ 0.07 $ 0.38 $ 0.75
Weighted average number of
shares outstanding
(in thousands) 26,077 26,884 28,285 30,533
Balance Sheet Data (at Period End):
Cash and cash equivalents $ 140 $ 475 $ 937 25,373
Total assets 2,051 33,533 87,124 210,596
Total debt (including capital
lease obligations) 1,559 18,884 44,411 3,301
Minority interest -- 137 1,183 --
Shareholders' equity (deficit) (376) 1,655 12,420 145,720
Other Operating Data:
Billed minutes of use 1,384,300 2,963,080
Revenue per billed minute of use $ 0.156 $ 0.145
Cost of services per billed minute of use $ 0.097 $ 0.085
(1) The Company commenced operations in November 1993.
</TABLE>
Forward-Looking Information
Statements in this report concerning future results, performance,
achievements, expectations or trends, if any, are forward-looking statements.
Actual results, performance, achievements, events or trends could differ
materially from those expressed or implied by such forward-looking statements as
a result of known and unknown risks, uncertainties and other factors including
those described below and those identified by the Company in the Company's other
filings with the Securities and Exchange Commission.
Introduction
Telco Communications Group, Inc. and its wholly owned subsidiaries
(collectively "Telco" or "the Company") 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 five digit
Carrier Identification Code (CIC) before dialing the number they are calling.
Using a CIC Code to access the Company's network is known as "dial around" or
"casual calling" because customers can use the Company's services at any time
without changing their existing presubscribed long distance carrier. The Company
markets its residential long distance services through marketing subsidiaries
under two brands, each with a unique CIC Code: Dial & Save (CIC Code 10457) and
the Long Distance Wholesale Club (LDWC) (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 December 1996, the Company
provided long distance services to approximately 2.6 million customers (switched
access lines) in 48 states and the District of Columbia. All dial around
operations are conducted through marketing subsidiaries that are referred to
collectively as the Consumer Division.
To increase its volume of call traffic, Telco has begun to sell its daytime
capacity on a wholesale basis to other long distance carriers and in addition
has created a Commercial Sales Division ("CSD") to target business and carrier
customers. Because the Company's existing customer base is primarily
residential, the majority of calls are handled during off-peak evening and
weekend periods. As of December 31, 1996, CSD had opened 22 sales offices in 13
states and employed approximately 220 sales personnel. For the fourth quarter of
1996, CSD revenues were $9.3 million, or approximately 7.8% of total
consolidated revenues.
The Company bills its dial around 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 casual calling customers. The
Company has agreements with LECs, including all of the Regional Bell Operating
Companies ("RBOCs"), that cover substantially all 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, Inc. ("Tel Labs"), a wholly owned
telecommunications billing company started in 1991 by Telco's Chairman of the
Board.
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; Austin, Texas and Las Vegas, Nevada.
Additionally, the Company is installing a DEX 600E switch in the New York City
metropolitan area which is expected to be made operational during the first half
of 1997 and has taken receipt of an eighth switch to be installed later in 1997
in a yet undetermined location.
Future issues affecting the Company's operations for 1997 and beyond are as
follows:
Competitive Factors. The Company has observed new entrants and increased
competition in the Company's dial around segment. Additionally, although the
basic rates of the largest long distance carriers available to most residential
customers increased during 1996, the Company has also observed an increase in
the number of promotional, discounted ca lling plans available to long distance
consumers.
Regulatory Changes. The operations of the Company will continue to be
affected by the ongoing events associated with the 1996 Telecommunications Act.
Such events include access charge reform which could materially reduce
transmission costs for both the Company and other long distance companies, the
entrance of the RBOCs into the long distance marketplace and the ability of long
distance companies like Telco to begin marketing local telephone services.
Availability of Transmission Facilities. The Company has observed a
tightening in the market for the availability of leased fiber optic facilities
connecting the Company's switches. The Company leases these facilities under
multi-year contracts with three major vendors and, to date, has been able to
secure the necessary facilities.
Expansion of the Commercial Sales Division. The costs associated with the
continuing expansion of CSD are expected to reduce the Company's net income at
least through 1997. The Company expects that the revenue growth associated with
this division will represent a material portion of the overall growth of the
Company.
Integration of Voice Network Acquisition. On March 11, 1997, the Company
announced the proposed acquisition of certain voice network assets which include
the capacity rights to 100,000 DS-3 miles of transmission capacity, 5 Nortel DMS
250 switches and other associated telecommunications equipment. The ability of
the Company to generate adequate ca sh flow from this asset acquisition will be
based on the integration of these network assets into Telco's existing network
and the resale of surplus capacity to third party customers.
