<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
STAR TELECOMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4813 77-0362681
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
223 EAST DE LA GUERRA STREET
SANTA BARBARA, CALIFORNIA 93101
(805) 899-1962
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------
KELLY D. ENOS
CHIEF FINANCIAL OFFICER
STAR TELECOMMUNICATIONS, INC.
223 EAST DE LA GUERRA STREET
SANTA BARBARA, CALIFORNIA 93101
(805) 899-1962
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
TIMOTHY F. SYLVESTER, ESQ. NEIL WOLFF, ESQ.
Riordan & McKinzie Wilson Sonsini Goodrich & Rosati,
300 South Grand Avenue, 29th Floor Professional Corporation
Los Angeles, California 90071 650 Page Mill Road
(213) 629-4824 Palo Alto, California 94304-1050
(650) 493-9300
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If the Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(1) OFFERING PRICE(1) FEE
<S> <C> <C> <C> <C>
Common Stock, par value $0.001 per share 3,926,830 $41.4375 $162,718,019 $48,002
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 of the Securities Act of 1933, as amended, based on the average
of the high and low sale price of a share of Common Stock, $41.875 and
$41.00, respectively, as reported on the Nasdaq National Market on March 18,
1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION
MARCH , 1998
7,000,000 Shares
[LOGO]
STAR TELECOMMUNICATIONS, INC.
Common Stock
---------
All of the 7,000,000 shares of Common Stock offered hereby are being sold by
STAR Telecommunications, Inc. ("STAR" or the "Company"). The Company's Common
Stock is quoted on the Nasdaq National Market under the symbol STRX. On March
23, 1998, the last reported sale price of the Common Stock on the Nasdaq
National Market was $22.44 per share. On March 31, 1998, STAR will give effect
to a 2.05-for-1 stock split payable in the form of a stock dividend to the
holders of all shares of Common Stock outstanding on February 20, 1998 with the
payment of 1.05 shares for each such outstanding share of Common Stock (the
"Stock Split"). Unless otherwise indicated, the numbers in this Prospectus give
effect to the Stock Split.
--------------
THE COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 HEREOF.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.............................................. $ $ $
Total(3)............................................... $ $ $
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company and a stockholder of the Company (the "Selling Stockholder")
have granted the Underwriters a 30-day option to purchase up to 1,050,000
additional shares of Common Stock solely to cover over-allotments, if any.
To the extent that the option is exercised, the Underwriters will offer the
additional shares at the Price to Public shown above. If the option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $
and $ , respectively, and the Selling Stockholder would receive
aggregate net proceeds of $ . The Company will not receive any
of the proceeds from the sale of shares by the Selling Stockholder. See
"Underwriting."
----------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about ,
1998.
BT ALEX. BROWN
MERRILL LYNCH & CO.
HAMBRECHT & QUIST
LEHMAN BROTHERS
FURMAN SELZ
<PAGE>
The date of this Prospectus is , 1998.
<PAGE>
DESCRIPTION OF FORWARD-LOOKING STATEMENTS
This Prospectus contains "forward-looking statements," as defined under
Section 27A of the Securities Act of 1933, as amended (the "Securities Act").
Forward-looking statements are statements other than historical information or
statements of current condition. Some forward looking statements may be
identified by use of such terms as "believes," "anticipates," "intends" or
"expects." These forward-looking statements relate to plans, objectives and
expectations for future operations of STAR. In light of the risks and
uncertainties inherent in all such projected operation matters, the inclusion of
forward-looking statements in this Prospectus should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved or that any of the Company's operating
expectations will be realized. Revenues and results of operations are difficult
to forecast and could differ materially from those projected in the
forward-looking statements contained in this Prospectus. Forward-looking
statements may be deemed to include those set forth in "Prospectus Summary,"
regarding the Company's introduction into service of various international
gateway switches, commitments to acquire undersea cables and various aspects of
the Company's strategy. Such forward-looking statements may be deemed to include
statements in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," regarding the Company's strategy to lower its cost of
services and improve its gross margin and its belief that price declines may be
offset in part by increased calling volumes and decreased costs and its belief
in the sufficiency of capital resources. Forward-looking statements in
"Business" may be deemed to include projected growth in international
telecommunications traffic, the Company's strategy of marketing its services to
foreign-based long distance providers, expanding its U.S. and developing
European switching capabilities, and expanding into commercial markets. Actual
results could differ from those projected in any forward-looking statements for
the reasons detailed in the "Risk Factors" section of the Prospectus, beginning
on page 7, or elsewhere in this Prospectus. The Company undertakes no obligation
to release publicly the results of any future revisions it may make to any of
its forward-looking statements to reflect events or circumstances after the date
hereof, to reflect the occurrence of unanticipated events or to reflect any
change in the Company's operating strategy.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH REGULATION M. SEE "UNDERWRITING."
2
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. SEE "AVAILABLE INFORMATION." UNLESS OTHERWISE
INDICATED, THE INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) GIVES EFFECT TO A 2.05-FOR-1 STOCK
SPLIT PAYABLE IN THE FORM OF A STOCK DIVIDEND TO THE HOLDERS OF ALL SHARES OF
COMMON STOCK OUTSTANDING ON FEBRUARY 20, 1998 WITH THE PAYMENT OF 1.05 SHARES
FOR EACH SUCH OUTSTANDING SHARE OF COMMON STOCK (THE "STOCK SPLIT") AND (III)
ASSUMES NO EXERCISE OF OPTIONS OUTSTANDING AS OF FEBRUARY 28, 1998. THIS
PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS," AS DEFINED IN SECTION 27A OF
THE SECURITIES ACT. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN
"RISK FACTORS."
THE COMPANY
STAR Telecommunications, Inc. ("STAR" or the "Company") is an emerging
multinational carrier focused primarily on the international long distance
market. The Company offers highly reliable, low-cost switched voice services on
a wholesale basis, primarily to U.S.-based long distance carriers. STAR provides
international long distance service to approximately 220 foreign countries
through a flexible network comprised of various foreign termination
relationships, international gateway switches, leased and owned transmission
facilities and resale arrangements with long distance providers. The Company has
grown its revenues rapidly by capitalizing on the deregulation of international
telecommunications markets, combining sophisticated information systems with
flexible routing and leveraging management's industry expertise. STAR has
increased its revenues from $46.3 million in 1995 to $376.2 million in 1997.
The Company serves the large and growing international long distance
telecommunications market. According to industry sources, worldwide gross
revenues in this market were over $60 billion in 1996 and the volume of
international traffic on the public telephone network is expected to grow at a
compound annual growth rate of approximately 13% from 1996 through the year
2000.
STAR markets its services to large global carriers seeking lower rates and
high quality overflow capacity, as well as to small and medium-sized long
distance companies that do not have the critical mass to invest in their own
international transmission facilities or to obtain volume discounts from the
larger facilities-based carriers. During the fourth quarter of 1997, the Company
provided switched international long distance services to 105 customers and
currently provides these services to nine of the top forty global carriers. The
Company has also recently focused on building a customer base overseas,
particularly in Europe, and has opened offices in Dusseldorf, Frankfurt, Hamburg
and Munich, Germany and London, England. In addition, STAR has begun to market
its international long distance services directly to certain commercial
customers in the U.S. and overseas.
The Company currently operates international gateway switching facilities in
New York, Los Angeles, Dallas and London, England. In 1998, the Company plans to
put into service switches in Atlanta, Chicago, Miami and Seattle; Dusseldorf,
Frankfurt, Hamburg and Munich, Germany; Paris, France; and Tokyo, Japan. STAR's
switching facilities are linked to a proprietary reporting system, which the
Company believes provides it with a competitive advantage by permitting
management on a real-time basis to determine the most cost-effective termination
alternatives, monitor customer usage and manage gross margins by route. The
Company holds ownership positions in a number of digital undersea fiber optic
cables, has recently added capacity on the TPC-5 undersea fiber optic cable
system and has entered into commitments to acquire transmission capacity on
three additional undersea fiber optic cable systems, Gemini, AC-1 and China-US.
3
<PAGE>
STRATEGY
The Company's objective is to be a leading provider of highly reliable,
low-cost switched international long distance services on a wholesale basis to
U.S. and foreign-based telecommunications companies, as well as on a retail
basis to commercial customers. Key elements of the Company's strategy include
the following:
CAPITALIZE ON PROJECTED INTERNATIONAL LONG DISTANCE GROWTH. The Company
believes that the international long distance market provides attractive
opportunities due to its higher revenue and profit per minute, and greater
projected growth rate as compared to the domestic long distance market. The
Company targets international markets with high volumes of traffic, relatively
high rates per minute and prospects for deregulation and privatization. The
Company believes that the ongoing trend toward deregulation and privatization
will create new opportunities for the Company in international markets. Although
the Company has focused to date primarily on providing services for U.S.-based
long distance providers, the Company also intends to expand the international
long distance services it offers to foreign-based long distance providers.
LEVERAGE TRAFFIC VOLUME TO REDUCE COSTS. The Company continues to focus on
building its volume of international long distance traffic. Higher traffic
volumes strengthen the Company's negotiating position with vendors, customers
and potential foreign partners, which allows the Company to lower its costs of
service. In addition, higher traffic volumes on particular routes allow the
Company to lower its cost of services on these routes by transitioning from
acquiring capacity on a variable cost per minute basis to fixed cost
arrangements such as longer-term capacity agreements with major carriers,
long-term leases and ownership of facilities.
LEVERAGE INFORMATION SYSTEMS AND SWITCHING CAPABILITIES. The Company
leverages its sophisticated information systems to analyze its routing
alternatives, and select the most cost-effective routing from among the Company
owned facilities, network of resale arrangements with other long distance
providers, operating agreements and alternative termination relationships. The
Company has invested significant resources in the development of software to
track specific usage information by customer and revenue and cost information on
specific routes on a daily basis. The Company's information systems are critical
components in managing its customer and vendor relationships, routing traffic to
the most cost-effective alternative, and targeting its marketing efforts.
MAINTAIN HIGH QUALITY. The Company believes that reliability, call
completion rates, voice quality, rapid set up time and a high level of customer
and technical support are key factors evaluated by U.S. and foreign-based
telecommunications companies and large corporate customers in selecting a
carrier for their international traffic. The Company's state-of-the-art
switching equipment is fully compliant with international C-7 and domestic SS-7
signaling standards. STAR strives to provide a consistently high level of
customer and technical support and has technical support personnel at its
switching facilities 24 hours per day, seven days per week to assist its
customers and to continually monitor network operations.
EXPAND INTO COMMERCIAL MARKET. The Company plans to expand into niche
commercial markets in the U.S. and in other deregulating countries where it
believes it can leverage its international network and where the customer base
has a significant international calling pattern. The Company recently acquired
L.D. Services, Inc. ("LDS") and intends to acquire United Digital Network, Inc.
("UDN"). The Company is using the LDS telemarketing sales force to target small
commercial customers in ethnic markets to increase traffic to Mexico and Latin
America. Additionally, STAR intends to use UDN's network of independent sales
agents to target medium-sized commercial customers with a demand for
international calling services at competitive rates. Finally, the Company plans
to use its direct sales forces to target larger commercial customers,
concentrating at first on potential customers in Los Angeles and New York. With
respect to the offering of commercial services abroad, the Company initially
intends to focus on Germany, the U.K. and selected European cities where
competition for commercial customers is less mature.
4
<PAGE>
GROWTH THROUGH ACQUISITIONS. The Company actively pursues opportunities to
enhance its business through strategic and synergistic acquisitions. These
acquisitions may focus on entering new territories, enlarging the Company's
presence in an existing territory, adding capacity or expanding into new market
segments, such as the commercial market. In addition to expanding its revenue
base, the Company plans to realize operating efficiencies by integrating
newly-acquired operations into the Company's billing, tracking and other
systems. On November 30, 1997, the Company acquired LDS, a long distance
provider focusing on small commercial customers throughout the United States,
for approximately 849,000 shares of Common Stock. On March 10, 1998, the Company
acquired T-One Corp. ("T-One"), an international wholesale long distance
provider, for 1,353,000 shares of Common Stock. On November 19, 1997, the
Company entered into an agreement to acquire UDN, a commercial long distance
provider. The acquisition of UDN is subject to approval by UDN's stockholders
and to various regulatory approvals. Assuming the receipt of all necessary
approvals, STAR expects to consummate the UDN acquisition in the second quarter
of 1998 for approximately 800,000 shares of Common Stock. Each of these
transactions has been, or will be, accounted for as a pooling of interests.
STAR was incorporated in Nevada in September 1993 as STAR Vending, Inc. and
was reincorporated in Delaware as STAR Telecommunications, Inc. in April 1997.
STAR's executive offices are located at 223 East De La Guerra Street, Santa
Barbara, California 93101. Its telephone number at that location is (805)
899-1962.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................... 7,000,000 shares
Common Stock to be outstanding after the Offering..... 40,678,519 shares(1)
Use of proceeds....................................... Capital expenditures, working capital and
general corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol......................... STRX
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
(in thousands, except per share and per minute data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
1994 --------- --------- ---------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA(2):
Revenues.......................................................... $ 20,915 $ 46,283 $ 237,991 $ 376,198
Gross profit...................................................... 8,140 14,386 32,406 50,961
Income (loss) from operations..................................... 3,328 4,114 (3,076) 11,049
Net income (loss)................................................. $ 3,323 $ 3,973 $ (4,220) $ 5,568
Pro forma net income (loss)(unaudited)(3)......................... $ 1,994 $ 2,407 $ (5,163) $ 5,373
Pro forma diluted income (loss) per share(unaudited)(4)........... $ 0.12 $ 0.13 $ (0.24) $ 0.17
Weighted average number of diluted common shares outstanding(4)... 16,865 18,020 21,939 31,625
OTHER CONSOLIDATED FINANCIAL AND OPERATING DATA(2):
EBITDA(5)......................................................... $ 3,351 $ 4,267 $ (1,986) $ 13,849
Capital expenditures(6)........................................... 57 2,175 13,018 24,732
Wholesale billed minutes of use................................... -- 38,106 479,681 863,295
Wholesale revenue per billed minute of use(7)..................... -- $ 0.4102 $ 0.4288 $ 0.3997
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------
ACTUAL
--------- AS ADJUSTED(8)
--------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA(2):
Working capital...................................................................... $ 15,846 $ 165,156
Total assets......................................................................... 113,553 262,863
Long-term liabilities, net of current portion........................................ 12,271 12,271
Stockholders' equity................................................................. 44,014 193,324
</TABLE>
- ------------------------------
(1) Based on the number of shares outstanding as of December 31, 1997. Excludes
3,497,097 shares subject to outstanding options as of December 31, 1997 at a
weighted average exercise price of approximately $3.54 per share. Also
excludes 1,794,978 shares reserved for issuance under the Company's stock
plans. See "Management--1997 Omnibus Stock Incentive Plan," "--1996 Outside
Director Nonstatutory Stock Option Plan" and Note 10 of Notes to
Consolidated Financial Statements.
(2) Does not reflect the acquisition of T-One, which was consummated on March
10, 1998, or the acquisition of UDN, which remains subject to the approval
of UDN's stockholders and to various regulatory approvals. If the Company's
financial statements had been restated to include the combined operating
results of the Company and T-One at the beginning of the audited periods
presented, revenues would have been $58.9 million, $260.4 million and $406.6
million, gross profit would have been $14.7 million, $33.7 million and $52.8
million and net income (loss) would have been $2.1 million, $(5.7) million
and $5.6 million for the years ended December 31, 1995, 1996 and 1997,
respectively. See Note 14 of Notes to Consolidated Financial Statements.
(3) The pro forma net income or loss per share assumes that both STAR and LDS
had been C-Corporations for all periods presented.
(4) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used in computing pro
forma net income (loss) per share.
(5) EBITDA represents earnings before interest income and expense, income taxes,
depreciation and amortization expense. EBITDA does not represent cash flows
as defined by generally accepted accounting principles and does not
necessarily indicate that cash flows are sufficient to fund all the
Company's cash needs. EBITDA should not be considered in isolation or as a
substitute for net income, cash flows from operating activities or other
measures of the Company's liquidity determined in accordance with generally
accepted accounting principles.
(6) Includes assets financed with capital leases or notes. See Note 2 of Notes
to Consolidated Financial Statements.
(7) Represents wholesale gross call usage revenue per billed minute. Amounts
exclude other revenue related items such as finance charges.
(8) Adjusted to reflect the sale of 7,000,000 shares of Common Stock by the
Company at an assumed offering price of $22.44 per share and the application
of the estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
6
<PAGE>
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE
OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING THE SHARES OF
COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MAY CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. SEE
"DESCRIPTION OF FORWARD-LOOKING STATEMENTS."
OPERATING RESULTS SUBJECT TO SIGNIFICANT FLUCTUATIONS
The Company's quarterly operating results are difficult to forecast with any
degree of accuracy because a number of factors subject these results to
significant fluctuations. As a result, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
FACTORS INFLUENCING OPERATING RESULTS, INCLUDING REVENUES, COSTS AND
MARGINS. The Company's revenues, costs and expenses have fluctuated
significantly in the past and are likely to continue to fluctuate significantly
in the future as a result of numerous factors. The Company's revenues in any
given period can vary due to factors such as call volume fluctuations,
particularly in regions with relatively high per-minute rates; the addition or
loss of major customers, whether through competition, merger, consolidation or
otherwise; the loss of economically beneficial routing options for the
termination of the Company's traffic; financial difficulties of major customers;
pricing pressure resulting from increased competition; and technical
difficulties with or failures of portions of the Company's network that impact
the Company's ability to provide service to or bill its customers. The Company's
cost of services and operating expenses in any given period can vary due to
factors such as fluctuations in rates charged by carriers to terminate the
Company's traffic; increases in bad debt expense and reserves; the timing of
capital expenditures, and other costs associated with acquiring or obtaining
other rights to switching and other transmission facilities; changes in the
Company's sales incentive plans; and costs associated with changes in staffing
levels of sales, marketing, technical support and administrative personnel. In
addition, the Company's operating results can vary due to factors such as
changes in routing due to variations in the quality of vendor transmission
capability; loss of favorable routing options; the amount of, and the accounting
policy for, return traffic under operating agreements; actions by domestic or
foreign regulatory entities; the level, timing and pace of the Company's
expansion in international and commercial markets; and general domestic and
international economic and political conditions. Further, a substantial portion
of transmission capacity used by the Company is obtained on a variable, per
minute and short term basis, subjecting the Company to the possibility of
unanticipated price increases and service cancellations. Since the Company does
not generally have long term arrangements for the purchase or resale of long
distance services, and since rates fluctuate significantly over short periods of
time, the Company's gross margins are subject to significant fluctuations over
short periods of time. The Company's gross margins also may be negatively
impacted in the longer term by competitive pricing pressures.
EXAMPLES OF FACTORS AFFECTING OPERATING RESULTS. The Company has in the
past encountered significant difficulties in the collection of accounts
receivable from certain of its customers. For example, in the fourth quarter of
1996 and the first quarter of 1997, Hi-Rim Communications, Inc. ("Hi-Rim"),
formerly one of the Company's major customers and Cherry Communications, Inc.
("CCI"), the Company's largest customer in 1996 experienced financial
difficulties and were unable to pay in full, on a timely basis, outstanding
accounts receivable. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In early 1997, the Company implemented
more stringent credit policies and monitoring systems. There can be no
assurance, however, that if the Company experiences similar difficulties in the
collection of future accounts receivable from its customers, the Company's
financial condition and results of operations would not be materially adversely
affected.
7
<PAGE>
ABILITY TO CONTINUE AND MANAGE GROWTH; COMMERCIAL MARKET
The Company has increased revenues from $46.3 million in 1995 to $376.2
million in 1997, with revenues increasing in each of the last ten quarters. Such
growth should not be considered indicative of future revenue growth or operating
results. If revenue levels fall below expectations, net income is likely to be
disproportionately adversely affected because a proportionately smaller amount
of the Company's operating expenses varies with its revenues. This effect is
likely to increase as a greater percentage of the Company's cost of services are
associated with owned and leased facilities. There can be no assurance that the
Company will be able to achieve or maintain profitability on a quarterly or
annual basis in the future. It is likely that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
As part of the Company's significant revenue growth, it has expanded, and
plans to continue to expand, the number of its employees and the geographic
scope of its operations. Additionally, an important component of the Company's
strategy is to grow and expand through acquisition. These factors have resulted,
and will continue to result, in increased responsibilities for management
personnel and have placed, and will continue to place, increased demands upon
the Company's operating and financial systems, which may lead to unanticipated
costs and divert management's attention from day-to-day operations. The Company
may also be required to attract, train and retain additional highly qualified
management, technical, sales and marketing and customer support personnel. The
process of locating such personnel with the combination of skills and attributes
required to implement the Company's strategy is often lengthy. The inability to
attract and retain additional qualified personnel could materially and adversely
affect the Company. The Company expects that its expansion into foreign
countries will lead to increased financial and administrative demands, such as
increased operational complexity associated with expanded network facilities,
administrative burdens associated with managing an increasing number of foreign
subsidiaries and relationships with foreign partners and expanded treasury
functions to manage foreign currency risks. The Company's accounting systems and
policies have been developed as the Company has experienced significant growth.
There can be no assurance that the Company's personnel, systems, procedures and
controls will be adequate to support the Company's future operations. See "--
Dependence on Key Personnel," "Business--Employees" and "Management."
With the acquisition of LDS, STAR began providing service to the commercial
market, which is more labor intensive than the wholesale market, and as a result
has higher overhead costs. The Company also may be required to update and
improve its billing systems and procedures and/or hire new management personnel
to handle the demands of the commercial market. There can be no assurance that
the Company will be able to effectively manage the costs of and risks associated
with its expansion into the commercial market.
RISKS INHERENT IN ACQUISITION STRATEGY
An important component to the Company's strategy is to grow and expand
through acquisitions. This growth strategy is dependent on the continued
availability of suitable acquisition candidates and subjects the Company to a
number of risks. The Company has recently completed two acquisitions, LDS on
November 30, 1997, and T-One on March 10, 1998. Additionally, on November 19,
1997, the Company entered into an agreement to acquire UDN. The acquisition of
UDN is subject to approval of UDN's stockholders and to various regulatory
approvals, and the Company may not complete this acquisition. These acquisitions
have placed significant demands on the Company's financial and management
resources, as the process for integrating acquired operations presents a
significant challenge to the Company's management and may lead to unanticipated
costs or a diversion of management's attention from day-to-day operations. There
can be no assurance that the Company will be able to successfully integrate
these acquisitions or any other acquisitions made by the Company in the future
into Company
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operations. Integrating acquisitions may require integration of financial and
call routing systems, network and other physical facilities and personnel.
Difficulties in integrating these and other acquisitions can cause system
degradation, added costs and loss of personnel or customers. Additionally, the
Company may incur unknown liabilities despite management's efforts to
investigate the operations of the acquired business. The impact of these risks,
and other risks arising as a result of STAR's acquisition strategy, could
adversely affect the Company's operating results.
RISKS ASSOCIATED WITH GROWTH OF TELECOMMUNICATIONS NETWORK AND CUSTOMER BASE
Historically, the Company has relied primarily on leased transmission
capacity for the delivery of its telecommunications services. The Company's
telecommunications expenses have in the past primarily been variable, based upon
minutes of use, consisting largely of payments to other long distance carriers,
customer/carrier interconnect charges, leased fiber circuit charges and switch
facility costs. During 1997, however, the Company made considerable capital
expenditures in order to expand its network, and intends to continue to do so in
the future. See "Use of Proceeds" and "Business--Network." Although the
Company's strategy is to seek to establish significant traffic volumes prior to
investing in fixed-cost facilities, the development of such facilities entails
significant costs and prior planning, which are based in part on the Company's
expectations concerning future revenue growth and market developments. As the
Company expands its network and the volume of its network traffic, its cost of
revenues will increasingly consist of fixed costs arising from the ownership and
maintenance of its switches and undersea fiber optic cables. While the Company
believes that in the long-term these investments will allow it to reduce its
cost of service and to enhance its service offerings, in the short-term, costs
increases and a decrease in the Company's operating margins may occur. If the
Company's traffic volume were to decrease, or fail to increase to the extent
expected or necessary to make efficient use of its network, the Company's costs
as a percentage of revenues could increase significantly, which could have a
material adverse effect on the Company's business, financial condition or
results of operations.
In addition, the Company's business depends in part on its ability to obtain
transmission facilities on a cost-effective basis. Because undersea fiber optic
cables typically take several years to plan and construct, carriers generally
make investments well in advance, based on a forecast of anticipated traffic.
Therefore, the Company's operations are subject to the risk that it will not
adequately anticipate the amount of traffic over its network, and may not
procure sufficient cable capacity or network equipment in order to ensure the
cost-effective transmission of customer traffic. Although the Company
participates in the planning of undersea fiber optic transmission facilities, it
does not control the construction of such facilities and must seek access to
such facilities through partial ownership positions. If ownership positions are
not available, the Company must seek access to such facilities through lease
arrangements on negotiated terms that may vary with industry and market
conditions. There can be no assurance that the Company will be able to continue
to obtain sufficient transmission facilities or access to undersea fiber optic
cable on economically viable terms. The failure of the Company to obtain
telecommunications facilities that are sufficient to support its network traffic
in a manner that ensures the reliability and quality of its telecommunications
services may have a material adverse effect on its business, financial condition
or results of operations.
RISKS OF INTERNATIONAL TELECOMMUNICATIONS BUSINESS
The Company has to date generated a substantial majority of its revenues by
providing international telecommunications services to its customers on a
wholesale basis. The international nature of the Company's operations involves
certain risks, such as changes in U.S. and foreign government regulations and
telecommunications standards, dependence on foreign partners, tariffs, taxes and
other trade barriers, the potential for nationalization and economic downturns
and political instability in foreign countries. In addition, the Company's
business could be adversely affected by a reversal in the current trend toward
deregulation of telecommunications carriers. The Company will be increasingly
subject to these risks to the extent that the Company proceeds with the planned
expansion of its international operations.
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RISK OF DEPENDENCE ON FOREIGN PARTNERS. The Company will increasingly rely
on foreign partners to terminate its traffic in foreign countries and to assist
in installing transmission facilities and network switches, complying with local
regulations, obtaining required licenses, and assisting with customer and vendor
relationships. The Company may have limited recourse if its foreign partners do
not perform under their contractual arrangements with the Company. The Company's
arrangements with foreign partners may expose the Company to significant legal,
regulatory or economic risks.
RISKS ASSOCIATED WITH FOREIGN GOVERNMENT CONTROL AND HIGHLY REGULATED
MARKETS. Governments of many countries exercise substantial influence over
various aspects of the telecommunications market. In some cases, the government
owns or controls companies that are or may become competitors of the Company or
companies (such as national telephone companies) upon which the Company and its
foreign partners may depend for required interconnections to local telephone
networks and other services. Accordingly, government actions in the future could
have a material adverse effect on the Company's operations. In highly regulated
countries in which the Company is not dealing directly with the dominant local
exchange carrier, the dominant carrier may have the ability to terminate service
to the Company or its foreign partner and, if this occurs, the Company may have
limited or no recourse. In countries where competition is not yet fully
established and the Company is dealing with an alternative operator, foreign
laws may prohibit or impede new operators from offering services in these
markets.
RISKS ASSOCIATED WITH FOREIGN CURRENCY FLUCTUATIONS. The Company's revenues
and cost of long distance services are sensitive to foreign currency
fluctuations. The Company expects that an increasing portion of the Company's
net revenue and expenses will be denominated in currencies other than U.S.
dollars, and changes in exchange rates may have a significant effect on the
Company's results of operations. Although the Company utilizes hedging
instruments to reduce the risk of foreign currency fluctuations, the Company
will not be fully protected from these risks and the instruments themselves
involve a degree of risk. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
FOREIGN CORRUPT PRACTICES ACT. The Company is also subject to the Foreign
Corrupt Practices Act ("FCPA"), which generally prohibits U.S. companies and
their intermediaries from bribing foreign officials for the purpose of obtaining
or keeping business. The Company may be exposed to liability under the FCPA as a
result of past or future actions taken without the Company's knowledge by
agents, strategic partners and other intermediaries. Such liability could have a
material adverse effect on the Company's business, operating results and
financial condition.
POTENTIAL ADVERSE EFFECTS OF GOVERNMENT REGULATION
The Company's business is subject to various U.S. and foreign laws,
regulations, agency actions and court decisions. The Company's U.S.
international telecommunications service offerings are subject to regulation by
the Federal Communications Commission (the "FCC"). The FCC requires
international carriers to obtain certificates of public convenience and
necessity prior to acquiring international facilities by purchase or lease, or
providing international service to the public. Prior FCC approval is also
required to transfer control of a certificated carrier. The Company must file
reports and contracts with the FCC and must pay regulatory fees, which are
subject to change. The Company is also subject to the FCC policies and rules
discussed below. The FCC could determine, by its own actions or in response to a
third party's filing, that certain of the Company's services, termination
arrangements, agreements with foreign carriers, transit or refile arrangements
or reports did not comply with FCC policies and rules. If this occurred, the FCC
could order the Company to terminate noncompliant arrangements, fine the Company
or revoke the Company's authorizations. Any of these actions could have a
material adverse effect on the Company's business, operating results and
financial condition.
FCC INTERNATIONAL PRIVATE LINE RESALE POLICY. The FCC's international
private line ("IPL") resale policy limits the conditions under which a carrier
may connect IPLs to the public switched telephone
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network ("PSTN") at one or both ends to provide switched services, commonly
known as International Simple Resale ("ISR"). A carrier generally may only offer
ISR services to a foreign country if the FCC has found (a) the country is a
member of the World Trade Organization ("WTO") and at least 50% of the U.S.
billed and settled traffic to that country is settled at or below the FCC's
benchmark settlement rate or (b) the country is not a WTO member, but it offers
U.S. carriers equivalent opportunities to engage in ISR and at least 50% of the
U.S. billed and settled traffic is settled at or below the applicable benchmark.
The Company's FCC authority currently permits it to provide ISR service to
Canada, the U.K., Sweden, New Zealand, Australia and the Netherlands. The FCC is
currently reviewing U.S. carrier applications to provide ISR to Belgium, Chile,
Denmark, Finland, France, Germany, Hong Kong, Norway and Luxembourg, among other
routes. Upon grant of any such ISR application to a given country, the FCC's
rules also would permit the Company to provide ISR service to that country.
Certain of the Company's termination arrangements with foreign operators may be
inconsistent with the FCC's IPL resale policy and the Company's existing ISR
authorization.
FCC INTERNATIONAL SETTLEMENTS POLICY. The FCC's International Settlement
Policy ("ISP") limits the arrangements which U.S. international carriers may
enter into with foreign carriers for exchanging public switched
telecommunications traffic, which the FCC terms International Message Telephone
Service ("IMTS"). This policy does not apply to ISR services. The ISP requires
that U.S. carriers receive an equal share of the accounting rate and receive
inbound traffic in proportion to the volume of U.S. outbound traffic which they
generate. The ISP also prohibits a U.S. carrier and a foreign carrier which
possesses sufficient market power on the foreign end of the route to affect
competition adversely in the U.S. market from entering into exclusive
arrangement involving services, facilities or functions on the foreign end of a
U.S. international route which are necessary for providing basic
telecommunications and which are not offered to similarly situated U.S.
carriers. It is possible that the FCC could find that certain of the Company's
arrangements with foreign operators are inconsistent with the ISP.
FCC POLICIES ON TRANSIT AND REFILE. The Company uses both transit and
refile arrangements to terminate its international traffic. The FCC routinely
approves transit arrangements by U.S. international carriers. The FCC's rules
also expressly permit carriers to use ISR facilities to route traffic via a
third country for refile through the PSTN. The extent to which U.S. carriers may
enter into refile arrangements, consistent with the ISP, is currently under
review by the FCC. Certain of the Company's transit or refile arrangements may
violate the ISP or other FCC policies.
RECENT AND POTENTIAL FCC ACTIONS. Regulatory action that may be taken in
the future by the FCC may intensify the competition which the Company faces,
impose additional operating costs upon the Company, disrupt certain of the
Company's transmission arrangements or otherwise require the Company to modify
its operations. Future FCC action may also provide the Company additional
competitive flexibility by, for example, eliminating or substantially reducing
the tariff requirements applicable to the Company's interstate and international
telecommunications services. The FCC is encouraging new market entrants by
implementing the WTO Basic Telecommunications Agreement (the "WTO Agreement")
and through other actions. The FCC may approve pending mergers which could
produce more effective competitors in the Company's markets. The FCC may
increase regulatory fees charged to the Company and its competitors by
eliminating the exemption for carriers which provide only international services
or through other actions, which could raise the Company's costs of service
without assurance that the Company and its competitors could pass fee increases
through to their customers. See "Business--Government Regulation."
STATE. The intrastate long distance telecommunications operations of STAR
and its subsidiaries are subject to various state laws and regulations,
including prior certification, notification, registration and/or
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tariff requirements. The vast majority of states require that STAR and its
subsidiaries apply for certification to provide intrastate telecommunications
services. Certificates of authority can generally be conditioned, modified or
revoked by state regulatory authorities for failure to comply with state laws
and regulations. Fines and other penalties, including revocation of a
certificate of authority, may be imposed.
In 1997, prior to the Company's acquisition of LDS, LDS settled disputes
with the California Public Utilities Commission (the "California PUC") and with
the District Attorney of Monterey, California regarding LDS' alleged
unauthorized switching of long distance customers (the "Settlements"). As part
of the Settlements, LDS was subject to fines and restrictions on its business
operations in California. In addition, the FCC has received numerous informal
complaints against LDS regarding the alleged unauthorized switching of long
distance customers, which complaints currently remain under review.
Following the Company's acquisition of LDS and in order to comply with the
Settlements, STAR has imposed strict restrictions on certain former LDS
employees, restricting these employees with respect to California intrastate
telecommunications operations. Additionally, the Company has taken a number of
steps to reduce the risk of a repeat occurrence regarding the alleged
unauthorized switching of commercial customers in California. If the Company
inadvertently fails to comply with such guidelines or if such guidelines are
determined to be inadequate to comply with the Settlements, the Company may be
subject to penalties or revocation of its certificate of authority. See
"Business--Government Regulation--Actions Against LDS."
FOREIGN REGULATIONS. The Company is also subject to regulation in foreign
countries, such as the U.K. and Germany, in connection with certain of its
business activities. For example, the Company's use of transit, ISR or other
routing arrangements may be affected by laws or regulations in either the
transited or terminating foreign jurisdiction. Foreign countries, either
independently or jointly as members of the International Telecommunications
Union ("ITU"), or other supra-national organizations such as the European Union
or the WTO, may have adopted or may adopt laws or regulatory requirements
regarding such services for which compliance would be difficult or expensive,
that could force the Company to choose less cost-effective routing alternatives
and that could adversely affect the Company's business, operating results and
financial condition.
To the extent that it seeks to provide telecommunications services in other
non-U.S. markets, the Company is subject to the developing laws and regulations
governing the competitive provision of telecommunications services in those
markets. The Company currently plans to provide a limited range of services in
Mexico, Belgium and France, as permitted by regulatory conditions in those
markets, and to expand its operations as these markets implement scheduled
liberalization to permit competition in the full range of telecommunications
services in the next several years. The nature, extent and timing of the
opportunity for the Company to compete in these markets will be determined, in
part, by the actions taken by the governments in these countries to implement
competition and the response of incumbent carriers to these efforts. There can
be no assurance that the regulatory regime in these countries will provide the
Company with practical opportunities to compete in the near future, or at all,
or that the Company will be able to take advantage of any such liberalization in
a timely manner. See "Business--Government Regulation."
REGULATION OF CUSTOMERS. The Company's customers are also subject to
actions taken by domestic or foreign regulatory authorities that may affect the
ability of customers to deliver traffic to the Company. Regulatory sanctions
have been imposed on certain of the Company's customers in the past. While such
sanctions have not adversely impacted the volume of traffic received by the
Company from such customers to date, future regulatory actions could materially
adversely affect the volume of traffic received from a major customer, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
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RISKS OF NETWORK FAILURE
Any system or network failure that causes interruptions in the Company's
operations could have a material adverse effect on its business, financial
condition or results of operations. The Company's operations are dependent on
its ability to successfully expand its network and integrate new and emerging
technologies and equipment into its network, which are likely to increase the
risk of system failure and to cause strain upon the network. The Company's
operations also are dependent on the Company's protection of its hardware and
other equipment from damage from natural disasters such as fires, floods,
hurricanes and earthquakes, other catastrophic events such as civil unrest,
terrorism and war and other sources of power loss and telecommunications
failures. Although the Company has taken a number of steps to prevent its
network from being affected by natural disasters, fire and the like, such as
building redundant systems for power supply to the switching equipment, there
can be no assurance that any such systems will prevent the Company's switches
from becoming disabled in the event of an earthquake, power outage or otherwise.
The failure of the Company's network, or a significant decrease in telephone
traffic resulting from effects of a natural or man-made disaster, could have a
material adverse effect on the Company's relationship with its customers and the
Company's business, operating results and financial condition. See
"Business--Network."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the efforts of
senior management personnel and a group of employees with longstanding industry
relationships and technical knowledge of the Company's operations, in
particular, Christopher E. Edgecomb, the Company's Chief Executive Officer. The
Company maintains and is the beneficiary under a key person life insurance
policy in the amount of $10.0 million with respect to Mr. Edgecomb. The Company
believes that its future success will depend in large part upon its continuing
ability to attract and retain highly skilled personnel. Competition for
qualified, high-level telecommunications personnel is intense and there can be
no assurance that the Company will be successful in attracting and retaining
such personnel. The loss of the services of one or more of the Company's key
individuals, or the failure to attract and retain other key personnel, could
materially adversely affect the Company's business, operating results and
financial condition. See "Management."
SIGNIFICANT COMPETITION
The international telecommunications industry is intensely competitive and
subject to rapid change. The Company's competitors in the international
wholesale switched long distance market include large, facilities-based
multinational corporations and smaller facilities-based providers in the U.S.
and overseas that have emerged as a result of deregulation, switch-based
resellers of international long distance services and international joint
ventures and alliances among such companies. The Company also competes abroad
with a number of dominant telecommunications operators that previously held
various monopolies established by law over the telecommunications traffic in
their countries. International wholesale switched service providers compete on
the basis of price, customer service, transmission quality, breadth of service
offerings and value-added services. Additionally, the telecommunications
industry is in a period of rapid technological evolution, marked by the
introduction of competitive product and service offerings, such as the
utilization of the Internet for international voice and data communications. The
Company is unable to predict which technological development will challenge its
competitive position or the amount of expenditures will be required to respond
to a rapidly changing technological environment. Further, the number of the
Company's competitors is likely to increase as a result of the competitive
opportunities created by a new Basic Telecommunications Agreement concluded by
members of the WTO in February 1997. Under the terms of the WTO Agreement,
starting on January 1, 1998, the United States and over 65 countries have
committed to open their telecommunications markets to competition, foreign
ownership and adopt measures to protect against anticompetitive behavior. As a
result, the Company believes that competition will continue to increase, placing
downward pressure on prices. Such pressure could adversely affect the
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Company's gross margins if the Company is not able to reduce its costs
commensurate with such price reductions.
COMPETITION FROM DOMESTIC AND INTERNATIONAL COMPANIES. A majority of the
U.S.-based international telecommunications services revenue is currently
generated by AT&T Corp. ("AT&T"), MCI Communications Corp. ("MCI") and Sprint
Corporation ("Sprint"). The Company also competes with WorldCom, Inc.
("WorldCom"), Pacific Gateway Exchange, Inc. and other U.S.-based and foreign
long distance providers, including the Regional Bell Operating Companies
("RBOCs"), which presently have FCC authority to resell and terminate
international telecommunication services. Many of these competitors have
considerably greater financial and other resources and more extensive domestic
and international communications networks than the Company. The Company's
business would be materially adversely affected to the extent that a significant
number of such customers limit or cease doing business with the Company for
competitive or other reasons. Consolidation in the telecommunications industry
could not only create even larger competitors with greater financial and other
resources, but could also adversely affect the Company by reducing the number of
potential customers for the Company's services.
EXPANSION INTO COMMERCIAL MARKET. With the acquisition of LDS, STAR began
providing long distance service to the commercial market, a market that is
subject to intense competition from a number of well capitalized companies. The
commercial market is also characterized by the lack of customer loyalty, with
commercial customers regularly changing service providers. There can be no
assurance that STAR will be able to compete successfully in the commercial
market. See "Business--Strategy--Expansion into Commercial Market."
CUSTOMER CONCENTRATION
While the list of the Company's most significant customers varies from
quarter to quarter, the Company's five largest customers accounted for
approximately 30% of its revenues in 1997. The Company could lose a significant
customer for many reasons, including the entrance into the market of significant
new competitors with lower rates than the Company, downward pressure on the
overall costs of transmitting international calls, transmission quality
problems, changes in U.S. or foreign regulations or unexpected increases in the
Company's cost structure as a result of expenses related to installing a global
network or otherwise.
NEED FOR ADDITIONAL CAPITAL TO FINANCE GROWTH AND CAPITAL REQUIREMENTS
The Company believes that it must continue to enhance and expand its network
and build out its telecommunications network infrastructure in order to maintain
its competitive position and continue to meet the increasing demands for service
quality, capacity and competitive pricing. The Company's ability to grow
depends, in part, on its ability to expand its operations through the ownership
and leasing of network capacity, which requires significant capital
expenditures, that are often incurred prior to the Company's receipt of the
related revenue.
The Company believes that, based upon its present business plan, the
proceeds from the Offering, together with the Company's existing cash resources
and expected cash flow from operating activities, will be sufficient to meet its
currently anticipated working capital and capital expenditure requirements for
at least twelve months. If the Company's growth exceeds current expectations, if
the Company obtains one or more attractive opportunities to purchase the
business or assets of another company, or if the Company's cash flow from
operations after the end of such period is insufficient to meet its working
capital and capital expenditure requirements, the Company will need to raise
additional capital from equity or debt sources. There can be no assurance that
the Company will be able to raise such capital on favorable terms or at all. If
the Company is unable to obtain such additional capital, the Company may be
required to reduce the scope of its anticipated expansion, which could have a
material adverse effect on the Company's business, financial condition or
results of operations.
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VOLATILITY OF STOCK PRICE
The market price of the shares of Common Stock has risen since the Company's
initial public offering in June 1997 and is trading at a high multiple of the
Company's earnings. The market price for such shares has been highly volatile
and may be significantly affected by factors such as actual or anticipated
fluctuations in the Company's operating results, the announcement of potential
acquisitions by the Company, changes in federal and international regulations,
activities of the largest domestic providers, industry consolidation and
mergers, conditions and trends in the international telecommunications market,
adoption of new accounting standards affecting the telecommunications industry,
changes in recommendations and estimates by securities analysts, general market
conditions and other factors. In addition, the stock market has from time to
time experienced significant price and volume fluctuations that have
particularly affected the market prices for the shares of emerging growth
companies like the Company. These broad market fluctuations may adversely affect
the market price of the Company's Common Stock.
CONTROL OF COMPANY BY NAMED OFFICERS AND DIRECTORS
Upon the consummation of this offering, the Company's Named Officers (as
defined below) and directors in the aggregate will beneficially own
approximately 37.6% of the outstanding shares of Common Stock and the Company's
Chief Executive Officer will beneficially own approximately 31.9% of the
outstanding shares. These stockholders will be able to exercise control over all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. Such concentration of ownership
may have the effect of delaying or preventing a change in control of the
Company. See "Principal Stockholders."
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION, BYLAWS AND
DELAWARE LAW
The Company's Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting and conversion rights of such
shares, without any further vote or action by the Company's stockholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. The Company has no current plans
to issue shares of Preferred Stock. The Company is also subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law,
which will prohibit the Company from engaging in a "business combination" with
an "interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 could have an effect of delaying or preventing a change in control
of the Company. In addition, the Company's Amended and Restated Certificate of
Incorporation provides for a classified Board of Directors such that
approximately only one-third of the members of the Board will be elected at each
annual meeting of stockholders. Classified boards may have the effect of
delaying, deferring or discouraging changes in control of the Company. Further,
certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws and of Delaware law could delay or make more difficult
a merger, tender offer or proxy contest involving the Company. Additionally,
certain federal regulations require prior approval of certain transfers of
control of telecommunications companies, which could also have the effect of
delaying, deferring or preventing a change in control. See "Business--Government
Regulation," "Description of Capital Stock--Preferred Stock" and
"--Anti-takeover Effects of Provisions of the Certificate of Incorporation,
Bylaws and Delaware Law."
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have approximately
42,804,000 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding and vested
options to purchase approximately 1,334,000 shares of Common Stock outstanding
and vested as of February 28, 1998) of which 9,430,000 have been previously
registered pursuant to the Securities Act. Of the approximately 42,804,000
shares of Common Stock outstanding, the 7,000,000 shares offered hereby will be
freely transferable without restriction or further registration under the
Securities Act. Approximately 558,000 additional shares which are not currently
registered will be available for immediate unrestricted sale in the public
market on the date of this Prospectus and approximately 1,601,000 additional
shares will be available for immediate sale on the date of this Prospectus,
subject to the public information, volume limitation and notice provisions of
Rule 144 adopted under the Securities Act. Approximately 410,000 shares will be
available for sale within 45 days after the date of this prospectus, subject to
the Rule 144 public information, volume limitations and notice provisions.
Approximately 1,985,000 shares will be available for sale in the public market
45 days after the date of this Prospectus upon the expiration of certain lock-up
agreements, of which 1,875,000 shares are subject, until July 12, 1998, to the
Rule 144 public information, volume limitation and notice provisions described
below and the remaining 110,000 which remain subject to the volume and other
limitations of Rule 144. Upon the expiration of certain additional lock-up
agreements 90 days after the date of this Prospectus, (i) approximately
16,136,000 shares will be available for sale in the public market, subject to
the Rule 144 public information, volume limitation and notice provisions and
(ii) approximately 2,050,000 shares will be available for unrestricted sale in
the public market. Approximately 1,353,000 shares issued in the T-One
acquisition shall be available for sale on the date of the publication by the
Company of at least 30 days of combined operating results of STAR and T-One.
Approximately 849,000 shares issued in the LDS acquisition will be available for
sale after November 30, 1998.
Certain stockholders holding approximately 7,153,000 shares of Common Stock
are entitled to registration rights with respect to their shares of Common
Stock. Sales of substantial amounts of such shares in the public market after
this offering, or the prospect of such sales, could adversely affect the market
price of the Common Stock. Such sales also might make it more difficult for the
Company to sell equity securities or equity related securities in the future at
a time and price that the Company deems appropriate. See "Description of Capital
Stock," "Shares Eligible for Future Sale" and "Underwriting."
YEAR 2000 COMPUTER PROGRAM FAILURE
A significant percentage of the software that runs most of the computers in
the United States relies on two-digit date codes to perform computations and
decision-making functions. Commencing on January 1, 2000, these computer
programs may fail from an inability to interpret date codes properly,
misinterpreting "00" as the year 1900 rather than 2000. The Company believes
that the Company's billing, credit and call tracking systems are Year 2000
compliant and do not use programs with the two-digit date code flaw. At the same
time, a number of the computers of the Company's customers and vendors that
interface with the Company's systems may run on programs that have Year 2000
problems and may disrupt the Company's billing, credit and tracking systems.
Failure of any of the computer programs integral to the Company's key customers
and vendors could adversely affect the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
to be sold by the Company in this offering (at an assumed public offering price
of $22.44) are estimated to be $149,310,000 ($164,739,600 if the Underwriters'
over-allotment option is exercised in full), after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company. The Company will not receive any of the proceeds from the sale of
shares of Common Stock, if any, by a selling stockholder (the "Selling
Stockholder") pursuant to the Underwriters' over-allotment option.
The Company intends to use approximately $80 million of the proceeds of the
offering to expand the Company's network, including the purchase of fiber optic
cable capacity, the purchase of switches and the buildout of leasehold
improvements for these facilities. The remainder of the proceeds are expected to
be used for working capital, expansion of the Company's marketing and sales
organization and general corporate purposes. Although the Company may use a
portion of the net proceeds for possible acquisition of businesses that are
complementary to those of the Company, there are no current plans in this
regard. Pending such uses, the Company plans to invest the net proceeds in
short-term, interest-bearing, investment grade securities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Strategy."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been traded on the Nasdaq National Market
since June 12, 1997. The following table sets forth, for the fiscal periods
indicated, the quarterly high and low sales prices for the Common Stock, as
reported by Nasdaq and as adjusted to reflect the Stock Split that will occur on
March 31, 1998.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------
Second Quarter (from June 12, 1997)............................................................... 7 3/8 4 5/8
Third Quarter..................................................................................... 11 7/8 6 1/4
Fourth Quarter.................................................................................... 17 3/4 9 1/2
FISCAL YEAR ENDING DECEMBER 31, 1998
- --------------------------------------------------------------------------------------------------
First Quarter (through March 23, 1998)............................................................ 22 3/4 14
</TABLE>
The last reported sale price of the Common Stock on the Nasdaq National
Market on March 23, 1998 was $22.44 per share. As of March 16, 1998, there were
155 holders of record of the Company's Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and has no
intention of paying cash dividends in the foreseeable future. The Company
anticipates that all future earnings, if any, generated from operations will be
retained by the Company to develop and expand its business. Any future
determination with respect to the payment of dividends will be at the discretion
of the Board of Directors and will depend upon, among other things, the
Company's operating results, financial condition and capital requirements, the
terms of then-existing indebtedness, general business conditions and such other
factors as the Board of Directors deems relevant. In addition, the Company's
existing revolving credit facility prohibits the payment of cash dividends
without the lender's consent.
17
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of December 31, 1997 and (ii) the capitalization of the Company as adjusted
to reflect the sale of 7 million shares of Common Stock offered hereby (at an
assumed public offering price of $22.44) and the application of the estimated
net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term liabilities, less current portion............................................... $ 12,271 $ 12,271
--------- -----------
Stockholders' equity:
Preferred stock: $0.001 par value, 5,000,000 shares authorized, no shares issued and
outstanding on an actual basis and as adjusted........................................ -- --
Common stock: $0.001 par value, 50,000,000 shares authorized, 33,678,519 shares issued
and outstanding on an actual basis; 50,000,000 shares authorized, 40,678,519 shares
outstanding as adjusted(1)............................................................ 34 41
Additional paid-in capital.............................................................. 45,407 194,710
Deferred compensation................................................................... (30) (30)
Retained earnings (deficit)............................................................. (1,397) (1,397)
--------- -----------
Stockholders' equity.................................................................. 44,014 193,324
--------- -----------
Total capitalization.................................................................. $ 56,285 $ 205,595
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Excludes 3,497,097 shares subject to outstanding options as of December 31,
1997 at a weighted average exercise price of approximately $3.54 per share.
Also excludes 1,794,978 shares reserved for issuance under the Company's
stock plans. See "Management--1997 Omnibus Stock Incentive Plan," "--1996
Outside Director Nonstatutory Stock Option Plan" and Note 10 of Notes to
Consolidated Financial Statements.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto and with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," each of which is included elsewhere in this
Prospectus. The consolidated statements of operations data for the years ended
December 31, 1995, 1996 and 1997, and the balance sheet data at December 31,
1996 and 1997 are derived from audited financial statements included elsewhere
in this Prospectus. The consolidated statement of operations data for the year
ended December 31, 1994 and the consolidated balance sheet data at December 31,
1994 are unaudited and are derived from unaudited financial statements not
included in this Prospectus. The consolidated balance sheet data at December 31,
1995 is derived from audited financial statements not included in this
Prospectus. Although incorporated in 1993, the Company did not commence business
until 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1994 1995 1996 1997
----------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND PER
MINUTE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA(1):
Revenues.................................. $ 20,915 $ 46,283 $ 237,991 $ 376,198
Cost of services.......................... 12,775 31,897 205,585 325,237
----------- --------- --------- ---------
Gross profit............................ 8,140 14,386 32,406 50,961
Operating expenses:
Selling, general and administrative..... 4,782 10,086 34,331 35,381
Depreciation and amortization........... 30 186 1,151 4,245
Merger expense.......................... -- -- -- 286
----------- --------- --------- ---------
Total operating expenses................ 4,812 10,272 35,482 39,912
----------- --------- --------- ---------
Income (loss) from operations........... 3,328 4,114 (3,076) 11,049
----------- --------- --------- ---------
Other income (expenses):
Interest income......................... 3 22 110 492
Interest expense........................ -- (64) (601) (1,633)
Legal settlements and expenses.......... -- -- (100) (1,653)
Other................................... (7) (33) 39 208
----------- --------- --------- ---------
Income (loss) before provision for
income taxes.......................... 3,324 4,039 (3,628) 8,463
Provision for income taxes................ 1 66 592 2,895
----------- --------- --------- ---------
Net income (loss)......................... $ 3,323 $ 3,973 $ (4,220) $ 5,568
----------- --------- --------- ---------
----------- --------- --------- ---------
Pro forma net income (loss)
(unaudited)(2)........................... $ 1,994 $ 2,407 $ (5,163) $ 5,373
----------- --------- --------- ---------
----------- --------- --------- ---------
Pro forma diluted income (loss) per share
(unaudited)(3)........................... $ 0.12 $ 0.13 $ (0.24) $ 0.17
----------- --------- --------- ---------
----------- --------- --------- ---------
Weighted average number of diluted common
shares outstanding(3).................... 16,865 18,020 21,939 31,625
OTHER CONSOLIDATED FINANCIAL AND OPERATING
DATA(1):
EBITDA(4)................................. $ 3,351 $ 4,267 $ (1,986) $ 13,849
Capital expenditures(5)................... 57 2,175 13,018 24,732
Wholesale billed minutes of use........... -- 38,106 479,681 863,295
Wholesale revenue per billed minute of
use(6)................................... $ -- $ 0.4102 $ 0.4288 $ 0.3997
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1994 1995 1996 1997
----------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA(1):
Working capital (deficit)................. $ 2,007 $ 1,222 $ (6,342) $ 15,846
Total assets.............................. 5,105 18,316 54,000 113,553
Total long-term liabilities, net of
current portion.......................... -- 904 5,870 12,271
Retained earnings (deficit)............... 1,839 1,596 (5,968) (1,397)
Stockholders' equity...................... 2,197 3,047 7,911 44,014
</TABLE>
- ------------------------
(1) Does not reflect the acquisition of T-One, which was consummated on March
10, 1998, or the acquisition of UDN, which remains subject to the approval
of UDN's stockholders and to various regulatory approvals. If the Company's
financial statements had been restated to include the combined operating
results of the Company and T-One at the beginning of the audited periods
presented, revenues would have been $58.9 million, $260.4 million and
$406.6 million, gross profit would have been $14.7 million, $33.7 million
and $52.8 million and net income (loss) would have been $2.1 million,
$(5.7) million and $5.6 million for the years ended December 31, 1995, 1996
and 1997, respectively. See Note 14 of Notes to Consolidated Financial
Statements.
(2) The pro forma net income or loss per share assumes that both STAR and LDS
had been
C-Corporations for all periods presented.
(3) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used in computing pro
forma net income (loss) per share.
(4) EBITDA represents earnings before interest income and expense, income
taxes, depreciation and amortization expense. EBITDA does not represent
cash flows as defined by generally accepted accounting principles and does
not necessarily indicate that cash flows are sufficient to fund all of the
Company's cash needs. EBITDA should not be considered in isolation or as a
substitute for net income, cash flows from operating activities or other
measures of the Company's liquidity determined in accordance with generally
accepted accounting principles.
(5) Includes assets financed with capital leases or notes. See Note 2 of Notes
to Consolidated Financial Statements.
(6) Represents wholesale gross call usage revenue per billed minute. Amounts
exclude other revenue related items such as finance charges.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH "SELECTED
CONSOLIDATED FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE
NOTES THERETO, EACH OF WHICH IS INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS, AS DEFINED IN SECTION 27A OF THE
SECURITIES ACT, THAT INVOLVE RISKS AND UNCERTAINTIES. STAR'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS
AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO THOSE DISCUSSED IN
"RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. SEE "DESCRIPTION OF
FORWARD-LOOKING STATEMENTS."
OVERVIEW
The Company is an emerging multinational carrier focused primarily on the
international long distance market. The Company offers highly reliable, low-cost
switched voice services on a wholesale basis, primarily to U.S.-based long
distance carriers. STAR provides international long distance service to
approximately 220 countries through its flexible network comprised of various
foreign termination relationships, international gateway switches, leased and
owned transmission facilities and resale arrangements with other long distance
providers.
The Company installed its first international gateway switch in Los Angeles
in June 1995 and initially recognized wholesale revenues in August 1995. A
significant portion of the Company's revenues in 1994 and 1995 were generated by
the commercial operations of LDS.
REVENUES. Most of the Company's revenues are generated by the sale of
international long distance services on a wholesale basis to other, primarily
domestic, long distance providers. The Company records revenues from the sale of
long distance services at the time of customer usage. The Company's agreements
with its wholesale customers are short-term in duration and the rates charged to
customers are subject to change from time to time, generally with five days
notice to the customer.
COST OF SERVICES. The Company has pursued a strategy of attracting
customers and building calling volume and revenue by offering favorable rates
compared to other long distance providers. The Company continues to lower its
cost of services by (i) expanding the Company's owned network facilities, (ii)
continuing to utilize the Company's sophisticated information systems to route
calls over the most cost-effective routes and (iii) leveraging the Company's
traffic volumes and information systems to negotiate lower variable usage-based
costs with domestic and foreign providers of transmission capacity.
Cost of services includes those costs associated with the transmission and
termination of international long distance services. Currently, a majority of
transmission capacity used by the Company is obtained on a variable, per minute
basis. As a result, some of the Company's current cost of services is variable.
The Company's contracts with its vendors provide that rates may fluctuate, with
rate change notice periods varying from five days to one year, with certain of
the Company's longer term arrangements requiring the Company to meet minimum
usage commitments in order to avoid penalties. Such variability and the short-
term nature of many of the contracts subject the Company to the possibility of
unanticipated cost increases and the loss of cost-effective routing
alternatives. Included in the Company's cost of services are accruals for rate
and minute disputes and unreconciled billing differences between the Company and
its vendors. Each quarter management reviews the cost of services accrual and
adjusts the balance for resolved items. Cost of services also includes fixed
costs associated with the leasing of network facilities.
The Company intends to begin providing international long distance services
to commercial customers in certain European countries in the second half of
1998. STAR began providing long distance service to commercial markets in the
U.S. with its acquisition of LDS in November 1997. STAR believes that traffic
from commercial customers has the potential to generate higher gross margins
than wholesale traffic. STAR also expects, however, that an expansion into this
market will also increase the risk of bad debt
21
<PAGE>
exposure and lead to higher overhead costs. Information related to wholesale and
commercial revenues and operations will be reported in future Exchange Act
filings made by STAR in accordance with Financial Accounting Standards Board
Statement No. 131.
Prices in the international long distance market have declined in recent
years and, as competition continues to increase, STAR believes that prices are
likely to continue to decline. Additionally, STAR believes that the increasing
trend of deregulation of international long distance telecommunications will
result in greater competition, which could adversely affect STAR's revenue per
minute and gross margin. STAR believes, however, that the effect of such
decreases in prices will be offset by increased calling volumes and decreased
costs.
OPERATING EXPENSES. Selling, general and administrative expenses consist
primarily of personnel costs, depreciation and amortization, tradeshow and
travel expenses and commissions and consulting fees, as well as an accrual for
bad debt expense. These expenses have been increasing over the past year, which
is consistent with STAR's recent growth, accelerated expansion into Europe, and
investment in systems and facilities. The Company expects this trend to
continue, and to include, among other things, a significant increase in
depreciation and amortization. Management believes that additional selling,
general and administrative expenses will be necessary to support the expansion
of the Company's network facilities, its sales and marketing efforts and STAR's
expansion into commercial markets.
FOREIGN EXCHANGE. The Company's revenues and cost of long distance services
are sensitive to foreign currency fluctuations. The Company expects that an
increasing portion of the Company's revenues and expenses will be denominated in
currencies other than U.S. dollars, and changes in exchange rates may have a
significant effect on the Company's results of operations.
FACTORS AFFECTING FUTURE OPERATING RESULTS. The Company's quarterly
operating results are difficult to forecast with any degree of accuracy because
a number of factors subject these results to significant fluctuations. As a
result, STAR believes that period-to-period comparisons of its operating results
are not necessarily meaningful and should not be relied upon as indications of
future performance.
The Company's revenues, costs and expenses have fluctuated significantly in
the past and are likely to continue to fluctuate significantly in the future as
a result of numerous factors. The Company's revenues in any given period can
vary due to factors such as call volume fluctuations, particularly in regions
with relatively high per-minute rates; the addition or loss of major customers,
whether through competition, merger, consolidation or otherwise; the loss of
economically beneficial routing options for the termination of STAR's traffic;
financial difficulties of major customers; pricing pressure resulting from
increased competition; and technical difficulties with or failures of portions
of STAR's network that impact STAR's ability to provide service to or bill its
customers. STAR's cost of services and operating expenses in any given period
can vary due to factors such as fluctuations in rates charged by carriers to
terminate STAR's traffic; increases in bad debt expense and reserves; the timing
of capital expenditures, and other costs associated with acquiring or obtaining
other rights to switching and other transmission facilities; changes in STAR's
sales incentive plans; and costs associated with changes in staffing levels of
sales, marketing, technical support and administrative personnel. In addition,
STAR's operating results can vary due to factors such as changes in routing due
to variations in the quality of vendor transmission capability; loss of
favorable routing options; the amount of, and the accounting policy for, return
traffic under operating agreements; actions by domestic or foreign regulatory
entities; the level, timing and pace of STAR's expansion in international and
commercial markets; and general domestic and international economic and
political conditions. Further, a substantial portion of transmission capacity
used by the Company is obtained on a variable, per minute and short term basis,
subjecting the Company to the possibility of unanticipated price increases and
service cancellations. Since STAR does not generally have long term arrangements
for the purchase or resale of long distance services, and since rates fluctuate
significantly over short periods of time, STAR's gross margins are subject to
significant fluctuations over short periods
22
<PAGE>
of time. The Company's gross margins also may be negatively impacted in the
longer term by competitive pricing pressures.
RECENT ACQUISITIONS AND DEVELOPMENTS
The Company has recently acquired or entered into agreements to acquire the
following companies and has taken the following actions:
- L.D. SERVICES, INC. On November 30, 1997, the Company acquired LDS,
certain non-operating entities and majority ownership in another entity
for approximately 849,000 shares of Common Stock in a transaction
accounted for as a pooling of interests. The Company's audited financial
statements have been restated to include LDS' historical performance for
all relevant periods. The commercial business of LDS has historically had
higher gross margins and higher selling, general and administrative
expenses and operating costs than the Company's wholesale operations. As
the Company integrates and expands the commercial accounts of LDS, such
increase in operations may affect the Company's future operating margins.
In 1997, LDS settled disputes with the California PUC and with the
District Attorney of Monterey, California. The resulting payments and
restrictions on LDS' activities adversely affected its 1997 operating
results. See "Business--Government Regulation--Actions Against LDS."
- T-ONE CORP. On March 10, 1998, the Company acquired T-One for 1,353,000
shares of Common Stock in a transaction accounted for as a pooling of
interests. Consistent with applicable accounting standards, as of the date
of this Prospectus, the Company's audited financial statements have not
been restated to include T-One's historical performance. For the fiscal
year ended December 31, 1997, T-One had revenues of $30.4 million, gross
profit of $1.8 million, selling, general and administrative expenses of
$1.5 million and net income of $0.2 million. See Note 14 of Notes to
Consolidated Financial Statements.
- UNITED DIGITAL NETWORK, INC. On November 19, 1997, the Company entered
into an agreement to acquire UDN in a transaction to be accounted for as a
pooling of interests. The acquisition of UDN is subject to approval by
UDN's stockholders and to various regulatory approvals. Assuming the
receipt of all necessary approvals, management expects to consummate the
UDN acquisition in the second quarter of 1998 for approximately 800,000
shares of Common Stock. In connection with the UDN acquisition, STAR has
loaned an aggregate of $4.5 million to UDN. The Company's financial
statements have not been restated to reflect the acquisition of UDN. Based
solely on information provided by UDN to STAR, which has not been
independently verified by STAR, for the nine month period ended January
31, 1998, UDN had revenues of $23.9 million and a net loss of $6.5
million. STAR believes that, because UDN operates in the commercial
market, its higher gross margins and operating costs will have an impact
on the Company's margins upon consummation of the merger and on a
going-forward basis once STAR's operating results are restated to include
UDN's historical performance. UDN's Common Stock trades on the Vancouver
Stock Exchange under the symbol UDN.
- STOCK SPLIT. On March 31, 1998, the Company will give effect to the Stock
Split with payment to the holders of the shares of Common Stock
outstanding on February 20, 1998 a stock dividend equal to 1.05 shares of
Common Stock for each such outstanding share.
23
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain selected items in the Company's
statements of operations as a percentage of total revenues for the periods
indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues.......................................................................... 100.0% 100.0% 100.0%
Costs of services................................................................. 68.9 86.4 86.5
--------- --------- ---------
Gross profit...................................................................... 31.1 13.6 13.5
Operating expenses:
Selling, general and administrative expenses.................................... 21.8 14.4 9.4
Depreciation and amortization................................................... 0.4 0.5 1.1
--------- --------- ---------
Total operating expenses........................................................ 22.2 14.9 10.6
Income (loss) from operations..................................................... 8.9 (1.3) 2.9
--------- --------- ---------
Income (loss) before provision for income taxes................................... 8.7 (1.5) 2.3
Provision for income taxes........................................................ 0.1 0.3 0.8
--------- --------- ---------
Net income (loss)................................................................. 8.6% (1.8)% 1.5%
--------- --------- ---------
--------- --------- ---------
</TABLE>
YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES. Revenues increased 58.1% to $376.2 million in 1997 from $238.0
million in 1996. Wholesale revenues increased to $348.7 million from $208.1
million, with minutes of use increasing to 863.3 million minutes in 1997, as
compared to 479.7 million minutes of use in the prior year. This increase
reflects an increase in the number of wholesale customers from 84 in 1996 to 105
at the end of 1997, as well as an increase in usage by existing customers. The
average rate per minute of usage for wholesale customers declined from $0.43
cents per minute in 1996 to $0.40 cents per minute in 1997, reflecting the
change in country mix to include a larger proportion of lower rate per minute
countries as well as lower prices on competitive routes. Taking into account the
acquisition of T-One, on a pro forma basis, revenues in 1997 would have been
$406.6 million, an increase of 56.1% from $260.4 million in 1996.
Commercial revenues decreased to $27.5 million in 1997 from $29.9 million in
1996 reflecting the termination of the LDS customer base in California due to
the 1997 settlement entered into by LDS with each of the California PUC and the
District Attorney of Monterey, California. See "Business--Governmental
Regulation--Actions Against LDS."
GROSS PROFIT. Gross profit increased 57.3% to $51.0 million in 1997 from
$32.4 million in 1996. Wholesale gross profit increased to $39.8 million in 1997
from $19.7 million for 1996 and wholesale gross margin increased to 11.4% from
9.4%, respectively. Wholesale gross profit expanded during 1997 as traffic was
increasingly routed over the Company's proprietary international network.
Commercial gross profit decreased 11.8% to $11.2 million in 1997 from $12.7
million in 1996 and commercial gross margin declined to 40.7% from 42.6% over
such periods, reflecting declining prices in the competitive long distance
market. As STAR migrates the LDS commercial customer base onto the Company's
network, LDS' cost of commercial long distance services is expected to decline.
Taking into account the acquisition of T-One, on a pro forma basis, gross profit
in 1997 would have been $52.8 million, an increase of 56.4% over gross profit of
$33.7 million in 1996.
SELLING, GENERAL AND ADMINISTRATIVE. In 1997, selling, general and
administrative expenses increased 3.1% to $35.4 million, from $34.3 million in
1996. Wholesale selling, general and administrative expenses increased to $26.0
million in 1997 from $24.1 million in 1996, but decreased as a percentage of
wholesale revenues to 7.5% from 11.6% over the comparable periods. Total
expenses increased year to year in
24
<PAGE>
absolute dollars as STAR expanded its proprietary international network and
employee base. Included in the 1996 selling, general and administrative expense
was $11.6 million in reserves and write-offs against deposits and accounts
receivable related to bad debts from two customers. Commercial selling, general
and administrative expenses decreased to $9.4 million in 1997 from $10.2 million
in 1996 and remained flat as a percentage of commercial revenues at
approximately 34.1%. The Company expects selling, general and administrative
expenses to expand in absolute dollars and as a percentage of revenues in fiscal
year 1998, as the Company expands its network and employee base and in
connection with the Company's entry into the commercial market.
DEPRECIATION. Depreciation increased to $4.2 million for 1997 from $1.2
million for 1996, and increased as a percentage of revenues to 1.1% from 0.5% in
the prior period. Depreciation increased as a result of STAR's continuing
expansion of its proprietary international network which includes purchases of
switches, submarine cable and leasehold improvements associated with switch
sites. STAR expects depreciation expense to increase as the Company continues to
expand its global telecommunications network.
OTHER INCOME (EXPENSE). Other expense, net, increased to $2.6 million in
1997 from $552,000 in 1996. This increase is primarily due to interest expense
of $1.6 million incurred under various capital leases and bank lines of credit
and a legal settlement and associated expenses of $1.7 million. The legal
settlement relates to the dispute settled by LDS with the California PUC and the
District Attorney of Monterey County. See "Business--Governmental
Regulation--Action Against LDS." Interest income earned on short-term
investments increased to $492,000 in 1997 from $110,000 in 1996 due to interest
earned on the proceeds of the Company's June 1997 initial public offering.
PROVISION FOR INCOME TAXES. The provision for income taxes increased to
$2.9 million in 1997 from $592,000 in 1996, primarily due to the increase in
profitability of the Company.
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUES. Revenues increased 414.2% to $238.0 million in 1996 from $46.3
million 1995. Wholesale revenues increased to $208.1 million in 1996 from $16.1
million in 1995, with minutes of use increasing to 479.7 million in 1996, as
compared to 38.1 million minutes of use in the prior year. The increase in
wholesale revenue resulted from STAR's commencement of operations as an
international long distance carrier, an increase in the number of customers as
compared to the prior year and an increase in minutes of wholesale traffic from
new and existing customers. The increase in traffic is also attributable to an
increase in the number of routes with favorable rates that STAR was able to
offer to customers. Commercial revenues decreased to $29.9 million in 1996 from
$30.2 million in 1995 due to a decrease in the rate per minute charged, which
was partially offset by an increase in the number of minutes sold. Taking into
account the acquisition of T-One, on a pro forma basis revenues would have been
$260.4 million in 1996, an increase of 341.9% from $58.9 million in 1995.
GROSS PROFIT. Gross profit increased 125.3% to $32.4 million for 1996 from
$14.4 million in 1995. Wholesale gross profit increased to $19.7 million in 1996
from $1.8 million for 1995. Wholesale gross margin decreased to 9.4% in 1996
from 11.0% in 1995, reflecting the change from STAR's prior consulting business
to operating as an international long distance carrier. Gross profit was
positively impacted during 1996 by the negotiation of lower rates on routes with
significant traffic, and negatively impacted by increases in traffic on routes
with lower margins. Commercial gross profit increased to $12.7 million in 1996
from $12.6 million in 1995 with gross margin increasing to 42.6% from 41.8%,
respectively. The gross profit from commercial services expanded as costs
associated with the local exchange carriers declined. Taking into account the
acquisition of T-One, on a pro forma basis, gross profit in 1996 would have been
$33.7 million, an increase of 130.0% from $14.7 million in 1995.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 240.4% to $34.3 million in 1996 from $10.1 million in 1995.
Wholesale selling, general and administrative expenses
25
<PAGE>
increased to $24.1 million in 1996 from $2.1 million in 1995, and decreased as a
percentage of revenues to 11.6% from 12.8% in the prior period. Selling, general
and administrative expenses increased between periods as STAR increased its
employee base and incurred payroll, employee benefits, commission and related
expenses. STAR also established a reserve for doubtful accounts to reflect its
significantly higher revenue levels and invested in sales and marketing
activities, including tradeshows and travel. Hi-Rim and CCI, two of STAR's major
customers in 1996, informed STAR that they were experiencing financial
difficulties and would be unable to pay in full outstanding accounts receivable.
As a result, the full amount of the approximately $10.8 million owed to STAR by
Hi-Rim and CCI as of December 31, 1996 which was not subsequently collected or
for which no offsetting value was received, was written off or reserved in 1996.
In addition, STAR wrote-off $820,000 of intangible assets relating to CCI.
Commercial selling, general and administrative expenses increased to $10.2
million in 1996 from $8.0 million in 1995 reflecting higher operating costs.
DEPRECIATION. Depreciation increased to $1.2 million for 1996 from $186,000
for 1995, an increase as a percentage of revenues to 0.5% from 0.4% in the prior
period. Depreciation increased as a result of STAR's purchase of switches and of
the operating equipment and leasehold improvements associated with its Los
Angeles and New York switching facilities. Depreciation expense will increase as
STAR expands its ownership of switching and transmission facilities through
purchase or use of capital leases.
OTHER INCOME (EXPENSE). Other expense, net, increased to $552,000 in 1996
from $75,000 in 1995. This increase is primarily due to a $100,000 legal
settlement in the second quarter of 1996 as well as $601,000 in interest expense
incurred under various bank and stockholder lines of credit. This increase was
offset by $110,000 in interest income on short-term investments and cash
equivalents primarily from funds raised in private placements of equity
securities during the first three quarters of 1996.
PROVISION FOR INCOME TAXES. Through December 31, 1995, STAR had elected to
be taxed as an S-Corporation for both federal and state income tax purposes and
thus was only subject to 1.5% tax on taxable income for state purposes. LDS was
an S-Corporation through the date of the merger on November 30, 1997. The pro
forma provision for income taxes, assumes that both STAR and LDS were
C-Corporations for all periods presented. During 1996, the historical provision
for income taxes increased to $592,000 as a result of the reserve of $2.9
million of the net deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, STAR had cash and cash equivalents of approximately
$1.5 million, short-term investments of $18.6 million and a working capital
surplus of $15.8 million. In June 1997, the Company completed an initial public
offering of 9.4 million shares of Common Stock of which approximately 8.1
million shares were sold by the Company and approximately 1.3 million shares
were sold by certain selling stockholders. The net proceeds to the Company
(after deducting underwriting discounts and offering expenses) from the sale of
such shares of Common Stock were approximately $30.9 million. As of December 31,
1997, the Company had used the proceeds from the offering to repay indebtedness
of $14.2 million, to purchase switching and transmission related equipment and
to finance the Company's operations in the U.K.
As of December 31, 1997, STAR had no funds outstanding on its $25 million
revolving line of credit, which bears interest at a rate of the bank's cost of
funds plus 175 basis points and expires on July 1, 1999. However, the line of
credit is reduced by outstanding letters of credit in the amount of $4.9
million.
STAR generated net cash from operating activities of $10.1 million in 1997,
primarily from net income plus depreciation and amortization, while using $3.4
million in 1996. The Company's investing activities used cash of approximately
$29.6 million during 1997 primarily resulting from capital expenditures and the
investment of the proceeds from the initial public offering in marketable
securities, while using $9.8 million in 1996. The Company's financing activities
provided cash of approximately $19.3 million during 1997
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primarily from the sale of Common Stock and borrowings under lines of credit,
offset by repayments under various lines of credit, while providing $14.7
million in 1996.
STAR had capital lease obligations of $13.6 million, and $0.8 million in
term loans, relating to its switching facilities and operating equipment. STAR
anticipates making capital expenditures of approximately $80.0 million over the
next 12 months to expand its global network. STAR believes that the proceeds
from this offering and cash generated from operations, as well as funding under
its bank line of credit, will satisfy STAR's current liquidity needs.
Nevertheless, as the Company continues to expand its network facilities and
pursues its strategy of growth through acquisition, the Company's liquidity
needs may increase, perhaps significantly, which could require the Company to
seek such additional financing or the expansion of its borrowing capacity under
current or new lines of credit. As appropriate, STAR will use capital lease
financing or raise additional debt or equity capital to finance new projects or
acquisitions. The Company had foreign currency contracts outstanding at December
31, 1997 in the notional amount of $6.3 million. See Note 2 of Notes to
Consolidated Financial Statements.
YEAR 2000 COMPLIANCE. The Company has made a concerted effort to insure
that the software components of its information and billing systems are Year
2000 compliant. As such, management believes that, after January 1, 2000, the
Company will be able to continue to accurately track and bill calls. At the same
time, it is likely that the operations of a number of the Company's customers
and vendors rely on software that is not Year 2000 compliant.
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BUSINESS
OVERVIEW
STAR is an emerging multinational carrier focused primarily on the
international long distance market. The Company offers highly reliable, low-cost
switched voice services on a wholesale basis, primarily to U.S.-based long
distance carriers. STAR provides international long distance service to
approximately 220 foreign countries through a flexible network comprised of
various foreign termination relationships, international gateway switches,
leased and owned transmission facilities and resale arrangements with long
distance providers. The Company has grown its revenues rapidly by capitalizing
on the deregulation of international telecommunications markets, combining
sophisticated information systems with flexible routing and leveraging
management's industry expertise. STAR has increased its revenues from $46.3
million in 1995 to $376.2 million in 1997.
INDUSTRY BACKGROUND
The international long distance telecommunications services industry
consists of all transmissions of voice and data that originate in one country
and terminate in another. This industry is undergoing a period of fundamental
change which has resulted in substantial growth in international
telecommunications traffic. According to industry sources, worldwide gross
revenues for providers of international telephone service were over $60 billion
in 1996 and the volume of international traffic on the public telephone network
is expected to grow at a compound annual growth rate of approximately 13% from
1996 through the year 2000.
From the standpoint of U.S.-based long distance providers, the industry can
be divided into two major segments: the U.S. international market, consisting of
all international calls billed in the U.S., and the overseas market, consisting
of all international calls billed in countries other than the U.S. The U.S.
international market has experienced substantial growth in recent years, with
gross revenues from international long distance services rising from
approximately $8.5 billion in 1990 to approximately $14.9 billion in 1996,
according to FCC data.
The Company believes that a number of trends in the international
telecommunications market will continue to drive growth in international
traffic, including:
- continuing deregulation and privatization of telecommunications markets;
- pressure to reduce international outbound long distance rates paid by end
users driven by increased competition in newly deregulated global markets;
- the dramatic increase in the availability of telephones and the number of
access lines in service around the world;
- the increasing globalization of commerce, trade and travel;
- the proliferation of communications devices such as faxes, cellular
telephones, pagers and data communications devices;
- increasing demand for data transmission services, including the Internet;
and
- the increased utilization of high quality digital undersea cable and
resulting expansion of bandwidth availability.
THE DEVELOPMENT OF THE U.S. AND OVERSEAS MARKETS
The 1984 deregulation of the U.S. telecommunications industry enabled the
emergence of a number of new long distance companies in the U.S. Today, there
are over 500 U.S. long distance companies, most of which are small or
medium-sized companies. In order to be successful, these small and medium-sized
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companies need to offer their customers a full range of services, including
international long distance. However, most of these carriers do not have the
critical mass to receive volume discounts on international traffic from the
larger facilities-based carriers such as AT&T, MCI and Sprint. In addition,
these small and medium-sized companies generally have only limited capital
resources to invest in international facilities. New international carriers such
as STAR emerged to take advantage of this demand for less expensive
international bandwidth. These emerging multinational carriers acted as
aggregators of international traffic for smaller carriers, taking advantage of
larger volumes to obtain volume discounts on international routes (resale
traffic), or investing in facilities when volume on particular routes justify
such investments. Over time, as these emerging international carriers became
established and created high quality networks, they began to carry overflow
traffic from the larger long distance providers seeking lower rates on certain
routes.
Deregulation and privatization have also allowed new long distance providers
to emerge in foreign markets. By eroding the traditional monopolies held by
single national providers, many of which are wholly or partially government
owned, such as Post Telegraph & Telephone operators ("PTTs"), deregulation is
providing U.S.-based providers the opportunity to negotiate more favorable
agreements with PTTs and emerging foreign providers. In addition, deregulation
in certain foreign countries is enabling U.S.-based providers to establish local
switching and transmission facilities in order to terminate their own traffic
and begin to carry international long distance traffic originated in that
country. STAR believes that growth of traffic originated in markets outside of
the U.S. will be higher than the growth in traffic originated within the U.S.
due to recent deregulation in many foreign markets, relative economic growth
rates and increasing access to telecommunications facilities in emerging
markets.
INTERNATIONAL SWITCHED LONG DISTANCE SERVICES
International switched long distance services are provided through switching
and transmission facilities that automatically route calls to circuits based
upon a predetermined set of routing criteria. The call typically originates on a
local exchange carrier's network and is transported to the caller's domestic
long distance carrier. The domestic long distance provider then carries the call
to an international gateway switch. An international long distance provider
picks up the call at its gateway and sends it directly or through one or more
other long distance providers to a corresponding gateway switch operated in the
country of destination. Once the traffic reaches the country of destination, it
is then routed to the party being called though that country's domestic
telephone network.
International long distance providers can generally be categorized by their
ownership and use of switches and transmission facilities. The largest U.S.
carriers, such as AT&T, MCI and Sprint, primarily utilize owned transmission
facilities and generally use other long distance providers to carry their
overflow traffic. Since only very large carriers have transmission facilities
that cover the over 200 countries to which major long distance providers
generally offer service, a significantly larger group of long distance providers
own and operate their own switches but either rely solely on resale agreements
with other long distance
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carriers to terminate their traffic or use a combination of resale agreements
and owned facilities in order to terminate their traffic as shown below:
[LOGO]
OPERATING AGREEMENTS. Under traditional operating agreements, international
long distance traffic is exchanged under bilateral agreements between
international long distance providers in two countries. Operating agreements
provide for the termination of traffic in, and return traffic to, the
international long distance providers' respective countries at a standard
"accounting rate" with that international provider. Under a traditional
operating agreement, the international long distance provider that originates
more traffic compensates the long distance provider in the other country by
paying a net amount based on the difference between minutes sent and minutes
received and the settlement rate, which is generally one-half of the accounting
rate.
Under a typical operating agreement both carriers jointly own the
transmission facilities between two countries. A carrier gains ownership rights
in a digital fiber optic cable by purchasing direct ownership in a particular
cable prior to the time the cable is placed in service, acquiring an
"Indefeasible Right of Use" ("IRU") in a previously installed cable, or by
leasing or obtaining capacity from another long distance provider that either
has direct ownership or IRUs in the cable. In situations where a long distance
provider has sufficiently high traffic volume, routing calls across directly
owned or IRU cable is generally more cost-effective on a per call basis than the
use of short-term variable capacity arrangements with other long distance
providers or leased cable. However, direct ownership and acquisition of IRUs
require a company to make an initial investment of its capital based on
anticipated usage.
TRANSIT ARRANGEMENTS. In addition to utilizing an operating agreement to
terminate traffic delivered from one country directly to another, an
international long distance provider may enter into transit arrangements
pursuant to which a long distance provider in an intermediate country carries
the traffic to a country of destination. Such transit arrangements involve
agreement among the providers in all the countries involved and are generally
used for overflow traffic or where a direct circuit is unavailable or not volume
justified.
RESALE ARRANGEMENTS. Resale arrangements typically involve the wholesale
purchase and sale of transmission and termination services between two long
distance providers on a variable, per minute basis. The resale of capacity,
which was first permitted in the U.S. market in the 1980s enabled the emergence
of new international long distance providers that rely at least in part on
capacity acquired on a wholesale basis from other long distance providers.
International long distance calls may be routed through a facilities-based
carrier with excess capacity, or through multiple long distance resellers
between the originating long
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distance provider and the facilities-based carrier that ultimately terminates
the traffic. Resale arrangements set per minute prices for different routes,
which may be guaranteed for a set time period or subject to fluctuation
following notice. The resale market for international capacity is constantly
changing, as new long distance resellers emerge and existing providers respond
to fluctuating costs and competitive pressures. In order to be able to
effectively manage costs when utilizing resale arrangements, long distance
providers need timely access to changing market data and must quickly react to
changes in costs through pricing adjustments or routing decisions.