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
Year Ended December 31,
<S> <C> <C> <C> <C>
1993 1994 1995 1996
Revenues, net 100.0% 100.0% 100.0% 100.0%
Cost of services 87.5 62.0 62.1 58.8
Gross margin 12.5 38.0 37.9 41.2
Operating expenses:
Selling, general and administrative 115.3 26.9 26.0 29.3
Depreciation and amortization 4.8 1.1 1.5 1.9
Operating income (107.6) 10.0 10.4 10.0
Interest and other 2.2 2.0 1.4 0.7
Income taxes -- 3.2 3.5 3.8
Net income (109.8%) 4.5% 5.0% 5.3%
</TABLE>
1996 Compared to 1995
Revenues. Revenues increased 99%, or $213.2 million, from $215.4 million
for 1995 to $428.6 million for 1996. The increase in revenue was due to an
increase in billed customer minutes from both the Company's Consumer and
Commercial Sales Divisions offset by a decline in revenue per billed minute of
use. Total billed minutes of use were 2,963.1 million for 1996, a 114% increase,
versus 1,384.3 million minutes for 1995. Revenue per minute of use was $0.145
for 1996 versus $0.156 per minute of use for 1995. This revenue per minute
decrease was primarily attributable to an increase in carrier revenue both as a
percentage of total revenue and in aggregate, which is a lower revenue per
minute of use product than the Company's other product lines.
Revenues for the Consumer Division were $405.7 million, a 96% increase
versus $206.9 million for 1995. The Consumer Division expanded its marketing
efforts during 1996 into new states through both LDWC and Dial & Save, and also
targeted its marketing efforts into many of its existing geographical markets.
Revenues for CDS, which consists of revenue from commercial and carrier
customers, were $22.1 million for 1996 versus $8.5 million for 1995, a 160%, or
$13.6 million increase. The total for both 1995 and for the first six months of
1996 consists solely of carrier revenue.
The Company generated $0.8 million in revenue from its Tel Labs subsidiary
for 1996, all of which occurred after Telco's acquisition of Tel Labs in the
third quarter of 1996. The offsets to revenue increased during 1996 compared to
1995 both as a percentage of revenue and in the aggregate due to increased
billed customer minutes and incre ases in revenue allowances, principally due to
increases in revenues in geographical areas where LECs require higher holdback
percentages.
Cost of Services. Cost of services increased 88%, or $118.3 million, from
$133.7 million for 1995 to $252.0 million for 1996. Approximately $101.8 million
of this increase was attributable to direct costs relating to LEC access charges
and the Company's transmission of on-net and off-net traffic, all of which was
partially offset by a decrease in per minute costs. The remaining $16.5 million
increase was the result of higher facilities lease costs associated with the
expanded transmission network and Tel Labs expenses offset by a $0.9 million
reduction in installation charges. The cost per minute for 1996 was $0.085
versus $0.097 for 1995. 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 $94.9 million, from $81.6
million for 1995 to $176.5 million for 1996, due to the reasons discussed above.
As a percentage of revenues, gross margin increased from 37.9% for 1995 to 41.2%
for 1996.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased $69.7 million, or 125%, from $55.9 million for
1995 to $125.6 million for 1996. Approximately $11.4 million of this increase
was attributable to the direct expenses of the Commercial Sales Division,
commenced in June 1996. Approximately $31.0 million of the increase was the
result of higher Consumer Division marketing expenses for 1996 compared to 1995,
and the remaining $27.3 million increase was the result of higher LEC billing
expenses, customer service costs and other corporate general and administrative
expense generally associated with increased customer minutes of use. As a
percentage of revenues, selling, general and administrative expense increased to
29.3% for 1996 from 26.0% for 1995.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased by $4.7 million, from $3.3 million for 1995 to $8.0 million
for 1996. As a percentage of revenues, depreciation and amortization expense
increased to 1.9 % for 1996 from 1.5% for 1995. The aggregate increase in this
expense was primarily attributable to increase d depreciation expense related to
the expansion of the Company's switch network and amortization of goodwill
associated with the Long Distance Wholesale Club and Tel Labs acquisitions
during 1996.
Interest Expense. Interest expense increased by $0.5 million, from $3.0
million for 1995 to $3.5 million for 1996. This increase was due primarily to
increased borrowings and an increase in the Company's capital lease obligations,
partially offset by the net proceeds generated by the Company's initial public
offering (IPO) in August 1996, which substantially reduced outstanding
borrowings and capital lease obligations for the remainder of the year.
Net Income. Net income increased $12.1 million from $10.8 million for 1995
to net income of $22.9 million for 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 Consumer Division customers. During 1994,
the Consumer Division marketed dial around services in Florida, five
mid-Atlantic states and the District of Columbia. During 1995, the Consumer
Division expanded its mail campaigns into 21 additional states and conducted
remailings in certain states targeted during 1994. Dial & Save and Long Distance
Wholesale Club products 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 in the aggregate due to an increase in
billed customer minutes.
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.
Approximately $93.4 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. Facilities lease costs increased by $8.9
million from $1.3 million in 1994 to $10.2 million in 1995 due to the expansion
of the Company's transmission network. 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.
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. Approximately $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.
Liquidity and Capital Resources
The Company conducts its operations through its direct and indirect wholly
owned subsidiaries. There are no restrictions on the movement of cash within the
consolidated group, and the Company's discussion of its liquidity is based on
the consolidated group. The Company measures its liquidity based on cash flow as
reported in its Consolidated Statements of Cash Flows.
On August 14, 1996 the Company sold 4,681,000 shares of Common Stock (of
which 825,000 shares were sold on August 27, 1996 in conjunction with the
underwriters' exercise of the over-allotment option) in its IPO. The net
proceeds to the Company (after expenses) of approximately $60.0 million were
used to repay existing indebtedness, including capital lease obligations and the
outstanding balance on the Company's existing credit facility. The remaining
proceeds, coupled with the Company's cash and borrowing capacity under the
credit facility, were used to fund working capital and capital expenditures and
for general corporate purposes.
Since commencing operations in 1993, the Company has experienced rapid
growth requiring substantial investments in working capital, capital
expenditures and mail marketing expenses. Additionally, start-up costs
associated with the formation of CSD are expected to reduce the Company's
consolidated net income at least through 1997. In December 1996, the Company
entered into a new credit facility for borrowings up to $100 million (the New
Credit Facility). Borrowings under the New Credit Facility are subject to
limitations within various financial covenants and ratios including Total
Leverage Ratio, Interest Coverage Ratio and Current Ratio. The interest rate on
the New Credit Facility is based on the prevailing Total Leverage Ratio not to
exceed 2.5 times and ranges on a Eurodollar (LIBOR) option from a spread of
0.75% to 1.625%, and on a Base (Prime) Rate option from a spread of 0% to
0.625%.
Net cash from operating activities increased $24.8 million from $0 for 1995
to $24.8 million for 1996. The increase was largely the result of increases in
net income and depreciation and amortization expense offset by an increase in
working capital accounts. Net cash used for investing activities increased $2.2
million from $9.8 million for 1995 to $12.0 million for 1996. Including
equipment acquired under capital leases, net cash used for investing activities
decreased $5.6 million from $25.0 million for 1995 to $19.4 million for 1996.
The decrease was the result of reducing expenditures on the Company's nationwide
transmission network. Net cash from financing activities increased $1.3 million
from $10.3 million for 1995 to $11.6 million for 1996. This increase was the
result of the receipt of proceeds from the IPO offset by the use of proceeds
from the IPO to reduce the outstanding debt under Company's existing Credit
Facility and capital lease obligations.
In connection with the Company's March 11, 1997 announcement of the
proposed acquisition of certain voice network assets for $170 million, the
Company has received a commitment for a $100 million increase in the New Credit
Facility, bringing the total facility, upon completion of documentation and the
satisfaction of the other requirement s stated in the bank's commitment letter,
to a total of $200 million. The commitment calls for an increase in the overall
interest costs of the New Credit Facility versus those discussed above. The
Company intends to utilize a portion of the $200 million facility along with its
existing cash balances, to fund the purchase price of the voice network asset
acquisition. There can be no assurance that the Company will be able to satisfy
the requirements stated in such commitment letter necessary to obtain the $100
million increase in the New Credit Facility and, in such circumstances, the
Company may be forced to seek other alternatives.
<PAGE>
To the Shareholders and Board of Directors of Telco
Communications Group, Inc.,
We have audited the accompanying consolidated balance sheets of Telco
Communications Group, Inc. and subsidiaries as of December 31, 1996 and 1995 and
the related consolidated statements of income and retained earnings, and of cash
flows for each of the three years in the period ended December 31, 1996. 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.