ALTERNATIVE TERMINATION ARRANGEMENTS. As the international
telecommunications market has become deregulated, service providers have
developed alternative arrangements to reduce their termination costs by, for
example, routing traffic via third countries to obtain lower settlement rates or
using international private line facilities to bypass the settlement rates
applicable to traffic routed over the PSTN. These arrangements include ISR,
traffic refiling and the acquisition of transmission and switching facilities in
foreign countries so as to self-correspond. Refiling of traffic takes advantage
of disparities in settlement rates between different countries. An originating
operator typically refiles traffic by sending it first to a third country that
enjoys lower settlement rates with the destination country where upon it is
forwarded or refiled to the destination country thereby resulting in a lower
overall termination cost. The difference between transit and refiling is that,
with respect to transit, the operator in the destination country typically has a
direct relationship with the originating operator and is aware of the
arrangement, while with refiling, the operator in the destination country
typically is not aware that it is terminating refiled traffic originated in
another country. With ISR, a long distance provider completely bypasses the
settlement system by connecting an IPL to the PSTN on one or both ends. While
ISR currently is only sanctioned by U.S. and other regulatory authorities on
some routes, ISR services are increasing and are expected to expand
significantly as deregulation of the international telecommunications market
continues. In addition, new market access agreements, such as the WTO Agreement,
have made it possible for many international service providers to establish
their own transmission and switching facilities in certain foreign countries,
enabling them to self-correspond and directly terminate traffic. See
"--Government Regulation."
The highly competitive and rapidly changing international telecommunications
market has created a significant opportunity for carriers that can offer high
quality, low cost international long distance service. Deregulation,
privatization, the expansion of the resale market and other trends influencing
the international telecommunications market are driving decreased termination
costs, a proliferation of routing options, and increased competition. Successful
companies among both the emerging and established international long distance
companies will need to aggregate enough traffic to lower costs of both
facilities-based or resale opportunities, maintain systems which enable analysis
of multiple routing options, invest in facilities and switches and remain
flexible enough to locate and route traffic through the most advantageous
routes.
THE STAR APPROACH
STAR is an emerging multinational carrier focused primarily on the
international long distance market. The Company offers highly reliable, low-cost
switched voice services on a wholesale basis, primarily to U.S.-based long
distance carriers. STAR provides international long distance service to
approximately 220 foreign countries through a flexible network comprised of
various foreign termination relationships, international gateway switches,
leased and owned transmission facilities and resale arrangements with long
distance providers. The Company has grown its revenues rapidly by capitalizing
on the deregulation of international telecommunications markets, combining
sophisticated information systems with flexible routing and leveraging
management's industry expertise.
STAR markets its services to large global carriers seeking lower rates and
high quality overflow capacity, as well as to small and medium-sized long
distance companies that do not have the critical mass to invest in their own
international transmission facilities or to obtain volume discounts from the
larger facilities-based carriers. During the fourth quarter of 1997, the Company
provided switched international
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long distance services to 105 customers and currently provides these services to
nine of the top forty global carriers. The Company has also recently focused on
building a customer base overseas, particularly in Europe, and has opened
offices in Dusseldorf, Frankfurt, Hamburg and Munich, Germany and London,
England. In addition, STAR has begun to market its international long distance
services directly to certain commercial customers in the U.S. and overseas.
STRATEGY
The Company's objective is to be a leading provider of highly reliable,
low-cost switched international long distance services on a wholesale basis to
U.S. and foreign-based telecommunications companies, as well as on a retail
basis to commercial customers. Key elements of the Company's strategy include
the following:
EXPAND SWITCHING AND TRANSMISSION FACILITIES. The Company is continuing to
pursue a flexible approach to expanding and enhancing its network facilities by
investing in both switching and transmission facilities where traffic volumes
justify such investments. The Company has expanded its international gateway
switching facilities through the addition of a facility in Dallas and plans to
put into service in 1998 switches in Atlanta, Chicago, Miami and Seattle;
Dusseldorf, Frankfurt, Hamburg and Munich, Germany; Paris, France; and Tokyo,
Japan. The Company's international gateway switch in London, England went into
service in April 1997 and four switches in Germany are expected to be
operational in the second quarter of 1998. In addition, the Company is planning
to install a network of switches in selected other European and Asian cities.
CAPITALIZE ON PROJECTED INTERNATIONAL LONG DISTANCE GROWTH. The Company
believes that the international long distance market provides attractive
opportunities due to its higher revenue and profit per minute, and greater
projected growth rate as compared to the domestic long distance market. The
Company targets international markets with high volumes of traffic, relatively
high rates per minute and prospects for deregulation and privatization. The
Company believes that the ongoing trend toward deregulation and privatization
will create new opportunities for the Company in international markets. Although
the Company has focused to date primarily on providing services for U.S.-based
long distance providers, the Company also intends to expand the international
long distance services it offers to foreign-based long distance providers.
LEVERAGE TRAFFIC VOLUME TO REDUCE COSTS. The Company continues to focus on
building its volume of international long distance traffic. Higher traffic
volumes strengthen the Company's negotiating position with vendors, customers
and potential foreign partners, which allows the Company to lower its costs of
service. In addition, higher traffic volumes on particular routes allow the
Company to lower its cost of services on these routes by transitioning from
acquiring capacity on a variable cost per minute basis to fixed cost
arrangements such as longer-term capacity agreements with major carriers,
long-term leases and ownership of facilities.
LEVERAGE INFORMATION SYSTEMS AND SWITCHING CAPABILITIES. The Company
leverages its sophisticated information systems to analyze its routing
alternatives, and select the most cost-effective routing from among the Company
owned facilities, network of resale arrangements with other long distance
providers, operating agreements and alternative termination relationships. The
Company has invested significant resources in the development of software to
track specific usage information by customer and revenue and cost information on
specific routes on a daily basis. The Company's information systems are critical
components in managing its customer and vendor relationships, routing traffic to
the most cost-effective alternative, and targeting its marketing efforts.
MAINTAIN HIGH QUALITY. The Company believes that reliability, call
completion rates, voice quality, rapid set up time and a high level of customer
and technical support are key factors evaluated by U.S. and foreign-based
telecommunications companies and large corporate customers in selecting a
carrier for their
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international traffic. The Company's state-of-the-art switching equipment is
fully compliant with international C-7 and domestic SS-7 signaling standards.
STAR strives to provide a consistently high level of customer and technical
support and has technical support personnel at its switching facilities 24 hours
per day, seven days per week to assist its customers and to continually monitor
network operations.
EXPAND INTO COMMERCIAL MARKET. The Company plans to expand into niche
commercial markets in the U.S. and in other deregulating countries where it
believes it can leverage its international network and where the customer base
has a significant international calling pattern. As an example of this strategy,
the Company is using the LDS telemarketing sales force to target small
commercial customers in ethnic markets to increase traffic to Mexico and Latin
America. Additionally, STAR intends to use UDN's network of independent sales
agents to target medium-sized commercial customers with a demand for
international calling services at competitive rates. Finally, the Company plans
to use its direct sales forces to target larger commercial customers,
concentrating at first on potential customers in Los Angeles and New York. With
respect to the offering of commercial services abroad, the Company initially
intends to focus on Germany, the U.K. and selected European cities where
competition for commercial customers is less mature.
GROWTH THROUGH ACQUISITIONS. The Company actively pursues opportunities to
enhance its business through strategic and synergistic acquisitions. These
acquisitions may focus on entering new territories, enlarging the Company's
presence in an existing territory, adding capacity or expanding into new market
segments, such as the commercial market. In addition to expanding its revenue
base, the Company plans to realize operating efficiencies by integrating
newly-acquired operations into the Company's billing, tracking and other
systems. On November 30, 1997, the Company acquired LDS, a long distance
provider focusing on small commercial customers throughout the United States,
for approximately 849,000 shares of Common Stock. On March 10, 1998, the Company
acquired T-One, an international wholesale long distance provider, for 1,353,000
shares of Common Stock. On November 19, 1997, the Company entered into an
agreement to acquire UDN, a commercial long distance provider. The acquisition
of UDN is subject to approval by UDN's stockholders and to various regulatory
approvals. Assuming the receipt of all necessary approvals, STAR expects to
consummate the UDN acquisition in the second quarter of 1998 for approximately
800,000 shares of Common Stock. Each of these transactions has been, or will be,
accounted for as a pooling of interests.
NETWORK
The Company provides international long distance services to approximately
220 foreign countries through a flexible, switched-based network consisting of
resale arrangements with other long distance providers, various foreign
termination relationships, international gateway switches and leased and owned
transmission facilities. The Company's network employs state-of-the-art digital
switching and transmission technologies and is supported by comprehensive
monitoring and technical support personnel. The Company's switching facilities
are staffed 24 hours per day, seven days per week.
TERMINATION ARRANGEMENTS
The Company seeks to retain flexibility and maximize its termination
opportunities by utilizing a continuously changing mix of routing alternatives,
including resale arrangements, operating agreements and other advantageous
termination arrangements. This diversified approach is intended to enable the
Company to take advantage of the rapidly evolving international
telecommunications market in order to provide low-cost international long
distance service to its customers.
STAR utilizes resale arrangements to provide it with multiple options for
routing traffic through its switches to each destination country. Traffic under
resale arrangements typically terminates pursuant to a third party's
correspondent relationships. The Company purchased capacity from 57 vendors in
1997. A substantial portion of this capacity is obtained on a variable, per
minute and short-term basis, subjecting
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the Company to the possibility of unanticipated price increases and service
cancellations. The Company's contracts with its vendors provide that rates may
fluctuate, with rate change notice periods varying from five days to one year,
with certain of the Company's longer term arrangements requiring STAR to make
minimum usage commitments in order to achieve additional volume discounts. As a
result of deregulation and competition in the international telecommunications
market, the pricing of termination services varies by carrier depending on such
factors as call traffic and time of day. Since the Company does not typically
enter into long-term contracts with these providers, pricing can change
significantly over short periods of time. The Company's proprietary information
systems enable the Company to track the pricing variations in the international
telecommunications market on a daily basis, allowing the Company's management to
locate and reroute traffic to the most cost-effective alternatives. See "Risk
Factors--Operating Results Subject to Significant Fluctuations."
The Company currently has operating agreements with carriers in a number of
countries and is in the process of negotiating additional operating agreements
for other countries. The Company has been and will continue to be selective in
entering into operating agreements. The Company also has agreements with
international providers of long distance services for termination of traffic
that the Company routes over its network to such countries. The Company
currently has such termination arrangements with several carriers in a number of
countries, and STAR is in the process of expanding its coverage of such
countries and entering into similar arrangements in additional countries. The
FCC or foreign regulatory agencies may take the view that certain of the
Company's termination arrangements do not comply with current rules and policies
applicable to international settlements, such as current ISR rules. To the
extent that the revenue generated under such arrangements becomes a significant
portion of overall revenue, the loss of such arrangements, whether as a result
of regulatory actions or otherwise, could have a material adverse effect on the
Company's business, operating results and financial condition. In addition, the
FCC could impose sanctions on the Company, including forfeitures, if certain of
the Company's arrangements are found to be inconsistent with FCC rules. See
"--Government Regulation," "Risk Factors--Risks of International
Telecommunications Business," and "--Potential Adverse Effects of Government
Regulation."
SWITCHES AND TRANSMISSION FACILITIES
International long distance traffic to and from the U.S. is generally
transmitted through an international gateway switching facility across undersea
digital fiber optic cable or via satellite to a termination point. International
gateway 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 calls. STAR's global
network facilities include both international gateway switches and undersea
digital fiber optic cable.
The Company currently operates international gateway switches in New York,
Los Angeles, Dallas and London, England. In 1998, the Company plans to put into
service international gateway switches in Atlanta, Chicago, Miami and Seattle;
Dusseldorf, Frankfurt, Hamburg and Munich, Germany; Paris, France; and Tokyo,
Japan. The Company considers any of its switches to be international gateway
switches if the Company can route international calls across such switch.
STAR's switching facilities are linked to a proprietary reporting system,
which the Company believes provides it with a competitive advantage by
permitting management on a real-time basis to determine the most cost-effective
termination alternatives, monitor customer usage and manage gross margins by
route. The Company has installed multiple redundancies into its switching
facilities to decrease the risk of a network failure. For example, the Company
employs both battery and generator power back-up and has installed hardware that
automatically shifts the system to auxiliary power during a power outage, rather
than relying on manual override. STAR is in the process of adding a network
control center in its Los Angeles facility, which is expected to be completed in
1998.
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The Company currently holds ownership positions in a number of digital
undersea fiber optic cables, and has recently added capacity on the TPC-5
undersea fiber optic cable system and has entered into commitments to acquire
transmission capacity on three additional undersea fiber optic cable systems,
Gemini, AC-1 and China-US. The Company plans to increase its investment in
direct and IRU ownership of cable in situations where the Company enters into
operating agreements and in other situations in which it determines that such an
investment would enhance operating efficiency or reduce transmission costs.
Through its acquisitions of T-One and UDN, STAR has acquired, or will
acquire, additional switching and transmission facilities. By acquiring T-One,
the Company has added a switch located in the same building as the Company's New
York international gateway switch and has added a number of operating agreements
to countries in Africa and the Middle East, among other locations. In addition,
T-One owns capacity on certain cable and satellite systems. Upon consummation of
the acquisition of UDN, the Company will acquire a switch located in the same
building as the Company's Dallas switch. The Company plans to integrate these
facilities into its existing network.
SALES AND MARKETING
The Company markets its services on a wholesale basis to other
telecommunications companies through its experienced direct sales force and
marketing/account management team who leverage the long-term industry
relationships of the Company's senior management. The Company reaches its
customers primarily through domestic and international trade shows and through
relationships gained from years of experience in the telecommunications
industry. The Company had 20 direct sales and marketing employees and over 145
telemarketing representatives as of March 1, 1998.
In the wholesale market, the Company's sales and marketing employees utilize
the extensive, customer specific usage reports and network utilization data
generated by the Company's sophisticated information systems to effectively
negotiate agreements with customers and prospective customers and to rapidly
respond to changing market conditions. The Company believes that it has been
able to compete more effectively as a result of the personalized service and
ongoing senior management-level attention that is given to each customer.
In connection with the Company's expansion into the commercial market, the
Company expects to target small commercial customers through LDS' existing
telemarketing operation, deliver services to medium-sized commercial customers
through UDN's network of independent sales agents and utilize a direct sales
force to approach larger commercial accounts. Establishment of a sales force
capable of effectively expanding the Company's services into the commercial
market can be expected to require substantial efforts and management and
financial resources and may increase the Company's operating costs. See "Risk
Factors--Risks Associated with Growth of Telecommunications Network and Customer
Base."
INFORMATION AND BILLING SYSTEMS
The Company's operations use advanced information systems including call
data collection and call data storage linked to a proprietary reporting system.
The Company also maintains redundant billing systems for rapid and accurate
customer billing. STAR's switching facilities are linked to a proprietary
reporting system, which the Company believes provides it with a competitive
advantage by permitting management on a real-time basis to determine the most
cost-effective termination alternatives, monitor customer usage and manage gross
margins by route. The Company's systems also enable it to ensure accurate and
timely billing and to reduce routing errors. As the Company's systems were
designed for the wholesale marketplace, the Company is currently in the process
of modifying its systems in anticipation of its entrance into the commercial
marketplace.
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The Company's proprietary reporting software compiles call, price and cost
data into a variety of reports which the Company can use to re-program its
routes on a real-time basis. The Company's reporting software can generate the
following reports as needed:
- customer usage, detailing usage by country and by time period within
country, in order to track sales and rapidly respond to any loss of
traffic from a particular customer;
- country usage, subtotaled by vendor or customer, which assists the Company
with route and network planning;
- vendor rates, through an audit report that allows management to determine
at a glance which vendors have the lowest rates for a particular country
in a particular time period;
- vendor usage by minute, enabling the Company to verify and audit vendor
bills;
- dollarized vendor usage to calculate the monetary value of minutes passed
to the Company's vendors, which assists with calculating operating margin
when used in connection with the customer reports;
- loss reports used to rapidly highlight routing alternatives that are
operating at a loss as well as identifying routes experiencing substantial
overflow; and
- LATA (Domestic Call Area) reporting by originating and terminating LATA,
allowing for accurate Local Exchange charge audits, and protecting from
Local Exchange overcharging.
STAR has built multiple redundancies into its billing and call data
collections systems. Nine call collector computers receive call information in
real-time, immediately duplicating data, sending one copy to billing, while the
other copy is used for customer service internally and for traffic analysis.
STAR maintains two independent and redundant billing systems in order to both
verify billing internally and to ensure that bills are sent out on a timely
basis. All of the call data, and resulting billing data, are continuously backed
up on tape drives and redundant storage devices, and are regularly transported
to an off-site safe location.
COMPETITION
The international telecommunications industry is intensely competitive and
subject to rapid change. The Company's competitors in the international
wholesale switched long distance market include large, facilities-based
multinational corporations and PTTs, smaller facilities-based providers in the
U.S. and overseas that have emerged as a result of deregulation, switched-based
resellers of international long distance services and international joint
ventures and alliances among such companies. International wholesale switched
long distance providers compete on the basis of price, customer service,
transmission quality, breadth of service offerings and value-added services. The
Company also competes abroad with a number of dominant telecommunications
operators that previously held various monopolies established by law over the
telecommunications traffic in their countries. See "Risk Factors--Significant
Competition." Additionally, the telecommunications industry is in a period of
rapid technological evolution, marked by the introduction of competitive new
product and service offerings, such as the utilization of the Internet for
international voice and data communications. The Company is unable to predict
which of many possible future product and service offerings will be important to
maintain its competitive position or what expenditures will be required to
develop and provide such products and services. The Company believes that it
competes favorably on the basis of price, transmission quality and customer
service. The number of the Company's competitors is likely to increase as a
result of the new competitive opportunities created by the WTO Agreement.
Further, under the terms of the WTO Agreement, the United States and the other
68 countries participating in the Agreement have committed to open their
telecommunications markets to competition, and foreign ownership and adopt
measures to protect against anticompetitive behavior, effective starting on
January 1, 1998. As a result, the Company believes that competition will
continue to
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increase, placing downward pressure on prices. Such pressure could adversely
affect the Company's gross margins if the Company is not able to reduce its
costs commensurate with such price reductions.
COMPETITION FROM DOMESTIC AND INTERNATIONAL COMPANIES AND ALLIANCES. A
majority of the U.S.-based international telecommunications services revenue is
currently generated by AT&T, MCI and Sprint. The Company also competes with
WorldCom, Pacific Gateway Exchange, Inc. and other U.S.-based and foreign long
distance providers, including the RBOCs, which presently have FCC authority to
resell and terminate international telecommunication services. Many of these
companies have considerably greater financial and other resources and more
extensive domestic and international communications networks than the Company.
The Company's business would be materially adversely affected to the extent that
a significant number of such customers limit or cease doing business with the
Company for competitive or other reasons. Consolidation in the
telecommunications industry could not only create even larger competitors with
greater financial and other resources, but could also adversely affect the
Company by reducing the number of potential customers for the Company's
services.
EXPANSION INTO COMMERCIAL MARKET. With the acquisition of LDS, STAR began
providing long distance service to the commercial market, a market that is
subject to intense competition from a number of well capitalized companies. The
commercial market is also characterized by the lack of customer loyalty, with
commercial customers regularly changing service providers. There can be no
assurance that STAR will be able to compete successfully in the commercial
market.
GOVERNMENT REGULATION
The Company's U.S. interstate and international telecommunications service
offerings generally are subject to the regulatory jurisdiction of the FCC.
Certain telecommunication services offered by the Company in the U.S. may also
be subject to the jurisdiction of state regulatory authorities, commonly known
as public utility commissions ("PUCs"). The Company's telecommunications service
offerings outside the U.S. are also generally subject to regulation by national
regulatory authorities. In addition, U.S. and foreign regulatory authorities may
affect the Company's international service offerings as a result of the
termination or transit arrangements associated therewith. U.S. or foreign
regulatory authorities may take actions or adopt regulatory requirements which
could adversely affect the Company. See "Risk Factors--Potential Adverse Affect
of Government Regulation."
U.S. REGULATION
The Company's business is subject to various U.S. and foreign laws,
regulations, agency actions and court decisions. The Company's U.S.
international telecommunications service offerings are subject to regulation by
the FCC. The FCC requires international carriers to obtain certificates of
public convenience and necessity prior to acquiring international facilities by
purchase or lease, or providing international service to the public. Prior FCC
approval is also required to transfer control of a certificated carrier. The
Company is also subject to FCC policies and rules that regulate the manner in
which international telecommunication services may be provided, including, for
instance, the circumstances under which a carrier may provide international
switched services using IPL facilities and under which it may route traffic
through third countries to or from its final destination.
The Communications Act and the FCC's rules and policies also impose certain
other obligations on carriers providing international telecommunication
services. These include the obligation to file at the FCC and to maintain
tariffs containing the rates, terms and conditions applicable to their services;
to file certain reports regarding international traffic and facilities; to file
certain contracts with correspondent carriers; to disclose affiliations with
foreign carriers and significant foreign ownership interests; to pay certain
regulatory fees based, among other things, upon the carrier's revenues and
ownership of international transmission capacity.
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INTERNATIONAL SERVICES. FCC rules require the Company to obtain prior FCC
authorization to acquire and operate international communication circuits in
satellites and undersea fiber optic cables; similar FCC authority is required
for the Company to resell such capacity. The Company holds both facilities-based
and resale international authorizations, including a "global" authorization that
provides broad authority to offer switched and private line international
services. The Company has filed tariffs for international services with the FCC.
FCC INTERNATIONAL PRIVATE LINE RESALE POLICY. The FCC's IPL resale policy
limits the conditions under which a carrier may connect IPLs to the PSTN at one
or both ends to provide switched services, commonly known as ISR. A carrier
generally may only offer ISR services to a foreign country if the FCC has found
(a) the country is a member of the WTO and at least 50% of the U.S. billed and
settled traffic to that country is settled at or below the benchmark settlement
rate adopted by the FCC in IB Docket No. 96-261; or (b) the country is not a WTO
member, but it offers U.S. carriers equivalent opportunities to engage in ISR
and at least 50% of the U.S. billed and settled traffic is settled at or below
the applicable benchmark. Settled traffic refers to traffic subject to an
accounting rate agreement between U.S. and foreign carriers. An accounting rate
is a per minute wholesale charge negotiated by international carriers for
terminating traffic in either direction. Each carrier is paid a settlement rate
for terminating traffic on its own network which ordinarily is one-half of the
accounting rate. The Company's FCC authority currently permit it to provide ISR
service to Canada, the U.K., Sweden, New Zealand, Australia and the Netherlands.
The FCC is currently reviewing U.S. carrier applications to provide ISR to
Belgium, Chile, Denmark, Finland, France, Germany, Hong Kong, Norway and
Luxembourg, among other routes, and upon grant of any such ISR application to a
given country, the FCC's rules also would permit the Company to provide ISR
service to that country. Certain of the Company's termination arrangements with
foreign operators involve IPL arrangements which may be inconsistent with the
foregoing FCC IPL resale policy and the Company's existing ISR authorization. If
the FCC were to determine, by its own actions or in response to the filing of a
third party that any of the Company's IPL arrangements violate its ISR policy or
the Company's ISR authorization, the FCC could order the Company to terminate
any non-conforming arrangements. In addition, the Company could be subject to a
monetary forfeiture and to other penalties, including the revocation of the
Company's FCC authorizations to operate as an international carrier. Any such
FCC action could have a material adverse effect upon the Company's business,
operating results and financial condition.
FCC INTERNATIONAL SETTLEMENTS POLICY. The FCC's ISP places limits on the
arrangements which U.S. international carriers may enter into with foreign
carriers for exchanging public switched telecommunications traffic, which the
FCC terms International Message Telephone Service. The policy does not apply to
ISR services. The ISP is primarily intended to deter dominant foreign carriers
from discriminating amongst competing U.S. carriers by, for example, favoring
the foreign carrier's U.S. affiliate. Absent FCC consent, the ISP requires that
U.S. carriers receive an equal share of the accounting rate (i.e., that
settlement rates be equivalent) and receive inbound traffic in proportion to the
volume of U.S. outbound traffic which they generate. The ISP also prohibits a
U.S. carrier from offering or accepting a "special concession" from a foreign
carrier where the foreign carrier possess sufficient market power on the foreign
end of the route to affect competition adversely in the U.S. market. A "special
concession" is defined by the FCC as an exclusive arrangement involving
services, facilities or functions on the foreign end of a U.S. international
route which are necessary for providing basic telecommunications which are not
offered to similarly situated U.S. carriers. U.S. international carriers wishing
to establish settlement arrangements for IMTS which do not comply with the ISP
must obtain a waiver of the FCC's rules or a declaratory ruling from the FCC
that the non-standard arrangement is in the public interest. FCC policy provides
that a request by a U.S. international carrier to establish a non-standard
settlement arrangement with a foreign carrier in a WTO member country is
presumptively in the public interest, and that said presumption generally may be
overcome only by a demonstration that the foreign carrier is not subject to
competition in its home market from more than one facilities-based international
carrier. Notwithstanding the FCC's ISP waiver and flexibility policies, it is
possible that the FCC could find that certain of the Company's arrangements with
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foreign operators were or are inconsistent with the ISP and that the Company has
not requested prior FCC authority therefore. If the FCC were to determine by its
own actions or in response to the filing of a third party that the Company has
violated the ISP, the FCC could order the Company to terminate any non-
conforming arrangement. In addition, the Company could be subject to a monetary
forfeiture and to other penalties, including revocation of the Company's FCC
authorizations to operate as an international carrier. Any such FCC action could
have a material adverse effect upon the Company's business, operating results
and financial condition.
The FCC's policies also require U.S. international carriers providing IMTS
to negotiate and adopt settlement rates with foreign correspondents for IMTS
which are at or below certain benchmark rates beginning January 1, 1999. U.S.
international carriers must establish IMTS settlement rates at or below the
benchmark rate with any foreign affiliate beginning April 1, 1998. The Company
expects that any IMTS operating agreement which it has or may have with a
foreign affiliate will satisfy the foregoing benchmarks requirement.
The Company currently has IMTS operating agreements with certain foreign
correspondents which provide for settlement rates above the FCC's prescribed
benchmarks. The Company will negotiate in good faith to establish IMTS
settlement rates with its foreign correspondents which satisfy the FCC's
benchmarks but there can be no assurance that such negotiations will succeed.
The FCC's order adopting the foregoing settlement benchmarks and the timetable
therefor is currently being reconsidered by the FCC. Several foreign
telecommunications carriers also have petitioned the U.S. Court of Appeals to
vacate the FCC's benchmarks order because, among other things, the FCC lacks the
jurisdiction to prescribe the settlement rates which foreign carriers may
collect from U.S. carriers. However, subject to FCC reconsideration and action
by the Court of Appeals, if the Company is unable to negotiate benchmark
settlement rates with certain foreign correspondents, the FCC may intervene on
its own action or in response to a filing by a third party. The Company is
unable to predict the form which such intervention may take but it could disrupt
the Company's arrangement for transmitting traffic to certain countries require
the Company to suspend direct service to certain countries or require the
Company to make alternative termination arrangements with certain countries, all
of which could have a material adverse effect on the Company's business,
operating results and financial condition.
FCC POLICIES ON TRANSIT AND REFILE. International switched
telecommunication traffic is frequently routed indirectly via one or more third
countries to its final destination. When such arrangements are mutually agreed,
they are commonly based on a transit agreement under which settlement payments
are made to all parties. In other cases, traffic may be sent to a third country
and then forwarded or refiled for delivery to its final destination without the
knowledge or consent of the destination carrier. The Company uses both transit
and refile arrangements to terminate its international traffic. The FCC
routinely approves transit arrangements by U.S. international carriers. The
FCC's rules also expressly permit carriers to use ISR facilities to route
traffic via a third country for refile through the public switched network.
However, the extent to which U.S. carriers may enter into refile arrangements,
consistent with the ISP, is currently under review by the FCC. In 1997, the FCC
stated that above-cost accounting rates had led an increasing amount of
international traffic to migrate to least cost routes through the use of
practices such as hubbing, refile and reorigination. The FCC stated that such
practices are an economically rational response to inflated settlement rates.
Notwithstanding the FCC's past rules, policies and statements regarding the
scope of permissible transit and refile arrangements, the FCC could find by its
own actions or in response to the filing of a third party, that certain of the
Company's transit or refile arrangements violate the ISP or other FCC policies.
In that event, the FCC could order the Company to terminate any non-conforming
transit or refile arrangements. In addition, the Company could be subject to a
monetary forfeiture and to other penalties, including revocation of the
Company's FCC authorizations to operate as an international carrier. Any such
FCC action could have a material adverse effect on the Company's business,
operating results and financial condition.
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REPORTING REQUIREMENTS. International telecommunication carriers also are
required by the FCC's rules timely to file certain reports regarding
international traffic and revenues, the ownership and use of international
facilities and their affiliates with foreign carriers. The FCC considers a U.S.
carrier to be affiliated with a foreign carrier if it has a 25% interest in the
capital stock of the carrier or it controls the foreign carrier or is under
common ownership or control. The FCC requires these reports so that, among other
things, it may monitor the development of industry competition and the potential
for a dominant foreign carrier to discriminate amongst U.S. carriers. The
Company generally has filed said traffic, facilities and foreign affiliation
reports. The FCC's rules require international telecommunication carriers to
file at the FCC copies of their contracts with other carriers, including
operating agreements, within 30 days of execution. The Company has filed copies
of its operating agreements with the FCC. Competitive U.S. international
carriers do not routinely file other carrier-to-carrier contracts with the FCC
and, consistent with industry practice, the Company has not filed certain other
carrier contracts. Notwithstanding the foregoing FCC filings by the Company, the
FCC by its own action or in response to the filing of a third party could
determine that the Company has failed to meet certain of the foregoing filing
and reporting requirements or that certain Company filings are deficient. In
that event, the Company could be directed to remedy any asserted non-compliance;
the Company could also be subject to a monetary forfeiture and to other
penalties, and, although the Company believes that it would be largely
unprecedented in such circumstances, and hence unlikely, the FCC could revoke
the Company's authorizations to operate as an international carrier. Any such
FCC action could have a material adverse affect on the Company's business,
results and financial condition.
REGULATORY FEES. The Communications Act and FCC rules and policies impose
certain fees upon carriers providing interstate and international
telecommunication services. These fees are levied, among other things, to defray
the FCC's operating expenses, to underwrite universal telecommunication service
(e.g., by subsidizing certain services used by schools and libraries, such as
Internet access, and by other telecommunications users in areas of the U.S.
where service costs are significantly above average), to fund the
Telecommunications Relay Service ("TRS"), which provides special options for
hearing-impaired users, and to support the administration of telephone numbering
plans.
Carriers that provide domestic interstate services must pay an annual
regulatory fee based on their interstate revenues; the fee is currently 0.12% of
revenue. The bulk of the Company's revenue, which is derived from international
services, is not subject to this fee. Carriers that provide domestic interstate
services to end users must pay a universal telecommunications service fee each
month based upon the total estimated demand for U.S. universal service funding.
If applicable, each carrier's share is approximately four percent of the
carrier's annual end user revenues. The Company generally offers its services
only to other carriers which in turn provide services to end-users. Such
carrier-to-carrier revenues are not subject to universal service fees, and thus
the Company generally is not liable to pay universal service fees. Carriers that
only offer international service (i.e., service between the United States and a
foreign country or service between two foreign carriers) also are not subject to
the universal service fee. However, if an international carrier has an affiliate
that provides domestic interstate services, then the carrier's international
revenues are subject to said fee. Until its acquisition of LDS, the Company did
not offer domestic interstate services. As a result of the operations of LDS,
any revenue the Company receives from end users for international services may
be subject to universal service fees. U.S. interstate and international carriers
must pay a percentage of their total revenue each year to support the North
American Numbering Plan Administrator. For the 1998 filing year, the
contribution rate is less than .003 percent of net telecommunications revenue.
U.S. carriers must pay a certain percentage of their domestic interstate
revenues to support the TRS Fund. For the 1998 filing year, the contribution
rate is less than .04 percent of gross domestic interstate revenue. The Company
has routinely paid the foregoing regulatory fees and, with regard to the annual
regulatory fees owed by interstate carriers, the Company is currently owed
approximately $20,000 by the FCC due to the inadvertent overpayment of said fee
for a prior year. The foregoing regulatory fees typically change annually. The
Company cannot predict the future regulatory fees for which it may be liable.
Said fees could rise significantly for the Company and amount to four percent or
more of the
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Company's gross international and interstate revenues if the Company is no
longer exempt from paying universal service fees as a result of an affiliate's
provision of domestic interstate services, or because the Company provides
service directly to end users, or because amendments to the Communications Act
repeal the universal service fee exemption for carriers which only offer
international service or services provided to connecting carriers. Because the
international telecommunication services business is highly competitive, an
increase in the regulatory fees which the Company must pay could impair its
market position and have a material adverse effect on the Company's business,
operating results and financial condition.
RECENT AND POTENTIAL FCC ACTIONS. Recent FCC rulemaking orders and other
actions have lowered the entry barriers for new facilities-based and resale
international carriers by streamlining the processing of new applications and
granting non-dominant carriers greater flexibility in establishing non-standard
settlement arrangements with non-dominant foreign carriers, including the
non-dominant U.S. affiliates of such carriers. In addition, the FCC's rules
implementing the WTO Agreement presume that competition will be advanced by the
U.S. entry of facilities-based and resale carriers from WTO member countries,
thus further increasing the number of potential competitors in the U.S. market
and the number of carriers which may also offer end-to-end services. The FCC is
reviewing the proposed merger of WorldCom and MCI, and is expected soon to
review the proposed merger of LCI International, Inc. and Qwest Communications
International Inc. FCC approval and consummation of these mergers would increase
concentration in the international telecommunications service industry and the
potential market power of the Company's competitors. The FCC also recently has
sought to reduce the foreign termination costs of U.S. international carriers by
prescribing maximum or benchmark settlement rates which foreign carriers may
charge U.S. carriers for terminating switched telecommunications traffic and, if
the FCC's benchmarks order survives judicial review, the FCC's action may reduce
the Company's settlement costs, although the costs of other U.S. international
carriers also may be reduced in a similar fashion. The FCC has not stated how it
will enforce the new settlement benchmarks if U.S. carriers are unsuccessful in
negotiating settlement rates at or below the prescribed benchmarks, but any
future FCC intervention could disrupt the Company's transmission arrangements to
certain countries or require the Company to modify its existing arrangements;
other U.S. international carriers might be similarly affected. The 1996
amendment to the Communications Act permits the FCC to forbear enforcement of
the tariff provisions in the Act, which apply to all interstate and
international carriers, and the U.S. Court of Appeals is currently reviewing an
FCC order directing all domestic interstate carriers to detariff their
offerings. Subject to the Court's decision, the FCC may forbear its current
tariff rules for U.S. international carriers, such as the Company, or order such
carriers to detariff their services. In that event, the Company would have
greater flexibility in pricing its service offerings and to compete, although
any such FCC action likely would grant other non-dominant international carriers
equivalent freedom. The FCC routinely reviews the contribution rate for various
levels of regulatory fees, including the rate for fees levied to support
universal service, which fees may be increased in the future for various
reasons, including the need to support the universal service programs mandated
by the Communications Act, the total costs for which are still under review by
the FCC. The FCC also is reviewing the extent to which international carriers
may refile traffic using international private line facilities or otherwise.
Future FCC actions regarding refile could affect the Company by, for example,
requiring it to discontinue certain termination arrangements which it now has or
to implement alternative routing arrangements for certain countries; on the
other hand, the FCC may further liberalize its existing rules and policies
regarding refile in which case the Company is likely to be well positioned to
expand certain refile operations even though new opportunities may become
available to its competitors. The Company can not predict the net effect of
these or other possible future FCC actions on its business, operating results
and financial condition, although the net effect could be material.
STATE REGULATION
STATE. The intrastate long distance telecommunications operations of STAR
and its subsidiaries are subject to various state laws and regulations,
including prior certification, notification, registration and/or
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tariff requirements. In certain states, prior regulatory approval is required
for changes in control of telecommunications services. The vast majority of
states require STAR and its subsidiaries to apply for certification to provide
intrastate telecommunications services, or at a minimum to register or to be
found to be exempt from regulation, prior to commencing sale of intrastate
services. Additionally, the vast majority of states require STAR or its
subsidiaries to file and maintain detailed tariffs setting forth rates charged
by STAR to its end-users for intrastate services. Many states also impose
various reporting requirements and/or require prior approval for transfers of
control of certificated carriers and assignments of carrier assets, including
customer bases, carrier stock offerings, and incurrence by carriers of
significant debt. Certificates of authority can generally be conditioned,
modified, canceled, terminated or revoked by state regulatory authorities for
failure to comply with state laws and/or rules, regulations and policies of the
state regulatory authorities. Fines and other penalties, including, for example,
the return of all monies received for intrastate traffic from residents of a
state in which a violation has occurred may be imposed.
STAR, along with its regulated subsidiaries, believes it has made the
filings and taken the actions it believes are necessary to provide the
intrastate services it currently provides to end users throughout the U.S. STAR
and/or its subsidiaries are qualified to do business as foreign corporations,
and have received certification to provide intrastate telecommunications
services in all states where certification is required, and have received
approval for changes of control where such approvals are necessary. The Company
and its subsidiaries are required to make periodic filings in order to maintain
certificated status and remain qualified as foreign corporations.
In early 1997, the FCC instituted significant changes to the current
incumbent local exchange carrier access charge structure. These changes were
meant, in part, to bring access charges closer to their actual costs. While
there has been a general trend towards access charge reductions, new primary
interexchange carrier charges (PICCs) were authorized by the FCC to be imposed
on interexchange carriers serving presubscribed access charges closer to their
actual costs. PICCs are a flat-rated, per presubscribed line, per month access
charge imposed upon all facilities-based carriers (although they may be passed
through to resellers). Facilities-based carriers were assessed interstate PICCs
effective January 1, 1998. Intrastate PICCs have also been adopted in the five
state Ameritech region (Michigan, Wisconsin, Illinois, Indiana, and Ohio), and
may be adopted elsewhere. At the same time, the Company may pursue underlying
carriers for pass throughs of any access charge reductions they may realize from
incumbent local exchange carriers.
ACTIONS AGAINST LDS. In 1997, prior to the Company's acquisition of LDS,
LDS settled disputes with the California PUC and with the District Attorney of
Monterey, California regarding LDS' alleged unauthorized switching of long
distance customers. As part of the Settlements, LDS was subject to fines and
restrictions on its business operations in California. In addition, the FCC has
received numerous informal complaints against LDS regarding the alleged
unauthorized switching of long distance customers, which complaints currently
remain under review.
Following the Company's acquisition of LDS and in order to comply with the
Settlements, STAR has imposed strict restrictions on certain former LDS
employees, restricting these employees with respect to California intrastate
telecommunications operations. Additionally, the Company has taken a number of
steps to reduce the risk of a repeat occurrence regarding the alleged
unauthorized switching of commercial customers in California. There can,
however, be no assurance that LDS or STAR will not be subject to further
regulatory review by the California PUC or the FCC.
FOREIGN REGULATION
UNITED KINGDOM. In the U.K., telecommunications services offered by the
Company through its affiliate, STAR Europe Ltd., are subject to regulation by
various U.K. regulatory agencies. The U.K. generally permits competition in all
sectors of the telecommunications market, subject to licensing requirements and
license conditions. The Company has been granted licenses to provide
international traffic on a resale basis and over its own facilities, which
licenses are subject to a number of restrictions.
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Implementation of these licenses have permitted the Company to engage in
cost-effective routing of traffic between the U.S. and the U.K. and beyond.
GERMANY. In Germany, telecommunications services offered by the Company
through its affiliate, STAR Telecommunications Deutschland GmbH ("STAR
Germany"), are subject to regulation by the Regulierungsbehorde fur
Telekommunikation und Post (which is under the jurisdiction of the Ministry of
Economy). Germany permits the competitive provision of international
facilities-based and resale services. STAR Germany was granted a license for the
provision of voice telephony on the basis of self-operated telecommunications
networks on December 4, 1997. Under this license, STAR Germany is presently
installing telecommunications switching facilities in Dusseldorf, Frankfurt,
Hamburg and Munich and is leasing connection transmission facilities between
these switches and additional facilities. The network of STAR Germany will be
used primarily for routing international telecommunications traffic between the
U.S., the U.K., Germany and beyond. There can be no assurance that future
changes in regulation of the services provided by STAR Germany will not have a
material adverse effect on the Company's business, operating results and
financial condition.
OTHER COUNTRIES. The Company plans to initiate a variety of services in
certain European countries including France and Belgium. These services will
include value-added services to closed user groups and other voice services as
regulatory liberalization in those countries permits. These and other countries
have announced plans or adopted laws to permit varying levels of competition in
the telecommunications market. Under the terms of the WTO Agreement, each of the
signatories has committed to opening its telecommunications market to
competition, foreign ownership and to adopt measures to protect against
anticompetitive behavior, effective starting on January 1, 1998. Although the
Company plans to obtain authority to provide service under current and future
laws of those countries, or, where permitted, provide service without government
authorization, there can be no assurance that foreign laws will be adopted and
implemented providing the Company with effective practical opportunities to
compete in these countries. Moreover, there can be no assurance of the nature
and pace of liberalization in any of these markets. The Company's inability to
take advantage of such liberalization could have a material adverse affect on
the Company's ability to expand its services as planned.
EMPLOYEES
As of March 1, 1998, the Company employed 454 full-time employees. The
Company is not subject to any collective bargaining agreement and it believes
that its relationships with its employees are good.
PROPERTIES
The Company's principal offices are located in Santa Barbara, California in
four facilities providing an aggregate of approximately 17,659 square feet of
office space. Approximately 5,332 square feet of this office space is leased
pursuant to two leases that both expire in July 1999. The remaining
approximately 12,327 square feet of office space is located in two buildings and
is rented by the Company pursuant to a lease that expires in June 2003. The
Company also leases approximately 16,595 square feet of space for its switching
facility in Los Angeles, California under a sublease and a lease expiring in
April 2006, an aggregate of approximately 33,445 square feet of space for its
switching facilities in New York, New York under three leases which expire in
December 31, 2001, July 31, 2003 and April 2008, respectively, approximately
6,167 square feet of space for its switching facility in Dallas, Texas under a
lease expiring in April 2007, and approximately 8,000 square feet of space for
its switching facility in London, England under a lease expiring in July 2006.
The Company leases approximately 14,628 square feet in Dusseldorf, approximately
27,835 square feet in Frankfurt, approximately 12,002 square feet in Hamburg and
approximately 12,408 square feet in Munich, Germany under four leases expiring
on or about January 1, 2008. The aggregate facility lease payments made by the
Company in 1997 were approximately $2.2 million. The Company believes that all
other material terms of its leases are commercially reasonable terms that are
typically found in commercial leases in each of the respective areas in which
the Company leases space.
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The Company believes that its facilities are adequate to support its current
needs and that additional facilities will be available at competitive rates as
needed.
LITIGATION
The Company is not presently a party to any material pending litigation.
From time to time, however, the Company is party to various legal proceedings,
including billing disputes and collection matters, that arise in the ordinary
course of business.
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MANAGEMENT
OFFICERS AND DIRECTORS
The officers and directors of the Company, and their ages as of March 16,
1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- -----------------------------------------------------------------
<S> <C> <C>
Christopher E. Edgecomb(1).... 39 Chief Executive Officer, Chairman of the Board and Director
Mary A. Casey(1)(2)........... 35 President, Secretary and Director
David Vaun Crumly............. 34 Executive Vice President--Sales and Marketing
James E. Kolsrud.............. 53 Executive Vice President--Operations and Engineering
Kelly D. Enos................. 39 Chief Financial Officer and Treasurer
Mark Gershien................. 46 Director
Gordon Hutchins, Jr.(3)....... 48 Director
John R. Snedegar(2)(3)........ 48 Director
</TABLE>
- ------------------------
(1) Member of Non-Executive Stock Option Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
CHRISTOPHER E. EDGECOMB co-founded the Company in September 1993, served as
President of the Company until January 1996 and has served as the Company's
Chief Executive Officer and Chairman of the Board since January 1996. Mr.
Edgecomb has been a Director of the Company since its inception. Prior to that
time, Mr. Edgecomb was a founder and the Executive Vice President of West Coast
Telecommunications ("WCT"), a nation-wide long distance carrier, from August
1989 to December 1994. Prior to founding WCT, Mr. Edgecomb was President of
Telco Planning, a telecommunications consulting firm, from January 1986 to July
1989. Prior to that time, Mr. Edgecomb held senior level sales and marketing
positions with TMC Communications, American Network and Bay Area Teleport.
MARY A. CASEY has been a Director and Secretary of the Company since
co-founding the Company in September 1993, and has served as the Company's
President since January 1996. Prior to that time, Ms. Casey was Director of
Customer Service at WCT from December 1991 to June 1993, and served as Director
of Operator Services at Call America, a long distance telecommunications
company, from May 1988 to December 1991.
DAVID VAUN CRUMLY has served as the Company's Executive Vice
President--Sales and Marketing since January 1996. Prior to that time, Mr.
Crumly served as a consultant to the Company from November 1995 to January 1996,
was Vice President of Carrier Sales of Digital Network, Inc. from June 1995 to
November 1995 and was Director of Carrier Sales of WCT from June 1992 to June
1995. Prior to joining WCT, Mr. Crumly served in various sales and marketing
capacities with Metromedia, a long-distance company, from September 1990 to June
1992 and with Claydesta, a long-distance company, from May 1987 to September
1989.
JAMES E. KOLSRUD has served as the Company's Executive Vice
President--Operations and Engineering since September 1996. Prior to joining the
Company, Mr. Kolsrud was an international telecommunications consultant from
March 1995 to September 1996. Prior to that time, he was a Vice President,
Corporate Engineering and Administration of IDB Communications Group, Inc.
("IDB"), an international communications company, from October 1989 to March
1995, and prior to that time, he was President of the International Division of
IDB.
45
<PAGE>
KELLY D. ENOS has served as the Company's Chief Financial Officer since
December 1996 and as Treasurer since April 1997. Prior to that time, Ms. Enos
was an independent consultant in the merchant banking field from February 1996
to November 1996 and a Vice President of Fortune Financial, a merchant banking
firm, from April 1995 to January 1996. Ms. Enos served as a Vice President of
Oppenheimer & Co., Inc., an investment bank, from July 1994 to March 1995 and a
Vice President of Sutro & Co., an investment bank, from January 1991 to June
1994.
MARK GERSHIEN has served as a Director of the Company since March 1998. Mr.
Gershien has been the Senior Vice President of Sales and Marketing for Level 3
Communications, a telecommunications and information services company, since
January 1998. Prior to that time, Mr. Gershien was the Senior Vice President of
National Accounts for WorldCom, Inc., an international telecommunications
company, and President and Chief Executive Officer of MFS Telecom, a division of
MFS Communications, Inc. prior to its merger with WorldCom, Inc.
GORDON HUTCHINS, JR. has served as a Director of the Company since January
1996. Mr. Hutchins has been President of GH Associates, a telecommunications
consulting firm, since July 1989. Prior to founding GH Associates, Mr. Hutchins
served as President and Chief Executive Officer of ICC Telecommunications, a
competitive access provider, and held senior management positions with several
other companies in the telecommunications industry.
JOHN R. SNEDEGAR has served as a Director of the Company since January 1996.
Mr. Snedegar has been the President and a Director of UDN since June 1990. From
June 1980 to February 1992, Mr. Snedegar was the President and CEO of AmeriTel
Management, Inc., a provider of long distance telecommunications and management
services. Mr. Snedegar is also a director for StarBase Corporation, a software
development company. Mr. Snedegar also serves as President of Kendall Venture
Funding, Ltd., a reporting company in Alberta, Canada.
BOARD COMPOSITION
In accordance with the terms of the Company's Amended and Restated
Certificate of Incorporation, the terms of office of the Board of Directors are
divided into three classes: Class I, whose term will expire at the annual
meeting of stockholders to be held in 1998; Class II, whose term will expire at
the annual meeting of stockholders to be held in 1999; and Class III, whose term
will expire at the annual meeting of stockholders to be held in 2000. The Class
I directors are Gordon Hutchins, Jr. and John R. Snedegar, the Class II
directors are Mark Gershien and Mary A. Casey, and the Class III director is
Christopher E. Edgecomb. At each annual meeting of stockholders after the
initial classification, the successors to directors whose term will then expire
will be elected to serve from the time of election and qualification until the
third annual meeting following election. This classification of the Board of
Directors may have the effect of delaying or preventing changes in control or
changes in management of the Company. See "Risk Factors--Anti-takeover Effects
of Certificate of Incorporation, Bylaws and Delaware Law" and "Description of
Capital Stock--Anti-takeover Effects of Provisions of the Certificate of
Incorporation, Bylaws and Delaware Law."
Each officer is elected by and serves at the discretion of the Board of
Directors. Each of the Company's officers and directors, other than nonemployee
directors, devotes substantially full time to the affairs of the Company. The
Company's nonemployee directors devote such time to the affairs of the Company
as is necessary to discharge their duties. There are no family relationships
among any of the directors, officers or key employees of the Company.
DIRECTOR COMPENSATION
The Company's non-employee directors receive $2,000 for each Board meeting
attended and $1,000 for each telephonic Board meeting. In addition, each
non-employee director is reimbursed for out-of-pocket expenses incurred in
connection with attendance at meetings of the Board of Directors and its
46
<PAGE>
committees. In 1996, Messrs. Hutchins and Snedegar were each granted stock
options to purchase 20,500 shares of Common Stock. In 1997, Messrs. Hutchins,
Snedegar and Roland Van der Meer, a former director, were each granted stock
options to purchase 10,250 shares of Common Stock. In 1998, Messrs. Hutchins,
Snedegar and Gershien were each granted stock options to purchase 10,250 shares
of Common Stock. See "Certain Transactions--Transactions with Outside
Directors."
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation earned
by the Company's Chief Executive Officer and four other executive officers who
earned (or would have earned) salary and bonus in excess of $100,000 for
services rendered in all capacities to the Company and its subsidiaries (the
"Named Officers") for each of the fiscal years in the two year period ended
December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
SECURITIES
FISCAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS (#) COMPENSATION($)
- --------------------------------------------------- ----------- --------- ----------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Christopher E. Edgecomb............................ 1997 360,000 -- -- 3,202(1)
Chief Executive Officer 1996 360,000 -- -- 9,223(1)
and Chairman of the Board
Mary A. Casey...................................... 1997 217,500 -- -- 13,615(2)
President and Secretary 1996 156,042 -- -- 15,028(2)
David Vaun Crumly.................................. 1997 380,779 1,014 -- 6,202(2)
Executive Vice President--Sales 1996 298,002 -- 410,000 3,202(2)
and Marketing
James E. Kolsrud................................... 1997 177,083 1,014 -- 5,528(3)
Executive Vice President--Operations 1996 25,000 -- 205,000 --
and Engineering
Kelly D. Enos(4)................................... 1997 150,000 1,014 20,500 25,924(5)
Chief Financial Officer and Treasurer 1996 12,500 -- 153,750 --
</TABLE>
- ------------------------
(1) Consists of life and health insurance premiums paid by the Company.
(2) Consists of life and health insurance premiums and a car allowance paid by
the Company.
(3) Consists of health insurance premiums paid by the Company.
(4) Ms. Enos joined the Company in December 1996.
(5) Consists of a moving allowance of $22,721 and life and health insurance
premiums paid by the Company.
47
<PAGE>
The following table contains information concerning the stock option grants
made to each of the Named Officers named below for the year ended December 31,
1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE OF ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION --------------------
NAME GRANTED(#) FISCAL YEAR SHARE($/SH) DATE 5%($) 10%($)
- --------------------------------------- ----------- --------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Kelly D. Enos.......................... 20,500(2) 2.3% $ 6.83 06/27/07 $ 88,045 $ 223,124
</TABLE>
- --------------------------
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the
10-year option term will be at the assumed 5% and 10% levels or at any other
defined level. Unless the market price of the Common Stock appreciates over
the option term, no value will be realized from the option grants made to
the executive officer.
(2) The option becomes exercisable in four equal annual installments on June 26,
1998, 1999, 2000 and 2001, respectively.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
No options were exercised by the Named Officers for the fiscal year ended
December 31, 1997. No stock appreciation rights were exercised during such year
or were outstanding at the end of that year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board (the "Compensation
Committee") was formed in May 1996, and, in 1997, the members of the
Compensation Committee were Gordon Hutchins, Jr., John R. Snedegar and Roland A.
Van der Meer. None of these individuals was at any time during the year ended
December 31, 1997, or at any other time, an officer or employee of the Company.
Mr. Van der Meer resigned from the Board and the Compensation Committee,
effective as of February 1, 1998. The Non-Executive Compensation Committee of
the Company's Board (the "Non-Executive Compensation Committee") was formed in
1997, and the members are Christopher E. Edgecomb and Mary A. Casey. No member
of the Compensation Committee or the Non-Executive Compensation Committee served
at any time during the year ended December 31, 1997 as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board, Compensation Committee or
Non-Executive Compensation Committee. The Compensation Committee and the
Non-Executive Compensation Committee shall collectively be referred to hereafter
as the "Compensation Committees."
1997 OMNIBUS STOCK INCENTIVE PLAN
The Company's 1997 Omnibus Stock Incentive Plan (the "Omnibus Plan") was
adopted by the Board of Directors on January 30, 1997 as the successor to the
Company's 1996 Supplemental Option Plan (the "Supplemental Plan"). The Company
has reserved 3,075,000 shares for issuance under the Omnibus Plan. This share
reserve is comprised of (i) the 2,050,000 shares that were available for
issuance under the Supplemental Plan, plus (ii) an increase of 1,025,000 shares.
As of February 28, 1998, 16,621 shares had been issued under the Supplemental
and Omnibus Plans, options for 2,143,045 shares were outstanding (889,413 of
which were granted under the Supplemental Plan) and approximately 915,330 shares
remained available for future grant. Shares of Common Stock subject to
outstanding options, including options
48
<PAGE>
granted under the Supplemental Plan, which expire or terminate prior to
exercise, will be available for future issuance under the Omnibus Plan. In
addition, if stock appreciation rights ("SARs") and stock units are settled
under the Omnibus Plan, then only the number of shares actually issued in
settlement will reduce the number of shares available for future issuance under
this plan.
Under the Omnibus Plan, employees, outside directors and consultants may be
awarded options to purchase shares of Common Stock, SARs, restricted shares and
stock units. Options may be incentive stock options designed to satisfy Section
422 of the Internal Revenue Code or nonstatutory stock options not designed to
meet such requirements. SARs may be awarded in combination with options,
restricted shares or stock units, and such an award may provide that the SARs
will not be exercisable unless the related options, restricted shares or stock
units are forfeited.
The Omnibus Plan is administered by the Board or the Compensation Committees
(the "Administrator"). The Administrator has the complete discretion to
determine which eligible individuals are to receive awards; determine the award
type, number of shares subject to an award, vesting requirements and other
features and conditions of such awards; interpret the Omnibus Plan; and make all
other decisions relating to the operation of the Omnibus Plan.
The exercise price for options granted under the Omnibus Plan may be paid in
cash or in outstanding shares of Common Stock. Options may also be exercised on
a cashless basis, by a pledge of shares to a broker or by promissory note. The
payment for the award of newly issued restricted shares will be made in cash. If
an award of SARs, stock units or restricted shares from the Company's treasury
is granted, no cash consideration is required.
The Administrator has the authority to modify, extend or assume outstanding
options and SARs or may accept the cancellation of outstanding options and SARs
in return for the grant of new options or SARs for the same or a different
number of shares and at the same or a different exercise price.
The Board may determine that an outside director may elect to receive his or
her annual retainer payments and meeting fees from the Company in the form of
cash, options, restricted shares, stock units or a combination thereof. The
Board will decide how to determine the number and terms of the options,
restricted shares or stock units to be granted to outside directors in lieu of
annual retainers and meeting fees.
Upon a change in control, the Administrator may determine that an option or
SAR will become fully exercisable as to all shares subject to such option or
SAR. A change in control includes a merger or consolidation of the Company,
certain changes in the composition of the Board and acquisition of 50% or more
of the combined voting power of the Company's outstanding stock. In the event of
a merger or other reorganization, outstanding options, SARs, restricted shares
and stock units will be subject to the agreement of merger or reorganization,
which may provide for the assumption of outstanding awards by the surviving
corporation or its parent, their continuation by the Company (if the Company is
the surviving corporation), accelerated vesting and accelerated expiration, or
settlement in cash.
The Board may amend or terminate the Omnibus Plan at any time. Amendments
may be subject to stockholder approval to the extent required by applicable
laws. In any event, the Omnibus Plan will terminate on January 22, 2007, unless
sooner terminated by the Board.
1996 OUTSIDE DIRECTOR NONSTATUTORY STOCK OPTION PLAN
The Company's 1996 Outside Director Nonstatutory Stock Option Plan (the
"Director Plan") was ratified and approved by the Board of Directors as of May
14, 1996. The Company has reserved 410,000 shares of Common Stock for issuance
under the Director Plan. As of February 28, 1998, 61,500 shares had been issued
under the Director Plan, options for 82,000 shares were outstanding and 266,500
shares remained available for future grant. If an outstanding option expires or
terminates unexercised, then the shares subject to such option will again be
available for issuance under the Director Plan.
49
<PAGE>
Under the Director Plan, outside directors of the Company may receive
nonstatutory options to purchase shares of Common Stock. The Director Plan is
administered by the Board or the Compensation Committee (the "Administrator").
The Administrator has the discretion to determine which eligible individuals
will receive options, the number of shares subject to each option, vesting
requirements and any other terms and conditions of such options.
The exercise price for options granted under the Director Plan will be at
least 85% of the fair market value of the Common Stock on the option grant date,
shall be 110% of the fair market value of the Common Stock on the option grant
date if the option is granted to a holder of more than 10% of the Common Stock
outstanding and may be paid in cash, check or shares of Common Stock. The
exercise price may also be paid by cashless exercise or pledge of shares to a
broker.
The Administrator may modify, extend or renew outstanding options or accept
the surrender of such options in exchange for the grant of new options, subject
to the consent of the affected optionee.
Upon a change in control, the Board may accelerate the exercisability of
outstanding options and provide an exercise period during which such accelerated
options may be exercised. The Board also has the discretion to terminate any
outstanding options that had been accelerated and had not been exercised during
such exercise period. In the event of a merger of the Company into another
corporation in which holders of Common Stock receive cash for their shares, the
Board may settle the option with a cash payment equal to the difference between
the exercise price and the amount paid to holders of Common Stock pursuant to
the merger.
The Board may amend or terminate the Director Plan at any time. In any
event, the Director Plan will terminate on May 14, 2006, unless sooner
terminated by the Board.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
The Company has an employment agreement with Mary A. Casey, pursuant to
which Ms. Casey holds the position of President of the Company, is paid an
annual salary of $20,000 per month, subject to adjustment to reflect increases
in the Consumer Price Index, was entitled to purchase 1,677,273 shares of Common
Stock, and is eligible to receive a bonus, as determined by the Chief Executive
Officer and Board of Directors. The agreement also provides that Ms. Casey will
receive a severance payment equal to $7,000 per month for the first six months
after termination of employment, and an additional payment of $7,000 per month
for the next six months, minus any amounts earned by her from other employment
during such period. In addition, the agreement provides that if Ms. Casey's
employment is terminated (other than for cause) within four months after a Sale
Transaction (as defined below), she will continue to receive the compensation
provided in the agreement until the expiration of the agreement on December 31,
2000, instead of the severance payments described above. A Sale Transaction is
an acquisition of more than 75% of the voting securities of STAR, pursuant to a
tender offer or exchange offer approved in advance by the Board of Directors.
In January 1996, the Company entered into an employment agreement with David
Vaun Crumly pursuant to which Mr. Crumly became Executive Vice President of the
Company. The agreement provides for an annual salary of $10,000 per month with
an annual increase, plus incentive bonuses tied to gross revenues of the
Company. The agreement also provides for a commission on certain accounts of the
Company and an option to purchase 369,000 shares of Common Stock at an exercise
price of $0.73 per share. In addition, in the event of a Sale Transaction, Mr.
Crumly will receive a bonus payment equal to the lesser of $1,500,000 or a
percentage of the monthly gross sales of accounts relating to customers
introduced to the Company by Mr. Crumly. If his employment is terminated in
certain circumstances, without cause, within four months after a Sale
Transaction, Mr. Crumly is entitled to receive the compensation provided in this
agreement, minus any compensation earned by other employment, until the
expiration of the agreement on December 31, 2000.
50
<PAGE>
In December 1996, the Company entered into an employment agreement with
Kelly D. Enos, pursuant to which Ms. Enos became Chief Financial Officer of the
Company. The agreement provides for an annual salary of $150,000 (which has been
increased to $160,000) and an option to purchase 153,750 shares of Common Stock
at an exercise price of $4.00 per share. The agreement also provides that Ms.
Enos will receive a severance payment equal to the compensation which she would
have received under the remaining term of the agreement if she terminates the
agreement as a result of STAR's default of its material obligations and duties
under the agreement or if she is terminated by the Company without cause within
four months after a Sale Transaction.
In September 1996, STAR entered into an employment agreement with James
Kolsrud, pursuant to which Mr. Kolsrud became Executive Vice
President--Operations and Engineering of STAR. The agreement provides for a
monthly salary of $16,667, an option to purchase 205,000 shares of Common Stock
pursuant to the Company's 1996 Supplemental Stock Option Plan at a price of
$4.00 per share, reimbursement of reasonable out-of-pocket expenses incurred in
connection with Company business, and fringe benefits accorded to executives of
the Company as determined by the Board of Directors. In the event of termination
pursuant to the agreement, Mr. Kolsrud shall be entitled to receive compensation
accrued and payable to him as of the date of his termination or death, and all
other amounts payable to him under the agreement shall thereupon cease. If his
employment is terminated in certain circumstances within four months after a
Sale Transaction, then Mr. Kolsrud shall continue to receive the compensation
provided in the agreement until the expiration of the agreement on December 31,
2000.
51
<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS WITH OUTSIDE DIRECTORS
The Company provided services to Digital Network, Inc. ("DNI") in the amount
of approximately $1,141,000 in 1997. DNI is a wholly owned subsidiary of UDN,
and John R. Snedegar, a Director of the Company, is President of UDN. On
November 19, 1997, the Company entered into an agreement to acquire UDN. Messrs.
Snedegar and Edgecomb beneficially own 11% and 2%, respectively, of the
outstanding common stock of UDN. In the context of the potential acquisition of
UDN, the Company has loaned $4.5 million to UDN at market rates of interest.
Assumming the receipt of all necessary stockholder and regulatory approvals,
management expects to consummate the UDN acquisition in the second quarter of
1998 for approximately 800,000 shares of Common Stock. Prior to consummation of
the acquisition of UDN, the Company will receive a fairness opinion from an
investment banking firm that the consideration paid was fair, from a financial
point of view, to the stockholders of the Company. UDN's Common Stock is traded
on the Vancouver Stock Exchange under the symbol UDN.
GH Associates, an affiliate of Gordon Hutchins Jr., a Director of the
Company, provides consulting services to the Company. In 1995, 1996 and 1997,
the Company made payments of approximately $60,000, $154,000 and $72,000,
respectively, to GH Associates for general business consulting services relating
to the telecommunications industry and for the performance of other tasks
requested by the Company's Chief Executive Officer, President and Board of
Directors. In addition, in connection with these services, the Company granted
to Mr. Hutchins a nonstatutory option to purchase 205,000 shares of Common Stock
at an exercise price of $1.46 per share.
The Company's Outside Directors have been granted nonstatutory stock options
under the Director Plan. See "Management--Director Compensation."
TRANSACTIONS WITH EXECUTIVE OFFICERS
In January 1998, the Company granted to each of Kelly Enos, David Vaun
Crumly and James Kolsrud incentive stock options to purchase 4,100 shares of
Common Stock at an exercise price of $16.31.
On October 4, 1996, the Company entered into a $12.0 million line of credit
with Comerica Bank. This line of credit was guaranteed by Christopher E.
Edgecomb, the Company's Chief Executive Officer. The Company has entered into a
new revolving credit facility since that time and Mr. Edgecomb's guarantee of
the Comerica Bank line has been terminated. Mr. Edgecomb did not receive any
additional compensation in connection with such guarantee. STAR has entered into
lines of credit with Mr. Edgecomb in the aggregate amount of $1,448,000 that
expire on March 30, 1998. Borrowings under the lines of credit bear interest at
a rate of 9.0% and there was $138,000 outstanding under these lines of credit as
of December 31, 1997. In addition, on November 27, 1997 the Company provided a
short-term loan to Mr. Edgecomb for $8.0 million. The loan carried interest of
7% per annum and was repaid in seven days.
Mr. Edgecomb owns Star Aero Services, Inc. ("Star Aero"), which has
ownership interests in five airplanes that the Company utilizes for business
travel from time to time. For the years ended December 31, 1995, 1996 and 1997,
the Company paid $144,000, $68,000 and $171,000, respectively, in costs related
to the use of Star Aero services.
Mr. Crumly had controlling ownership of three companies that resold
transmission capacity to the Company during 1996 for a total of approximately
$240,000. No fees were paid to Mr. Crumly during 1997 with respect to such
transmission capacity. In addition, the Company has agreed to reimburse legal
fees incurred by such companies in connection with a dispute with the provider
of the capacity that was resold to the Company. To date, the fees paid or
incurred total approximately $131,000.
Mr. Kolsrud has a 25% interest in Interpacket Group, Inc. ("Interpacket")
which has direct termination arrangements with the Company for certain countries
in Central and South America. For the years
52
<PAGE>
ended December 31, 1996 and 1997, the Company paid $37,000 and $256,000,
respectively, for services rendered by Interpacket. In addition, the Company
purchased satellite transmission equipment and services from Interpacket during
1997 in the amount of $1,114,000.
INDEMNIFICATION
The Company's Amended and Restated Certificate of Incorporation limits the
liability of its directors for monetary damages arising from a breach of their
fiduciary duty as directors, except to the extent otherwise required by the
Delaware General Corporation Law. Such limitation of liability does not affect
the availability of equitable remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise discretionary under Delaware
law. The Company's has also entered into or will enter into indemnification
agreements with its officers and directors containing provisions that may
require the Company, among other things, to indemnify such officers and
directors against certain liabilities that may arise by reason of their status
or service as directors or officers (other than liabilities arising from willful
misconduct of a culpable nature), to advance their expenses incurred as a result
of any proceeding against them as to which they could be indemnified, and to
obtain directors' and officers' insurance if available on reasonable terms.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans between the
Company and its officers, directors, principal stockholders and their affiliates
will be approved by a majority of the Board of Directors, including a majority
of the independent and disinterested outside directors on the Board of
Directors, and will continue to be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties.
53
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of Common Stock as of March 16, 1998, by (i) each
person who is known by STAR to own beneficially more than five percent of the
Company's Common Stock, (ii) each of the Company's directors, (iii) each of the
Named Officers and (iv) all current officers and directors as a group. Mr.
Edgecomb may sell shares of Common Stock to the Underwriters in connection with
the exercise of the Underwriter's over-allotment option.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY
OWNED(2)
------------------------
SHARES BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED OFFERING OFFERING
- -------------------------------------------------------------------- ------------------------ ----------- -----------
<S> <C> <C> <C>
Entities affiliated with the Hunt Family Trusts(3).................. 2,099,182 5.9% 4.9%
3900 Thanksgiving Tower
Dallas, Texas 75201
Gotel Investments, Ltd.(4).......................................... 1,874,532 5.2 4.4
16, Rue de la Pelissiere
1204, Geneva
Switzerland
Gordon Hutchins, Jr.(5)............................................. 178,350 * *
John R. Snedegar(6)................................................. 30,750 * *
Mark Gershien....................................................... -- * *
Christopher E. Edgecomb(7).......................................... 13,668,707 38.2 31.9
Mary A. Casey....................................................... 1,646,613 4.6 3.8
David Vaun Crumly(8)................................................ 594,500 1.7 1.4
James E. Kolsrud(9)................................................. 71,747 * *
Kelly D. Enos(10)................................................... 54,837 * *
All directors and executive officers as a group
(8 persons)(11)................................................... 16,245,504 44.8 37.6
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares of
Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to securities. The address for each listed director and
officer is c/o STAR Telecommunications, Inc., 223 East De La Guerra Street,
Santa Barbara, California 93101. To the Company's knowledge, except as
indicated in the footnotes to this table and pursuant to applicable
community property laws, the persons named in the table have sole voting
and investment power with respect to all shares of Common Stock.
(2) Percentage of beneficial ownership is based on approximately 35,804,000
shares of Common Stock outstanding as of March 16, 1998 and 42,804,000
shares of Common Stock after the completion of this offering. The number of
shares of Common Stock beneficially owned includes the shares issuable
pursuant to stock options that are exercisable within sixty days of March
24, 1998. Shares issuable pursuant to stock options are deemed outstanding
for computing the percentage of the person holding such options but are not
outstanding for computing the percentage of any other person.
(3) Consists of 692,895 shares held by Lyda Hunt--Herbert Trusts--David Shelton
Hunt, 346,447 shares held by Lyda Hunt--Herbert Trusts--Bruce William Hunt,
346,447 shares held by Lyda Hunt--
54
<PAGE>
Herbert Trusts--Douglas Herbert Hunt, 346,447 shares held by Lyda
Hunt--Herbert Trusts--Barbara Ann Hunt, 346,447 shares held by Lyda
Hunt--Herbert Trusts--Lyda Bunker Hunt and 20,500 shares held by David
Shelton Hunt. The co-trustees of each of the Hunt Family Trusts hold voting
and investment power for all shares of STAR's Common Stock held by the
respective trusts. Walter P. Roach and Gage A. Prichard are the co-trustees
of each such trust.
(4) The board of directors of Gotel Investments, Ltd. ("Gotel") holds voting
and investment power for all shares of Common Stock held by Gotel. Gotel's
board of directors is comprised of Barry Guterman, Walter Stresemann and
Gregory Elias.
(5) Consists of 178,350 shares issuable upon the exercise of stock options
exercisable within sixty days of March 24, 1998.
(6) Consists of 20,500 shares of Common Stock and 10,250 shares issuable upon
the exercise of stock options exercisable within sixty days of March 24,
1998.
(7) Includes 330,000 shares of Mr. Edgecomb that may be sold to the
Underwriters in connection with the exercise of the over-allotment option.
Following the full exercise of such option, after the offering, the number
of shares of Common Stock beneficially owned by Mr. Edgecomb would be
13,338,707 or 30.6% of shares outstanding, and 37.7% for all executive
officers and directors as a group. See "Underwriting" for a description of
the Underwriters' over-allotment option.
(8) Consists of 451,000 shares of Common Stock, and 143,500 shares of Common
Stock issuable upon the exercise of stock options exercisable within sixty
days of March 24, 1998.
(9) Consists of 20,497 shares of Common Stock held in joint tenancy and 51,250
shares of Common Stock issuable upon the exercise of stock options
exercisable within sixty days of March 24, 1998.
(10) Consists of 16,400 shares of Common Stock and 38,437 shares of Common Stock
issuable upon the exercise of stock options exercisable within sixty days
of March 24, 1998.
(11) Includes 421,787 shares of issuable upon the exercise of stock options
exercisable within sixty days of March 24, 1998.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, $0.001 par value, and 5,000,000 shares of Preferred Stock, $0.001
par value.
COMMON STOCK
As of March 16, 1998, there were approximately 35,804,000 shares of Common
Stock outstanding that were held of record by approximately 155 stockholders.
There will be approximately 42,804,000 shares of Common Stock outstanding
(assuming no exercise of the Underwriters' over-allotment option and assuming no
exercise after February 28, 1998, of outstanding options) after giving effect to
the sale of shares of Common Stock to the public offered hereby.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Company's Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of the liquidation, dissolution,
or winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of Preferred Stock, if any, then outstanding. The Common
Stock has no preemptive or conversion rights or other subscription rights. There
are no redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
shares of Common Stock to be issued upon completion of this offering will be
fully paid and nonassessable.
PREFERRED STOCK
Pursuant to the Company's Amended and Restated Certificate of Incorporation,
the Board of Directors has the authority to issue up to 5,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the stockholders.
The issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders and may adversely affect the voting and other rights of the holders
of Common Stock. The issuance of Preferred Stock with voting and conversion
rights may adversely affect the voting power of the holders of Common Stock,
including the loss of voting control to others. At present, the Company has no
plans to issue any of the Preferred Stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
CERTIFICATE OF INCORPORATION AND BYLAWS. The Company's Amended and Restated
Certificate of Incorporation provides that the Board of Directors be divided
into three classes of directors, with each class serving a staggered three-year
term. The classification system of electing directors may tend to discourage a
third party from making a tender offer or otherwise attempting to obtain control
of the Company and may maintain the incumbency of the Board of Directors, as the
classification of the Board of Directors generally increases the difficulty of
replacing a majority of the directors. The Amended and Restated Certificate of
Incorporation also provides that all stockholder actions must be effected at a
duly called meeting and not by a consent in writing. Further, provisions of the
Bylaws and the Amended and Restated Certificate of Incorporation provide that
the stockholders may amend the Bylaws or certain provisions of the Amended and
Restated Certificate of Incorporation only with the affirmative vote of 75% of
the Company's capital stock. These provisions of the Amended and Restated
Certificate of Incorporation and Bylaws could discourage potential acquisition
proposals and could delay or prevent a change in control of the Company. These
provisions are intended to enhance the likelihood of continuity and
56
<PAGE>
stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of the
Company. These provisions are designed to reduce the vulnerability of the
Company to an unsolicited acquisition proposal. The provisions also are intended
to discourage certain tactics that may be used in proxy fights. However, such
provisions could have the effect of discouraging others from making tender
offers for the Company's shares and, as a consequence, they also may inhibit
fluctuations in the market price of the Company's shares that could result from
actual or rumored takeover attempts. Such provisions also may have the effect of
preventing changes in the management of the Company. See "Risk Factors--Effect
of Certain Charter Provisions; Anti-takeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law."
DELAWARE TAKEOVER STATUTE. The Company is subject to Section 203 of the
Delaware General Corporation Law ("Section 203"), which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder; (ii) upon consummation of the
transaction that resulted in the stockholder becoming an interested stockholder,
the interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned (x)
by persons who are directors and also officers and (y) by employee stock plans
in which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer; or (iii) on or subsequent to such date, the business combination is
approved by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
REGISTRATION RIGHTS
Holders of approximately 7,153,000 shares of Common Stock are entitled to
certain rights with respect to the registration of such shares under the
Securities Act. Under the terms of the agreements between the Company and the
holders of such registrable securities, if the Company proposes to register any
of its securities under the Securities Act, either for its own account or for
the account of other security holders exercising registration rights, such
holders are entitled to notice of such registration and are entitled to include
shares of such Common Stock therein. Additionally, certain holders are also
entitled to demand registration rights pursuant to which they may require the
Company to file a registration statement under the Securities Act at its expense
with respect to their shares of Common Stock, and the Company is required to use
its best efforts to effect such registration. Further, holders may require the
Company to file additional registration statements on Form S-3 at the Company's
expense. All of these registration rights are subject to certain conditions and
limitations, among them the right of the underwriters of an offering to
57
<PAGE>
limit the number of shares included in such registration and the right of the
Company not to effect a requested registration within six months following an
offering of the Company's securities, including the offering made hereby.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock Transfer
Corp., 1745 Gardena Avenue, Glendale, California 91204, and its telephone number
is (818) 502-1404.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have approximately
42,804,000 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding and vested
options to purchase approximately 1,334,000 shares of Common Stock outstanding
and vested as of February 28, 1998) of which 9,430,000 have been previously
registered pursuant to the Securities Act. Of the approximately 42,804,000
shares of Common Stock outstanding, the 7,000,000 shares offered hereby will be
freely transferable without restriction or further registration under the
Securities Act. Approximately 558,000 additional shares which are not currently
registered will be available for immediate unrestricted sale in the public
market on the date of this Prospectus and approximately 1,601,000 additional
shares will be available for immediate sale on the date of this Prospectus,
subject to the public information, volume limitation and notice provisions of
Rule 144 adopted under the Securities Act.
Approximately 410,000 shares will be available for sale within 45 days after
the date of this Prospectus, subject to the Rule 144 public information, volume
limitations and notice provisions. Approximately 1,985,000 shares will be
available for sale in the public market 45 days after the date of this
Prospectus upon the expiration of certain lock-up agreements (described below),
of which 1,875,000 shares are subject, until July 12, 1998, to the Rule 144
public information, volume limitation and notice provisions described below and
the remaining 110,000 which remain subject to the volume and other limitations
of Rule 144. Upon the expiration of certain additional lock-up agreements
(described below) 90 days after the date of this Prospectus, (i) approximately
16,136,000 shares will be available for sale in the public market, subject to
the Rule 144 public information, volume limitation and notice provisions and
(ii) approximately 2,050,000 shares will be available for unrestricted sale in
the public market.
Approximately 1,353,000 shares issued in the T-One acquisition shall be
available for sale on the date of the publication by the Company of at least 30
days of combined operating results of STAR and T-One.
Approximately 849,000 shares issued in the LDS acquisition will be available
for sale after November 30, 1998.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year is entitled to sell within any three-month period a number of such shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
Common Stock (approximately 428,000 shares immediately after the offering) or
(ii) the average weekly trading volume during the four calendar weeks preceding
such sale, subject to the filing of a Form 144 with respect to such sale. A
person (or persons whose shares are aggregated) who is not deemed to have been
an affiliate of the Company at any time during the 90 days immediately preceding
the sale who has beneficially owned his or her shares for at least two years is
entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations described above. Persons deemed to be affiliates must always sell
pursuant to Rule 144, even after the applicable holding periods have been
satisfied.
The Company, its directors, executive officers and certain other
stockholders have agreed pursuant to the Underwriting Agreement and other
agreements that they will not sell any Common Stock without the prior consent of
BT Alex. Brown Incorporated for a period of in some cases 45 days and in other
cases
58
<PAGE>
90 days from the date of this Prospectus (the "90-day Lockup Period"), except
that the Company may, without such consent, grant options and sell shares
pursuant to the Company's stock option plans.
The Company has filed a registration statement under the Securities Act to
register all of the shares of Common Stock reserved for issuance upon exercise
of options granted under the Company's Supplemental Plan, Omnibus Plan and
Director Plan. Therefore, shares issued from time to time upon exercise of
vested options under any of such Plans may be sold in the public market,
subject, in the case of directors, officers and other affiliates, to the volume
and other limitations of Rule 144 applicable to affiliates. Based on options
outstanding as of March 16, 1998, holders of vested options exercisable for
approximately 534,207 shares of Common Stock will be eligible to sell their
shares without restriction immediately upon exercise on the date of this
Prospectus, and holders of options exercisable for approximately 113,750 shares
of Common Stock will be eligible to sell their shares after the expiration of
the 90 day Lock-Up Period, subject, in the case of affiliates, to the Rule 144
volume and other limitations.
In addition, after this offering, the holders of approximately 7,153,000
shares of Common Stock will be entitled to certain rights with respect to
registration of such shares under the Securities Act. Registration of such
shares under the Securities Act would result in such shares becoming freely
tradeable without restriction under the Securities Act (except for shares
purchased by affiliates of the Company) immediately upon the effectiveness of
such registration. See "Description of Capital Stock--Registration Rights."
59
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, the
underwriters named below (the "Underwriters"), through their representatives, BT
Alex. Brown Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Hambrecht & Quist LLC, Lehman Brothers Inc. and Furman Selz LLC (the
"Representatives") have severally agreed to purchase from the Company the
following respective number of shares of Common Stock at the public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
BT Alex. Brown Incorporated................................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.........................
Hambrecht & Quist LLC......................................................
Lehman Brothers Inc........................................................
Furman Selz LLC............................................................
-----------------
Total.............................................................. 7,000,000
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares are
purchased.
The Company and the Selling Stockholder have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page of this Prospectus and to certain dealers at such price less a concession
not in excess of $ per share. The Underwriters may allow and such dealers
may reallow, a concession not in excess of $ per share to certain other
dealers. After the offering, the public offering price and other selling terms
may be changed by the Representatives.
The Company and the Selling Stockholder have granted to the Underwriters an
option, exercisable no later than 30 days after the date of this Prospectus, to
purchase up to an aggregate of 1,050,000 additional shares of Common Stock at
the public offering price, less the underwriting discounts and commissions, set
forth on the cover page of this Prospectus. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage of such additional shares as the
number of shares of Common Stock to be purchased by it shown in the above table
bears to the total number of shares of Common Stock offered hereby, and the
Company and the Selling Stockholder will be obligated, pursuant to the option,
to sell shares to the Underwriters if any. The Underwriters may exercise such
option only to cover over-allotments, if any, made in connection with the sale
of shares of Common Stock offered hereby. If purchased, the Underwriters will
offer such additional shares on the same terms as those on which the 7,000,000
shares are being offered.
In connection with this offering, certain Underwriters may engage in passive
market making transactions in the Common Stock on the Nasdaq National Market
immediately prior to the commencement of sales in this offering in accordance
with Rule 103 of Regulation M. Passive market making consists of displaying bids
on the Nasdaq National Market limited by the bid prices of independent market
makers and making purchases limited by such prices and effected in response to
order flow. Net purchases by a passive market maker on each day are limited to a
specified percentage of the passive market maker's average daily trading volume
in the Common Stock during a specified period and must be discontinued when such
limit is reached. Passive market making may stabilize the market price of the
Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
Subject to applicable limitations, the Underwriters, in connection with this
offering, may place bids for or make purchases of the Common Stock in the open
market or otherwise, for long or short account or
60
<PAGE>
cover short positions incurred, to stabilize, maintain or otherwise affect the
price of the Common Stock, which may be higher than the price that might
otherwise prevail in the open market. There can be no assurance that the price
of the Common Stock will be stabilized, or that stabilizing, if commenced, will
not be discontinued at any time. Subject to applicable limitations, the
Underwriters may also place bids or make purchases on behalf of the underwriting
syndicate to reduce a short position created in connection with this Offering.
The Underwriters are not required to engage in these activities and may end
these activities at any time.
The Underwriting Agreement contains certain covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil,
liabilities, including liabilities under the Securities Act of 1933, as amended.
The Company, each of its directors and executive officers and certain
stockholders, who in the aggregate will beneficially own, following this
offering, approximately 20,821,000 shares of Common Stock (including options to
purchase shares of Common Stock that are currently exercisable or exercisable
within 60 days of March 24, 1998), have agreed that they will not, directly or
indirectly, without the prior written consent of BT Alex. Brown Incorporated,
offer, sell, offer to sell, contract to sell or otherwise dispose of any shares
of Common Stock for a period of in some cases 45 days and in other cases 90 days
after the date of this Prospectus, except that the Company (i) may issue shares
of Common Stock upon the exercise or conversion of other currently outstanding
options; (ii) may issue options to purchase shares of Common Stock to its
directors, officers and employees in connection with its existing stock option
plans; and (iii) may issue shares of Common Stock or securities convertible
into, or exercisable for, shares of Common Stock pursuant to an acquisition
transaction. Additionally, certain shares of the Selling Stockholders held by
brokers as security for margin loans may be sold by such brokers in the event of
a margin call on such shares.
The Company may, from time to time, engage the services of one or more of
the Underwriters to provide investment banking, merger and acquisition and
related services.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Riordan & McKinzie, a Professional Corporation, Los Angeles,
California. Certain legal matters in connection with the offering will be passed
upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California.
EXPERTS
The Consolidated Financial Statements of STAR Telecommunications, Inc. as of
December 31, 1996 and 1997 and for each of the years in the three year period
ended December 31, 1997, included in this Prospectus and elsewhere in this
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as set forth in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
AVAILABLE INFORMATION
STAR has filed with the Commission the Registration Statement with respect
to the Common Stock to be issued hereby, of which this Prospectus constitutes a
part. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information, reference is hereby made to the Registration Statement and the
exhibits and schedules thereto. Any statements contained herein concerning the
contents of any contract, agreement or other document referred to herein and
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission are not necessarily complete. With respect to each such contract,
agreement or other
61
<PAGE>
document filed with the Commission as an exhibit, reference is made to the
exhibit for a more complete description of the matter involved, and each such
statement is qualified in its entirety by such reference.
STAR is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and, in accordance therewith, files reports, proxy
statements, registration statements and other information with the Commission.
The reports, proxy statements, registration statements and other information
filed by STAR with the Commission may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material may be obtained by mail from the Public
Reference Section of the Commission at 450 West Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Commission also maintains a Web Site at
http://www.sec.gov which contains reports, proxy statements, registration
statements and other information regarding registrants that file electronically
with the Commission. STAR's Common Stock is listed on the Nasdaq National Market
under the symbol "STRX." Reports, proxy statements and other information filed
by STAR may be inspected at the offices of the Nasdaq National Market, Reports
Section, 1735 K Street, Washington, D.C. 20006.