/s/Deloitte & Touche
Richmond, Virginia
February 7, 1997
<PAGE>
<TABLE>
Consolidated Balance Sheets
(In thousands, except share data)
December 31
<CAPTION>
<S> <C> <C>
1995 1996
ASSETS
Current Assets
Cash and cash equivalents $ 937 $ 25,373
Accounts receivable, trade (net of
allowances of $3,771 and $7,972
at December 31, 1995 and 1996,
respectively) 55,824 89,114
Prepaid income taxes 333 2,394
Deferred income tax asset 885 357
Other 1,112 8,947
Total current assets 59,091 126,185
Property and Equipment
Leasehold improvements 1,148 2,189
Network equipment 4,534 34,749
Office furniture 1,958 5,474
Network equipment under capital lease 19,290 --
Network facilities under development 4,076 7,375
Accumulated depreciation (3,479) (10,121)
Total property and equipment, net 27,527 39,666
Other Assets
Goodwill 245 43,663
Other assets 261 1,082
506 44,745
Total Assets $ 87,124 $210,596
Liabilities and Shareholders' Equity
Current Liabilities
Capital lease obligation, current portion 2,973 681
Excise taxes payable 1,289 3,103
Accounts payable 15,303 21,062
Accrued network access and
transmission expense 9,429 21,450
Other accrued expenses 1,322 12,670
Deferred income taxes payable -- 1,225
Payable to related parties 414 --
Total current liabilities 30,730 60,191
Long Term Liabilities
Long-term debt 28,262 --
Capital lease obligation, noncurrent 13,176 2,620
Deferred income taxes 1,353 2,065
Total long term liabilities 42,791 4,685
Minority Interest 1,183 0
Commitments and Contingencies (Note 14)
Shareholders' Equity -- --
Common stock (no par value; 150,000,000
shares authorized 32,754,869 shares
outstanding) 896 111,309
Preferred stock (15,000,000 shares
authorized, unissued) -- --
Additional paid-in capital-accumulated
deficit remaining upon termination
of S-corporation election (1,247) (1,247)
Unrealized gain on marketable securities,
net of tax -- 10
Retained earnings 12,771 35,648
Total shareholders' equity 12,420 145,720
Total Liabilities and Shareholders'
Equity $ 87,124 $ 210,596
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Income and
Retained Earnings
(in thousands, except per share data)
Years ended December 31
<CAPTION>
<S> <C> <C> <C>
1994 1995 1996
Revenues, net $ 44,707 $215,376 $428,552
Cost of services 27,736 133,728 252,036
Gross margin 16,971 81,648 176,516
Operating Expenses:
Selling, general and administrative 12,018 55,936 125,575
Depreciation and amortization 496 3,326 7,967
Total operating expenses 12,514 59,262 133,542
Operating income 4,457 22,386 42,974
Interest expense 897 2,952 3,515
Other income (expense) 15 (92) 501
Income taxes:
Current 1,075 7,420 14,175
Deferred 357 111 2,219
Total income taxes 1,432 7,531 16,394
Minority interest 137 1,046 689
Net income 2,006 10,765 22,877
Retained earnings (deficit), beginning
of period (1,247) 2,006 12,771
Conversion of S-Corporation tax status 1,247 -- --
Retained earnings, end of period $ 2,006 $ 12,771 $ 35,648
Net income per common and common
equivalent share $ 0.07 $ 0.38 $ 0.75
Average common and common equivalent 26,884 28,285 30,533
shares
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31
<CAPTION>
<S> <C> <C> <C>
1994 1995 1996
Cash Flows From (Used For) Operations
Net income $ 2,006 $ 10,765 $ 22,877
Adjustments to reconcile net income to
net cash from (used for) operating
activities:
Depreciation and amortization 496 3,326 7,968
Minority interest 137 1,046 689
Loss on disposal of fixed assets -- 110 526
Deferred income taxes 357 123 2,465
Change in current assets and liabilities:
Trade accounts receivable (24,115) (30,838) (33,290)
Prepaid and other assets (1,617) 514 (6,964)
Accounts payable 1,300 13,828 7,158
Accrued expenses 8,796 2,172 23,369
Income taxes payable 741 (1,075) --
Net cash from (used for) (11,899) (29) 24,798
operating activities
Cash Flows Used For Investing
Activities:
Equipment purchases (1,301) (9,815) (11,987)
Investments, net of cash acquired (8) -- --
Net cash from (used for)
investing activities (1,309) (9,815) (11,987)
Cash Flows From Financing
Activities:
Proceeds from the line of credit 29,127 28,262 --
Payments on the line of credit (13,759) (15,367) (28,262)
Payments on capital leases (1,267) (2,376) (20,281)
Payments on short-term debt (583) (213) --
Proceeds from contributed capital 50 -- --
Repurchase of common shares (25) -- --
Proceeds from sale of options -- -- 256
Proceeds from sale of stock -- -- 59,912
Net cash from financing activities 13,543 10,306 11,625
Increase in Cash 335 462 24,436
Cash, beginning of the period 140 475 937
Cash, end of the period $ 475 $ 937 25,373
</TABLE>
<PAGE>
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 and commercial customers in 48 states and the District of
Columbia.
Significant Accounting Policies:
Basis of Consolidation-The consolidated financial statements include the
accounts of Telco Communications Group, Inc. and its wholly owned Dial & Save
subsidiaries as well as Long Distance Wholesale Club, Telco Development Group of
Delaware, Inc. and Tel Labs, Inc. (collectively, the Company). All intercompany
transactions and accounts have been e liminated in consolidation (see Note 3).
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.
Sales, Advertising and Related Marketing Expenses-Costs incurred in
connection with sales, advertising and marketing activities are recognized in
the period in which 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 re corded prepaid advertising and
mail marketing costs of $1,055,414, $377,745 and $1,681,898 at December 31,
1994, 1995 and 1996, 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. The Company defers the recognition
of certain sales commissions paid pursuant to long-term customer commitments
(one year or greater) and recognizes the expense for the commissions over an
estimated time in which the commissions are earned. All other sales commissions
are expensed when incurred. As of December 31, 1996, the Company had recorded
prepaid commissions of $737,987.