62
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997............................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997................. F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997....... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997................. F-6
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To STAR Telecommunications, Inc.:
After the stock split discussed in Note 14 of the Notes to Consolidated
Financial Statements is effected, we expect to be in a position to render the
following audit report.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 12, 1998
"REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of STAR Telecommunications, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of STAR
TELECOMMUNICATIONS, INC. (a Delaware corporation) AND SUBSIDIARIES, as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of STAR Telecommunications,
Inc. and Subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
, 1998"
F-2
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................................ $1,726,000 $ 1,458,000
Short-term investments............................................................... 1,630,000 18,579,000
Accounts receivable, net of allowance of $6,202,000 and $7,745,000 at December 31,
1996 and 1997, respectively........................................................ 27,660,000 42,407,000
Receivable from related parties...................................................... 115,000 --
Other receivables.................................................................... 284,000 2,198,000
Prepaid expenses..................................................................... 960,000 4,712,000
Prepaid taxes........................................................................ 677,000 --
Deferred income taxes................................................................ -- 3,699,000
Other current assets................................................................. 825,000 61,000
---------- -----------
Total current assets............................................................... 33,877,000 73,114,000
---------- -----------
PROPERTY AND EQUIPMENT:
Operating equipment.................................................................. 8,653,000 29,142,000
Leasehold improvements............................................................... 4,248,000 6,289,000
Furniture, fixtures and equipment.................................................... 2,418,000 4,564,000
---------- -----------
15,319,000 39,995,000
Less-Accumulated depreciation and amortization....................................... (1,407,000) (5,638,000)
---------- -----------
13,912,000 34,357,000
---------- -----------
OTHER ASSETS:
Investments.......................................................................... 153,000 27,000
Deposits............................................................................. 5,630,000 6,055,000
Other................................................................................ 428,000 --
---------- -----------
6,211,000 6,082,000
---------- -----------
Total assets....................................................................... $54,000,000 $113,553,000
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit............................................................ $7,814,000 $ --
Revolving lines of credit with stockholder........................................... 26,000 138,000
Current portion of long-term debt.................................................... 267,000 480,000
Current portion of obligations under capital leases.................................. 872,000 2,495,000
Accounts payable..................................................................... 9,391,000 7,987,000
Taxes payable........................................................................ -- 2,156,000
Related party payable................................................................ 269,000 --
Accrued line costs................................................................... 19,494,000 38,403,000
Accrued expenses..................................................................... 2,086,000 5,609,000
---------- -----------
Total current liabilities.......................................................... 40,219,000 57,268,000
---------- -----------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion............................................... 466,000 348,000
Capital lease obligations, net of current portion.................................... 4,936,000 11,139,000
Deferred compensation................................................................ 116,000 57,000
Deposits............................................................................. -- 164,000
Other long-term liabilities.......................................................... 352,000 563,000
---------- -----------
Total long-term liabilities........................................................ 5,870,000 12,271,000
---------- -----------
STOCKHOLDERS' EQUITY:
Series A Preferred Stock, $.001 par value, authorized-- 5,000,000 shares
Issued and outstanding-- 2,802,446 at December 31, 1996 and none at December 31,
1997............................................................................... 3,000 --
Common Stock, $.001 par value, authorized - 50,000,000 shares
Issued and outstanding-- 23,223,810 and 33,678,519 at December 31, 1996 and 1997,
respectively....................................................................... 23,000 34,000
Additional paid-in capital........................................................... 13,971,000 45,407,000
Deferred compensation................................................................ (118,000) (30,000)
Retained earnings (deficit).......................................................... (5,968,000) (1,397,000)
---------- -----------
Stockholders' equity............................................................... 7,911,000 44,014,000
---------- -----------
Total liabilities and stockholders' equity....................................... $54,000,000 $113,553,000
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1995 1996 1997
------------- -------------- --------------
<S> <C> <C> <C>
REVENUES......................................................... $ 46,283,000 $ 237,991,000 $ 376,198,000
COSTS OF SERVICES................................................ 31,897,000 205,585,000 325,237,000
------------- -------------- --------------
Gross Profit................................................... 14,386,000 32,406,000 50,961,000
------------- -------------- --------------
OPERATING EXPENSES:
Selling, general and administrative expenses................... 10,086,000 34,331,000 35,381,000
Depreciation and amortization.................................. 186,000 1,151,000 4,245,000
Merger expense................................................. -- -- 286,000
------------- -------------- --------------
10,272,000 35,482,000 39,912,000
------------- -------------- --------------
Income (loss) from operations................................ 4,114,000 (3,076,000) 11,049,000
------------- -------------- --------------
OTHER INCOME (EXPENSES):
Interest income................................................ 22,000 110,000 492,000
Interest expense............................................... (64,000) (601,000) (1,633,000)
Legal settlement and expenses.................................. -- (100,000) (1,653,000)
Other income (expense)......................................... (33,000) 39,000 208,000
------------- -------------- --------------
(75,000) (552,000) (2,586,000)
------------- -------------- --------------
Income (loss) before provision for income taxes.............. 4,039,000 (3,628,000) 8,463,000
PROVISION FOR INCOME TAXES....................................... 66,000 592,000 2,895,000
------------- -------------- --------------
NET INCOME (LOSS)................................................ $ 3,973,000 $ (4,220,000) $ 5,568,000
------------- -------------- --------------
------------- -------------- --------------
Income (loss) before provision for income taxes.............. 4,039,000 (3,628,000) 8,463,000
PRO FORMA INCOME TAXES (UNAUDITED)............................... 1,632,000 1,535,000 3,090,000
------------- -------------- --------------
PRO FORMA NET INCOME (LOSS) (UNAUDITED).......................... $ 2,407,000 $ (5,163,000) $ 5,373,000
------------- -------------- --------------
------------- -------------- --------------
Pro forma basic income (loss) per common share (unaudited)....... $ 0.13 $ (0.24) $ 0.19
------------- -------------- --------------
------------- -------------- --------------
Pro forma diluted income (loss) per common share (unaudited)..... $ 0.13 $ (0.24) $ 0.17
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
--------- ----------- --------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994.............................. -- $ -- 17,455,959 $ 17,000 $ 341,000 $ --
Issuance of common stock................................ -- -- 1,843,339 2,000 101,000 --
Conversion of debt to equity............................ -- -- -- -- 990,000 --
Net income.............................................. -- -- -- -- -- --
Cash distributions to stockholders...................... -- -- -- -- -- --
--------- ----------- --------- ----------- ---------- -------------
Balance, December 31, 1995.............................. -- -- 19,299,298 19,000 1,432,000 --
Effect of terminating the S-corporation election........ -- -- -- -- (690,000) --
Compensation expense relating to stock options.......... -- -- -- -- 168,000 (118,000)
Issuance of common stock................................ -- -- 3,924,512 4,000 5,564,000 --
Issuance of preferred stock............................. 2,802,446 3,000 -- -- 7,497,000 --
Net loss................................................ -- -- -- -- -- --
Cash distributions to stockholders...................... -- -- -- -- -- --
--------- ----------- --------- ----------- ---------- -------------
Balance, December 31, 1996.............................. 2,802,446 3,000 23,223,810 23,000 13,971,000 (118,000)
Effect of L.D. Services terminating the S-corporation
election.............................................. -- -- -- -- (61,000) --
Conversion of redeemable preferred stock to common
stock................................................. (2,802,446) (3,000) 1,868,284 3,000 -- --
Initial public offering of common stock................. -- -- 8,097,500 8,000 30,936,000 --
Exercise of stock options............................... -- -- 488,925 -- 447,000 --
Compensation expense relating to stock options.......... -- -- -- -- -- 88,000
Tax benefit from non-qualified stock options............ -- -- -- -- 114,000 --
Cash distributions to stockholders...................... -- -- -- -- -- --
Net income.............................................. -- -- -- -- -- --
--------- ----------- --------- ----------- ---------- -------------
Balance, December 31, 1997.............................. -- $ -- 33,678,519 $ 34,000 $45,407,000 $ (30,000)
--------- ----------- --------- ----------- ---------- -------------
--------- ----------- --------- ----------- ---------- -------------
<CAPTION>
RETAINED
EARNINGS
(DEFICIT) TOTAL
---------- ----------
<S> <C> <C>
Balance, December 31, 1994.............................. $1,839,000 $2,197,000
Issuance of common stock................................ -- 103,000
Conversion of debt to equity............................ -- 990,000
Net income.............................................. 3,973,000 3,973,000
Cash distributions to stockholders...................... (4,216,000) (4,216,000)
---------- ----------
Balance, December 31, 1995.............................. 1,596,000 3,047,000
Effect of terminating the S-corporation election........ 690,000 --
Compensation expense relating to stock options.......... -- 50,000
Issuance of common stock................................ -- 5,568,000
Issuance of preferred stock............................. -- 7,500,000
Net loss................................................ (4,220,000) (4,220,000)
Cash distributions to stockholders...................... (4,034,000) (4,034,000)
---------- ----------
Balance, December 31, 1996.............................. (5,968,000) 7,911,000
Effect of L.D. Services terminating the S-corporation
election.............................................. 61,000 --
Conversion of redeemable preferred stock to common
stock................................................. -- --
Initial public offering of common stock................. -- 30,944,000
Exercise of stock options............................... -- 447,000
Compensation expense relating to stock options.......... -- 88,000
Tax benefit from non-qualified stock options............ -- 114,000
Cash distributions to stockholders...................... (1,058,000) (1,058,000)
Net income.............................................. 5,568,000 5,568,000
---------- ----------
Balance, December 31, 1997.............................. $(1,397,000) $44,014,000
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
-------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ 3,973,000 $ (4,220,000) $ 5,568,000
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization.................................. 186,000 1,151,000 4,245,000
Loss on investment............................................. 80,000 -- --
Loss on disposal of equipment.................................. -- -- 42,000
Compensation expense relating to stock options................. -- 50,000 88,000
Provision for doubtful accounts................................ 217,000 15,753,000 7,695,000
Deferred income taxes.......................................... -- -- (3,699,000)
Deferred compensation.......................................... -- 116,000 (59,000)
Decrease (increase) in assets:
Accounts receivable.............................................. (10,522,000) (28,476,000) (22,442,000)
Receivable from related parties.................................. 129,000 (65,000) 115,000
Other receivables................................................ (268,000) -- (1,914,000)
Prepaid expenses................................................. (114,000) (830,000) (3,752,000)
Deposits......................................................... (630,000) (4,948,000) (425,000)
Prepaid taxes.................................................... -- (677,000) 677,000
Other current assets............................................. -- (825,000) 764,000
Increase (decrease) in liabilities:
Accounts payable................................................. 8,035,000 (1,269,000) (1,404,000)
Taxes payable.................................................... -- -- 2,270,000
Related party payables........................................... 320,000 (51,000) (269,000)
Accrued line costs............................................... 476,000 19,018,000 18,909,000
Accrued expenses................................................. 194,000 1,865,000 3,523,000
Deposits......................................................... -- -- 164,000
-------------- ------------- -------------
Net cash provided by (used in) operating activities........ 2,076,000 (3,408,000) 10,096,000
-------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................. (1,123,000) (7,852,000) (13,436,000)
Investments...................................................... -- (153,000) 126,000
Short-term investments........................................... -- (1,630,000) (16,949,000)
Other............................................................ -- (139,000) 639,000
-------------- ------------- -------------
Net cash used in investing activities...................... (1,123,000) (9,774,000) (29,620,000)
-------------- ------------- -------------
</TABLE>
F-6
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Stockholders' distributions...................................... $ (4,216,000) $ (4,034,000) $ (1,058,000)
Borrowings under lines of credit................................. 1,460,000 14,746,000 34,211,000
Repayments under lines of credit................................. (130,000) (8,262,000) (42,025,000)
Borrowings under lines of credit with stockholder................ 3,418,000 701,000 583,000
Repayments under lines of credit with stockholder................ (1,319,000) (1,873,000) (471,000)
Borrowings under long-term debt.................................. -- 800,000 193,000
Payments under long-term debt.................................... -- (67,000) (1,622,000)
Payments under capital lease obligations......................... (52,000) (358,000) (1,946,000)
Issuance of common stock......................................... -- 5,568,000 30,944,000
Stock options exercised.......................................... -- -- 447,000
Issuance of preferred stock...................................... -- 7,500,000 --
------------- ------------- --------------
Net cash (used in) provided by financing activities.......... (839,000) 14,721,000 19,256,000
------------- ------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... 114,000 1,539,000 (268,000)
CASH AND CASH EQUIVALENTS, beginning of year....................... 73,000 187,000 1,726,000
------------- ------------- --------------
CASH AND CASH EQUIVALENTS, end of year............................. $ 187,000 $ 1,726,000 $ 1,458,000
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements
F-7
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. NATURE OF BUSINESS
STAR Telecommunications, Inc., a Delaware corporation, and Subsidiaries (the
"Company" or "STAR"), is an emerging multinational carrier focused primarily on
the international long distance market. The Company offers highly reliable,
low-cost switched voice services on a wholesale basis primarily to U.S.-based
long distance carriers. STAR provides international long distance service
through a flexible network comprised of foreign termination relationships,
international gateway switches, leased and owned transmission facilities and
resale arrangements with other long distance providers. While the Company was
incorporated in 1993, it did not commence its current business as a provider of
long distance services until the second half of 1995. During the six months
ended June 1995, the Company primarily acted as an agent for, and provided
various consulting services to, companies in the telecommunications industry.
During 1996 and 1997, the Company established several wholly-owned foreign
subsidiaries to further expand its international network. The Company made
substantial investments to install switch facilities in two of these
subsidiaries, Star Europe Limited (SEL) which is located in London, England, and
Star Telecommunications Deutschland (GmbH) which is located in Frankfurt,
Germany. The Company plans to use these switch facilities to decrease
international traffic termination costs and to initiate outbound calls from
these local markets.
In December 1997, the Company entered into the domestic commercial
long-distance market through the acquisition of L.D. Services, Inc., also known
as LCCR Inc. ("LDS"). LDS is a retail long-distance service provider throughout
the United States. The merger constituted a tax-free reorganization and has been
accounted for as a pooling of interests under Accounting Principles Board
Opinion No. 16. Accordingly, all prior period consolidated financial statements
presented have been restated to include the results of operations, financial
position and cash flows of LDS as though it had always been a part of STAR (see
Note 8). The pro forma results of operations and pro forma income or loss per
common share for 1995, 1996 and 1997 assumes that both STAR and LDS had been
C-Corporations for all periods presented.
The Company is subject to various risks in connection with the operation of
its business. These risks include, but are not limited to, regulations (both
domestic and foreign), dependence on transmission facilities-based carriers and
suppliers, price competition and competition from larger industry participants.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
STAR Telecommunications, Inc. and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
REVENUE RECOGNITION
The Company records revenues for telecommunications sales at the time of
customer usage. Finance charges for customer late payments are included in
revenues and amount to $32,000, $1,467,000 and $2,747,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
F-8
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST OF SERVICES
Cost of services for wholesale long distance services represents direct
charges from vendors that the Company incurs to deliver service to its
customers. These include leasing costs for the dedicated phone lines, which form
the Company's network, and rate-per-minute charges from other carriers that
terminate traffic on behalf of the Company. In addition, retail long distance
service cost includes billing and collection service fees from local exchange
carriers and call rating services.
ACCOUNTING FOR INTERNATIONAL LONG DISTANCE TRAFFIC
The Company has carrier service agreements with telecommunication carriers
in foreign countries under which international long distance traffic is both
originated and terminated on the Company's network. The Company records revenues
and related costs as the traffic is recorded in the switch. Revenue from foreign
customers equaled $178,000 and $6,577,000 for the years ended December 31, 1996
and 1997, respectively. The Company had no revenues from foreign customers
during 1995.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposits and money market funds,
which are highly liquid short-term instruments with original maturities of three
months or less from the date of purchase. Cash and cash equivalents are stated
at cost, which approximates market.
FINANCIAL INSTRUMENTS
The carrying amounts of notes payable and capital lease obligations
approximate their fair value because interest rates approximate market rates for
similar instruments.
Off balance sheet derivative financial instruments at December 31, 1997
consist of foreign currency exchange agreements.
The Company enters into foreign currency exchange contracts to manage
foreign currency exposures. The principle objective of such contracts is to
minimize the risks and/or costs associated with financial and global operating
activities. The Company does not utilize financial instruments for trading or
other speculative purposes. The counterparty to these contractual arrangements
is a multi-national financial institution with which the Company also has other
financial relationships.
The Company enters into forward currency exchange contracts in the normal
course of business to manage its exposure against foreign currency fluctuations
on payable positions resulting from fixed asset purchases and other contractual
expenditures denominated in foreign currencies. At December 31, 1997, gains and
losses on foreign exchange contracts are not material to the consolidated
financial statements.
The fair values of foreign currency contracts are estimated by obtaining
quotes from brokers. At December 31, 1997, the Company has foreign currency
contracts outstanding with the notional value of $6,305,000 which had an
estimated fair value to receive $6,218,000 worth of German marks and British
pounds, the difference of which has been recognized in operations.
F-9
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table summarizes outstanding commitments to purchase foreign
currency at December 31, 1997:
<TABLE>
<CAPTION>
MATURITY NOTIONAL
DATE AMOUNT FAIR VALUE DIFFERENCE
-------------------------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
British Pounds..................... 1/29/98 through 3/27/98 $ 364,000 $ 373,000 $ 9,000
Deutsche Mark...................... 1/05/98 through 1/26/98 5,941,000 5,845,000 (96,000)
------------ ------------ ----------
$ 6,305,000 $ 6,218,000 $ (87,000)
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
MARKETABLE SECURITIES
Marketable securities consists of interest bearing securities with original
maturities in excess of three months. At December 31, 1997, the fair market
value of temporary investments, classified as "available for sale securities",
approximated cost, thus no unrealized holding gains or losses were reported in
the accompanying balance sheets. During fiscal year 1997, the Company realized
gains from the sale of securities of approximately $48,000.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and amortization of
property and equipment are computed using the straight-line method over the
following estimated useful lives:
<TABLE>
<S> <C>
Operating equipment....................................... 5-25 years
Leasehold improvements.................................... Life of lease
Computer equipment........................................ 3-7 years
Furniture and fixtures.................................... 5-7 years
</TABLE>
Operating equipment includes assets financed under capital lease obligations
of $6,218,000 and $15,921,000 at December 31, 1996 and 1997, respectively.
Accumulated amortization related to assets financed under capital leases was
$391,000 and $2,123,000 at December 31, 1996 and 1997, respectively.
In addition, operating equipment includes seven Indefeasible Rights of Use
(IRU) in cable systems amounting to $110,000 and $2,303,000 and four ownership
interests in an international cable amounting to $148,000 and $1,534,000 at
December 31, 1996 and 1997, respectively. These assets are amortized over the
life of the agreements of 14 to 25 years (see Note 5).
Replacements and betterments, renewals and extraordinary repairs that extend
the life of the asset are capitalized; other repairs and maintenance are
expensed. The cost and accumulated depreciation applicable to assets sold or
retired are removed from the accounts and the gain or loss on disposition is
recognized in other income or expense.
DEPOSITS AND OTHER ASSETS
Deposits represent payments made to long distance providers to secure lower
rates. These deposits are refunded or applied against future services. Other
assets at December 31, 1996 represent initial public offering expenses, which
were subsequently charged to additional paid in capital during 1997 at the time
of the initial public offering.
F-10
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
During the years ended December 31, 1995, 1996 and 1997 cash paid for
interest was $45,000, $534,000 and $1,359,000, respectively. For the same
periods, cash paid for income taxes amounted to $51,000, $1,262,000 and
$3,761,000, respectively.
Non-cash investing and financing activities are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Equipment purchased through capital leases.......................... $ 1,052,000 $ 5,166,000 $ 9,772,000
Notes issued for asset purchases.................................... -- -- 1,524,000
Debt converted to equity............................................ 1,093,000 -- --
Tax benefits related to stock options............................... -- -- 114,000
</TABLE>
These non-cash transactions are excluded from the consolidated statements of
cash flows.
NET INCOME (LOSS) PER COMMON SHARE
The following schedule summarizes the information used to compute pro forma
net income or loss per common share for the years ended December 31, 1995, 1996
and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Pro forma net income (loss)......................................... $ 2,407,000 $ (5,163,000) $ 5,373,000
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of common shares used to compute basic
earnings (loss) per share.......................................... 18,020,000 21,939,000 28,868,000
Weighted average common share equivalents........................... -- -- 2,757,000
------------- ------------- -------------
Weighted average number of common shares and common share
equivalents used to compute diluted earnings (loss) per share...... 18,020,000 21,939,000 31,625,000
------------- ------------- -------------
------------- ------------- -------------
Basic pro forma net income (loss) per common share (unaudited)...... $ 0.13 $ (0.24) $ 0.19
Diluted pro forma net income (loss) per common share (unaudited).... $ 0.13 $ (0.24) $ 0.17
</TABLE>
CONCENTRATIONS OF RISK
The Company's two largest customers account for approximately 25 percent and
7 percent of gross accounts receivable at December 31, 1996 and 1997,
respectively. The Company's largest customer and second largest customer in 1997
represent 3 percent and 4 percent of accounts receivable as of December 31,
1997, respectively. The Company's largest customer in 1996 was Cherry
Communications, Inc. The second largest customer in 1996 was Hi-Rim
Communications, Inc. Only one customer, Cherry Communications had a receivable
balance exceeding 10 percent of gross accounts receivable at December 31, 1996
and no individual customer has an account receivable balance greater than 10
percent of gross accounts receivable at December 31, 1997.
F-11
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The two largest customers represent approximately 16 percent, 26 percent and
17 percent of revenues during the years ended December 31, 1995, 1996 and 1997,
respectively. During 1995 and 1996, only sales to Cherry Communications exceeded
10 percent of total sales. For the year ended December 31, 1997, only one
customer equaled 10 percent of consolidated sales.
The Company performs ongoing credit evaluations of its customers. The
Company analyzes daily traffic patterns and concludes whether or not the
customer's credit status justifies the traffic volume. If the customer is deemed
to carry too large a volume in relation to its credit history, the traffic
received by the Company's switch is reduced to prevent further build up of the
receivable from this customer. The Company's allowance for doubtful accounts is
based on current market conditions.
Purchases from the four largest vendors for the years ended December 31,
1995 and 1996 amounted to 57 percent and 45 percent of total purchases,
respectively. Purchases from the four largest vendors for the year ended
December 31, 1997 amounted to 36 percent of total purchases.
Included in the Company's balance sheets at December 31, 1996 and 1997 are
approximately $179,000 and $6,367,000 of equipment which is located in foreign
countries.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share". The statement replaces primary EPS with basic EPS, which is computed by
dividing reported earnings available to common stockholders by weighted average
shares outstanding. The provision requires the calculation of diluted EPS. The
Company adopted this statement in 1997 and all prior year earnings per share
amounts have been recalculated based on the provisions of SFAS No. 128.
F-12
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRANSLATION OF FOREIGN CURRENCY
Management determined that the functional currency of its foreign
subsidiaries is still the U.S. dollar. Thus all foreign translation gains or
losses are reflected in the results of operations in other income (expense).
The foreign subsidiary balance sheets are translated into U.S. dollars using
the year-end exchange rates except for prepayments, property, other long-term
assets, and stockholders' equity accounts, which are translated at rates in
effect when these balances were originally recorded. Revenues and expenses are
translated at average rates during the year except for depreciation and
amortization, which are translated at historical rates.
3. ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1997 consist of the following:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Payroll and related......................................................... $ 783,000 $ 943,000
Management bonuses.......................................................... 25,000 152,000
Professional services....................................................... 640,000 384,000
Sales and other taxes....................................................... 10,000 295,000
Line and billing cost....................................................... 324,000 2,592,000
Other....................................................................... 304,000 1,243,000
------------ ------------
$ 2,086,000 $ 5,609,000
------------ ------------
------------ ------------
</TABLE>
4. LINES OF CREDIT
BANK LINE OF CREDIT
Effective as of September 30, 1997, the Company executed an agreement with
Sanwa Bank, California for a $25 million line of credit, which expires on July
1, 1999. The facility has certain financial and non-financial covenants that
include, among other restrictions, the maintenance of minimum levels of tangible
net worth. Borrowings on the facility are limited to 75 percent of eligible
accounts receivable and are secured by substantially all of the assets of the
Company. The credit facility provides for borrowings at an interest rate based
upon the bank's cost of funds plus 1.75 percent (7.47 percent at December 31,
1997). The Company plans to use the credit facility to support letters of credit
and for working capital or other general corporate purposes. At December 31,
1997, no amounts were outstanding, however the Company's availability under this
credit facility was reduced to $20.1 million due to $4.9 million in letters of
credit which were outstanding at December 31, 1997.
The weighted average interest rate on short term debt during the years ended
December 31, 1995, 1996 and 1997 was 10.21 percent, 9.68 percent and 9.12
percent, respectively.
LINES OF CREDIT WITH STOCKHOLDER
At December 31, 1996 and 1997, the Company's revolving lines of credit with
the founder and chief executive officer of the Company totaled $1,448,000. The
debt matures on March 30, 1998 with interest
F-13
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
4. LINES OF CREDIT (CONTINUED)
payable at maturity at a rate of 9 percent. There was $1,422,000 and $1,310,000
available to be borrowed against these lines of credit at December 31, 1996 and
1997, respectively. The Company recognized interest expense related to this debt
of $11,000, $34,000 and $9,000 for the years ended December 31, 1995, 1996 and
1997, respectively.
5. LONG-TERM DEBT
The Company finances some of its telecommunication equipment under capital
lease arrangements or through notes payable as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------ -------------
<S> <C> <C>
Bank debt at prime plus 1.5 percent........................................ $ 733,000 $ --
Notes payable for Indefeasible Rights of Use on submarine cable, payable in
quarterly installments of principal plus interest at LIBOR plus 6 percent
(11.72 percent at December 31, 1997) through September 1999............... -- 762,000
Note payable for Indefeasible Right of Use, payable in quarterly
installments of $9,000 plus interest at LIBOR plus 6 percent through
September 1999............................................................ -- 66,000
Obligations under capital leases........................................... 5,808,000 13,634,000
------------ -------------
$ 6,541,000 $ 14,462,000
------------ -------------
------------ -------------
</TABLE>
Minimum future lease payments under capital leases at December 31, 1997 are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -----------------------------------------------------------------------------------------
<S> <C>
1998................................................................................. $ 3,944,000
1999................................................................................. 3,943,000
2000................................................................................. 3,614,000
2001................................................................................. 2,927,000
2002................................................................................. 2,505,000
Thereafter........................................................................... 814,000
-------------
17,747,000
Less: Amount representing interest....................................................... (4,113,000)
-------------
13,634,000
Less: Current portion.................................................................... (2,495,000)
-------------
$ 11,139,000
-------------
-------------
</TABLE>
F-14
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space, dedicated private telephone lines,
equipment and other items under various agreements expiring through 2006. At
December 31, 1997, the minimum aggregate payments under non-cancelable operating
leases are summarized as follows:
<TABLE>
<CAPTION>
FACILITIES AND DEDICATED
YEAR ENDING DECEMBER 31, EQUIPMENT PRIVATE LINES TOTAL
- --------------------------------------------------------- -------------- ------------- -------------
<S> <C> <C> <C>
1998................................................. $ 3,375,000 $ 4,969,000 $ 8,344,000
1999................................................. 3,318,000 1,906,000 5,224,000
2000................................................. 3,283,000 372,000 3,655,000
2001................................................. 2,946,000 -- 2,946,000
2002................................................. 2,739,000 -- 2,739,000
Thereafter........................................... 8,423,000 -- 8,423,000
-------------- ------------- -------------
$ 24,084,000 $ 7,247,000 $ 31,331,000
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
Facility and equipment rent expense for the years ended December 31, 1995,
1996 and 1997 was approximately $195,000, $1,076,000 and $3,199,000,
respectively. Dedicated private line expense was approximately $604,000,
$7,045,000 and $9,414,000, for those same periods and is included in cost of
services in the accompanying consolidated statements of operations.
EMPLOYMENT AGREEMENTS
The Company has employment agreements through December 31, 2000 with several
employees and executives. Some of these agreements provide for a continuation of
salaries in the event of a termination, with or without cause, following a
change in control of the Company. One agreement provides for a payment of at
least $1,500,000 in the event of a change in control of the Company.
The Company expensed $116,000 and $64,000 of deferred compensation relating
to these agreements for the years ended December 31, 1996 and 1997,
respectively.
PURCHASE COMMITMENTS
The Company is obligated under various service agreements with long distance
carriers to pay minimum usage charges. The Company anticipates exceeding the
minimum usage volume with these vendors. Minimum future usage charges at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -----------------------------------------------------------------------------------------
<S> <C>
1998..................................................................................... $ 44,053,000
1999..................................................................................... 8,356,000
2000..................................................................................... 2,949,000
2001..................................................................................... 65,000
2002..................................................................................... 65,000
Thereafter............................................................................... 774,000
-------------
$ 56,262,000
-------------
-------------
</TABLE>
F-15
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has entered into six fixed asset purchase agreements. These
commitments are to purchase IRU's, switches, and leasehold improvements for
switch sites. The total commitment approximates $63 million. The Company plans
to finance the majority of these costs through capital lease arrangements.
LEGAL MATTERS
The Company is subject to litigation from time to time in the normal course
of business. Although it is not possible to predict the outcome of such
litigation, based on the facts known to the Company and after consultation with
counsel, management believes that such litigation will not have a material
adverse effect on its financial position or results of operations.
On September 4, 1997, prior to the merger between LDS and the Company, LDS
entered into a settlement agreement with the Consumer Services Division of the
California Public Utilities Commission (PUC). The agreement settles the alleged
unauthorized switching of long-distance customers to LDS between the years 1995
and 1996. It includes a payment of $760,000 to the PUC for restitution to
affected customers as defined in the agreement. Additionally, LDS agreed to a
voluntary revocation of its operating authority in the State of California.
Under the agreement, service to all California customers has to be terminated
within 120 days after approval of the agreement by the PUC. On November 19,
1997, the PUC approved the agreement along with a transfer of control to STAR.
On November 15, 1997, LDS settled a civil suit with the District Attorney of
Monterey, California for a monetary payment of $700,000 and various non-monetary
concessions as defined in the agreement. This suit was of the same nature as the
above action of the PUC and covers complaints from the years 1994 through 1997.
LETTERS OF CREDIT
At December 31, 1997, the Company has nine standby letters of credit
outstanding, which expire between January 20, 1998 and December 19, 1998. These
letters of credit, all of which are secured by the bank line of credit, total
$4,900,000.
7. RELATED PARTY TRANSACTIONS
The founder and chief executive officer of the Company owns Star Aero
Services, Inc. (Star Aero). Star Aero's principal assets represent airplanes
which it provides to the Company for business travel on an as needed basis. In
return, the Company pays for costs related to the airplanes. Star Aero
reimburses the Company for certain costs relating to the maintenance of the
planes. For the years ended December 31, 1995, 1996 and 1997, the Company paid
$144,000, $68,000 and $171,000, respectively, in costs related to the use of
Star Aero services. As of December 31, 1995 and 1996, the Company had
receivables from Star Aero of $50,000 and $115,000, respectively. The Company
had no receivables from Star Aero at December 31, 1997.
During 1997, the Company provided a short-term loan to the chief executive
officer for $8,000,000. The loan carried interest of 7 percent per annum, was
secured by $30,000,000 of the stockholder's stock in the Company, and was repaid
in seven days.
F-16
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. RELATED PARTY TRANSACTIONS (CONTINUED)
During 1995, the Company invested $128,000 in a company related to an
employee of STAR. During 1996 and 1997, the Company provided services to this
company in the amounts of $167,000 and $926,000. As of December 31, 1996 and
1997, accounts receivable from this related party amounted to $57,000 and
$41,000, respectively.
During 1995, 1996 and 1997, the Company purchased consulting services from a
company owned by a board member in the amount of $60,000, $154,000 and $72,000,
respectively.
During 1996 and 1997, the Company purchased consulting services from a
company owned in part by an employee for $37,000 and $256,000, respectively. In
addition, the Company purchased equipment and services from this company in the
amount of $1,114,000 in 1997. In addition, the Company purchased
telecommunication services from three related companies for $240,000 during 1996
and paid legal fees on behalf of these companies in the amount of $131,000.
During the years ended December 31, 1995, 1996 and 1997, the Company also
provided long distance telephone service to a company controlled by another
board member in the amount of $43,000, $250,000 and $1,141,000, respectively.
Accounts receivable for these services total $721,000 as of December 31, 1997.
In addition, the Company loaned $2,500,000 to this related party. The Company
has announced its intention to merge the two companies (see Note 14).
8. BUSINESS COMBINATIONS
In November 1997, the Company acquired LDS, a domestic commercial long
distance telecommunications provider, in a transaction that was accounted for as
a pooling of interests. The Company issued 849,298 shares of its common stock to
LDS' shareholders in exchange for all outstanding LDS shares plus shares of
certain non-operating entities owned by LDS' shareholders and majority ownership
in an affiliated telephone retailer controlled by LDS. The accompanying
consolidated financial statements have been restated to include the financial
position and results of operations of LDS for all periods presented.
Net sales and historical net income (loss) of the combining companies for
the last three years are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------- -------------- --------------
<S> <C> <C> <C>
Net Sales:
STAR................................................. $ 16,125,000 $ 208,086,000 $ 348,738,000
LDS.................................................. 30,158,000 29,905,000 27,460,000
------------- -------------- --------------
Total................................................ $ 46,283,000 $ 237,991,000 $ 376,198,000
------------- -------------- --------------
------------- -------------- --------------
Net Income (Loss):
STAR................................................. $ (568,000) $ (6,644,000) $ 5,605,000
LDS.................................................. 4,541,000 2,424,000 (37,000)
------------- -------------- --------------
Total................................................ $ 3,973,000 $ (4,220,000) $ 5,568,000
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
9. INCOME TAXES
Through December 31, 1995, the Company had elected to be taxed as an
S-Corporation for both federal and state income tax purposes. While the election
was in effect, all taxable income, deductions,
F-17
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
9. INCOME TAXES (CONTINUED)
losses and credits of the Company were included in the tax returns of the
shareholders. Accordingly, for federal income tax purposes, no tax benefit,
liability or provision has been reflected in the accompanying historical
consolidated financial statements for the year ended December 31, 1995. For
state tax purposes, an S-Corporation is subject to a 1.5 percent tax on taxable
income, with a minimum tax of approximately $1,000 annually. Effective January
1, 1996, the Company terminated its S-Corporation election and is now taxable as
a C-Corporation.
In addition, the results of operations and provision for income taxes for
LDS through November 30, 1997 reflects LDS' status as an S-Corporation. The
unaudited pro-forma income taxes, pro-forma net income (loss), and pro-forma
earnings per share information reflected in the consolidated statements of
operations assumes that both STAR and LDS were taxed as C-Corporations for all
periods presented.
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," under which deferred assets and liabilities are
provided on differences between financial reporting and taxable income using
enacted tax rates. Deferred income tax expenses or credits are based on the
changes in deferred income tax assets or liabilities from period to period.
Under SFAS No. 109, deferred tax assets may be recognized for temporary
differences that will result in deductible amounts in future periods. A
valuation allowance is recognized if, on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax asset will not
be realized.
The Company has recorded a net deferred tax asset of $3,699,000 at December
31, 1997. Realization is dependent on generating sufficient taxable income in
the future. Although realization is not assured, management believes it is more
likely than not that the net deferred tax asset recorded will be realized.
The components of the net deferred tax assets at December 31, 1996 and 1997
are as follows:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Deferred tax asset:
Reserve for accounts and note receivable................................ $ 3,104,000 $ 4,169,000
Accrued line cost....................................................... 201,000 798,000
Vacation accrual........................................................ 24,000 138,000
Deferred compensation................................................... 47,000 38,000
Accrued bonuses......................................................... 25,000 --
Accrued services........................................................ -- 183,000
Foreign net operating losses............................................ -- 468,000
State income taxes...................................................... 48,000 392,000
------------- -------------
3,449,000 6,186,000
Deferred tax liability:
Depreciation............................................................ (565,000) (804,000)
------------- -------------
Subtotal.................................................................. 2,884,000 5,382,000
Valuation reserve......................................................... (2,884,000) (1,683,000)
------------- -------------
Net deferred tax asset.................................................... $ -- $ 3,699,000
------------- -------------
------------- -------------
</TABLE>
F-18
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
9. INCOME TAXES (CONTINUED)
The provision for income taxes for the years ended December 31, 1995, 1996
and 1997 are as follows:
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL (UNAUDITED)
-------------------------------- ----------------------------------
1995 1996 1997 1995 1996 1997
--------- --------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Current
Federal taxes............................. $ -- $ 393,000 $4,899,000 $1,365,000 $1,231,000 $5,281,000
State taxes............................... 66,000 199,000 1,138,000 416,000 394,000 1,261,000
--------- --------- ---------- --------- ----------- ----------
66,000 592,000 6,037,000 1,781,000 1,625,000 6,542,000
--------- --------- ---------- --------- ----------- ----------
Deferred
Federal taxes............................. -- -- (2,273,000) (121,000) (70,000) (2,512,000)
State taxes............................... -- -- (869,000) (28,000) (20,000) (940,000)
--------- --------- ---------- --------- ----------- ----------
-- -- (3,142,000) (149,000) (90,000) (3,452,000)
--------- --------- ---------- --------- ----------- ----------
Provision for income taxes.................. $ 66,000 $ 592,000 $2,895,000 $1,632,000 $1,535,000 $3,090,000
--------- --------- ---------- --------- ----------- ----------
--------- --------- ---------- --------- ----------- ----------
</TABLE>
Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate for the years ended December 31, 1995, 1996
and 1997 are as follows:
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL (UNAUDITED)
---------------------------------- ----------------------------------
1995 1996 1997 1995 1996 1997
---------- ---------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income taxes at the statutory federal
rate................................ $1,373,000 $(1,234,000) $2,962,000 $1,373,000 ($1,234,000) $2,962,000
State income taxes, net of federal
income tax effect................... 246,000 (221,000) 486,000 246,000 (221,000) 486,000
Foreign taxes at rates different than
U.S. taxes.......................... -- -- 187,000 -- -- 187,000
Change in valuation reserve........... -- 2,884,000 (1,201,000) -- 2,884,000 (1,201,000)
Permanent differences................. -- 104,000 33,000 13,000 108,000 307,000
Effect of STAR S-Corp status until
December 31, 1995................... 223,000 -- -- -- -- --
Effects of LDS S-Corp status until
November 30, 1997................... (1,808,000) (958,000) 152,000 -- -- --
Other................................. 32,000 17,000 276,000 -- (2,000) 349,000
---------- ---------- ---------- --------- ----------- ----------
$ 66,000 $ 592,000 $2,895,000 $1,632,000 $1,535,000 $3,090,000
---------- ---------- ---------- --------- ----------- ----------
---------- ---------- ---------- --------- ----------- ----------
</TABLE>
10. STOCK OPTIONS
On January 22, 1996, the Company adopted the 1996 Stock Incentive Plan (the
"Plan"). The Plan, which was amended on March 31, 1996, provides for the
granting of stock options to purchase up to 1,476,000 shares of common stock and
terminates January 22, 2006. Options granted become exercisable at a rate of not
less than 20 percent per year for five years.
During 1996, the Company entered into three separate stock option agreements
outside the Plan. The first agreement, dated March 1, 1996, provided for 410,000
non-incentive stock options exercisable immediately. The options were
exercisable at fair market value at the date of issuance, which was $0.98 per
share, to expire in 10 years. The second stock option agreement was entered into
on May 1, 1996 for an
F-19
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
10. STOCK OPTIONS (CONTINUED)
additional 410,000 shares to also be issued at $0.98 per share. Of these options
half vested on March 1, 1997 and half expired. On May 15, 1996, the Company
granted 205,000 options, valued at $1.46 per share at the date of issuance to a
director. Of these options 34 percent were exercisable immediately. The
remaining options are exercisable equally on May 15, 1997 and 1998.
At December 31, 1996 and 1997, 1,025,000 and 820,000 options, respectively,
issued outside a plan were outstanding.
On September 23, 1996, the Company adopted the 1996 Supplemental Stock
Option Plan. This plan which expires on August 31, 2006, replaces the Plan and
has essentially the same features. The Company can issue options or other rights
to purchase up to 2,050,000 shares of stock which expire up to 10 years after
the date of grant, except for incentive options issued to a holder of more than
10 percent of the common stock outstanding, which expire five years after the
date of grant.
In December 1996, the Company issued 174,000 options at $4.00 per share. The
Board of Directors determined the market value of the December options to be
$4.68 per share. The Company is recognizing the difference between the market
value at the date of grant and the exercise price as compensation expense over
the vesting period.
At December 31, 1996 and 1997, 2,358,000 and 1,873,000 options,
respectively, were outstanding under the aggregate of the 1996 Stock Incentive
Plan and the Supplemental Stock Option Plan.
On May 14, 1996, the Company adopted the 1996 Outside Director Nonstatutory
Stock Option Plan (the "Director Plan"). The number of shares which may be
issued under this plan upon exercise of options may not exceed 410,000 shares.
The exercise price of an option is determined by the Board of Directors and may
not be less than 85 percent of the fair market value of the common stock at the
time of grant and has to be 110 percent of the fair market value of the common
stock at the time of grant if the option is granted to a holder of more than 10
percent of the common stock outstanding. At the discretion of the administrator,
the options vest at a rate of not less than 20 percent per year, which may
accelerate upon a change in control, as defined. The plan expires on May 14,
2006. At December 31, 1996 and 1997, 82,000 and 41,000 options, respectively,
were outstanding under the Director Plan.
On January 30, 1997, the Board of Directors approved the 1997 Omnibus Stock
Incentive Plan (the "Omnibus Plan") to replace the existing 1996 supplemental
plan upon the effective date of the initial public offering. The plan provides
for awards to employees, outside directors and consultants in the form of
restricted shares, stock units, stock options and stock appreciation rights and
terminates on January 22, 2007. The maximum number of shares available for
issuance under this plan may not exceed 1,025,000 shares plus the number of
shares still unissued under the supplemental option plan. Options granted to any
one optionee may not exceed more than 1,025,000 common shares per year subject
to certain adjustments. Incentive stock options may not have a term of more than
10 years from the date of grant. At December 31, 1997, 763,000 options, were
outstanding under the Omnibus Plan.
F-20
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
10. STOCK OPTIONS (CONTINUED)
Information regarding the Company's stock option plans and nonqualified
stock options as of December 31, 1995, 1996 and 1997, and changes during the
years ended on those dates is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------------- -----------------
<S> <C> <C>
December 31, 1995.......................................... -- $ --
Granted.................................................... 3,491,355 1.89
Exercised.................................................. -- --
Forfeited.................................................. (26,855) 1.95
--------------- ------
December 31, 1996.......................................... 3,464,500 1.89
--------------- ------
Granted.................................................... 914,296 7.91
Exercised.................................................. (488,925) 0.89
Forfeited.................................................. (392,774) 2.40
--------------- ------
December 31, 1997.......................................... 3,497,097 $ 3.54
--------------- ------
--------------- ------
</TABLE>
At December 31, 1996, 912,425 options were exercisable at a weighted average
exercise price of $1.10 per share. At December 31, 1997, 1,275,645 options were
exercisable at a weighted average exercise price of $1.51 per share. The options
outstanding at December 31, 1997 expire in various years through 2007.
Information about stock options outstanding at December 31, 1997 is
summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTED EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE
- ---------------------------------------------------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$0.73 to $1.46...................................... 1,807,126 8.28 $ 1.17 1,113,695 $ 1.14
$4.00 to $6.83...................................... 1,146,721 8.96 $ 4.68 161,950 $ 4.07
$8.11 to $11.10..................................... 543,250 9.66 $ 9.06 -- $ --
----------- ----- ----------- ----------- -----
3,497,097 8.72 $ 3.54 1,275,645 $ 1.51
----------- ----- ----------- ----------- -----
----------- ----- ----------- ----------- -----
</TABLE>
The Company has elected to adopt FASB No. 123 for disclosure purposes only
and applies Accounting Principle Board (APB) Opinion No. 25 and related
interpretations in accounting for its employee stock options. Approximately
$50,000 and $88,000 in compensation cost was recognized relating to consultant
options for the years ended December 31, 1996 and 1997, respectively. Had
compensation cost for stock options awarded under these plans been determined
based on the fair value at the dates of grant consistent with the methodology of
FASB No. 123, the Company's net income or loss and basic and diluted income or
loss per share for the years ended December 31, 1996 and 1997 would have
reflected the following pro-forma amounts:
F-21
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
10. STOCK OPTIONS (CONTINUED)
Pro-forma Net Income (Loss) Per Share
<TABLE>
<CAPTION>
1996 1997
------------- ------------
<S> <C> <C>
Pro-Forma Net Income (Loss)...................................... $ (5,536,000) $ 4,756,000
Pro-Forma Basic Net Income (Loss) per share...................... $ (0.25) $ 0.16
Pro Forma Diluted Net Income (Loss) per share.................... $ (0.25) $ 0.15
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method of option pricing with the following assumptions used
for the grants; weighted average risk-free interest rate of 6.4 and 6.2 percent
and an expected life of ten years and six years for the years ended December 31,
1996 and 1997, respectively. Expected volatility for 1997 was 31.05 percent and
it is assumed that no dividends would be issued during the option term. Because
the Company did not have a stock option program prior to 1996, the resulting
pro-forma compensation cost may not be representative of that to be expected in
future years.
11. CAPITAL STOCK
During 1994, the Company issued 16,606,661 shares of stock to the Company's
founder for $10,000. During 1995, this stockholder converted $990,000 of debt
into capital for no additional shares. During 1995, the Company also issued
1,843,339 shares to another executive of the Company on conversion of a loan.
On February 23, 1996, the Company sold 2,049,980 shares of common stock to
various investors for $1,500,000. On July 12, 1996, the Company sold 1,874,532
shares of common stock to an investor for $4,068,000.
On July 25, 1996, the Company sold 2,802,446 shares of Series A preferred
stock to a group of investors for $7,500,000. In connection with this
transaction, the Company and buyers of the preferred shares entered into an
investor's rights agreement which obligated the Company to file up to two
registration statements to register such shares. These preferred shares
converted to common stock at a ratio of 3-for-2 as a result of the public
offering in accordance with the investors rights agreement.
In June 1997, the Company completed its Initial Public Offering ("IPO") of
9,430,000 shares of common stock of which 8,097,500 shares were sold by the
Company and 1,332,500 shares were sold by certain selling shareholders. The net
proceeds to the Company (after deducting underwriting discounts and offering
expenses of approximately $4.6 million) from the sale of shares was
approximately $30.9 million.
On November 30, 1997, the Company completed the acquisition of LDS pursuant
to the terms of the agreement and 849,298 shares were issued for all of the
outstanding shares to LDS.
12. BUSINESS SEGMENTS
At December 31, 1997, Star has two business segments, wholesale long
distance and commercial long distance telecommunications. The wholesale segment
provides long distance services to U.S. and foreign based telecommunications
companies and the commercial segment, obtained by acquisition of LDS, provides
commercial long distance services to small retailers throughout the United
States.
F-22
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
12. BUSINESS SEGMENTS (CONTINUED)
The accounting policies of the segments are the same as those described in
the significant accounting policies, however, the Company evaluates performance
based on profit or loss from operations before income taxes and non-recurring
gains or losses. There are no intercompany sales among the wholesale and
commercial segments and both segments are managed separately.
Reportable segment information for the years ended December 31, 1995, 1996
and 1997 are as follows:
<TABLE>
<CAPTION>
WHOLESALE COMMERCIAL ALL OTHER TOTAL
-------------- ------------- ---------- --------------
<S> <C> <C> <C> <C>
1995
Revenues from external customers..................... $ 16,125,000 $ 30,158,000 $ -- $ 46,283,000
Interest income...................................... -- 22,000 -- 22,000
Interest expense..................................... (64,000) -- -- (64,000)
Depreciation and amortization........................ (128,000) (58,000) -- (186,000)
Segment profit (loss)................................ (568,000) 4,541,000 -- 3,973,000
Other significant non-cash items:
Capital lease additions............................ 888,000 164,000 -- 1,052,000
Property additions financed by notes payable....... -- -- -- --
Debt converted to equity........................... 1,093,000 -- -- 1,093,000
Segment assets....................................... 12,869,000 5,447,000 -- 18,316,000
Expenditures for segment assets...................... 1,062,000 61,000 -- 1,123,000
1996
Revenues from external customers..................... $ 208,086,000 $ 29,905,000 $ -- $ 237,991,000
Interest income...................................... 83,000 27,000 -- 110,000
Interest expense..................................... (589,000) (12,000) -- (601,000)
Depreciation and amortization........................ (1,073,000) (78,000) -- (1,151,000)
Segment profit (loss)................................ (6,644,000) 2,424,000 -- (4,220,000)
Other significant non-cash items:
Capital lease additions............................ 5,097,000 69,000 -- 5,166,000
Property additions financed by notes payable....... -- -- -- --
Segment assets....................................... 48,674,000 5,326,000 -- 54,000,000
Expenditures for segment assets...................... 7,838,000 14,000 -- 7,852,000
1997
Revenues from external customers..................... $ 348,738,000 $ 27,460,000 $ -- $ 376,198,000
Interest income...................................... 519,000 -- (27,000) 492,000
Interest expense..................................... (1,633,000) (27,000) 27,000 (1,633,000)
Depreciation and amortization........................ (4,189,000) (56,000) -- (4,245,000)
Segment profit (loss)................................ 5,605,000 (37,000) -- 5,568,000
Other significant non-cash items:
Capital lease additions............................ 9,772,000 -- -- 9,772,000
Property additions financed by notes payable....... 1,524,000 -- -- 1,524,000
Segment assets....................................... 106,709,000 6,844,000 -- 113,553,000
Expenditures for segment assets...................... 13,419,000 17,000 -- 13,436,000
</TABLE>
F-23
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
12. BUSINESS SEGMENTS (CONTINUED)
The Company had no customers, collectively, representing more than 10
percent of consolidated revenue in any foreign country.
13. QUARTERLY CONSOLIDATED INFORMATION (UNAUDITED)
The following table presents unaudited quarterly operating results,
including the results of LDS, for each of the Company's eight quarters in the
two-year period ended December 31, 1997 (amounts in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
----------- --------- --------- ----------
<S> <C> <C> <C> <C>
1996
Net sales............................................... $ 42,926 $ 50,064 $ 68,433 $ 76,568
Gross profit............................................ 6,689 7,206 7,714 10,797
Operating income (loss)................................. 2,100 1,961 1,219 (8,356)
Net income (loss)....................................... 1,477 1,294 870 (7,861)
1997
Net sales............................................... $ 79,382 $ 89,167 $ 94,867 $ 112,782
Gross profit............................................ 10,789 11,730 12,913 15,529
Operating income........................................ 2,495 2,633 3,100 2,821
Net income.............................................. 1,907 656 1,014 1,991
</TABLE>
14. SUBSEQUENT EVENTS
ACQUISITIONS
In November 1997, the Company signed a merger agreement with United Digital
Network, Inc. ("UDN"). Under the terms of the agreement, as amended, UDN
stockholders will receive approximately 800,000 shares of STAR common stock. The
Company intends to account for the transaction as a pooling of interests. At
December 31, 1997, the Company has accounts receivable from UDN in the amount of
$721,000 and a note receivable of $2.5 million plus accrued interest of $28,000.
Both the accounts receivable and the note have been fully reserved at December
31, 1997. Subsequent to year end, the Company loaned an additional $2 million to
UDN.
On March 10, 1998, the Company consummated a merger with T-One Corp.
("T-One") to be accounted for as a pooling of interests. In connection with this
merger, the Company issued 1,353,000 shares of its common stock for all
outstanding shares of T-One. The following unaudited pro forma data
F-24
<PAGE>
STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
14. SUBSEQUENT EVENTS (CONTINUED)
summarizes the combined operating results of the Company and T-One as if the
merger had occurred at the beginning of the periods presented.
<TABLE>
<CAPTION>
1995 1996 1997
------------- -------------- --------------
<S> <C> <C> <C>
Revenue.......................................................... $ 58,937,000 $ 260,423,000 $ 406,636,000
Gross profit..................................................... 14,667,000 33,739,000 52,784,000
Income (loss) from operations.................................... 3,847,000 (3,658,000) 11,365,000
Net income (loss) (1)............................................ 2,140,000 (5,738,000) 5,574,000
Diluted income (loss) per common share (2)....................... $ 0.11 $ (0.25) $ 0.17
</TABLE>
- ------------------------
(1) Includes pro forma income (loss) of STAR plus net income (loss) of T-One
assuming STAR and LDS C-Corporation status.
(2) The diluted pro forma income (loss) per common share is based on the sum of
the historical average common shares outstanding, as reported by STAR, and
the historical average common shares outstanding for T-One (adjusted to
reflect non-dilutive common stock equivalents) converted to STAR shares at
the exchange ratio of 13,530 STAR shares per T-One share.
EQUITY TRANSACTIONS
On February 3, 1998 the Company announced a 2.05 for 1 stock split in the
nature of a stock dividend. The stock split is effective March 31, 1998 and has
been retroactively reflected in the accompanying consolidated financial
statements for all periods presented.
Subsequent to year end, the Company granted 219,350 additional stock options
to employees and directors.
LINE OF CREDIT
On March 18, 1998, the Company amended the line of credit agreement with
Sanwa Bank by adjusting the borrowing base to 55% of aggregate eligible accounts
receivable, revising certain covenants and releasing all pledged collateral.
F-25
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Use of Proceeds................................ 17
Price Range of Common Stock.................... 17
Dividend Policy................................ 17
Capitalization................................. 18
Selected Consolidated Financial Data........... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 21
Business....................................... 28
Management..................................... 45
Certain Transactions........................... 52
Principal Stockholders......................... 54
Description of Capital Stock................... 56
Shares Eligible for Future Sale................ 58
Underwriting................................... 60
Legal Matters.................................. 61
Experts........................................ 61
Available Information.......................... 61
Index to Consolidated Financial
Statement.................................... F-1
</TABLE>
7,000,000 Shares
[LOGO]
STAR TELECOMMUNICATIONS, INC.
Common Stock
------------
PROSPECTUS
------------
BT ALEX. BROWN
MERRILL LYNCH & CO.
HAMBRECHT & QUIST
LEHMAN BROTHERS
FURMAN SELZ
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee, the NASD filing fees and the Nasdaq Stock Market
listing fee.
<TABLE>
<S> <C>
SEC Registration fee.............................................. $ 48,002
NASD fee.......................................................... $ 18,564
Nasdaq National Market listing fee................................ $ 17,500
Printing and engraving expenses................................... $ 125,000
Legal fees and expenses........................................... $ 250,000
Accounting fees and expenses...................................... $ 175,000
Blue sky fees and expenses........................................ $ 20,000
Transfer agent fees............................................... $ 5,000
Miscellaneous fees and expenses................................... $ 40,934
---------
Total........................................................... $ 700,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6, of the Registrant's
Bylaws provides for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. The Registrant's Amended and
Restated Certificate of Incorporation provides that, pursuant to Delaware law,
its directors shall not be liable for monetary damages for breach of the
directors' fiduciary duty as directors to the Company and its stockholders. This
provision in the Amended and Restated Certificate of Incorporation does not
eliminate the directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under Delaware law. In addition, each director will continue to
be subject to liability for breach of the director's duty of loyalty to the
Company for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
The Registrant has entered or will enter into Indemnification Agreements with
its officers and directors that provide the Registrant's officers and directors
with further indemnification to the maximum extent permitted by the Delaware
General Corporation Law. Reference is made to Section 7 of the Underwriting
Agreement contained in Exhibit 1.1 hereto, indemnifying officers and directors
of the Registrant against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since inception, the Company has issued and sold the following securities:
1. On March 10, 1998, the Registrant issued 1,353,000 shares of its
Common Stock in exchange for all of the outstanding capital stock of T-One
Corp. in a transaction valued at $25,080,000.
II-1
<PAGE>
2. On November 30, 1997, the Registrant issued 849,298 shares of Common
Stock in exchange for all of the outstanding capital stock of LD Services,
Inc. in a transaction valued at approximately $13,930,569.
3. As of March 31, 1997, the Registrant had issued 18,450,000 shares of
Common Stock pursuant to direct issuances to employees in consideration for
services and advances provided by such employees for an aggregate purchase
price of approximately $1,103,000.
4. On February 23, 1996, the Registrant issued and sold 2,049,979
shares of Common Stock to a group of six investors for an aggregate purchase
price of $1,500,000.00.
5. On July 12, 1996, the Registrant issued and sold 1,874,532 shares of
Common Stock to Gotel Investments Ltd. for an aggregate purchase price of
$4,068,651.00.
6. On July 25, 1996, the Registrant issued and sold 2,802,446 shares of
Series A Preferred Stock to a group of twenty-two investors for an aggregate
purchase price of $7,500,003.51.
7. Since inception from time to time, as of February 28, 1998, the
Registrant has granted to employees, directors and consultants options to
purchase an aggregate of approximately 4,798,000 shares of Common Stock
pursuant to stock option agreements and the Registrant's stock option plans.
The sales and issuances described above were deemed to be exempt from
registration under the Securities Act in reliance upon Section 4(2) thereof, as
transactions by an issuer not involving any public offering, or in reliance upon
the exemption from registration provided by Rule 701 promulgated under the
Securities Act. In addition, the recipients of securities in each such
transaction represented their intentions 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 Registrant, to information about the
Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS.
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
1.1- Form of Underwriting Agreement (preliminary form).
2.1* Amended and Restated Stock Acquisition Agreement and Plan of Merger dated as of November 30, 1997 by
and among the Registrant, Big Dave's Acquisition Corp., LCCR, Inc., and the shareholders listed on the
signature page thereto.
2.2 Agreement and Plan of Merger dated as of November 19, 1997 by and among the Registrant, IIWII Corp. and
United Digital Network, Inc. (the "UDN Merger Agreement").
2.3 First Amendment to the UDN Merger Agreement dated as of January 30, 1998.
2.4 Stock Purchase Agreement dated as of January 26, 1998 by and among the Registrant, T-One Corp. and Taha
Mikati, as amended.
3.1 Amended and Restated Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
4.1+++ Specimen Common Stock certificate.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
4.2+ Registration Rights Agreement, dated September 24, 1996, between the Registrant and the investors named
therein.
4.3+ Registration Rights Agreement, dated July 12, 1996, between the Registrant and the investor named
therein.
4.4+ Investor Rights Agreement dated July 25, 1996, between the Registrant and the investors named therein.
4.5* Registration Rights Agreement dated as of November 30, 1997 by and among the Company and the
shareholders listed on the signature page thereto.
4.6 Registration Rights Agreement dated as of March 10, 1998 between the Registrant and Taha Mikati.
5.1- Opinion of Riordan & McKinzie, a Professional Law Corporation.
10.1+ Form of Indemnification Agreement.
10.2+ 1996 Amended and Restated Stock Incentive Plan.
10.3+ 1996 Outside Director Nonstatutory Stock Option Plan.
10.4++ 1997 Omnibus Stock Incentive Plan.
10.5+ Employment Agreement between the Registrant and Mary Casey dated July 14, 1995, as amended.
10.6+ Employment Agreement between the Registrant and Kelly Enos dated December 2, 1996.
10.7+ Employment Agreement between the Registrant and David Vaun Crumly dated January 1, 1996.
10.8+ Employment Agreement between the Registrant and James Kolsrud dated December 18, 1996.
10.9+ Consulting Agreement between the Registrant and Gordon Hutchins, Jr. dated May 1, 1996.
10.10+ Nonstatutory Stock Option Agreement between the Registrant and Gordon Hutchins, Jr. dated May 15, 1996.
10.11+ Free Standing Commercial Building Lease between the Registrant and Thomas M. Spear, as receiver for De
La Guerra Court Investments, dated for reference purposes as of March 1, 1996.
10.12+ Standard Office Lease--Gross between the Registrant and De La Guerra Partners, L.P. dated for reference
purposes as of July 9, 1996.
10.13+ Office Lease between the Registrant and WHUB Real Estate Limited Partnership dated June 28, 1996, as
amended.
10.14+ Standard Form of Office Lease between the Registrant and Hudson Telegraph Associates dated February 28,
1996.
10.15+ Agreement for Lease between the Registrant and Telehouse International Corporation of Europe Limited
dated July 16, 1996.
10.16+ Sublease between the Registrant and Borton, Petrini & Conron dated March 20, 1994, as amended.
10.17+ Office Lease between the Registrant and One Wilshire Arcade Imperial, Ltd. dated June 28, 1996.
10.18+ Lease Agreement between the Registrant and Telecommunications Finance Group dated April 6, 1995.
10.19+ Lease Agreement between the Registrant and Telecommunications Finance Group dated January 3, 1996, as
amended.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.20++ Master Lease Agreement between the Registrant and NTFC Capital Corporation dated December 20, 1996.
10.21+ Variable Rate Installment Note between the Registrant and Metrobank dated October 4, 1996.
10.22+ Assignment of Purchase Order and Security Interest between the Registrant and DSC Finance Corporation
dated January 1, 1996.
10.23++ Line of Credit Promissory Note between the Registrant and Christopher E. Edgecomb dated November 7,
1996, as amended.
10.24++ Office Lease Agreement between the Registrant and Beverly Hills Center LLC effective as of April 1,
1997.
10.25 Credit Agreement dated as of September 30, 1997 among the Registrant, the financial institutions party
thereto and Sanwa Bank California, as amended.
10.26 Office Lease between the Registrant, Hudson Telegraph Associates and American Communications Corp., as
amended.
10.27 Amendment Number Three to Employment Agreement between the Registrant and Mary A. Casey dated as of
July 1, 1997.
10.28 Amendment Number One to Employment Agreement between the Registrant and Kelly D. Enos dated as of
November 12, 1997.
10.29 Amendment Number One to First Restatement of Employment Agreement between the Registrant and James
Kolsrud dated as of June 16, 1997.
10.30 Amendment Number One to Employment Agreement between the Registrant and David Vaun Crumly dated as of
November 11, 1997.
10.31 First Amendment to Amended and Restated 1996 Stock Incentive Plan.
10.32- Agreement dated as of December 1, 1997 between the Registrant and Nortel Dasa Network Systems GmbH &
Co. KG.
10.33 Leasing Agreement between the Registrant and Nortel Dasa Network Systems GmbH & Co. KG.
10.34 Guarantee Agreement between the Registrant and Nortel Dasa Network Systems GmbH & Co. KG.
10.35 Note and Security Agreement dated as of December 18, 1997 between the Registrant and NationsBanc
Leasing Corporation.
10.36 Amendment of Lease dated as of September 30, 1997 between the Registrant and Hudson Telegraph
(reference is hereby made to Exhibit 10.14).
10.37- Office Lease dated July 1, 1997 between the Registrant and NWT Partners, Ltd.
10.38 Lease Agreement dated July 29, 1996 between the Registrant and Telecommunications Finance Group.
10.39 Promissory Note issued by Christopher E. Edgecomb in favor of the Registrant dated November 26, 1997.
10.40 Stock Pledge Agreement dated November 26, 1997 between the Registrant and Christopher E. Edgecomb.
10.41 Commercial Lease dated October 31, 1997 between the Registrant and Prinzenpark GbR.
10.42 Commercial Lease dated October 9, 1997 between the Registrant and WSL Weststadt Liegenschafts GmbH.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.43 Office Lease between the Registrant and Airport-Center KGHP Gewerbeban GmbH & Cie.
10.44 Lease dated November 19, 1997 between the Registrant and DIFA Deutsche Immobilien Fonds
Aktiengesellschaft.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP, Independent Accountants.
23.2- Consent of Riordan & McKinzie (contained in Exhibit 5.1).
24.1 Power of Attorney (see page II-7).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
+ Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-21325) on February 7, 1997 and incorporated by
reference herein.
++ Filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-21325) on May 16, 1997 and
incorporated by reference herein.
+++ Filed as an exhibit to Amendment No. 2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-21325) on May 29, 1997 and
incorporated by reference herein.
* Filed on December 15, 1997 as an exhibit to the Company's Current Report on
Form 8-K (File No. 000-22581) and incorporated by reference herein.
- To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A
II-5
<PAGE>
and contained in a form of Prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Santa
Barbara, State of California, on this 23rd day of March, 1998.
<TABLE>
<S> <C> <C>
STAR TELECOMMUNICATIONS, INC.
By: /s/ KELLY D. ENOS
-----------------------------------------
Kelly D. Enos
Chief Financial Officer
</TABLE>
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Christopher E. Edgecomb, Mary A. Casey and Kelly
D. Enos, and each of them, his true and lawful attorneys-in-fact and agents,
each with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments, including post-effective amendments, to this Registration Statement,
and any registration statement relating to the offering covered by this
Registration Statement and filed pursuant to Rule 462(b) under the Securities
Act of 1993, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact and agents or
their substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
/s/ CHRISTOPHER E. EDGECOMB Chief Executive Officer
- ------------------------------ and Director (Principal March 23, 1998
Christopher E. Edgecomb Executive Officer)
/s/ MARY A. CASEY
- ------------------------------ President and Director March 23, 1998
Mary A. Casey
/s/ KELLY D. ENOS Chief Financial Officer
- ------------------------------ (Principal Financial and March 23, 1998
Kelly D. Enos Accounting Officer)
/s/ GORDON HUTCHINS, JR.
- ------------------------------ Director March 23, 1998
Gordon Hutchins, Jr.
/s/ JOHN R. SNEDEGAR
- ------------------------------ Director March 23, 1998
John R. Snedegar
/s/ MARK GERSHIEN
- ------------------------------ Director March 23, 1998
Mark Gershien
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF DOCUMENT NUMBERED PAGE
- --------- ------------------------------------------------------------------------------------------ -----------------
<C> <S> <C>
1.1- Form of Underwriting Agreement (preliminary form).
2.1* Amended and Restated Stock Acquisition Agreement and Plan of Merger dated as of November
30, 1997 by and among the Registrant, Big Dave's Acquisition Corp., LCCR, Inc., and the
shareholders listed on the signature page thereto.
2.2 Agreement and Plan of Merger dated as of November 19, 1997 by and among the Registrant,
IIWII Corp. and United Digital Network, Inc. (the "UDN Merger Agreement").
2.3 First Amendment to the UDN Merger Agreement dated as of January 30, 1998.
2.4 Stock Purchase Agreement dated as of January 26, 1998 by and among the Registrant, T-One
Corp. and Taha Mikati, as amended.
3.1 Amended and Restated Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
4.1+++ Specimen Common Stock certificate.
4.2+ Registration Rights Agreement, dated September 24, 1996, between the Registrant and the
investors named therein.
4.3+ Registration Rights Agreement, dated July 12, 1996, between the Registrant and the
investor named therein.
4.4+ Investor Rights Agreement dated July 25, 1996, between the Registrant and the investors
named therein.
4.5* Registration Rights Agreement dated as of November 30, 1997 by and among the Company and
the shareholders listed on the signature page thereto.
4.6 Registration Rights Agreement dated as of March 10, 1998 between the Registrant and Taha
Mikati.
5.1- Opinion of Riordan & McKinzie, a Professional Law Corporation.
10.l+ Form of Indemnification Agreement.
10.2+ 1996 Amended and Restated Stock Incentive Plan.
10.3+ 1996 Outside Director Nonstatutory Stock Option Plan.
10.4++ 1997 Omnibus Stock Incentive Plan.
10.5+ Employment Agreement between the Registrant and Mary Casey dated July 14, 1995, as
amended.
10.6+ Employment Agreement between the Registrant and Kelly Enos dated December 2, 1996.
10.7+ Employment Agreement between the Registrant and David Vaun Crumly dated January 1, 1996.
10.8+ Employment Agreement between the Registrant and James Kolsrud dated December 18, 1996.
10.9+ Consulting Agreement between the Registrant and Gordon Hutchins, Jr. dated May 1, 1996.
10.10+ Nonstatutory Stock Option Agreement between the Registrant and Gordon Hutchins, Jr. dated
May 15, 1996.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF DOCUMENT NUMBERED PAGE
- --------- ------------------------------------------------------------------------------------------ -----------------
<C> <S> <C>
10.11+ Free Standing Commercial Building Lease between the Registrant and Thomas M. Spear, as
receiver for De La Guerra Court Investments, dated for reference purposes as of March 1,
1996.
10.12+ Standard Office Lease--Gross between the Registrant and De La Guerra Partners, L.P. dated
for reference purposes as of July 9, 1996.
10.13+ Office Lease between the Registrant and WHUB Real Estate Limited Partnership dated June
28, 1996, as amended.
10.14+ Standard Form of Office Lease between the Registrant and Hudson Telegraph Associates dated
February 28, 1996.
10.15+ Agreement for Lease between the Registrant and Telehouse International Corporation of
Europe Limited dated July 16, 1996.
10.16+ Sublease between the Registrant and Borton, Petrini & Conron dated March 20, 1994, as
amended.
10.17+ Office Lease between the Registrant and One Wilshire Arcade Imperial, Ltd. dated June 28,
1996.
10.18+ Lease Agreement between the Registrant and Telecommunications Finance Group dated April 6,
1995.
10.19+ Lease Agreement between the Registrant and Telecommunications Finance Group dated January
3, 1996, as amended.
10.20++ Master Lease Agreement between the Registrant and NTFC Capital Corporation dated December
20, 1996.
10.21+ Variable Rate Installment Note between the Registrant and Metrobank dated October 4, 1996.
10.22+ Assignment of Purchase Order and Security Interest between the Registrant and DSC Finance
Corporation dated January 1, 1996.
10.23++ Line of Credit Promissory Note between the Registrant and Christopher E. Edgecomb dated
November 7, 1996, as amended.
10.24++ Office Lease Agreement between the Registrant and Beverly Hills Center LLC effective as of
April 1, 1997.
10.25 Credit Agreement dated as of September 30, 1997 among the Registrant, the financial
institutions party thereto and Sanwa Bank California, as amended.
10.26 Office Lease between the Registrant, Hudson Telegraph Associates and American
Communications Corp., as amended.
10.27 Amendment Number Three to Employment Agreement between the Registrant and Mary A. Casey
dated as of July 1, 1997.
10.28 Amendment Number One to Employment Agreement between the Registrant and Kelly D. Enos
dated as of November 12, 1997.
10.29 Amendment Number One to First Restatement of Employment Agreement between the Registrant
and James Kolsrud dated as of June 16, 1997.
10.30 Amendment Number One to Employment Agreement between the Registrant and David Vaun Crumly
dated as of November 11, 1997.
10.31 First Amendment to Amended and Restated 1996 Stock Incentive Plan.
10.32- Agreement dated as of December 1, 1997 between the Registrant and Nortel Dasa Network
Systems GmbH & Co. KG.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF DOCUMENT NUMBERED PAGE
- --------- ------------------------------------------------------------------------------------------ -----------------
<C> <S> <C>
10.33 Leasing Agreement between the Registrant and Nortel Dasa Network Systems GmbH & Co. KG.
10.34 Guarantee Agreement between the Registrant and Nortel Dasa Network Systems GmbH & Co. KG.
10.35 Note and Security Agreement dated as of December 18, 1997 between the Registrant and
NationsBanc Leasing Corporation.
10.36 Amendment of Lease dated as of September 30, 1997 between the Registrant and Hudson
Telegraph (reference is hereby made to Exhibit 10.14).
10.37- Office Lease dated July 1, 1997 between the Registrant and NWT Partners, Ltd.
10.38 Lease Agreement dated July 29, 1996 between the Registrant and Telecommunications Finance
Group.
10.39 Promissory Note issued by Christopher E. Edgecomb in favor of the Registrant dated
November 26, 1997.
10.40 Stock Pledge Agreement dated November 26, 1997 between the Registrant and Christopher E.
Edgecomb.
10.41 Commercial Lease dated October 31, 1997 between the Registrant and Prinzenpark GbR.
10.42 Commercial Lease dated October 9, 1997 between the Registrant and WSL Weststadt
Liegenschafts GmbH.
10.43 Office Lease between the Registrant and Airport-Center KGHP Gewerbeban GmbH & Cie.
10.44 Lease dated November 19, 1997 between the Registrant and DIFA Deutsche Immobilien Fonds
Aktiengesellschaft.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP, Independent Accountants.
23.2- Consent of Riordan & McKinzie (contained in Exhibit 5.1).
24.1 Power of Attorney (see page II-7).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
+ Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-21325) on February 7, 1997 and incorporated by
reference herein.
++ Filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-21325) on May 16, 1997 and
incorporated by reference herein.
+++ Filed as an exhibit to Amendment No. 2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-21325) on May 29, 1997 and
incorporated by reference herein.
* Filed on December 15, 1997 as an exhibit to the Company's Current Report on
Form 8-K (File No. 000-22581) and incorporated by reference herein.
- To be filed by amendment.
<PAGE>
EXHIBIT 2.2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
STAR TELECOMMUNICATIONS, INC.,
IIWII CORP.
AND
UNITED DIGITAL NETWORK, INC.
Dated as of November 19, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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<TABLE>
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<S> <C> <C>
ARTICLE I THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.1 THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.2 FILING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.3 EFFECTIVE TIME OF THE MERGER. . . . . . . . . . . . . . . . . . . . .2
1.4 CERTIFICATE OF INCORPORATION AND BY-LAWS. . . . . . . . . . . . . . .2
1.5 DIRECTORS AND OFFICERS. . . . . . . . . . . . . . . . . . . . . . . .2
1.6 WARRANTS AND OPTIONS. . . . . . . . . . . . . . . . . . . . . . . . .2
ARTICLE II CONVERSION OF AND SURRENDER AND
PAYMENT FOR COMMON STOCK . . . . . . . . . . . . . . . . . . . . . .2
2.1 CONVERSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.2 CLOSING OF TRANSFER BOOKS . . . . . . . . . . . . . . . . . . . . . .4
2.3 SURRENDER OF CERTIFICATES . . . . . . . . . . . . . . . . . . . . . .4
ARTICLE III CERTAIN EFFECTS OF MERGER . . . . . . . . . . . . . . . . . . . . . .4
3.1 EFFECT OF MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . .4
3.2 FURTHER ASSURANCES. . . . . . . . . . . . . . . . . . . . . . . . . .5
ARTICLE IV REPRESENTATIONS AND WARRANTIES
OF THE ACQUIROR AND NEWCO . . . . . . . . . . . . . . . . . . . . . .5
4.1 ORGANIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
4.2 CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
4.3 AUTHORITY RELATIVE TO AGREEMENT . . . . . . . . . . . . . . . . . . .5
4.4 ACQUIROR COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . .6
4.5 NO VIOLATIONS OR CONSENTS . . . . . . . . . . . . . . . . . . . . . .6
4.6 LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
4.7 FINANCIAL STATEMENTS AND REPORTS. . . . . . . . . . . . . . . . . . .7
4.8 REGISTRATION STATEMENT; BLUE SKY FILINGS; PROXY STATEMENT;
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . .7
4.9 BROKERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . . . .8
5.1 CORPORATE ORGANIZATION. . . . . . . . . . . . . . . . . . . . . . . .8
5.2 CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
5.3 OPTIONS, WARRANTS OR OTHER RIGHTS . . . . . . . . . . . . . . . . . .8
5.4 AUTHORITY RELATIVE TO AGREEMENT . . . . . . . . . . . . . . . . . . .9
5.5 NO VIOLATIONS OR CONSENTS . . . . . . . . . . . . . . . . . . . . . .9
5.6 GOVERNMENTAL AUTHORIZATIONS AND REGULATIONS . . . . . . . . . . . . 10
5.7 LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.8 FINANCIAL STATEMENTS AND REPORTS; MATERIAL LIABILITIES. . . . . . . 10
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5.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. . . . . . . . . . . . . . . . 11
5.10 BENEFIT PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.11 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.12 ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . 13
5.13 REAL ESTATE LEASES. . . . . . . . . . . . . . . . . . . . . . . . . 13
5.14 TITLE TO PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES. . . . . . . 14
5.15 TAX MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.16 INTELLECTUAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . . 15
5.17 LABOR MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.18 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.19 CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.20 REGISTRATION STATEMENT; BLUE SKY FILINGS; PROXY STATEMENT;
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.21 BROKERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.22 CONTINUITY OF INTEREST. . . . . . . . . . . . . . . . . . . . . . . 17
5.23 TRANSACTIONS WITH AFFILIATED PARTIES. . . . . . . . . . . . . . . . 17
ARTICLE VI COVENANTS AND AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . 18
6.1 REGISTRATION STATEMENT; PROXY STATEMENT; STOCKHOLDER
MEETING; VANCOUVER EXCHANGE. . . . . . . . . . . . . . . . . . . . 18
6.2 CONDUCT OF THE BUSINESS OF THE COMPANY PRIOR TO THE
EFFECTIVE TIME. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.3 ACCESS TO PROPERTIES AND RECORD; ACQUIROR NOTICE. . . . . . . . . . 21
6.4 NEGOTIATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.5 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.6 CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.7 REASONABLE BEST EFFORTS . . . . . . . . . . . . . . . . . . . . . . 22
6.8 CERTIFICATION OF STOCKHOLDER VOTE . . . . . . . . . . . . . . . . . 23
6.9 LOAN TO COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.10 OUTSOURCING AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . 23
6.11 AFFILIATE AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . 23
6.12 PROXY AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.13 DISCLOSURE SCHEDULES. . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE VII CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . . . . . . . 24
7.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. . . . . 24
7.2 CONDITIONS TO THE OBLIGATION OF THE COMPANY TO EFFECT
THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
7.3 CONDITIONS TO OBLIGATIONS OF THE ACQUIROR AND NEWCO TO
EFFECT THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . 25
7.4 CLOSING CONDITIONS DEEMED SATISFIED . . . . . . . . . . . . . . . . 26
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ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER . . . . . . . . . . . . . . . . . 27
8.1 TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.2 FEES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . 28
8.3 AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
8.4 WAIVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE IX MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
9.1 SURVIVAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
9.2 EXPENSES AND FEES . . . . . . . . . . . . . . . . . . . . . . . . . 29
9.3 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
9.4 HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
9.5 PUBLICITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
9.6 ENTIRE AGREEMENT; KNOWLEDGE . . . . . . . . . . . . . . . . . . . . 30
9.7 ASSIGNMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
9.8 COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
9.9 INVALIDITY, ETC.. . . . . . . . . . . . . . . . . . . . . . . . . . 31
9.10 SPECIFIC PERFORMANCE. . . . . . . . . . . . . . . . . . . . . . . . 31
9.11 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
iii
<PAGE>
EXHIBITS
Exhibit A Certificate of Merger
Exhibit B Promissory Note
Exhibit C Affiliate Agreements
Exhibit D Proxy Agreement
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of November 19, 1997 (this
"Agreement"), by and among STAR Telecommunications, Inc., a Delaware corporation
(the "Acquiror"), IIWII Corp., a Delaware corporation and wholly-owned
subsidiary of the Acquiror ("Newco"), and United Digital Network, Inc., a
Delaware corporation (the "Company").
R E C I T A L S:
A. The Boards of Directors of Newco, the Acquiror and the Company deem it
advisable and in the best interests of their respective stockholders to merge
Newco with and into the Company (the "Merger") upon the terms and conditions set
forth herein and in accordance with the General Corporation Law of the State of
Delaware (the "General Corporation Law") (the Company and Newco being
hereinafter sometimes referred to as the "Constituent Corporations" and the
Company, following the effectiveness of the Merger, being hereinafter sometimes
referred to as the "Surviving Corporation"); and
B. The Boards of Directors of the Acquiror, Newco and the Company have
approved the Merger upon the terms and subject to the conditions set forth
herein and, in the case of the Company, on the receipt of a "fairness opinion"
from its financial advisor in form, substance, and scope that is satisfactory to
the Board of Directors of the Company.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants, agreements and conditions contained herein, and in order to set forth
the terms and conditions of the Merger and the mode of carrying the same into
effect, the parties hereby agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Upon the terms and conditions hereinafter set forth
and in accordance with the General Corporation Law, at the Effective Time, as
defined below, Newco shall be merged with and into the Company and thereupon the
separate existence of Newco shall cease, and the Company, as the Surviving
Corporation, shall continue to exist under and be governed by the General
Corporation Law.
1
<PAGE>
1.2 FILING. Upon the satisfaction or waiver of the conditions set
forth in Section 7 hereof (other than the condition set forth in Section 7.1(b)
which may not be waived), Newco and the Company will cause a Certificate of
Merger, in substantially the form of EXHIBIT A attached hereto (the "Certificate
of Merger"), to be executed and filed with the Secretary of State of the State
of Delaware as provided in Section 251 of the General Corporation Law.
1.3 EFFECTIVE TIME OF THE MERGER. The Merger shall become effective
immediately upon the filing, in accordance with Section 251 of the General
Corporation Law, of the Certificate of Merger with the Secretary of State of the
State of Delaware in accordance with Section 251. The date and time of such
filing is herein sometimes referred to as the "Effective Time."
1.4 CERTIFICATE OF INCORPORATION AND BY-LAWS. Upon the effectiveness
of the Merger, the Certificate of Incorporation of Newco shall be the
certificate of incorporation of the Surviving Corporation and the By-Laws of
Newco as in effect on the date hereof shall be the By-Laws of the Surviving
Corporation.
1.5 DIRECTORS AND OFFICERS. The persons who are directors of Newco
immediately prior to the Effective Time and the officers of the Company shall,
after the Effective Time and in accordance with the Certificate of Merger, serve
as the directors and officers, respectively, of the Surviving Corporation, in
each case such directors and officers to serve until their successors have been
duly elected and qualified in accordance with the Certificate of Incorporation
and By-Laws of the Surviving Corporation.
1.6 WARRANTS AND OPTIONS. On the Effective Time, the Acquiror shall
assume the duties and obligations of the Company, and the Acquiror shall be
vested with the powers, rights and privileges of the Company, under (a) the
warrants of the Company that remain outstanding at the Effective Time (the
"Warrants") and (b) the options of the Company that remain outstanding at the
Effective Time (the "Options"), as such warrants and options are listed on
Schedule 5.3. As of the Effective Time, the Acquiror shall have reserved for
issuance and continue to maintain sufficient shares of Acquiror Common Stock, as
defined below, to issue the required shares of Acquiror Common Stock pursuant to
the exercise of Warrants and Options after the Effective Time, subject to
appropriate adjustment in the exercise price thereof, based on the Exchange
Ratio, as defined below.
ARTICLE II
CONVERSION OF AND SURRENDER AND
PAYMENT FOR COMMON STOCK
2.1 CONVERSION. At the Effective Time, by virtue of the Merger and
without any action on the part of the holders thereof:
(a) Each of the issued and outstanding shares of the Common
Stock, $.01 par value, of the Company ("Common Stock"), other than
(i) Dissenting Stock, as defined below,
2
<PAGE>
or (ii) shares of Common Stock held in the treasury of the Company, shall be
automatically converted into the right to receive consideration per share (the
"Merger Consideration") consisting of that portion of a share (the "Exchange
Ratio") of the Acquiror's common stock, $0.001 per share ("Acquiror Common
Stock"), determined by dividing $2.75 by the average closing price of
Acquiror's Common Stock on the Nasdaq National Market for the five (5) trading
days prior to the Effective Time (the "Average Price"), provided that, if the
Average Price is equal to or greater than $32.73, then the Exchange Ratio shall
be determined by dividing $3.00 by the Average Price, provided, further, that,
if the Average Price is less than or equal to $26.78, then the Exchange Ratio
shall be determined by dividing $2.50 by the Average Price. The Exchange Ratio
shall be adjusted as may be necessary and appropriate to reflect any and all
stock splits, reverse stock splits, reclassifications and similar capital events
that affect Acquiror Common Stock.
(b) Each issued and outstanding share of the Common Stock of
Newco shall be converted into approximately Seven Thousand Five Hundred
Sixty-Four (7,564) validly issued, fully paid and non-assessable shares of
common stock, $.01 par value (the "New Common Stock"), of the Surviving
Corporation.
(c) All shares of Common Stock which are held by the Company as
treasury shares shall be canceled and retired and cease to exist, without any
conversion thereof or payment with respect thereto.
(d) No fraction of a share of Acquiror Common Stock will be
issued in the Merger, but, in lieu thereof, each holder of Common Stock who
would otherwise be entitled to a fraction of a share of Acquiror Common Stock
(after aggregating all fractional shares of Acquiror Common Stock to be received
by such holder) will be entitled to receive from the Acquiror an amount of cash
(rounded to the nearest whole US $0.01) equal to the product of (i) such
fraction of a share multiplied by (ii) the Average Price.