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.
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 residential customers.
The fees vary by LEC.
Marketable Securities-Marketable securities are classified as available for
sale. These are reported at fair value with unrealized gains and losses reported
in shareholders' equity, net of tax.
Property and Depreciation-Property, plant and equipment is recorded it
cost. Depreciation is computed using the straight-line method 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.
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.
Excise Taxes Payable-Excise taxes payable represent sales and excise tax
amounts collected which are subsequently remitted to taxing authorities.
Reclassification-Certain amounts in the 1994 and 1995 consolidated
financial statements have been reclassified to conform to the 1996 presentation.
Use of Estimates-The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities 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.
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 public offering were
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.
Long-Lived Assets, Identifiable Intangibles and Goodwill-The Company has
recorded goodwill and certain identified intangibles in connection with its
acquisitions of Long Distance Wholesale Club, Tel Labs and Dial & Save of
Pennsylvania. These assets are amortized over periods ranging from 5 to 35
years. Telco reviews long-lived assets, certain identifiable intangibles, and
goodwill pertaining to those assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, the Company estimates
the future cash flows expected to result from the use of the asset and its
eventual dispos ition. If the sum of the expected future cash flows is less than
the carrying amount of the asset, an impairment loss is recognized.
Stock Based Compensation-The Company, as permitted by the Statement of
Financial Accounting Standards No. 123, 'Accounting for Stock-Based
Compensation' (SFAS No. 123), has chosen to continue to account for stock based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of grant over
the amount an employee must pay to acquire the stock. The Company has adopted
the disclosure requirements of SFAS No. 123 (see Note 9).
2. Initial Public Offering
In August 1996, a total of 6,325,000 shares of the Company's common stock,
no par value (the Common Shares), were sold in an initial public offering (IPO)
at $14 per share. Certain selling stockholders sold 1,644,000 Common Shares, and
4,681,000 Common Shares were sold by the Company which resulted in net proceeds
to the Company of approximately $60.0 million after deducting the expenses of
the offering.
3. Business Combinations
Long Distance Wholesale Club-Pursuant to an agreement dated April 1, 1996,
the Company acquired the remaining minority interest in LDWC in a transaction in
which all of the remaining LDWC shares were exchanged for a total of 5,102,125
shares of the Company's common stock and LDWC became a wholly owned subsidiary
of the Company. 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.
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%.
Tel Labs, Inc.- Pursuant to the Share Exchange Agreement dated as of June
1, 1996 and concurrent with the completion of the IPO, Tel Labs became a wholly
owned subsidiary of the Company, and the Tel Labs shareholders received an
aggregate of 593,334 shares of the Company+s common stock in exchange for all of
their shares in Tel Labs. As a result of the Tel Labs share exchange described
above, the remaining minority interest in Telco Development Group of Delaware,
Inc. was acquired. (see Note 4)
The following represents the results of operations on a proforma basis as
though the LDWC and Tel Labs combinations had occurred at the beginning of the
respective periods presented:
<TABLE>
<CAPTION>
<S> <C> <C>
1995 1996
(in thousands)
Revenues, net $ 217,011 $ 430,434
Net income 10,688 23,144
Net income per share $ .37 $ .76
</TABLE>
4. Related Party Transactions
The Company leases office and switch site facilities from Bricks In The
Sticks, Ltd., which is controlled by the Company's Chairman who is also a
shareholder of the Company. The Company paid total rents of $63,500, $179,420
and $221,868 for these facilities, for the years ended December 31, 1994, 1995
and 1996, 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:
1997 $ 251,981
1998 265,127
1999 213,669
2000 13,913
2001 2,539
The Company purchased data processing services for call translation and
rating from Tel Labs, which prior to its acquisition by Telco in August 1996 was
controlled by the Company's Chairman. The Company paid $155,000, $1,260,000, and
$751,382 for these services for the years ended December 31, 1994, 1995 and
1996, respectively. Concurrent with the Company's initial public offering, Tel
Labs became a wholly owned subsidiary of Telco (see Note 3).
The Company purchased computer equipment and support until May 1996 from
Telco Development Group, Inc. which is controlled by the Company's Chairman, who
is also a shareholder of the Company. The Company paid $229,100, $779,918 and
$552,424 for these services for the years ended December 31, 1994, 1995 and
1996, respectively.
A non-management shareholder of the Company also holds a minority ownership
interest in an international long distance services provider. This international
provider and the Company purchase transmission services from one another
pursuant to service agreements.
5. Allowances
Changes in the allowance for unbillable or uncollectible accounts and
billing services fees were as follows at December 31:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1994 1995 1996
Balance at the beginning of year $ 59,763 $ 1,078,442 $ 3,771,413
Provision charged to operations 2,545,350 11,517,017 22,525,369
Write-offs, net of recoveries (1,526,671) (8,824,046) (18,324,678)
Balance at the end of year $ 1,078,442 $ 3,771,413 $ 7,972,104
</TABLE>
Amounts reducing gross revenues as a result of refunds, rebates, and
unbilled or uncollectible revenue totaled $2,625,451, $9,143,602 and $23,045,788
for the years ended 1994, 1995 and 1996, respectively.