Notwithstanding any provision of this Agreement to the contrary, shares of
the Common Stock with respect to which appraisal rights have been demanded and
perfected in accordance with Section 262(d) of the General Corporation Law (the
"Dissenting Stock") shall not be converted into the right to receive the Merger
Consideration at or after the Effective Time, and the holder thereof shall be
entitled only to such rights as are granted by the General Corporation Law.
Notwithstanding the preceding sentence, if any holder of shares of Common Stock
who demands appraisal of such shares under the General Corporation Law shall
effectively withdraw his demand for such appraisal (in accordance with
Section 262(k) of the General Corporation Law) or becomes ineligible for such
appraisal (through failure to perfect or otherwise) then, as of the Effective
Time or the occurrence of such event, whichever is the last to occur, such
holder's Dissenting Stock shall cease to be Dissenting Stock and shall be
converted into and represent the right to receive the Merger Consideration,
without interest thereon, as provided in this Section 2.1. The Company shall
give Acquiror (i) prompt notice of any written demands for appraisal,
withdrawals of demands for appraisal and any other instrument served pursuant to
Section 262 of the General Corporation Law received by the Company and (ii) the
opportunity to
3
<PAGE>
participate in all negotiations and proceedings with respect to demands for
appraisal under such Section.
2.2 CLOSING OF TRANSFER BOOKS. At the Effective Time, the stock
transfer books of the Company shall be closed, and no transfer of shares of
Common Stock of the Company shall thereafter be made. If, after the Effective
Time, certificates previously representing shares of Common Stock are presented
to the Surviving Corporation or the Exchange Agent, as defined below, such
certificates shall be canceled and exchanged for the Merger Consideration as
provided in Section 2.1, subject to applicable law in the case of Dissenting
Stock.
2.3 SURRENDER OF CERTIFICATES. At least five days prior to the
mailing of the Proxy Statement, as defined below, Newco shall, subject to the
reasonable approval of the Company, designate an exchange agent (the "Exchange
Agent") to effect the exchange for Acquiror Common Stock of certificates that,
prior to the Effective Time, represented shares of Common Stock entitled to the
Merger Consideration. As soon as practicable after the Effective Time, the
Exchange Agent shall send a notice and transmittal form to each holder of record
of Common Stock immediately prior to the Effective Time advising such holder of
the effectiveness of the Merger and the procedure for surrendering to the
Exchange Agent (who may appoint forwarding agents with the approval of Newco)
the certificate or certificates to be exchanged pursuant to the Merger. Upon
the surrender for exchange of such a certificate, together with such letter of
transmittal duly completed and properly executed in accordance with instructions
thereto and such other documents as may be required pursuant to such
instructions, the holder shall receive the Merger Consideration. After the
Effective Time, until so surrendered and exchanged, each certificate which
immediately prior to the Effective Time represented outstanding shares of the
Common Stock (other than Dissenting Stock) shall represent solely the right to
receive the Merger Consideration.
ARTICLE III
CERTAIN EFFECTS OF MERGER
3.1 EFFECT OF MERGER. On and after the Effective Time, the Surviving
Corporation shall possess all the rights, privileges, powers and franchises, and
be subject to all the restrictions, disabilities and duties of each of the
Constituent Corporations; and all and singular rights, privileges, powers and
franchises of each of the Constituent Corporations, and all property, real,
personal and mixed, and all debts due to either of the Constituent Corporations
on whatever account, as well for stock subscriptions as all other things in
action or belonging to each of the Constituent Corporations, shall be vested in
the Surviving Corporation; and all property, rights, privileges, powers and
franchises, and all and every other interest shall be thereafter the property of
the Surviving Corporation as they were of the Constituent Corporations, and the
title to any real estate vested by deed or otherwise, in either of the
Constituent Corporations shall not revert or be in any way impaired; but all
rights of creditors and all liens upon any property of either of the Constituent
Corporations shall be preserved unimpaired, and all debts, liabilities and
duties of the Constituent Corporations shall thenceforth attach to and be the
sole responsibility of the
4
<PAGE>
Surviving Corporation and may be enforced against the Surviving Corporation to
the same extent as if said debts, liabilities and duties had been incurred or
contracted by it.
3.2 FURTHER ASSURANCES. If at any time after the Effective Time the
Surviving Corporation shall consider or be advised that any further deeds,
assignments or assurances in law or any other acts are necessary, desirable or
proper to vest, perfect or confirm, of record or otherwise, in the Surviving
Corporation, the title to any property or right of the Constituent Corporations
acquired or to be acquired by reason of, or as a result of, the Merger, the
Constituent Corporations agree that the Surviving Corporation and its proper
officers and directors shall and will execute and deliver all such deeds,
assignments and assurances in law and do all acts necessary, desirable or proper
to vest, perfect or confirm title to such property or right in the Surviving
Corporation and otherwise to carry out the purposes of this Agreement, and that
the proper officers and directors of the Constituent Corporations and the proper
officers and directors of the Surviving Corporation are fully authorized in the
name of the Constituent Corporations or otherwise to take any and all such
action.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE
ACQUIROR AND NEWCO
The Acquiror and Newco jointly and severally represent and warrant to the
Company as follows:
4.1 ORGANIZATION. Each of Acquiror and Newco is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and each has the requisite corporate power and authority to own, lease
and operate its assets and to conduct its business in the manner in which it is
presently conducted.
4.2 CAPITAL STOCK. The authorized capital stock of the Acquiror
consists in its entirety of 50,000,000 shares of Common Stock, $0.001 par
value, of which, as of September 30, 1997, 15,798,254 are issued and
outstanding, and 5,000,000 shares of Preferred Stock, $0.001 par value per
share, none of which is issued and outstanding. The authorized capital stock of
Newco consists in its entirety of 1,000 shares of common stock, $.01 par value,
all of which are issued and outstanding. All of the outstanding shares of Newco
common stock are owned beneficially and of record by the Acquiror.
4.3 AUTHORITY RELATIVE TO AGREEMENT. Each of the Acquiror and Newco
has full corporate power and authority to execute and deliver this Agreement and
to consummate the Merger and the other transactions contemplated on its part
hereby. The execution, delivery and performance by each of the Acquiror and
Newco of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of the Acquiror and Newco. This Agreement has been duly executed and delivered
by each of the Acquiror and Newco, and is a legal, valid and binding obligation
of each of the
5
<PAGE>
Acquiror and Newco, enforceable against each of the Acquiror and Newco in
accordance with its terms, except to the extent that its enforceability may be
limited by applicable bankruptcy, insolvency, reorganization or other laws
affecting the enforcement of creditors' rights generally or by general equitable
principles.
4.4 ACQUIROR COMMON STOCK. The shares of Acquiror Common Stock to be
issued in connection with the Merger have been duly authorized and, when issued
as contemplated hereby at the Effective Time, will be validly issued, fully paid
and non-assessable, and not subject to any preemptive rights or other rights or
interests of third parties.
4.5 NO VIOLATIONS OR CONSENTS. The execution, delivery and
performance of this Agreement by each of the Acquiror and Newco and the
consummation by each of them of the transactions contemplated hereby, will not
(i) violate or conflict with any provision of any charter or by-laws of the
Acquiror or Newco, (ii) require the consent, waiver, approval, license or
authorization of or any filing by the Acquiror or Newco with any public
authority, other than (a) the filing of a pre-merger notification report under
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules and regulations promulgated thereunder (the "HSR Act"), (b) in connection
with or in compliance with the provisions of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the Securities Act of 1933, as amended
(the "Securities Act"), the Communications Act of 1934, as amended (the
"Communications Act"), the General Corporation Law or the "takeover" or "blue
sky" laws of various states and (c) any other filings and approvals expressly
contemplated by this Agreement, (iii) violate, conflict with or result in a
breach of or the acceleration of any obligation under, or constitute a default
(or an event which with notice or the lapse of time or both would become a
default) under, or give to others any right of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or other
encumbrance on any property or asset of the Acquiror or Newco pursuant to any
provision of any indenture, mortgage, lien, lease, agreement, instrument, order,
judgment or decree to which the Acquiror or Newco is subject or by which the
Acquiror or Newco or any of their property or assets is bound, or (iv) violate
or conflict with any law, rule, regulation, permit, ordinance or decree
applicable to the Acquiror or Newco or by which any property or asset of either
of them is bound or affected except, in each of the instances set forth in items
(i) through (iv) above, where failure to give such notice, make such filings, or
obtain such authorizations, consents or approvals, or where such violations,
conflicts, breaches or defaults, in the aggregate, would not have an Acquiror
Material Adverse Effect, as defined below.
4.6 LITIGATION. Except as may be disclosed in the Acquiror SEC
Filings, as defined below, there are no suits, arbitrations, actions or
proceedings pending or, to the best of the Acquiror's knowledge, threatened or,
to the best of the Acquiror's knowledge, investigations pending or threatened
against the Acquiror or with respect to any property or asset of it before any
court, arbitrator, administrator or governmental or regulatory authority or body
which, in the aggregate, are likely to have a material adverse effect on the
business, operations or financial condition of the Acquiror (an "Acquiror
Material Adverse Effect").
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4.7 FINANCIAL STATEMENTS AND REPORTS. The Acquiror heretofore has
delivered to the Company true and complete copies of (a) its Registration
Statement on Form S-1 dated June 12, 1997, Registration No. 333-21325, and
(b) its Quarterly Reports on Form 10-Q for the quarters ended June 30, 1997 and
September 30, 1997 (collectively,"Acquiror SEC Filings"). As of the respective
times such documents were filed or, as applicable, became effective, the
Acquiror SEC Filings complied as to form and content, in all material respects,
with the requirements of the Securities Act and the Exchange Act, as the case
may be, and the rules and regulations promulgated thereunder, and did not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
financial statements of the Acquiror included in the Acquiror SEC Filings were
prepared in accordance with generally accepted accounting principles ("GAAP")
applied on a consistent basis and (except as may be indicated therein or in the
notes thereto) present fairly the consolidated financial position, results of
operations and cash flows of the Acquiror and its consolidated subsidiaries as
of the dates and for the periods indicated subject, in the case of unaudited
interim consolidated financial statements, to normal recurring year-end
adjustments.
4.8 REGISTRATION STATEMENT; BLUE SKY FILINGS; PROXY STATEMENT; OTHER
INFORMATION. The Registration Statement, as defined below, and the information
supplied or to be supplied in writing by either the Acquiror or Newco for
inclusion in the Proxy Statement, as defined below, and any other documents to
be filed with the Securities and Exchange Commission (the "SEC"), including,
without limitation, the British Columbia Securities Commission ("BCSC"), the
Vancouver Stock Exchange (the "VSE") or any regulatory agency in connection with
the transactions contemplated hereby, will not be, at the respective times such
documents are filed or declared effective by the SEC and on the Effective Time,
and, with respect to the Proxy Statement, when first published, sent or given to
stockholders of the Company, false or misleading with respect to any material
fact, or omit to state any material fact necessary in order to make the
statements therein not misleading or, in the case of the Proxy Statement or any
amendment thereof or supplement thereto, at the time of the special meeting of
the Company's stockholders provided for in Section 6.1, be false or misleading
with respect to any material fact, or omit to state any material fact necessary
to correct any statement in any earlier communication with respect to the
solicitation of any proxy for such meeting. All documents which the Acquiror or
Newco files or is responsible for filing with the SEC and any regulatory agency
in connection with the Merger (including, without limitation, the Registration
Statement) will comply as to form and content in all material respects with the
provisions of applicable law and regulations. Notwithstanding the foregoing,
the Acquiror and Newco make no representations or warranties with respect to any
information that has been supplied in writing by the Company or its auditors,
attorneys or financial advisors specifically for use in the Registration
Statement or in any other documents to be filed by the Acquiror with the SEC or
any other regulatory agency in connection with the transactions contemplated
hereby.
4.9 BROKERS. Neither the Acquiror nor Newco has paid or become
obligated to pay any fee or commission to any broker, finder, investment banker
or other intermediary in
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connection with this Agreement, except that the Acquiror has retained Lehman
Brothers as its financial advisor in connection with the transactions
contemplated by this Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the disclosure schedules to be delivered to the
Acquiror by the Company (the "Disclosure Schedules") pursuant to Section 6.13,
the Company represents and warrants to the Acquiror and Newco as follows:
5.1 CORPORATE ORGANIZATION. Each of the Company and each of its
subsidiaries Advanced Management Services, Inc. CTN -- Custom Telecommunications
Network of Arizona, Inc. and United Digital Network of Texas, Inc. (formerly
known as AnswerNet, Inc., which includes, pursuant to a merger, Digital Network,
Inc.) (each a "Subsidiary" and collectively, the "Subsidiaries"), is a
corporation duly organized, validly existing and in good standing under the laws
of its state of incorporation with all requisite corporate power and authority
to own, operate and lease its properties and to carry on its business as it is
now being conducted, and is qualified or licensed to do business and is in good
standing in each jurisdiction in which the failure to be so qualified or
licensed, in the aggregate, would have a material adverse effect on the
financial condition, operations or business of the Company and the Subsidiaries
taken as a whole (a "Company Material Adverse Effect"). The Certificates of
Incorporation and By-Laws of the Company and the Subsidiaries are in full force
and effect. The Company is not in violation of or in default under any
provision of its Certificate of Incorporation or By-Laws. The Subsidiaries are
the only subsidiaries, direct or indirect, of the Company.
5.2 CAPITAL STOCK. The authorized capital stock of the Company
consists in its entirety of 100,000,000 shares of Common Stock, $.01 par value,
of which, as of the date hereof, 7,564,103 are issued and outstanding and none
are held in the Company's treasury. Except as set forth on SCHEDULE 5.2, all of
the outstanding shares of capital stock of each of the Subsidiaries are owned
beneficially and of record by the Company free and clear of all liens, charges,
encumbrances, options, rights of first refusal or limitations or agreements
regarding voting rights of any nature, other than the Proxy Agreement, as
defined below. All of the outstanding shares of capital stock of the Company
and the Subsidiaries have been duly authorized, validly issued and are fully
paid and nonassessable.
5.3 OPTIONS, WARRANTS OR OTHER RIGHTS. Except as set forth on
SCHEDULE 5.3 or as contemplated by this Agreement, there is no outstanding
right, subscription, warrant, call, unsatisfied preemptive right, option or
other agreement or arrangement of any kind to purchase or otherwise to receive
from the Company or any Subsidiary any of the outstanding, authorized but
unissued, unauthorized or treasury shares of the capital stock or any other
equity security of the Company or any Subsidiary and there is no outstanding
security of any kind convertible into or exchangeable for such capital stock.
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5.4 AUTHORITY RELATIVE TO AGREEMENT. The Company has full corporate
power and authority to execute and deliver this Agreement and to consummate the
Merger and the other transactions contemplated on its part hereby. The
execution and delivery by the Company of this Agreement and the consummation of
the transactions contemplated on its part hereby have been duly authorized by
its Board of Directors, and (other than the approval and adoption of this
Agreement by the holders of a majority of the then outstanding shares of Common
Stock, as provided in Section 6.1 hereof, the filing and recordation of
appropriate merger documents as required by the General Corporation Law and the
receipt of a satisfactory fairness opinion from its financial advisor) no other
corporate proceedings on the part of the Company or its stockholders are
necessary to authorize the execution and delivery of this Agreement by the
Company or the consummation of the transactions contemplated on its part hereby.
In that regard, the Company hereby represents that its Board of Directors has
(i) determined that the Merger is fair to and in the best interests of the
Company's stockholders, (ii) approved the Merger and (iii) resolved to recommend
in the Proxy Statement adoption of this Agreement and authorization of the
Merger by the stockholders of the Company, such matters to be subject to the
fiduciary duties of such directors and to the receipt of a satisfactory fairness
opinion from its financial advisor. This Agreement has been duly executed and
delivered by the Company, and constitutes a legal, valid and binding obligation
of the Company, enforceable against the Company in accordance with its terms,
except to the extent that its enforceability may be limited by applicable
bankruptcy, insolvency, reorganization or other laws affecting the enforcement
of creditors' rights generally or by general equitable principles.
5.5 NO VIOLATIONS OR CONSENTS. Except as set forth on SCHEDULE 5.5,
the execution, delivery and performance of this Agreement by the Company and the
consummation by it of the transactions contemplated hereby will not (i) violate
or conflict with any provision of any charter or by-laws of the Company or any
Subsidiary, (ii) require the consent, waiver, approval, license or authorization
of or any filing by the Company or any Subsidiary with any third party or public
authority (other than (a) the filing of a premerger notification report under
the HSR Act, (b) in connection with or in compliance with the provisions of the
Exchange Act, the Securities Act, the General Corporation Law, the
Communications Act or the "takeover" or "blue sky" or "public utility" laws of
various states, and (c) and any other filings and approvals expressly
contemplated by this Agreement, including, without limitation, those with the
BCSC and the VSE), (iii) violate, conflict with or result in a breach of or the
acceleration of any obligation under, or constitute a default (or an event which
with notice or the lapse of time or both would become a default) under, or give
to others any right of termination, amendment, acceleration or cancellation of,
or result in the creation of a lien or other encumbrance on any property or
asset of the Company or any Subsidiary pursuant to any provision of any
indenture, mortgage, lien, lease, agreement, instrument, order, judgment or
decree to which the Company or any Subsidiary is subject or by which the Company
or any Subsidiary or any of their property or assets is bound, or (iv) violate
or conflict with any law, rule, regulation, permit, ordinance, regulation or
decree applicable to the Company or any Subsidiary or by which any property or
asset of either of them is bound or affected except, in each of the instances
set forth in items (i) through (iv) above, where failure to give such notice,
make such filings, or obtain such authorizations, consents or
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approvals, or where such violations, conflicts, breaches or defaults, in the
aggregate, would not have a Company Material Adverse Effect.
5.6 GOVERNMENTAL AUTHORIZATIONS AND REGULATIONS. SCHEDULE 5.6 is a
true and complete list of all material governmental licenses, franchises,
permits and other authorizations ("Permits") held by the Company and/or the
Subsidiaries. Such Permits are all governmental licenses, franchises, permits
and other authorizations necessary to the conduct of the business of the Company
and the Subsidiaries, except where the failure to hold such Permits, in the
aggregate, would not have a Company Material Adverse Effect. Such Permits are
valid and in full force and effect and the Company knows of no threatened
suspension, cancellation or invalidation of any such Permit except where any
such action would not result in a Company Material Adverse Effect. Neither the
Company nor any Subsidiary is in conflict with, or is in default or violation
of, any law, rule, regulation, order, judgment, Permit, ordinance, regulation or
decree applicable to the Company or any Subsidiary or by which any property or
asset of either of them is bound or affected, except where such conflicts,
defaults or violations, in the aggregate, would not have a Company Material
Adverse Effect.
5.7 LITIGATION. Except as may be disclosed in the PPM, as defined
below, or on SCHEDULE 5.7, there are no suits, arbitrations, actions or
proceedings, pending or, to the best of the Company's or any Subsidiary's
knowledge, threatened or, to the best of the Company's or any Subsidiary's
knowledge, investigations pending or threatened against the Company or any
Subsidiary or with respect to any property or asset of any of them before any
court, arbitrator, administrator or governmental or regulatory authority or body
which, in the aggregate, are likely to have a Company Material Adverse Effect.
5.8 FINANCIAL STATEMENTS AND REPORTS; MATERIAL LIABILITIES.
(a) The Company has delivered to the Acquiror true and complete
copies of its Confidential Private Placement Memorandum dated October 28, 1997
(the "PPM") As of the date thereof, the PPM did not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements in the PPM were prepared in accordance with GAAP applied on a
consistent basis and (except as may be indicated therein or in the notes
thereto) present fairly the consolidated financial position, results of
operations and cash flows of the Company and its consolidated subsidiaries as of
the dates and for the periods indicated subject, in the case of un-audited
interim consolidated financial statements, to normal recurring year-end
adjustments and subject to the "going concern" opinion of the Company's
independent accountants. (The audited consolidated balance sheet of the Company
and the Subsidiaries as of April 30, 1997 included in the PPM is hereinafter
called the "Company Balance Sheet," and April 30, 1997 is hereinafter called the
"Company Balance Sheet Date," and the Company's balance sheet for the three
month period ended July 31, 1997 included in the PPM is hereafter called the
"Interim Balance Sheet").
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(b) Except as set forth on SCHEDULE 5.8(b), the Company and its
Subsidiaries, considered as a whole, have no material liabilities or obligations
(whether fixed, accrued, contingent or otherwise) that are not fully reflected
or provided for on, or disclosed in the notes to, the Company Balance Sheet or
the Company Interim Balance Sheet, except for (i) liabilities in the ordinary
course of business that could not be reasonably expected to have a Company
Material Adverse Effect or (ii) liabilities incurred in the ordinary course of
business that are not required by GAAP to be reflected thereon and which are not
material.
5.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the Company Balance
Sheet Date and except as disclosed on SCHEDULE 5.9, the business of the Company
and the Subsidiaries have been conducted in the ordinary course consistent with
past practice, and (i) there has not been any material adverse change in the
financial condition, results of operations, properties, or business of the
Company or any Subsidiary, nor, to the Company's knowledge, has there occurred
any event or development that could be reasonably foreseen to result in a
Company Material Adverse Effect.
5.10 BENEFIT PLANS. Except as disclosed on SCHEDULE 5.10, neither the
Company nor any Subsidiary has outstanding any employment agreement with any
officer or employee of the Company or any Subsidiary or any bonus, incentive
compensation, deferred compensation, profit sharing, stock option, stock bonus,
stock purchase, savings, severance, salary continuation, consulting, retirement
(including health and life insurance benefits provided after retirement) or
pension plan (including Company Employee Benefit Plans as defined in
Section 5.11 hereof) or arrangement with or for the benefit of any officer,
employee or other person, or for the benefit of any group of officers, employees
or other persons that provides for payment of more than $100,000 in annual
benefits. Neither the Company nor any Subsidiary has made, or entered into any
agreement to make, any payment that becomes payable as a result of the
consummation of this transaction which would be treated as an "excess parachute
payment" as defined in Section 280G of the Internal Revenue Code of 1986, as
amended (the "IRC"). There are no such agreements, plans or other arrangements
entered into with or provided for any independent contractors with whom the
Company or any Subsidiary has a business relationship.
5.11 ERISA. Set forth on SCHEDULE 5.10 are all of the employee
benefit plans, as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), but without regard to whether any
such plan is in fact subject to ERISA, that is sponsored, or is being maintained
or contributed to, by the Company or any Subsidiary that provides for payment of
more than $25,000 in annual benefits (the "Company Employee Benefit Plans").
None of the Company Employee Benefit Plans are "multiemployer plans" as defined
in Section 3(37) of ERISA. The Company has furnished or made available or will
promptly after the date hereof make available to Newco and the Acquiror (a) a
true and complete copy of the plan document and summary plan description for
each Company Employee Benefit Plan, (b) a true and complete copy of the most
recently filed Form 5500 (including the related schedules) with respect to each
Company Employee Benefit Plan for which such form is required to be filed, (c) a
true and complete copy of any trust agreement, insurance contract or other
agreement or arrangement serving as source of funding any benefits payable under
any Company Employee Benefit Plan, and
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(d) the most recently issued financial statement and actuarial report, if any,
for each Company Employee Benefit Plan. No "prohibited transactions" (as such
term is defined in Section 4975 of the IRC, or in Part 4 of Subtitle B of
Title I of ERISA) have occurred with respect to any Company Employee Benefit
Plan that could result in the imposition of taxes or penalties that, in the
aggregate, could have a Company Material Adverse Effect. With respect to each
of the Company Employee Benefit Plans that is intended to qualify for favorable
income tax treatment under Section 401(a) of the IRC, (i) the Internal Revenue
Service ("IRS") has issued a favorable determination letter with respect to such
plan; (ii) except as set forth on SCHEDULE 5.10, the Company has furnished Newco
and Acquiror with a copy of the determination letter most recently issued by the
IRS with respect to such plan and the application filed with the IRS for such
determination letter; and (iii) to the best knowledge of the Company, no event
has occurred from the date of each such favorable determination letter that
would adversely affect the tax-qualified status of the plan in question. Each
Company Employee Benefit Plan has been administered in compliance with the
applicable requirements of ERISA and the IRC, and in compliance with all other
applicable provisions of law, except for such noncompliance, if any, that, in
the aggregate, would not have a Company Material Adverse Effect. With respect
to each Company Employee Benefit Plan, neither the Company nor any Subsidiary
has incurred liabilities which, in the aggregate, could have a Company Material
Adverse Effect as a result of the violation of or the failure to comply with any
applicable provision of ERISA, the IRC, any other applicable provision of law,
or any provision of such plan. None of the Company Employee Benefit Plans which
is an "employee pension benefit plan", as that term is defined in Section 3(2)
of ERISA (a "Company Employee Pension Benefit Plan"), has incurred an
"accumulated funding deficiency," within the meaning of Section 302 of ERISA or
Section 412 of the IRC which, in the aggregate, could have a Company Material
Adverse Effect. Neither the Company nor any Subsidiary has failed to make any
contribution to, or to make any payment under, any Company Employee Benefit Plan
that it was required to make pursuant to the terms of the plan or pursuant to
applicable law in any amount which, in the aggregate, could have a Company
Material Adverse Effect. To the best knowledge of the Company, no "reportable
events," with respect to which a notice must be filed with the Pension Benefit
Guaranty Corporation ("PBGC"), has occurred with respect to any Company Employee
Pension Benefit Plan subject to Title IV of the ERISA which events, in the
aggregate, could have a Company Material Adverse Effect. No proceedings by the
PBGC to terminate any Company Employee Pension Benefit Plan pursuant to
Subtitle C of Title IV of ERISA have to the best of the Company's knowledge,
been instituted or threatened which, in the aggregate, could have a Company
Material Adverse Effect. Except for any liabilities in an amount which, in the
aggregate, would not have a Company Material Adverse Effect, neither the Company
nor any Subsidiary (1) has incurred any liability to the PBGC in connection with
any Company Employee Pension Benefit Plan, including any liability under
Section 4069 of ERISA and any penalty imposed under Section 4071 of ERISA,
(2) has terminated any Company Employee Pension Benefit Plan, or ceased
operations at any facility or withdrawn from any Company Employee Pension
Benefit Plan, in a manner that could subject it to liability or any liens under
Section 4062, 4063, 4064 or 4068 of ERISA or (3) has any knowledge as to the
existence of any state of facts, or as to the occurrence of any transactions,
that might reasonably be anticipated to result in any liability of the Company
or any Subsidiary to the PBGC under any other provision of Title IV of ERISA.
There is no pending or, to the best knowledge of the
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Company, threatened legal action, proceeding or investigation against or
involving any Company Employee Benefit Plan which could result in liabilities to
the Plan, the Company or any Subsidiary that, in the aggregate, could have a
Company Material Adverse Effect. Except as disclosed on SCHEDULE 5.10, the
present value of accrued benefits of each Company Employee Benefit Plan that is
a defined benefit plan as defined in Section 3(35) of ERISA does not exceed the
value of the assets of such plan available to pay such benefits by an amount
that, in the aggregate for all such plans, could have a Company Material Adverse
Effect. All representations made by the Company in this Section 5.11 are
likewise true with respect to each Subsidiary.
5.12 ENVIRONMENTAL MATTERS. "Company Real Properties" shall mean all
real property now or previously owned, operated or leased by the Company, any
Subsidiary or any predecessor-in-interest. Except as set forth on SCHEDULE
5.12: (i) the Company, each of the Subsidiaries, and to the best of the
Company's knowledge, each of the Company Real Properties is in compliance with,
and has no liability under any or all applicable Environmental Laws, except
where the failure to comply or such liability would not have a Company Material
Adverse Effect; (ii) none of the Company, any Subsidiary or any of the Company
Real Properties has been alleged in writing by any governmental agency or third
party to be in violation of, to be liable under, or to be subject to any
administrative or judicial proceeding pursuant to, any Environmental Law, the
violation of which would have a Company Material Adverse Effect; and (iii) to
the best knowledge of the Company and each Subsidiary, there are no facts or
circumstances which could reasonably form the basis for the assertion of any
claims against the Company or any Subsidiary relating to environmental matters
which, in the aggregate, would have a Company Material Adverse Effect. As used
herein, Environmental Law means any federal, state, or local law, statute, rule
or regulation, or the common law governing or relating to the environment or to
occupational health and safety.
5.13 REAL ESTATE LEASES. SCHEDULE 5.13 sets forth a complete and
accurate list, a copy of which has been delivered to the Acquiror of (i) all
leases and subleases under which the Company or any Subsidiary is lessor or
lessee of any real property, together with all amendments, supplements,
nondisturbance agreements and other agreements pertaining thereto; (ii) all
material options held by the Company or any Subsidiary or contractual
obligations on the part of the Company or any Subsidiary to purchase or acquire
any interest in real property; and (iii) all options granted by the Company or
any Subsidiary or contractual obligations on the part of the Company or any
Subsidiary to sell or dispose of any material interest in real property (except
for sale-leaseback transactions) in each such instance in items (i) through
(iii) above, which provides for a payment of more than $25,000. Such leases,
subleases and other agreements are in full force and constitute binding
obligations of the Company and, to the best of its knowledge, the other parties
thereto, and (i) there are no defaults thereunder by the Company or any
Subsidiary or, to the best of Company's knowledge, by any other party thereto;
and (ii) no event has occurred which (with notice, lapse of time or both or
occurrence of any other event) would constitute a default by the Company or any
Subsidiary or, to the best of the Company's knowledge, by any other party
thereto, other than defaults or events which, in the aggregate, would not have a
Company Material Adverse Effect. The Company or a Subsidiary has good, valid
and insurable
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leasehold title to all such leased property, free and clear of all encumbrances,
liens, charges or other restrictions of any kind or character, except for
Permitted Liens, as defined below.
5.14 TITLE TO PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES.
SCHEDULE 5.14 lists all real property owned by the Company or any Subsidiary as
of the date of this Agreement. The Company and/or a Subsidiary has good, valid
and insurable title in fee simple to all of the real property listed on
SCHEDULE 5.14, free and clear of all encumbrances, liens, charges or other
restrictions of any character whatsoever, except for (i) statutory liens for
current taxes or assessments not due or delinquent or the validity of which is
being contested in good faith, (ii) mechanics, workers, repairmen's and other
similar liens arising or incurred in the ordinary course of business, (iii) such
other liens, imperfections in title, charges, easements, restrictions and other
encumbrances, if any, which in the aggregate do not have a Company Material
Adverse Effect, and (iv) except as set forth on SCHEDULE 5.14 (collectively
"Permitted Liens"). Except for leased assets, the Company and the Subsidiaries
have good and insurable title to all of their material tangible personal
property used in their businesses, including, without limitation, those
reflected in the Company Balance Sheet (other than assets disposed of in the
ordinary course of business since the Company Balance Sheet Date), free and
clear of all liens, charges, pledges, security interests or other encumbrances,
except liens for taxes not yet due and payable and such liens or other
imperfections of title of the type and nature described as "Permitted Liens"
above to the extent applicable, if any, as would not, in the aggregate, have a
Company Material Adverse Effect on the operation of the business of the Company
or any Subsidiary, and except as reflected or disclosed in the Company Balance
Sheet, or on SCHEDULE 5.14.
5.15 TAX MATTERS. Except as set forth on SCHEDULE 5.15, the Company
has paid, or the Company Balance Sheet contains adequate provision for, all
federal, state, local, foreign or other governmental income, franchise, payroll,
F.I.C.A., unemployment, withholding, real property, personal property, sales,
payroll, disability and all other taxes imposed on the Company or any Subsidiary
or with respect to any of their respective properties, or otherwise payable by
them, including interest and penalties, if any, in respect thereof
(collectively, "Company Taxes"), for the Company taxable period ended on the
date of the Company Balance Sheet and all fiscal periods of the Company prior
thereto, except such nonpayment, or failure to make adequate provision, which,
in the aggregate, would not have a Company Material Adverse Effect. Company
Taxes paid and/or incurred from the date of the Company Balance Sheet until the
Effective Time include only Company Taxes incurred in the ordinary course of
business determined in the same manner as in the taxable period ending on the
date of the Company Balance Sheet. Except as disclosed on SCHEDULE 5.15, the
Company and its Subsidiary have timely filed all income tax, excise tax, sales
tax, use tax, gross receipts tax, franchise tax, employment and payroll related
tax, property tax, and all other tax returns which the Company and/or each
Subsidiary (as the case may be) are required to file ("Tax Returns"), and have
paid or provided for all the amounts shown to be due thereon, except where such
failure to make such timely filings, in the aggregate, would not have a Company
Material Adverse Effect, and except for the nonpayment of such amounts which, in
the aggregate, would not have a Company Material Adverse Effect. Except as set
forth on SCHEDULE 5.15, (i) neither the Company nor any Subsidiary has filed or
entered into, or is otherwise bound by, any election, consent or extension
agreement
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that extends any applicable statute of limitations with respect to taxable
periods of the Company, (ii) the Company is not a party to any contractual
obligation requiring the indemnification or reimbursement of any person with
respect to the payment of any Tax, (iii) no claim has ever been made or
threatened by an authority in a jurisdiction where the Company or any Subsidiary
do not file Tax Returns that they are or may be subject to Taxes by that
jurisdiction, except for any such claims as, in the aggregate, would not have a
Company Material Adverse Effect, (iv) no issues have been raised by the relevant
taxing authorities on audit that are of a recurring nature and that would have
an effect upon the Taxes of the Company or any Subsidiary, except for any issue
which, in the aggregate, would not have a Company Material Adverse Effect.
Except as set forth on SCHEDULE 5.15, to the best of the Company's and each
Subsidiary's knowledge, no action or proceeding is pending or threatened by any
governmental authority for any audit, examination, deficiency, assessment or
collection from the Company or any Subsidiary of any Company Taxes, no
unresolved claim for any deficiency, assessment or collection of any Company
Taxes has been asserted against the Company or any Subsidiary, and all resolved
assessments of Company Taxes have been paid or are reflected in the Company
Balance Sheet, except for any of the foregoing which, in the aggregate, would
not have a Company Material Adverse Effect.
5.16 INTELLECTUAL PROPERTY. SCHEDULE 5.16 lists all the registered
patents, trademarks, service marks, copyrights, trade names and applications for
any of the foregoing owned by the Company or any Subsidiary as of the date of
this Agreement (the "Registered Intellectual Property"). The Company and/or the
Subsidiaries have good title to the Registered Intellectual Property and have
good title to, or valid licenses or rights to use, all patents, copyrights,
trademarks, trade names, brand names, proprietary and other technical
information, technology and software (collectively "Intellectual Property")
which are used in the operation of their businesses as presently conducted,
except for such title, license or use imperfections as, in the aggregate, would
not have a Company Material Adverse Effect. There are no claims or proceedings
pending or, to the Company's and each Subsidiary's knowledge, threatened against
the Company or any Subsidiary asserting that the Company or any Subsidiary is
infringing or engaging in the unauthorized use of any Intellectual Property of
any other person or entity, except such claims or proceedings which, in the
aggregate, would not have a Company Material Adverse Effect.
5.17 LABOR MATTERS. Neither the Company nor any Subsidiary is a party
to any collective bargaining agreement with respect to any of their employees.
None of the employees of the Company or any Subsidiary are represented by any
labor union and, as of the date hereof, neither the Company nor any Subsidiary
has any knowledge of any union organizational efforts involving the Company's
employees during the past five years. Except as set forth on SCHEDULE 5.17,
neither the Company nor any Subsidiary has received written notice of any claim,
or has knowledge of any facts which are likely to give rise to any claim, that
they have not complied in any respect with any laws relating to the employment
of labor, including, without limitation, any provisions thereof relating to
wages, hours, collective bargaining, the payment of social security and similar
taxes, equal employment opportunity, employment discrimination or employment
safety, except such claims which, in the aggregate, would not have a Company
Material Adverse Effect.
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5.18 INSURANCE. SCHEDULE 5.18 lists, as of the date of this
Agreement, all material policies of fire, products liability, general liability,
vehicle, worker's compensation, directors' and officers' liability, title and
other insurance owned or held by or covering the Company or any Subsidiary or
any of their property or assets which are material to the business of the
Company and any Subsidiary, taken as a whole. As of the date hereof, all of
such policies are in full force and effect, except as to matters or defaults
which, in the aggregate, would not have a Company Material Adverse Effect, and
no written notice of cancellation or termination has been received with respect
to any such policy which has not been replaced or cannot be replaced on
substantially similar terms prior to the date of such cancellation or
termination.
5.19 CONTRACTS. SCHEDULE 5.19 contains a complete and correct list of
all material agreements, contracts and commitments (collectively, the
"Contracts"), (a) to which the Company is a party or by which it is bound, or
(b) by which any of the assets, properties or the business is bound, and in
either case, which constitute (i) mortgages, indentures, security agreements,
and other agreements and instruments relating to the borrowing of money by or
from, or any extension or credit to or from, the Company; (ii) sales agency or
marketing agreements; (iii) agreements or commitments for capital expenditures;
(iv) brokerage or finder's agreements; (v) partnership, joint venture or other
arrangements or agreements involving a sharing of profits or expenses;
(vi) contracts or commitments to sell, lease or otherwise dispose of any assets,
properties or business other than in the ordinary course of business;
(vii) contracts or commitments limiting the freedom of the Company to compete in
any line of business or in any geographic area or with any person, and any
nondisclosure or nonsolicitation agreements which limit the Company; (viii) any
other agreements, contracts and commitments material to the business, operations
or financial condition of the Company in each instance under items (i) through
(viii) above which Contract relates to an aggregate amount of more than $75,000.
All of the Contracts are valid and in full force and effect and the Company has
performed all of its obligations under each Contract and no default, violation
or breach by the Company or, to the Company's knowledge, any other party, under
any Contract has occurred which affects the enforceability of such Contract or
any party's rights thereunder, except for such defaults, violations and breaches
which would not, in the aggregate, have a Company Material Adverse Effect.
5.20 REGISTRATION STATEMENT; BLUE SKY FILINGS; PROXY STATEMENT; OTHER
INFORMATION. The Proxy Statement and the information supplied or to be supplied
in writing by the Company for inclusion in the Registration Statement and any
other documents to be filed with the SEC, the BCSC, the VSE or any other
regulatory agency in connection with the transactions contemplated hereby will,
at the respective times such documents are filed, or, as applicable, declared
effective, and on the Effective Time, and, with respect to the Proxy Statement,
when first published, sent or given to stockholders of the Company, be false or
misleading with respect to any material fact, or omit to state any material fact
necessary in order to make the statements therein not misleading or, in the case
of the Proxy Statement or any amendment thereof or supplement thereto, at the
time of the special meeting of the Company's stockholders provided for in
Section 6.1, be false or misleading with respect to any material fact, or omit
to state any material fact necessary to correct any statement in any earlier
communication with respect to the
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solicitation of any proxy for such meeting. If, at any time prior to the
Effective Time, any event relating to the Company or any of its affiliates,
officers or directors is discovered by the Company that should be set forth in
an amendment to the Registration Statement or a supplement to the Proxy
Statement, the Company will promptly inform the Acquiror, and such amendment or
supplement will be promptly filed with the VSE and disseminated to the
stockholders of the Company, to the extent required by applicable securities
laws. All documents which the Company files or is responsible for filing with
the VSE and any other regulatory agency in connection with the Merger
(including, without limitation, the Proxy Statement) will comply as to form and
content in all material respects with the provisions of applicable law.
Notwithstanding the foregoing, neither the Company nor the Subsidiary make any
representations or warranties with respect to any information that has been
supplied in writing by the Acquiror or Newco, or their auditors, attorneys,
financial advisors, specifically for use in the Proxy Statement, or in any other
documents to be filed with the VSE or any other regulatory agency in connection
with the transactions contemplated hereby.
5.21 BROKERS. Except as set forth in Schedule 5.21, neither the
Company nor any Subsidiary has paid or become obligated to pay any fee or
commission to any broker, finder, investment banker or other intermediary in
connection with this Agreement.
5.22 CONTINUITY OF INTEREST. The Company has caused each person who
is an affiliate, as defined in Rule 12b-2 under the Exchange Act (an
"Affiliate"), to deliver to the Acquiror and each Affiliate has, concurrently
with the signing of this Agreement, signed an affiliate agreement in the form
attached hereto as EXHIBIT C (an "Affiliate Agreement") providing, among other
things, that such person has no plan or intention and will not sell, pledge,
transfer or otherwise dispose of shares of Acquiror Common Stock or in any way
reduce their risk relative to any such shares, until such time as financial
results covering at least 30 days of combined operations of the Acquiror and the
Company have been published within the meaning of Section 201.01 of the
Codification of Financial Reporting Policies of the SEC and except in compliance
with the applicable provisions of the Securities Act, and the rules and
regulations thereunder.
5.23 TRANSACTIONS WITH AFFILIATED PARTIES. SCHEDULE 5.23 sets forth a
true and complete list and description of all transactions engaged in between
the Company and any director, officer, employee, stockholder, partner or agent
of the Company, or any of their respective spouses or children, any trust of
which any such person is the grantor, trustee or beneficiary, any corporation of
which any such person or party is a stockholder, employee, officer or director,
or any partnership or other person in which any such person or party owns an
interest (all such persons, trusts, corporations and partnerships being herein
referred to collectively as "Affiliated Parties" and individually as an
"Affiliated Party"). No Affiliated Party is a party to any agreement, contract
or commitment with the Company except as set forth in SCHEDULE 5.24.
ARTICLE VI
COVENANTS AND AGREEMENTS
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6.1 REGISTRATION STATEMENT; PROXY STATEMENT; STOCKHOLDER MEETING;
VANCOUVER EXCHANGE.
(a) As promptly as practicable after the execution of this
Agreement, the Acquiror and Newco will file with the SEC a registration
statement on Form S-4 (as amended or supplemented, the "Registration Statement")
relating to the registration under the Securities Act of the Acquiror Common
Stock to be received in the Merger, and file with state securities
administrators such registration statements or other documents as may be
required under applicable blue sky laws to qualify or register such Acquiror
Common Stock in such states as are designated by the Company (the "Blue Sky
Filings"). The Acquiror and Newco will use their reasonable best efforts to
cause the Registration Statement to become effective as soon as practicable. In
the process of its preparation of the Registration Statement, the Acquiror will
provide the Company and its advisors drafts of the Registration Statement and
will provide the Company and its advisors a reasonable opportunity to
participate in such drafting process. The Acquiror will notify the Company
promptly of the receipt of any comments from the SEC or its staff or from any
state securities administrators and of any request by the SEC or its staff or by
any state securities administrators for amendments or supplements to the
Registration Statement or any Blue Sky Filings or for additional information,
and will supply the Company and its legal counsel with copies of all
correspondence between the Acquiror or any of its representatives, on the one
hand, and the SEC, its staff or any state securities administrators, on the
other hand, with respect to the Registration Statement.
(b) As promptly as practicable following the execution of this
Agreement, and after receipt by the Company of a fairness opinion from its
financial advisor, the Company agrees that this Agreement shall be submitted at
a meeting (the "Meeting") of its stockholders duly called and held pursuant to
Section 251(c) of the General Corporation Law. As soon as practicable after the
date of this Agreement, the Company shall take all action, to the extent
necessary in accordance with applicable law, its Certificate of Incorporation
and By-Laws, to convene a meeting of its stockholders promptly to consider and
vote upon the approval of the Merger, and the Company shall prepare and file
with the VSE, subject to the prior approval of the Acquiror, which approval the
Acquiror shall not unreasonably withhold, such information as may be necessary
to allow the VSE to approve the merger (the "VSE Approval"), preliminary and
final versions of a proxy statement and proxy and other filings relating to the
Meeting as required by the VSE and the applicable regulations thereof. The term
"Proxy Statement" shall mean such proxy statement at the time it initially is
mailed to stockholders and all duly filed amendments or revisions made thereto,
if any, similarly mailed. Notice of the Meeting shall be mailed to the
Company's stockholders of the Company along with the Proxy Statement. The
Company will notify the Acquiror promptly of the receipt of any comments from
the VSE with respect to the Proxy Statement and will supply the Acquiror and its
legal counsel with copies of all correspondence from or to the VSE and any other
applicable regulatory authority. The Company, after consultation with the
Acquiror and its legal counsel, shall respond promptly to any comments made by
the VSE with respect to the VSE Approval and the Proxy Statement and cause the
Proxy Statement and proxy to be mailed to its stockholders at the earliest
practicable time following the execution hereof.
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6.2 CONDUCT OF THE BUSINESS OF THE COMPANY PRIOR TO THE EFFECTIVE
TIME. Except as set forth on SCHEDULE 6.2, the Company agrees that prior to the
Effective Time, except as otherwise consented to or approved in writing by the
Acquiror or expressly permitted by this Agreement:
(a) the business of the Company and the Subsidiaries shall be
conducted only in the ordinary course and consistent with past practice;
(b) each of the Company and each Subsidiary shall not (i) amend
its Certificate of Incorporation or By-Laws, (ii) change the number of
authorized, issued or outstanding shares of its capital stock, except upon the
exercise of stock options or warrants outstanding on the date hereof,
(iii) declare, set aside or pay any dividend or other distribution or payment in
cash, stock or property in respect of shares of its capital stock, (iv) make any
direct or indirect redemption, retirement, purchase or other acquisition of any
of its capital stock (except for repurchases of Common Stock from employees
pursuant to existing stock subscription agreements between the Company and
certain of its employees) or (v) split, combine or reclassify its outstanding
shares of capital stock;
(c) neither the Company nor any Subsidiary shall, directly or
indirectly, (i) issue, grant, sell or pledge or agree or propose to issue,
grant, sell or pledge any shares of, or rights of any kind to acquire any shares
of the capital stock of the Company or any Subsidiary, except that the Company
may issue shares of Common Stock upon the exercise of stock options or warrants
outstanding on the date hereof, (ii) other than in the ordinary course of
business and consistent with past practice and other than with respect to the
Promissory Note, incur any material indebtedness for borrowed money, except
material indebtedness for borrowed money incurred under credit facilities
existing as of the date hereof, (iii) waive, release, grant or transfer any
rights of material value, except in the ordinary course of business consistent
with past practices or (iv) transfer, lease, license, sell, mortgage, pledge,
dispose of or encumber any material assets of the Company or any Subsidiary
other than in the ordinary course of business and consistent with past practice;
(d) the Company and the Subsidiaries shall use their reasonable
commercial efforts to preserve intact the business organization of the Company
and the Subsidiaries, to keep available the services of its operating personnel
and to preserve the goodwill of those having business relationships with each of
them, including, without limitation, suppliers and customers;
(e) neither the Company nor any Subsidiary will, directly or
indirectly, (i) increase the compensation payable or to become payable by it to
any of its employees, officers or directors, except in accordance with
employment agreements, welfare and benefit plans set forth on SCHEDULE 5.10, and
except, with respect to employees who are not directors or officers, for
increases in the ordinary course of business, consistent with past practice,
(ii) adopt additional, or make any payment or provision, other than as required
by existing plans or agreements, including provisions and actions under existing
stock option plans in connection with the Merger, in the ordinary course of
business and consistent with prior practice, with respect to
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any stock option, bonus, profit sharing, pension, retirement, deferred
compensation, employment or other payment or employee compensation plan,
agreement or arrangement for the benefit of employees of the Company or any
Subsidiary, (iii) grant any stock options or stock appreciation rights or issue
any warrants, (iv) enter into or amend any employment or severance agreement or
arrangement or (v) make any loan or advance to, or enter into any written
contract, lease or commitment with, any officer or director of the Company or
its Subsidiary;
(f) neither the Company nor any Subsidiary shall, directly or
indirectly, assume, guarantee, endorse or otherwise become responsible for the
obligations of any other individual, firm or corporation other than a Subsidiary
or make any loans or advances to any individual, firm or corporation except in
the ordinary course of its business and consistent with past practices;
(g) neither the Company nor any Subsidiary shall make any
investment of a capital nature either by purchase of stock or securities,
contributions to capital, property transfers, acquisition or financing of
equipment or otherwise, or other than in the ordinary course of business, by the
purchase of any property or assets of any other individual, firm or corporation;
(h) neither the Company nor any Subsidiary shall enter into
modify or amend in any material respect or take any action to terminate their
respective material contracts, except in the ordinary course of business;
(i) neither the Company nor any Subsidiary shall take any
action, other than reasonable and usual actions in the ordinary course of
business and consistent with past practice, with respect to accounting policies
or procedures, except for changes required by GAAP;
(j) neither the Company nor any Subsidiary shall, without the
consent of the Acquiror, settle or compromise any material federal, state, local
or foreign income tax proceeding or audit;
(k) the Company and the Subsidiaries will promptly advise the
Acquiror in writing of any Company Material Adverse Effect or any breach of the
Company's representations or warranties, or any material breach of a covenant
contained herein of which the Company or any Subsidiary has knowledge; and
(l) neither the Company nor any Subsidiary shall enter into an
agreement to do any of the things described in clauses (a) through (k).
6.3 ACCESS TO PROPERTIES AND RECORD; ACQUIROR NOTICE. The Company
and the Subsidiaries shall afford to the Acquiror and Newco and their respective
accountants, counsel and representatives, reasonable access during normal
business hours throughout the period prior to the Effective Time to all of their
properties, books, contracts, commitments and written records (including, but
not limited to, tax returns for the preceding six years), and shall make
reasonably available their officers and employees to answer fully and promptly
questions put to them thereby;
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provided that no investigation pursuant to this Section 6.3 shall alter any
representation or warranties of any party hereto or conditions to the obligation
of the parties hereto; provided, further, that such access shall not
unreasonably interfere with the normal business operations of any of the parties
hereto. In connection with the preparation of its fairness opinion, the
Company's financial advisor shall be provided with the reasonable level of
access to the Acquiror and its books and records that may be necessary with
respect thereto. The Acquiror will provide the Company written notice of any
Acquiror Material Adverse Effect.
6.4 NEGOTIATIONS. Following the execution of this Agreement by the
Company, neither the Company nor any Subsidiary, nor the directors, officers,
attorneys, financial advisors, or other authorized persons of any of them,
shall, directly or indirectly, solicit, initiate or participate in discussions
or negotiations with or the submission of any offer or proposal by or provide
any information to, any corporation, partnership, person, or other entity or
group (other than Newco or the Acquiror or any officer or other authorized
representative of Newco or the Acquiror) concerning any Third Party Transaction,
as defined below, or, except as provided in Section 8.1(b) or as may be
consistent with fiduciary responsibilities under applicable law as advised in
writing by outside counsel, participate in any negotiation regarding any Third
Party Transaction or otherwise cooperate in any way with any effort or attempt
by any other person to effectuate a Third Party Transaction. Notwithstanding the
foregoing, the Board of Directors of the Company may furnish such information to
or enter into discussions and/or negotiations with any corporation, partnership,
person or other entity or group that makes an unsolicited offer to engage in a
Third Party Transaction with the Company that the Board of Directors of the
Company in good faith determines, with the assistance of its financial advisor,
may represent a transaction more favorable to the Company's stockholders when
compared to the Merger and the Merger Consideration if, and only to the extent
that, the Board determines after consultation with outside legal counsel that
the failure to take such action would be inconsistent with the compliance by the
Board of Directors with its fiduciary duties to the stockholders of the Company
under applicable law, provided that such party shall enter into a
confidentiality agreement on substantially the terms contained in Section 6.6 of
this Agreement, the Company shall notify the Acquiror as to the contents of
information being provided and the Company shall diligently enforce its rights
under such confidentiality agreement. The Company represents and warrants that
the Company is not currently involved in discussions or negotiations with any
third party with respect to a Third Party Transaction. The Company will
promptly communicate to the Acquiror the identity of any potential third party
purchaser making any such proposal or contact and, prior to the execution of any
agreement relating to any such Third Party Transaction, shall also communicate
the proposed terms and conditions thereof. The Company agrees not to release
any third party from, or waive any provision of, any confidentiality or
standstill agreement to which the Company is a party.
6.5 INDEMNIFICATION. The Acquiror agrees that all provisions with
respect to indemnification by the Company and the Subsidiaries or with respect
to liability to the Company or any Subsidiary now existing in favor of any
present or former director, officer, employee or agent (and their respective
heirs and assigns) of the Company or any Subsidiary, respectively (the
"Indemnified Parties"), as set forth in their respective Certificates of
Incorporation, as amended,
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or By-Laws or pursuant to other agreements in effect on the date hereof, shall
survive the Merger, shall not be amended, repealed or modified and shall
continue in full force and effect for a period of at least six years from the
Effective Time.
6.6 CONFIDENTIALITY.
(a) Subject to applicable law and to subpoena, the Acquiror and
Newco will hold, and will cause each of their affiliates, employees, officers,
directors and other representatives to hold, in strict confidence, and to not
use to the detriment of the Company or the Subsidiaries, any information or data
concerning the Company or the Subsidiaries furnished to them in connection with
the transactions contemplated by this Agreement, except for information or data
generally known or available to the public; and if the transactions contemplated
by this Agreement are not consummated, such confidence shall be maintained and
the Acquiror and Newco will return to the Company or the Subsidiaries all such
information and data as the Company or the Subsidiaries may request.
(b) Subject to applicable law and to subpoena, each of the
Company and the Subsidiaries will hold, and will cause each of the Company's and
each Subsidiary's employees, officers, directors and other representatives to
hold, in strict confidence, and to not use to the detriment of the Acquiror or
Newco, any information or data concerning the Acquiror or Newco furnished to
them in connection with the transactions contemplated by this Agreement, except
for information or data generally known or available to the public; and if the
transactions contemplated by this Agreement are not consummated, such confidence
shall be maintained and the Company and the Subsidiaries will return to the
Acquiror or Newco all such information and data as the Acquiror or Newco may
request.
6.7 REASONABLE BEST EFFORTS. Subject to the terms and conditions
hereof and the fiduciary obligations of the directors of the Company, each of
the parties hereto agrees to use their reasonable best efforts to take, or cause
to be taken, all action and to do, or cause to be done, all things necessary to
satisfy the conditions set forth herein as soon as practicable, including,
without limitation, reasonable best efforts necessary to list on the Nasdaq
National Market the shares of the Acquiror Common Stock issuable pursuant to the
Merger or thereafter, reasonable best efforts necessary to have removed or
rescinded any temporary, preliminary or permanent injunction, including the
injunctions or other orders described in Section 7.1(c), and reasonable best
efforts necessary to defend against any and all litigation, including the
proceedings described in Section 7.1(f) brought against either of the parties
hereto. The Acquiror and the Company each agree to take, or cause to be taken,
all action, and to do, or cause to be done, all things necessary or required by
the United States Federal Trade Commission or the United States Department of
Justice in connection with the expiration or termination of the waiting period
under the HSR Act; provided that neither party will be required to take any
action or to do anything in connection with the foregoing which would materially
impair the Acquiror's or the Surviving Corporation's ownership or operation of
all or a material portion of the business and assets of the Company and its
Subsidiary taken as a whole, or compel the Acquiror to dispose of all or a
material portion of the business or assets of the Acquiror and its subsidiaries,
taken as a whole.
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No party hereto will take any action for the purpose of delaying, impairing or
impeding the receipt of any required consent, authorization, order or approval
or the making of any required filing or registration.
6.8 CERTIFICATION OF STOCKHOLDER VOTE. At or prior to the closing of
the transactions contemplated by this Agreement, the Company shall deliver to
Acquiror a certificate of the Company's Secretary setting forth (i) the number
of shares of Common Stock voted in favor of adoption of this Agreement and
consummation of the Merger and the number of shares of Common Stock voted
against adoption of this Agreement and consummation of the Merger; and (ii) the
number of shares of Dissenting Stock.
6.9 LOAN TO COMPANY. On the execution of this Agreement, the
Acquiror shall loan to the Company $2.5 million pursuant to the terms and
conditions set forth in that certain promissory note attached hereto as
Exhibit B (the "Promissory Note").
6.10 OUTSOURCING AGREEMENT. The Company and the Acquiror shall use
reasonable efforts to negotiate the terms and conditions of and enter into a
billing outsourcing agreement, which shall provide, among other things, for the
management by Acquiror of the Company's customer billings and which shall be on
terms at least as favorable as the terms of the Company's present outsourcing
agreement.
6.11 AFFILIATE AGREEMENTS. To ensure that the Merger is accounted for
as a "pooling of interests," the Company will deliver to Newco from such
affiliates of the Company as deemed necessary by the Acquiror's independent
auditors a written agreement in the form attached hereto as Exhibit C (the
"Affiliate Agreements") relating to the disposition of the shares of the
Acquiror's Common Stock received thereby in the Merger.
6.12 PROXY AGREEMENT. On the execution of this Agreement, John R.
Snedegar shall deliver to the Acquiror a proxy agreement substantially in the
form attached hereto as Exhibit D (the "Proxy Agreement").
6.13 DISCLOSURE SCHEDULES. The Company shall use its reasonable best
efforts to deliver the Disclosure Schedules to the Acquiror promptly following
the execution of this Agreement.
ARTICLE VII
CONDITIONS PRECEDENT
7.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
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(a) The Registration Statement shall have been declared
effective, and no stop order suspending the effectiveness of the Registration
Statement shall have been issued by the SEC or shall be continuing to be in
effect, and no proceedings for that purpose shall have been initiated or
threatened by the SEC.
(b) This Agreement and the Merger contemplated hereby shall have
been approved and adopted by the requisite vote of the holders of the
outstanding shares of Common Stock of the Company entitled to vote thereon at
the Meeting.
(c) No United States, Canadian or state governmental authority
or other agency or commission or United States, Canadian or state court of
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, injunction or other order (whether
temporary, preliminary or permanent) which is in effect and has the effect of
making the acquisition of Common Stock by Newco illegal or otherwise prohibiting
consummation of the transactions contemplated by this Agreement.
(d) Any waiting period applicable to the Merger under the HSR
Act shall have expired or been terminated.
(e) All filings with the FCC required under the Communications
Act and with state agencies under state public utility statutes, if necessary,
shall have been made.
(f) The shares of Acquiror Common Stock issuable in the Merger
or thereafter shall have been authorized for listing on the Nasdaq National
Market, upon official notice of issuance.
(g) There shall not have been instituted or pending any action
or proceeding by or before any court or governmental authority or other
regulatory or administrative agency or commission, domestic or foreign, by any
government or governmental authority, nor shall there be any determination by
any government, governmental authority, regulatory or administrative agency or
commission which, in either case, would require either party to take any action
or do anything in connection with the foregoing which would result in a material
adverse effect to their respective businesses or materially impair Acquiror's or
the Surviving Corporation's ownership or operation of all or a material portion
of the business or assets of the Company and the Subsidiary, taken as a whole,
or compel Acquiror to dispose of all or a material portion of the business or
assets of Acquiror and the Subsidiaries, taken as a whole.
7.2 CONDITIONS TO THE OBLIGATION OF THE COMPANY TO EFFECT THE MERGER.
The obligation of the Company to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Time of the following additional
conditions:
(a) Each of the Acquiror and Newco shall have performed in all
material respects its obligations under this Agreement required to be performed
by it on or prior to the Effective Time pursuant to the terms hereof.
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(b) All representations or warranties of the Acquiror and Newco
in this Agreement which are qualified with respect to an Acquiror Material
Adverse Effect or materiality shall be true and correct, and all such
representations or warranties that are not so qualified shall be true and
correct in all material respects, in each case as if such representation or
warranty was made as of the Effective Time, except to the extent that any such
representation or warranty is made as of a specified date, in which case such
representation or warranty shall have been true and correct as of such specified
date.
(c) Since the date of this Agreement, there shall not have been
any material adverse change in the financial condition, results of operations,
properties or business of the Acquiror and its Subsidiaries, taken as a whole,
excluding any such change caused by a general change in the economy or in the
telecommunications industry served by the Acquiror and its Subsidiaries.
(d) Each of the Acquiror and Newco shall have delivered a
certificate of its President or Vice President to the effect set forth in
paragraphs (a), (b) and (c) of this Section 7.2.
(e) The Company shall have received from Riordan & McKinzie,
counsel to the Acquiror and Newco, an opinion dated the Effective Time in the
form reasonably agreed to by the parties hereto.
(f) The Company shall have received the opinion of its financial
advisors that the Merger and other transactions contemplated by this Agreement
are fair, from a financial point of view, to the stockholders of the Company.
7.3 CONDITIONS TO OBLIGATIONS OF THE ACQUIROR AND NEWCO TO EFFECT THE
MERGER. The obligations of Acquiror and Newco to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the following
additional conditions:
(a) Each of the Company and its Subsidiaries shall have
performed in all material respects each of its obligations under this Agreement
required to be performed by it on or prior to the Effective Time pursuant to the
terms hereof.
(b) All representations or warranties of the Company in this
Agreement which are qualified with respect to a Company Material Adverse Effect
or materiality shall be true and correct, and all such representations or
warranties that are not so qualified shall be true and correct in all material
respects, in each case as if such representation or warranty were made as of the
Effective Time except to the extent that any such representation or warranty is
made as of a specified date, in which case such representation or warranty shall
have been true and correct as of such specified date.
(c) Since the date of this Agreement, there shall not have been
any material adverse change in the financial condition, results of operations,
properties or business of the Company and its Subsidiaries, taken as a whole,
excluding any such change caused by a general
25
<PAGE>
change in the economy or in the telecommunications industry served by the
Company and its Subsidiaries and other than any such change approved by the
Acquiror.
(d) The Company shall have delivered a certificate of its
President or Vice President to the effect set forth in paragraphs (a), (b) and
(c) to this Section 7.3.
(e) Newco shall have received letters of resignation addressed
to the Company from those members of the Company's board of directors as listed
on SCHEDULE 7.3(e), which resignations shall be effective as of the Effective
Time.
(f) The Acquiror shall have received from Parker Chapin Flattau
& Klimpl, LLP, counsel to the Company, an opinion dated the Effective Time in
the form reasonably agreed to by the parties hereto.
(g) Holders of no more than 5% of the outstanding shares of
Common Stock shall not have caused such shares to become Dissenting Stock.
(h) Newco shall have received executed Affiliate Agreements from
designated Company affiliates.
(i) The Acquiror shall have received letters (i) from Arthur
Andersen LLP approving the accounting treatment of the Merger as a "pooling of
interests" and (ii) from Price Waterhouse LLP that the Company has taken no
action in the past two years that would prevent the application of a "pooling of
interests" accounting treatment to the Merger, and the SEC shall not have
objected to such accounting treatment.
7.4 CLOSING CONDITIONS DEEMED SATISFIED. If the Meeting has been
completed and has resulted in a vote sufficient to approve the Merger in
accordance with applicable law, and if all other conditions precedent to the
consummation of the Merger contained in this Article VII (other than the
conditions set forth in Sections 7.1(c) and (d)) have been satisfied or have
otherwise been waived as of the date of such Meeting, such conditions precedent
to the consummation of the Merger (except as provided in the next succeeding
sentence) shall terminate, and the parties to this Agreement agree to consummate
the Merger as soon as practicable thereafter; provided, however, that in no
event shall any party be required to consummate the Merger or any other
transactions contemplated by this Agreement to the extent that such consummation
would violate any applicable laws or regulations. In such event, the Acquiror,
on the one hand, and the Company, on the other hand, shall cooperate to deliver,
as soon as practicable after the satisfaction or waiver of such conditions
precedent, the officer's certificates and opinions required of the Acquiror by
Section 7.2(d) and 7.2(f), and required of the Company by Section 7.3(d) and
7.3(f), respectively, and, upon the Effective Time, the Acquiror shall deliver
the certificate required of the Exchange Agent by Section 7.2(e) and the Company
will deliver to Newco the letters of resignation required by Section 7.3(e).
26
<PAGE>
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 TERMINATION. This Agreement may be terminated and the Merger
contemplated herein may be abandoned at any time prior to the Effective Time and
before approval by the stockholders of the Company:
(a) by the mutual consent of Newco and the Company;
(b) by Newco or the Company, if (i) the Board of Directors of
the Company shall have failed to recommend, or withdrawn, modified or amended in
any respect its approval or recommendation of the Merger and of the transactions
contemplated hereby or the Board of Directors of the Company shall have resolved
to do any of the foregoing or (ii) the stockholders shall have failed to vote in
favor of this Agreement and the Merger and, in the case of the Company seeking
termination pursuant to Section 8.1(b)(i), the Company having paid to Newco the
Termination Fee, as defined below, in accordance with the terms of Section 8.2.
(c) by Newco if (i) there has occurred a material adverse change
in the financial condition, operations, or business of the Company and its
Subsidiaries taken as a whole, or (ii) there is a breach of any of the
representations and warranties of the Company which are qualified with respect
to a Company Material Adverse Effect or materiality or if the Company shall have
breached in any material respect any of such representations or warranties which
are not so qualified, or if the Company fails to comply in any material respect
with any of its covenants or agreements contained herein, which breaches or
failures, as the case may be, are, in the aggregate, material in the context of
the transactions contemplated by this Agreement;
(d) by the Company (i) if there has occurred a material adverse
change in the financial condition, operations, or business of the Acquiror or
(ii) there is a breach of any of the representations and warranties of the
Acquiror or Newco which are qualified with respect to an Acquiror Material
Adverse Effect or materiality or if the Acquiror or Newco shall have breached in
any material respect any of such representations or warranties which are not so
qualified, or if the Acquiror or Newco fails to comply in any material respect
with any of its covenants or agreements contained herein, which breaches or
failures, as the case may be, are, in the aggregate, material in the context of
the transactions contemplated by this Agreement; and
(e) by either Newco or the Company, if on or before May 1, 1998
the Merger shall not have been consummated; provided that neither party may
terminate under this Section 8.1(e) if such failure has been caused by that
party's material breach of this Agreement; provided further that if any
condition to this Agreement shall fail to be satisfied by reason of the
existence of an injunction or order of any court or governmental or regulatory
body resulting from an action or proceeding commenced by any party which is not
a government or governmental authority, then at the request of either party the
deadline date referred to above shall be extended for a reasonable period of
time, not in excess of 120 days, to permit the parties to have such injunction
vacated or order reversed.
27
<PAGE>
(f) by the Acquiror by the later to occur of December 3, 1997,
or the date that is three business days after delivery by the Company of the
final version of the Disclosure Schedules.
(g) by the Company if it has not satisfied the condition set
forth in Section 7.2 (f).
In the event of such termination and abandonment, no party hereto
(or any of its directors or officers) shall have any liability or further
obligation to any other party to this Agreement except as provided in
Section 8.2, and except that nothing herein will relieve any party from
liability for any wilful breach of this Agreement prior to such termination or
abandonment.
8.2 FEES AND EXPENSES. If this Agreement is terminated by Newco or
the Company pursuant to Section 8.1(b)(i), (a) after receipt of a bona fide
proposal to acquire (by means of a tender or exchange offer, merger,
consolidation, business combination or otherwise) all or a substantial portion
of the outstanding shares of Common Stock or of the assets of the Company and
the Subsidiaries (all such transactions being referred to herein as "Third Party
Transactions"), or (b) prior to the satisfaction of the condition set forth in
Section 7.2(f), then the Company shall, simultaneously with such termination,
pay to Newco by wire transfer of immediately available funds, $2,000,000.00 (the
"Termination Fee").
8.3 AMENDMENT. Subject to the applicable provisions of the General
Corporation Law, this Agreement may be amended by the parties hereto solely by
action taken by their respective Boards of Directors. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
8.4 WAIVER. At any time prior to the Effective Time, the parties
hereto, by action taken by their respective Boards of Directors, may (i) extend
the time for the performance of any of the obligations or other acts of the
other parties hereto, (ii) waive any inaccuracies in the representations and
warranties of the other party contained herein or in any documents delivered
pursuant hereto, and (iii) waive compliance by the other party with any of the
agreements or conditions herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in an instrument
in writing signed on behalf of such party.
ARTICLE IX
MISCELLANEOUS
9.1 SURVIVAL. All representations, warranties and agreements
contained in this Agreement or in any instrument delivered pursuant to this
Agreement shall terminate and be extinguished at the Effective Time or the
earlier date of termination of this Agreement pursuant to Section 8.1, as the
case may be, except that the agreements set forth in Article I and in
Sections 6.5, 6.6, 6.7, 6.9, 6.10 and 9.5 will survive the Effective Time
indefinitely and those set
28
<PAGE>
forth in Sections 8.2 and 9.5 will survive the termination of this Agreement
indefinitely, and other than any covenant the breach of which has resulted in
the termination of this Agreement.
9.2 EXPENSES AND FEES. If the Merger is consummated, all reasonable
fees and expenses incurred in connection with the Merger and the transactions
contemplated thereby will be paid by the Surviving Corporation. If the Merger
is not consummated, each party hereto shall, subject to the provision of
Section 8.2 above, bear their respective fees and expenses.
9.3 NOTICES. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been given or
made if in writing and delivered personally or sent by registered or certified
mail (postage prepaid, return receipt requested) or by telecopier to the parties
at the following addresses and facsimile numbers:
(a) if to Newco or the Acquiror to:
STAR Telecommunications, Inc.
223 E. De La Guerra St.
Santa Barbara, CA 93101
Attention: Chris Edgecomb
Fax: (805) 884-1137
with copies to:
Riordan & McKinzie
300 South Grand Avenue, Ste. 2900
Los Angeles, CA 90071
Attention: Timothy F. Sylvester, Esq.
Fax: (213) 229-8550
(b) if to the Company, to:
United Digital Network, Inc.
18872 MacArthur Blvd., Suite 300
Irvine, CA 92612
Attention: John R. Snedegar
Fax: (714) 833-8679
with copies to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
Attention: Martin E. Weisberg, Esq.
Fax: (212) 704-6288
29
<PAGE>
or at such other addresses as shall be furnished by the parties by like notice,
and such notice or communication shall be deemed to have been given or made as
of the date so delivered or mailed or confirmation of transmission.
9.4 HEADINGS. The headings contained in this Agreement are inserted
for convenience only and do not constitute a part of this Agreement.
9.5 PUBLICITY. The parties hereto shall not, and shall cause their
affiliates not to, issue or cause the publication of any press release or other
announcement with respect to the Merger or this Agreement without consulting
with all other parties and their respective counsel and without delivering a
draft of any such press release to such parties.
9.6 ENTIRE AGREEMENT; KNOWLEDGE. This Agreement constitutes the
entire agreement among the parties and supersedes all other prior agreements and
understandings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof. For purposes of this Agreement,
"knowledge" of any party shall mean the knowledge of the executive officers of
that party after such officers shall have made all reasonable inquiries.
9.7 ASSIGNMENT. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefits of the parties hereto and their
respective successors and permitted assigns. Neither this Agreement nor any of
the rights, interests or obligations shall be assigned by any of the parties
hereto without the prior written consent of the other parties, provided that
Newco's rights and duties hereunder may be assigned to a wholly owned subsidiary
of the Acquiror, which assumes all of Newco's duties and obligations. This
Agreement is not intended to confer upon any other person any rights or remedies
hereunder.
9.8 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
9.9 INVALIDITY, ETC. In the event that any provision of this
Agreement shall be deemed contrary to law or invalid or unenforceable in any
respect by a court of competent jurisdiction, the remaining provisions shall
remain in full force and effect to the extent that such provisions can still
reasonably be given effect in accordance with the intentions of the parties, and
the invalid and unenforceable provisions shall be deemed, without further action
on the part of the parties, modified, amended and limited solely to the extent
necessary to render the same valid and enforceable.
9.10 SPECIFIC PERFORMANCE. Each of the parties hereto acknowledges
and agrees that the other parties hereto would be irreparably damaged in the
event any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. Accordingly, each of the
parties hereto agrees that they each shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically this Agreement and the terms and conditions hereof in any
action instituted in any
30
<PAGE>
court of the United States or any state having competent jurisdiction, in
addition to any other remedy to which such party may be entitled, at law or in
equity.
9.11 GOVERNING LAW. The validity and interpretation of this Agreement
shall be governed by the laws of the State of Delaware, without reference to the
conflict of laws principles thereof.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
31
<PAGE>
IN WITNESS WHEREOF, the Acquiror, Newco and the Company have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
ACQUIROR: STAR Telecommunications, Inc.
By: /s/ Chris Edgecomb
-------------------------------------
Chris Edgecomb
Chief Executive Officer
NEWCO: IIWII Corp.
By: /s/ Kelly Enos
-------------------------------------
Kelly Enos
Chief Financial Officer
COMPANY: United Digital Network, Inc.
By: /s/ John R. Snedegar
-------------------------------------
John R. Snedegar
Chief Executive Officer
32
<PAGE>
EXHIBIT 2.3
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER dated as of January 30,
1998 (this "Amendment"), by and among STAR Telecommunications, Inc., a Delaware
corporation (the "Acquiror"), IIWII Corp., a Delaware corporation and
wholly-owned subsidiary of the Acquiror ("Newco"), and United Digital Network,
Inc., a Delaware corporation (the "Company").
R E C I T A L S:
A. The parties to this Amendment entered into that certain Agreement and
Plan of Merger dated as of November 19, 1997 (the "Merger Agreement"), which set
forth the terms and conditions pursuant to which the Merger would be
consummated.
B. The parties to this Amendment hereby wish to amend the Merger
Agreement on the terms set forth below.
C. Capitalized terms not otherwise defined herein shall have the meanings
therefor in the Merger Agreement.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants, agreements and conditions contained herein, and in order to set forth
the terms and conditions of the Merger and the mode of carrying the same into
effect, the parties hereby agree as follows:
ARTICLE I
THE MERGER
1. CONVERSION. Section 2.1(a) of the Agreement shall be deleted in its
entirety and replaced with the following:
(a) Each of the issued and outstanding shares of the Common Stock,
$.01 par value, of the Company ("Common Stock"), other than (i) Dissenting
Stock, as defined below, or (ii) shares of Common Stock held in the treasury of
the Company, shall be automatically converted into the right to receive
consideration per share (the "Merger Consideration") consisting of that portion
of a share (the "Exchange Ratio") of the Acquiror's common stock, $0.001 per
share ("Acquiror Common Stock"), determined by dividing US$2.05 by the average
closing price of
<PAGE>
Acquiror's Common Stock on the Nasdaq National Market for the five (5) trading
days prior to the Effective Time (the "Average Price").
2. SECOND LOAN TO COMPANY. Promptly following the execution of this
Amendment, the Acquiror shall loan to the Company $2 million pursuant to the
terms and conditions set forth in that certain promissory note attached hereto
as Exhibit B-1. Following the receipt of such funds, the Company shall
immediately apply at least $700,000 to balances due by the Company to the
Acquiror.
3. WAIVER OF SECTION 8.1(f). STAR hereby waives Section 8.1(f) of the
Merger Agreement. In that regard, the Acquiror acknowledges that, subject to
Sections 6.2(k) and 7.3(b) of the Merger Agreement, it has completed its due
diligence investigation of the Company.
4. NO FURTHER AMENDMENT. Except as otherwise set forth in this
Amendment, the Merger Agreement shall remain in full force and effect without
further amendment, modification or alteration.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
signed by their respective officers thereunto duly authorized, all as of the
date first written above.
ACQUIROR: STAR Telecommunications, Inc.
By: /s/ Kelly Enos
-------------------------------------
Kelly Enos
Chief Financial Officer
NEWCO: IIWII Corp.
By: /s/ Kelly Enos
-------------------------------------
Kelly Enos
Chief Financial Officer
COMPANY: United Digital Network, Inc.
By: /s/ John R. Snedegar
-------------------------------------
John R. Snedegar
Chief Executive Officer
2
<PAGE>
EXHIBIT 2.4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STOCK PURCHASE AGREEMENT
BY AND AMONG
STAR TELECOMMUNICATIONS, INC.,
T-ONE CORP.
AND
TAHA MIKATI
Dated as of January 26, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
PAGE
----
<S> <C> <C>
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 INDEX OF DEFINED TERMS. . . . . . . . . . . . . . . . . . . . 1
1.2 OTHER TERMS . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE II PURCHASE AND SALE OF SHARES . . . . . . . . . . . . . . . . . 4
2.1 PURCHASE AND SALE . . . . . . . . . . . . . . . . . . . . . . 4
2.2 PURCHASE PRICE. . . . . . . . . . . . . . . . . . . . . . . . 4
2.3 ESCROW OF SHARES. . . . . . . . . . . . . . . . . . . . . . . 5
2.4 PURCHASE PRICE ADJUSTMENT.. . . . . . . . . . . . . . . . . . 5
ARTICLE III CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.1 CLOSING DATE. . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 DELIVERIES OF THE SHAREHOLDER . . . . . . . . . . . . . . . . 5
3.3 DELIVERIES OF STAR. . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF STAR. . . . . . . . . . . . 6
4.1 ORGANIZATION. . . . . . . . . . . . . . . . . . . . . . . . . 6
4.2 CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . 6
4.3 AUTHORITY RELATIVE TO AGREEMENT . . . . . . . . . . . . . . . 6
4.4 STAR SHARES . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.5 NO VIOLATIONS OR CONSENTS . . . . . . . . . . . . . . . . . . 7
4.6 LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.7 FINANCIAL STATEMENTS AND REPORTS. . . . . . . . . . . . . . . 7
4.8 BROKERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.9 ABSENCE OF AGREEMENTS, DISCUSSIONS OR PLANS . . . . . . . . . 8
4.10 DUE DILIGENCE . . . . . . . . . . . . . . . . . . . . . . . . 8
4.11 REGULATION S REPRESENTATIONS AND WARRANTIES . . . . . . . . . 8
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE
COMPANY AND THE SHAREHOLDER . . . . . . . . . . . . . . . . . 8
5.1 CORPORATE ORGANIZATION. . . . . . . . . . . . . . . . . . . . 8
5.2 CAPITAL STOCK; OWNERSHIP AND TITLE TO THE SHARES. . . . . . . 8
5.3 AUTHORITY RELATIVE TO AGREEMENT . . . . . . . . . . . . . . . 9
5.4 NO VIOLATIONS OR CONSENTS . . . . . . . . . . . . . . . . . .10
5.5 GOVERNMENTAL AUTHORIZATIONS AND REGULATIONS . . . . . . . . .10
5.6 LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . .10
5.7 FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . .11
5.8 NO LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . .11
5.9 ABSENCE OF CERTAIN CHANGES. . . . . . . . . . . . . . . . . .11
5.10 BENEFIT PLANS . . . . . . . . . . . . . . . . . . . . . . . .13
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
5.11 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
5.12 ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . . . .15
5.13 REAL ESTATE LEASES. . . . . . . . . . . . . . . . . . . . . .15
5.14 TITLE TO PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES. . . .16
5.15 TAX MATTERS . . . . . . . . . . . . . . . . . . . . . . . . .16
5.16 INTELLECTUAL PROPERTY . . . . . . . . . . . . . . . . . . . .17
5.17 LABOR MATTERS . . . . . . . . . . . . . . . . . . . . . . . .17
5.18 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . .17
5.19 CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . .18
5.20 CUSTOMERS . . . . . . . . . . . . . . . . . . . . . . . . . .18
5.21 NO HSR FILING . . . . . . . . . . . . . . . . . . . . . . . .18
5.22 ACCOUNTS RECEIVABLE . . . . . . . . . . . . . . . . . . . . .18
5.23 BOARD OF DIRECTORS APPROVAL . . . . . . . . . . . . . . . . .19
5.24 NO AGREEMENTS TO SELL . . . . . . . . . . . . . . . . . . . .19
5.25 BROKERS . . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.26 TRANSACTIONS WITH AFFILIATED PARTIES. . . . . . . . . . . . .19
5.27 REGULATION S REPRESENTATIONS AND COVENANTS. . . . . . . . . .19
ARTICLE VI COVENANTS AND AGREEMENTS. . . . . . . . . . . . . . . . . . .21
6.1 CONDUCT OF THE BUSINESS OF THE COMPANY
PRIOR TO THE CLOSING DATE . . . . . . . . . . . . . . . . .21
6.2 ACCESS TO PROPERTIES AND RECORD; STAR NOTICE. . . . . . . . .23
6.3 ACQUISITION PROPOSALS . . . . . . . . . . . . . . . . . . . .23
6.4 INDEMNIFICATION BY STAR . . . . . . . . . . . . . . . . . . .23
6.5 INDEMNIFICATION BY THE SHAREHOLDER. . . . . . . . . . . . . .24
6.6 CERTAIN LIMITATIONS OF INDEMNIFICATION. . . . . . . . . . . .25
6.7 CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . .26
6.8 REASONABLE BEST EFFORTS . . . . . . . . . . . . . . . . . . .27
6.9 DELIVERY OF FINANCIAL STATEMENTS AND OTHER
DOCUMENTS BY THE COMPANY. . . . . . . . . . . . . . . . . .27
6.10 DELIVERY OF SEC FILINGS BY STAR; NOTICE TO THE
SHAREHOLDER. . . . . . . . . . . . . . . . . . . . . . . . .28
6.11 NON-COMPETITION . . . . . . . . . . . . . . . . . . . . . . .28
6.12 CERTAIN EVENTS. . . . . . . . . . . . . . . . . . . . . . . .28
6.13 RESTRICTION ON TRANSFER OF SHARES . . . . . . . . . . . . . .28
ARTICLE VII CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . . . .29
7.1 CONDITIONS TO EACH PARTY'S OBLIGATION UNDER
THIS AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . .29
7.2 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
AND THE SHAREHOLDER UNDER THIS AGREEMENT. . . . . . . . . . .29
7.3 CONDITIONS TO OBLIGATIONS OF STAR UNDER THIS AGREEMENT. . . .30
ii
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TABLE OF CONTENTS
(CONTINUED)
PAGE
----
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER . . . . . . . . . . . . . .31
8.1 TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . .31
8.2 AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . .31
8.3 WAIVER. . . . . . . . . . . . . . . . . . . . . . . . . . . .32
ARTICLE IX MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . .32
9.1 SURVIVAL. . . . . . . . . . . . . . . . . . . . . . . . . . .32
9.2 EXPENSES AND FEES . . . . . . . . . . . . . . . . . . . . . .32
9.3 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . .32
9.4 HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . . .34
9.5 PUBLICITY . . . . . . . . . . . . . . . . . . . . . . . . . .34
9.6 ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . .34
9.7 ASSIGNMENT. . . . . . . . . . . . . . . . . . . . . . . . . .34
9.8 COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . .34
9.9 INVALIDITY, ETC.. . . . . . . . . . . . . . . . . . . . . . .34
9.10 SPECIFIC PERFORMANCE. . . . . . . . . . . . . . . . . . . . .34
9.11 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . .35
9.12 BOOKS AND RECORDS . . . . . . . . . . . . . . . . . . . . . .35
</TABLE>
iii
<PAGE>
EXHIBITS
Exhibit A Form of Escrow Agreement
Exhibit B Form of Registration Rights Agreement
DISCLOSURE SCHEDULES
Schedule 5.4 Consents and Violations
Schedule 5.5 Permits
Schedule 5.6 Litigation
Schedule 5.8 Liabilities
Schedule 5.9 Changes
Schedule 5.11 Benefit Plans
Schedule 5.12 Environmental Matters
Schedule 5.13 Real Estate Leases
Schedule 5.14 Real Property
Schedule 5.15 Taxes
Schedule 5.16 Registered Intellectual Property
Schedule 5.17 Labor
Schedule 5.18 Insurance
Schedule 5.19 Contracts
Schedule 5.20 Customers
Schedule 5.22 Accounts Receivable
Schedule 5.25 Brokers
Schedule 5.26 Affiliated Party Transactions
iv
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STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement is entered into as of January 26, 1998 (this
"Agreement"), by and among STAR Telecommunications, Inc., a Delaware corporation
("STAR"), T-One Corp., a Delaware corporation (the "Company"), and Taha Mikati,
an individual (the "Shareholder").
R E C I T A L S:
A. The Company owns and operates a long distance telecommunication
business.