6. Long Term and Other Debt
On December 27, 1996, the Company entered into a credit agreement with a
group of banks under which the company may borrow up to $100,000,000 (the
Facility). The Facility expires on December 27, 1999. The interest rate on the
Facility is determined either at a Prime Rate or an Eurodollar (LIBOR) option
based on the Company's prevailing total leverage ratio as defined in the loan
agreement. The applicable margin on the Prime Rate is from 0% to 0.625% and on
the Eurodollar Rate from 0.75% to 1.625%. The Facility is secured by a pledge of
stock of all the Company's subsidiaries and a negative pledge of its assets. The
Facility contains certain financial covenants which prescribe certain leverage,
interest coverage and working capital ratios as well as limitations on capital
expenditures. There were no borrowings under the Facility as of December 31,
1996.
As of December 31, 1995 the long term debt consisted of a $25,000,000 line
of credit, plus interim financing of $10,000,000. The credit agreement also
included a warrant agreement which was exercised concurrent with the Company's
IPO (see note 11). Also concurrent with the IPO, the Company utilized the
proceeds from the IPO to reduce the line of credit. On January 24, 1996, the
Company entered into a two year credit agreement with a group of banks totaling
$45,000,000. On March 20, 1996, the credit agreement was amended to provide
$20,000,000 of additional financing. The credit agreement was secured by
substantially all of the Company's assets and required the Company to maintain
certain financial ratios, restricted the payment of dividends, and required all
subsidiary companies' stock to be pledged as collateral. As a result of the new
financing in January and March 1996, $28,261,527 was reclassified to long term
debt at December 31, 1995.
7. 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 $4,819,099, $22,214,849
and $4,886,175 less accumulated depreciation of $412,372, $2,587,847 and $ -0-
as of December 31, 1994, 1995 and 1996, respectively. At December 31, 1996, 100%
of such equipment was leased from one vendor. Total equipment under capital
leases includes $1,685,000, $2,925,000 and $4,886,175 classified as network
facilities under development, as of December 31, 1994, 1995 and 1996,
respectively.
During September and October of 1996, the Company utilized proceeds from
the IPO to retire $20,177,000 in capital lease obligations.
Future minimum lease payments for assets under capital leases at December
31, 1996 are as follows:
1997 $ 720,131
1998 823,006
1999 823,007
2000 823,007
2001 720,131
Thereafter 102,876
Total minimum payments 4,012,158
Imputed interest (711,426)
Net obligation 3,300,732
Current portion 681,000
Capital lease obligation, noncurrent $ 2,619,732
In addition to operating leasing activities discussed in Note 4, the
Company leases switch sites and office space in various cities throughout the
United States. The total minimum rental commitment as of December 31, 1996 due
in future years is as follows:
Years ending December 31,
1997 $ 718,875
1998 718,465
1999 617,454
2000 362,818
2001 49,760
Total rent expense under these leases was $68,809, $206,534 and $614,256
for the years ended December 31, 1994, 1995 and 1996, respectively.
8. 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, 1995 and 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1994 1995 1996
Current:
Federal $ 822,612 $6,023,084 $11,618,476
State 252,225 1,397,387 2,556,995
Total Current $1,074,837 $7,420,471 $14,175,471
Deferred:
Federal $ 320,589 $ 91,780 $1,878,830
State 36,200 19,341 339,744
Total Deferred $ 356,789 $ 111,121 $2,218,574
</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, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1995 1996
Deferred Tax Liabilities (current):
Bad debts-non-accrual method $ -- $(1,035,505)
Other -- (189,652)
-- (1,225,157)
Deferred Tax Liabilities (non-current):
Book over tax basis in property, plant and
equipment (1,161,939) (1,726,877)
Other (191,443) (338,802)
(1,353,382) (2,065,679)
Deferred Tax Assets (current):
Bad debts-non-accrual method 580,643 --
Other 304,126 357,212
884,769 357,212
Deferred Tax Liability, net $ (468,613) $(2,933,624)
</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.
Reconciliation of income taxes computed at the federal statutory tax rate
to actual income tax expense for the years ended December 31, 1994, 1995 and
1996 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1994 1995 1996
Federal Statutory Rate 34.00% 35.00% 35.00%
Effect of:
State taxes-net of Federal benefit 6.23 4.76 4.66%
Other 1.42 1.40 2.09%
Income Tax Expense 41.65% 41.16% 41.75%
</TABLE>
9. Incentive Stock Options
On July 1, 1994, the Company adopted a stock 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.
In April 1996, the Board of Directors of the Company adopted and the
shareholders of the Company approved the Telco Communications Group, Inc.
Amended and Restated 1994 Stock Option Plan, (the "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 Internal Revenue Code of 1986, as amended, 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 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 Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". Accordingly, no compensation cost has been recognized for the
Plan. Had compensation cost for the Company's Plan been determined on the fair
value at the grant date for awards in 1996 consistent with the provisions of
SFAS No. 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
<S> <C> <C>
1995 1996
Net income - as reported $ 10,764,912 $22,876,735
Net income - pro forma $ 10,734,973 $22,125,831
Earnings per share - as reported $ 0.38 $ 0.75
Earnings per share - pro forma $ 0.38 $ 0.72
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in the following periods:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1995 1996(pre-IPO) 1996(post-IPO)
Expected lives 5 years 5 years 5 years
Expected volatility Near 0% Near 0% 110%
Dividend yield 0% 0% 0%
Risk-free interest rate 6.383% 6.175% 6.175%
</TABLE>
Information regarding the Plan for 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1994 1995 1996
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Shares Price Shares Price
Options outstanding,
beginning of year -- 1,633,487 $1.22 2,137,829 $0.54
Options exercised -- -- $0.80 (878,151) $0.80
Options granted 1,633,487 504,342 $2.61 2,482,000 $10.55
Options outstanding,
end of year 1,633,487 2,137,829 $1.54 3,741,678 $7.69
Option price range
at end of year $0.31 to $0.31 to $0.67 to
$1.85 $3.55 $18.75
Option price range
for exercised shares $0.31 to
$3.55
Options available for
grant at end of year 5,866,513 5,362,171 2,880,171
Weighted-average fair
value of options,
granted during the year $0.70 $6.09
</TABLE>
The following table summarizes information about fixed price stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
-------------------- --------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Exercise Price at 12/31/96 life Price at 12/31/96 Price
$0.67 109,101 8.0 years $0.67 109,101 $0.67
$1.76 to $1.85 803,080 7.9 years $1.78 803,080 $1.78
$2.51 to $3.55 347,497 8.7 years $2.56 171,111 $3.01
$7.53 1,487,500 9.3 years $7.53 -- --
$14.00 to $18.75 994,500 9.7 years $15.08 -- --
Total 3,741,678 1,083,292
10. Supplemental Cash Flow Information
The following represents supplemental cash flow information for the years
ended December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1994 1995 1996
Cash paid for:
Interest $ 656,958 $ 2,939,472 $ 3,324,870
Income taxes 336,598 8,223,750 10,611,427
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 7,433,469
Business Combination:
Fair value of assets acquired 1,025,533 -- 47,388,826
Stock issued -- -- (46,629,000)
Liabilities assumed (855,173) -- (759,826)
Cash paid for common stock $ 170,360 $ -- $ --
</TABLE>
11. Capital Stock
Accumulated Deficit
Remaining Upon
Termination of Unrealized Gains
Shares Common S-Corporation On Securities
Outstanding Stock Election Held For Sale
(in thousands)
Balance December 31, 1995: 20,864 $ 896 $ (1,247) --
Issuance of common shares 5,317 59,912 -- --
Loans to option holders (584) -- --
Purchase of subsidiary 5,696 47,725 -- --
Proceeds from exercise
of options 878 840 -- --
Tax benefit from net
warrant activity -- 2,520 -- --
Unrealized gain on marketable
securities -- -- -- $ 10
Net income -- -- -- --
Balance December 31, 1996: 32,755 $111,309 $ (1,247) $ 10
Stock Split-On June 12, 1996, the shareholders and directors executed a
joint consent in lieu of a meeting. The joint consent provided that effective
immediately prior to the completion of the Company's IPO, the Company declared a
425 to 1 stock split to shareholders of record on that date. Per share amounts
in the accompanying financial statements and footnotes have been adjusted for
the split.
Preferred Stock-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.
Warrants-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. The exercise price for the warrant was a
nominal price which was negotiated at the time the Company entered into the
credit agreement. Concurrent with the Company's IPO, Signet Media Capital Group
exercised the Signet Warrant in full for 636,158 shares of common stock and sold
all shares of common stock issuable upon exercise of such warrant in the IPO.
Shareholder Loans-As of December 31, 1996 the Company had outstanding loans
to shareholders in the amount of $584,147. The loans were made in connection
with the concurrent exercise of options to acquire 818,773 shares of the
Company's common stock. As a result, such loans are recorded as a separate
component of stockholders' equity. Each of the loans were made at the lowest
interest rate permitted by law and either will become due and payable upon the
earlier of three years from the date of the loan; or three days after the shares
purchased from the exercised options are sold; or due and payable the day the
shares purchased upon exercise of the options are marginable.