B. The Shareholder owns 100% of the issued and outstanding shares (the
"Shares") of the Company's Common Stock, $.01 par value per share (the
"Company's Common Stock"); and
C. Pursuant to the terms and conditions of this Agreement, the
Shareholder wishes to sell the Shares to STAR and STAR wishes to acquire the
Shares from the Shareholder, as further set forth below. In that regard, the
Company wishes to facilitate the purchase and sale of the Shares and each of the
other transactions described in this Agreement and has agreed to make the
representations, warranties, covenants, agreements and other accommodations set
forth herein.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants, agreements and conditions contained herein, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
ARTICLE I
DEFINITIONS
1.1 INDEX OF DEFINED TERMS. The following terms shall have the
respective meanings given thereto in the sections indicated below:
<TABLE>
<CAPTION>
DEFINED TERM SECTION
<S> <C>
Acquisition Proposal 6.3
Actions 5.6
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DEFINED TERM SECTION
Affiliated Party 5.26
Agreement Preamble
Audited Financial Statements 5.7
Average Price 2.2
Closing 3.1
Closing Date 3.1
Communications Act 6.8
Company Preamble
Company Balance Sheet 5.14
Company's Common Stock Recitals
Company Employee Benefit Plans 5.11
Company Employee Pension Benefit Plan 5.11
Company Real Properties 5.12
Company Taxes 5.15
Contracts 5.19
December Balance Sheet 2.4
December Net Worth 2.4
Disposition 5.27(f)
Encumbrances 5.2(b)
Environmental Law 5.12
ERISA 5.11
Escrow Agent 2.3
Escrow Agreement 2.3
Escrow Period 2.3
Escrow Shares 2.3
Exchange Act 4.7
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DEFINED TERM SECTION
FCC 6.8
Financial Statements 5.7
GAAP 2.4
Indemnified Party 6.6(f)
Intellectual Property 5.16
IRC 5.10
IRS 5.11
Large Customers 5.20
Losses 6.4(a)
Material Adverse Effect 5.1
PBGC 5.11
Permits 5.5
Permitted Liens 5.14
Registered Intellectual Property 5.16
Regulation S 4.11
Restricted Period 5.27(c)
SEC 4.7
SEC Filings 4.7
Securities Act 4.7
Shareholder Indemnitees 6.4(a)
Shareholder's Threshold Amount 6.5(a)
STAR Preamble
STAR Shares 2.2
STAR Common Stock 2.2
STAR Indemnitees 6.5(a)
STAR's Accountants 2.4
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DEFINED TERM SECTION
STAR's Threshold Amount 6.4(a)
Tax Returns 5.15
Termination Date 5.27(f)
Transfer Agent 5.27(g)
Unaudited Financial Statements 5.7
</TABLE>
1.2 OTHER TERMS. For purposes of this Agreement, the following terms
or phrases shall have the following meanings:
(a) "Person" shall mean and include any corporation,
partnership, limited liability company, trust, unincorporated organization,
other entity or individual.
(b) "Knowledge," "to the best knowledge of" and any derivative
thereof of any Person shall mean the actual knowledge of such Person after
reasonable inquiry. For purposes of this Agreement, the knowledge of the
Company means the actual knowledge of the executive officers and directors of
the Company after reasonable inquiry.
ARTICLE II
PURCHASE AND SALE OF SHARES
2.1 PURCHASE AND SALE. Subject to the terms and conditions of this
Agreement, at the Closing, as defined below, the Shareholder agrees to sell,
assign and transfer the Shares to STAR, and STAR agrees to purchase the Shares
from Shareholder.
2.2 PURCHASE PRICE. Subject to Section 2.4, the Shareholder shall
receive 660,000 shares (the "STAR Shares") of STAR's common stock, $0.001 per
share ("STAR Common Stock") as the purchase price (the "Purchase Price") for the
sale, assignment, transfer and delivery of all of the issued and outstanding
Shares to STAR at the Closing. The number of STAR Shares issuable pursuant to
this Section 2.2 shall be appropriately adjusted for any stock dividends,
splits, reverse splits, combinations and recapitalizations of STAR Common Stock,
as well as the issuance of shares of capital stock of STAR or any successor or
assign of STAR (whether by merger, consolidation, sale of assets or otherwise)
which may be issued in respect of, in exchange for or in conversion or
substitution of, STAR Common Stock, in each case occurring after the date
hereof.
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2.3 ESCROW OF SHARES. A total of nine and nine-tenths percent (9.9%)
of the STAR Shares (the "Escrow Shares") shall be deposited at the Closing Date
in an escrow established with Citicorp Trust, N.A. (California) or such other
Person mutually agreeable to STAR and the Shareholder (the "Escrow Agent"), such
escrow to be pursuant to the terms of that certain escrow agreement in
substantially the form attached hereto as Exhibit A (the "Escrow Agreement").
As further set forth in the Escrow Agreement, the Escrow Shares shall be held in
escrow for a period (the "Escrow Period") commencing at the Closing Date, as
defined below, and ending on the earlier to occur of (a) the first anniversary
thereof and (b) the completion following the Closing Date of the first audited
consolidated financial statements of STAR containing combined operations of STAR
and the Company. The Escrow Shares shall be subject to offset pursuant to the
terms of Section 6.5, as further set forth in the Escrow Agreement. Any such
offset against the Escrow Shares shall be calculated as set forth in the Escrow
Agreement.
2.4 PURCHASE PRICE ADJUSTMENT.
Prior to the Closing Date, the Shareholder shall deliver to STAR
the audited balance sheet of the Company as of December 31, 1997 (the "December
Balance Sheet"), which shall be prepared in accordance with generally accepted
accounting principles, consistently applied ("GAAP"). The Purchase Price shall
be adjusted by the amount, if any, by which the December Net Worth is less than
negative Nine Hundred Thousand Dollars (-$900,000). Any such adjustment shall
be made at a price per share equal to $31.82 (the "Average Price"). For
purposes hereof, "December Net Worth" shall mean assets minus liabilities, as
each is set forth on the December Balance Sheet.
ARTICLE III
CLOSING
3.1 CLOSING DATE. Subject to the fulfillment of the conditions
specified in Article VII (any or all of which may be waived in writing by the
respective parties whose performance is conditioned upon satisfaction of such
conditions), the purchase and sale of the Shares shall be consummated at a
closing (the "Closing") to be held at the offices of STAR, at 223 East
de la Guerra Street, Santa Barbara, CA 93101 at 11:00 a.m. or at such time as
STAR, the Company and the Shareholder shall mutually agree but not later than
May 31, 1998 (such date and time being herein referred to as the "Closing
Date").
3.2 DELIVERIES OF THE SHAREHOLDER. At the Closing, the Shareholder
shall deliver to STAR (a) a stock certificate representing the Shares, duly
endorsed for transfer and with appropriate stock powers, and (b) all of the
agreements, documents and instruments required to be delivered by the Company
and the Shareholder under Section 7.3.
3.3 DELIVERIES OF STAR. At the Closing, STAR shall deliver to the
Shareholder (a) payment of the Purchase Price by delivery of two certificates
representing the
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STAR Shares and (b) all of the agreements, documents and instruments required to
be delivered by STAR under Sections 7.2. Simultaneously therewith, the
Shareholder shall deposit with the Escrow Agent a certificate representing the
Escrow Shares pursuant to the Escrow Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF STAR
STAR represents and warrants to the Shareholder as follows:
4.1 ORGANIZATION. STAR is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, and has
the requisite corporate power and authority to own, lease and operate its assets
and to conduct its business in the manner in which it is presently conducted.
4.2 CAPITAL STOCK. The authorized capital stock of STAR consists in
its entirety of 50,000,000 shares of Common Stock, $0.001 par value, of which,
as of December 31, 1997, 16,428,540 were issued and outstanding, and 5,000,000
shares of Preferred Stock, $0.001 par value per share, none of which is issued
and outstanding.
4.3 AUTHORITY RELATIVE TO AGREEMENT. STAR has full corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated on its part hereby. The execution, delivery and
performance by STAR of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of STAR. This Agreement has been duly executed and delivered by
STAR, and is a legal, valid and binding obligation of STAR, enforceable against
STAR in accordance with its terms, except to the extent that its enforceability
may be limited by applicable bankruptcy, insolvency, reorganization or other
laws affecting the enforcement of creditors' rights generally or by general
equitable principles. Each other agreement to be executed by STAR in connection
with this Agreement will be duly executed and delivered by STAR and will
constitute a legal, valid and binding obligation of STAR, enforceable against
STAR in accordance with its terms, subject to applicable bankruptcy, insolvency,
moratorium, reorganization or similar laws affecting creditors' rights generally
and subject to general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
4.4 STAR SHARES. The STAR Shares to be issued to the Shareholder on
the Closing Date have been duly authorized and, when issued in exchange for the
Shares pursuant to the terms hereof, will be validly issued, fully paid and
non-assessable, and not subject to any liens, pledges, charges, encumbrances,
restrictions of any kind, preemptive rights or any other rights or interests of
third parties or any other Encumbrances, as defined below. The STAR Shares
will, on the Closing Date, be approved for quotation on the Nasdaq National
Market.
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4.5 NO VIOLATIONS OR CONSENTS. The execution, delivery and
performance of this Agreement by STAR and the consummation thereby of the
transactions contemplated hereby, will not (a) violate or conflict with any
provision of the Certificate of Incorporation or By-Laws of STAR or any
agreement or instrument to which STAR or any of its property is subject,
(b) require the consent, waiver, approval, license or authorization of or any
filing by STAR with any Person or governmental authority, other than the rules
and regulations of the National Association of Securities Dealers, Inc. in order
to have the STAR Shares approved for quotation on the Nasdaq National Market,
and (c) violate or conflict with any law, rule, order, writ, judgment,
injunction, award, determination, regulation, permit, ordinance or decree
applicable to STAR.
4.6 LITIGATION. Except as may be disclosed in the SEC Filings, as
defined below, there are no suits, arbitrations, actions, claims, complaints,
grievances, investigations or proceedings pending or, to the best of STAR's
knowledge, threatened against STAR that, if resolved against STAR could be
reasonably expected to have a material adverse effect on STAR or on STAR's
ability to consummate the transactions contemplated by this Agreement.
4.7 FINANCIAL STATEMENTS AND REPORTS. STAR heretofore has delivered
to the Company and the Shareholder true and complete copies of (a) its
Prospectus dated June 12, 1997, (b) its Quarterly Reports on Form 10-Q for the
quarters ended June 30, 1997 and September 30, 1997 and (c) its Current Report
on Form 8-K, as filed with the Securities and Exchange Commission (the "SEC") on
December 15, 1997. Since June 12, 1997, STAR has filed with the SEC all forms,
reports and documents required to be filed by it under the Securities Act of
1933, as amended (the "Securities Act") or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). As of the respective times such documents were
or shall be filed or, as applicable, became or will become effective, the SEC
Filings made as of the date of this Agreement and all SEC Filings made after the
date hereof and prior to the Closing Date, complied (in the case of SEC Filings
filed on or before the date hereof) or shall comply (in the case of SEC Filings
after the date hereof) as to form and content, in all material respects, with
the requirements of the Securities Act and the Exchange Act, as the case may be,
and the rules and regulations promulgated thereunder, and did not (in the case
of SEC Filings filed on or before the date hereof) or will not (in the case of
SEC Filings filed after the date hereof) contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The financial statements of STAR
(including the notes thereto) included in the SEC Filings were prepared or will
be prepared in accordance with GAAP and (except as may be indicated therein or
in the notes thereto) present fairly or will present fairly the consolidated
financial position, results of operations and cash flows of STAR and its
consolidated subsidiaries as of the dates and for the periods indicated,
subject, in the case of unaudited interim consolidated financial statements, to
normal recurring year-end adjustments. As used herein, "SEC Filings" shall
mean all filings made or to be made prior to the Closing Date by STAR with the
SEC pursuant to the Securities Act and the Exchange Act.
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4.8 BROKERS. STAR has not paid or become obligated to pay any fee or
commission to any broker, finder, investment banker or other intermediary in
connection with this Agreement or the transactions contemplated hereby.
4.9 ABSENCE OF AGREEMENTS, DISCUSSIONS OR PLANS. STAR has not
entered into any agreements of any kind or taken any action to authorize, nor is
it engaged in any discussions with any Person, with respect to a sale or
transfer of shares of STAR Common Stock representing more than fifty percent
(50%) of the outstanding shares thereof or the sale of all or substantially all
of its assets. As of the date hereof, the Board of Directors of STAR has not
authorized any recapitalization, reclassification, spinoff, split-up, stock or
extraordinary cash dividend, combination or reverse split with respect to the
STAR Common Stock.
4.10 DUE DILIGENCE. STAR acknowledges that it has been provided with
the opportunity (a) to examine the physical properties and facilities of the
Company, (b) to meet and discuss with the officers, employees, agents and
accountants of the Company and the Shareholder and (c) to examine such other
data (including copies of the Contracts, the Permits and the Intellectual
Property) concerning the Company.
4.11 REGULATION S REPRESENTATIONS AND WARRANTIES. Assuming the
accuracy in all respects of the representations and warranties of the
Shareholder in Section 5.27, the offer and sale of the STAR Shares by STAR to
the Shareholder in the manner contemplated by this Agreement will be exempt from
the registration requirements of the Securities Act by reason of Regulation S
promulgated under the Securities Act ("Regulation S").
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND THE SHAREHOLDER
Except as set forth in the disclosure schedules attached hereto (the
"Disclosure Schedules"), the Company and the Shareholder jointly and severally
represent and warrant to STAR as follows:
5.1 CORPORATE ORGANIZATION. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware with all requisite corporate power and authority to own, operate and
lease its properties and to carry on its business as it is now being conducted,
and is qualified or licensed to do business and is in good standing in each
jurisdiction in which the failure to be so qualified or licensed, in the
aggregate, would have a material adverse effect on the financial condition,
results of operations or business of the Company (a "Material Adverse Effect").
True and correct copies of the charter documents of the Company have been
delivered or made available to STAR. The Company does not otherwise directly or
indirectly own any equity interest in any Person.
5.2 CAPITAL STOCK; OWNERSHIP AND TITLE TO THE SHARES.
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(a) CAPITAL STOCK. As of the date hereof, the authorized
capital stock of the Company consists in its entirety of one thousand (1,000)
shares of the Company's Common Stock, of which one hundred (100) are issued and
outstanding. The Shares are the only issued and outstanding shares of the
Company's Common Stock. The Shares have been duly authorized and validly
issued, are fully paid and non-assessable, are free of preemptive rights and
were issued in compliance with all applicable securities laws and regulations.
There are no voting trusts or other agreements, arrangements or understandings
with respect to the voting of the Shares to which the Company, the Shareholder
or any other person is a party. There are no preemptive rights, registration
rights, subscriptions, options, warrants, rights, convertible securities or
other agreements or commitments of any character relating to issued or unissued
shares of the Company's Common Stock or other securities of the Company and
there are no outstanding contractual obligations of the Company to repurchase,
redeem or otherwise acquire or sell, issue or otherwise transfer any outstanding
securities thereof.
(b) OWNERSHIP AND TITLE TO THE SHARES. The Shareholder is the
sole record and beneficial owner of the Shares and has good and valid title in
and to the Shares. The Shares are, and on the Closing Date will be, free and
clear of any and all liens, security interests, mortgages, deeds of trust,
pledges, claims, rights of first refusal, options, encumbrances, restrictions,
preemptive or subscriptive rights or other rights of third parties
("Encumbrances") other than those created by STAR. On the Closing, upon
consummation of the transactions contemplated by this Agreement, STAR will
acquire good and valid title to the Shares, free and clear of any and all
Encumbrances, other than those created by STAR.
5.3 AUTHORITY RELATIVE TO AGREEMENT. The Company has full corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated on its part hereby. The execution and delivery by the
Company of this Agreement and the consummation of the transactions contemplated
on its part hereby have been duly authorized by all necessary corporate action
on the part of the Company. This Agreement has been duly executed and delivered
by each of the Company and the Shareholder and constitutes the legal, valid and
binding obligation of each of the Company and the Shareholder, enforceable
against each of the Company and the Shareholder in accordance with its terms,
subject to applicable bankruptcy, insolvency, moratorium, reorganization or
similar laws affecting creditors' rights generally and subject to general
equitable principles (regardless of whether such enforceability is considered in
a proceeding in equity or at law). Each other agreement to be executed in
connection with this Agreement by the Company and the Shareholder on or prior to
the Closing Date will be duly executed and delivered by each of the Company and
the Shareholder, as the case may be, and will constitute a legal, valid and
binding obligation of each of the Company and the Shareholder, enforceable
against each of the Company and the Shareholder in accordance with its
respective terms, subject to applicable bankruptcy, insolvency, moratorium,
reorganization, or similar laws affecting creditors' rights generally and
subject to general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
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5.4 NO VIOLATIONS OR CONSENTS. Except as set forth on Schedule 5.4
hereto, the execution, delivery and performance of this Agreement by the Company
and by the Shareholder and the consummation by such parties of the transactions
contemplated hereby will not (a) violate any provision of law, rule,
regulation, order, writ, judgment, injunction, decree, determination or award
applicable to the Company or to the Shareholder, (b) require the consent,
waiver, approval or authorization of or any filing by the Company or by the
Shareholder with any person or governmental authority, (c) violate, result (with
or without notice or the passage of time, or both) in a breach of, or give rise
to the right to terminate, accelerate or cancel any obligation under, or require
the payment of any fee, or constitute (with or without notice or the passage of
time, or both) a default under, any of the terms or provisions of the
Certificate of Incorporation or Bylaws of the Company or any indenture,
mortgage, lien, Contract, as defined below, order, judgment, ordinance,
regulation, decree or other agreement or instrument to which the Company or the
Shareholder is subject or bound which would have, individually or in the
aggregate, a Material Adverse Effect or interfere in any material respect with
the Company's or the Shareholder's ability to consummate the transactions
contemplated by this Agreement, (d) result in the creation of any Encumbrance
upon any of the property of the Company which would have, individually or in the
aggregate, a Material Adverse Effect, (e) result in the creation of any
Encumbrance upon any of the Shares or (f) result in a loss or adverse
modification of any license, permit, certificate, franchise, Contract or other
right granted to or otherwise held by the Company, which loss or modification
would have, individually or in the aggregate, a Material Adverse Effect.
Neither the Company nor the Shareholder has, in connection with this Agreement,
(x) obtained any waiver, supplement, modification or amendment of the terms or
provisions of any indenture, mortgage, lien, lease, agreement, Contract,
instrument, order, judgment, ordinance, regulation or decree to which the
Company or the Shareholder is subject or bound or (y) entered into any
understanding or agreement with respect thereto.
5.5 GOVERNMENTAL AUTHORIZATIONS AND REGULATIONS. Schedule 5.5 is a
true and complete list of all material governmental licenses, franchises,
permits and other authorizations ("Permits") held by the Company. Such Permits
are all governmental licenses, franchises, permits and other authorizations
reasonably necessary to the conduct of the business of the Company as presently
conducted, such Permits are valid and in full force and effect and the Company
knows of no threatened suspension, cancellation or invalidation of any such
Permit. The Company is not in conflict with, or is in default or violation of,
any Permit applicable to the Company or by which any property or asset of the
Company is bound or affected, except where such conflicts, defaults or
violations, in the aggregate, would not have a Material Adverse Effect.
5.6 LITIGATION. Except as set forth on Schedule 5.6 hereto, there
are no actions, proceedings, claims, complaints, grievances, investigations or
unfair labor practice complaints or grievances or investigations (collectively,
"Actions") pending or, to the best knowledge of the Company and the Shareholder,
threatened, against the Company or any of the assets or properties of the
Company or against the Shareholder before any court or governmental or
regulatory authority or body or arbitrator, which, if such Action were
determined adversely to the Company, would have, individually or in the
aggregate, a Material Adverse Effect, nor, to the best knowledge of the Company
and the Shareholder, is there any reasonable basis for any of the
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foregoing. There are no Actions pending or, to the best knowledge of the
Company and the Shareholder, threatened against the Company or the Shareholder
challenging the validity or propriety of the transactions contemplated by this
Agreement. None of the assets, property or other rights of the Company thereof
is subject to any order, judgment, injunction, writ or decree, which would have,
individually or in the aggregate, a Material Adverse Effect.
5.7 FINANCIAL STATEMENTS. The Company has previously delivered to
STAR its audited balance sheet for the fiscal years ended December 31, 1994,
1995 and 1996, along with the accompanying statements of income and statements
of cash flow for such fiscal years (collectively, the "Audited Financial
Statements"). Prior to the Closing, the Company will deliver to STAR its
unaudited balance sheet for the fiscal year ended December 31, 1997, along with
the accompanying statement of income and statement of cash flow for such fiscal
year (the "Unaudited Financial Statements," and collectively with the Audited
Financial Statements, the "Financial Statements"). The Audited Financial
Statements were prepared, and the Unaudited Financial Statements will be
prepared, pursuant to the books and records of the Company and, with respect to
the Audited Financial Statements, such preparation was made in accordance with
GAAP (except as may be indicated therein or in the notes thereto). The Audited
Financial Statements present fairly, and the Unaudited Financial Statements will
present fairly, in all material respects the financial position of the Company
as of the dates thereof and the results of operations and cash flow for the
periods then ended, subject to normal year-end adjustments, except that the
Unaudited Financial Statements may not contain all notes and disclosures
required by GAAP.
5.8 NO LIABILITIES. Except as set forth on Schedule 5.8, the Company
does not have any material liabilities, obligations or commitments of any nature
(whether absolute, accrued, contingent or otherwise and whether matured or
unmatured), including without limitation any liabilities due or to become due to
any taxing authority having jurisdiction over the Company, except liabilities,
obligations or commitments (a) reflected in, reserved against or disclosed in
the Financial Statements (including the notes thereto), (b) under Contracts,
leases and other agreements and instruments listed on Schedules 5.13, 5.16 and
5.19, and (c) incurred since January 1, 1997 in the ordinary course of the
Company's business and consistent with the Company's past practices.
5.9 ABSENCE OF CERTAIN CHANGES. Except as set forth in Schedule 5.6,
5.8 or 5.9, since January 1, 1997, the Company has conducted its business in the
ordinary course and there has not been any:
(a) material adverse change in the financial condition, assets,
liabilities, business or results of operations of the Company;
(b) addition to or modification of employee benefits plans,
arrangements or practices, other than in the ordinary course of business,
consistent with past practice;
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(c) sale, assignment or transfer of any of the material assets
of the Company, other than in the ordinary course of business, consistent with
past practice;
(d) cancellation of any indebtedness owed to the Company in an
aggregate amount greater than Seventy Five Thousand Dollars ($75,000), or waiver
of any rights of similar value to the Company relating to any of its business
activities or properties, other than in the ordinary course of business;
(e) amendment, cancellation or termination of any Contract
material to the Company, other than in the ordinary course of business,
consistent with past practices;
(f) failure to repay any material obligation of the Company;
(g) change in accounting methods, principles or practices by the
Company materially affecting its assets, liabilities or results of operations;
(h) material revaluation by the Company of its assets, including
without limitation, any material write-offs, material increases in any reserves
except in the ordinary course of business consistent with past practice or any
material write-up of the value of inventory, property, equipment or any other
asset;
(i) material damage, destruction or loss (if not covered by
insurance) affecting any office or other facility maintained by the Company or
any other material asset of the Company and resulting in a loss in an aggregate
amount in excess of One Hundred Thousand Dollars ($100,000);
(j) Encumbrance with respect to any assets of the Company except
for Permitted Liens, equipment leases or other Encumbrances arising in the
ordinary course of business;
(k) declaration, setting aside or payment of any dividend or
other distribution or payment (whether in cash, stock or property) with respect
to the Shares, or any redemption, purchase or other acquisition of any of the
Shares, or any other payment to the Shareholder;
(l) issuance by the Company of, or commitment by it to issue,
any shares of the Company's Common Stock or other equity securities or any
securities convertible into or exchangeable or exercisable for shares of the
Company's Common Stock or other equity securities;
(m) indebtedness for borrowed money incurred by the Company or
any commitment to incur indebtedness for borrowed money entered into by the
Company, or any loans made or agreed to be made by the Company, other than
pursuant to credit facilities described on Schedule 5.19;
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(n) incurrence of other liabilities involving an aggregate
amount in excess of One Hundred Fifty Thousand Dollars ($150,000) or more,
except in the ordinary course of business, or any material increase or change in
any assumptions underlying, or methods of calculating, any bad debt, contingency
or other reserves;
(o) payment, discharge or satisfaction of any liabilities other
than the payment, discharge or satisfaction in the ordinary course of business,
consistent with past practice, of liabilities reserved against in the Financial
Statements or of liabilities incurred in the ordinary course of business,
consistent with past practice, since such date or of other liabilities involving
Fifty Thousand Dollars ($50,000) or less individually and One Hundred Fifty
Thousand Dollars ($150,000) or less in the aggregate;
(p) increase in the compensation of officers or employees
(including any such increase pursuant to any bonus, pension, profit sharing or
other plan or commitment) or any increase in the compensation payable or to
become payable to any officer or employee or any severance or termination pay,
except for increases in the ordinary course of business, consistent with past
practices or as required by law or any existing agreement and except for cost of
living adjustments and other increases consistent with past practices;
(q) granting of any bonus, incentive compensation, service,
award or other like benefit to any officer or employee except in accordance with
plans or arrangements disclosed on Schedule 5.11; or
(r) other event or condition of any character which in any one
case or in the aggregate has had a Material Adverse Effect.
5.10 BENEFIT PLANS. Except as disclosed on Schedule 5.11, the Company
has no outstanding any written employment agreement with any officer or employee
of the Company or any bonus, incentive compensation, deferred compensation,
profit sharing, stock option, stock bonus, stock purchase, savings, severance,
salary continuation, consulting, retirement (including health and life insurance
benefits provided after retirement) or pension plan (including Company Employee
Benefit Plans, as defined below) or arrangement with or for the benefit of any
officer, employee or other person, or for the benefit of any group of officers,
employees or other persons, that provides for payment of more than $100,000 in
annual benefits. The Company has not made, or entered into any agreement to
make, any payment that becomes payable as a result of the consummation of this
transaction which would be treated as an "excess parachute payment" as defined
in Section 280G of the Internal Revenue Code of 1986, as amended (the "IRC").
There are no such agreements, plans or other arrangements entered into with or
provided for any independent contractors with whom the Company has a business
relationship.
5.11 ERISA. Set forth on Schedule 5.11 are all of the employee
benefit plans, as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), but without regard to whether any
such plan is in fact subject to ERISA, that is sponsored, or is being maintained
or contributed to, by the Company that provides for payment of
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more than Seventy Five Thousand Dollars ($75,000) in annual benefits (the
"Company Employee Benefit Plans"). None of the Company Employee Benefit Plans
are "multiemployer plans" as defined in Section 3(37) of ERISA. The Company has
furnished or made available or will promptly after the date hereof make
available to STAR (a) a true and complete copy of the plan document and summary
plan description, if any, for each Company Employee Benefit Plan, (b) a true and
complete copy of the most recently filed Form 5500 (including the related
schedules) with respect to each Company Employee Benefit Plan for which such
form is required to be filed, (c) a true and complete copy of any trust
agreement, insurance contract or other agreement or arrangement serving as
source of funding any benefits payable under any Company Employee Benefit Plan,
and (d) the most recently issued financial statement and actuarial report, if
any, for each Company Employee Benefit Plan. No "prohibited transactions" (as
such term is defined in Section 4975 of the IRC, or in Part 4 of Subtitle B of
Title I of ERISA) have occurred with respect to any Company Employee Benefit
Plan that would result in the imposition of taxes or penalties that, in the
aggregate, would have a Material Adverse Effect. With respect to each of the
Company Employee Benefit Plans that is intended to qualify for favorable income
tax treatment under Section 401(a) of the IRC, (i) the Internal Revenue Service
("IRS") has issued a favorable determination letter with respect to such plan;
(ii) except as set forth on Schedule 5.11, the Company has furnished or made
available to STAR a copy of the determination letter most recently issued by the
IRS with respect to such plan and the application filed with the IRS for such
determination letter; and (iii) to the best knowledge of the Company and the
Shareholder, no event has occurred from the date of each such favorable
determination letter that would materially adversely affect the tax-qualified
status of the plan in question. Each Company Employee Benefit Plan has been
administered in compliance with the applicable requirements of ERISA and the
IRC, and in compliance with all other applicable provisions of law, except for
such noncompliance, if any, that, in the aggregate, would not have a Material
Adverse Effect. With respect to each Company Employee Benefit Plan, the Company
has not incurred liabilities which, in the aggregate, would have a Material
Adverse Effect as a result of the violation of or the failure to comply with any
applicable provision of ERISA, the IRC, any other applicable provision of law,
or any provision of such plan. None of the Company Employee Benefit Plans which
is an "employee pension benefit plan", as that term is defined in Section 3(2)
of ERISA (a "Company Employee Pension Benefit Plan"), has incurred an
"accumulated funding deficiency," within the meaning of Section 302 of ERISA or
Section 412 of the IRC which, in the aggregate, would have a Material Adverse
Effect. The Company has not failed to make any contribution to, or to make any
payment under, any Company Employee Benefit Plan that it was required to make
pursuant to the terms of the plan or pursuant to applicable law in any amount
which, in the aggregate, would have a Material Adverse Effect. To the best
knowledge of the Company, no "reportable events," with respect to which a notice
must be filed with the Pension Benefit Guaranty Corporation ("PBGC"), has
occurred with respect to any Company Employee Pension Benefit Plan subject to
Title IV of the ERISA which events, in the aggregate, would have a Material
Adverse Effect. No proceedings by the PBGC to terminate any Company Employee
Pension Benefit Plan pursuant to Subtitle C of Title IV of ERISA have to the
best of the Company's knowledge, been instituted or threatened which, in the
aggregate, would have a Material Adverse Effect. Except for any liabilities in
an amount which, in the aggregate, would not have a Material Adverse Effect, the
Company (1) has not incurred any liability to the PBGC in connection with any
Company
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Employee Pension Benefit Plan, including any liability under Section 4069 of
ERISA and any penalty imposed under Section 4071 of ERISA, (2) has not
terminated any Company Employee Pension Benefit Plan, or ceased operations at
any facility or withdrawn from any Company Employee Pension Benefit Plan, in a
manner that could subject it to liability or any liens under Section 4062, 4063,
4064 or 4068 of ERISA or (3) has no knowledge as to the existence of any state
of facts, or as to the occurrence of any transactions, that would result in any
liability of the Company to the PBGC under any other provision of Title IV of
ERISA. There is no pending or, to the best knowledge of the Company or the
Shareholder, threatened legal action, proceeding or investigation against or
involving any Company Employee Benefit Plan which would result in liabilities to
the Plan, the Company that, in the aggregate, would have a Material Adverse
Effect. Except as disclosed on Schedule 5.11, the present value of accrued
benefits of each Company Employee Benefit Plan that is a defined benefit plan as
defined in Section 3(35) of ERISA does not exceed the value of the assets of
such plan available to pay such benefits by an amount that, in the aggregate for
all such plans, would have a Material Adverse Effect.
5.12 ENVIRONMENTAL MATTERS. "Company Real Properties" shall mean
all real property now or previously owned, operated or leased by the Company.
Except as set forth on Schedule 5.12: (i) the Company and each of the Company
Real Properties is in compliance with, and has no liability under any or all
applicable Environmental Laws, except where the failure to comply or such
liability would not have a Material Adverse Effect; (ii) neither the Company nor
any of the Company Real Properties has been alleged in writing by any
governmental agency or third party to be in violation of, to be liable under, or
to be subject to any administrative or judicial proceeding pursuant to, any
Environmental Law, the violation of which would have a Material Adverse Effect;
and (iii) to the best knowledge of the Company and each Subsidiary, there are no
facts or circumstances which would result in any claims against the Company
relating to environmental matters which, in the aggregate, would have a Material
Adverse Effect. As used herein, "Environmental Law" means any federal, state,
or local law, statute, rule or regulation, or the common law governing or
relating to the environment.
5.13 REAL ESTATE LEASES. Schedule 5.13 sets forth a complete and
accurate list, a copy of which has been delivered to or made available to STAR
of (a) all leases and subleases under which the Company is lessor or lessee of
any real property, together with all amendments, supplements, nondisturbance
agreements and other agreements pertaining thereto; (b) all options held by the
Company or contractual obligations on the part of the Company to purchase or
acquire any material interest in real property; and (c) all options granted by
the Company or contractual obligations on the part of the Company to sell or
dispose of any material interest in real property (except for sale-leaseback
transactions) in each such instance in items (a) through (c) above, which
provides for an annual payment of more than Fifty Thousand Dollars ($50,000).
Such leases, subleases and other agreements constitute binding obligations of
the Company and, to the best of its knowledge, the other parties thereto, and
(x) there are no defaults thereunder by the Company or, to the best of Company's
knowledge, by any other party thereto; and (y) no event has occurred which (with
notice, lapse of time or both or occurrence of any other event) would constitute
a default by the Company or, to the best of the Company's knowledge, by any
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other party thereto, other than defaults or events which, in the aggregate,
would not have a Material Adverse Effect. The Company has good and valid
leasehold title to all such leased property, free and clear of all encumbrances,
liens, charges or other restrictions of any kind or character, except for
Permitted Liens, as defined below.
5.14 TITLE TO PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES.
Schedule 5.14 lists all real property owned by the Company as of the date of
this Agreement. The Company has good and valid title in fee simple to all of
the real property listed on Schedule 5.14, free and clear of all encumbrances,
liens, charges or other restrictions of any character whatsoever, except for
(a) statutory liens for taxes or assessments not due or delinquent or the
validity of which is being contested in good faith, (b) mechanics, workers,
repairmen's and other similar liens arising or incurred in the ordinary course
of business, (c) such other liens, imperfections in title, charges, easements,
restrictions and other encumbrances, if any, which in the aggregate do not have
a Material Adverse Effect, and (d) those items set forth on Schedule 5.14
(collectively, the "Permitted Liens"). Except for leased assets, the Company
has good and valid title to all of the material tangible personal property used
in its business, including, without limitation, those reflected in the balance
sheet of the Company for the fiscal year ended December 31, 1996 (the "Company
Balance Sheet") (other than assets disposed of in the ordinary course of
business since January 1, 1997), free and clear of all encumbrances, except for
Permitted Liens, and except as reflected or disclosed in the Financial
Statements.
5.15 TAX MATTERS. Except as set forth on Schedule 5.15, the Company
has paid, or the Financial Statements contain adequate provision for, all
federal, state, local, foreign or other governmental income, franchise, payroll,
F.I.C.A., unemployment, withholding, real property, personal property, sales,
payroll, disability and all other taxes imposed on the Company or with respect
to any of their respective properties, or otherwise payable by them, including
interest and penalties, if any, in respect thereof (collectively, "Company
Taxes"), for the Company taxable period ended on December 31, 1996 and all
fiscal periods of the Company prior thereto, except such nonpayment, or failure
to make adequate provision, which, in the aggregate, would not have a Material
Adverse Effect. Company Taxes paid and/or incurred from December 31, 1996 until
the Closing Date include only Company Taxes incurred in the ordinary course of
business determined in the same manner as in the taxable period ending on
December 31, 1996. Except as disclosed on Schedule 5.15, the Company has timely
filed all income tax, excise tax, sales tax, use tax, gross receipts tax,
franchise tax, employment and payroll related tax, property tax, and all other
tax returns which the Company is required to file ("Tax Returns"), and have paid
or provided for all the amounts shown to be due thereon, except where such
failure to make such timely filings, in the aggregate, would not have a Material
Adverse Effect, and except for the nonpayment or nonprovision of such amounts
which, in the aggregate, would not have a Material Adverse Effect. Except as
set forth on Schedule 5.15, (a) neither the Company has filed or entered into,
or is otherwise bound by, any election, consent or extension agreement that
extends any applicable statute of limitations with respect to taxable periods of
the Company, (b) the Company is not a party to any contractual obligation
requiring the indemnification or reimbursement of any person with respect to the
payment of any Tax, (c) no written claim has ever been made or threatened by an
authority in a jurisdiction where the Company do not file Tax
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Returns that they are or may be subject to Taxes by that jurisdiction, except
for any such claims as, in the aggregate, would not have a Material Adverse
Effect and (d) no issues have been raised by the relevant taxing authorities on
audit that are of a recurring nature and that would have a Material Adverse
Effect upon the Company. Except as set forth on Schedule 5.15, no Action is
pending or, to the best knowledge of the Company and the Shareholder, threatened
by any governmental authority for any audit, examination, deficiency, assessment
or collection from the Company of any Company Taxes, no material unresolved
written claim for any deficiency, assessment or collection of any Company Taxes
has been asserted against the Company, and all resolved assessments of Company
Taxes have been paid or are reflected in the Financial Statements.
5.16 INTELLECTUAL PROPERTY. Schedule 5.16 lists all the registered
patents, trademarks, service marks, copyrights, trade names and applications for
any of the foregoing owned by the Company as of the date of this Agreement (the
"Registered Intellectual Property"). The Company has good title to the
Registered Intellectual Property and has good title to, or valid licenses or
rights to use, all patents, copyrights, trademarks, trade names, brand names,
proprietary and other material technical information, technology and software
(collectively "Intellectual Property") which are used in the operation of its
business as presently conducted. There are no claims or proceedings pending or,
to the Company's and the Shareholder's knowledge, threatened against the Company
asserting that the Company is infringing or engaging in the unauthorized use of
any Intellectual Property of any other person or entity.
5.17 LABOR MATTERS. The Company is not a party to any collective
bargaining agreement with respect to any of its employees. None of the
employees of the Company are represented by any labor union and, as of the date
hereof, the Company has no knowledge of any union organizational efforts
involving the Company's employees during the past five years. Except as set
forth on Schedule 5.17, the Company has not received written notice of any
claim, or has knowledge of any facts which would give rise to any claim, that it
has not complied in any respect with any laws relating to the employment of
labor, including, without limitation, any provisions thereof relating to wages,
hours, collective bargaining, the payment of social security and similar taxes,
equal employment opportunity, employment discrimination or employment safety,
except to the extent that such non-compliance would not have a Material Adverse
Effect.
5.18 INSURANCE. Schedule 5.18 lists, as of the date of this
Agreement, all material policies of fire, products liability, general liability,
vehicle, worker's compensation, directors' and officers' liability, title and
other insurance owned or held by or covering the Company or any of their
property or assets which are material to the business of the Company. As of the
date hereof, all of such policies are in full force and effect, except as to
matters or defaults which, in the aggregate, would not have a Material Adverse
Effect, and no written notice of cancellation or termination has been received
with respect to any such policy which has not been replaced or cannot be
replaced on substantially similar terms prior to the date of such cancellation
or termination.
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5.19 CONTRACTS. Schedule 5.19 contains a complete and correct list of
all material agreements, contracts and commitments (collectively, the
"Contracts"), (a) to which the Company is a party or by which it is bound, or
(b) by which any of the assets, properties or the business is bound, and in
either case, which constitute (i) mortgages, indentures, security agreements,
and other agreements and instruments relating to the borrowing of money by or
from, or any extension or credit to or from, the Company; (ii) operating
agreements, carrier agreements and other vendor agreements; (iii) agreements or
commitments for capital expenditures; (iv) brokerage or finder's agreements;
(v) partnership, joint venture or other arrangements or agreements involving a
sharing of profits or expenses; (vi) contracts or commitments to sell, lease or
otherwise dispose of any assets, properties or business other than in the
ordinary course of business; (vii) contracts or commitments limiting the freedom
of the Company to compete in any line of business or in any geographic area or
with any person, and any nondisclosure or nonsolicitation agreements which limit
the Company; (viii) any other agreements, contracts and commitments material to
the business, operations or financial condition of the Company, in each instance
under items (i) through (viii) above which Contract relates to an aggregate
amount of more than $50,000. Such Contracts constitute binding obligations of
the Company and, to the best of its knowledge, the other parties thereto, and
(x) there are no defaults thereunder by the Company or, to the best of Company's
knowledge, by any other party thereto; and (y) no event has occurred which (with
notice, lapse of time or both or occurrence of any other event) would constitute
a default by the Company or, to the best of the Company's knowledge, by any
other party thereto, other than defaults or events which, in the aggregate,
would not have a Material Adverse Effect.
5.20 CUSTOMERS. Schedule 5.20 hereto sets forth the six (6) largest
customers for the fiscal year ended December 31, 1997 (the "Large Customers")
and the amount of all payments made by such Large Customers for such period.
To the best knowledge of the Company and the Shareholder, the Company has a good
business relationship with its Large Customers and none of the Large Customers
has canceled or otherwise terminated, or threatened in writing to cancel or
otherwise terminate, its relationship with the Company or, since January 1,
1997, decreased materially, or threatened in writing to decrease or limit
materially, its usage of the services of the Company.
5.21 NO HSR FILING. The transactions contemplated by this Agreement
are not subject to the filing of a premerger notification and report under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules
and regulations thereunder.
5.22 ACCOUNTS RECEIVABLE. The accounts receivable of the Company set
forth on the Company Balance Sheet or which have arisen since January 1, 1997
have arisen only from bona fide transactions in the ordinary course of business.
The services sold and delivered that gave rise to such accounts were sold and
delivered in conformity in all material respects with applicable Contracts and,
with respect to the Company's three largest customers during such periods,
except as set forth on Schedule 5.22, there are no refunds, rebates, discounts
or other adjustments payable with respect to any such accounts receivable from
such three largest customers. To the best knowledge of the Company and the
Shareholder, the accounts receivable
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set forth in the Company's balance sheet for the fiscal year ended December 31,
1997 have been or will be, with respect to the Company's three largest
customers, collected in full, net of applicable reserves.
5.23 BOARD OF DIRECTORS APPROVAL. The Board of Directors of the
Company has unanimously approved the transactions contemplated by this
Agreement. Such action of the Board of Directors remain in full force and
effect and no other action on the part of the Board of Directors shall be
necessary to consummate the transactions contemplated by this Agreement.
5.24 NO AGREEMENTS TO SELL. Except as contemplated by this Agreement,
neither the Company nor the Shareholder has any legal obligation, absolute or
contingent, to any Person to sell, transfer or assign, directly or indirectly,
any of the Shares or any of the capital stock, material assets or business of
the Company, to sell all or substantially all of the assets of the Company, or
to effect any merger, consolidation, liquidation, dissolution, recapitalization
or other reorganization of the Company or to enter into any agreement with
respect thereto.
5.25 BROKERS. Except as set forth in Schedule 5.25, neither the
Company nor the Shareholder has paid or become obligated to pay any fee or
commission to any broker, finder, investment banker or other intermediary in
connection with this Agreement.
5.26 TRANSACTIONS WITH AFFILIATED PARTIES. Schedule 5.26 sets forth a
true and complete list and description of all transactions, involving the annual
receipt or expenditure of One Hundred Thousand Dollars ($100,000) or more,
engaged in between the Company and (a) any director, officer or stockholder of
the Company, or any of their respective spouses or children, any trust of which
any such person is the grantor, trustee or beneficiary, any corporation
controlled by any such person, or any partnership or other Person in which any
such person or party owns a controlling interest and (b) the Shareholder or any
corporation controlled by the Shareholder.
5.27 REGULATION S REPRESENTATIONS AND COVENANTS.
(a) The Shareholder understands and acknowledges that: (i) the
STAR Shares have not been and will not be registered under the Securities Act,
or under any state securities or blue sky laws (except as set forth in the
Registration Rights Agreement, as defined below), and may not be offered or sold
in the United States or to, or for the account or benefit of, any "U.S. person"
(as defined in Regulation S), unless they are registered under the Securities
Act and any applicable state securities or blue sky laws or unless an exemption
from such registration requirements is available; and (ii) the STAR Shares are
being offered and sold in a manner intended to comply with the conditions
contained in Regulation S, which permits securities to be sold in "offshore
transactions" (as defined in Regulation S), subject to certain terms and
conditions. Such Shareholder represents and warrants that it is not purchasing
the STAR Shares in any transaction or series of transactions that, although in
technical compliance with Regulation S, is part of a plan or scheme to evade the
registration provisions of the Securities Act.
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(b) The Shareholder is not a "U.S. person" and is not acquiring
the STAR Shares for the benefit of any "U.S. person."
(c) During the period of 40 days following the Closing Date (the
"Restricted Period"), the Shareholder will not offer or sell the STAR Shares in
the United States or to, or for the account or benefit of a "U.S. person." Any
proposed offer or sale of any of the STAR Shares prior to the end of the
Restricted Period will be subject to the prior delivery by the Shareholder to
STAR of: (i) a written certification that the STAR Shares have not been offered
or sold in the United States or to, or for the account or benefit of, any "U.S.
person"; and (ii) a written certification of the proposed transferee, reasonably
acceptable to STAR, confirming that such transferee is outside the United
States, is not a "U.S. person," and that the transfer is otherwise permissible
under Regulation S. The Shareholder will not, directly or indirectly, offer,
sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy,
purchase or otherwise acquire or take a pledge of) the STAR Shares otherwise
than in compliance with the Securities Act, any applicable state securities or
blue sky laws and any applicable securities laws of jurisdictions outside the
United States, and the rules and regulations promulgated thereunder.
(d) The Shareholder understands that it should consult with
United States legal counsel prior to offering or selling all or any part of the
STAR Shares in the United States.
(e) During the period that is five business days immediately
prior to the Closing Date, the Shareholder will not, and from the Closing Date
and through the expiration of the Restricted Period, such Shareholder will not,
directly or indirectly, execute or effect or cause to be executed or effected
any short sale, option or equity swap transaction in or with respect to the STAR
Common Stock or any other derivative security transaction, the purpose or effect
of which is to hedge or transfer to a third party all or any part of the risk of
loss associated with such Shareholder's ownership of the STAR Shares.
(f) The Shareholder acknowledges and agrees that the
certificates evidencing the STAR Shares shall have a legend substantially as
follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CONTRACTUAL RESTRICTIONS PURSUANT TO WHICH, PRIOR TO [40 DAYS
AFTER THE CLOSING DATE] (THE "TERMINATION DATE"), NO OFFER OR
SALE (COLLECTIVELY, A "DISPOSITION") OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE MAY BE MADE UNLESS (A) THE
DISPOSITION IS MADE OUTSIDE THE UNITED STATES AND TO, OR FOR THE
ACCOUNT OR BENEFIT OF, ANY PERSON WHO IS NOT A "U.S. PERSON," AND
(B) PRIOR TO SUCH DISPOSITION, THE BENEFICIAL OWNER OF SUCH
SHARES AND THE PROPOSED TRANSFEREE SUBMIT A CERTIFICATION AS
DESCRIBED IN THAT CERTAIN STOCK PURCHASE AGREEMENT PURSUANT TO
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WHICH THESE SECURITIES WERE ISSUED. SUCH CONTRACTUAL
RESTRICTIONS TERMINATE ON, AND THIS LEGEND MAY BE REMOVED UPON
PRESENTATION OF THIS STOCK CERTIFICATE TO THE TRANSFER AGENT OR
THE ISSUER AT ANY TIME AFTER THE TERMINATION DATE."
(g) The Shareholder will be entitled to obtain from STAR's
transfer agent (the "Transfer Agent") at any time from the first business day
following the Restricted Period one or more substitute stock certificates
without the restrictive legend described above upon surrender to the Transfer
Agent of the stock certificate or certificates delivered pursuant to the
preceding paragraph which, in the case of any holder subsequent to the
Shareholder must be duly endorsed for transfer or surrender. STAR shall be
responsible for the payment of any amount necessary to be paid pursuant to any
transfer tax or similar governmental charge relating to such transaction.
ARTICLE VI
COVENANTS AND AGREEMENTS
6.1 CONDUCT OF THE BUSINESS OF THE COMPANY PRIOR TO THE CLOSING DATE.
The Company and the Shareholder agree that, from and after the date hereof until
the Closing Date, except as otherwise consented to or approved in writing by
STAR or expressly permitted by this Agreement:
(a) the business of the Company shall be conducted only in the
ordinary course and consistent with past practice;
(b) each of the Company shall not (i) amend its Certificate of
Incorporation or By-Laws, (ii) change the number of authorized, issued or
outstanding shares of its capital stock, (iii) declare, set aside or pay any
dividend or other distribution or payment in cash, stock or property in respect
of shares of its capital stock, (iv) make any direct or indirect redemption,
retirement, purchase or other acquisition of any of its capital stock or
(v) split, combine or reclassify its outstanding shares of capital stock;
(c) the Company shall not, directly or indirectly, (i) issue,
grant, sell or pledge or agree or propose to issue, grant, sell or pledge any
shares of, or rights of any kind to acquire any shares of the capital stock of
the Company, (ii) other than in the ordinary course of business and consistent
with past practice, incur any material indebtedness for borrowed money, except
material indebtedness for borrowed money incurred under credit facilities
existing as of the date hereof, (iii) waive, release, grant or transfer any
rights of material value, except in the ordinary course of business consistent
with past practices or (iv) transfer, lease, license, sell, mortgage, pledge,
dispose of or encumber any material assets of the Company other than in the
ordinary course of business and consistent with past practice;
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(d) the Company shall use its reasonable efforts to preserve
intact in all material respects the business organization of the Company, to
keep available the services of its operating personnel and to preserve in all
material respects the goodwill of those having business relationships with it,
including, without limitation, suppliers and customers;
(e) the Company will not, directly or indirectly, (i) increase
the compensation payable or to become payable by it to any of its employees,
officers or directors, except in accordance with the employment agreements and
arrangements and the employee welfare and benefit plans set forth on
Schedule 5.11, and except, with respect to employees who are not directors or
officers, for increases in the ordinary course of business, consistent with
past practice, (ii) adopt additional benefit plans, or make any payment or
provision, with respect to any stock option, bonus, profit sharing, pension,
retirement, deferred compensation, employment or other payment or employee
compensation plan, agreement or arrangement for the benefit of employees of the
Company, except in the ordinary course of business consistent with past
practices, (iii) grant any stock options or stock appreciation rights or issue
any warrants, (iv) enter into or amend any employment or severance agreement or
arrangement, other than with respect to at will clerical employees in the
ordinary course of business, or (v) make any loan or advance to (other than with
respect to travel expenses advanced in the ordinary course of business), or
enter into any written contract, lease or commitment with, any officer or
director of the Company;
(f) the Company shall not, directly or indirectly, assume,
guarantee, endorse or otherwise become responsible for the obligations of any
other individual, firm or corporation or make any loans or advances to any
individual, firm or corporation;
(g) the Company shall not make any investment of a capital
nature either by purchase of stock or securities, contributions to capital,
property transfers, acquisition or financing of equipment or otherwise, or by
the purchase of any property or assets of any other individual, firm or
corporation, other than in the ordinary course of business consistent with past
practice;
(h) the Company shall not enter into modify or amend in any
material respect or take any action to terminate their respective material
contracts, except in the ordinary course of business;
(i) the Company shall not take any action, other than reasonable
and usual actions in the ordinary course of business and consistent with past
practice, with respect to accounting policies or procedures, except for changes
required by GAAP;
(j) the Company shall not, without the consent of STAR (which
consent shall not be unreasonably withheld or delayed), settle or compromise any
material federal, state, local or foreign income tax proceeding or audit;
(k) the Company and the Shareholder will promptly advise STAR in
writing of any event or condition that has had a Material Adverse Effect or any
material breach of
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the Company's representations or warranties, or any material breach by the
Company or the Shareholder of a covenant contained herein of which the Company
or the Shareholder has knowledge; and
(l) neither the Company nor the Shareholder shall enter into an
agreement to do any of the things prohibited by clauses (a) through (k).
6.2 ACCESS TO PROPERTIES AND RECORD; STAR NOTICE. The Company shall
afford to STAR and its accountants, counsel and representatives, reasonable
access during normal business hours throughout the period prior to the Closing
Date to all of its properties, books, contracts, commitments and written records
(including but not limited to tax returns for the preceding six years), and
shall make reasonably available its officers and employees to answer questions
put to them thereby; provided that no investigation pursuant to this Section 6.2
shall alter any representation or warranties of any party hereto or conditions
to the obligation of the parties hereto; provided, further, that such access
shall not unreasonably interfere with the normal business operations of any of
the parties hereto.
6.3 ACQUISITION PROPOSALS. Following the execution of this
Agreement, none of the Company, the Shareholder nor any of the Company's
directors, partners, officers, employees or other representatives or agents
shall, directly or indirectly, communicate, solicit, initiate, encourage or
participate (including furnishing information concerning the Company's business,
properties or assets) in any discussions or negotiations with regard to any
proposal to acquire, directly or indirectly, any shares of the capital stock of
the Company, or with regard to any other transaction relating directly or
indirectly to a stock sale, merger, consolidation or other business combination
involving the Company or any Shareholder, or the acquisition of a substantial
portion of the assets of the Company (an "Acquisition Proposal"). The Company
and the Shareholder will immediately communicate to STAR the identity of any
Person that contacts the Company or the Shareholder with respect to the initial
terms of a potential Acquisition Proposal.
6.4 INDEMNIFICATION BY STAR.
(a) STAR agrees to indemnify the Company, the Shareholder and
their respective officers, directors, employees, agents and representatives
(collectively, the "Shareholder Indemnitees") against, and hold such Shareholder
Indemnitees harmless from, any and all claims, obligations, costs, expenses
(including, without limitation, reasonable attorneys' fees and expenses),
damages, losses and liabilities (collectively, "Losses") arising out of the
breach of any representation, warranty, covenant or agreement of STAR herein.
Notwithstanding the foregoing, STAR shall not be liable to any Shareholder
Indemnitee under this Section 6.4(a) until the aggregate of all such Losses
exceeds Two Hundred Fifty Thousand Dollars ($250,000) ("STAR's Threshold
Amount"), in which case STAR shall be required to indemnify the Shareholder
Indemnitees for the full amount of such Losses, including STAR's Threshold
Amount. Notwithstanding the foregoing, no claim for indemnification under this
Section 6.4(a) may be made after the end of the Escrow Period.
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(b) Each of the Shareholder Indemnitees agrees to give STAR
prompt written notice of any claim, assertion, event or proceeding by or in
respect of a third party of which it has knowledge concerning any Loss as to
which it may request indemnification hereunder. STAR shall have the right to
direct, through counsel of its own choosing, the defense or settlement of any
such claim or proceeding (provided that STAR shall have first acknowledged its
indemnification obligations hereunder specifically in respect of such claim or
proceeding) at its own expense, which counsel shall be reasonably satisfactory
to the Shareholder Indemnitees. If STAR elects to assume the defense of any
such claim or proceeding, the Shareholder Indemnitees may participate in such
defense, but in such case the expenses of the Shareholder Indemnitees incurred
in connection with such participation shall be paid by the Shareholder
Indemnitees. The Shareholder Indemnitees shall reasonably cooperate with STAR
in the defense or settlement of any such claim, assertion, event or proceeding.
If STAR elects to direct the defense of any such claim or proceeding, the
Shareholder Indemnitees shall not pay, or permit to be paid, any part of any
claim or demand arising from such asserted liability, unless STAR consents in
writing to such payment or unless STAR withdraws from the defense of such
asserted Loss, or unless a final judgment from which no appeal may be taken by
or on behalf of STAR is entered against such indemnified party for such Loss.
STAR will not settle or compromise any claim subject to this Section 6.4(b)
without the prior consent of the affected Shareholder Indemnitees, such consent
not to be unreasonably withheld, provided that such consent shall not be
necessary if such settlement or compromise includes (i) the payment of monetary
damages by STAR on behalf of such Shareholder Indemnitees and (ii) the full
release of such Persons. If STAR shall fail to defend, or if, after commencing
or undertaking any such defense, STAR fails to prosecute or withdraws from such
defense, the Shareholder Indemnitees shall have the right to undertake the
defense or settlement thereof at STAR's expense.
6.5 INDEMNIFICATION BY THE SHAREHOLDER.
(a) The Shareholder agrees to indemnify STAR, and each of STAR's
respective officers, directors, employees, agents and representatives
(collectively, the "STAR Indemnitees"), against, and hold such STAR Indemnitees
harmless from any and all Losses of STAR arising out of the breach of any
representation, warranty, covenant or agreement of the Shareholder herein or (to
the extent that such breach occurs prior to the Closing) of the Company herein.
Notwithstanding the foregoing, the Shareholder shall not be liable to the STAR
Indemnitees under this Section 6.5(a) until the aggregate of all such Losses
exceeds Two Hundred Fifty Thousand Dollars ($250,000) (the "Shareholder's
Threshold Amount"), in which case the Shareholder shall be required to indemnify
the STAR Indemnitees for the full amount of such Losses, including the
Shareholder's Threshold Amount, provided that the Shareholder's Threshold Amount
shall not apply with respect to any Loss resulting from a breach of the
representations and warranties contained in Section 5.2. Notwithstanding the
foregoing, no claim for indemnification under this Section 6.5(a) may be made
after the Escrow Period.
(b) Each of the STAR Indemnitees agrees to give the Shareholder
prompt written notice of any claim, assertion, event or proceeding by or in
respect of a third party of which it has knowledge concerning any Loss as to
which it may request indemnification
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<PAGE>
hereunder. The Shareholder shall have the right to direct, through counsel of
its own choosing, the defense or settlement of any such claim or proceeding
(provided that the Shareholder shall have first acknowledged its indemnification
obligations hereunder specifically in respect of such claim or proceeding) at
its own expense, which counsel shall be reasonably satisfactory to the STAR
Indemnitees. If the Shareholder elects to assume the defense of any such claim
or proceeding, the STAR Indemnitees may participate in such defense, but in such
case the expenses of the STAR Indemnitees incurred in connection with such
participation shall be paid by the STAR Indemnitees. The STAR Indemnitees shall
reasonably cooperate with the Shareholder in the defense or settlement of any
such claim, assertion, event or proceeding. If the Shareholder elects to direct
the defense of any such claim or proceeding, the STAR Indemnitees shall not pay,
or permit to be paid, any part of any claim or demand arising from such asserted
Loss, unless the Shareholder consents in writing to such payment or unless the
Shareholder withdraws from the defense of such asserted Loss, or unless a final
judgment from which no appeal may be taken by or on behalf of the Shareholder is
entered against any STAR Indemnitee for such Loss. The Shareholder will not
settle or compromise any claim subject to this Section 6.5(b) without the prior
consent of the affected STAR Indemnitees, such consent not to be unreasonably
withheld, provided that such consent shall not be necessary if such settlement
or compromise includes (i) the payment of monetary damages by the Shareholder on
behalf of such STAR Indemnitees and (ii) the full release of such Persons. If
the Shareholder shall fail to defend, or if, after commencing or undertaking any
such defense, the Shareholder fails to prosecute or withdraws from such defense,
the STAR Indemnitees shall have the right to undertake the defense or settlement
thereof at the Shareholder's expense.
(c) Any Loss subject to indemnification pursuant to this
Section 6.5 shall be offset against any appropriate number of Escrow Shares
pursuant to the terms and conditions of the Escrow Agreement.
6.6 CERTAIN LIMITATIONS OF INDEMNIFICATION. Notwithstanding anything
contained in this Agreement to the contrary:
(a) In no event shall the aggregate liability of the Shareholder
hereunder exceed the aggregate value of the Escrow Shares at the Closing Date
(with such value to be calculated as set forth in the Escrow Agreement). In no
event shall any Indemnifying Party be liable to any Indemnified Party for
special, indirect or consequential damages or loss of profits. No
indemnification shall be made hereunder in respect of any representation or
warranty of the Shareholder relating or the Company to or concerning, directly
or indirectly, any of the items in the Closing Balance Sheet.
(b) If any claim for indemnification hereunder is or may be the
subject of insurance or other right to indemnification or contribution from any
third party, the Indemnified Parties promptly shall notify each applicable
insurance carrier of any such claim and related Loss and tender defense thereof
to such insurance carrier, and shall notify each potential third party
indemnitor or contributor that may be liable for all or any portion of such
claim and related Loss.
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The Indemnified Parties shall cooperate with each such insurance carrier, and
shall pursue diligently all rights against and cooperate with each such third
party indemnitor or contributor.
(c) The indemnification obligations of the Shareholder on the
one hand under Section 6.4 and of STAR on the other under Section 6.5 shall
constitute the sole and exclusive remedies of STAR on the one hand and the
Shareholder on the other hand, for the recovery of money damages with respect to
the matters described in Sections 6.4 and 6.5.
(d) Any liability for indemnification under Section 6.4 or 6.5
shall be determined without duplication of recovery by reason of the state of
facts giving rise to such liability constituting a breach of more than one
representation, warranty, covenant or agreement.
(e) If any Indemnifying Party shall be liable for
indemnification under Section 6.4 or 6.5, then such Indemnifying Party shall be
subrogated to all rights of the Indemnified Party with respect to the claims to
which such indemnification relates.
(f) As used in this Section 6.6, "Indemnified Party" shall mean
the Shareholder Indemnitees or the STAR Indemnitees, as applicable.
6.7 CONFIDENTIALITY.
(a) Subject to applicable law, STAR will hold, and will cause
each of its affiliates, employees, officers, directors and other representatives
to hold, in strict confidence, and to not use to the detriment of the Company
any information or data concerning the Company furnished to them in connection
with the transactions contemplated by this Agreement; and if the transactions
contemplated by this Agreement are not consummated, such confidence shall be
maintained and STAR will return to the Company all such information and data as
the Company may request. Notwithstanding the foregoing, a Person may disclose
such data and information (i) if compelled to disclose the same by judicial or
administrative process or by other requirements of law, (ii) in any action, suit
or proceeding brought by a party hereto in pursuit of its rights or in the
exercise of its remedies hereunder, (iii) if the same can be shown to have been
previously known by such Person, (iv) if the same hereafter is in the public
domain through no fault of such Person, or (v) if the same is later acquired by
such Person from another source and such Person is not aware that such source is
under an obligation to another party hereto to keep such data and information
confidential.
(b) Subject to applicable law, the Company will hold, and will
cause each of the its affiliates, employees, officers, directors and other
representatives to hold, in strict confidence, and to not use to the detriment
of STAR, any information or data concerning STAR furnished to them in connection
with the transactions contemplated by this Agreement, and if the transactions
contemplated by this Agreement are not consummated, such confidence shall be
maintained and the Company will return to STAR all such information and data as
STAR may request. Notwithstanding the foregoing, a Person may disclose such
data and information (i) if compelled to disclose the same by judicial or
administrative process or by other requirements of
26
<PAGE>
law, (ii) in any action, suit or proceeding brought by a party hereto in pursuit
of its rights or in the exercise of its remedies hereunder, (iii) if the same
can be shown to have been previously known by such Person, (iv) if the same
hereafter is in the public domain through no fault of such Person, or (v) if the
same is later acquired by such Person from another source and such Person is not
aware that such source is under an obligation to another party hereto to keep
such data and information confidential.
6.8 REASONABLE BEST EFFORTS. Subject to the terms and conditions
hereof, each of the parties hereto agrees to use his or its reasonable best
efforts necessary (a) to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary to satisfy the conditions set forth
herein as soon as practicable, (b) to have removed or rescinded any temporary,
preliminary or permanent injunction, including the injunctions or other orders
described in Section 7.1(a), and (c) to defend against any and all litigation.
STAR and the Company each agree to take, or cause to be taken, all action, and
to do, or cause to be done, all things necessary or required by the United
States Federal Communications Commission (the "FCC") and applicable state
regulatory agencies and public utilities in connection with the transfer of any
licenses required hereunder, including without limitation, any license held by
the Company under Section 214 of the Communications Act of 1934, as amended (the
"Communications Act"), provided that neither party will be required to take any
action or to do anything in connection with the foregoing which would materially
impair STAR's ownership or operation of all or a material portion of the
business and assets of the Company or compel STAR to dispose of all or a
material portion of the business or assets of STAR. No party hereto will take
any action for the purpose of delaying, impairing or impeding the receipt of any
required consent, authorization, order or approval or the making of any required
filing or registration.
6.9 DELIVERY OF FINANCIAL STATEMENTS AND OTHER DOCUMENTS BY THE
COMPANY.
(a) The Company shall deliver to STAR, as soon as practicable,
but in any event within thirty (30) days after the end of each month, and within
forty-five (45) days after the end of each quarter, an unaudited balance sheet,
statement of income and statement of cash flow for such month or quarter, as the
case may be, and for the fiscal year-to-date.
(b) The Company shall deliver to STAR, as soon as practicable,
but in any event within five (5) days of receipt by the Company, copies of any
management letters and other correspondence of the Company's independent
auditors.
(c) The Company shall promptly deliver to STAR notice of any
material defaults under any Contracts and of any material litigation.
(d) The Company shall deliver to STAR, as soon as practicable,
all other information reasonably requested by STAR, where such information is
readily available and may be reduced to written form.
6.10 DELIVERY OF SEC FILINGS BY STAR; NOTICE TO THE SHAREHOLDER.
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<PAGE>
(a) STAR shall deliver to the Company and the Shareholder any
and all SEC Filings made by STAR under the Securities Act or the Exchange Act
promptly upon the filing thereof.
(b) STAR shall promptly notify the Shareholder if STAR becomes
aware that any of the representations and warranties of the Company and the
Shareholder contained herein are not true and correct.
6.11 NON-COMPETITION.
(a) The Shareholder agrees that, for a period of 24 months
following the Closing Date, the Shareholder will not, on his own behalf, on
behalf of any Person controlled by him or by acting as an officer, director,
employee, consultant or agent to any Person, solicit, call on or do business
with any U.S. based provider or carrier of long distance telecommunication
services.
(b) The Shareholder acknowledges that, due to his unique
knowledge and expertise in the area of long distance telecommunications, STAR
would not be reasonably and adequately compensated with monetary damages for a
breach of this Section 6.11. As such, the Shareholder agrees that STAR shall be
entitled to seek injunctive relief for any breach or alleged breach of this
Section 6.11, in addition to any other remedy at law or in equity that may be
available to STAR.
6.12 CERTAIN EVENTS. STAR will promptly advise the Company and the
Shareholder in writing of any event or condition that would have a material
adverse effect on the ability of STAR to consummate the transactions
contemplated hereby, or of any material breach of STAR's representations or
warranties or any material breach of a covenant contained herein of which STAR
has knowledge.
6.13 RESTRICTION ON TRANSFER OF SHARES. Notwithstanding anything in
this Agreement to the contrary, from and after the Closing Date the Shareholder
will not sell, transfer or otherwise dispose of, offer to sell, transfer or
otherwise dispose of or take any other action that reduces the risk of the
Shareholder's ownership of or investment in any of the STAR Shares, until such
time as STAR has published financial results covering at least 30 days of
post-Closing combined operations of STAR and the Company. Publication may,
without limitation, include a Form 10-Q or 8-K filing, the issuance of a
quarterly report or monthly earning report, or any other public issuance that
includes combined sales and net income for 30 days of post-Closing operations.
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ARTICLE VII
CONDITIONS PRECEDENT
7.1 CONDITIONS TO EACH PARTY'S OBLIGATION UNDER THIS AGREEMENT. The
respective obligations of each party to consummate the transactions contemplated
by this Agreement shall be subject to the fulfillment at or prior to the Closing
Date of the following conditions:
(a) No United States or state governmental authority or other
agency or commission or United States or state court of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any statute, rule,
regulation, injunction or other order (whether temporary, preliminary or
permanent) which is in effect and has the effect of making the acquisition of
the Shares illegal or otherwise prohibiting consummation of the transactions
contemplated by this Agreement.
(b) There shall not have been instituted or pending any action
or proceeding by or before any court or governmental authority or other
regulatory or administrative agency or commission, domestic or foreign, by any
government or governmental authority to restrain, prohibit or materially alter
the transactions contemplated by this Agreement, nor shall there be any
determination by any government, governmental authority, regulatory or
administrative agency or commission which restrains, prohibits or materially
alters the transactions contemplated by this Agreement.
7.2 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND THE SHAREHOLDER
UNDER THIS AGREEMENT. The obligation of the Company and the Shareholder to
consummate the transactions contemplated by this Agreement shall be subject to
the fulfillment at or prior to the Closing Date of the following additional
conditions:
(a) STAR shall have performed in all material respects its
obligations under this Agreement required to be performed by it on or prior to
the Closing Date pursuant to the terms hereof.
(b) All representations or warranties of STAR in this Agreement
which are qualified with respect to materiality shall be true and correct, and
all such representations or warranties that are not so qualified shall be true
and correct in all material respects, in each case as if such representation or
warranty was made as of the Closing Date, except to the extent that any such
representation or warranty is made as of a specified date, in which case such
representation or warranty shall have been true and correct (or true and correct
in all material respects, as the case may be) as of such specified date.
(c) Since the date of this Agreement, there shall not have been
a material adverse change in the financial condition, results of operations,
properties or business of STAR, excluding any such change caused by a general
change in the economy or in the telecommunications industry.
29
<PAGE>
(d) STAR shall have delivered a certificate of its President or
Chief Financial Officer to the effect set forth in paragraphs (a), (b) and (c)
of this Section 7.2.
(e) STAR shall have delivered to the Shareholder a Registration
Rights Agreement substantially in the form of Exhibit B hereto.
7.3 CONDITIONS TO OBLIGATIONS OF STAR UNDER THIS AGREEMENT. The
obligations of STAR to consummate the transactions contemplated by this
Agreement shall be subject to the fulfillment at or prior to the Closing Date of
the following additional conditions:
(a) Each of the Company and the Shareholder shall have performed
in all material respects each of its or his obligations under this Agreement
required to be performed by it or him on or prior to the Closing Date pursuant
to the terms hereof.
(b) All representations or warranties of the Company and the
Shareholder in this Agreement which are qualified with respect to a Material
Adverse Effect or materiality shall be true and correct, and all such
representations or warranties that are not so qualified shall be true and
correct in all material respects, in each case as if such representation or
warranty were made as of the Closing Date except to the extent that any such
representation or warranty is made as of a specified date, in which case such
representation or warranty shall have been true and correct (or true and correct
in all material respects, as the case may be) as of such specified date.
(c) Since the date of this Agreement, there shall not have been
any material adverse change in the financial condition, results of operations,
properties or business of the Company, excluding any such change caused by a
general change in the economy or in the telecommunications industry.
(d) The Company shall have delivered a certificate of its
President to the effect set forth in paragraphs (a), (b) and (c) to this
Section 7.3.
(e) STAR shall have received letters of resignation addressed to
the Company from all members of the Company's board of directors, which
resignations shall be effective as of the Closing Date.
(f) STAR shall have received an audited balance sheet of the
Company for the fiscal year ended December 31, 1997, along with an audited
statement of income and statement of cash flow for such period. STAR shall also
have received a schedule certified by the President of the Company and setting
forth outstanding accounts receivable and accounts payable of the Company as of
December 31, 1997 with respect to SatCor and MedNet.
(g) The SEC shall have reviewed and approved of STAR's
accounting treatment of the transactions contemplated hereby as a "pooling of
interests."
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(h) STAR shall have received true and correct copies of the
Company's existing operating agreements with telecommunication service providers
in each of Zaire and Guinea.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 TERMINATION. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Closing Date:
(a) by the mutual consent of STAR, the Company and the
Shareholder;
(b) by STAR if (i) there has occurred a material adverse change
in the financial condition, operations, or business of the Company or (ii) there
is a breach of any of the representations or warranties of the Company which are
qualified with respect to a Material Adverse Effect or materiality or if the
Company shall have breached in any material respect any of such representations
or warranties which are not so qualified, or if the Company fails to comply in
any material respect with any of its covenants or agreements contained herein,
which breaches or failures, as the case may be, are, in the aggregate, material
in the context of the transactions contemplated by this Agreement; and
(c) by the Company and the Shareholder if (i) there has occurred
a material adverse change in the financial condition, operations or business of
STAR or (ii) there is a breach of any of the representations or warranties of
STAR which are qualified with respect to materiality or if STAR shall have
breached in any material respect any of such representations or warranties which
are not so qualified, or if STAR fails to comply in any material respect with
any of its covenants or agreements contained herein, which breach or failures,
as the case may be, are, in the aggregate, material in the context of the
transactions contemplated by this Agreement; and
(d) by any of STAR, the Company or the Shareholder, if on or
before May 31, 1998 the transactions contemplated by this Agreement shall not
have been consummated; provided that neither party may terminate under this
Section 8.1(d) if such failure has been caused by that party's material breach
of this Agreement; provided, further, that if any condition to this Agreement
shall fail to be satisfied by reason of the existence of an injunction or order
of any court or governmental or regulatory body resulting from an action or
proceeding commenced by any party which is not a government or governmental
authority, then at the request of either party the deadline date referred to
above shall be extended for a reasonable period of time, not in excess of 30
days, to permit the parties to have such injunction vacated or order reversed.
8.2 AMENDMENT. Subject to the applicable provisions of the General
Corporation Law, this Agreement may be amended by the parties hereto solely by
action taken by their respective Boards of Directors. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
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8.3 WAIVER. At any time prior to the Closing Date, the parties
hereto, by action taken by their respective Boards of Directors, may (i) extend
the time for the performance of any of the obligations or other acts of the
other parties hereto, (ii) waive any inaccuracies in the representations and
warranties of the other party contained herein or in any documents delivered
pursuant hereto, and (iii) waive compliance by the other party with any of the
agreements or conditions herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in an instrument
in writing signed on behalf of such party.
ARTICLE IX
MISCELLANEOUS
9.1 SURVIVAL. The representations and warranties set forth herein
shall terminate and be extinguished at the end of the Escrow Period.
9.2 EXPENSES AND FEES. The Shareholder shall bear the costs and
expenses incurred by the Company in connection with the transactions
contemplated by this Agreement, whether or not such transactions are
consummated.
9.3 NOTICES. All notices, consents, approvals, waivers and other
communications given or made pursuant hereto shall be in writing and shall be
deemed to have been given or made if in writing and delivered personally or sent
by registered or certified mail (postage prepaid, return receipt requested) or
by telecopier to the parties at the following addresses and facsimile numbers:
(a) If to STAR, to:
STAR Telecommunications, Inc.
223 E. De La Guerra St.
Santa Barbara, CA 93101
Attention: Kelly D. Enos
Fax: (805) 884-1137
with copies to:
Riordan & McKinzie
300 South Grand Avenue, Ste. 2900
Los Angeles, CA 90071
Attention: Timothy F. Sylvester, Esq.
Fax: (213) 229-8550
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(b) If to the Company, to:
T-1 Corp.
405 Park Avenue
New York, NY 10022
Attention: Azmi Mikati
Fax: (212) 444-8008
with copies to:
Whitman Breed Abbott & Morgan LLP
200 Park Avenue
New York, NY 10166
Attention: James P. Gerkis, Esq.
Fax: (212) 351-3131
(c) If to the Shareholder, to:
Taha Mikati
P.O. Box 116876
Socam Building
Njla Kfouri Street
Beirut
LEBANON
Fax: (011) (9611) 869113
with copies to:
Whitman Breed Abbott & Morgan LLP
200 Park Avenue
New York, NY 10166
Attention: James P. Gerkis, Esq.
Fax: (212) 351-3131
or at such other addresses as shall be furnished by the parties by like notice,
and such notice or other communications shall be deemed to have been given or
made upon delivery or receipt thereof.
9.4 HEADINGS. The headings contained in this Agreement are inserted
for convenience only and do not constitute a part of this Agreement.
9.5 PUBLICITY. The parties hereto shall not, and shall cause their
affiliates not to, issue or cause the publication of any press release or other
announcement with respect to the
33
<PAGE>
transactions contemplated by this Agreement without consulting with all other
parties and their respective counsel and without delivering a draft of any such
press release to such parties.
9.6 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement among the parties and supersedes all other prior agreements and
understandings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof.
9.7 ASSIGNMENT. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefits of the parties hereto and their
respective successors and permitted assigns. Neither this Agreement nor any of
the rights, interests or obligations shall be assigned by any of the parties
hereto without the prior written consent of the other parties. This Agreement
is not intended to confer upon any other person any rights or remedies hereunder
other than the Shareholder Indemnitees and/or the STAR Indemnitees.
9.8 COUNTERPARTS. This Agreement may be executed (including by
facsimile transmission) in one or more counterparts, all of which shall be
considered one and the same agreement and each of which shall be deemed an
original.
9.9 INVALIDITY, ETC. In the event that any provision of this
Agreement shall be deemed contrary to law or invalid or unenforceable in any
respect by a court of competent jurisdiction, the remaining provisions shall
remain in full force and effect to the extent that such provisions can still
reasonably be given effect in accordance with the intentions of the parties, and
the invalid and unenforceable provisions shall be deemed, without further action
on the part of the parties, modified, amended and limited solely to the extent
necessary to render the same valid and enforceable.
9.10 SPECIFIC PERFORMANCE. Each of the parties hereto acknowledges
and agrees that the other parties hereto would be irreparably damaged in the
event any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. Accordingly, each of the
parties hereto agrees that they each shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically this Agreement and the terms and conditions hereof in any
action instituted in any court of the United States or any state having
competent jurisdiction, in addition to any other remedy to which such party may
be entitled, at law or in equity.
9.11 GOVERNING LAW. The validity and interpretation of this Agreement
shall be governed by the laws of the State of Delaware, without reference to the
conflict of laws principles thereof.
9.12 BOOKS AND RECORDS. From and after the Closing and until the
sixth anniversary thereof (or for such longer period as may be required by law
or as may be reasonably necessary as a result of tax audits and contests), each
of STAR and the Company agrees to grant to the Shareholder, upon reasonable
notice and during normal business hours, reasonable access to, and the right to
make copies of, any books and records of the Company that pertain to the
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Company or the operation of its business on or prior to the Closing Date, for
any reasonable business purpose of the Shareholder, provided that, in connection
with such access, other than for purposes of the filing of tax returns by the
Shareholder or any other tax related matter, the Shareholder may, in the sole
discretion of the Company, be required to execute and deliver a reasonable
confidentiality agreement or similar nondisclosure document. Neither STAR nor
the Company shall destroy any item referred to above in this Section 9.12
without first offering to the Shareholder the opportunity, at the Shareholder's
expense to obtain the same.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, STAR, the Company and the Shareholder have caused this
Agreement to be executed as of the date first written above.
STAR: STAR Telecommunications, Inc.
By:
--------------------------------------------
Kelly D. Enos
Chief Financial Officer
THE COMPANY: T-One Corp.
By:
--------------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
THE SHAREHOLDER:
-------------------------------------------------
Taha Mikati
36
<PAGE>
IN WITNESS WHEREOF, STAR, the Company and the Shareholder have
caused this Agreement to be executed as of the date first written above.
STAR: STAR Telecommunications, Inc.
By: /s/ KELLY D. ENOS
--------------------------------------------
Kelly D. Enos
Chief Financial Officer
THE COMPANY: T-One Corp.
By: /s/ AZMI MIKATI
-----------------------------------------------
Name: Azmi T. Mikati
Title:
-------------------------------------
THE SHAREHOLDER:
Taha Mikati
37
<PAGE>
EXHBIT 3.1
SECOND AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION OF
STAR TELECOMMUNICATIONS, INC.
A DELAWARE CORPORATION
(PURSUANT TO SECTIONS 228, 242 AND 245
OF THE DELAWARE GENERAL CORPORATION LAW)
STAR Telecommunications, Inc., a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"General Corporation Law")
DOES HEREBY CERTIFY:
FIRST: That this corporation was originally incorporated on
September 13, 1996, pursuant to the General Corporation Law.
SECOND: That the Board of Directors duly adopted resolutions
proposing to amend and restate the Amended and Restated Certificate of
Incorporation of this corporation, declaring said amendment and restatement
to be advisable and in the best interests of this corporation and its
stockholders, and authorizing the appropriate officers of this corporation to
solicit the consent of the stockholders therefor, which resolution setting
forth the proposed amendment and restatement is as follows:
"RESOLVED, that the Amended and Restated Certificate of
Incorporation of this corporation be amended and restated in its entirety as
follows:
ARTICLE I
The name of the corporation is STAR Telecommunications, Inc. (the
"Corporation").
ARTICLE II
The address of the registered office of this corporation in the
State of Delaware is 1209 Orange Street, in the City of Wilmington, County of
New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted
is to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
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ARTICLE IV
The Corporation is authorized to issue two classes of stock to be
designated common stock ("Common Stock") and preferred stock ("Preferred
Stock"). The number of shares of Common Stock authorized to be issued is
Fifty Million (50,000,000), par value $0.001 per share, and the number of
Preferred Stock authorized to be issued is Five Million (5,000,000), par
value $0.001 per share.
The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors is
hereby authorized, in the resolution or resolutions adopted by the Board of
Directors providing for the issue of any wholly unissued series of Preferred
Stock, within the limitations and restrictions stated in this Second Amended
and Restated Certificate of Incorporation (the "Restated Certificate"), to
fix or alter the dividend rights, dividend rate, conversion rights, voting
rights, rights and terms of redemption (including sinking fund provisions),
the redemption price or prices, and the liquidation preferences of any wholly
unissued series of Preferred Stock, and the number of shares constituting any
such series and the designation thereof, or any of them, and to increase or
decrease the number of shares of any series subsequent to the issue of shares
of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so
decreased, the shares constituting such decrease shall resume the status that
they had prior to the adoption of the resolution originally fixing the number
of shares of such series.
ARTICLE V
Except as otherwise provided in this Restated Certificate, in
furtherance and not in limitation of the powers conferred by statute, the
Board of Directors is expressly authorized to make, repeal, alter, amend and
rescind any or all of the Bylaws of the Corporation.
ARTICLE VI
The number of directors of the Corporation shall be fixed from time
to time by a bylaw or amendment thereof duly adopted by the Board of
Directors.
The Board of Directors shall be and is divided into three classes,
Class I, Class II and Class III. Such classes shall be as nearly equal in
number of directors as possible. Each director shall serve for a term ending
on the third annual meeting following the annual meeting at which such
director was elected; provided, however, that the directors first elected to
Class I shall serve for a term ending on the annual meeting next following
the end of fiscal year 1997, the directors first elected to Class II shall
serve for a term ending on the second annual meeting next following the end
of fiscal year 1998, and the directors first elected to Class III shall serve
for a term ending on the third annual meeting next following the end of
fiscal year 1999. The foregoing notwithstanding, each director shall serve
until his successor shall have been duly elected and qualified, unless he
shall resign, become disqualified, disabled or shall otherwise be removed.
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At each annual election, directors chosen to succeed those whose
terms then expire shall be of the same class as the directors they succeed,
unless by reason of any intervening changes in the authorized number of
directors, the Board shall designate one or more directorships whose term
then expires as directorships of another class in order more nearly to
achieve equality of number of directors among the classes.
Notwithstanding the rule that the three classes shall be as nearly
equal in number of directors as possible, in the event of any change in the
authorized number of directors each director then continuing to serve as such
shall nevertheless continue as a director of the class of which he is a
member until the expiration of his current term, or his prior death,
resignation or removal. If any newly created directorship may, consistently
with the rule that the three classes shall be as nearly equal in number of
directors as possible, be allocated to either class, the Board shall allocate
it to that of the available class whose term of office is due to expire at the
earliest date following such allocation.
ARTICLE VII
Elections of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
ARTICLE VIII
Except as otherwise provided in this Restated Certificate, any
action required or permitted to be taken by the stockholders of the
Corporation must be effected at an annual or special meeting of the
stockholders of the Corporation, and no action required to be taken or that
may be taken at any annual or special meeting of the stockholders of the
Corporation may be taken without a meeting except by the unanimous written
consent of all stockholders entitled to vote on such action, and the power of
stockholders to consent in writing to the taking of any action by less than
unanimous consent of all such stockholders is specifically denied.
ARTICLE IX
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived
any improper personal benefit. If the Delaware General Corporation Law is
amended after approval by the stockholders of this Article to authorize
corporate action further eliminating or limiting the personal liability of
directors then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law as so amended.
Any repeal or modification of the foregoing provisions of this
Article IX by the stockholders of the Corporation shall not adversely affect
any right or protection of a director of the Corporation existing at the time
of such repeal or modification.
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ARTICLE X
In addition to any vote of the holders of any class or series of
the stock of this Corporation required by law or by this Restated
Certificate, the affirmative vote of the holders of a majority of the voting
power of all of the then outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required to amend or repeal the
provisions of ARTICLE I, ARTICLE II, and ARTICLE III of this Restated
Certificate. Notwithstanding any other provision of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser
vote or no vote, but in addition to any vote of the holders of any class or
series of the stock of this Corporation required by law or by this Restated
Certificate, the affirmative vote of the holders of at least seventy-five
percent (75%) of the voting power of all of the then outstanding shares of
the capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required
to amend or repeal any provision of this Restated Certificate not specified
in the preceding sentence.
* * * *
THIRD: The foregoing Second Amended and Restated Certificate of
Incorporation has been duly adopted by the Corporation's Board of Directors
in accordance with the applicable provisions of Section 245 of the General
Corporation Law of the State of Delaware.
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IN WITNESS WHEREOF, the undersigned has signed this Certificate
this 17(th) day of June, 1997.
/s/ Christopher E. Edgecomb
----------------------------------
Christopher E. Edgecomb
Chief Executive Officer
ATTEST:
/s/ Mary A. Casey
- ---------------------------------
Mary A. Casey
President and Secretary
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
STAR TELECOMMUNICATIONS, INC.