12. Employee Benefit Plans
The Company implemented a 401(k) pension plan in December 1996. Employees
are eligible to participate in the plan if they have been employed by the
Company for six months. 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. In 1995 the Company's subsidiary Long
Distance Wholesale Club implemented a 401(k) pension plan. Concurrent with the
formation of the Company's plan , no more contributions by the employees or the
employer will be made to the LDWC plan. The Company contributed $11,781 and
$65,605 to the plan for the years ended December 31, 1995 and 1996.
13. Deferred Compensation Plan
The Company, through its wholly owned subsidiary LDWC, provided a deferred
compensation plan for one of its officers. The plan provided 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
required funding of the deferred compensation amount equal to the officer's
deferral plus interest at an annual rate that was determined by the Board of
Directors from time to time. The Company recognized expense of $257,661 in 1995
and $274,506 in 1996 related to this agreement. Amounts funded by the Company
were $215,877 in 1995 and $363,636 in 1996.
14. Commitments and Contingencies
The Company is a party from time to time to litigation in the ordinary
course of business including employment related litigation. No provision has
been reflected in the accompanying financial statements for any litigation.
Based 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 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 one 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. Quarterly Operating Results (Unaudited)
The following amounts reflect all adjustments, consisting of only normal
recurring accruals (except as disclosed below), necessary in the opinion of the
Company's management for a fair statement of the results for the interim
periods.
1995
First Second Third Fourth
Quarter Quarter Quarter Quarter
Total revenues $45,276,969 $47,317,674 $58,341,464 $64,439,376
Earnings (loss)
before income taxes 5,863,870 6,122,628 6,526,647 (216,640)
Net earnings (loss) 3,538,031 3,735,088 3,766,887 (275,094)
Net earnings (loss) per
common and common equivalent
share $ 0.13 $ 0.13 $ 0.13 $ (0.01)
1996
First Second Third Fourth
Quarter Quarter Quarter Quarter
Total revenues $91,927,548 $104,078,360 $113,768,316 $118,778,212
Earnings before income
taxes 6,415,231 8,727,375 10,412,800 13,715,374
Net earnings 3,280,690 5,185,541 6,165,852 8,244,651
Net earnings per common
and common equivalent
share $ 0.12 $ 0.18 $ 0.20 $ 0.24
The Company's results for the fourth quarter of 1995 were affected by
increased allowances, significant switch installation charges, and end of
quarter mail marketing expenses materially exceeding those of any previous
quarter.
17. Subsequent Events (Unaudited)
On March 11, 1997, the Company signed a definitive asset purchase agreement
to acquire the voice networks of Advantis, a data and voice network partnership
of International Business Machines Corp. and Sears, Roebuck and Co., for
approximately $170 million in cash. The Advantis assets include service rights
to approximately 100,000 network miles of DS-3 fiber optic capacity (under a
long term lease), five Nortel DMS 250 switches and other ancillary network
equipment. In conjunction with the agreement, the Company has received a
commitment for an increase in its credit facility to $200 million. The bank
financing commitment calls for an increase in the prevailing interest costs,
other fees and related items. The transaction is conditioned upon, among other
things, receiving governmental approval under Hart-Scott-Rodino Act. It
anticipated that the acquisition will be completed during the second quarter of
1997.
The following is a list of the Company's subsidiaries as of March 18, 1997:
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
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
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
<PAGE>
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
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
Network Control Services, Inc. Delaware
Telco Billing, Inc. Delaware
Telco Holdings, Inc. Delaware
Telco Network Services, Inc. Nevada
Telco Switch Corp. Delaware
Telco Switch Limited Partnership Nevada
Telco Voice Network, Inc. Nevada
Tel Labs, Inc. Virginia
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-05857 of Telco Communications Group, Inc. on Form S-8 of our report dated
February 7, 1997, incorporated by reference in the Annual Report on Form 10-K of
Telco Communications Group, Inc. for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Richmond, Virginia
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 936,771 25,372,575
<SECURITIES> 0 0
<RECEIVABLES> 59,595,401 97,086,496
<ALLOWANCES> 3,771,413 7,972,104
<INVENTORY> 0 0
<CURRENT-ASSETS> 59,091,410 126,184,771
<PP&E> 31,005,198 49,786,683
<DEPRECIATION> 3,478,485 10,121,057
<TOTAL-ASSETS> 87,123,970 210,595,919
<CURRENT-LIABILITIES> 30,730,420 60,190,531
<BONDS> 0 0
0 0
0 0
<COMMON> 896,079 111,309,316
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 87,123,970 210,595,919
<SALES> 215,375,486 428,552,436
<TOTAL-REVENUES> 215,375,486 428,552,436
<CGS> 133,727,834 252,035,525
<TOTAL-COSTS> 133,727,834 252,035,525
<OTHER-EXPENSES> 59,353,235 133,041,775
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,951,975 3,514,903
<INCOME-PRETAX> 19,342,442 39,960,233
<INCOME-TAX> 7,531,592 16,394,046
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,794,912 22,876,735
<EPS-PRIMARY> 0.38 0.75
<EPS-DILUTED> 0 0
</TABLE>