A DELAWARE CORPORATION
ARTICLE I
OFFICES
SECTION 1. The registered office shall be in the City of Wilmington,
County of New Castle, State of Delaware.
SECTION 2. The corporation may also have offices at such other places
both within and without the State of Delaware as the Board of Directors may
from time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. All meetings of the stockholders for the election of
directors shall be held at such time and place, within or without the State
of Delaware, as may be fixed from time to time by the Board of Directors, and
stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof.
SECTION 2. Annual meetings of stockholders, commencing with the year
1997, shall be held at such date and time as shall be designated from time to
time by the Board of Directors and stated in the notice of the meeting, at
which they shall elect by a plurality vote a board of directors, and transact
such other business as may properly be brought before the meeting.
SECTION 3. Written notice of the annual meeting stating the place, date
and hour of the meeting shall be given to each stockholder entitled to vote
at such meeting not fewer than ten (10) nor more than sixty (60) days before
the date of the meeting.
SECTION 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten (10) days before every
meeting of stockholders, a complete list of the stockholders entitled to vote
at the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be
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specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
SECTION 5. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the president and shall be called by the
president or secretary at the request in writing of a majority of the Board
of Directors. Such request shall state the purpose or purposes of the
proposed meeting.
SECTION 6. Written notice of a special meeting stating the place, date
and hour of the meeting and the purpose or purposes for which the meeting is
called, shall be given not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting, to each stockholder entitled to vote at such
meeting.
SECTION 7. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
SECTION 8. The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy,
shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present
or represented at any meeting of the stockholders, the stockholders entitled
to vote thereat, present in person or represented by proxy, shall have power
to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented.
At such adjourned meeting at which a quorum shall be present or represented
any business may be transacted that might have been transacted at the meeting
as originally notified. If the adjournment is for more than thirty (30) days,
or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder
of record entitled to vote at the meeting.
SECTION 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or
of the certificate of incorporation, a different vote is required, in which
case such express provision shall govern and control the decision of such
question.
SECTION 10. Unless other provided in the certificate of incorporation,
each stockholder shall at every meeting of the stockholders be entitled to
one vote in person or by proxy for each share of the capital stock having
voting power held by such stockholder, but no proxy shall be voted on after
three (3) years from its date, unless the proxy provides for a longer period.
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ARTICLE III
DIRECTORS
SECTION 1. The number of directors shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there
exist any vacancies in previously authorized directorships at the time any
such resolution is presented to the Board for adoption). Directors shall be
divided into three classes, as nearly equal in number as reasonably possible,
with the term of office of the first class to expire at the 1997 annual
meeting of stockholders, the term of office of the second class to expire at
the 1998 annual meeting of stockholders and the term of office of the third
class to expire at the 1999 annual meeting of stockholders. At each annual
meeting of stockholders following such initial classification and election,
directors elected to succeed those directors whose terms expire shall be
elected for a term of office to expire at the third succeeding annual meeting
of stockholders after their election. All directors shall hold office until
the expiration of term for which elected, and until their respective
successors are elected and qualified, except in the case of the death,
resignation or removal of any director. Directors need not be stockholders.
SECTION 2. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole
remaining director, and the directors so chosen shall hold office until the
next annual election and until their successors are duly elected and shall
qualify, unless sooner displaced. If there are no directors in office, then
an election of directors may be held in the manner provided by statute.
SECTION 3. The business of the corporation shall be managed by or under
the direction of its board of directors, which may exercise all such powers
of the corporation and do all such lawful acts and things as are not by
statute or by the certificate of incorporation or by these bylaws directed or
required to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
SECTION 4. The Board of Directors of the corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
SECTION 5. The first meeting of each newly elected Board of Directors
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the even of the failure of
the stockholders to fix the time or place of such first meeting of the newly
elected Board of Directors, or in the event such meeting is not held at the
time and place so fixed by the stockholders, the meeting may be held at such
time and place as shall be specified in a notice given as hereinafter
provided for special meetings of the Board of Directors, or as shlal be
specified in a written waiver signed by all of the directors.
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SECTION 6. Regular meetings of the Board of Directors may be held
without notice at such time and at such place as shall from time to time be
determined by the board.
SECTION 7. Special meetings of the Board of Directors may be called by
the president on ten (10) days' notice to each director by mail or
forty-eight (48) hours notice to each director either personally or by
telephone, telegram or facsimile; special meetings shall be called by the
president or secretary in like manner and on like notice on the written
request of two (2) directors unless the board consists of only one director,
in which case special meetings shall be called by the president or secretary
in like manner and on like notice on the written request of the sole director.
SECTION 8. At all meetings of the board a majority of the directors
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be
present.
SECTION 9. Unless otherwise restricted by the certificate of
incorporation of these bylaws, any action required or permitted to be taken
at any meeting of the Board of Directors or of any committe thereof may be
taken without a meeting, if all members of the board or committee, as the
case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the board or committee.
SECTION 10. Unless otherwise restricted by the certificate of
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting
of the Board of Directors, or any committee, by means of conference telephone
or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
SECTION 11. The Board of Directors may, by resolution passed by a
majority of the whole board, designate one (1) or more committees, each
committee to consist of one (1) or more of the directors of the corporation.
The board may designate one (1) or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any
meeting of the committee.
In the absence of disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or she or they constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in the
place of any such absent or disqualified member.
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Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority
of the Board of Directors in the management of the business and affairs of
the corporation, and may authorize the seal of the corporation to be affixed
to all papers that may require it; but no such committee shall have the power
or authority in reference to amending the certificate of incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending
the bylaws of the corporation; and, unless the resolution or the certificate
of incorporation expressly so provide, no such committee shall have the power
or authority to declare a dividend or to authorize the issuance of stock.
Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors.
SECTION 12. Each committee shall keep regular minutes of its meetings
and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
SECTION 13. Unless otherwise restricted by the certificate of
incorporation or these bylaws, the Board of Directors shall have the
authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of
Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as director. No such payment shall
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees
may be allowed like compensation for attending committee meetings.
REMOVAL OF DIRECTORS
SECTION 14. Unless otherwise restricted by the certificate of
incorporation or bylaw, any director or the entire Board of Directors may
be removed, for cause only, by the holders of a majority of shares entitled
to vote at an election of directors.
ARTICLE IV
NOTICES
SECTION 1. Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these bylaws, notice is required to be
given to any director or stockholder, it shall not be construed to mean
personal notice, but such notice may be given in writing, by mail, addressed
to such director or stockholder, at his address as it appears on the records
of the corporation, with postage thereon prepaid, and such notice shall be
deemed to be given at the time when the same shall be deposited in the United
States mail. Notice to directors may also be given by telegram, telephone or
facsimile.
SECTION 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing,
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signed by the person or persons entitled to said notice, whether before or
after the time stated therein, shall be deemed equivalent thereto.
ARTICLE V
OFFICERS
SECTION 1. The officers of the corporation shall be chosen by the Board
of Directors and shall be a president, treasurer and a secretary. The Board
of Directors may elect from among its members a Chairman of the Board and a
Vice Chairman of the Board. The Board of Directors may also choose one or
more vice-presidents, assistant secretaries and assistant treasurers. Any
number of offices may be held by the same person, unless the certificate of
incorporation or these bylaws otherwise provide.
SECTION 2. The Board of Directors at it first meeting after each annual
meeting of stockholders shall choose a president, a treasurer, and a
secretary, and may choose vice presidents, assistant secretaries and
assistant treasurers.
SECTION 3. The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
SECTION 4. The salaries of all officers and agents of the corporation
shall be fixed by the Board of Directors.
SECTION 5. The officers of the corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of
the corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
SECTION 6. The Chairman of the Board, if any, shall preside at all
meetings of the Board of Directors and of the stockholders at which he or she
shall be present. He or she shall have and may exercise such powers as are,
from time to time, assigned to him or her by the Board and as may be provided
by law.
SECTION 7. In the absence of the Chairman of the Board, the Vice
Chairman of the Board, if any, shall preside at all meetings of the Board of
Directors and of the stockholders at which he or she shall be present. He or
she shall have and may exercise such powers as are, from time to time,
assigned to him or her by the Board and as may be provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
SECTION 8. The president shall be the chief operating officer of the
corporation; and in the absence of the Chairman and Vice Chairman of the
Board the president shall preside at all meetings of the stockholders and the
Board of Directors; the president shall have general and
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active management of the business of the corporation and shall see that all
orders and resolutions of the Board of Directors are carried into effect.
SECTION 9. The president shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent of the corporation.
SECTION 10. In the absence of the president or in the event of the
president's inability or refusal to act, the vice-president, if any, (or in
the event there be more than one vice-president, the vice-presidents in the
order designated by the directors, or in the absence of any designation, then
in the order of their election) shall perform the duties of the president,
and when so acting, shall have all the powers of and be subject to all the
restrictions upon the president. The vice-presidents shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
SECTION 11. The secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all the proceedings
of the meetings of the corporation and of the Board of Directors in a book to
be kept for that purpose and shall perform like duties for the standing
committees when required. The secretary or she shall give, or cause to be
given, notice of all meetings of the stockholders and special meetings of the
Board of Directors, and shall perform such other duties as may be prescribed
by the Board of Directors or president, under whose supervision he or she
shall be. The secretary shall have custody of the corporate seal of the
corporation and the secretary, or an assistant secretary, shall have
authority to affix the same to any instrument requiring it and when so
affixed, it may be attested by his signature or by the signature of such
assistant secretary. The Board of Directors may give general authority to any
other officer to affix the seal of the corporation and to attest the affixing
by his signature.
SECTION 12. The assistant secretary, or if there be more than one, the
assistant secretaries in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board
of directors may from time to time prescribe.
TREASURER AND ASSISTANT TREASURERS
SECTION 13. The treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all
moneys and other valuable effects in the name and to the credit of the
corporation in such depositories as may be designated by the Board of
Directors. Unless otherwise appointed, the chief financial officer shall be
the treasurer.
SECTION 14. The treasurer shall disburse the funds of the corporation as
may be
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ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors,
at its regular meetings, or when the Board of Directors so requires, an
account of all of his or her transactions as treasurer and of the financial
condition of the corporation.
SECTION 15. If required by the Board of Directors, the treasurer shall
give the corporation a bond (which shall be renewed every six years) in such
sum and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of the treasurer's
office and for the restoration to the corporation, in case of the treasurer's
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in the treasurer's
possession or under the treasurer's control belonging to the corporation.
SECTION 16. The assistant treasurer, or if there shall be more than one,
the assistant treasurers in the order determined by the Board of Directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the treasurer or in the event of the treasurer's
inability or refusal to act, perform the duties and exercise the powers of
the treasurer and shall perform such other duties and have such other powers
as the Board of Directors may from time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
SECTION 1. Every holder of stock in the corporation shall be entitled to
have a certificate, signed by, or in the name of the corporation by, the
chairman or vice-chairman of the Board of Directors, or the president or a
vice-president and the treasurer or an assistant treasurer, or the secretary
or an assistant secretary of the corporation, certifying the number of shares
owned by such stockholder in the corporation.
Certificates may be issued for partly paid shares and in such case upon
the face or back of the certificates issued to represent any such partly paid
shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware,
in lieu of the foregoing requirements, there may be set forth on the face or
back of the certificate that the corporation shall issue to represent such
class or series of stock, a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights.
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SECTION 2. Any of or all the signatures on the certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same
effect as if he or she were such officer, transfer agent or registrar at the
date of issue.
LOST CERTIFICATES
SECTION 3. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such
manner as its shall require and/or to give the corporation a bond in such sum
as it may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost, stolen
or destroyed.
TRANSFER OF STOCK
SECTION 4. Upon surrender to the corporation or the transfer agent of
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall
be the duty of the corporation to issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction upon
its books.
FIXING RECORD DATE
SECTION 5. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholder or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights
in respect of any change, conversion or exchange of stock or for the purpose
of any other lawful action, the Board of Directors may fix, in advance, a
record date, which shall not be more than sixty (60) nor less than ten (10)
days before the date of such meeting, nor more than sixty (60) days prior to
any other action. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors
may fix a new record date for the adjourned meeting.
REGISTERED STOCKHOLDERS
SECTION 6. The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
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share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
SECTION 1. Dividends upon the capital stock of the corporation, subject
to the provisions of the certificate of incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting,
pursuant to law. Dividends may be paid in cash, in property, or in shares of
the capital stock, subject to the provisions of the certificate of
incorporation.
SECTION 2. Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as
a reserve or reserves to meet contingencies, or for equalizing dividends, or
for repairing or maintaining any property of the corporation, or for such
other purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
SECTION 3. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons
as the Board of Directors may from time to time designate.
SECTION 4. The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors.
SEAL
SECTION 5. The Board of Directors may adopt a corporate seal having
inscribed thereon the name of the corporation, the year of its organization
and the words "Corporate Seal, Delaware". The seal may be used by causing it
or a facsimile thereof to be impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
SECTION 6. The corporation shall, to the fullest extent authorized under
the laws of the State of Delaware, as those laws may be amended and
supplemented from time to time, indemnify any director made, or threatened to
be made, a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of being a director of the
corporation or a predecessor corporation or, at the corporation's request, a
director or officer of another corporation, provided, however, that the
corporation shall indemnify any such agent in
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connection with a proceeding initiated by such agent only if such proceeding
was authorized by the Board of Directors of the corporation. The
indemnification provided for in this Section 6 shall: (i) not be deemed
exclusive of any other rights to which those indemnified may be entitled
under any bylaw, agreement or vote of stockholders or disinterested directors
or otherwise, both as to action in their official capacities and as to action
in another capacity while holding such office, (ii) continue as to a person
who has ceased to be a director, and (iii) inure to the benefit of the heirs,
executors and administrators of such a person. The corporation's obligation
to provide indemnification under this Section 6 shall be offset to the extent
of any other source of indemnification or any otherwise applicable insurance
coverage under a policy maintained by the corporation or any other person.
Expenses incurred by a director of the corporation in defending a civil
or criminal action, suit or proceeding by reason of the fact that he or she
is or was a director of the corporation (or was serving at the corporation's
request as a director or officer of another corporation) shall be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director to
repay such amount if it shall ultimately be determined that such director is
not entitled to be indemnified by the corporation as authorized by relevant
sections of the General Corporation Law of Delaware. Notwithstanding the
foregoing, the corporation shall not be required to advance such expenses to
an agent who is a party to an action, suit or proceeding brought by the
corporation and approved by a majority of the Board of Directors of the
corporation that alleges willful misappropriation of corporate assets by such
agent, disclosure of confidential information in violation of such agent's
fiduciary or contractual obligations to the corporation or any other willful
and deliberate breach in bad faith of such agent's duty to the corporation or
its stockholders.
The foregoing provisions of this Section 6 shall be deemed to be a
contract between the corporation and each director who serves in such
capacity at any time while this bylaw is in effect, and any repeal or
modification thereof shall not affect any rights or obligations then existing
with respect to any state of facts then or theretofore existing or any
action, suit or proceeding theretofore or thereafter brought based in whole
or in part upon any such state of facts.
The Board of Directors in its discretion shall have a power on behalf of
the corporation to indemnify any person, other than a director, made a party
to any action, suit or proceeding by reason of the fact that such person,
their testator or intestate, is or was an officer or employee of the
corporation.
To assure indemnification under this Section 6 of all directors, officers
and employees who are determined by the corporation or otherwise to be or to
have been "fiduciaries" of any employee benefit plan of the corporation that
may exist from time to time, Section 145 of the General Corporation of Law of
Delaware shall, for the purposes of this Section 6, be interpreted as
follows: an "other enterprise" shall be deemed to include such an employee
benefit plan, including without limitation, any plan of the corporation that
is governed by the Act of Congress entitled "Employee Retirement Income
Security Act of 1974," as amended from time to time; the corporation shall be
deemed to have requested a person to serve an employee
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benefit plan where the performance by such person of his duties to the
corporation also imposes duties on, or otherwise involves services by, such
person to the plan or participants or beneficiaries of the plan; excise taxes
assessed on a person with respect to an employee benefit plan pursuant to
such Act of Congress shall be deemed "fines."
ARTICLE VIII
AMENDMENTS
SECTION 1. These bylaws may be altered, amended or repealed or new
bylaws may be adopted by stockholders holding at least seventy-five percent
(75%) of the Company's outstanding capital stock ("Amending Stockholders") or
by the Board of Directors, when such power is conferred upon the Board of
Directors by the certificate of incorporation at any regular meeting of the
stockholders or of the Board of Directors or by the Amending Stockholders at
any special meeting of the stockholders or by the Board of Directors at any
special meeting of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new bylaws be contained in the notice of
such special meeting. If the power to adopt, amend or repeal bylaws is
conferred upon the Board of Directors by the certificate or incorporation it
shall not divest or limit the power of the stockholders to adopt, amend or
repeal bylaws.
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EXHIBIT 4.6
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of
March 9, 1998, between STAR Telecommunications, Inc., a Delaware corporation
("STAR"), and Taha Mikati, an individual ("Holder").
R E C I T A L S:
A. Pursuant to the terms and conditions of that certain Stock Purchase
Agreement (the "Stock Purchase Agreement") dated January 26, 1998 by and among
STAR, T-One Corp., a Delaware corporation ("T-One"), and Holder, STAR will issue
and deliver to the Holder 660,000 shares (the "Initial Shares") of STAR's common
stock, $.01 par value per share ("Common Stock") at Closing and 693,000 shares
of Common Stock (the "Additional Shares" and, together with the Initial Shares,
the "Shares") on or about March 31, 1998 (but in any event not later than
April 4, 1998).
B. In connection with the transactions contemplated by the Stock Purchase
Agreement, STAR has agreed to grant to the Holder the registration rights set
forth herein with respect to the Shares.
A G R E E M E N T:
NOW, THEREFORE, intending to be legally bound, the parties agree as
follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms
shall have the following meanings:
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
"Prospectus" shall mean the prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement and including
post-effective amendments and all material incorporated by reference in such
Prospectus.
"Register", "registered" and "registration" shall refer to a
registration effected by preparing and filing a Registration Statement and
taking all other actions that are necessary or appropriate in connection
therewith, and the declaration or ordering of effectiveness of such Registration
Statement by the SEC.
"Registration Expenses" shall have the meaning set forth in Section 5.
<PAGE>
"Registrable Securities" shall mean (i) the Shares and (ii) any
securities issued or issuable with respect to such Shares by way of a stock
dividend, stock split, combination of shares, recapitalization, restructuring,
merger, consolidation or other reorganization of STAR, provided that such term
shall not include any such shares of Common Stock sold to the public by Holder
pursuant to a Registration Statement or to Rule 144 under the Securities Act or
sold by Holder in a private transaction in which Holder's rights hereunder were
not assigned, and shall not include any Shares that are eligible for resale to
the public pursuant to Rule 144(k) of the Securities Act.
"Registration Statement" shall mean any registration statement of STAR
in compliance with the Securities Act that covers Registrable Securities
pursuant to the provisions of this Agreement, including, without limitation, the
Prospectus, all amendments and supplements to such Registration Statement or
Prospectus, including all post-effective amendments, all exhibits and all
material incorporated by reference in such Registration Statement.
"Securities Act" shall mean the Securities Act of 1933, as amended
from time to time.
"SEC" shall mean the Securities and Exchange Commission.
"Underwritten registration" or "underwritten offering" shall mean a
registration in which securities of STAR are sold to an underwriter or through
an underwriter as agent for reoffering to the public.
2. STAR REGISTRATION. If STAR shall determine to register any shares of
Common Stock for its own account or for the account of any stockholders (other
than a registration relating either to the sale of securities to employees of
STAR pursuant to a stock option, stock purchase or similar benefit plan or to an
SEC Rule 145 transaction), Holder shall be entitled to include Registrable
Securities in such registration (and related underwritten offering, if any) on
the following terms and conditions:
(a) STAR shall promptly give written notice of such determination to
Holder who shall have the right to request, by written notice given to STAR
within fifteen (15) days of the receipt by Holder of such notice, that a
specific number of Registrable Securities be included in such Registration
Statement.
(b) If the Registration Statement relates to an underwritten
offering, the notice called for by Section 2(a) shall specify the name of the
managing underwriter for such offering and the number of securities to be
registered for the account of STAR and, if then known, for the account of any of
the other stockholders of STAR.
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(c) If the Registration Statement relates to an underwritten
offering, Holder agrees to enter into an underwriting agreement containing
standard and customary terms and conditions and to sell his Registrable
Securities pursuant to the terms thereof.
(d) If the managing underwriter for the underwritten offering under
the Registration Statement to be filed by STAR determines that inclusion of all
or any portion of the Registrable Securities in such offering would adversely
affect the ability of the underwriter for such offering to sell all of the
securities requested to be included for sale in such offering, the number of
shares that may be included in such registration in such offering shall be
allocated as follows: (i) first, STAR shall be permitted to include all shares
of capital stock to be registered thereby and (ii) second, Holder shall be
allowed to include such additional amount as the managing underwriter deems
appropriate, such amount to be allocated among Holder and any other selling
stockholders on a pro rata basis based on the total number of shares of capital
stock held thereby. The foregoing sentence notwithstanding, if the underwritten
offering is being registered by STAR at the instance of another shareholders or
shareholders to whom STAR has granted the right to require that STAR undertake
such registration (hereinafter, "Demand Right Holders"), then the managing
underwriter of such offering may reduce the number of Holder's Registrable
Securities included in such offering, or exclude them entirely, without any
reduction of the shares to be included in such offering by any such Demand Right
Holders.
(e) Holder shall have the right to withdraw his Registrable
Securities from the Registration Statement at any time prior to the effective
date thereof, but if the same relates to an underwritten offering and an
underwriting agreement has been entered into, he may only do so during the time
period and on terms deemed appropriate by the underwriters for such underwritten
offering as specified in such underwriting agreement.
(f) STAR shall have the right to terminate or withdraw any
registration initiated by it under this Section 2 prior to the effective date of
such registration, whether or not Holder has elected to include Registrable
Securities in such registration.
(g) All registration rights set forth herein shall expire within two
years after the date of this Agreement.
3. RESTRICTIONS ON PUBLIC SALE BY HOLDER. If Holder's Registrable
Securities are included (in whole or in part) in a Registration Statement filed
by STAR under Section 2 for sale in an underwritten offering, Holder agrees, if
requested by the managing underwriter of such offering, not to sell, make any
short sale of, loan, grant any option for the purchase of, dispose of or effect
any public sale or distribution of securities of the same series and class as
(or securities exchangeable or exercisable for or convertible into securities of
the same series and class as) the Registrable Securities included in the
Registration Statement, including a sale pursuant to Rule 144 under the
Securities Act (except as part of such underwritten registration), during the
ten (10)-day period prior to, and during the one hundred eighty (180)-
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day period (or shorter period requested by the underwriter) beginning on the
closing date of such underwritten offering, to the extent timely notified in
writing by STAR or the managing underwriter.
4. REGISTRATION PROCEDURES. In the case of each registration,
qualification or compliance effected by STAR pursuant to this Agreement, STAR
shall, by notice to Holder, keep Holder advised in writing as to the initiation,
progress and effective date of each registration, qualification and compliance
and, in connection with STAR's registration obligations pursuant to Section 2
hereof, subject to Sections 2(d) and 2(f), STAR will use its best efforts to
effect such registration to permit the offer and sale of the Registrable
Securities proposed to be included in a Registration Statement in accordance
with the intended method or methods of disposition thereof, and pursuant thereto
STAR will as expeditiously as possible:
(a) prepare and file with the SEC a Registration Statement with
respect to such Registrable Securities and use its best efforts to cause such
Registration Statement to become effective as soon as practicable thereafter,
and, upon the request of Holder, keep such registration statement effective for
up to 120 days, provided that, before filing any Registration Statement or
Prospectus or any amendments or supplements thereto, STAR will furnish to Holder
and his counsel, copies of all such documents proposed to be filed, at least ten
(10) days prior to the filing thereof, including, without limitation, documents
incorporated by reference in the Prospectus and, if requested by the Holder, the
exhibits incorporated by reference therein, and Holder shall have the
opportunity to object to any information pertaining solely to Holder that is
contained therein and STAR will make the corrections reasonably requested by
Holder with respect to such information prior to filing any Registration
Statement or amendment thereto or any Prospectus or any supplement thereto.
STAR will not include or name Holder in any Registration Statement or Prospectus
without the consent of Holder, unless required to do so by the Securities Act
and the rules and regulations thereunder.
(b) prepare and file with the SEC such amendments, post-effective
amendments and supplements to the Registration Statement and the Prospectus as
may be necessary to keep such Registration Statement effective for a period of
up to 120 days, or such shorter period as is necessary to complete the
distribution of the securities covered by such Registration Statement and to
comply with the provisions of the Securities Act and the rules and regulations
thereunder with respect to the disposition of all securities covered by such
Registration Statement.
(c) promptly notify Holder (i) when the Registration Statement, any
pre-effective amendment, the Prospectus or any Prospectus supplement or
post-effective amendment has been filed, and, with respect to the Registration
Statement or any post-effective amendment, when the same has become effective,
(ii) of any request by the SEC for amendments or supplements to the Registration
Statement or the Prospectus or for additional information, (iii) of the issuance
by the SEC of any stop order suspending the
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effectiveness of the Registration Statement or the initiation of any proceedings
for that purpose, (iv) of the receipt by STAR of any notification with respect
to the suspension of the qualification of the Registrable Securities for sale in
any jurisdiction or the initiation or threatening of any proceeding for such
purpose and (v) of the happening of any event which makes any statement made in
the Registration Statement, the Prospectus or any document incorporated therein
by reference untrue or which requires the making of any changes in the
Registration Statement, the Prospectus or any document incorporated therein by
reference in order to make the statements therein not misleading.
(d) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of the Registration Statement at the earliest
possible moment.
(e) furnish to Holder, without charge, at least one signed copy of
the Registration Statement and any amendment or supplement thereto, the
Prospectus included in such Registration Statement (including, without
limitation, each preliminary prospectus), including financial statements and
schedules, all documents incorporated therein by reference and all exhibits
(including those incorporated by reference) and such other documents as Holder
may reasonably request in order to facilitate the disposition of the Registrable
Securities.
(f) deliver to Holder, without charge, such reasonable number of
conformed copies of the Registration Statement (including any amendment or
supplement thereto) and such number of copies of the Prospectus (including each
preliminary prospectus) and any amendment or supplement thereto (and any
documents incorporated by reference therein) as Holder may reasonably request,
all in full conformity with the Securities Act; STAR consents to the use of the
Prospectus or any amendment or supplement thereto by Holder in connection with
the offer and sale of the Registrable Securities covered by the Prospectus or
any amendment or supplement thereto.
(g) prior to any offering of Registrable Securities covered by a
Registration Statement, register or qualify or cooperate with Holder in
connection with the registration or qualification of such Registrable Securities
for offer and sale under the securities or blue sky laws of such jurisdictions
as Holder reasonably requests, and use its best efforts to keep each such
registration or qualification effective, including through new filings, or
amendments or renewals, during the period such Registration Statement is
required to be kept effective pursuant to the terms of this Agreement; and do
any and all other acts or things necessary or advisable to enable the
disposition in all such jurisdictions reasonably requested by Holder of the
Registrable Securities covered by such Registration Statement, provided that
under no circumstances shall STAR be required in connection therewith or as a
condition thereof to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
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(h) upon the occurrence of any event contemplated by Section
4(c)(v) above, prepare a supplement or post-effective amendment to the
Registration Statement or the Prospectus or any document incorporated therein
by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Registrable Securities, the Prospectus
will not contain an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading.
(i) make generally available to Holder consolidated earnings
statements satisfying the provisions of Section 11(a) of the Securities Act
and Rule 158 thereunder, as soon as practicable after the end of any twelve
(12)-month period (or ninety (90) days, if such period is a fiscal year) (i)
commencing at the end of any fiscal quarter in which Registrable Securities
are sold to underwriters in a firm or best efforts underwritten offering, or
(ii) if not sold to underwriters in such an offering, beginning with the
first month of STAR's first fiscal quarter commencing after the effective
date of the Registration Statement, which statements shall cover said twelve
(12)-month period.
(j) use its best efforts to cause all Registrable Securities covered
by each Registration Statement to be listed subject to notice of issuance, prior
to the date of the first sale of such Registrable Securities pursuant to such
Registration Statement, on each securities exchange on which the Common Stock
issued by STAR are then listed, and admitted to trading on The Nasdaq Stock
Market, if the Common Stock is then admitted for quotation on The Nasdaq Stock
Market.
(k) in the case of an underwritten offering, cause to be delivered to
Holder and the underwriters, if any, opinions of counsel to STAR in customary
form, covering such matters as are customarily covered by opinions for an
underwritten public offering as the underwriters may request and addressed to
the underwriters and Holder.
(l) make available for inspection by Holder, any underwriter
participating in any disposition pursuant to such Registration Statement, and
any attorney, accountant or other agent retained by Holder or any underwriter,
all financial and other records, pertinent corporate documents and properties of
STAR, and cause STAR's officers, directors, employees and independent
accountants to supply all information reasonably requested by Holder or any such
underwriter, attorney, accountant or agent in connection with such Registration
Statement;
(m) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such Registration Statement;
(n) cause to be delivered, immediately prior to the effectiveness of
the Registration Statement (and, in the case of an underwritten offering, at the
time of delivery of any Registrable Securities sold pursuant thereto), letters
from STAR's independent certified public accountants addressed to Holder and
each underwriter, if any, stating that such
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accountants are independent public accountants within the meaning of the
Securities Act and the applicable published rules and regulations thereunder,
and otherwise in customary form and covering such financial and accounting
matters as are customarily covered by letters of the independent certified
public accountants delivered in connection with primary or secondary
underwritten public offerings, as the case may be.
Holder agrees that, upon receipt of any notice from STAR of the happening
of any event of the kind described in clauses (ii) through (v) of Section 4(c)
hereof, Holder will forthwith discontinue disposition of Registrable Securities
under the Prospectus related to the applicable Registration Statement until
Holder's receipt of the copies of the supplemented or amended Prospectus, or
until he is advised in writing by STAR that the use of the Prospectus may be
resumed. It shall be a condition precedent to the obligations of STAR to take
any action pursuant to this Section 4 with respect to the Registrable Securities
of Holder that Holder shall furnish to STAR such information regarding himself
and the Registrable Securities held by him as shall be required by the
Securities Act to effect the registration of Holder's Registrable Securities.
5. REGISTRATION EXPENSES. All expenses incident to any registration to
be effected hereunder and incident to STAR's performance of or compliance with
this Agreement, including without limitation all registration, filing and
qualification fees, fees and expenses of compliance with securities or blue sky
laws, printing expenses, messenger and delivery expenses, NASD, stock exchange
and qualification fees, fees and disbursements of STAR's counsel and of
independent certified public accountants of STAR (all such expenses being herein
called "Registration Expenses") will be borne by STAR. Holder shall bear (i)
all underwriting commissions (and transfer taxes, if any) relating to the
Registrable Securities registered and (ii) the fees and expenses of his legal
counsel and accountants.
6. INDEMNIFICATION.
(a) INDEMNIFICATION BY STAR. If Holder's Registrable Securities are
sold under a Prospectus which is a part of a Registration Statement, STAR agrees
to indemnify and hold harmless Holder from and against any and all losses,
claims, damages and liabilities (including any investigation, legal or other
expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted) to which
Holder may become subject under the Securities Act, the Exchange Act or other
federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities arise out of or are based
upon (i) any untrue statement or alleged untrue statement of a material fact
contained in any Registration Statement, Prospectus or preliminary prospectus or
any amendment or supplement thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading and (iii) any violation or alleged
violation by STAR of the Securities Act, the Exchange Act or any state
securities or blue sky laws in connection with the Registration Statement,
Prospectus or preliminary prospectus or any amendment or supplement
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thereto, provided that STAR will not be liable to Holder to the extent that such
loss, claim, damage or liability arises from or is based upon any untrue
statement of a material fact or omission of a material fact that was made in
such Registration Statement, Prospectus or preliminary prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to STAR by Holder expressly for use therein.
(b) INDEMNIFICATION OF STAR BY HOLDER. If Holder's Registrable
Securities are sold under a Prospectus which is a part of a Registration
Statement, Holder agrees to indemnify and hold harmless STAR, its directors and
each officer who signed such Registration Statement and each person who controls
STAR (within the meaning of Section 15 of the Securities Act) from and against
any and all losses, claims, damages and liabilities (including any
investigation, legal or other expenses reasonably incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted) to which STAR or any other such person may become subject under
the Securities Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities arise out of or are based upon (i) any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement, Prospectus or preliminary prospectus or any amendment or supplement
thereto, (ii) the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (iii) any violation or alleged violation by STAR of the
Securities Act, the Exchange Act or any state securities or blue sky laws in
connection with the Registration Statement, Prospectus or preliminary prospectus
or any amendment or supplement thereto, but in each case only to the extent that
such losses, claims, damages and liabilities arise out of or are based upon any
untrue statement of a material fact or omission of a material fact that was made
in the Prospectus, the Registration Statement, or any amendment or supplement
thereto, in reliance upon and in conformity with information furnished in
writing to STAR by Holder expressly for use therein, provided that in no event
shall the aggregate liability of Holder exceed the amount of the net proceeds
received by Holder upon the sale of the Registrable Securities giving rise to
such indemnification obligation. STAR and Holder shall be entitled to receive
indemnities from underwriters, selling brokers, dealer managers and similar
securities industry professionals participating in the distribution, to the same
extent as customarily furnished by such persons in similar circumstances.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any person entitled to
indemnification hereunder will (i) give prompt notice to the indemnifying party
of any claim with respect to which it seeks indemnification and (ii) permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party, provided that any person entitled to
indemnification hereunder shall have the right to employ separate counsel and to
participate in the defense of such claim, but the fees and expenses of such
counsel shall be at the expense of such person and not of the indemnifying party
unless (A) the indemnifying party has agreed to pay such fees or expenses,
(B) the indemnifying party shall have failed to assume the defense of such claim
and employ counsel reasonably
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satisfactory to such person, or (C) in the reasonable judgment of such person,
based upon advice of their counsel, a conflict of interest may exist between
such person and the indemnifying party with respect to such claims (in which
case, if the person notifies the indemnifying party in writing that such person
elects to employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall not have the right to assume the defense of such claim
on behalf of such person). If such defense is not assumed by the indemnifying
party, the indemnifying party will not be subject to any liability for any
settlement made without consent (but such consent will not be unreasonably
withheld or delayed). No indemnified party will be required to consent to entry
of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by all claimants or plaintiffs to such
indemnified party of a release from all liability in respect to such claim or
litigation. Any indemnifying party who is not entitled to, or elects not to,
assume the defense of a claim will not be obligated to pay the fees and expenses
of more than one counsel for all parties indemnified by such indemnifying party
with respect to such claim. As used in this Section 6(c), the terms
"indemnifying party", "indemnified party" and other terms of similar import are
intended to include only STAR (and its officers, directors and control persons
as set forth above) on the one hand, and Holder on the other hand, as
applicable.
(d) CONTRIBUTION. If for any reason the foregoing indemnity is
unavailable or insufficient to hold harmless an indemnified party in respect of
any losses, claims, damages, liabilities or expenses (or actions in respect
thereof), then the indemnifying party shall contribute to the amount paid or
payable by the indemnified party as a result of such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the one
hand and the indemnified party on the other hand in connection with statements
or omissions which resulted in such losses, claims, damages, liabilities or
expenses (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the indemnifying party or the indemnified
party and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission.
Notwithstanding the foregoing, Holder shall not be required to contribute any
amount in excess of the amount Holder would have been required to pay to an
indemnified party if the indemnity under Section 6(b) hereof was available. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(e) OTHER RIGHTS. The provisions of this Section 6 shall be in
addition to any other rights of indemnification or contribution which any
indemnified party may have pursuant to law, equity, contract or otherwise and
shall remain in full force and effect regardless of any investigation made by or
on behalf of an indemnified party.
9
<PAGE>
(f) TIMING OF PAYMENTS. An indemnifying party shall make payments of
all amounts required to be made pursuant to the foregoing provisions of this
Section 6 to or for the account of the indemnified party from time to time
promptly upon receipt of bills or invoices relating thereto or when otherwise
due or payable.
(g) SURVIVAL. The indemnity and contribution agreements contained in
this Section 6 shall remain in full force and effect and shall survive the
transfer of such Registrable Securities by Holder.
7. RULE 144. STAR covenants that it will file, on a timely basis, the
reports required to be filed by it under the Securities Act and the Exchange Act
and the rules and regulations adopted by the SEC thereunder, and it will take
such further action as Holder may reasonably request (including, without
limitation, compliance with the current public information requirements of
Rule 144(c) under the Securities Act), all to the extent required from time to
time to enable Holder to sell Registrable Securities without registration under
the Securities Act within the limitation of the conditions provided by Rule 144
under the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the SEC. Upon the request of
Holder, STAR will deliver to Holder a written statement verifying that it has
complied with such requirements.
8. NO INCONSISTENT AGREEMENTS. STAR will not enter into any agreement
offering registration rights to any holders of Common Stock that conflict with
or violate the rights set forth herein without the consent of Holder, which
consent may be granted or withheld in the sole discretion of Holder.
9. ASSIGNMENT OF RIGHTS. Holder may assign his rights under this
Agreement to any transferee of Registrable Securities, if (i) such transferee
has acquired at least twenty-five percent (25%) of the Registrable Securities
originally held by Holder, and (ii) such transferee has executed a writing
wherein such transferee agrees to be bound by the terms hereof.
10. NOTICES. All notices required or permitted under the terms of this
Agreement shall be delivered in the manner called for in the Stock Purchase
Agreement.
11. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon Holder and his legal representatives, successors and
assigns, and upon STAR and its successors and assigns, including without
limitation any corporation resulting from any merger or consolidation of STAR
with or into such corporation (in which STAR is not the surviving corporation)
or any corporation whose securities are issued in exchange for STAR's shares of
common stock.
12. SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable,
10
<PAGE>
the validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be affected
or impaired thereby.
13. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof and shall supersede and
preempt any prior understandings, agreements or representations, written or
oral, by or among the parties hereto.
14. COUNTERPARTS. This Agreement may be executed (including by facsimile
transmission) with counterpart signature pages or in any number of counterparts,
each of which shall be original, and all of which together shall constitute one
instrument.
15. AMENDMENT. Any provision of this Agreement may be amended, waived or
modified only by a writing signed by STAR and by Holder.
16. GOVERNING LAW. This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of Delaware.
17. RECAPITALIZATION, EXCHANGES, ETC., AFFECTING STAR'S CAPITAL STOCK.
The provisions of this Agreement shall apply, to the full extent set forth
herein with respect to any and all shares of capital stock of STAR or any
successor or assign of STAR (whether by merger, consolidation, sale of assets or
otherwise) which may be issued in respect of, in exchange for or in
substitution of, the Registrable Securities and shall be appropriately adjusted
for any stock dividends, splits, reverse splits, combinations, recapitalizations
and the like occurring after the date hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"STAR"
STAR TELECOMMUNICATIONS, INC.
By: /s/ Kelly D. Enos
-------------------------------------
Kelly D. Enos
Chief Financial Officer
"HOLDER"
/s/ Taha Mikati
----------------------------------------
Taha Mikati
11
<PAGE>
EXHIBIT 10.25
U.S. $25,000,000
CREDIT AGREEMENT
===============================================
STAR TELECOMMUNICATIONS, INC.
BORROWER
THE FINANCIAL INSTITUTIONS NAMED HEREIN
LENDERS
AND
SANWA BANK CALIFORNIA
AGENT
===============================================
Dated as of September 30, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ARTICLE 1
DEFINITIONS . . . . . . . . . . . . . . . 1
1.1 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 RULES AND INTERPRETATION . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE 2
THE REVOLVING CREDIT FACILITY. . . . . . . . . . . 15
2.1 COMMITMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2 OPTIONAL CURRENCIES. . . . . . . . . . . . . . . . . . . . . . . . 16
2.3 ISSUANCE OF LETTERS OF CREDIT. . . . . . . . . . . . . . . . . . . 16
2.4 COMMITMENT PERCENTAGE. . . . . . . . . . . . . . . . . . . . . . . 19
2.5 TYPES OF LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.6 EVIDENCE OF OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . 20
2.7 COMMITMENT REDUCTION . . . . . . . . . . . . . . . . . . . . . . . 20
2.8 COMMITMENT TERMINATION . . . . . . . . . . . . . . . . . . . . . . 21
2.9 REQUIRED PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 21
2.10 UNUSED COMMITMENT FEE. . . . . . . . . . . . . . . . . . . . . . . 21
2.11 FACILITY FEE . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.12 ADMINISTRATIVE FEES. . . . . . . . . . . . . . . . . . . . . . . . 21
2.13 VOLUNTARY CONVERSION OF ADVANCES . . . . . . . . . . . . . . . . . 21
2.14 NOTICE OF BORROWING. . . . . . . . . . . . . . . . . . . . . . . . 22
2.15 COMMITMENT OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . 23
2.16 INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.17 RATES APPLICABLE AFTER DEFAULT . . . . . . . . . . . . . . . . . . 23
2.18 METHOD OF PAYMENT. . . . . . . . . . . . . . . . . . . . . . . . . 23
2.19 TELEPHONIC NOTICES . . . . . . . . . . . . . . . . . . . . . . . . 24
2.20 INTEREST PAYMENT DATES; INTEREST AND FEE BASIS . . . . . . . . . . 24
2.21 NOTIFICATION OF LOAN, INTEREST RATES, PREPAYMENTS AND
COMMITMENT REDUCTIONS. . . . . . . . . . . . . . . . . . . . . . . 25
2.22 APPLICABLE LENDING OFFICES . . . . . . . . . . . . . . . . . . . . 25
2.23 NON-RECEIPT OF FUNDS BY THE AGENT. . . . . . . . . . . . . . . . . 25
2.24 WITHHOLDING TAX EXEMPTION. . . . . . . . . . . . . . . . . . . . . 26
2.25 OPTIONAL PREPAYMENT. . . . . . . . . . . . . . . . . . . . . . . . 26
2.26 OPTIONAL CURRENCY DOLLAR EQUIVALENT. . . . . . . . . . . . . . . . 27
2.27 MANDATORY PREPAYMENTS. . . . . . . . . . . . . . . . . . . . . . . 27
2.28 APPLICATION OF REPAYMENTS. . . . . . . . . . . . . . . . . . . . . 28
2.29 INTEREST LIMITATION. . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE 3
CHANGE IN CIRCUMSTANCES . . . . . . . . . . . . 29
3.1 YIELD PROTECTION . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.2 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
3.3 REPLACEMENT OF LENDERS . . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE 4
CONDITIONS PRECEDENT . . . . . . . . . . . . . 31
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<PAGE>
4.1 INITIAL LOAN OR LETTER OF CREDIT . . . . . . . . . . . . . . . . . 31
4.2 ALL LOANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.3 ALL LETTERS OF CREDIT. . . . . . . . . . . . . . . . . . . . . . . 33
ARTICLE 5
REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . 34
5.1 AUTHORIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
5.2 ENFORCEABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . 34
5.3 USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . 34
5.4 LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
5.5 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . 34
5.6 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
5.7 SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
5.8 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
5.9 ACCURACY OF INFORMATION. . . . . . . . . . . . . . . . . . . . . . 35
5.10 ORGANIZATION AND EXISTENCE . . . . . . . . . . . . . . . . . . . . 35
5.11 CONSENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
5.12 INTELLECTUAL PROPERTY. . . . . . . . . . . . . . . . . . . . . . . 36
5.13 DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
5.14 NATURE OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 36
5.15 RANKING OF LOANS . . . . . . . . . . . . . . . . . . . . . . . . . 36
5.16 INVESTMENT COMPANY ACTS; OTHER REGULATIONS . . . . . . . . . . . . 36
5.17 ENVIRONMENTAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . 37
5.18 TITLE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
5.19 FICTITIOUS NAME FILING NOTICES . . . . . . . . . . . . . . . . . . 37
ARTICLE 6
FINANCIAL COVENANTS . . . . . . . . . . . . . 37
6.1 CAPITAL EXPENDITURES . . . . . . . . . . . . . . . . . . . . . . . 37
6.2 MINIMUM TOTAL LEVERAGE RATIO . . . . . . . . . . . . . . . . . . . 37
6.3 MINIMUM TANGIBLE NET WORTH . . . . . . . . . . . . . . . . . . . . 37
6.4 MINIMUM CURRENT RATIO. . . . . . . . . . . . . . . . . . . . . . . 38
6.5 MINIMUM CASH FLOW COVERAGE . . . . . . . . . . . . . . . . . . . . 38
6.6 PROFITABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . 38
ARTICLE 7
AFFIRMATIVE COVENANTS. . . . . . . . . . . . . 38
7.1 FINANCIAL REPORTING. . . . . . . . . . . . . . . . . . . . . . . . 38
7.2 USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . 41
7.3 NOTICE OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . 41
7.4 CONDUCT OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . 41
7.5 RECORDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
7.6 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
7.7 COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . . . 41
7.8 MAINTENANCE OF PROPERTIES. . . . . . . . . . . . . . . . . . . . . 42
7.9 INSPECTION/AUDITS. . . . . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE 8
NEGATIVE COVENANTS. . . . . . . . . . . . . . 42
8.1 DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
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<PAGE>
8.2 MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
8.3 SALE OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . 43
8.4 SALE OF ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . 44
8.5 ACQUISITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
8.6 AFFILIATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
8.7 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
8.8 ENCUMBRANCES AND LIENS . . . . . . . . . . . . . . . . . . . . . . 45
8.9 LOANS, ADVANCES AND GUARANTIES . . . . . . . . . . . . . . . . . . 45
8.10 INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
8.11 DIVIDENDS AND DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . 45
ARTICLE 9
DEFAULTS . . . . . . . . . . . . . . . . 46
9.1 PAYMENT DEFAULTS.. . . . . . . . . . . . . . . . . . . . . . . . . 46
9.2 REPRESENTATIONS AND WARRANTIES.. . . . . . . . . . . . . . . . . . 46
9.3 OTHER LOAN DOCUMENT DEFAULTS.. . . . . . . . . . . . . . . . . . . 46
9.4 BANKRUPTCY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
9.5 OTHER AGREEMENTS.. . . . . . . . . . . . . . . . . . . . . . . . . 46
9.6 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
9.7 JUDGMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
9.8 LOAN DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 47
9.9 CHANGE OF CONTROL. . . . . . . . . . . . . . . . . . . . . . . . . 47
9.10 MATERIAL ADVERSE EFFECT. . . . . . . . . . . . . . . . . . . . . . 47
ARTICLE 10
ACCELERATION, WAIVERS AND AMENDMENTS. . . . . . . . . 47
10.1 ACCELERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
10.2 CASH COLLATERAL. . . . . . . . . . . . . . . . . . . . . . . . . . 48
10.3 ADDITIONAL REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . 48
10.4 AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
10.5 PRESERVATION OF RIGHTS . . . . . . . . . . . . . . . . . . . . . . 48
ARTICLE 11
GENERAL PROVISIONS. . . . . . . . . . . . . . 49
11.1 SURVIVAL OF REPRESENTATIONS. . . . . . . . . . . . . . . . . . . . 49
11.2 GOVERNMENTAL REGULATION. . . . . . . . . . . . . . . . . . . . . . 49
11.3 HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
11.4 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 49
11.5 SEVERAL OBLIGATIONS; BENEFITS OF THIS AGREEMENT. . . . . . . . . . 49
11.6 EXPENSES; INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . 49
11.7 NUMBERS OF DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . 50
11.8 SEVERABILITY OF PROVISIONS . . . . . . . . . . . . . . . . . . . . 50
11.9 NONLIABILITY OF LENDERS. . . . . . . . . . . . . . . . . . . . . . 50
11.10 CHOICE OF LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . 50
11.11 CONSENT TO JURISDICTION. . . . . . . . . . . . . . . . . . . . . . 50
11.12 WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . 51
11.13 INTEGRATION CLAUSE . . . . . . . . . . . . . . . . . . . . . . . . 51
11.14 CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . . . . . . . 51
11.15 DISPUTE RESOLUTION . . . . . . . . . . . . . . . . . . . . . . . . 51
ARTICLE 12
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<PAGE>
THE AGENT. . . . . . . . . . . . . . . . . 52
12.1 APPOINTMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
12.2 POWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
12.3 GENERAL IMMUNITY . . . . . . . . . . . . . . . . . . . . . . . . . 53
12.4 NO RESPONSIBILITY FOR LOANS, RECITALS, ETC.. . . . . . . . . . . . 53
12.5 ACTION ON INSTRUCTIONS OF LENDERS. . . . . . . . . . . . . . . . . 53
12.6 EMPLOYMENT OF AGENTS AND COUNSEL . . . . . . . . . . . . . . . . . 53
12.7 RELIANCE ON DOCUMENTS; COUNSEL . . . . . . . . . . . . . . . . . . 53
12.8 AGENT'S REIMBURSEMENT AND INDEMNIFICATION. . . . . . . . . . . . . 54
12.9 RIGHTS AS A LENDER . . . . . . . . . . . . . . . . . . . . . . . . 54
12.10 LENDER CREDIT DECISION . . . . . . . . . . . . . . . . . . . . . . 54
12.11 SUCCESSOR AGENT. . . . . . . . . . . . . . . . . . . . . . . . . . 54
ARTICLE 13
SETOFF; RATABLE PAYMENTS . . . . . . . . . . . . 55
13.1 SETOFF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
13.2 RATABLE PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 56
ARTICLE 14
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS . . . . . . 56
14.1 SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . . . . . . . 56
14.2 PARTICIPATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 56
14.3 ASSIGNMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
14.4 DISSEMINATION OF INFORMATION . . . . . . . . . . . . . . . . . . . 58
14.5 TAX TREATMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . 59
ARTICLE 15
NOTICES. . . . . . . . . . . . . . . . . . 59
15.1 GIVING NOTICE. . . . . . . . . . . . . . . . . . . . . . . . . . . 59
15.2 CHANGE OF ADDRESS. . . . . . . . . . . . . . . . . . . . . . . . . 59
ARTICLE 16
COUNTERPARTS. . . . . . . . . . . . . . . . . 59
</TABLE>
SCHEDULE 1 - LENDERS AND APPLICABLE LENDING OFFICES
SCHEDULE 2 - SUBSIDIARIES
SCHEDULE 3 - DEBT
SCHEDULE 4 - CORPORATE INVESTMENT POLICY
SCHEDULE 5 - APPROVED ACCOUNT DEBTORS
EXHIBIT A - FORM OF NOTE
EXHIBIT B - COMPLIANCE CERTIFICATE
EXHIBIT C - ASSIGNMENT AGREEMENT
EXHIBIT D - FORM OF NOTICE OF BORROWING
EXHIBIT E - FORM OF BORROWING BASE CERTIFICATE
EXHIBIT F - FORM OF BORROWER COUNSEL OPINION
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<PAGE>
CREDIT AGREEMENT
This Credit Agreement, dated as of September 30, 1997, is among STAR
TELECOMMUNICATIONS, INC., a Delaware corporation (the "Borrower"), the financial
institutions party hereto (together with their respective successors and
permitted assigns, the "Lenders") and SANWA BANK CALIFORNIA ("Sanwa"), as Agent.
The parties hereto agree as follows:
RECITALS
WHEREAS, the Borrower wishes to obtain commitments from all Lenders for
pro rata credit extensions under a multicurrency revolving credit and letter
of credit facility in an aggregate amount not to exceed $25,000,000 at any
time outstanding, such credit being available on a committed basis as (i) pro
rata multicurrency revolving loans in an aggregate amount at any time
outstanding not to exceed $10,000,000, (ii) commercial or standby letters of
credit in an aggregate amount at any time issued and outstanding not to
exceed $8,000,000, shared by the Lenders on a pro rata risk participation
basis and (iii) pro rata U.S. Dollar revolving loans in an aggregate amount
at any time outstanding not to exceed $25,000,000.
WHEREAS, the Lenders have agreed, on the terms and conditions herein set
forth, to extend credit to the Borrower for the purposes of financing the
conversion of receivables into cash and to provide letters of credit and
foreign exchange capabilities in support of the Borrower's normal operations.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereto hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 DEFINITIONS. As used in this Agreement:
"ACCOUNTS" means all presently existing and hereafter arising accounts
receivable, contract rights, chattel paper, and all other forms of obligations
owing to the Borrower, payable in Dollars or in any Optional Currency consented
to by the Lenders, arising out of the sale or lease of goods, or the rendition
of services by the Borrower, whether or not earned by performance, and any and
all credit insurance, guaranties and other security therefor.
"ACCOUNT DEBTOR" means any obligor on an Account.
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<PAGE>
"ADVANCE" means a borrowing hereunder consisting of the aggregate amount
of the several Loans made by the Lenders to the Borrower of the same Type
and, in the case of a Fixed Rate Loan, for the same Interest Period.
"AFFILIATE" of any Person means any other Person directly or indirectly
controlling, controlled by or under common control with such Person. A
Person shall be deemed to control another Person if the controlling Person
possesses, directly or indirectly, the power to direct or cause the direction
of the management or policies of the controlled Person, whether through
ownership of stock, by contract or otherwise; provided that control shall be
conclusively presumed when any Person or affiliated group directly or
indirectly owns 10% or more of the securities having ordinary voting power
for the election of directors of a corporation.
"AGENT" means Sanwa in its capacity as administrative agent for the
Lenders pursuant to Article 12, and not in its individual capacity as a
Lender, and any successor Agent appointed pursuant to Article 12.
"AGGREGATE AVAILABLE COMMITMENT" means the aggregate of the Available
Commitments of all the Lenders.
"AGGREGATE COMMITMENT" means the aggregate of the Commitments of all the
Lenders.
"AGREEMENT" means this Credit Agreement, as it may be amended or modified
and in effect from time to time.
"AGREEMENT ACCOUNTING PRINCIPLES" means generally accepted accounting
principles as in effect from time to time, applied in a manner consistent with
that used in preparing the financial statements referred to in Section 5.5
(except for changes concurred to by the Borrower's independent public
accountants and the Required Lenders).
"APPLICABLE LENDING OFFICE" means for any Lender, its office for Fixed Rate
Loans and Reference Rate Loans, specified in Schedule 1 or in the Assignment and
Acceptance pursuant to which it became a party hereto, as the case may be, any
of which offices may, upon 10 days' prior written notice to the Agent and the
Borrower, be changed by such Lender.
"APPLICABLE MARGIN": for each Fixed Rate Loan is 1.75%.
"ARTICLE" means an article of this Agreement unless another document is
specifically referenced.
"ASSIGNMENT AND ACCEPTANCE" means an Assignment and Acceptance in the form
of Exhibit C hereto.
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"AUTHORIZED OFFICER" means any of the Chairman, Chief Executive Officer,
President, Chief Financial Officer, Controller or Treasurer (specifically
authorized by the Borrower) of the Borrower, acting singly.
"AVAILABLE COMMITMENT" means, with respect to each Lender, the amount by
which (i) the Commitment of each Lender on such date exceeds (ii) the sum of
(a) the aggregate principal sum of such Lender's Loans outstanding, (b) such
Lender's Commitment Percentage of the aggregate Letter of Credit Amount of all
Letters of Credit outstanding and (c) such Lender's Commitment Percentage of the
aggregate amount of unreimbursed drawings under all Letters of Credit on such
date.
"BORROWER" is defined in the first paragraph hereof.
"BORROWING BASE" shall mean, as at any date, the lesser of (i) 75% of the
aggregate Eligible Accounts Receivable and (ii) the Aggregate Available
Commitment.
"BORROWING BASE CERTIFICATE" shall mean a certificate of an Authorized
Officer of the Borrower, in substantially the form of Exhibit E and
appropriately completed.
"BORROWING DATE" means a date on which an Advance is made hereunder.
"BUSINESS DAY" means any day (i) other than a Saturday, Sunday or other day
on which commercial banks are authorized or required by law to close in
Los Angeles, California and (ii) if the applicable Business Day relates to a
Loan in an Optional Currency, on which dealings in foreign currency and exchange
are carried on in the relevant local money market.
"CAPITAL EXPENDITURES" means, for any period, for any person or entity, the
aggregate of all expenditures which are made during such period (whether paid in
cash or accrued as liabilities), by such person or entity, for property, plant
or equipment and which would be reflected as additions to property, plant or
equipment on a balance sheet of such person or entity prepared in accordance
with Agreement Accounting Principles (including, without limitation, all such
property held under Capitalized Leases).
"CAPITALIZED LEASE" of a Person means any lease of Property by such Person
as lessee which would be capitalized on a balance sheet of such Person prepared
in accordance with Agreement Accounting Principles.
"CASH FLOW COVERAGE RATIO" means for the Borrower and its Subsidiaries on a
Consolidated Basis, determined as of the end of each fiscal quarter for the
period of four fiscal quarters then ended (commencing January 1, 1997 with
annualized results until December 31, 1997), the ratio of EBITDA minus income
taxes
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paid to the current portion of long-term debt and Capitalized Leases and
Interest Expense then due and payable.
"CHANGE OF CONTROL" means (i) the acquisition by any Person (including any
syndicate or group deemed to be a "Person" under Section 13(d)(3) or 14(d)(2) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") or any
successor provision to either of the foregoing) of beneficial ownership,
directly or indirectly, of shares of capital stock of the Borrower entitling
such Person to exercise more than 50% of the total voting power of all voting
shares of the Borrower; or (ii) any consolidation of the Borrower with, or
merger of the Borrower into, any other Person, any merger of another Person into
the Borrower, or any sale or transfer of all or substantially all of the assets
of the Borrower to another Person other than (a) a consolidation or merger which
does not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of capital stock other than shares of capital stock owned by
any of the parties to the consolidation or merger and in which the Consolidated
Tangible Net Worth of their surviving corporation immediately after the
transaction equals or exceeds the Consolidated Tangible Net Worth of the
Borrower immediately prior to such transaction or (b) a merger which is effected
solely to change the jurisdiction of incorporation of the Borrower or (c) any
consolidation with or merger of the Borrower into a Subsidiary of the Borrower
with the prior written consent of the Lenders or any sale or transfer by the
Borrower with the written consent of the Lenders of all or substantially all of
its assets to one or more of its wholly-owned Subsidiaries in any one
transaction or a series of transactions, provided that in each case set forth in
clause (ii) hereof that the resulting corporation or each Subsidiary assumes or
guaranties the obligation of the Borrower under this Agreement and other Loan
Documents and the Consolidated Tangible Net Worth of the surviving or acquiring
corporation and any such consolidation, merger or sale of assets immediately
after the consummation of such transaction equals or exceeds the Consolidated
Tangible Net Worth of the Borrower immediately prior to such transaction.
"CLOSING DATE" means the date on which all the conditions precedent set
forth in Section 4.1 shall have been satisfied or waived and this Agreement
becomes effective.
"CODE" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time, including the regulations proposed or
promulgated thereunder.
"COMMITMENT" means, for each Lender, the obligation of such Lender to make
Loans and participate in Letters of Credit not exceeding the amount set forth
opposite its name on Schedule 1 hereto or as set forth in any Assignment and
Acceptance relating to any assignment that has become effective pursuant to
Section 14.3, as such amount may be modified from time to time pursuant to the
terms hereof.
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"COMMITMENT PERCENTAGE" means as to any Lender at any time, the percentage
of the Aggregate Commitments then constituted by such Lender's Commitments.
"COMPLIANCE CERTIFICATE" has the meaning set forth in Section 7.1(iii).
"CONSOLIDATED," "CONSOLIDATING" and "ON A CONSOLIDATED BASIS," when
describing financial statements, refers to those of the Borrower and its
Subsidiaries.
"CONTINGENT LIABILITIES" means with respect to the Borrower and its
Subsidiaries, contingent liabilities as determined in accordance with Agreement
Accounting Principles.
"CONTROL" means the power to direct or cause the direction of the
management or policies of a Person, whether through rights of ownership under
voting securities, under contract or otherwise, and "Controlling" and
"Controlled" shall have meanings correlative thereto.
"CONTROLLED GROUP" means all members of a controlled group of corporations
and all trades or businesses (whether or not incorporated) under common control
which, together with the Borrower or any of its Subsidiaries, are treated as a
single employer under Section 414 of the Code.
"CONVERSION/CONTINUATION NOTICE" is the notice referred to in Section 2.13.
"CURRENT ASSETS" means with respect to the Borrower and its Subsidiaries,
current assets, including cash and net trade Accounts, determined on a
Consolidated Basis in accordance with Agreement Accounting Principles.
"CURRENT LIABILITIES" means with respect to the Borrower and its
Subsidiaries, current liabilities, including all amounts outstanding hereunder,
determined on a Consolidated Basis in accordance with Agreement Accounting
Principles.
"DEBT" of any Person means without duplication (i) all indebtedness of such
Person for borrowed money or for the deferred purchase price of property or
services, (ii) all obligations of such Person evidenced by notes, bonds,
debentures or other similar instruments, (iii) all indebtedness created or
arising under any conditional-sale or other title-retention agreement with
respect to property acquired by such Person, (iv) that portion of the
obligations of such Person as lessee under leases that have been or should be,
in accordance with Agreement Accounting Principles, recorded on the Borrower's
balance sheet as Capitalized Leases, (v) all obligations of such Person under
direct or indirect guaranties in respect of, and obligations (contingent or
otherwise) to purchase or otherwise acquire, or otherwise to secure a credit
against loss in respect
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of, indebtedness or obligations of others of the kinds referred to in clause
(i), (ii), (iii) or (iv) above and (vi) liabilities in respect of unfunded
vested benefits under plans covered by Title IV of ERISA.
"DEFAULT" means any Event of Default and any default, event or condition
that would, with the giving of any requisite notice and the passage of any
requisite period of time, constitute an Event of Default.
"DISTRIBUTIONS" means the declaration or payment of any dividend or
distribution on or in respect to any shares of any class of capital stock, any
partnership interest or any membership interest of any Person, other than
dividends or other distributions payable solely in shares of common stock,
partnership interests or membership units of such Person, as the case may be;
the purchase, redemption or other retirement of any shares of any class of
capital stocks, partnership interests or membership units of such Person,
directly or indirectly, through a Subsidiary or otherwise; the return of equity
capital by any Person to its shareholders, partners or members as such; or any
other distribution on or in respect of any shares of any class of capital stock,
partnership interests or membership unit of such Person.
"DOLLARS" or "$" shall mean lawful money of the United States of America.
"DOLLAR EQUIVALENT" means with respect to any amounts denominated in a
currency other than Dollars, the amount (as conclusively ascertained by the
Agent absent manifest error) in Dollars which is or could be purchased by the
Agent (in accordance with its normal banking practices) with such amounts
denominated in such other currency in the foreign currency deposits market for
delivery on such date at the spot rate of exchange, at or about 11:00 a.m.,
local time in the foreign currency deposits market, on the date of
determination.
"DRAWING LENDER" has the meaning set forth in Section 2.3(iii).
"EBITDA" means for any period, for the fiscal quarter most recently ended
and the immediately preceding three fiscal quarters, Net Income after
eliminating extraordinary gains and losses, PLUS (i) provisions for taxes,
(ii) depreciation and amortization, (iii) Interest Expense, (iv) all non-cash
costs and (v) taxes paid in cash for such applicable period.
"ELIGIBLE ACCOUNT RECEIVABLE" means those Accounts, net of finance charges,
which have been earned by performance, which are by their terms due and payable
within 31 days, or less, from the date of the invoice, have been validly
assigned to the Agent and strictly comply with all the Borrower's warranties and
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representations to the Lenders, but Eligible Accounts shall not include the
following:
(i) unless an Account of any Account Debtor set forth in Section 5, any
Account with respect to which the Account Debtor is an officer, shareholder,
director, employee or agent of the Borrower;
(ii) any Account with respect to which the Account Debtor is a Subsidiary
of, related to, or affiliated or has common officers or directors with the
Borrower;
(iii) any Account relating to goods placed on consignment, guarantied sale
or other terms by reason of which the payment by the Account Debtor may be
conditional;
(iv) any Account with respect to which the Account Debtor is not a
resident of the United States or Canada, unless agreed to by the Required
Lenders;
(v) any Account with respect to which the Account Debtor is the United
States or any department, agency or instrumentality of the United States unless
agreed to by the Required Lenders;
(vi) any Swap-Check Account, provided, however, that up to $5,000,000 of
Swap-Check Accounts may be included as Eligible Accounts;
(vii) any Account with respect to which there is asserted a defense,
counterclaim, discount or setoff, whether well-founded or otherwise, but only to
the extent thereof and except for those discounts, allowances and returns
arising in the ordinary course of the Borrower's business;
(viii) any Account with respect to which the account debtor becomes
insolvent, fails to pay his debts as they mature or goes out of business or is
owned by an account debtor which has become a subject of a proceeding under any
provision of the United States Bankruptcy Code, as amended, or under any other
bankruptcy or insolvency law, including, but not limited to, assignments for the
benefit of creditors, formal or informal moratoriums, compositions or extensions
with all or substantially all of its creditors;
(ix) all Accounts owed by an Account Debtor with respect to which 25% or
more of the aggregate Dollar amount of its accounts are not paid within 30 days
from the due date of the invoice;
(x) any Account that is not paid by the account debtor within 30 days of
its due date;
(xi) unless an Account of an Account Debtor set forth on Schedule 5 or
unless approved by the Required Lenders, that
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portion of the Accounts owed by any single Account Debtor which exceeds 15%
of all of the Accounts; and
(xii) any Account which the Bank deems not to be an Eligible Account.
"ELIGIBLE ASSIGNEE" means (i) a commercial bank organized under the laws of
the United States, or any State thereof or the District of Columbia, and having
total assets in excess of $250,000,000; (ii) 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 $250,000,000, provided that such bank is acting
through a branch or agency located in the United States; (iii) an insurance
company or other financial institution or an investment fund that is engaged in
making, purchasing or otherwise investing in commercial loans in the ordinary
course of its business and having total assets in excess of $250,000,000;
(iv) any Affiliate of an existing Lender; and (v) any other Person approved by
the Agent and, in the absence of any Default, the Borrower; provided, however,
that an Affiliate of the Borrower shall not qualify as an Eligible Assignee.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any rule or regulation issued thereunder.
"EUROCURRENCY LIABILITIES" has the meaning set forth in Regulation D of the
Board of Governors of the Federal Reserve System.
"EVENT OF DEFAULT" has the meaning set forth in Section 9.
"FACILITY TERMINATION DATE" means July 1, 1999, unless accelerated pursuant
to Section 10.1.
"FED FUNDS RATE" means above the overnight federal funds effective rate, as
published by the Board of Governors of the Federal Reserve System as in effect
from time to time.
"FIXED RATE" means the actual cost of funds, adjusted for all reserves,
incurred by the Agent at the time of a Fixed Rate Loan hereunder.
"FIXED RATE LOAN" means a Loan when it bears interest at the Fixed Rate
plus the Applicable Margin.
"FUNDED DEBT" means the sum of the outstanding principal balance of all
Debt of the Borrower and its Subsidiaries on a Consolidated Basis described in
clauses (i), (ii), (iii) and (iv) of the definition of "Debt" set forth herein.
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"GOVERNMENTAL PERSON" means, whether domestic or foreign, any national,
federal, state or local government, any political subdivision thereof or any
governmental, quasi-governmental, judicial, public or regulatory
instrumentality, authority, body or entity, including the Federal Deposit
Insurance Corporation, the Comptroller of the Currency, the Board of Governors
of the Federal Reserve System, any central bank and any comparable authority.
"GOVERNMENTAL RULE" means any treaty, law, rule, regulation, ordinance,
order, code, judgment, decree, directive, interpretation, request, guideline,
policy or similar form of decision of any Governmental Person.
"INTEREST EXPENSE" means as of any date, for the fiscal quarter most
recently ended and the immediately preceding three fiscal quarters, the sum of
(i) the amount of all interest on Funded Debt which was paid, payable and/or
accrued for such period (without duplication of previous amounts) and (ii) all
commitment, letter of credit or line of credit fees paid, payable and/or accrued
for such period (without duplication of previous amounts) to any lender in
exchange for such lender's commitment to lend.
"INTEREST PERIOD" means, with respect to a Fixed Rate Loan, a period of up
to 90 days (subject to availability by the Lenders), commencing on a Business
Day selected by the Borrower pursuant to this Agreement. Such Interest Period
shall end on (but exclude) the day which corresponds numerically to such date up
to 90 days thereafter. If an Interest Period would otherwise end on a day which
is not a Business Day, such Interest Period shall end on the next succeeding
Business Day, provided, however, that if said next succeeding Business Day falls
in a new calendar month, such Interest Period shall end on the immediately
preceding Business Day. No Interest Period may end after the Facility
Termination Date.
"LENDERS" is defined in the first paragraph hereof.
"LETTER OF CREDIT" shall have the meaning set forth in Section 2.1.
"LETTER OF CREDIT AMOUNT" means the stated maximum amount available to be
drawn under a particular Letter of Credit, as such amount may be reduced or
reinstated from time to time in accordance with the terms of such Letter of
Credit.
"LETTER OF CREDIT FEE" means an amount equal to the product of (i) 1.75%
and (ii) the Letter of Credit Amount of each standby Letter of Credit.
"LETTER OF CREDIT REQUEST" means a request by the Borrower for the issuance
of a Letter of Credit, on the Agent's standard form of standby and/or commercial
letter of credit application
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and agreement (or any successor standard agreement) and containing terms and
conditions satisfactory to the Agent in its sole discretion.
"LIEN" means any voluntary or involuntary lien, security interest or other
charge or encumbrance of any kind, or any other type of preferential
arrangement, including the lien or retained title of a conditional vendor and
any easement, right of way or other encumbrance on title to real property.
"LOAN" means, with respect to a Lender, a Fixed Rate Loan or a Reference
Rate Loan.
"LOAN DOCUMENTS" means this Agreement, any Letter of Credit Requests, the
Letters of Credit, the Security Agreement, UCC-1 Financing Statements and the
Notes executed by the Borrower in connection herewith and any other agreement
executed by the Borrower in connection herewith, as such agreements and
documents may be amended, supplemented and otherwise modified from time to time
in accordance with the terms hereof.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the
business, Property, condition (financial or otherwise) or results of operations
of the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the
Borrower to perform its obligations under the Loan Documents or (iii) the
validity or enforceability of any of the Loan Documents or the rights or
remedies of the Agent or the Lenders thereunder.
"MULTIEMPLOYER PLAN" means a Plan that is a "multiemployer plan" as defined
in Section 3(37) or 4001(i)(3) of the Borrower's ERISA Plan.
"NET INCOME" means for the Borrower and its Subsidiaries on a Consolidated
Basis, net income as determined in accordance with Agreement Accounting
Principles.
"NOTES" mean promissory notes, in substantially the form of Exhibit A
hereto, duly executed by the Borrower and payable to the order of a Lender in
the amount of its Commitment, including any amendment, modification, renewal or
replacement of such promissory note.
"NOTICE OF ASSIGNMENT" is defined in Section 14.3(ii).
"OBLIGATIONS" means all unpaid principal of and accrued and unpaid interest
on the Notes, the obligation to reimburse drawings under Letters of Credit
(including the contingent obligation to reimburse any drawings under outstanding
Letters of Credit), all accrued and unpaid fees and all expenses,
reimbursements, indemnities and other obligations of the Borrower to the Lenders
or to any Lender, the Agent or any indemnified party hereunder arising under the
Loan Documents.
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"OPTIONAL CURRENCIES" means the currencies of Great Britain, France,
Germany, Australia or any other currency acceptable to the Agent freely tradable
in the offshore interbank market and which is freely convertible into Dollars.
"PBGC" means the Pension Benefit Guaranty Corporation, or any successor
thereto.
"PERSON" means any natural person, corporation, firm, limited liability
company, joint venture, partnership, association, enterprise, trust or other
entity or organization, or any government or political subdivision or any
agency, department or instrumentality thereof.
"PLAN" means an employee pension benefit plan which is covered by Title IV
of ERISA or subject to the minimum funding standards under Section 412 of the
Code maintained by or contributed to by the Borrower or any member of the
Controlled Group.
"PROPERTY" of a Person means any and all property, whether real, personal,
tangible, intangible, or mixed, of such Person, or other assets owned, leased or
operated by such Person.
"PURCHASERS" is defined in Section 14.3(i).
"REFERENCE RATE" means the rate per annum (rounded upward, if necessary, to
the next higher 1/100th of 1%) equal to the annual rate of interest announced
from time to time by the Agent at its head office in Los Angeles, California, as
its corporate reference rate (which is a rate set by the Agent based upon
various factors including general economic and market conditions, is used as a
reference point for pricing certain loans and the Agent may price its loan at,
above or below such rate).
"REFERENCE RATE LOAN" means a Loan when it bears interest at the Reference
Rate.
"REGULATION D" means Regulation D of the Board of Governors of the Federal
Reserve System as from time to time in effect and any successor thereto or other
regulation or official interpretation of said Board of Governors relating to
reserve requirements applicable to member banks of the Federal Reserve System.
"REGULATION U" means Regulation U of the Board of Governors of the Federal
Reserve System as from time to time in effect and any successor or other
regulation or official interpretation of said Board of Governors relating to the
extension of credit by banks for the purpose of purchasing or carrying margin
stocks applicable to member banks of the Federal Reserve System.
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"REPORTABLE EVENT" means a reportable event as defined in Section 4043 of
ERISA and the regulations issued under such section, with respect to a Single
Employer Plan, excluding, however, such events as to which the PBGC by
regulation waived the requirement of Section 4043(a) of ERISA that it be
notified within 30 days of the occurrence of such event, provided, however, that
a failure to meet the minimum funding standard of Section 412 of the Code and of
Section 302 of ERISA shall be a Reportable Event regardless of the issuance of
any such waiver of the notice requirement in accordance with either
Section 4043(a) of ERISA or Section 412(d) of the Code.
"REQUIRED LENDERS" means Lenders in the aggregate having at least 66 2/3%
of the Aggregate Commitment or, if the Aggregate Commitment has been terminated,
Lenders in the aggregate holding at least 66 2/3% of the aggregate unpaid
principal amount of the outstanding Loans. Any Lender which has refused to make
available its Commitment Percentage of any Advance or to fund its portion of any
Loan or Letter of Credit shall not be included in this calculation.
"REQUIREMENT OF LAW" means as to any Person, the articles or certificate of
incorporation of such Person, and any material law, treaty, rule or regulation,
determination or policy statement or interpretation of an arbitrator or a court
or other Governmental Person, in each case applicable to or binding upon such
Person or any of its Property or to which such Person or any of its Property is
subject.
"RESERVE PERCENTAGE" means, for any Interest Period for any Fixed Rate
Loan, the reserve percentage applicable two Business Days before the first day
of such Interest Period under regulations issued from time to time by the Board
of Governors of the Federal Reserve System for determining the maximum reserve
requirements (including any emergency, supplemental or other marginal reserve
requirement) for the Agent with respect to liabilities or assets consisting of
or including Eurocurrency Liabilities (or with respect to any other category of
liabilities that includes deposits by reference to which the interest rate on
such Fixed Rate Loan is determined) having a term equal to such Interest Period.
"SANWA" is defined in the first paragraph hereof.
"SEC" means the United States Securities and Exchange Commission or any
successor thereto.
"SEC REPORT" means a Current Report on Form 8-K pursuant to the Securities
Exchange Act of 1934.
"SECTION" means a numbered section of this Agreement, unless another
document is specifically referenced.
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"SECURITY AGREEMENT" means the Security Agreement dated as of even date
herewith, executed by the Borrower in favor of the Agent, as secured party, for
the benefit of the Lenders, all in form and substance as may be acceptable to
the Agent, as it may be amended or modified and in effect from time to time.
"SINGLE EMPLOYER PLAN" means a Plan other than a Multiemployer Plan.
"SUBORDINATED INDEBTEDNESS" means, collectively, Debt (i) for which the
Borrower is directly and primarily liable, and in respect of which none of its
Subsidiaries is contingently or otherwise obligated, unless such Subsidiary has
executed a guaranty (in form and substance satisfactory to the Required Lenders)
with respect to the Obligations of the Borrower hereunder and (ii) which is
subordinated to the obligations of the Borrower under this Agreement on terms,
and pursuant to documentation contained in other terms (including interest,
amortization, covenants and events of default), in term, form and substance
satisfactory to the Agent and the Required Lenders.
"SUBSIDIARY" of a Person means (i) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the time
be owned or controlled, directly or indirectly, by such Person or by one or more
of its Subsidiaries or by such Person and one or more of its Subsidiaries, or
(ii) any partnership, association, joint venture or similar business
organization more than 50% of the ownership interests having ordinary voting
power of which shall at the time be so owned or controlled. Unless otherwise
expressly provided, all references herein to a "Subsidiary" shall mean a
Subsidiary of the Borrower.
"SWAP-CHECK ACCOUNT" means any Account with respect to which the Borrower
is or may become liable to the Account Debtor for goods sold or services
rendered by the Account Debtor to the Borrower which are not offset on a "net"
basis, but which are billed and settled on a substantially simultaneous basis.
"TANGIBLE NET WORTH" means, as at any date for any Person, the sum for such
Person and its Subsidiaries (determined on a Consolidated Basis without
duplication in accordance with Agreement Accounting Principles) of the
following:
(i) The amount of capital stock plus any additional paid-in capital, PLUS
(ii) Subordinated Indebtedness, PLUS
(iii) The amount of surplus and retained earnings (or, in a case of a
surplus or retained earnings deficit, minus the amount of such deficit), MINUS
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(iv) The sum of the following: the cost of treasury shares and the book
value of all assets which should be classified as intangibles (without
duplication of deductions in respect of items already deducted in arriving at
surplus and retained earnings) but in any event including goodwill, minority
interests, research and development costs, trademarks, tradenames, copyrights,
patents and franchises, unamortized debt discount and expense, MINUS
(v) All amounts due to such Person from officers and/or Affiliates of
such Person.
"TAXES" is defined in Section 3.2.
"TOTAL LEVERAGE RATIO" means for the Borrower and its Subsidiaries on a
Consolidated Basis, determined as of the end of each fiscal quarter for the
period of four fiscal quarters then ended, the ratio of Total Liabilities
(including obligations under Capitalized Leases) outstanding at such time to
Tangible Net Worth.
"TOTAL LIABILITIES" means, as of any date, the sum, for the Borrower and
its Subsidiaries on a Consolidated Basis in accordance with Agreement Accounting
Principles of the following:
(i) all Debt (other than Subordinated Indebtedness) and
(ii) all other liabilities which should be classified as liabilities on the
balance sheet, including all reserves (other than general contingency reserves)
and all deferred taxes and other deferred items.
"TRANSFEREE" is defined in Section 14.4.
"TYPE" means, with respect to a Loan, its nature as a Reference Rate Loan
or a Fixed Rate Loan.
"UNFUNDED LIABILITIES" means the amount (if any) by which the present value
of all nonforfeitable benefits under all Single Employer Plans exceeds the fair
market value of all such Plan assets allocable to such benefits, all determined
in accordance with the respective most recent valuations for such Plans.
1.2 RULES AND INTERPRETATION.
(i) A reference to any document or agreement shall mean such document
or agreement as amended, modified or supplemented from time to time in
accordance with its terms and the terms of this Agreement.
(ii) The singular includes the plural and the plural includes the
singular.
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(iii) A reference to any law includes any amendment or modification of
such law.
(iv) A reference to any Person includes its permitted successors and
permitted assigns.
(v) Accounting terms capitalized but not otherwise defined herein
shall have their meanings applied to them by Agreement Accounting Principles
applied on a consistent basis by the accounting entity to which they refer.
(vi) The words "include," "includes," and "including" are not
limiting.
(vii) All terms not specifically defined herein or by Agreement
Accounting Principles, which terms are defined in the Uniform Commercial Code as
in effect in the State of California, have the meanings assigned to them
therein.
(viii) Reference to a particular "section" refers to that section of
this Agreement unless otherwise indicated.
(ix) The words "herein," "hereof," "hereunder" and words of like
import shall mean to this Agreement as a whole and not to any particular section
or subdivision of this Agreement.
ARTICLE 2
THE REVOLVING CREDIT FACILITY
2.1 COMMITMENTS. Each Lender severally agrees, on the terms and
conditions set forth in this Agreement, (i) to make Loans on a revolving
credit basis and in Dollars or in any Optional Currency to the Borrower from
time to time and (ii) to participate in standby and/or commercial letters of
credit issued for the account of the Borrower pursuant to Section 2.3 from
time to time (each a "Letter of Credit" and, collectively, the "Letters of
Credit"), from and including the Closing Date to but excluding the Facility
Termination Date in an amount not to exceed the amount of its Commitment. Up
to $10,000,000 in aggregate principal amount of the Aggregate Commitment may
be borrowed in Optional Currencies by the Borrower pursuant to the provisions
of Section 2.2 hereof. The sum of (i) the aggregate principal amount of all
Loans outstanding (including Loans in any Optional Currency calculated at the
Dollar Equivalent thereof), (ii) the aggregate Letter of Credit Amount of all
Letters of Credit outstanding and (iii) the aggregate amount of unreimbursed
drawings under all Letters of Credit, shall not exceed, at any time, the
Borrowing Base. The Borrowing Base availability shall be determined on the
basis of the Borrowing Base Certificate which is delivered on the Closing
Date and in accordance with Section 7.1(iv). Further, the sum of (x) the
aggregate Letter of Credit Amount of all Letters of Credit
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outstanding and (y) the aggregate amount of unreimbursed drawings under all
Letters of Credit shall not exceed $8,000,000 at any time. Within the limit
of each Lender's Commitment and as set forth herein, the Borrower may borrow,
have Letters of Credit issued and/or renewed for its account, prepay Loans,
reborrow and have additional Letters of Credit issued for its account.
2.2 OPTIONAL CURRENCIES. The Borrower shall be entitled to request Loans
on a revolving credit basis and in an Optional Currency from time to time from
and including the Closing Date to but excluding the Facility Termination Date by
giving the Agent a notice of borrowing pursuant to the provisions of
Section 2.14 hereof. The sum of the aggregate amount of all Optional Currency
Loans to the Borrower shall not at any time exceed $10,000,000.
2.3 ISSUANCE OF LETTERS OF CREDIT.
(i) The Borrower shall be entitled to request the issuance of standby
and/or commercial Letters of Credit from time to time from and including the
Closing Date to but excluding the date which is seven Business Days prior to the
Facility Termination Date by giving the Agent a Letter of Credit Request at
least three Business Days before the requested date of issuance of such Letter
of Credit (provided that such Letter of Credit Request is received by the Agent
no later than 11:00 a.m., Los Angeles time, and any Letter of Credit Request
received after such time shall be deemed to have been received on the next
Business Day) (which date of issuance shall be a Business Day). No Letter of
Credit shall have an expiration date beyond the Facility Termination Date. The
aggregate Letter of Credit Amounts under all outstanding Letters of Credit and
the aggregate amount of unreimbursed drawings under Letters of Credit shall
reduce, dollar for dollar, the Aggregate Available Commitment. Letters of
Credit may only be requested in Dollars. The sum of (a) the aggregate Letter of
Credit Amount of all Letters of Credit outstanding and (b) the aggregate amount
of unreimbursed drawings under all Letters of Credit shall not at any time
exceed $8,000,000. In addition, the sum of (i) the aggregate principal amount
of all Loans outstanding, (ii) the aggregate Letter of Credit Amount of all
Letters of Credit outstanding and (iii) the aggregate amount of unreimbursed
drawings under all Letters of Credit shall not exceed, at any time, the
Borrowing Base. Each Letter of Credit Request shall be made in writing, shall
be signed by an Authorized Officer, shall be irrevocable and shall be effective
upon receipt by the Agent. Provided that a valid Letter of Credit Request has
been received by the Agent and upon fulfillment of the other applicable
conditions set forth in Section 4.3, the Agent will issue the requested Letter
of Credit from its office specified in Section 15.1.
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Letters of Credit shall be used only for the purpose of supporting the
operations of the Borrower and its Subsidiaries incurred in the ordinary course
of business.
(ii) Immediately upon the issuance of each Letter of Credit, the Agent
shall be deemed to have sold and transferred to each Lender, and each Lender
shall be deemed to have purchased and received from the Agent, in each case
irrevocably and without any further action by any party, an undivided interest
and participation in such Letter of Credit, each drawing thereunder and the
obligations of the Borrower under this Agreement in respect thereof in an amount
equal to the product of (i) such Lender's Commitment Percentage and (ii) the
maximum amount available to be drawn under such Letter of Credit (assuming
compliance with all conditions to drawing). The Agent shall promptly advise
each Lender of the issuance of each Letter of Credit, the Letter of Credit
Amount of such Letter of Credit, any change in the face amount or expiration
date of such Letter of Credit, the cancellation or other termination of such
Letter of Credit and any drawing under such Letter of Credit.
(iii) The payment by the Agent of a draft drawn under any Letter of
Credit shall first be made from any cash collateral deposit held by the Agent
with respect to such Letter of Credit. After any such cash collateral deposit
has been applied, and unless the Borrower has repaid any remaining amount due to
the Agent pursuant to the Agent's payment on such Letter of Credit, the payment
by the Agent of a draft drawn under any Letter of Credit shall constitute for
all purposes of this Agreement the making by the Agent in its individual
capacity as a Lender hereunder (in such capacity, the "Drawing Lender") of a
Reference Rate Loan in the amount of such payment (but without any requirement
of compliance with the conditions set forth in Section 4.3). In the event that
any such Loan by the Drawing Lender resulting from a drawing under any Letter of
Credit is not repaid by the Borrower by 12:00 noon, Los Angeles time, on the day
of payment of such drawing, the Agent shall promptly notify each other Lender.
Each Lender shall, on the day of such notification (or if such notification is
not given by 1:00 p.m., Los Angeles time, on such day, then on the next
succeeding Business Day), make a Reference Rate Loan, which shall be used to
repay the applicable portion of the Reference Rate Loan of the Drawing Lender
with respect to such Letter of Credit drawing, in an amount equal to the amount
of such Lender's participation in such drawing for application to repay the
Drawing Lender (but without any requirement of compliance with the applicable
conditions set forth in Section 4.3) and shall deliver to the Agent for the
account of the Drawing Lender, on the day of such notification (or if such
notification is not given by 1:00 p.m., Los Angeles time, on such day, then on
the next succeeding Business Day) and in immediately available funds, the amount
of such Reference Rate Loan. In the event that any Lender fails to make
available to the Agent for the account of the Drawing Lender the amount of such
Reference Rate
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Loan, the Drawing Lender shall be entitled to recover such amount on demand
from such Lender together with interest thereon at the Federal Funds Rate.
(iv) The obligations of the Borrower with respect to any Letter of Credit,
any Letter of Credit Request and any other agreement or instrument relating to
any Letter of Credit and any Reference Rate Loan made under Section 2.3(iii)
shall be absolute, unconditional and irrevocable and shall be paid strictly in
accordance with the terms of the aforementioned documents under all
circumstances, including the following:
(a) any lack of validity or enforceability of any Letter of Credit,
this Agreement or any other Loan Document;
(b) the existence of any claim, setoff, defense or other right that
the Borrower may have at any time against any beneficiary or transferee of any
Letter of Credit (or any Person for whom any such beneficiary or transferee may
be acting), the Agent, any Lender (other than the defense of payment to a Lender
in accordance with the terms of this Agreement) or any other Person, whether in
connection with this Agreement, any other Loan Document, the transactions
contemplated hereby or thereby or any unrelated transaction;
(c) any statement or other document presented under any Letter of
Credit proving to be forged, fraudulent, invalid or insufficient in any respect,
or any statement therein being untrue or inaccurate in any respect whatsoever;
(d) payment by the Agent under any Letter of Credit against
presentation of a draft or certificate that does not comply on its face with the
terms of such Letter of Credit;
(e) any exchange, release or nonperfection of any collateral, or any
release, amendment or waiver of or consent to departure from any Loan Document
or other guaranty, for any of the Obligations of the Borrower in respect of the
Letters of Credit; and
(f) any other circumstance or happening whatsoever, whether or not
similar to any of the foregoing.
(v) The Borrower shall pay to the Agent with respect to each Letter of
Credit issued hereunder, the following fees:
(a) for each standby Letter of Credit, a Letter of Credit Fee to
the Agent for the pro rata benefit of the Lenders (provided that the Agent
shall retain for its account alone the initial $250 of any such Letter of
Credit Fee as an issuance fee), equal to the product of (i) the Applicable
Margin and (ii) the Letter of Credit Amount of such Letter of Credit (such
fee to be payable on the date such Letter of Credit is issued);
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(b) for each commercial Letter of Credit a letter of credit fee
to the Agent for the pro rata benefit of the Lenders (provided that the Agent
shall retain for its account alone the initial $120 of any such fee as an
issuance fee) equal to Agent's standard fees for issuance of commercial letters
of credit; and
(c) from time to time, such additional fees and charges (including
cable charges) as are generally associated with letters of credit, in accordance
with the Agent's standard internal charge guidelines and the related Letter of
Credit Request.
(vi) The terms of this Agreement shall take precedence if there is any
inconsistency between the terms of this Agreement and the terms of any Letter of
Credit Request utilized by the Agent.
(vii) The Borrower assumes all risks of the acts or omissions of any
beneficiary or transferee of any Letter of Credit with respect to its use of
such Letter of Credit. Neither the Agent nor any Lender nor any of their
respective officers or directors shall be liable or responsible for (i) the use
that may be made of any Letter of Credit or any acts or omissions of any
beneficiary or transferee in connection therewith; (ii) in the absence of any
gross negligence or willful misconduct by the Agent, the validity, sufficiency
or genuineness of documents, or of any endorsement thereof, even if such
documents should prove to be in any or all respects invalid, insufficient,
fraudulent or forged; (iii) in the absence of any gross negligence or willful
misconduct by the Agent, payment by the Agent against presentation of documents
that do not comply with the terms of any Letter of Credit, including failure of
any documents to bear any reference or adequate reference to any Letter of
Credit; or (iv) in the absence of any gross negligence or willful misconduct by
the Agent, any other circumstance whatsoever in making or failing to make
payment under any Letter of Credit. In furtherance and not in limitation of the
foregoing, the Agent may accept any document that appears on its face to be in
order, without responsibility for further investigation, regardless of any
notice or information to the contrary.
2.4 COMMITMENT PERCENTAGE. The principal amount of each Lender's Loan
and participation in a Letter of Credit shall be in an amount equal to the
product of (i) such Lender's Commitment Percentage (expressed as a fraction)
and (ii) the total amount of the Loan or Loans or Letters of Credit
requested; PROVIDED THAT in no event shall any Lender be obligated to make a
Loan if, after giving effect to such Loan, such Lender's Loans, its
Commitment Percentage of the aggregate Letter of Credit Amount of all Letters
of Credit outstanding and its Commitment Percentage of the aggregate amount
of unreimbursed drawings under all Letters of Credit outstanding
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would exceed its Commitment or if the amount of such requested Loan is in
excess of such Lender's Available Commitment.
2.5 TYPES OF LOANS. Except as limited herein, the Loans may from time to
time be (i) Fixed Rate Loans, (ii) Reference Rate Loans or (iii) a combination
thereof, as determined by the Borrower and notified to the Agent in accordance
with Section 2.14. Notwithstanding the foregoing, the initial Loans made on the
Closing Date shall be made as Reference Rate Loans and shall be subject to
conversion to Fixed Rate Loans pursuant to Section 2.13. Each Lender may make
or maintain its Loans to the Borrower by or through any Applicable Lending
Office.
2.6 EVIDENCE OF OBLIGATIONS. The Loans made by each Lender to the
Borrower shall be evidenced by a Note, with appropriate insertions therein as to
payee, date and principal amount, payable to the order of such Lender and
representing the obligation of the Borrower to pay the aggregate unpaid
principal amount of all Loans made by such Lender to the Borrower, with interest
thereon as prescribed in Sections 2.16 and 2.17. Each Lender is hereby
authorized (but not required) to record the date and amount of each payment or
prepayment of principal of its Loans made to the Borrower, each continuation
thereof, each conversion of all or a portion thereof to another Type or Optional
Currency and, in the case of Fixed Rate Loans, the length of each Interest
Period with respect thereto, in the books and records of such Lender, and any
such recordation shall constitute PRIMA FACIE evidence of the accuracy of the
information so recorded. The failure of any Lender to make any such recordation
or notation in the books and records of the Lender (or any error in such
recordation or notation) shall not affect the obligations of the Borrower
hereunder or under the Notes. Each Note shall (i) be dated the Closing Date,
(ii) provide for the payment of interest in accordance with Sections 2.16 and
2.17 and (iii) be stated to be payable on the Facility Termination Date.
2.7 COMMITMENT REDUCTION. At the Borrower's option and upon at least five
Business Days' prior irrevocable written notice to the Agent, with such notice
specifying the amount and the date of such reduction, the Borrower may
permanently reduce the Aggregate Commitment in whole at any time or in part from
time to time; provided, however, that each partial reduction of the Aggregate
Commitment shall be in an aggregate amount equal to at least $1,000,000 or an
integral multiple of $100,000. The Agent shall promptly notify each Lender (by
telecopy or by telephone) of such requested Commitment reduction.
Reductions of the Aggregate Commitment pursuant to this Section 2.7 shall
automatically effect a reduction of the Commitment of each Lender to an amount
equal to the product of (i) the Aggregate Commitment of all Lenders, as reduced
pursuant to this Section 2.7 and (ii) the Commitment Percentage of such
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Lender, in each case determined immediately prior to such reduction of the
Aggregate Commitment on such date. Any such Commitment reduction shall be
applied as the Borrower directs, but in the absence of any such direction,
all sublimits shall be ratably reduced.
Upon each reduction of the Aggregate Commitment, the Borrower shall (i) pay
the unused commitment fee, payable pursuant to Section 2.10, accrued on the
amount of the Aggregate Commitment so reduced through the date of such
reduction, (ii) prepay the amount, if any, by which the sum of (a) the aggregate
unpaid principal amount of the Loans, (b) the aggregate Letter of Credit Amount
of all Letters of Credit outstanding and (c) the aggregate amount of
unreimbursed drawings under all Letters of Credit exceeds the amount of the
Aggregate Commitment as so reduced, together with accrued interest on the amount
being prepaid to the date of such prepayment (or, with respect to outstanding
Letters of Credit, make a cash collateral deposit in an amount equal to such
excess to the extent such excess is not corrected by the foregoing prepayment)
and (d) compensate the Lenders for their funding costs, if any, in accordance
with Section 3.1(i).
2.8 COMMITMENT TERMINATION. The Commitment of each Lender and the
Aggregate Commitment shall terminate on the Facility Termination Date.
2.9 REQUIRED PAYMENTS. The outstanding Loans and all other unpaid
Obligations shall be paid in full by the Borrower on the Facility Termination
Date.
2.10 UNUSED COMMITMENT FEE. The Borrower agrees to pay to the Agent for
the benefit of the Lenders an unused commitment fee to be shared among Lenders
on the basis of their respective Commitment Percentages with respect to the
Commitments for the period from and including the Closing Date to but excluding
the Facility Termination Date, computed at .25% of the average daily aggregate
amount of the Aggregate Available Commitment from time to time in effect, to be
payable quarterly in arrears, within 5 days after the end of each quarter, and
on the Facility Termination Date.
2.11 FACILITY FEE. The Borrower agrees to pay to the Agent on the Closing
Date for the pro rata benefit of the Lenders a facility fee set forth in a fee
letter dated as of the Closing Date between the Borrower and the Agent.
2.12 ADMINISTRATIVE FEES. The Borrower agrees to pay to the Agent on the
Closing Date, for its own account, certain administrative fees set forth in a
fee letter dated as of the Closing Date between the Borrower and the Agent.
2.13 VOLUNTARY CONVERSION OF ADVANCES. The Borrower may on any Business
Day, upon written notice (a
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"Conversion/Continuation Notice") given to the Agent not later than 12:00
noon, Los Angeles time, on the second Business Day before the date of the
proposed conversion and subject to the provisions of Section 3.1(c), convert
any Advance into an Advance of another Type; PROVIDED, HOWEVER, that, with
respect to a conversion from a Fixed Rate Loan into a Reference Rate Loan,
any such conversion shall be made on, and only on, the last day of the
Interest Period for such Loan. Each such notice of a conversion shall,
within the restrictions specified above, specify (i) the Loan to be
converted, (ii) the Type of Loan into which such Loan is to be converted and
(iii) the requested date for such conversion. Upon receipt of any such
notice the Agent shall promptly notify each Lender thereof. Any part of
outstanding Fixed Rate Loans and Reference Rate Loans may be converted as
provided herein, provided (a) no Loan may be converted into a Fixed Rate Loan
after the date that is one month prior to the Facility Termination Date and
(b) the Borrower shall not have the right to continue or convert to a Fixed
Rate Loan if a Default shall have occurred and be continuing. However, if
the Borrower shall fail to give any required notices described above in this
Section or if such continuation is not permitted pursuant to the preceding
sentence, such Loans shall be automatically converted to Reference Rate Loans
on the last day of such then-expiring Interest Period and shall be continued
in Dollars or the Optional Currency in which last denominated.
2.14 NOTICE OF BORROWING. The Borrower shall give the Agent irrevocable
telephonic notice (promptly followed by written notice substantially in the form
of Exhibit D attached hereto) (which telephonic notice must be received by the
Agent prior to 10:30 a.m., Los Angeles time, on the proposed Borrowing Date or,
if all or any part of the Loans are requested to be made as Fixed Rate Loans or
Loans in an Optional Currency, three Business Days prior to each proposed
Borrowing Date) requesting that the Lenders make the Loans on the proposed
Borrowing Date and specifying (i) the aggregate amount of Loans requested to be
made (which must be in an aggregate amount equal to at least $1,000,000 (or the
Dollar Equivalent of such amount if made in an Optional Currency) or an integral
multiple of $100,000 (or the Dollar Equivalent of such amount if made in an
Optional Currency)) (or, if less, the then Available Commitment), (ii) subject
to Section 2.5, whether the Loans are (iii) if the Loans are to be entirely or
partly Fixed Rate Loans, the respective amounts of each such Type of Loan and
the respective lengths of the Interest Periods therefor and (iv) if the Loans
are to be partly or entirely Loans in an Optional Currency, the respective
amounts of each Optional Currency. Each Loan in an Optional Currency must have
a Dollar Equivalent at least equal to $1,000,000 or the remaining balance of the
Available Commitment, if less. On receipt of such telephonic notice, the Agent
shall promptly notify each Lender thereof no later than 10:30 a.m., Los Angeles
time, on the date of receipt of such telephonic notice. On the proposed
Borrowing Date, not later
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than 1:00 p.m., Los Angeles time, each Lender shall make available to the
Agent at its office specified in Section 15.1 such Lender's Commitment
Percentage of the aggregate borrowing amount (as determined in accordance
with Section 2.4) in immediately available funds and in Dollars or the
Optional Currency requested. Not later than 1:30 p.m., Los Angeles time, on
the date of such Loans and upon fulfillment of the applicable conditions set
forth in Section 4, the Agent shall make such Loans available to the Borrower
in immediately available funds. Each notice pursuant to this Section 2.14
shall be irrevocable and binding on the Borrower. The Agent may, in the
absence of notification from any Lender that such Lender has not made its
Commitment Percentage available to the Agent, on such date, credit the
account of the Borrower on the books of such office of the Agent with the
aggregate amount of Loans.
2.15 COMMITMENT OBLIGATIONS. Neither the Agent nor any Lender shall be
responsible for the obligation or Available Commitment of any other Lender
hereunder, nor will the failure of any Lender to comply with the terms of this
Agreement relieve any other Lender or the Borrower of their obligations under
this Agreement and the Notes. Nothing herein shall be deemed to relieve any
Lender from its obligation to fulfill its Commitments hereunder or to prejudice
any rights which the Borrower may have against any Lender as a result of any
default by such Lender hereunder.
2.16 INTEREST. A Reference Rate Loan shall bear interest on the
outstanding principal amount thereof, for each day from and including the date
such Loan is made or is converted from a Fixed Rate Loan into a Reference Rate
Loan pursuant to Section 2.13 to (but not including) the date it becomes due or
is converted into a Fixed Rate Loan pursuant to Section 2.13 hereof, at a rate
per annum equal to the Reference Rate for such day. Changes in the rate of
interest on any Loan maintained as a Reference Rate Loan will take effect
simultaneously with each change in the Reference Rate. Each Fixed Rate Loan
shall bear interest from and including the first day of the Interest Period
applicable thereto to (but not including) the last day of such Interest Period
at the Fixed Rate determined as applicable to such Fixed Rate Loan.
2.17 RATES APPLICABLE AFTER DEFAULT. Notwithstanding anything to the
contrary contained herein, during the continuance of an Event of Default no Loan
may be made as, converted into or continued as a Fixed Rate Loan. During the
continuance of an Event of Default each Loan shall bear interest at a rate per
annum equal to the Reference Rate plus 2% per annum. All such interest shall be
payable on demand of the Agent.
2.18 METHOD OF PAYMENT. All payments of the Obligations hereunder shall be
made, without setoff, deduction, or counterclaim, in immediately available funds
in Dollars or the
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Optional Currency in which the Loan was made to the Agent at the address
specified pursuant to Article 15, or at any other Applicable Lending Office
of the Agent specified in writing by the Agent to the Borrower, by 2:00 p.m.,
Los Angeles time, on the date when due and shall be applied ratably by the
Agent among the Lenders. Each payment delivered to the Agent for the account
of any Lender shall be delivered promptly by the Agent to such Lender in the
same type of funds that the Agent received at its address specified pursuant
to Article 15 or at any Applicable Lending Office specified in a notice
received by the Agent from such Lender. The Agent is hereby authorized (but
not obligated) to charge the accounts of the Borrower maintained with Sanwa
for each payment of principal, interest and fees as it becomes due hereunder.
2.19 TELEPHONIC NOTICES. The Borrower hereby authorizes the Lenders and
the Agent to borrow Loans and to convert or continue Loans and effect selections
of Types of Loans based on telephonic notices made by any Person or Persons the
Agent or any Lender in good faith believes to be acting on behalf of the
Borrower. The Borrower agrees to deliver promptly to the Agent a written
confirmation, if such confirmation is requested by the Agent or any Lender, of
each telephonic notice signed by an Authorized Officer. If the written
confirmation differs in any material respect from the action taken by the Agent
and the Lenders, the records of the Agent and the Lenders shall govern absent
manifest error.
2.20 INTEREST PAYMENT DATES; INTEREST AND FEE BASIS. Interest accrued on
each Reference Rate Loan shall be payable in arrears on the first Business Day
of each calendar month, commencing with the first such date to occur after the
Closing Date, on any date on which Reference Rate Loan is prepaid, whether due
to acceleration or otherwise, and at maturity. Interest accrued on that portion
of the outstanding principal amount of any Reference Rate Loan converted into a
Fixed Rate Loan on a day other than an interest payment date shall be payable on
the date of conversion. Interest accrued on each Fixed Rate Loan shall be
payable on the last day of its applicable Interest Period, on any date on which
the Fixed Rate Loan is prepaid, whether by acceleration or otherwise, and at
maturity.
Interest on Fixed Rate Loans and fees shall be calculated for actual days
elapsed on the basis of a 360-day year and interest on Reference Rate Loans
shall be calculated for actual days elapsed on the basis of 365-day year.
Interest shall be payable for the day a Loan is made but not for the day of any
payment on the amount paid if payment is received prior to 2:00 p.m., Los
Angeles time, at the place of payment. Whenever any payment to be made
hereunder shall be stated to be due on a day that is not a Business Day, such
payment shall be made on the next succeeding Business Day, and such extension of
time shall in such case be included in the computation of payment of
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interest; PROVIDED, HOWEVER, that, if such extension would cause any payment
of interest on or principal of any Fixed Rate Loan to be made in the next
following calendar month, then such payment shall instead be made on the next
preceding Business Day, and such shortened time shall in such case be used in
the computation of payment of interest.
2.21 NOTIFICATION OF LOAN, INTEREST RATES, PREPAYMENTS AND COMMITMENT
REDUCTIONS. Promptly after receipt thereof, the Agent will notify each Lender
of the contents of a borrowing notice, Conversion/Continuation Notice and
repayment notice received by it hereunder. The Agent will notify each Lender of
the interest rate applicable to each Loan promptly upon determination of such
interest rate and will give each Lender prompt notice of each change in the
Reference Rate.
Each determination of an interest rate by the Agent pursuant to any
provision of this Agreement shall be conclusive and binding on the Borrower and
the Lenders in the absence of manifest error.
2.22 APPLICABLE LENDING OFFICES. Subject to Section 3.3, each Lender
may book its Loans at any Applicable Lending Office selected by such Lender
and may change its Applicable Lending Office from time to time. All terms of
this Agreement shall apply to any such Applicable Lending Office and the
Notes shall be deemed held by each Lender for the benefit of such Applicable
Lending Office. Each Lender may, by written or telex notice to the Agent and
the Borrower, designate an Applicable Lending Office through which the Loans
will be made by it and for whose account Loan payments are to be made.
2.23 NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Borrower or a Lender,
as the case may be, notifies the Agent prior to the date on which it is
scheduled to make payment to the Agent of (i) in the case of a Lender, the
proceeds of a Loan or (ii) in the case of the Borrower, a payment of principal,
interest or fees to the Agent for the account of the Lenders, that it does not
intend to make such payment, the Agent may assume that such payment has been
made. The Agent may, but shall not be obligated to, make the amount of such
payment available to the intended recipient in reliance upon such assumption.
If such Lender or the Borrower, as the case may be, has not in fact made such
payment to the Agent, the recipient of such payment shall, on demand by the
Agent, repay to the Agent the amount so made available together with interest
thereon in respect of each day during the period commencing on the date such
amount was so made available by the Agent until the date the Agent recovers such
amount at a rate per annum equal to (a) in the case of payment by a Lender, the
overnight federal funds effective rate (as published by the Board of Governors
of the Federal Reserve System as in effect from time to time) for such day or
(b) in the case of payment by the Borrower, the interest rate applicable to the
relevant Loan.
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2.24 WITHHOLDING TAX EXEMPTION. Subject to Section 3.3, at least five
Business Days prior to the first date on which interest or fees are payable
hereunder for the account of any Lender, each Lender that is not incorporated
under the laws of the United States of America, or a state thereof, agrees
that it will deliver to the Borrower and the Agent two duly completed copies
of United States Internal Revenue Service Form 1001 or 4224, certifying in
either case that such Lender is entitled to receive payments under this
Agreement and the Notes without deduction or withholding of any United States
federal income taxes. Each Lender which so delivers a Form 1001 or 4224
further undertakes to deliver to the Borrower and the Agent two additional
copies of such form (or a successor form) on or before the date that such
form expires (currently, three successive calendar years for Form 1001 and
one calendar year for Form 4224) or becomes obsolete or after the occurrence
of any event requiring a change in the most recent forms so delivered by it,
and such amendments thereto or extensions or renewals thereof as may be
reasonably requested by the Borrower or the Agent, in each case certifying
that such Lender is entitled to receive payments under this Agreement and the
Notes without deduction or withholding of any United States federal income
taxes, unless an event (including without limitation any change in treaty,
law or regulation) has occurred prior to the date on which any such delivery
would otherwise be required which renders all such forms inapplicable or
which would prevent such Lender from duly completing and delivering any such
form with respect to it and such Lender advises the Borrower and the Agent
that it is not capable of receiving payments without any deduction or
withholding of United States federal income tax.
2.25 OPTIONAL PREPAYMENT. The Borrower may at any time and from time
to time, prepay the Loans, in whole or in part, without premium or penalty
(except amounts required by Section 3.1), upon at least three Business Days'
irrevocable written notice, in the case of Fixed Rate Loans, and upon at
least one Business Day's irrevocable written notice, in the case of Reference
Rate Loans, from the Borrower to the Agent, specifying the date and amount of
prepayment and whether the prepayment is of Fixed Rate Loans, Reference Rate
Loans or a combination thereof, the amount allocable to each. Any prepayment
of a Fixed Rate Loan on a day other than the last day of an Interest Period
applicable thereto shall also be subject to the payment of amounts due under
Section 3.1 hereof. Upon receipt of any such notice from the Borrower, the
Agent shall promptly notify each Lender thereof. If any such notice is
given, the amount specified in such notice shall be due and payable by the
Borrower on the date specified therein, together with accrued interest to
such date on the amount prepaid. Partial prepayments of Loans shall be in an
aggregate principal amount of $1,000,000 (or the Dollar Equivalent thereof if
denominated in an Optional Currency) or in increments of $100,000 above such
amount. Optional prepayments shall be applied as directed by
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the Borrower and, in the absence of such direction, as the Agent shall
determine.
2.26 OPTIONAL CURRENCY DOLLAR EQUIVALENT. For all purposes of this
Agreement, the amount in one currency which shall be equivalent on any
particular date to a specified amount in another currency shall be that
amount (as conclusively ascertained by the Agent absent manifest error) in
the first currency which is or could be purchased by the Agent (in accordance
with its normal banking practices) with such specified amount in the second
currency in the foreign currency deposit markets for delivery on such date at
the spot rate of exchange prevailing at or about 11:00 a.m., Los Angeles
time, on such date.
In the event that any portion of the funds available under the terms of
this Agreement is denominated in one or more Optional Currencies, the Dollar
Equivalent of such portion of the funds shall be calculated pursuant to the
above paragraph by the Agent at the time the Borrower request any Loan or
Letter of Credit and otherwise no less frequently that once per week. The
amount so determined shall then be added to the amount already outstanding in
Dollars for the purpose of determining the remaining Aggregate Available
Commitment and any required repayments hereunder.
2.27 MANDATORY PREPAYMENTS.
(i) If at any time the aggregate principal amount of all Loans
outstanding (including Loans in any Optional Currency calculated at the
Dollar Equivalent thereof), the aggregate Letter of Credit Amount of all
Letters of Credit outstanding and the aggregate amount of unreimbursed
drawings under all Letters of Credit shall exceed the lesser of (a) the
Aggregate Commitment and (b) the Borrowing Base, whether as a result of
fluctuations in currency exchange rates or otherwise, the Borrower shall pay
immediately upon demand made by the Agent all amounts (calculated at the
Dollar Equivalent, if applicable) required in order to reduce such amounts
outstanding to the lesser of (a) the Aggregate Commitment and (b) the
Borrowing Base, and if no Loans are then outstanding, shall deposit with the
Agent cash collateral in an amount equal to the amount by which the aggregate
Letter of Credit Amounts of all Letters of Credit outstanding exceeds the
lesser of (a) the Aggregate Commitment and (b) the Borrowing Base. If any
such prepayment would result in the Borrower being obligated to pay
breakfunding costs under Section 3.1(i), the Borrower may elect to deposit
such prepayment amounts in a cash collateral account with the Agent (for the
benefit of the Lenders), which amounts the Agent shall apply to reduce
outstanding Loans at the end of relevant Interest Periods.
(ii) If at any time the aggregate principal amount of the outstanding
Loans (calculating all amounts denominated in
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Optional Currencies at their Dollar Equivalent) extended in Optional
Currencies shall exceed $10,000,000, whether as a result of fluctuations in
currency exchange rates or otherwise, the Borrower shall pay immediately upon
demand by the Agent all amounts required in order to reduce such amount
outstanding to $10,000,000 (or the Dollar Equivalent of Loans outstanding in
Optional Currencies). If any such prepayment would result in the Borrower
being obligated to pay breakfunding costs under Section 3.1(i), the Borrower
may elect to deposit such prepayment amounts in a cash collateral account
with the Agent (for the benefit of the Lenders), which amounts the Agent
shall apply to reduce outstanding Loans at the end of relevant Interest
Periods.
(iii) If at any time the aggregate Letter of Credit Amount of all
Letters of Credit outstanding and the aggregate amount of unreimbursed drawings
under all Letters of Credit shall exceed $8,000,000 for whatever reason, the
Borrower shall immediately deposit with the Agent cash collateral in an amount
equal to the amount by which the aggregate Letter of Credit Amount of all
Letters of Credit outstanding and any aggregate amount of unreimbursed drawings
under all Letters of Credit shall exceed $8,000,000. If any such prepayment
would result in the Borrower being obligated to pay breakfunding costs under
Section 3.1(i), the Borrower may elect to deposit such prepayment amounts in a
cash collateral account with the Agent (for the benefit of the Lenders), which
amounts the Agent shall apply to reduce outstanding Loans at the end of
relevant Interest Periods.
(iv) Upon a sale, or a combination of sales, lease transfer or other
disposition of the assets of the Borrower (other than sales in the ordinary
course of business which ordinary course shall include, among other things, the
purchase and sale of access switches and circuits) which results in receipts by
the Borrower in an aggregate amount equal to at least $2,000,000 of either (1)
cash proceeds and/or (2) repayment of any Debt owing to the Borrower resulting
from any such sale or combination of sale of assets, the Borrower shall prepay
the Loans in amount equal to 100% of such cash proceeds or Debt repaid (net of
reasonable and customary costs of sale and related income tax expense) in excess
of $2,000,000. All such prepayments shall be applied in accordance with Section
2.28.
2.28 APPLICATION OF REPAYMENTS. All repayments of principal made pursuant
to Section 2.27 (except as expressly set forth in Sections 2.27(i), (ii) and
(iii)) shall be applied, in the absence of instruction by the Borrower, first to
the principal of Reference Rate Loans and then to the principal of Fixed Rate
Loans. Each partial repayment shall be allocated among the Lenders in
proportion, as nearly as practicable, to their respective Commitment
Percentages, with adjustments to the
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extent practicable, to equalize any prior repayments not exactly in
proportion.
Notwithstanding the rights given to the Borrower pursuant to California
Civil Code Sections 1479 and 2822 or equivalent provisions in the laws in the
State of California, to designate how payments will be applied, the Borrower
hereby waives such rights and the Agent shall have the right in its sole
discretion, other than as specifically set forth herein, to determine the order
and method of application of payments to outstanding Obligations and to revise
such application prospectively or retroactively at its discretion.
2.29 INTEREST LIMITATION. Notwithstanding any other term of this Agreement
or any Note or any other Loan Document or any other document referred to herein
or therein, the maximum amount of interest which may be charged to or collected
from any person liable hereunder or under any Note by the Lenders shall be
absolutely limited to, and shall in no event exceed, the maximum amount of
interest which could lawfully be charged or collected under applicable law,
except that the maximum of all amounts constituting interest under applicable
law, howsoever computed shall never exceed as to any Person liable therefor such
lawful maximum, in any term of this Agreement, any Note, any Loan Document or
any other document referred to herein or therein which could be construed as
providing for interest in excess of such lawful maximum shall be and hereby is
made expressly subject to and modified by the provisions of this Section.
ARTICLE 3
CHANGE IN CIRCUMSTANCES
3.1 YIELD PROTECTION.
(i) If any repayment of principal of, or conversion of, any Fixed
Rate Loan is made other than on the last day of an Interest Period therefor, as
a result of a prepayment, payment or conversion, or an acceleration of the
maturity of the Loan pursuant to Section 10, or for any other reason, or if the
Borrower shall fail to borrow a Fixed Rate Loan after requesting one, then the
Borrower shall, upon demand by the Agent pay to the Lenders any amounts required
to compensate them for any additional losses, costs or expenses that they may
reasonably incur as a result of such repayment, conversion or failure to borrow,
including any loss (including loss of anticipated profits), cost or expense
incurred by reason of the liquidation or reemployment of deposits or other funds
acquired by a Lender to fund or maintain such Fixed Rate Loan.
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(ii) Subject to Section 3.3, if, due to either (a) the introduction
of or any change in or in the interpretation of any Governmental Rule or (b)
the compliance by the Lenders with any Governmental Rule (whether or not
having the force of law), there is any increase in the cost to the Lenders of
agreeing to make, making, funding or maintaining any Fixed Rate Loan, then
the Borrower shall from time to time, upon written demand by the Agent, pay
to the Agent additional amounts sufficient to compensate the Lenders for such
increased cost. A certificate as to the amount of such increased cost,
submitted to the Borrower by the Agent, shall be conclusive and binding for
all purposes, absent manifest error.
(iii) Subject to Section 3.3, notwithstanding any other provision of
this Agreement, if the introduction of or any change in or in the interpretation
of any Governmental Rule makes it unlawful, or any Governmental Person asserts
that it is unlawful, for any Lender to perform its obligations hereunder to make
Fixed Rate Loans or to continue to fund or maintain Fixed Rate Loans hereunder,
then, on notice thereof and demand therefor by the Agent to the Borrower, (a)
the obligation of such Lender to make Fixed Rate Loans and to convert Reference
Rate Loans into Fixed Rate Loans shall terminate and (b) the Borrower shall
forthwith prepay in full that portion of the Fixed Rate Loans of such Lender
then outstanding, together with interest accrued thereon, unless the Borrower,
within five Business Days of such notice and demand, converts such portion of
Fixed Rate Loans into Reference Rate Loans in accordance with Section 2.13.
(iv) Subject to Section 3.3, if, with respect to any Fixed Rate Loan,
the Agent notifies the Borrower that the Fixed Rate for such Loan will not
adequately reflect the cost to one or more Lenders (as determined by such
Lender(s) in good faith on the basis of market conditions then in effect) of
making, funding or maintaining such Loan, then (a) such Loan will automatically,
on the last day of the then existing Interest Period therefor, convert into a
Reference Rate Loan and (b) the obligation of the affected Lender to make, or to
convert Reference Rate Loans into Fixed Rate Loans shall be suspended until the
Agent notifies the Borrower that the circumstances causing such suspension no
longer exist.
3.2 TAXES. Subject to Section 3.3, all payments by or on behalf of the
Borrower hereunder shall be made without set-off or counterclaim and in such
amounts as may be necessary in order that all such payments (after deduction or
withholding for or on account of any present or future taxes, levies, imposts,
duties or other charges of whatsoever nature imposed by any Governmental Person,
other than any tax on or measured by the overall net income of the Agent or a
Lender pursuant to the income tax laws of the United States, the jurisdiction
where the Agent's or such Lender's principal office is located or any political
subdivision thereof (collectively, the "Taxes")) shall
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not be less than the amounts otherwise specified to be paid hereunder. A
certificate as to any additional amounts payable to the Agent or a Lender
hereunder submitted to the Borrower by the Agent shall show in reasonable
detail the amount payable to the Agent or a Lender and the calculations used
to determine in good faith such amount and shall be conclusive absent
manifest error. Any amounts payable by the Borrower hereunder with respect
to past payments shall be due within ten days following receipt by the
Borrower of such certificate from the Agent; and such amounts payable with
respect to future payments shall be due concurrently with such future
payments. With respect to each deduction or withholding for or on account of
any Taxes, the Borrower shall promptly furnish to the Agent such
certificates, receipts and other documents as may be required (in the
reasonable judgment of the Agent) to establish any tax credit to which a
Lender may be entitled. The agreements and obligations of the Borrower under
this paragraph shall survive the payment in full of the Loans.
3.3 REPLACEMENT OF LENDERS. If the Borrower is obligated to pay to any
Lender (other than the Agent) any amount under Sections 3.1 or 3.2 or if any
Lender requests that its Fixed Rate Loans be converted into Reference Rate Loans
pursuant to Section 3.1, the Borrower may, so long as no Default or Event of
Default then exists, replace such Lender with another Lender which meets all of
the qualifications of being an Eligible Assignee and which complies with the
provisions of Section 14.3. The Borrower may, in the absence of replacing any
such Lender, request that such Lender designate another of its existing
facilities as the Applicable Lending Office for making Fixed Rate Loans or take
other reasonable action, if such designation or other action would avoid the
need for, or reduce the amount of, compensation to be paid by the Borrower
hereunder to such Lender. No Lender will be required to take any action which
in its good faith judgment is disadvantageous to such Lender.
ARTICLE 4
CONDITIONS PRECEDENT
4.1 INITIAL LOAN OR LETTER OF CREDIT. The Lenders shall not be required
to make their initial Loans or participate in the initial Letter of Credit
unless the Borrower has furnished to the Agent or unless the following shall be
in effect:
(i) this Agreement, the Notes and the Security Agreement, duly executed by
the Borrower, together with appropriate UCC-1 Financing Statements and original
stock certificates accompanied by stock powers executed in blank;
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(ii) Certificate of Incorporation certified by the Secretary of
State of Delaware and Bylaws of the Borrower certified by the Secretary of
the Borrower;
(iii) Resolutions of the Board of Directors of the Borrower
approving the execution, delivery and performance by the Borrower, of the
Loan Documents to which the Borrower is a party, certified by the Secretary
of the Borrower, to be true and correct and in full force and effect;
(iv) an Incumbency Certificate of the Borrower;
(v) a favorable legal opinion of counsel to the Borrower,
substantially in the form attached hereto as Exhibit F;
(vi) UCC search reports acceptable to the Agent;
(vii) a Borrowing Base Certificate as of the end of the prior
calendar month;
(viii) all fees and expenses to be paid on the Closing Date;
(ix) no statute, rule, regulation, order, decree or preliminary or
permanent injunction of any court or administrative agency or, to the best
knowledge of the Borrower, any such action threatened by any Person, shall be
in effect that prohibits the Lenders from consummating the transactions
contemplated by this Agreement and the other Loan Documents;
(x) copies of the Borrower's Consolidated and Consolidating
financial statements for the period ending June 30, 1997;
(xi) there shall not have been any material adverse change to the
syndication markets for credit facilities similar to this Agreement and there
shall not have occurred and be continuing a material disruption of or
material adverse change in financial, banking or capital markets which would
have an adverse effect on such syndication market, as determined by the Agent
in its sole discretion;
(xii) favorable results (as determined by the Agent) of a prefunding
field exam of all of the Borrower's property; and
(xiii) such other documents, instruments and opinions as the Agent,
any Lender or its respective counsel may have reasonably requested.
4.2 ALL LOANS. The Lenders shall not be required to make any Loan
(including the initial Loan) hereunder unless the Borrower shall have
furnished to the Agent with sufficient copies for the Lenders:
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(i) a duly completed certificate (which may be included in the
notice of borrowing) executed by an Authorized Officer of the Borrower
certifying that:
(a) there exists no Default or Event of Default;
(b) the representations and warranties contained in Article 5
hereof are true and correct in all material respects as of the Borrowing
Date except to the extent any such representation or warranty is stated to
relate solely to an earlier date, in which case such representation or
warranty shall be true and correct in all material respects on and as of
such earlier date; and
(c) no event has occurred, or condition exists, which could
reasonably be expected to have a Material Adverse Effect.
(ii) such other documents as the Agent, any Lender or its respective
counsel may have reasonably requested.
4.3 ALL LETTERS OF CREDIT. The Agent shall not be required to
issue any Letter of Credit and the Lenders shall not be required to
participate in any Letter of Credit (including the initial Letter of Credit)
hereunder unless the Borrower shall have has furnished to the Agent with
sufficient copies for the Lenders:
(i) a completed Letter of Credit Request with regard to each such
Letter of Credit;
(ii) all fees to be paid to the Agent in connection with each
Letter of Credit shall have been paid; and
(iii) such other documents as the Agent, any Lender or its
respective counsel may have reasonably requested.
Any Letter of Credit Request delivered to the Agent shall be deemed a
representation and warranty to the Agent and the Lenders that:
(i) there exists no Default or Event of Default;
(ii) the representations and warranties contained in Article 5
hereof are true and correct in all material respects as of the issuance date
of each Letter of Credit except to the extent any such representation or
warranty is stated to relate solely to an earlier date, in which case such
representation or warranty shall be true and correct on and as of such
earlier date; and
(iii) no event has occurred, or condition exists, which could
reasonably be expected to have a Material Adverse Effect.
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ARTICLE 5
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lenders that:
5.1 AUTHORIZATION. The execution, delivery and performance by the
Borrower of the Loan Documents to which the Borrower is a party are within the
Borrower's corporate powers, have been duly authorized by all necessary
corporate action and do not contravene any applicable law, rule, regulation or
order or any contractual restriction binding on or affecting the Borrower or its
Subsidiaries.
5.2 ENFORCEABILITY. Each Loan Document to which the Borrower is a party
is the legal, valid and binding obligation of the Borrower, enforceable against
the Borrower in accordance with its terms, except as the enforceability thereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting creditors' rights generally.
5.3 USE OF PROCEEDS. The Borrower will use the proceeds of the Loans
solely as set forth in Section 7.2. No action has been taken or is currently
planned by the Borrower, or any agent acting on its behalf, which would cause
this Agreement or the Notes to violate Regulation U or any other regulation of
the Board of Governors of the Federal Reserve System or to violate the
Securities and Exchange Act of 1934, in each case as in effect now or as the
same may hereafter be in effect. The Borrower is not engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock as one
of its important activities and none of the proceeds of the Loans or Letters of
Credit will be used directly or indirectly for such purpose.
5.4 LITIGATION. Except as disclosed in writing to the Agent, there is no
litigation, tax claim, proceeding, arbitration or dispute pending, or, to the
best knowledge of the Borrower, threatened against or affecting the Borrower or
its Property, an adverse determination in which could have a Material Adverse
Effect.
5.5 FINANCIAL STATEMENTS. The Consolidated financial statements of the
Borrower dated December 31, 1996 and June 30, 1997, copies of which have been
delivered to the Lenders, fairly and accurately reflect the financial condition
of the Borrower and its Subsidiaries as of such date (except to the extent that
the interim financial statements are subject to year-end adjustments and to the
inclusion of additional footnotes), and since such date there has been no
Material Adverse Effect.
5.6 TAXES. The Borrower and each Subsidiary have filed all tax returns
and reports required to be filed and have paid
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all applicable federal, state and local franchise and income taxes which are
set forth on such return.
5.7 SUBSIDIARIES. Schedule 2 hereto contains an accurate list of all of
the presently existing Subsidiaries of the Borrower, setting forth their
respective jurisdictions of incorporation or organization and the percentage of
their respective capital stock or ownership interests owned by the Borrower or
other Subsidiaries. All of the issued and outstanding shares of capital stock
of such Subsidiaries have been duly authorized and issued and are fully paid and
non-assessable.
5.8 ERISA. There are no Unfunded Liabilities of the Borrower. Each
Single Employer Plan complies in all material respects with all applicable
requirements of law and regulations, except to the extent that the failure to
comply therewith does not have a Material Adverse Effect. No Reportable Event
has occurred with respect to any Single Employer Plan, except to the extent that
such Reportable Event has no Material Adverse Effect. Neither the Borrower nor
any Subsidiary (a) is a party to any Multiemployer Plan or (b) has withdrawn
from any Multiemployer Plan, except to the extent such actions do not have a
Material Adverse Effect.
5.9 ACCURACY OF INFORMATION. No written information, exhibit or report
furnished by the Borrower or any of its Subsidiaries to the Agent or to any
Lender in connection with the negotiation of, or compliance with, the Loan
Documents (including projected financial information) contain any material
misstatement of fact or omit to state a material fact or any fact necessary to
make the statements contained therein not misleading in any material respect.
All projected financial information which has been furnished by or on behalf of
the Borrower or any Subsidiary to the Agent or any Lender was, at the time so
furnished, believed by the Borrower to have been prepared in a reasonable manner
and based on reasonable assumptions with respect to the Borrower's business,
provided that no representation is made by the Borrower that the future results
of the Borrower will equal those set forth in such projected financial
information.
5.10 ORGANIZATION AND EXISTENCE. The Borrower is duly organized, validly
existing and in good standing under the laws of the State of Delaware, and it
has the corporate power and authority, and the legal right, to own and operate
its Properties and to conduct the business in which it is currently engaged and
in which it proposes to be engaged after the Closing Date and is duly qualified
as a foreign entity and in good standing under the laws of each jurisdiction
where its ownership, lease or operation of Property or the conduct of its
business requires such qualification except to the extent that the failure to
comply thereunder could not, in the aggregate, reasonably be expected to have a
Material Adverse Effect and is
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in compliance with all Requirements of Law except to the extent that the
failure to comply therewith could not, in the aggregate, reasonably be
expected to have a Material Adverse Effect.
5.11 CONSENTS. No consent or authorization of, or filing with or other act
by or in respect of, any Governmental Authority, or any other Person is required
in connection with the Loans hereunder or with the execution, delivery,
performance, validity or enforceability of this Agreement, the Notes or the
other Loan Documents. The execution, delivery and performance of this
Agreement, the Notes and the other Loan Documents, the Loans, the Letters of
Credit and the use of the proceeds thereof will not violate any Requirement of
Law or contractual obligations of the Borrower or any of its Subsidiaries which
could be reasonably expected to have a Material Adverse Effect and will not
result in, or require, the creation or imposition of any Lien on any of its or
its Properties or revenues pursuant to any such Requirement of Law or
contractual obligation, except pursuant to the Loan Documents or otherwise as
permitted hereunder, which Lien could reasonably be expected to have a Material
Adverse Effect.
5.12 INTELLECTUAL PROPERTY. The Borrower and each of its Subsidiaries
owns, or is licensed to use, all trademarks, tradenames, patents, copyrights,
material permits, licenses or other intangibles necessary for the conduct of its
business as currently conducted without conflict with the rights of others,
except to the extent that the failure to own or license such property could not
reasonably be expected to have a Material Adverse Effect.
5.13 DEFAULT. There exists no Default or Event of Default.
5.14 NATURE OF BUSINESS. Neither the Borrower nor any of its subsidiaries
is engaged in any material business other than as set forth in the Borrower's
registration statement on Form S-1, Registration No. 333-21325, as declared
effective by the SEC on June 12, 1997.
5.15 RANKING OF LOANS. This Agreement and the other Loan Documents to
which the Borrower is party, when executed, and the Loans, when borrowed are and
will be the direct and general obligations of the Borrower. The Borrower's
Obligations hereunder and thereunder will rank at least PARI PASSU in priority
of payment with all other senior Debt, except to the extent otherwise permitted
hereunder.
5.16 INVESTMENT COMPANY ACTS; OTHER REGULATIONS. Neither the Borrower nor
any of its Subsidiaries is an "investment company," or a company "controlled" by
an "investment company," within the meaning of the Investment Company Act of
1940, as amended.
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5.17 ENVIRONMENTAL MATTERS. Except as disclosed to the Agent, the Borrower
and its Subsidiaries are in compliance in all material respects with all
applicable environmental laws, and there is no contamination at, under or about
any of their respective Properties, or violation of any environmental law with
respect to any of their respective Properties or the business conducted at any
of their respective Properties which involves a matter or matters which has
caused or reasonably likely to cause a Material Adverse Effect.
5.18 TITLE. Except for assets which may have been disposed of in the
ordinary course of business, the Borrower has good and marketable title to all
of the Property reflected in its financial statements delivered to the Lenders
and to all Property acquired by the Borrower since the date of said financial
statements, free and clear of all Liens, encumbrances, security interests and
adverse claims except (i) those specifically referred to in said financial
statements, (ii) those permitted by Section 8.8 hereof and (iii) those that
could not, in the aggregate, reasonably be expected to have a Material Adverse
Effect.
5.19 FICTITIOUS NAME FILING NOTICES. The Borrower and each Subsidiary has
provided to the Agent a complete and correct copy of each Fictitious Name Filing
Notices it has made.
ARTICLE 6
FINANCIAL COVENANTS
During the term of this Agreement, unless the Required Lenders shall
otherwise consent in writing:
6.1 CAPITAL EXPENDITURES. The Borrower will not, and will not permit any
Subsidiary to, make or commit to make (by way of the acquisition of securities
of a person or entity or otherwise) any Capital Expenditure, except for Capital
Expenditures not exceeding $30,000,000 in aggregate principal amount in 1997 and
not exceeding $40,000,000 in aggregate principal amount for any fiscal year
thereafter of the Borrower.
6.2 MINIMUM TOTAL LEVERAGE RATIO. The Borrower and its Subsidiaries on a
Consolidated Basis shall not permit, at any time, the Total Leverage Ratio to be
greater than 1.75:1.00.
6.3 MINIMUM TANGIBLE NET WORTH. The Borrower and its Subsidiaries on a
Consolidated Basis shall at all times maintain Tangible Net Worth of not less
than $35,000,000 PLUS 50% of cumulative Consolidated Net Income for the period
commencing on June 30, 1997 through the Facility Termination Date. (In the
event that the Borrower and their Subsidiaries have a Consolidated net loss for
any fiscal quarter, Net Income for
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purposes of this Section shall be deemed zero for such fiscal quarter).
6.4 MINIMUM CURRENT RATIO. The Borrower and its Subsidiaries on a
Consolidated Basis shall maintain at all times a ratio of Current Assets to
Current Liabilities of not less than 1.2:1.0.
6.5 MINIMUM CASH FLOW COVERAGE. The Borrower and its Subsidiaries on a
Consolidated Basis shall not permit at any time the Cash Flow Coverage Ratio to
be less than 1.5:1.00.
6.6 PROFITABILITY. The Borrower and its Subsidiaries on a Consolidated
Basis shall not permit more than one quarterly loss in any fiscal year nor shall
it permit any annual loss for any fiscal year.
ARTICLE 7
AFFIRMATIVE COVENANTS
During the term of this Agreement, unless the Required Lenders shall
otherwise consent in writing:
7.1 FINANCIAL REPORTING. The Borrower will maintain, for itself and each
Subsidiary, a system of accounting established and administered in accordance
with Agreement Accounting Principles, and furnish to each of the Lenders:
(i) As soon as available and in any event within 45 days after the
end of each quarterly fiscal period of each fiscal year of the
Borrower (except the last fiscal quarter), Consolidated
statements of income, retained earnings and cash flow and
Consolidating Statements of income and retained earnings of the
Borrower and its Consolidated Subsidiaries for such period and
for the period from the beginning of the respective fiscal year
to the end of such period, and the related Consolidated and
Consolidating balance sheets of the Borrower and its Consolidated
Subsidiaries as at the end of such period, setting forth in each
case in comparative form the corresponding Consolidated and
Consolidating figures for the corresponding period in the
preceding fiscal year, accompanied by a certificate of an
Authorized Officer of the Borrower, which certificate shall state
that those Consolidated and Consolidating financial statements
fairly present, respectively, the Consolidated and Consolidating
financial condition and results of operations of the Borrower and
its Consolidated Subsidiaries, in each case in accordance with
Agreement Accounting Principles,
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consistently applied, as at the end of, and for, such period
(subject to normal audit adjustments and to the absence of
footnotes).
(ii) As soon as available and in any event within 90 days after the
end of each fiscal year of the Borrower, Consolidated and
Consolidating statements of income, retained earnings and cash
flow of the Borrower and its Consolidated Subsidiaries for such
fiscal year and the related Consolidated and Consolidating
balance sheets of the Borrower and its Consolidated Subsidiaries
as at the end of such fiscal year, setting forth in each case in
comparative form the corresponding Consolidated and Consolidating
figures for the preceding fiscal year, and accompanied, in the
case of those Consolidated and Consolidating statements and
balance sheet of the Borrower, by a unqualified opinion of
independent certified public accountants of recognized national
standing, which opinion shall state that those Consolidated and
Consolidating financial statements fairly present, respectively,
the Consolidated and Consolidating financial condition and
results of operations of the Borrower and its Consolidated
Subsidiaries as at the end of, and for, such fiscal year in
accordance with Agreement Accounting Principles, consistently
applied.
(iii) Together with the financial statements required in Sections
7.1(i) and (ii), a compliance certificate in substantially the
form of Exhibit B hereto (a "Compliance Certificate") signed by
an Authorized Officer showing the calculations necessary to
determine compliance with this Agreement and stating that no
Default or Event of Default exists, or if any Default or Event of
Default exists, stating the nature and status thereof.
(iv) As soon as possible and in any event within 25 days after the end
of each calendar month, a monthly accounts receivable and payable
aging, together with a Borrowing Base Certificate signed by an
Authorized Officer showing the calculations necessary to
determine compliance with this Agreement and stating that no
Default or Event of Default exists, or if any Default or Event of
Default exists, stating the nature and status thereof.
(v) As soon as possible and in any event within 10 days after either
Borrower knows that any Reportable Event has occurred with
respect to any Single Employer Plan, a statement, signed by an
Authorized
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Officer, describing said Reportable Event and the action which
the Borrower proposes to take with respect thereto.
(vi) As soon as possible and in any event within 10 days after receipt
by the Borrower, a copy of (a) any notice or claim to the effect
that the Borrower or any of its Subsidiaries is or may be liable
to any Person as a result of the release by the Borrower, any of
its Subsidiaries, or any other Person of any toxic or hazardous
waste or substance into the environment and (b) any notice
alleging any violation of any federal, state or local
environmental, health or safety law or regulation by the Borrower
or any of its Subsidiaries, which, in either case, could
reasonably be expected to have a Material Adverse Effect.
(vii) Promptly upon the furnishing thereof to the shareholders of the
Borrower, copies of all financial statements, reports and proxy
statements so furnished.
(viii) Promptly upon the filing thereof, copies of all registration
statements and all other filings and annual, quarterly, monthly
or other regular reports or statutory statements which the
Borrower or any of its Subsidiaries files with the SEC the
Federal Communications Commission or any other regulatory agency.
(ix) As soon as possible and in any event as soon as the Borrower
knows of any litigation or administrative or regulatory
proceeding affecting the Borrower where the amount claimed
against the Borrower or where the granting of relief requested
could be reasonably expected to have a Material Adverse Effect.
(x) As soon as possible and in case within 10 days, any change in
the location of any of the Borrower's places of business or the
establishment of any, or the discontinuance of any existing,
places of businesses.
(xi) Such other statements, lists of property and accounts, budgets,
forecasts, reports or other information (including non-financial
information) as the Agent may from time to time reasonably
request in form satisfactory to the Agent.
(xii) By March 31 of each year, a forecast of the operating results of
the Borrower for such fiscal year and the immediately succeeding
fiscal year, in
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form acceptable to the Agent and accompanied by a certificate of
an Authorized Officer of the Borrower stating that such forecast
has been prepared on the basis of assumptions believed to be
reasonable by such Authorized Officer.
7.2 USE OF PROCEEDS. The Borrower will use the proceeds of the Loans
(i) to finance the conversion of receivables into cash, (ii) to provide standby
letters of credit and foreign exchange capabilities in support of the Borrower's
normal operations and (iii) for working capital and general corporate purposes.
The Borrower will not, nor will they permit any Subsidiary to, use any of the
proceeds of the Loans or Letters of Credit to purchase or carry any "margin
stock" (as defined in Regulation U).
7.3 NOTICE OF DEFAULT. The Borrower will, and will cause each Subsidiary
to, give prompt (but in any case, within 5 Business Days) notice in writing to
the Lenders of the occurrence of any Default or Event of Default and of any
other development, financial or otherwise, which could reasonably be expected to
have a Material Adverse Effect.
7.4 CONDUCT OF BUSINESS. The Borrower will, and will cause each
Subsidiary to, maintain its corporate existence, to carry on and conduct its
business in the telecommunications business and related fields and to do all
things necessary to remain in good standing in its respective jurisdiction of
organization and maintain all requisite authority to conduct its business in
each jurisdiction in which its respective businesses are conducted, except where
the failure to maintain such corporate existence would not result in a Material
Adverse Effect on the Borrower. The Borrower shall not, and shall not permit
any of its Subsidiaries to, make any material change in the nature of its
business as presently conducted; provided that the foregoing shall not be
construed as a limitation on Acquisitions permitted hereunder.
7.5 RECORDS. The Borrower will, and will cause each Subsidiary to, keep
adequate records and books of account, in which full and correct entries shall
be made in accordance with Agreement Accounting Principles of all financial
transactions of the Borrower, its Subsidiaries, its assets and its business.
7.6 INSURANCE. The Borrower will, and will cause each Subsidiary to,
maintain insurance on all its Property in such amounts and covering such risks
as is consistent with sound business practice, and the Borrower will furnish to
the Agent upon request full information as to the insurance carried.
7.7 COMPLIANCE WITH LAWS. The Borrower will, and will cause each
Subsidiary to, comply in all material respects with all applicable laws, rules,
regulations and orders (including without limitation, all applicable
environmental laws and the
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rules and regulations thereunder), such compliance to include, without
limitation, paying before the same become delinquent, all taxes, assessments
and governmental charges imposed upon it or upon its Property, except such
taxes, assessments and governmental charges as are being contested in good
faith by appropriate proceedings and as to which appropriate reserves are
maintained, except where such failure to so comply would not result in a
Material Adverse Effect on the Borrower.
7.8 MAINTENANCE OF PROPERTIES. The Borrower will, and will cause each
Subsidiary to, do all things reasonably necessary to maintain, preserve, protect
and keep its respective Property in good repair, working order and condition,
normal wear and tear excepted, and make all necessary and proper repairs,
renewals and replacements as may be reasonably necessary to conduct its
business.
7.9 INSPECTION/AUDITS. At any reasonable time and from time to time upon
reasonable notice (but, in the absence of any Event of Default, no more than
twice annually), the Borrower will, and will cause each Subsidiary to, permit
the Agent, by its respective representatives and agents, to inspect any of the
Property, corporate books and financial records of the Borrower and each
Subsidiary, to examine and make copies of the books of accounts and other
financial records of the Borrower and each Subsidiary, and to discuss the
affairs, finances and accounts of the Borrower and each Subsidiary with, and to
be advised as to the same by, its respective officers at such reasonable times
and intervals as the Lenders may designate. The Borrower will also, and will
cause its Subsidiaries to, cooperate in an audit of the Property of the Borrower
and its Subsidiaries, all at the Borrower's expense.
ARTICLE 8
NEGATIVE COVENANTS
During the term of this Agreement, unless the Required Lenders shall
otherwise consent in writing:
8.1 DEBT. The Borrower will not, nor will it permit any Subsidiary to,
create, incur or suffer to exist any Debt, except:
(i) Debt of the Borrower under the Loan Documents;
(ii) Debt in existence on the date hereof, as set forth on Schedule 3;
(iii) trade Debt incurred in the ordinary course of business;
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(iv) Debt incurred to refinance all or a portion of the Loans and/or
Letters of Credit as long as all proceeds are used to repay the Loans (or
apply as cash collateral for outstanding Letters of Credit), the Debt is not
senior or PARI PASSU in any way to the Loans or the Letters of Credit
remaining outstanding and such Debt does not mature prior to the maturity of
Loans and/or Letters of Credit remaining outstanding;
(v) Debt secured by Liens permitted pursuant to Section 8.8;
(vi) Contingent Liabilities incurred in the ordinary course of the
Borrower's business which does not exceed an aggregate principal amount of
$3,000,000 at any one time outstanding;
(vii) Debt and capital lease obligations for the purpose of acquiring
or financing the acquisition of fixed or capital assets permitted hereunder;
(viii) Debt under operating leases for real or personal property used
in the Borrower's business as presently conducted;
(ix) The endorsement of negotiable instruments for deposit or
collection in the ordinary course of the Borrower's business or presently
conducted; and
(x) Debt owed by a Subsidiary to the Borrower or by the Borrower to
a Subsidiary which does not exceed an aggregate principal amount of
$3,000,000 at any one time outstanding.
8.2 MERGER. The Borrower will not, nor will it permit any Subsidiary
to, enter into any merger, consolidation or amalgamation, or liquidate, wind
up or dissolve itself (or suffer any liquidation or dissolution), or convey,
sell, lease, assign, transfer or otherwise dispose of, all or substantially
all of its Property, business or assets; provided that the Borrower may merge
or consolidate with another Person if (i) the Borrower is the surviving
corporation, (ii) the Borrower will be in pro forma compliance with all
provisions of this Agreement subsequent to such merger or consolidation,
(iii) the Borrower shall have filed an SEC Report (if required to do so by
law) and (iv) the Borrower will not engage in any material line of business
substantially different from that engaged in the Closing Date; provided that
the foregoing shall not be construed as prohibiting the merger of a
Subsidiary into any other Subsidiary or into the Borrower.
8.3 SALE OF ASSETS. The Borrower will not, nor will it permit any
Subsidiary to, lease, sell or otherwise dispose of its respective Property, to
any other Person except for (i) sales of inventory in the ordinary course of
business for fair consideration and (ii) leases, sales or other dispositions of
its respective Property that, together with all other
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Property of the Borrower and its Subsidiaries previously leased, sold or
disposed of (other than inventory in the ordinary course of business) as
permitted by this Section during the term of this Agreement do not require
the Borrower to file an SEC Report; provided that the foregoing shall not be
construed as prohibiting a transfer of assets from a Subsidiary to the
Borrower or the merger of a Subsidiary into any other Subsidiary or into the
Borrower.
8.4 SALE OF ACCOUNTS. Except for retail Accounts generated by the
Borrower and its Subsidiaries in the ordinary course of business, which Accounts
are factored through a local exchange carrier or any authorized billing service,
the Borrower will not, nor will it permit any Subsidiary to, sell or otherwise
dispose of any notes receivable or accounts receivable, with or without
recourse, except that the Borrower or any of its Subsidiaries may assign
accounts receivable (previously expended by the Borrower as bad debts) for
collection, with or without recourse.
8.5 ACQUISITIONS. The Borrower will not, nor will it permit any
Subsidiary to, enter into any agreement, contract, binding commitment or other
arrangement providing for any acquisition, or take any action to solicit the
tender of securities or proxies in respect thereof in order to effect any
acquisition, unless:
(i) the Person to be (or whose assets are to be) acquired does not
oppose such Acquisition and the line or lines of business of the Person to be
acquired are substantially the same as one or more line or lines of business
conducted by the Borrower and its Subsidiaries as of the Closing Date,
(ii) no Default or Event of Default shall have occurred and be
continuing either immediately prior to or immediately after giving effect to
such acquisition on a pro forma basis and
(iii) during the period from and including the Closing Date until the
Facility Termination Date the aggregate consideration for each acquisition shall
not exceed $15,000,000 in principal amount.
8.6 AFFILIATES. The Borrower will not, and will not permit any Subsidiary
to, enter into any transaction (including, without limitation, the purchase or
sale of any Property or service) with, or make any payment or transfer to, any
Affiliate except in the ordinary course of business and pursuant to the
reasonable requirements of the Borrower's or such Subsidiary's business and upon
fair and reasonable terms no less favorable to the Borrower or such Subsidiary
than the Borrower or such Subsidiary would obtain in a comparable arms-length
transaction; provided that the foregoing shall not be construed as prohibiting a
transfer of assets from a Subsidiary to the Borrower or the merger of a
Subsidiary into the Borrower.
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8.7 ERISA. The Borrower will not, and will not permit any Subsidiary, to
have Unfunded Liabilities for any and all Plans maintained for or covering
employees of the Borrower or any Subsidiary to exceed $1,000,000 in the
aggregate at any time.
8.8 ENCUMBRANCES AND LIENS. The Borrower and its Subsidiaries on a
Consolidated Basis will not create, assume or suffer to exist any Lien (other
than for taxes not delinquent) on Property of any kind, whether real, personal
or mixed, now owned or hereafter acquired, or upon the income or profits
thereof, except for (i) minor encumbrances, easements covenants, conditions,
restrictions, encroachments, defects or irregularities in title on real property
which do not materially affect its market value, (ii) existing Liens on the
Borrower's personal property; (iii) future purchase money security interests
encumbering only the property purchased; (iv) statutory liens of bankers,
carriers, warehousemen, mechanics, materialmen, and other similar Liens imposed
by law, which are incurred in the ordinary course of business for sums not more
than 30 days delinquent or being contested in good faith; (v) deposits made in
the ordinary course of business to secure liability to insurance carriers; (vi)
attachment and judgment Liens securing claims less than $250,000 in the
aggregate; and (vii) monetary obligations of the Borrower under any leasing or
similar arrangement which, in accordance with Agreement Accounting Principles,
is classified as a Capitalized Lease.
8.9 LOANS, ADVANCES AND GUARANTIES. The Borrower will not, and will not
permit any Subsidiary to, except in the ordinary course of business as currently
conducted, make any loans or advances, become a guarantor or surety, pledge its
credit or Properties in any manner or extend credit; provided that the foregoing
shall not be construed as a limitation on guaranties or any Liens permitted
hereunder.
8.10 INVESTMENTS. The Borrower will not purchase the Debt of another
Person or entity except as set forth in the Borrower's Corporate Investment
Policy attached hereto as Schedule 4.
8.11 DIVIDENDS AND DISTRIBUTIONS. The Borrower will not, and will not
permit any of its Subsidiaries to, declare or pay any Distribution (other than
Distributions payable solely in common stock, provided that each Subsidiary that
is a wholly-owned Subsidiary of the Borrower may pay Distributions to its
shareholder so long as no Default or Event of Default exists). In addition, the
Borrower shall not, and shall not permit any of its Subsidiaries not to, redeem,
convert, retire or otherwise acquire shares of any class of its capital stock.
The Borrower shall not effect or permit any change in or amendment to any
document or instrument pertaining to the terms of the capital stock of the
Borrower.
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ARTICLE 9
DEFAULTS
The occurrence of any one or more of the following events shall constitute
an "Event of Default":
9.1 PAYMENT DEFAULTS. The Borrower shall fail to pay when due any payment
of principal of any Loan or any reimbursement obligation (with respect to a
drawing under a Letter of Credit) or, within 5 Business Days of when due, or
interest or any other charge or fee required under the terms of this Agreement
or the other Loan Documents.
9.2 REPRESENTATIONS AND WARRANTIES. Any representation or warranty made
by the Borrower under any Loan Document shall prove to have been incorrect or
misleading in any material respect when made.
9.3 OTHER LOAN DOCUMENT DEFAULTS. The Borrower shall fail to perform (i)
any obligation set forth in Sections 6.1, 6.2, 6.3, 6.4, 6.5, 6.6, 7.1, 7.2,
7.3, 7.6, 7.7, 7.9, 8.1, 8.2, 8.3, 8.4, 8.5, 8.8, 8.9, 8.10, and 8.11 of this
Agreement; or (ii) any other obligation contained in this Agreement or the other
Loan Documents, and such failure shall continue for 30 days after the earlier of
actual knowledge by the Borrower or written notice thereof from the Agent.
9.4 BANKRUPTCY. (i) The Borrower shall fail to pay its Debts generally as
they become due or shall file any petition or action for relief under any
bankruptcy, insolvency, reorganization, moratorium, creditor composition law, or
any other law for the relief of or relating to debtors; (ii) an involuntary
petition under any bankruptcy law shall be filed against the Borrower and shall
not be stayed, dismissed or discharged within 45 days of filing; or (iii) a
custodian, receiver, trustee, assignee for the benefit or creditors, or other
similar official, shall be appointed to take possession, custody or control of
the Properties of either Borrower and not be dismissed or discharged with 45
days of appointment.
9.5 OTHER AGREEMENTS. The Borrower shall fail to pay when due (whether at
final maturity or as a result of acceleration) principal or interest payments
then due under the terms of any bonds, notes, debentures or other agreements
evidencing, in the aggregate, at least $2,000,000 of Debt (excluding, for
purposes of this calculation, payments required under this Agreement or any of
the other Loan Documents) and such non-payment shall continue beyond any period
of grace provided with respect thereto, or the Borrower shall default in the
observance or performance of any other agreement contained in any such bonds,
notes, debentures or other agreements evidencing indebtedness, and the effect of
such failure or default is to cause the indebtedness evidenced thereby to be
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accelerated by the holders thereof prior to its stated date of maturity.
9.6 ERISA. Any Governmental Person shall take any action under ERISA or
the Borrower fails to meet minimum funding requirements or any other event shall
occur with respect to any Plan, that could have a Material Adverse Effect or
that the unfunded liabilities exceed $250,000.
9.7 JUDGMENTS. A final judgment or order for the payment of money in
excess of $250,000 shall be rendered against the Borrower and the same shall
remain undischarged for a period of 45 days during which execution shall not be
effectively stayed, or any judgment, writ, warrant of attachment, or execution
or similar process, shall be issued or levied against a substantial part of the
Borrower's property and such judgment, writ, warrant of attachment, or execution
or similar process, shall not be released, stayed, vacated, bonded or otherwise
dismissed within 20 days after its issue or levy.
9.8 LOAN DOCUMENTS. Any Loan Document shall fail to remain in full force
or effect or any action shall be taken by the Borrower to discontinue or to
assert the invalidity or unenforceability of any Loan Document.
9.9 CHANGE OF CONTROL. A Change of Control shall have occurred.
9.10 MATERIAL ADVERSE EFFECT. The occurrence of any event or the taking of
any action which results in a Material Adverse Effect on the Borrower.
ARTICLE 10
ACCELERATION, WAIVERS AND AMENDMENTS
10.1 ACCELERATION. If any Event of Default described in Section 9.4 occurs
with respect to the Borrower, the obligations of the Lenders to make Loans and
issue and participate in new Letters of Credit hereunder shall automatically
terminate and the Obligations shall immediately become due and payable without
any election or action on the part of the Agent or any Lender. If any other
Event of Default occurs, the Required Lenders may terminate or suspend the
obligations of the Lenders to make Loans and issue and participate in new
Letters of Credit hereunder, or declare the Obligations to be due and payable,
or both, whereupon the Obligations shall become immediately due and payable,
without presentment, demand, protest or notice of any kind, all of which the
Borrower hereby expressly waives. All Lenders' funded and unfunded obligations
hereunder shall be adjusted on a pro rata basis consistent with its respective
Commitment Percentages.
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10.2 CASH COLLATERAL. To the extent that any Letters of Credit are
outstanding at the time of any Event of Default, the Borrower shall deliver to
the Agent, for the benefit of the Lenders, a cash collateral deposit in an
amount equal to the aggregate Letter of Credit Amount for all Letters of Credit
then outstanding.
10.3 ADDITIONAL REMEDIES. The rights, powers and remedies given to the
Agent and the Lenders hereunder shall be cumulative and not alternative and
shall be in addition to all rights, powers and remedies given to the Agent and
the Lenders by law against the Borrower or any other Person, including but not
limited to any Lender's right of setoff or banker's lien.
10.4 AMENDMENTS. Subject to the provisions of this Article 10, the
Required Lenders (or the Agent with the consent in writing of the Required
Lenders) and the Borrower may enter into agreements supplemental hereto for the
purpose of adding or modifying any provisions to the Loan Documents or changing
in any manner the rights of the Lenders or the Borrower hereunder or waiving any
Default hereunder; provided, however, that no such supplemental agreement shall,
without the consent of each Lender affected thereby:
(i) Extend the maturity of any Loan or Note or forgive all or any
portion of the principal amount thereof, or reduce the rate or
extend the time of payment of interest or fees thereon.
(ii) Reduce the percentage specified in the definition of Required
Lenders.
(iii) Increase the amount of the Commitment of any Lender hereunder or
permit the Borrower to assign its rights under this Agreement.
(iv) Release any of the Property pledged under the Loan Documents.
(v) Amend this Section 10.4.
No amendment of any provision of this Agreement relating to the Agent shall be
effective without the written consent of the Agent. The Agent may waive payment
of the fees required under Section 14.3(ii) without obtaining the consent of any
other party to this Agreement.
10.5 PRESERVATION OF RIGHTS. No delay or omission of the Lenders or the
Agent to exercise any right under the Loan Documents shall impair such right or
be construed to be a waiver of any Default or an acquiescence therein, and the
making of a Loan notwithstanding the existence of a Default or the inability of
the Borrower to satisfy the conditions precedent to such Loan shall not
constitute any waiver or acquiescence. Any single or
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partial exercise of any such right shall not preclude other or further
exercise thereof or the exercise of any other right, and no waiver, amendment
or other variation of the terms, conditions or provisions of the Loan
Documents whatsoever shall be valid unless in writing signed by the Lenders
required pursuant to Section 10.4, and then only to the extent in such
writing specifically set forth. All remedies contained in the Loan Documents
or by law afforded shall be cumulative and all shall be available to the
Agent and the Lenders until the Obligations have been paid in full.
ARTICLE 11
GENERAL PROVISIONS
11.1 SURVIVAL OF REPRESENTATIONS. All representations and
warranties of the Borrower contained in this Agreement shall survive delivery
of the Notes and the making of the Loans and issuance of the Letters of
Credit herein contemplated.
11.2 GOVERNMENTAL REGULATION. Anything contained in this Agreement
to the contrary notwithstanding, no Lender shall be obligated to extend
credit to the Borrower in violation of any limitation or prohibition provided
by any applicable statute or regulation.
11.3 HEADINGS. Section headings in the Loan Documents are for
convenience of reference only, and shall not govern the interpretation of any
of the provisions of the Loan Documents.
11.4 ENTIRE AGREEMENT. The Loan Documents embody the entire
agreement and understanding among the Borrower, the Agent and the Lenders and
supersede all prior agreements and understandings among the Borrower, the
Agent and the Lenders relating to the subject matter thereof.
11.5 SEVERAL OBLIGATIONS; BENEFITS OF THIS AGREEMENT. The
respective obligations of the Lenders hereunder are several and not joint and
no Lender shall be the partner or agent of any other (except to the extent to
which the Agent is authorized to act as such). The failure of any Lender to
perform any of its obligations hereunder shall not relieve any other Lender
from any of its obligations hereunder. This Agreement shall not be construed
so as to confer any right or benefit upon any Person other than the parties
to this Agreement and its respective successors and assigns.
11.6 EXPENSES; INDEMNIFICATION. The Borrower shall reimburse the
Agent for any costs, internal charges and out-of-pocket expenses (including
reasonable attorneys' fees and time charges of attorneys for the Agent and
audit expenses), paid or incurred by the Agent in connection with the
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negotiation, documentation and syndication of this Agreement. The Borrower
shall also reimburse the Agent and each Lender for any costs, internal
charges and out-of-pocket expenses (including reasonable attorneys' fees and
time charges of attorneys for the Agent and each Lender) paid or incurred by
the Agent or any Lender in connection with the collection and enforcement of
the Loan Documents. The Borrower further agrees to indemnify the Agent and
each Lender, its directors, officers and employees against all losses,
claims, damages, penalties, judgments, liabilities and expenses (including,
without limitation, all expenses of litigation or preparation therefor
whether or not the Agent or any Lender is a party thereto) which any of them
may pay or incur arising out of or relating to this Agreement, the other Loan
Documents, the transactions contemplated hereby or the direct or indirect
application or proposed application of the proceeds of any Loan or Letter of
Credit hereunder, provided that no Person shall have the right to be
indemnified hereunder for such Person's own gross negligence or willful
misconduct as determined by a court of competent jurisdiction.
11.7 NUMBERS OF DOCUMENTS. All statements, notices, closing
documents, and requests hereunder shall be furnished to the Agent with
sufficient counterparts so that the Agent may furnish one to each of the
Lenders.
11.8 SEVERABILITY OF PROVISIONS. Any provision in any Loan
Document that is held to be inoperative, unenforceable, or invalid in any
jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable,
or invalid without affecting the remaining provisions in that jurisdiction or
the operation, enforceability, or validity of that provision in any other
jurisdiction, and to this end the provisions of all Loan Documents are
declared to be severable.
11.9 NONLIABILITY OF LENDERS. The relationship between the
Borrower and the Lenders and the Agent shall be solely that of borrower and
lender. Neither the Agent nor any Lender shall have any fiduciary
responsibilities to the Borrower. Neither the Agent nor any Lender
undertakes any responsibility to the Borrower to review or inform the
Borrower of any matter in connection with any phase of the Borrower's
business or operations.
11.10 CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A
CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF CALIFORNIA, BUT
GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
11.11 CONSENT TO JURISDICTION. SUBJECT TO SECTION 11.15 BELOW, THE
BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY
UNITED STATES FEDERAL OR CALIFORNIA STATE COURT SITTING IN LOS ANGELES IN ANY
ACTION OR
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PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER
HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR
PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY
WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH
SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN
INCONVENIENT FORUM SUBJECT TO SECTION 11.15 BELOW, NOTHING HEREIN SHALL LIMIT
THE RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE
BORROWER IN THE COURTS OF ANY OTHER JURISDICTION SUBJECT TO SECTION 11.15
BELOW. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE AGENT OR ANY
LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR
INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED
WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN LOS ANGELES,
CALIFORNIA.
11.12 WAIVER OF JURY TRIAL. SUBJECT TO SECTION 11.15 BELOW, THE
BORROWER, THE AGENT AND EACH LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL
PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN
TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED
WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER.
11.13 INTEGRATION CLAUSE. Except for documents and instruments
specifically referenced herein, this Agreement constitutes the entire agreement
among the Agent, the Lenders and the Borrower regarding the Loans and Letters of
Credit and all prior communications verbal or written between the Borrower and
the Agent or any Lender shall be of no further effect or evidentiary value.
11.14 CONFIDENTIALITY. The Lenders shall take normal and reasonable
precautions to maintain the confidentiality of all non-public information
obtained pursuant to the requirements of this Agreement which has been
identified as such by the Borrower but may, in any event, make disclosures (i)
reasonably required by any bona fide transferee, assignee or participant in
connection with the contemplated transfer or assignment of any of the
Commitments or Loans or participations therein or participations in Letters of
Credit, so long as such transferee, assignee or participant agrees to be bound
by the terms hereof or (ii) as required or requested by any governmental agency
or representative thereof or as required pursuant to any legal process or (iii)
to its attorneys and accountants or (iv) as required by law or (v) in connection
with litigation involving any Lender.
11.15 DISPUTE RESOLUTION. It is understood and agreed that upon the
request of any party hereto any dispute, claim, or controversy of any kind,
whether in contract or in tort, statutory or common law, legal or equitable now
existing or hereinafter arising out of, pertaining to or in connection with this
Agreement or the other Loan Documents, or any related
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agreements, documents, or instruments, shall be resolved through final and
binding arbitration administered by Judicial Arbitration & Mediation
Services, Inc. ("J.A.M.S."). The hearing shall be conducted at a location
determined by the arbitrator in Los Angeles, California and shall be
administered by and in accordance with the then existing Rules of Practice
and Procedure of Judicial Arbitration & Mediation Services, Inc., and
judgment upon any award rendered by the arbitrator may be entered by an State
or Federal Court having jurisdiction thereof. The arbitrator shall determine
which is the prevailing party or parties and shall include in the award that
party's or parties' reasonable attorneys' fees and costs. As soon as
practicable after selection of the arbitrator, the arbitrator or his/her
designated representative shall determine a reasonable estimate of
anticipated fees and costs of the arbitrator, and render a statement to each
party setting forth that party's pro-rata share of said fees and costs.
Thereafter each party shall, within ten days of receipt of said statement,
deposit said sum with the arbitrator. Failure of any party to make such a
deposit shall result in a forfeiture by the non-depositing party of the right
to prosecute or defend that claim which is the subject of the arbitration,
but shall not otherwise serve to abate, stay under this paragraph, nor any
other provision of this dispute resolution provision, or limit the right of
any party to obtain provisional or ancillary remedies such as injunctive
relief from any court having jurisdiction before, during or after the
pendency of any arbitration. The institution and maintenance of any action
for the pursuit of provisional or ancillary remedies shall not constitute a
waiver of the right of any party, including the plaintiff, to submit the
controversy or claim to arbitration.
ARTICLE 12
THE AGENT
12.1 APPOINTMENT. Sanwa is hereby appointed Agent hereunder and
under each other Loan Document, and each of the Lenders irrevocably
authorizes the Agent to act as the agent of such Lender. The Agent agrees to
act as such upon the express conditions contained in this Article 12. The
Agent shall not have a fiduciary relationship in respect of the Borrower or
any Lender by reason of this Agreement.
12.2 POWERS. The Agent shall have and may exercise such powers
under the Loan Documents as are specifically delegated to the Agent by the
terms of each thereof, together with such powers as are reasonably incidental
thereto. The Agent shall have no implied duties to the Lenders, or any
obligation to the Lenders to take any action thereunder except any action
specifically provided by the Loan Documents to be taken by the Agent.
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12.3 GENERAL IMMUNITY. Neither the Agent nor any of its directors,
officers, agents or employees shall be liable to the Borrower or any Lender
for any action taken or omitted to be taken by it or them hereunder or under
any other Loan Document or in connection herewith or therewith except for its
or its own gross negligence or willful misconduct.
12.4 NO RESPONSIBILITY FOR LOANS, RECITALS, ETC. Neither the Agent
nor any of its directors, officers, agents or employees shall be responsible
for or have any duty to ascertain, inquire into, or verify (i) any statement,
warranty or representation made in connection with any Loan Document or any
borrowing hereunder; (ii) the performance or observance of any of the
covenants or agreements of any obligor under any Loan Document, including,
without limitation, any agreement by an obligor to furnish information
directly to each Lender; (iii) the satisfaction of any condition specified in
Article 4 except receipt of items required to be delivered to the Agent; or
(iv) the validity, effectiveness or genuineness of any Loan Document or any
other instrument or writing furnished in connection therewith. The Agent
shall have no duty to disclose to the Lenders information that is not
required to be furnished by the Borrower to the Agent at such time, but is
voluntarily furnished by the Borrower to the Agent (either in its capacity as
Agent or in its individual capacity).
12.5 ACTION ON INSTRUCTIONS OF LENDERS. The Agent shall in all
cases be fully protected in acting, or in refraining from acting, hereunder
and under any other Loan Document in accordance with written instructions
signed by the Required Lenders, and such instructions and any action taken or
failure to act pursuant thereto shall be binding on all of the Lenders and on
all holders of Notes. The Agent shall be fully justified in failing or
refusing to take any action hereunder and under any other Loan Document
unless it shall first be indemnified to its satisfaction by the Lenders pro
rata against any and all liability, cost and expense that it may incur by
reason of taking or continuing to take any such action.
12.6 EMPLOYMENT OF AGENTS AND COUNSEL. The Agent may execute any
of its duties as Agent hereunder and under any other Loan Document by or
through employees, agents, and attorneys-in-fact and shall not be answerable
to the Lenders, except as to money or securities received by it or its
authorized agents, for the default or misconduct of any such agents or
attorneys-in-fact selected by it with reasonable care. The Agent shall be
entitled to advice of counsel concerning all matters pertaining to the agency
hereby created and its duties hereunder and under any other Loan Document.
12.7 RELIANCE ON DOCUMENTS; COUNSEL. The Agent shall be entitled
to rely upon any Note, notice, consent, certificate, affidavit, letter,
telegram, statement, paper or document believed by it to be genuine and
correct and to have been signed
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or sent by the proper person or persons, and, in respect to legal matters,
upon the opinion of counsel selected by the Agent, which counsel may be
employees of the Agent.
12.8 AGENT'S REIMBURSEMENT AND INDEMNIFICATION. The Lenders agree
to reimburse and indemnify the Agent ratably in proportion to its respective
Commitments (i) for any other expenses incurred by the Agent on behalf of the
Lenders, in connection with the preparation, execution, delivery,
administration and enforcement of the Loan Documents and (ii) for any
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind and nature whatsoever
which may be imposed on, incurred by or asserted against the Agent in any way
relating to or arising out of the Loan Documents or any other document
delivered in connection therewith or the transactions contemplated thereby,
or the enforcement of any of the terms thereof or of any such other
documents, provided that no Lender shall be liable for any of the foregoing
to the extent they arise from the gross negligence or willful misconduct of
the Agent. The obligations of the Lenders under this Section 12.8 shall
survive payment of the Obligations and termination of this Agreement.
12.9 RIGHTS AS A LENDER. In the event the Agent is a Lender, the
Agent shall have the same rights and powers hereunder and under any other
Loan Document as any Lender and may exercise the same as though it were not
the Agent, and the term "Lender" or "Lenders" shall, at any time when the
Agent is a Lender, unless the context otherwise indicates, include the Agent
in its individual capacity. The Agent may accept deposits from, lend money
to, and generally engage in any kind of trust, debt, equity or other
transaction, in addition to those contemplated by this Agreement or any other
Loan Document, with the Borrower or any of its Subsidiaries in which the
Borrower or such Subsidiary is not restricted hereby from engaging with any
other Person.
12.10 LENDER CREDIT DECISION. Each Lender acknowledges that it has,
independently and without reliance upon the Agent or any other Lender and based
on the financial statements prepared by the Borrower and such other documents
and information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement and the other Loan Documents. Each Lender
also acknowledges that it will, independently and without reliance upon the
Agent 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 Documents.
12.11 SUCCESSOR AGENT. The Agent may resign at any time by giving
written notice thereof to the Lenders and the Borrower, such resignation to be
effective upon the appointment
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of a successor Agent or, if no successor Agent has been appointed, forty-five
days after the retiring Agent gives notice of its intention to resign. Upon
any such resignation, the Required Lenders shall have the right to appoint,
with the consent (which shall not be unreasonably withheld) of the Borrower,
if no Default has occurred and is continuing, on behalf of the Borrower and
the Lenders, a successor Agent. If no successor Agent shall have been so
appointed by the Required Lenders within thirty days after the resigning
Agent's giving notice of its intention to resign, then the resigning Agent
may appoint, on behalf of the Borrower and the Lenders, a successor Agent.
If the Agent has resigned and no successor Agent has been appointed, the
Lenders may perform all the duties of the Agent hereunder and the Borrower
shall make all payments in respect of the Obligations to the applicable
Lender and for all other purposes shall deal directly with the Lenders. No
successor Agent shall be deemed to be appointed hereunder until such
successor Agent has accepted the appointment. Any such successor Agent shall
be a commercial bank having capital and retained earnings of at least
$50,000,000. Upon the acceptance of any appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the resigning
Agent. Upon the effectiveness of the resignation of the Agent, the resigning
Agent shall be discharged from its duties and obligations hereunder and under
the Loan Documents. After the effectiveness of the resignation of an Agent,
the provisions of this Article 10 shall continue in effect for the benefit of
such Agent in respect of any actions taken or omitted to be taken by it while
it was acting as the Agent hereunder and under the other Loan Documents.
ARTICLE 13
SETOFF; RATABLE PAYMENTS
13.1 SETOFF. Upon the occurrence and during the continuance of any Event
of Default, the Lenders are 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 any Lender to or for the credit
or the account of the Borrower against any and all obligations of the Borrower
now or hereafter existing under the Loan Documents, irrespective of whether or
not any Lender shall have made any demand under this Agreement and although such
obligations may be unmatured. The rights of the Lenders under this Section are
in addition to other rights and remedies (including other rights of setoff) that
the Lenders may have.
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13.2 RATABLE PAYMENTS. If any Lender, whether by setoff or otherwise, has
payment made to it upon its Loans (other than payments received pursuant to
Section 3.1 or 3.2) in a greater proportion than that received by any other
Lender, such Lender agrees, promptly upon demand, to purchase a portion of the
Loans held by the other Lenders so that after such purchase each Lender will
hold its ratable proportion of Loans. If any Lender, whether in connection with
setoff or amounts which might be subject to setoff or otherwise, receives
collateral or other protection for its Obligations or such amounts which may be
subject to setoff, such Lender agrees, promptly upon demand, to take such action
necessary such that all Lenders share in the benefits of such collateral ratably
in proportion to its Loans. In case any such payment is disturbed by legal
process, or otherwise, appropriate further adjustments shall be made.
ARTICLE 14
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS
14.1 SUCCESSORS AND ASSIGNS. The terms and provisions of the Loan
Documents shall be binding upon and inure to the benefit of the Borrower and the
Lenders and its respective successors and assigns, except that (i) the Borrower
shall not have the right to assign its rights or obligations under the Loan
Documents and (ii) any assignment by any Lender must be made in compliance with
Section 14.3. Notwithstanding clause (ii) of this Section, any Lender may at
any time, without the consent of the Borrower or the Agent, assign all or any
portion of its rights under this Agreement and its Notes to a Federal Reserve
Bank; provided, however, that no such assignment shall release the transferor
Lender from its obligations hereunder. The Agent and the Borrower may treat the
payee of any Note as the owner thereof for all purposes hereof unless and until
such payee complies with Section 14.3 in the case of an assignment thereof or,
in the case of any other transfer, a written notice of the transfer is filed
with the Agent. Any assignee or transferee of a Note agrees by acceptance
thereof to be bound by all the terms and provisions of the Loan Documents. Any
request, authority or consent of any Person, who at the time of making such
request or giving such authority or consent is the holder of any Note, shall be
conclusive and binding on any subsequent holder, transferee or assignee of such
Note or of any Note or Notes issued in exchange therefor.
14.2 PARTICIPATIONS.
(i) PERMITTED PARTICIPANTS; EFFECT. Any Lender may, in the
ordinary course of its business and in accordance with applicable law, at
any time sell to one or more banks or other entities ("Participants")
participating interests in any Loan owing to such Lender, any Note held
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by such Lender, any Commitment of such Lender or any other interest of such
Lender under the Loan Documents. In the event of any such sale by a Lender
of participating interests to a Participant, such Lender's obligations
under the Loan Documents shall remain unchanged, such Lender shall remain
solely responsible to the other parties hereto for the performance of such
obligations, such Lender shall remain the holder of any such Note for all
purposes under the Loan Documents, all amounts payable by the Borrower
under this Agreement shall be determined as if such Lender had not sold
such participating interests, and the Borrower and the Agent shall continue
to deal solely and directly with such Lender in connection with such
Lender's rights and obligations under the Loan Documents.
(ii) VOTING RIGHTS. Each Lender shall retain the sole right to
approve, without the consent of any Participant, any amendment,
modification or waiver of any provision of the Loan Documents other than
any amendment, modification or waiver with respect to any Loan or
Commitment in which such Participant has an interest which forgives
principal, interest or fees or reduces the interest rate or fees payable
with respect to any such Loan or Commitment or postpones any date fixed for
any regularly-scheduled payment of principal of, or interest or fees on,
any such Loan or Commitment.
(iii) BENEFIT OF SETOFF. The Borrower agrees that each
Participant shall be deemed to have the right of setoff provided in
Section 13.1 in respect of its participating interest in amounts owing
under the Loan Documents to the same extent as if the amount of its
participating interest were owing directly to it as a Lender under the Loan
Documents, provided that each Lender shall retain the right of setoff
provided in Section 13.1 with respect to the amount of participating
interests sold to each Participant. The Lenders agree to share with each
Participant, and each Participant, by exercising the right of setoff
provided in Section 11.1, agrees to share with each Lender, any amount
received pursuant to the exercise of its right of setoff, such amounts to
be shared in accordance with Section 13.2 as if each Participant were a
Lender.
14.3 ASSIGNMENTS.
(i) PERMITTED ASSIGNMENTS. Any Lender may, in the ordinary
course of its business and in accordance with applicable law, at any time
assign to one or more Eligible Assignees ("Purchasers") all or any part of
its rights and obligations under the Loan Documents, provided, however,
such assignments must be in a minimum amount at least equal to $2,000,000
and must be on a pro rata basis of all Obligations hereunder; provided,
however, that if such
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Purchaser is a Lender or an Affiliate thereof, no minimum amount shall be
applicable. Such assignment shall be substantially in the form of
Exhibit C hereto or in such other form as may be agreed to by the parties
thereto. The consent of the Borrower and the Agent shall be required prior
to an assignment becoming effective with respect to a Purchaser which is
not a Lender or an Affiliate thereof; provided, however, that if a Default
has occurred and is continuing, the consent of the Borrower shall not be
required. Such consent shall not be unreasonably withheld or delayed.
Each such assignment shall comply with all applicable Governmental Rules.
(ii) EFFECT; EFFECTIVE DATE. Upon (i) delivery to the Agent of a
notice of assignment, substantially in the form attached as Exhibit I to
Exhibit C hereto (a "Notice of Assignment"), together with any consents
required by Section 14.3(i), and (ii) payment of a $3,000 fee to the Agent
for processing such assignment, such assignment shall become effective on
the effective date specified in such Notice of Assignment. The Notice of
Assignment shall contain a representation by the Purchaser to the effect
that it is an Eligible Assignee and that none of the consideration used to
make the purchase of the Commitment and Loans under the applicable
assignment agreement are "plan assets" as defined under ERISA and that the
rights and interests of the Purchaser in and under the Loan Documents will
not be "plan assets" under ERISA. On and after the effective date of such
assignment, such Purchaser shall for all purposes be a Lender party to this
Agreement and any other Loan Document executed by the Lenders and shall
have all the rights and obligations of a Lender under the Loan Documents,
to the same extent as if it were an original party hereto, and no further
consent or action by the Borrower, the Lenders or the Agent shall be
required to release the transferor Lender with respect to the percentage of
the Aggregate Commitment and Loans assigned to such Purchaser. Upon the
consummation of any assignment to a Purchaser pursuant to this
Section 14.3(ii), the transferor Lender, the Agent and the Borrower shall
make appropriate arrangements so that replacement Notes are issued to such
transferor Lender and new Notes or, as appropriate, replacement Notes, are
issued to such Purchaser, in each case in principal amounts reflecting its
Commitment, as adjusted pursuant to such assignment.
14.4 DISSEMINATION OF INFORMATION. The Borrower authorizes each Lender to
disclose to any Participant or Purchaser or any other Person acquiring an
interest in the Loan Documents by operation of law (each a "Transferee") and any
prospective Transferee any and all information in such Lender's possession
concerning the creditworthiness of the Borrower and its Subsidiaries, provided
that each prospective Transferee
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shall execute and deliver to the Agent a confidentiality agreement (in form
and substance reasonably satisfactory to the Borrower and the Agent).
14.5 TAX TREATMENT. If any interest in any Loan Document is transferred to
any Transferee which is organized under the laws of any jurisdiction other than
the United States or any State thereof, the transferor Lender shall cause such
Transferee, concurrently with the effectiveness of such transfer, to comply with
the provisions of Section 2.21.
ARTICLE 15
NOTICES
15.1 GIVING NOTICE. Except as otherwise permitted by Sections 2.13
and 2.14 with respect to borrowing notices and notices regarding conversion or
continuation of Advances, all notices and other communications provided to any
party hereto under this Agreement or any other Loan Document shall be in writing
or by facsimile and addressed or delivered to the Borrower and the Agent at its
respective addresses set forth below its signature hereto and to each Lender at
its address set forth on Schedule 1 hereto or at such other address as may be
designated by such party in a notice to the other parties. Any notice, if
mailed and properly addressed with postage prepaid, shall be deemed given when
received; any notice, if transmitted by facsimile, shall be deemed given when
transmitted (answerback confirmed in the case of telexes).
15.2 CHANGE OF ADDRESS. The Borrower, the Agent and any Lender may each
change the address for service of notice upon it by a notice in writing to the
other parties hereto.
ARTICLE 16
COUNTERPARTS
This Agreement may be executed in any number of counterparts, all of which
taken together shall constitute one agreement, and any of the parties hereto may
execute this Agreement by signing any such counterpart. This Agreement shall be
effective when it has been executed by the Borrower, the Agent and the Lenders
and each party has notified the Agent by telex or telephone, that it has taken
such action.
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IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have executed
this Agreement as of the date first above written.
STAR TELECOMMUNICATIONS, INC.
By:
-----------------------------
Print Name: Kelly D. Enos
Title: Chief Financial Officer
223 East De La Guerra Street
Santa Barbara, California 93101
Attention: Kelly D. Enos
Telecopier: (805) 966-7593
SANWA BANK CALIFORNIA,
as Agent and Lender
By:
-----------------------------
Print Name: Robinson T. Kaspar
Title: Vice President
601 South Figueroa Street
Los Angeles, California 90017
Attention: Robinson T. Kaspar
Telecopier: (213) 896-7282
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SCHEDULE 1
LENDERS AND APPLICABLE LENDING OFFICES
<TABLE>
<CAPTION>
LENDER COMMITMENT APPLICABLE LENDING OFFICE
------ ---------- -------------------------
<S> <C> <C>
Sanwa Bank $25,000,000 601 South Figueroa Street
California, Los Angeles, CA 90017
Agent and Lender
</TABLE>
Attention: Robinson T. Kaspar
Vice President
Telecopier: (213) 896-7282
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FIRST AMENDMENT TO CREDIT AGREEMENT
This First Amendment to Credit Agreement (this "AMENDMENT"), dated as of
March 18, 1998, is entered into among STAR TELECOMMUNICATIONS, INC., a
Delaware corporation (the "BORROWER"), SANWA BANK CALIFORNIA, as the sole
lender party to the Credit Agreement referred to below (the "LENDER") and
SANWA BANK CALIFORNIA, as agent (the "AGENT").
RECITALS
A. The Borrower, the Lender and the Agent previously entered into that
certain Credit Agreement dated as of September 30, 1997 (the "CREDIT
AGREEMENT"). Capitalized terms used herein and not defined shall have the
meanings assigned to them in the Credit Agreement.
B. The Borrower, the Lender and the Agent desire to amend the Credit
Agreement, among other things, to release the collateral pledged in
connection therewith, to revise pricing, to add and amend certain provisions
relating the Borrower's covenants thereunder and to amend the form of the
Compliance Certificate set forth therein.
Accordingly, the parties hereto agree as follows:
AGREEMENT
Section 1. AMENDMENTS TO THE CREDIT AGREEMENT. As of the date of this
Amendment, the Credit Agreement shall be amended as follows:
(a) The definition of the term "Account Debtor" in Section 1.1 of the
Credit Agreement is deleted in its entirety.
(b) The definition of the term "Applicable Margin" in Section 1.1 of the
Credit Agreement is amended in its entirety to read as follows:
"`APPLICABLE MARGIN': for each Fixed Rate Loan, as set forth below:
<TABLE>
<CAPTION>
Applicable
Funded Debt Ratio Level Margin
----------------------- ----------
<S> <C>
1 1.375%
2 1.500%
3 1.675%
4 1.750%"
</TABLE>
<PAGE>
(c) The definition of the term "Borrowing Base" in Section 1.1 of the
Credit Agreement is amended in its entirety to read as follows:
"'BORROWING BASE' shall mean, as at any date, the leaser of (i) 55% of
the aggregate Eligible Accounts Receivable and (ii) the Aggregate
Available Commitment."
(d) The definition of the term "Eligible Account Receivable" in Section
1.1 of the Credit Agreement is amended in its entirety to read as follows:
"'ELIGIBLE ACCOUNT RECEIVABLE' means those Accounts, net of finance
charges, which have been earned by performance which are by their terms
due and payable within 31 days, or less, from the date of the invoice,
have been validly assigned to the Agent and strictly comply with all the
Borrower's warranties and representations to the Lenders."
(e) The following definitions are added to Section 1.1 of the Credit
Agreement in the appropriate alphabetical orders:
"'FUNDED DEBT RATIO' means for the Borrower and its Subsidiaries on a
Consolidated Basis, determined as of the end of each fiscal quarter for
the period of the four fiscal quarters then ended, the ratio of Funded
Debt outstanding at such time to EBITDA."
"'FUNDED DEBT RATIO LEVEL' means the following ratio levels: if the
Funded Debt Ratio shall be less than .5:1.00, the Funded Debt Ratio Level
shall be 1; if the Funded Debt Ratio shall be equal to or greater than
.5:1.00 and less than .75:1.00, the Funded Debt Ratio Level shall be 2;
if the Funded Debt Ratio Level shall be equal to or greater than .75:1.00
and less than 1.00:1.00 the Funded Debt Ratio Level shall be 3; and if the
Funded Debt Ratio shall be equal to or greater than 1.00:1.00, the Funded
Debt Ratio Level shall be 4."
(f) The definition of the term "Loan Documents" in Section 1.1 of the
Credit Agreement is amended in its entirety to read as follows:
"'LOAN DOCUMENTS' means this Agreement, any Letter of Credit Requests,
the Letters of Credit and the Notes executed by the Borrower in
connection herewith and any other agreement executed by the Borrower in
connection herewith, as such agreements and documents may be amended,
supplemented and otherwise modified from time to time in accordance with
the terms hereof."
(g) The definition of the term "Security Agreement" in Section 1.1 of
the Credit Agreement is deleted in its entirety.
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(h) The definition of the term "Swap-Check Account" in Section 1.1 of
the Credit Agreement is deleted in its entirety.
(i) The following is added to Section 2.16 of the Credit Agreement as a
new paragraph immediately after the end of the first paragraph thereof.
"For purposes of determining the Applicable Margin for each Fixed Rate
Loan, interest rates shall be calculated on the basis of the Funded Debt
Ratio set forth in the most recent quarterly Compliance Certificate
delivered by the Borrower to the Agent pursuant to Section 7.1(iii),
together with the accompanying required quarterly or annual financial
statements. For accrued and unpaid interest only (no changes being made
for interest payments previously made), changes in interest rates on the
Fixed Rate Loans attributable to changes in the Applicable Margin caused
by changes in the applicable Funded Debt Ratio Level shall be calculated
upon the delivery of a quarterly Compliance Certificate pursuant to
Section 7.1(iii), together with the accompanying required quarterly or
annual financial statements, setting forth such Funded Debt Ratio and the
applicable Funded Debt Ratio Level, and such change shall be effective
from the first day of the Interest Period applicable to such Fixed Rate
Loans subsequent to the delivery of such quarterly Compliance Certificate.
If, for any reason, the Borrower shall fail to deliver a quarterly
Compliance Certificate, together with the accompanying required quarterly
or annual financial statements, setting forth the Funded Debt ratio and
the applicable Funded Debt Ratio Level when due in accordance with
Section 7.1(iii), and such failure shall continue for a period of twenty
days, the Funded Debt Ratio Level shall be deemed to be Level 4,
retroactive to the date on which the Borrower should have delivered such
quarterly Compliance Certificate and shall continue until a Compliance
Certificate indicating a different Funded Debt Ratio Level is delivered
to the Agent."
(j) Section 6.4 of the Credit Agreement is amended in its entirety to
read as follows:
"6.4 MINIMUM CURRENT RATIO. The Borrower and its Subsidiaries on a
Consolidated Basis shall maintain at all times a ratio of Current Assets
to Current Liabilities of not less than (i) 1.19:1.00 for the fiscal year
ending as of December 31, 1997 and (ii) 1.20:1.00 at all other times."
(k) Section 6.6 of the Credit Agreement is amended in its entirety to
read as follows:
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"6.6 PROFITABILITY. The Borrower and its Subsidiaries on a Consolidated
Basis shall not permit any quarterly loss in any fiscal year nor shall it
permit any annual loss for any fiscal year."
(1) Section 7.1(iii) of the Credit Agreement is amended in its entirety
to read as follows:
"Together with the financial statements required in Sections 7.1(i) and
(ii), a compliance certificate in substantially the form of Exhibit B
hereto (a "Compliance Certificate"), signed by an Authorized Officer
showing the calculations necessary to determine compliance with this
Agreement (including the Funded Debt Ratio as of the end of the applicable
fiscal quarter for the period of the four fiscal quarters then ended and
the applicable Funded Debt Ratio Level) and stating that no Default or
Event of Default exists, or if any Default or Event of Default exists,
stating the nature and status thereof."
(m) Schedule 5 to the Credit Agreement is deleted in its entirety.
(n) Exhibit B to the Credit Agreement is amended in its entirety as set
forth in Addendum II hereto.
(o) Exhibit B to the Credit Agreement is amended in its entirety as set
forth in Addendum II hereto.
Section 2. TERMINATION OF SECURITY AGREEMENT. Notwithstanding anything
to the contrary in the Security Agreement, the Security Agreement is
terminated as of the date of this Amendment, and the Agent shall file
appropriate UCC Termination Statements and release any collateral pledged in
connection therewith.
Section 3. REPRESENTATIONS AND WARRANTIES. The Borrower represents and
warrants to the Agent and the Lender (and for the benefit of any other Lender
from time to time party to the Credit Agreement) as follows:
(a) the execution, delivery and performance of this Amendment have been
duly authorized and approved by all necessary action;
(b) this Amendment constitutes the legal, valid and binding obligation
of the Borrower, enforceable against the Borrower in accordance with its
terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally:
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(c) the representations and warranties contained in Article 5 of
the Credit Agreement are true and correct on and as of the date hereof as
though made on and as of the date hereof, except to the extent any such
representation or warranty shall be true and correct on and as of such
earlier date; and
(d) no Event of Default or Default has occurred and is continuing.
Section 4. CONDITION PRECEDENTS. The effectiveness of this Amendment as
of the date first above written is subject to the conditions precedent that
the Agent has received (a) this Amendment duly executed by the Borrower
and (b) the financial statements (and unqualified opinions of certified
public accountants) specified in Section 7.1 (ii) of the Credit
Agreement with respect to the fiscal year ending December 31, 1997,
showing no material change from any financial statements or other information
previously provided by the Borrower to the Agent pursuant to the Credit
Agreement.
Section 5. MISCELLANEOUS
(a) Except as expressly set forth herein, all provisions of the Credit
Agreement and the other Loan Documents shall continue in full force and
effect except that each reference to "the Credit Agreement" or words of like
import in any Loan Document shall mean and be a reference to the Credit
Agreement, as amended hereby.
(b) This Amendment may be executed in any number of counterparts and by
different parties hereto on separate counterparts, each of which counterparts
so executed and delivered shall be deemed to be an original, and all of which
counterparts, taken together, shall constitute but one and the same Amendment.
(c) This Amendment and the rights and obligations of the parties under
this Amendment shall be governed by, and construed and interpreted in
accordance with, the law of the State of California.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed by their respective duly authorized representatives as of the date
first above written.
STAR TELECOMMUNICATIONS, INC.
By: /s/ Kelly Enos
--------------------------
Name: Kelly Enos
--------------------------
Title: CFO
--------------------------
SANWA BANK CALIFORNIA,
as Agent and as the Lender
By: /s/ Rob Keeper
--------------------------
Name: Rob Keeper
--------------------------
Title: V.P.
--------------------------
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<PAGE>
EXHIBIT 10.26
=======================================
STANDARD FORM OF OFFICE LEASE
THE REAL ESTATE BOARD OF NEW YORK, INC.
=======================================
AGREEMENT OF LEASE, made as of this day of February 1993, between
HUDSON TELEGRAPH ASSOCIATES, having an office c/o William Real Estate
Co. Inc., 630 Fifth Avenue, New York, New York 10036 party of the first
part, hereinafter referred to as OWNER, and AMERICAN COMMUNICATIONS
CORP., a Delaware corporation having an office at T-ONE CORP. party of
the second part, hereinafter referred to as TENANT
WITNESSETH: Owner hereby leases to Tenant and Tenant hereby hires from
Owner room 316 (the "demised premises") substantially as shown on the plan
annexed as Exhibit A in the building known as 60 Hudson Street in the Borough
of Manhattan, City of New York, for the term (the "Term") to commence on the
date hereof (the "Commencement Date") and to end on July 31, 2003 (the
"Expiration Date") at a fixed annual rental rate (the "Fixed Rent") of (a)
$39,996 per annum from the Commencement Date through July 31, 1998 and (B)
$44,440 per annum from August 1, 1998 through the Expiration Date.
which Tenant agrees to pay in lawful money 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 convenant as follows:
RENT 1. Tenant shall pay the rent as above and as hereinafter provided.
OCCUPANCY 2. Tenant shall use and occupy demised premises for general
offices and a telecommunications switching facility and for no other
purposes.
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 nonstructural 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 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 damages 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 filling 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 in 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
therein 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 carelessness,
omission, neglect or improper conduct 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 as 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 submited 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 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 or 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 Officer, 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
<PAGE>
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 or operation therein, violated any such laws,
ordinances, orders, rules, regulations or requirements with respect thereto.
Tenant may, after securing Owner to 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 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, at 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 judgment, 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 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 attorneys 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 damaged 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, 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 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, 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 may of such
events, Owner may elect to terminate this lease by written notice to Tenant,
given within 90 days after such fire or casualty, 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 reasonable possible, all of Tenant's salvageable
inventory and movable 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. (c) Nothing
contained hereinabove shall relieve Tenant from liability that may exist as a
result of damage from fire or other casualty. Notwithstanding the foregoing,
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 against the other or any one
claiming through or under each of them by way of subrogation or otherwise.
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
benefitting 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,
than 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.
ASSIGNMENT, MORTGAGE, ETC.:
11. Tenant, for itself, its heirs, distributees, executors,
administrators, legal representatives, successors 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 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 of 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:-icon of hand-
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 reasonable hours for the purpose of showing the
- -------------------
- -icon of hand- Rider to be added if necessary.
<PAGE>
same to prospective purchasers or mortgagers of the building, and during the
last six months of the term for the purpose of showing the same to
prospective tenants. If Tenant is not present to open and permit an entry
into the 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 acts shall have no effect
on this lease or Tenant's obligations hereunder.
VAULT, VAULT SPACE, AREA:
14. No Vault, 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 assessed 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 cancelled 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 event: (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 (or 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 relet 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 reletting 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 by 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 or if the demised premises becomes 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 Section 235 of Title 11
of the U.S. Code (bankruptcy code); or if Tenant shall fail to move into or
take possession of the premises within fifteen (15) days after the
commencement of the term of this lease, then, in any one or more of such
events, upon Owner serving a written five (5) days notice upon Tenant
specifying the nature of said default and upon the expiration of said five
(5) 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 five (5) day
period, and if Tenant shall not have diligently commenced during such default
within such five (5) 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 three (3) days notice of cancellation of this lease
upon Tenant, and upon the expiration of said three (3) days this lease and
the term thereunder shall end and expire as fully and completely as if the
expiration of such three (3) 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, attorneys' 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 month shall not prejudice in any way
the rights of Owner to collect the deficiency of 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 judgment, 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, 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 attorney's fees, in instituting, prosecuting or defending
any action or proceeding, then Tenant will reimburse Owner for such sums so
paid or obligations incurred with interest and 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 five (5) 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
<PAGE>
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 agreements between Owner and Tenant and any executory agreement
hereafter made 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 the
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 items,
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 11 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) until after Owner shall have a given Tenant
written notice that the premises are substantially ready for Tenant's
occupancy. 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 occupancy shall be deemed to be under
all the terms, covenants, conditions and provisions of this lease, except as
to the covenant to pay rent. 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 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 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 counter-claim 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 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.
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 or fixtures if Owner is prevented or delayed from so doing by
reason of strike or labor troubles or any cause whatsoever including, but not
limited to, government preemption in connection with a National Emergency 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 of supply and
demand which have been or are affected 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 tendered 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 residency address or business of Tenant or 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 OWNER:
29. As long as Tenant is not in default under any of the covenants of
this lease, Owners 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) The demised
premises are to be kept clean by Tenant, at Tenant's sole expense, in a
manner 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) -icon of hand-; (f) Owner
reserves the right to stop services of the heating, elevators, plumbing,
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 judgments 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 upon ten days' written notice to
Tenant, proceed with alterations necessary therefor without in any wise
affecting this lease or the obligation of Tenant hereunder. The same shall be
done with a minimum of inconvenience to Tenant and Owner shall pursue the
alteration with due diligence.
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 means 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 any sale or sales of said land
and building or of said lease, or 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 (except such portion
thereof as is covered by specific hours in Article 29 hereof), Sundays and
all days 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.
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ADJACENT EXCAVATION--SHARING:
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 partner 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 assessed
by service of a notice in writing upon Owner within ten (10) days after
the giving of notice thereof. Nothing 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 licenses.
SECURITY:
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34. Tenant has deposited with Owner the sum of $22,000* 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 default 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 vendor 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 agree that the provisions
hereof shall apply to every transfer or assignments 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 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.
ESTOPEL 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 no 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, distributors, executors, administrators, successors, and except as
otherwise provided in this lease, their assigns.
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space to be filled in or deleted
*(the "Security Deposit")
IN WITNESS WHEREOF, Owner and Tenant have respectively signed and sealed this
lease as of the day and year first above written.
Witness for Owner:
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Witness for Tenant:
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HUDSON TELEGRAPH ASSOCIATES
By: 60 HUDSON ASSOCIATES, general partner
By: --------------------------------------------------- - Corporate Seal -
By: ____________________________________________________________________
(L.S.)
By: ____________________________________________________________________
T. ONE CORP. - Corporate Seal -
By: /s/ [illegible] (L.S.)
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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 deposit and say that he resides
in
that he is the of
the corporation described in and which recruited the foregoing instrument, as
OWNER; that he knows the seal of said corporation; that 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.
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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.
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CORPORATE TENANT
STATE OF NEW YORK, ss.:
County of
On this day of , 19 , before me
personally came
to me known, who being by my duly sworn, did deposit and say that he resides
in
that he is the of
the corporation described in and which recruited the foregoing instrument as
TENANT; that he knows the seal of said corporation; that 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.
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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.
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<PAGE>
GUARANTY
FOR VALUE RECEIVED, and in consideration for, and as an inducement to
Owner making the within lease with Tenant, the undersigned guarantees to
Owner, Owner's successors and assigns, the full performance and observance of
all the covenants, conditions and agreements, therein provided to be
performed and observed by Tenant, including the "Rules and Regulations" as
therein provided, without requiring any notice of non-payment,
non-performance, or non-observance, or proof of notice, or demand, whereby to
charge the undersigned therefor, all of which the undersigned hereby
expressly waives and expressly agrees that the validity of this agreement and
the obligations of the guarantor hereunder shall in no wise be terminated,
affected or impaired by reason of the assertion by Owners against Tenant of
any of the rights or remedies reserved to Owner pursuant to the provisions of
the within lease. The undersigned further comments and agrees that this
guaranty shall remain and continue in full force and effect as to any reason,
modification or assertion of the lease and during any period when Tenant is
occupying the premises as a "security tenant." As a further inducement to
Owner to make this lease and in consideration thereof. Owner and the
undersigned covenant and agree that in any action of proceeding brought by
either Owner or the undersigned against the other on any matter whatsoever
arising out of, under or by virtue of the term of this lease or of this
guaranty that Owner and the undersigned shall and do hereby waive trial by
jury.
Dated New York City 19
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WITNESS:
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STATE OF NEW YORK, ??.:
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 executed the foregoing Guaranty and acknowledged to me that he
executed the same
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Notary
(L.S.)
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Residence
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Business Address
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Firm Name
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-icon of hand-IMPORTANT - PLEASE READ-icon of hand-
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 sued for any purpose other than for ingress or
egress from the discussed premises and for delivery of merchandise and
equipment in a prompt and efficient manner using elevators and passageways
designated for such delivery by Owner. These 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 work receipt 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 employers or retailers, shall have caused it.
3. No carpet, rug or either 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 described premises any dirt or other substances into
any of the corridors of halls, elevators, or out of the doors or windows or
stairways of the building and tenant shall not use or permit to be used or
kept any foul or nauseous gas or substance in the demised premises, or permit
or suffer the demised premises to be occupied or ? in a manner offensive or
objectionable to Owner or other occupants of the buildings by reason of
noise, odors, and/or vibrations, to interfere in any way with other Tenants
or those having business therein, nor shall any animals 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 of 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 described premises of the building or on the inside of the
described premises 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 the event 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 described premises, and, if linoleum, or
other similar floor covering is desired to be used as 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
of 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 such Tenant shall cooperate to prevent the same.
10. Owner reserves the right to exclude from the building between the
hours of 6 P.M. and 8 A.M. and at all hours on Sundays, and legal holidays
all persons who do not present a pass to the building signed by Owner. Owner
will furnish passes to persons for whom any Tenant requires same in writing.
Each Tenant shall be responsible for all persons for whom the requests such
part and shall be Holder to Owner for all acts of such persons.
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 wherein
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
described premises, any inflammable, combustible or explosive fluid,
material, chemical of 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 the Owner with respect to such services. If
Tenant requires air conditioning or ventilation after the usual hours.
Tenants shall give notice in writing to the building superintendent prior
to 3:00 P.M. in the case of services required on week days, and prior to
3:00 P.M. on the day prior in the case of after hours service required on
weekends or on holidays.
14. Tenant shall not move any safe, heavy machinery, heavy equipment,
bulky matter or fixture into or out of the building without Landlord's prior
written consent. If such safe, machinery, equipment, bulky matter or fixture
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.
Address
Premises
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TO
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STANDARD FORM OF
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LEASE
The Real Estate Board of New York, Inc.
-C- Copyright 1991. All Rights Reserved.
Reproduction in whole or in part prohibited.
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Dated 19 .
Rent per Year
Rent per Month
Term
From
To
Drawn by .............................. Checked by ...........................
Entered by ............................ Approved by ..........................
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RIDER TO LEASE BETWEEN
AMERICAN COMMUNICATIONS CORP., AS LANDLORD,
AND HUDSON TELEGRAPH ASSOCIATES, 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 fiscal year July 1, 1992 -
June 30, 1993.
(B) "Tenant's Proportionate Share" shall mean .26%.
(C) "Base Labor Month" shall mean January, 1993.
(D) "Multiplication Factor" shall mean 2222.
(E) "Labor Rate Multiple" shall mean one.
(F) "Base Electric Date" shall mean January 1, 1993.
(G) "Utility Year" shall mean calendar year 1993 and each succeeding
calendar year (or portion thereof at the end of the Term) during
the Term.
(H) "Broker" shall mean Williams Real Estate Co. Inc..
(I) "Rent Commencement Date" shall mean August 1, 1993.
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 to be made by Tenant
pursuant to this lease shall be made by checks drawn upon a New York City
bank which is a member of the New York Clearing House Association or any
successor thereto.
(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 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 ???
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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 hereof:
(1) "Real Estate Taxes" shall mean all the real estate taxes and
assessments imposed by any governmental authority having jurisdiction upon
the Building and land upon which it is located ("Land") or any tax or
assessment hereafter imposed in whole or in part in substitution for such
real estate taxes and/or assessments.
(2) "Base Year Taxes" shall mean the Real Estate Taxes as finally
determined for the Base Tax Year.
(3) "Subsequent Tax Year" shall mean any tax fiscal year
commencing after the expiration of the Base Tax Year.
(B) If the Real Estate Taxes for any Subsequent Tax Year during the
Term exceed the Base Year Taxes (as initially imposed, if not finally
determined when a payment is due pursuant to Section (C)), Tenant shall pay
Landlord Tenant's Proportionate Share of such excess within fifteen (15) days
after Landlord shall furnish to Tenant a 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 the Real Estate Taxes
in corresponding installments, such that Tenant's payment is due not more
than fifteen (15) 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 are not known to Landlord as of the date of
Landlord's 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 fifteen (15) 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 statement.
(C) If the Base Year Taxes ultimately are 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. If Landlord succeeds in reducing any
assessed valuation for the Land and the Building prior to the billing of Real
Estate Taxes for any Subsequent Tax Year, Tenant shall pay Landlord Tenant's
Proportionate Share of the expenses so incurred by Landlord.
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(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: (i) 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 (ii) 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.
40. EXPENSE ESCALATION
(A) For purposes of the formula and other provisions set forth in this
Article and elsewhere in this lease:
(i) "Rate" shall mean the minimum regular hourly wage rate,
including adjustments of every kind and nature (including, without
limitation, all sums paid for Fringe Benefits, as hereinafter defined)
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 (including, without limitation, 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, including
Fringe Benefits, of $12.00 for the first thirty hours and an overtime hourly
wage rate, including Fringe Benefits, of $15.00 for the remaining ten hours,
the average hourly wage rate, including Fringe Benefits, for the applicable
period shall, before adjustment pursuant to the provisions of subdivision (v)
of this Section (A), 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 (including, without limitation, 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).
(ii) "Base Rate" shall mean the Rate in effect during the Base
Labor Month.
(iii) "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 ten (10) years or more, or
failing such classification in any subsequent Agreement, the most nearly
comparable classification in such Agreement.
(iv) "Fringe Benefits" shall mean all direct or indirect costs or
amounts paid, payable for, allocable to or incurred with respect to so-called
"fringe benefits" (whether in the form of payments made or accrued, actual or
potential reductions in time actually worked or otherwise), including,
without limitation, such costs or amounts for any and all of (a) pensions,
welfare funds, training funds and dues, (b) social security, vacations, sick
pay, holidays, jury duty, medical checkup, lunch time ?????
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unemployment, workmen's compensation, disability benefits, health, life,
accident and other types of insurance.
(v) In determining the Rate, the Base Rate and/or Fringe Benefits
on each applicable occasion pursuant to this lease, the Base Rate and the
Rate (and the hourly cost of Fringe Benefits) shall be calculated on the
basis of the number of hours which 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 Rate (and the hourly cost of Fringe
Benefits, as well) shall be calculated on the basis of Porter's actually
working 1,611.5 hours (2,080 hours less 468.5 hours)]
(B) 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 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 appropriate
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,
"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 Law ("Law Period"), the applicable increase ("Increase") in the Rate
for purposes of this Article shall be the Increase in the Rate ("Prior
Increase") which most immediately preceded the effective date of the Law. The
Increase shall take effect on the date following the expiration of the period
for the Prior Increase and an equivalent Increase shall take effect on each
anniversary of such effective date during the Law Period.
(C) Each notice given by Landlord pursuant to Section (B) shall be
binding upon Tenant unless, within thirty (30) days after its receipt of such
notice, 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.
41. ESCALATION FOR INCREASES IN UTILITY COSTS
(A) As used herein:
(i) "Fuel Cost" shall mean Landlord's cost for all fuel
(including steam and/or oil) used in the operation of the Building.
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(ii) "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);
(iii) "Utilities Cost" shall mean the sum of the Fuel Cost and the
Electricity Cost; and
(iv) "Base Utilities Cost" shall mean the Utilities Cost for the
initial Utility Year.
(B) 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.
(C) 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 (B).
(D) 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.
(E) 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,
(i) 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
(ii) after Landlord forwards the applicable Utilities Statement
for the preceding Utility Year, one-twelfth of the amount payable pursuant to
Section (B) for such preceding Utility Year.
(F) Once Landlord forwards the applicable Utilities Statement for the
preceding Utility Year, Landlord and/or Tenant, as the case may be, promptly
shall make the 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.
(G) 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.
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42. ELECTRICITY
(A) Landlord shall furnish up to 12 watts per rentable square foot of
electric current for Tenant's use in the demised premises upon and subject to
the terms and conditions set forth in this Article 42. Tenant's consumption
of electrical energy at the demised premises shall be measured by submeters
installed by Landlord at Tenant's expense.
(B) (i) From and after the Commencement Date, Tenant shall purchase
all electric current consumed in the demised premises from Landlord or
Landlord's designated agent at a rate equal to 108% of Landlord's Average
Cost (as hereinafter defined) applied to all electricity consumed in the
demised premises during the applicable billing period, as measured by the
submeters.
(ii) "Landlord's Average Cost" for all purposes 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" and "off-peak" usage, "time of day" usage and any and all other
relevant adjustments and charges) by (2) the total kilowatt hours consumed 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 or 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. 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. 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.
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
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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 $740 per
month. 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.
43. RESTRICTIONS ON USE
(A) Anything in Article 2 to the contrary notwithstanding, Tenant shall
not use or permit all or any part of the demised premises to be used for the:
(i) storage for purpose of sale of any alcoholic beverage in the demised
premises; (ii) storage for retail sale of any product or material in the
demised premises; (iii) 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);
(iv) 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; (v) conduct of the business of an employment agency
or executive search firm; (vi) conduct of any public auction, gathering,
meeting or exhibition; (vii) conduct of a stock brokerage office or business;
and (viii) occupancy of a foreign, United States, state, municipal or other
governmental body, agency or department or any authority or other entity
which is affiliated therewith or controlled thereby.
(B) Tenant shall not use or permit all or any part of the demised
premises to be used so as to impair the Building's character or dignity or
impose any additional burden upon Landlord in its operation.
(C) Tenant shall not obtain or accept for use in the demised premises
floor polishing, lighting maintenance, cleaning or other similar services
from any party not theretofore approved by the 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
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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).
(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 designate the then rental agent of the Building as Tenant's
exclusive agent to effect such sublease or assignment in accordance with such
rental agent's standard rates and rules then in effect. Thereafter, prior to
such assignment, subletting or occupancy, 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. 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."
(C) Landlord may, within sixty (60) days after its receipt of Tenant's
Notice, by notice to Tenant ("Landlord's Notice"), require Tenant to (i)
sublease the Space to Landlord or its nominee, on the terms set forth in
Section (D), or (ii) terminate this lease as to the Space for the period
specified in Tenant's Notice, on the terms set forth in Section (E). If
Tenant's proposed assignment or sublease is for more than fifty percent (50%)
of the demised premises or the then balance of the Term is three (3) years or
less, Landlord also may, by Landlord's Notice, terminate this lease as of the
proposed commencement date for such assignment, sublease or occupancy. If
Landlord fails to so exercise such options, it shall not unreasonably
withhold its consent to the proposed assignment, sublease or occupancy, but
such consent shall be deemed of no effect if such assignment, sublease or
occupancy is not consummated upon the terms set forth in Tenant's Notice and
within thirty (30) days after such consent is given.
(D) If Landlord requires Tenant to execute a sublease ("Sublease")
pursuant to clause (C)(i), the Sublease shall be upon the same terms as this
lease, except for such terms thereof as are inapplicable and except that: (i)
the term of the Sublease shall be the term specified in Tenant's Notice
commencing, at Landlord's option, on (a) the commencement date set forth in
Tenant's Notice, or (b) a date designated by Landlord which shall not be more
than thirty (30) days after the date of Landlord's Notice; (ii) the Net Rent
for the Sublease shall be the lesser of (a) the pro rata Net Rent for the
Space Tenant is then paying Landlord hereunder, or (b) the Net Rent set forth
in Tenant's Notice; (iii) the Electric Factor for the Sublease shall be the
lesser of (a) the pro rata portion of the Electric Factor Tenant is then
paying Landlord hereunder which is allocable to the Space, or (b) the
Electric Factor set forth in Tenant's Notice;
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(iv) Tenant's Proportionate Share and the Multiplication Factor for the
Sublease shall be determined based on the relative sizes of the Space and the
initial demised premises; (v) the subtenant under the Sublease shall have the
unrestricted right to assign the Sublease or any interest therein, to further
sublet all or any part of the Space and/or to make any alterations,
decorations, additions or improvements in and to the Space (all or any part
of which may be removed, at Landlord's option, at any time, provided Landlord
repairs all damage caused by such removal); (vi) Tenant, as sublandlord under
the Sublease, shall, at its expense: (a) erect all partitions required to
separate the Space for the remainder of the demised premises and (b) to the
extent necessitated by the Sublease, install all doors required for
independent access from the Space to the elevators, lavatories and staircases
on the floor and install all equipment and facilities (including, without
limitation, men's and women's toilets) required to comply with all applicable
laws and regulations of governmental authorities having jurisdiction and to
enable Landlord to maintain and service the Space and permit the Space to be
used as an independent unit; (vii) the Sublease shall provide that the
termination of all or any portion of this lease by merger is not thereby
intended; and (viii) at the expiration of the Sublease, the Space shall,
subject to clause (v), be returned to Tenant as then existing.
(E) If Landlord requires Tenant to terminate this lease as to the
Space pursuant to clause (C)(ii), (i) Tenant at its expense shall (a) erect
all partitions required to separate the Space from the remainder of the
demised premises and (b) to the extent required by Landlord, install all
doors required for independent access from the Space to the elevators,
lavatories and stairwells on the floor and install all equipment and
facilities (including, without limitation, men's and women's toilets)
required to comply with all applicable laws and regulations of governmental
authorities having jurisdiction and to enable Landlord to maintain and
service the Space and permit the Space to be used as an independent unit,
and (ii) Landlord and Tenant shall execute and deliver a supplementary
agreement modifying this lease by eliminating the Space from the demised
premises for the term specified in Tenant's Notice commencing, at Landlord's
option, on (a) the commencement date set forth in Tenant's Notice, or (b) a
date designated by Landlord which shall not be more than thirty (30) days
after the date of Landlord's Notice, and, for such period, reducing the Fixed
Rent and additional rent payable hereunder on a pro rata basis.
(F) 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.
(G) 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.
(H) 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.
(I) No sublease of all or any part of the demised premises (except a
Sublease) shall be effective unless and until Tenant delivers to Landlord
duplicate originals of the instrument of sublease (containing the provision
required by Section (J)) and any accompanying documents. Any such sublease
shall be subject and subordinate to this lease.
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(J) Any such sublease shall contain substantially the following
provisions:
(i) "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 off-set, 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.''
(ii) "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."
(K) Landlord's consent to any assignment or sublease shall neither
release Tenant from its liability for the performance of Tenant's obligations
hereunder during the balance of the Term nor 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.
(L) Tenant shall pay to Landlord, promptly upon demand therefor, all
costs and expenses (including, without limitation, reasonable attorney's fees
and disbursements) incurred by Landlord in connection with any assignment of
this lease or sublease of all or any part of the demised premises.
(M) 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 thereof, pay to
Landlord, as and when payable to Tenant:
(i) in the case of an assignment, sixty-six and two-thirds
percent (66 2/3%) 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); and
(ii) in the case of a sublease, sixty-six and two-thirds percent
(66 2/3%) of the amount, if any, by which (a) 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) exceeds (b) 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.
<PAGE>
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 any liability and expense (including reasonable attorney's fees) for
any other brokerage commission or finder's fee 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 the 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 with sublease to
or occupancy by such party. Such listing may be terminated by Landlord at any
time, without prior notice. The initial listing(s) in 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 Landlord for negligence, failure to perform
lease obligations or otherwise under or in connection with this lease shall
be limited to 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.
(B) In any claim made by Tenant against Landlord alleging that Landlord
has acted unreasonably where Landlord had an obligation to act reasonably,
Tenant's sole and exclusive recourse against Landlord shall be an action
seeking specific performance of Landlord's obligations under this lease.
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 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 be served by certified or
registered mail, return receipt requested, directed to the 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
<PAGE>
reimburse Landlord for such fees, costs or expenses within ten (10) 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. MODIFICATIONS REQUESTED BY MORTGAGEE
If any prospective mortgagee of the Land, Building or any leasehold
interest therein requires, as a condition precedent to issuing 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 mortgage requires.
50. "AS IS"
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. 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.
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 premises 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 thirty 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 and
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
<PAGE>
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.
(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) In the event that any utility company or governmental or
quasi-governmental authority requires any work, installation
<PAGE>
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 to
unreasonably withhold its consent to any Alterations which are nonstructural
or which do not affect the Building's system and facilities proposed to be
made by Tenant to adapt the demised premises for those business purposes
permitted by Article 2 hereof, provided that such Alterations are performed
only by contractors or mechanics designated by Landlord, do not affect any
part of the Building other than the demised premises, 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 demised premises. 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, (a) 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 (b) shall deliver to Landlord "as built" plans and
specifications for such Alteration within thirty (30) days of the completion
thereof. All Alterations shall be made and performed in accordance with the
Rules and 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.
(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 insur-
<PAGE>
ing 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 fees, costs and
expenses including, but not limited to, those of attorneys, architects and
engineers, incurred by Landlord in connection with inspecting the Alterations
to determine whether the same are being or have been performed in accordance
with the approved plans and specifications therefore and with all legal
requirements 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 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 defaults 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 Tenant shall pay as use and occupancy charge for the
holdover period an amount equal to the higher of (A) an amount equal to two
times the sum of (1) the pro rata Fixed Rent payable by Tenant during the
last year of the Term and (2) all monthly installments of additional rent
payable by Tenant pursuant to the terms of this lease that would have been
billable monthly by Landlord had the Term not expired; or (B) an amount equal
to the then market rental value for the demised premises as shall be
established by Landlord giving notice to Tenant of Landlord's good faith
estimate of such market rental value.
57. CONDITIONAL LIMITATION
In the event that twice 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 three (3) days' notice
of cancellation of this lease upon Tenant and, upon the expiration of said
three (3) days, this lease and the Term shall end and expire as fully and
completely as if the expiration of such three (3) 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 direction of as public officer or body pursuant to law
(collectively, "Law"), Tenant
<PAGE>
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 Law, an amount equal to (A) the Fixed Rent and additional rent which would
have been paid pursuant to this lease but for 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 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 obligations under this lease including, without limitation, the
provisions relating to assignment and subletting and the condition of the
demised premises.
60. SECURITY DEPOSIT
Supplementing Article 34:
Tenant may, at the execution of this lease or at any time during the
Term, substitute for the Security Deposit an irrevocable letter of credit
(the "Letter of Credit") in the amount of the Security Deposit issued by a
New York City commercial bank acceptable to Landlord in its discretion, and
in the form of the letter of credit annexed thereto as Exhibit B, to be held
by Landlord as security in accordance with Article 34 and this Article 60.
The Letter of Credit shall (i) initially expire not less than one (1) year
from the Commencement Date or the date of issuance if delivered to Landlord
thereafter, (ii) provide for automatic renewals for periods of not less than
one (1) year, and (iii) have a final expiration date not less than four (4)
months after the Expiration Date. Tenant shall pay to landlord, on demand and
as additional rent hereunder, all fees and charges paid by landlord to the
bank issuing the Letter of Credit in connection with this transfer of same to
any future owner of the Building. In the event of a default by Tenant of any
of the terms, provisions and conditions of this lease, Landlord shall be
permitted to draw down the entire amount of the Letter of Credit or any
portion thereof and apply the proceeds or any part thereof in accordance with
Article 34 of this lease and retain the balance for the deposit required
under Article 34. Landlord shall also have the right to draw down the entire
amount of the Letter of Credit in the event that Landlord receives notice
that the date of expiry of the Letter of Credit will not be extended by the
issuing bank and retain the balance for the deposit required under Article
34. If Landlord shall have drawn down the Letter of Credit and applied all or
any portion thereof, then Tenant shall deposit with Landlord, upon demand, a
sufficient amount of cash to bring the balance of cash held by Landlord under
Article 34 and this Article 60 to the amount of the Security Deposit.
61. ABATEMENT OF FIXED RENT
Anything herein to the contrary notwithstanding, 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.
<PAGE>
EXHIBIT B-1
(Bank Letterhead)
(Name and Address
of Landlord)
Re: IRREVOCABLE CLEAN LETTER OF CREDIT
Gentlemen:
By order of our client, _________________________________, we hereby
open our clean irrevocable Letter of Credit No. _________ in your favor for
an amount not to exceed in the aggregate $_______US Dollars effective
immediately.
Funds under this credit are available to you against your sight draft
drawn on us mentioning thereon our Credit No. ___.
This Letter of Credit shall expire sixteen (16) months from the date
hereof; provided, however, that it is a condition of this Letter of Credit
that it shall be deemed automatically extended, from time to time, without
amendment, for one year from the expiry date hereof and from each and every
future expiry date, unless at least thirty (30) days prior to any expiry date
we shall notify you by registered mail that we elect not to consider this
Letter of Credit renewed for any such additional period.
This Letter of Credit is transferable and may be transferred one or more
times. However, no transfer shall be effective unless advice of such transfer
is received by us in the form attached signed by you.
We hereby agree with you that all drafts drawn or negotiated in
compliance with the terms of this Letter of Credit will be duly and promptly
honored upon presentment and delivery of your draft to our office at
________________ if negotiated on or prior to the expiry date as the same may
from time to time be extended.
Except as otherwise specified herein, this Letter of Credit is subject
to the Uniform Customs and Practice for Documentary Credits (1983 Revision),
International Chamber of Commerce Publication No. 400.
Very truly yours,
(Name of Bank)
By: _______________________________
<PAGE>
EXHIBIT B-2
Re: Credit Issued by
----------------------- -------------------------
Gentlemen:
For value received, the undersigned beneficiary irrevocably transfers to:
- -------------------------------------------------------------------------------
(Name and Second Beneficiary)
- -------------------------------------------------------------------------------
(Address)
all rights of the undersigned beneficiary to draw under the above Letter of
Credit in its entirety.
By this transfer, all rights of the undersigned beneficiary in such
letter of Credit are transferred to the second beneficiary and the second
beneficiary shall have the sole rights as beneficiary thereof, including sole
rights relating to any amendments whether increases or extensions or other
amendments and whether now existing or hereafter made. All amendments are to
be advised direct to the second beneficiary without necessity of any consent
of or notice of the undersigned beneficiary.
The advice of such Letter of Credit is returned herewith, and we ask you
to endorse the assignment on the reverse thereof and forward it direct to the
second beneficiary with your customary notice of transfer.
Enclosed is remittance of $100.00 in payment of your transfer commission
and in addition thereto we agree to pay you on demand any expenses which may
be incurred by you in connection with this transfer.
Yours very truly,
SIGNATURE AUTHENTICATED
(Bank) Signature of Beneficiary
(Authorized Signature)
<PAGE>
62. 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.
63. LANDLORD'S WORK
With reasonable promptness after the execution and delivery hereof by
Landlord and Tenant, Landlord agrees to replace any broken panes of glass in
the demised premises.
64. INTERCONNECTIONS
(A) 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, governing codes and regulations and the relevant
provisions of this lease including, without limitation, Articles 3 and 54
and in accordance with plans and 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 whereby such other tenant
consents to Tenant making the proposed connection or other installation.
(B) In the event Tenant makes use of any existing means of
interconnection owned by Landlord, Tenant shall pay:
(i) a Base Charge (one time charge) of $30.00 per linear foot; and
(ii) 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) In the event 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.
<PAGE>
EXHIBIT A
[FLOOR PLAN, 3RD FLOOR]
<PAGE>
AMENDMENT OF LEASE
This Amendment of Lease (this "Agreement"), dated as of the 30th day of
April, 1997, 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 ("Landlord") and T-ONE CORP., a Delaware
corporation having an address at 60 Hudson Street, New York, New York 10013
("Tenant").
W I T N E S S E T H:
WHEREAS:
A. Landlord and Tenant entered into a lease dated as of February 17,
1993 (the "Existing Lease") pursuant to which Tenant leased a portion of the
3rd floor known as Room 316 (the "Existing Premises") in the building known
as 60 Hudson Street, New York, New York (the "Building").
B. Landlord and Tenant wish to increase the premises demised under the
Existing Lease by adding thereto the premises shown hatched on Exhibit A
annexed hereto (the "New Premises") and to make certain other changes in the
Existing Lease.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants hereinafter contained, Landlord and Tenant agree that the Existing
Lease is hereby amended as follows:
1. All terms contained in this Agreement shall, for the purposes
hereof, have the same meanings ascribed to them in the Existing Lease unless
otherwise defined herein. As used herein, the term "Lease" shall mean the
Existing Lease as amended by this Agreement and as hereafter amended.
2. Effective as of the date hereof (the "New Premises Date"), the
"premises" or "demised premises" shall be the Existing Premises plus the New
Premises. Landlord and Tenant mutually acknowledge, without making any
representation, that for all purposes of the Lease the New Premises shall be
deemed to contain 2,497 rentable square feet.
3. Commencing on the New Premises Date, the annual Fixed Rent payable
under the Lease shall be increased by $57,431 per annum. Notwithstanding the
foregoing, provided the Lease is in full force and effect and Tenant is not
in default thereunder beyond any applicable notice and grace period, the
additional Fixed Rent due with respect to the New Premises (I.E., $57,431 per
annum) shall abate from the New Premises Date to and including September 30,
1997.
<PAGE>
4. Landlord makes no representations concerning the condition of the
New Premises or the equipment, if any, located therein. Tenant agrees to
accept the New Premises in their "as is" condition on the New Premises Date.
Landlord shall not be required to perform any work to prepare the New
Premises for Tenant's occupancy. Tenant understands that, although there
exists duct-work to which an air-conditioning system may be attached (which
duct-work, in its "as is" condition, Tenant will be permitted to use), there
is no air-conditioning system presently serving the New Premises. Subject to
Tenant's compliance with all the applicable provisions of the Lease, Tenant
will be permitted to install and maintain, at Tenant's sole expense, an
air-conditioning system in the New Premises.
5. It is the intention of the parties that additional rent payable by
Tenant pursuant to the Lease be calculated separately for the Existing
Premises and the New Premises, with the calculations for the Existing
Premises being made pursuant to the provisions of Articles 37, 39, 40 and 41
of the Existing Lease as unmodified by this Agreement and the calculations
for the New Premises being made pursuant to the provisions of Articles 37,
39, 40 and 41 the Existing Lease with the following modifications:
(a) "Base Tax Year" for the New Premises shall mean the calendar
year 1997 and therefore "Base Year Taxes" for the New Premises shall mean
one-half of the Real Estate Taxes for tax fiscal year July 1, 1996 - June 30,
1997 plus one-half of the Real Estate Taxes for tax fiscal year July 1, 1997
- - June 30, 1998.
(b) "Tenant's Proportionate Share" for the New Premises shall mean
0.30%;
(c) "Base Labor Month" for the New Premises shall mean January, 1997;
(d) "Multiplication Factor" for the New Premises shall mean 2,497;
and
(e) "Base Utilities Cost" for the New Premises shall mean the
Utilities Cost for calendar year 1997.
6. Landlord shall furnish, at a location designated by Landlord, for
Tenant's use in the New Premises, up to twelve (12) watts of electric current
per rentable square foot contained in the New Premises upon and subject to
the terms and conditions set forth in Article 42 of the Lease. In bringing
such current from such designated location to the New 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 cost of $150.00 per amp if provided during the
twelve (12) month period after the
-2-
<PAGE>
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 energy in
the New Premises will be measured by a submeter to be installed by the
Landlord at Tenant's expense. Anything in the Lease to the contrary
notwithstanding, if the New Premises Date occurs prior to the installation
and proper calibration of the submeter, then (i) Tenant shall pay Landlord
for Tenant's consumption of electricity in the New Premises at the rate of
$312 per month during any period when construction is taking place in the
New Premises; and (ii) from and after the date on which Tenant occupies all
or a portion of the New Premises for the conduct of business and until the
installation and proper calibration of the submeter, Tenant shall pay
Landlord $624 per month on account, such payments to be retroactively
adjusted based on the average kilowatts and kilowatt hours consumed over the
first three (3) months after installation and proper calibration of the
submeter. In addition, if, during any time during the Term, it shall be
determined that the submeter(s) servicing the demised premises were
malfunctioning, or if Tenant's power is increased prior to the installation
and proper calibration of any required additional meters, 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 or had the additional power been properly metered, as the case
may be.
7. Simultaneously with the execution of this Agreement, Tenant has
delivered to Landlord a check subject to collection in the amount of $28,715,
increasing the amount of the Security Deposit to $50,715.
8. Landlord acknowledges that the business to be conducted by Tenant in
the demised premises requires the installation of certain communications
equipment owned by customers of Tenant in the demised premises, in order for
such customers to interconnect with Tenant's terminal facilities. Landlord
expressly agrees that Tenant may license the use of portions of the demised
premises to its customers solely for the purpose of locating equipment therein
without Landlord's further consent; provided, however, that such license
shall be granted only upon the execution by Tenant and its customers of an
agreement that expressly provides that (i) such license and the rights of such
licensee shall at all times be subordinate to this lease and shall not be
binding on Landlord; (ii) such license will expire no later than the day
prior to the expiration or earlier termination of this lease; and (iii) such
license shall be for equipment only and shall not grant to the licensee the
right to occupy any portion of the Building or the demised
-3-
<PAGE>
premises. Copies of any such agreements shall be delivered to Landlord with
reasonable promptness after execution.
9. The covenants, agreements, terms and conditions contained in this
Agreement shall bind and inure to the benefit of the parties hereto and their
respective successors, and, except as otherwise provided in the Lease, their
respective assigns.
10. Except as amended by this Agreement, the Lease and all covenants,
agreements, terms and conditions thereof shall remain in full force and
effect and the Lease, as so amended, is hereby in all respects ratified and
confirmed.
11. Tenant covenants, represents and warrants that Tenant has had no
dealings or communications with any broker or agent in connection with the
consummation of this Agreement other than Williams Real Estate Co. Inc. (the
"Broker"). Landlord agrees to pay a commission to the Broker pursuant to a
separate agreement. Tenant covenants and agrees to indemnify Landlord from
and against all costs, expenses (including reasonable attorneys' fees and
disbursements) and liability for any commission or other compensation claimed
by any broker or agent (other than Broker) with respect to this Agreement.
12. This Agreement may not be changed orally, but only by a writing
signed by the party against whom enforcement thereof is sought.
13. The submission of this Agreement to Tenant shall not constitute an
offer by Landlord to execute and exchange this Agreement with Tenant and is
made subject to Landlord's acceptance, execution and delivery thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
HUDSON TELEGRAPH ASSOCIATES
By: PMFWH NEWCORP., INC.,
general partner
By: /s/ Jeffrey Weissman
.............................
Jeffrey Weissman
Vice President
T-ONE CORP.
By: /s/ Donald E. Newton, CPA
..............................
Name: Donald E. Newton, CPA
Title: V.P. Controller
-4-
<PAGE>
[MAP]
EXHIBIT A
60 HUDSON STREET 3RD FLOOR [LOGO]
NEW YORK, NEW YORK 10013
[ILLEGIBLE] [ILLEGIBLE] [ILLEGIBLE]
<PAGE>
EXHIBIT 10.27
AMENDMENT NUMBER THREE TO EMPLOYMENT AGREEMENT
THIS AMENDMENT NUMBER THREE TO EMPLOYMENT AGREEMENT (this "Amendment")
is effective as of July 1, 1997, between STAR TELECOMMUNICATIONS, INC., a
Delaware corporation ("STAR"), as successor in interest to STAR Vending,
Inc., a Nevada corporation, and MARY CASEY ("EXECUTIVE").
RECITALS
A. Star and Executive are parties to that certain Employment
Agreement dated July 14, 1995 (the "Employment Agreement"), that certain
Amendment Number One to Employment Agreement dated January 1, 1996
("Amendment Number One"), and that certain Amendment Number Two to
Employment Agreement dated July 15, 1996 ("Amendment Number One"), pursuant
to which Executive is employed by Star.
B. The parties desire to adjust Executive's compensation and extend
the expiration date of the Employment Agreement, and thus have determined to
amend the Employment Agreement as set forth in this Amendment.
AGREEMENTS
NOW, THEREFORE, the parties agree to amend the Employment Agreement as
follows:
1. DEFINED TERMS. Capitalized terms used in this Amendment and not
otherwise defined shall have the meanings ascribed to them in the Employment
Agreement, Amendment Number One, and Amendment Number Two. From and after the
date hereof, the term "Agreement" as used in the Employment Agreement will
mean the Employment Agreement as amended by Amendment Number One, Amendment
Number Two, and this Amendment, unless and until such Employment Agreement
may again be amended.
2. AMENDMENT OF SECTION 3. Section 3 of the Employment Agreement
shall be amended to read in its entirety as follows:
"3. TERM. The term of Executive's employment by Star pursuant to this
Agreement shall be for the period commencing July 14, 1995 and ending
December 31, 2000. The term of Executive's employment is subject to earlier
termination as provided in Section 7."
3. AMENDMENT OF SECTION 4.1 Section 4.1 of the Employment Agreement
shall be amended to read in its entirety as follows:
"4.1 SALARY. Star shall pay Executive a monthly salary during the term of
this Agreement. This salary shall be $20,000 per month effective July 1,
1997. Executive's monthly salary shall be increased for the respective
calendar years commencing January 1, 1998, January 1, 1999, and January 1,
2000, as follows:
"(a) Before January 30, 1998, the parties shall ascertain from the
official Consumers Price Index for All Urban Wage Earners and Clerical
Workers (Revised Series), Los Angeles-Anaheim-Riverside Average
(1982-1984 = 100), as published by the Bureau of Labor Statistics,
Department of Labor (the "Index"), the Index for December 1996 (the "Base
Period Index") and for December 1997 (the "Comparison Period Index"). If
the Comparison Period Index exceeds the Base Period Index, the monthly
salary payable by Star to Executive for the entire calendar year 1998
shall be increased (but not decreased) by multiplying Executive's
then-existing monthly salary by a fraction, the numerator of which shall
be the Comparison Period Index and the denominator of which shall be the
Base Period Index. If the Comparison Period Index does not exceed the Base
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<PAGE>
Period Index, the monthly minimum salary payable to Executive by Company
during calendar 1998 shall remain at the monthly salary effective as of
December 31, 1997.
(b) A similar adjustment shall be made to Executive's monthly
salary for calendar years 1999 and 2000; but for the purpose of such
adjustments, the Base Period Index shall be calculated as of December,
1997 and 1998, respectively, and the Comparison Period Index shall be
calculated as of December 1998 and 1999, respectively.
(c) If the Index is no longer published, then appropriate index
figures for the Base Period Index and the Comparison Period Index shall be
derived from any successor or comparable index mutually agreed by the
parties to be authoritative.
(d) The parties acknowledge that the Comparison Period Index
figures for each year of the Employment Agreement may not be available in a
timely manner. Therefore, the monthly salary in efect during the preceding
month shall continue in effect until the respective average index figures
for the Comparison Period Indexes have been ascertained. Upon determination
of the respective Comparison Period Indexes for each year, an appropriate
adjustment shall be made, retroactive to January 1 of 1998, 1999, and 2000,
respectively, and Star shall immediately pay to Executive any increased
salary found to be due.
(e) Executive may receive such other increases in her salary in
addition to those set forth above as the Board of Directors of Star may
approve from time to time. Executive's salary shall not be reduced at any
time during the term of this Agreement, but the foregoing shall not limit
Star's rights under Section 7."
4. CONFIRMATION. Except as specifically amended by this Amendment,
the Employment Agreement, Amendment Number One, and Amendment Number Two will
continue unchanged, and the terms and conditions of the Employment Agreement,
Amendment Number One, and Amendment Number Two, as amended by this Amendment,
are ratified and confirmed.
IN WITNESS WHEREOF, the parties have executed this Amendment effective
as of the date first set forth above.
"STAR" "EXECUTIVE"
STAR TELECOMMUNICATIONS, INC.
a Delaware corporation
By /s/ Christopher E. Edgecomb /s/ Mary Casey
---------------------------- -------------------------
Christopher E. Edgecomb, CEO Mary Casey
-2-
<PAGE>
EXHIBIT 10.28
AMENDMENT NUMBER ONE TO EMPLOYMENT AGREEMENT
THIS AMENDMENT NUMBER ONE TO EMPLOYMENT AGREEMENT (this "Amendemnt") is
effective as of November 12, 1997, between STAR TELECOMMUNICATIONS, INC., a
Delaware corporation (the "COMPANY"), as successor in interest to STAR
Vending, Inc., a Nevada corporation, and KELLY ENOS ("EMPLOYEE").
RECITALS
A. Company and Employee are parties to that certain Employment
Agreement dated December 2, 1996 (the "Employment Agreement"), pursuant to
which Employee is employed by Company.
B. The parties desire to extend the expiration date of the Employment
Agreement, and thus have determined to amend certain provisions of the
Employment Agreement as set forth in this Amendment.
AGREEMENT
NOW, THEREFORE, the parties agree to amend the Employment Agreement as
follows:
1. DEFINED TERMS. Capitalized terms used in this Amendment and not
otherwise defined shall have the meanings ascribed to them in the Employment
Agreement. From and after the date hereof, the term "Agreement" as used in
the Employment Agreement will mean the Employment Agreement as amended by
this Amendment, unless and until such Employment Agreement may again be
amended.
2. AMENDMENT OF SECTION 2 OF EMPLOYMENT AGREEMENT. Section 2 of the
Employment Agreement shall be amended to read in its entirety as follows:
"2. TERM. The term of Employee's employment by Company pursuant to
this Agreement shall be for the period commencing December 2, 1996 and
ending December 31, 2000. The term of Employee's employment is subject
to earlier termination as provided in Section 7."
3. CONFIRMATION. Except as specifically amended by this Amendment, the
Employment Agreement will continue unchanged, and the terms and conditions of
the Employment Agreement, as amended by this Amendment, are ratified and
confirmed.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first set forth above.
"COMPANY" "EMPLOYEE"
STAR TELECOMMUNICATIONS, INC.,
A Delaware corporation
By /s/ Mary Casey /s/ Kelly Enos
---------------------------- ----------------------------
Mary Casey, President Kelly Enos
-1-
<PAGE>
EXHIBIT 10.29
AMENDMENT NUMBER ONE TO FIRST RESTATEMENT OF EMPLOYMENT AGREEMENT
THIS AMENDMENT NUMBER ONE TO FIRST RESTATEMENT OF EMPLOYMENT AGREEMENT
(this "Amendment") is effective as of June 16, 1997, between STAR
TELECOMMUNICATIONS, INC., a Delaware corporation (the "COMPANY"), as
successor in interest to STAR Vending, Inc., a Nevada corporation, and JAMES
KOLSRUD ("EMPLOYEE").
RECITALS
A. Company and Employee are parties to that certain Employment
Agreement dated September 14, 1996 (the "Employment Agreement"), and that
certain First Restatement of Employment Agreement dated December 18, 1996
(the "Restatement Agreement"), pursuant to which Employee is employed by
Company.
B. The parties desire to extend the expiration date of the Restatement
Agreement, and thus have determined to amend the Restatement Agreement as set
forth in this Amendment.
AGREEMENTS
NOW, THEREFORE, the parties agree to amend the Restatement Agreement as
follows:
1. DEFINED TERMS. Capitalized terms used in this Amendment and not
otherwise defined shall have the meanings ascribed to them in the Restatement
Agreement. From and after the date hereof, the term "Agreement" as used in
the Restatement Agreement will mean the Restatement Agreement as amended by
this Amendment, unless and until such Agreement may again be amended.
2. AMENDMENT OF SECTION 2. Section 2 of the Restatement Agreement
shall be amended to read in its entirety as follows:
"2. TERM. The term of Employee's employment by the Company pursuant to
this Agreement shall be for the period commencing September 14, 1996
and ending December 31, 2000. The term of Employee's employment is
subject to earlier termination as provided in Section 7."
3. AMENDMENT OF SECTION 3.1. Section 3.1 of the Restatement Agreement
shall be amended to read in its entirety as follows:
"3.1 BASE SALARY. The Company shall pay Employee a monthly salary during
the term of this Agreement. This salary shall be $16,666,67 per month.
Employee's salary shall not be reduced at any time during the term of
this Agreement, but the foregoing shall not limit the Company's rights
under Section 7."
4. CONFIRMATION. Except as specifically amended by this Amendment,
the Restatement Agreement will continue unchanged, and the terms and
conditions of the Restatement Agreement, as amended by this Amendment, are
ratified and confirmed.
-1-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first set forth above.
"COMPANY" "EMPLOYEE"
STAR TELECOMMUNICATIONS, INC.
a Delaware corporation
By /s/ Mary Casey /s/ James E. Kolsrud
- -------------------------------- ------------------------------------
Mary Casey, President James Kolsrud
-2-
<PAGE>
EXHIBIT 10.30
AMENDMENT NUMBER ONE TO EMPLOYMENT AGREEMENT
THIS AMENDMENT NUMBER ONE TO EMPLOYMENT AGREEMENT (this "Amendment") is
effective as of November 11, 1997, between STAR TELECOMMUNICATIONS, INC., a
Delaware corporation (the "COMPANY"), as successor in interest to STAR
Vending, Inc., a Nevada corporation, and DAVID VAUN CRUMLY ("EMPLOYEE").
RECITALS
A. Company and Employee are parties to that certain Employment
Agreement dated January 1, 1996 (the "Employment Agreement"), pursuant to
which Employee is employed by Company.
B. The parties desire to extend the expiration date of the Employment
Agreement, and thus have determined to amend the Employment Agreement as set
forth in this Agreement.
AGREEMENTS
NOW, THEREFORE, the parties agree to amend the Employment Agreement as
follows:
1. DEFINED TERMS. Capitalized terms used in this Amendment and not
otherwise defined shall have the meanings ascribed to them in the Employment
Agreement. From and after the date hereof, the term "Agreement" as used in
the Employment Agreement will mean the Employment Agreement as amended by
this Amendment, unless and until such Employment Agreement may again be
amended.
2. AMENDMENT OF SECTION 2. Section 2 of the Employment Agreement shall
be amended to read in its entirety as follows:
"2. TERM. The term of Employee's employment by Company pursuant to this
Agreement shall be for the period commencing January 1, 1996 and ending
December 31, 2000. The term of Employee's employment is subject to
earlier termination as provided in Section 7."
3. CONFIRMATION. Except as specifically amended by this Amendment, the
Employment Agreement will continue unchanged, and the terms and conditions of
the Employment Agreement, as amended by this Amendment, are ratified and
confirmed.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first set forth above.
"COMPANY" "EMPLOYEE"
STAR TELECOMMUNICATIONS, INC.
a Delaware corporation
By /s/ Mary Casey /s/ David Vaun Crumly
------------------------------ ------------------------------
Mary Casey, President David Vaun Crumly
-1-
<PAGE>
EXHIBIT 10.31
STAR VENDING, INC.
FIRST AMENDMENT TO
AMENDED AND RESTATED 1996 STOCK INCENTIVE PLAN
THIS FIRST AMENDMENT (the "Amendment") to the STAR VENDING, INC. AMENDED
AND RESTATED 1996 STOCK INCENTIVE PLAN (the "Restated Plan") was approved
effective March 31, 1996, by the Board of Directors and Shareholders of STAR
VENDING, INC., a Nevada corporation (the "Corporation").
RECITALS
A. The STAR Vending, Inc. 1996 Stock Incentive Plan was adopted by the
Board of Directors and Shareholders of the Corporation on January 22, 1996 (the
"Original Plan").
B. The Original Plan was entirely amended and restated effective March
31, 1996, which amendment and restatement of the Original Plan was adopted by
the Board of Directors on September 30, 1996. The Original Plan, as so amended
and restated is referred to herein as the "Restated Plan."
C. The Corporation desires to amend the Restated Plan to provide that the
options granted under the Restated Plan will immediately vest upon the
occurrence of certain specified events.
AMENDMENT
NOW, THEREFORE, the Restated Plan is amended to read as follows:
1. SECTION 6.12. Section 6.12 is deleted in its entirety and replaced with
the following new Section 6.12:
"6.12 ACCELERATION.
(a) A "Change in Control" for purposes of this Plan shall be
deemed to have occurred if, after the date of adoption of this Plan,
(i) a single entity or group of affiliated entities acquires more than
50% of the stock of the Company issued and outstanding immediately
prior to such acquisition; or (ii) shareholders approve the
consummation of any merger of the Company, if the shareholders of the
Company immediately before such transaction own, immediately after
consummation of such transaction, equity securities (other than
options and other rights to acquire equity securities) possessing
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<PAGE>
less than 50% of the voting power of the surviving or acquiring
corporation; or (iii) shareholders approve the consummation of any
sale or other disposition of all or substantially all of the assets of
the Company.
(b) If a Change in Control has occurred or if the Board of
Directors determines in good faith that a Change in Control is about
to occur, the Board of Directors may determine that it is necessary or
desirable to accelerate the exercisability of all options granted
hereunder. Upon such determination, the Board of Directors shall
establish the date upon which all options not theretofore exercisable
shall become exercisable, the period of time (not in excess of 10
days) during which such options may be exercised and the notice
required for exercise. The Board of Directors shall notify all
optionees of such date, exercise period and notice requirement.
(c) Any options subject to acceleration under this Section that
are not exercised during the exercise period established by the Board
of Directors pursuant to subsection (b) above shall be treated as if
no Change in Control had occurred and shall be governed by their
original terms. Nevertheless, by a notice to that effect which is
communicated in any reasonable manner to as many of the holders of
options as is feasible, the Board of Directors may provide that any
options accelerated pursuant to this Section 6.12 shall expire at the
end of the exercise period established by the Board of Directors
pursuant to subsection (b).
(d) In the event of a Change in Control that consists of a
merger of the Company with or into another entity in which holders of
the Company's common stock will receive cash for their shares, the
Board of Directors, upon making the determination set forth in
subsection (b) may provide that, upon consummation of such Change in
Control, all then outstanding options granted hereunder shall be
automatically converted into the right to receive cash in an amounts
equal to the difference, if any, between the price to be received by
holders of the Company's common stock for their shares and the
respective Exercise Prices of the outstanding options.
(e) Except as set forth in this subsection (e), if a Change in
Control occurs, and the Board of Directors does not make the
determination set forth in subsection (b) above, the exercisability of
the then-outstanding options of the Company granted under this Plan
shall not be affected. The foregoing notwithstanding, any options held
by an optionee whose employment with the Company (or any Subsidiary or
Parent) is terminated by the Company
-2-
<PAGE>
other than for cause within one year after such Change in Control
shall be deemed to be fully exercisable as of the date of such
termination of employment. Nothing in this subsection (e) shall limit
or affect the provisions of Section 6.4 of this Plan."
2. CONFIRMATION. In all other respects, the provisions of the Restated Plan
shall remain unchanged.
-3-
<PAGE>
EXHIBIT 10.33
NORTEL DASA
--------------------
Agreement Number:
--------------------
LEASING AGREEMENT -- PARTIAL AMORTIZATION
- -------------------------------------------------------------------------------
Name and address of lessee: Name and address of supplier:
Star Telecommunications Nortel Dasa Network Systems GmbH & Co. KG
Deutschland GmbH
Voltastrass 1a BG10 An der B31
60486 Frankfurt am Main 88039 Friedrichshafen
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Designation of leasing asset: Delivery date: Net purchase VAT %:
price in DM:
DMS 100 data switches 39.104.780,00
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Machine/Unit No.:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Irrevocable lease term: 60 months Total purchase price: DM 39.104.780,00
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Monthly leasing rate: SEE PAYMENT Monthly leasing payment: DM SEE PAYMENT
SCHEDULE (subject to Section 2 Leasing SCHEDULE
Conditions) + VAT: DM
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Residual value: 10% Total monthly leasing DM
3.901.478,00 of purchase price payment
in DM excl. VAT
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Lease period starts on: DEZEMBER 1997 First leasing payment DEZEMBER 1997
due on:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Location:
- -------------------------------------------------------------------------------
The parties hereto agree that Nortel Dasa's acquisition/manufacturing costs
and ancillary costs including financing costs are not covered by the leasing
payments to be made by the lessee during the irrevocable lease term.
The lessee authorizes Nortel Dasa Network Systems GmbH & Co. KG to collect
amounts due by direct debit to account no.:________________ with
The lessee offers to conclude with Nortel Dasa Network Systems GmbH & Co. KG
- -- referred to below as "Nortel Dasa" -- a leasing agreement on the
conditions set forth above and overleaf. The leasing agreement becomes
effective upon written acceptance by Nortel Dasa. The lessee instructs Nortel
Dasa to purchase the leasing asset after the leasing agreement has become
effective from the supplier at the terms and conditions which the lessee has
accepted or negotiated with the supplier. The choice of supplier and leasing
asset is made solely by the lessee. Nortel Dasa therefore assumes no warranty
for proper and punctual delivery, faultless condition from defects or for the
supplier's credit standing and ability to deliver.
Friedrichshafen,______________________ ______________________________
/s/ Kelly Enos
- ------------------------------------- ------------------------------------
Nortel Dasa Network Systems Lessee's company stamp and signature
GmbH & Co. KG
- -------------------------------------------------------------------------------
Nortel Dasa Network Systems GmbH & Co. KG-Postfach - 88039 Friedrichshafen
- - Werk 2 BG10 An der B31
??????????????????????????????????????????????????????????????
<PAGE>
NORTEL DASA
-1-
LEASING CONDITIONS -- PARTIAL AMORTIZATION
SECTION 1 DELIVERY, ACCEPTANCE
The lessee must accept the leasing asset delivered in faultless condition.
The lessee must confirm acceptance to Nortel Dasa in writing.
The lessee bears the cost and risk of delivery and assembly as well as the
cost of repairing any damage caused in this respect. Nortel Dasa hereby
assigns to the lessee any claims accruing to Nortel Dasa against the supplier
in this connection.
SECTION 2 LEASE TERM, MATURITY AND ALTERATION OF LEASING PAYMENTS
The leasing agreement is concluded on a fixed basis for the leasing period
stated overleaf with effect from the starting date specified.
The leasing payments, the first of which is due on the date stated overleaf,
must be made on the first of each month.
If the purchase price changes, the agreed leasing payments and the agreed
residual value change accordingly.
Nortel Dasa reserves the right to adjust the leasing rate accordingly if the
level of interest rates on the money and capital market rises or falls before
Nortel Dasa receives the lessee's confirmation of acceptance.
SECTION 3 RELEASE
The lessee bears all statutory levies and new taxes introduced during the
lease term which relate to Nortel Dasa in its capacity as lessor or as owner
of the leasing asset.
The lessee will release Nortel Dasa from all claims which third parties
assert against Nortel Dasa as a result of its ownership or for other reasons,
such as delivery, assembly or use of the leasing asset.
Nortel Dasa is entitled to make the respective payments and ask for
reimbursement of its expenses by the lessee.
SECTION 4 PROPERTY OF NORTEL DASA
The lessee must keep the leasing asset in orderly and functional condition at
his own expense. If the leasing asset is an EDP unit, the lessee will conclude
a maintenance agreement with the manufacturer at his own expense. In the case
of other leasing assets, Nortel Data may ask for conclusion of a maintenance
agreement at any time.
The lessee will observe such laws and statutory orders which apply to
possession and use of the leasing asset.
The lessee may not dispose of the leasing asset and may only move it from the
agreed location with Nortel Dasa's written consent.
Agents of Nortel Dasa are entitled to inspect the leasing asset during normal
business hours and may designate the leasing asset as the property of Nortel
Dasa.
The leasing asset is fixed to a property for a temporary purpose with the
intention of being detached after expiry of the leasing agreement. The lessee
is obliged to state this clearly to the owner of the property.
The lessee may only make alterations to the leasing asset after receiving
written approval from Nortel Dasa. The parties agree that a movable asset
which the lessee fixes to the leasing asset becomes the sole property of
Nortel Dasa after such attachment. The leasing agreement also applies to such
attachments. The lessee is, however, entitled to restore the original
condition of the leasing asset.
The lessee will inform Nortel Dasa without delay of compulsory distraint
measures with respect to the leasing asset or the property on which the
leasing asset is located. The intervention costs are borne by the lessee
unless they are reimbursed to Nortel Dasa.
SECTION 5 INSURANCE
During the lease term, the lessee will insure the leasing asset at his own
expense and a the asset's original value against all risks typical of the
leasing asset, in the case of EDP units in particular by electronic
insurance, and included in his normal company third-party insurance policy.
Nortel Dasa may ask for further appropriate insurance.
The lessee undertakes to apply to his insurance company for confirmation of
insurance in favour of Nortel Dasa. Should the lessee not submit the
confirmation of insurance within 30 days after the beginning of the lease
term or not pay his premiums during the lease term, Nortel Dasa is entitled
to take out an appropriate insurance policy at the lessee's expense.
The lessee hereby assigns to Nortel Dasa his rights under the insurance
policies and any claims in respect of damage to the leasing asset.
<PAGE>
EXHIBIT 10.34
To:
Nortel Dasa Network Systems GmbH & Co. KG
D-88039 Friedrichshafen
Germany
GUARANTEE
---------
Under an agreement dated December 1, 1997 (as the same may be amended from time
to time, the "Agreement"), with which we are familiar, you have agreed, subject
to certain terms and conditions, to make available credit facilities or other
financial accommodation to Star Telecommunications Deutschland GmbH, Voltastr.
1a, 60486 Frankfurt (the "Borrower") up to the amount of DM 31.284.000,00
against our first demand guarantee. Accordingly, we issue this Guarantee in
order to ensure that you shall receive payment of all amounts expressed to be
payable by the Borrower under the Agreement (the "Indebtedness") in the currency
and at the place provided therein at its stated or accelerated maturity, net of
any deduction or withholding whatsoever an irrespective of the factual or legal
circumstances and motives by reason of which the Borrower may fail to pay the
Indebtedness.
1. GUARANTEE AND GUARANTEED AMOUNT. WE HEREBY IRREVOCABLY AND UNCONDITIONALLY
GUARANTEE THE PAYMENT TO YOU, in Friedrichshafen and in effective Deutsche Mark,
of the Indebtedness UP TO DM 31.284.000,00. In addition to such amount, we
hereby irrevocably and unconditionally guarantee the payment to you of such
further amounts as correspond to interest, cost, expenses, fees and all other
amounts expressed to be payable by the Borrower under the Agreement. Payment
hereunder will be made net of any deduction or withholding whatsoever.
<PAGE>
2
2. PAYMENT UPON FIRST DEMAND. We shall effect payment hereunder IMMEDIATELY
UPON YOUR FIRST DEMAND and confirmation in writing or by teletransmission that
the amount claimed from us equals the Indebtedness (or part thereof) which the
Borrower has not paid when due.
3. PRIMARY, INDEPENDENT OBLIGATION. This Guarantee constitutes our primary
and independent obligation to make payment to you in accordance with the
terms hereof, under any and all circumstances, regardless of the validity,
legality or enforceability of the Agreement and irrespective of all
objections, exceptions or defences from the Borrower or third parties.
4. GUARANTEE FOR PAYMENT. You shall not be required first to claim payment
from, to proceed against, or enforce any claims on or security given by, the
Borrower or any other person before making demand from us hereunder.
5. EXCLUSION OF SPECIFIC DEFENCES. This Guarantee and our obligations
hereunder shall not be contingent upon the legal relationship between you and
the Borrower and shall be independent of and enforceable notwithstanding (a) any
defect in any provision of the Agreement, (b) any absence or insufficiency of
corporate resolutions relating to the Indebtedness, (c) any inadequate
representation of the Borrower, (d) any absence of licences or other
authorisations or any factual or legal restrictions or limitations existing or
introduced in the country of the Borrower, (e) any agreement made between you
and the Borrower concerning the Indebtedness, including any extension of the
term of payment and any rescheduling or restructuring of the Indebtedness,
whether or not we shall have given our consent thereto, (f) the taking,
existence, variation or release of any other collateral provided to you for the
Indebtedness, and your legal relationship with any provider of such other
collateral, (g) any right of the Borrower to rescind the
<PAGE>
3
Agreement, and (h) any right that you may have to set-off the Indebtedness
against a counterclaim of the Borrower.
6. TAXES. Any amount payable by us hereunder will be paid free and clear of
and without deduction of any withholding taxes. Withholding taxes are taxes,
duties or governmental charges of any kind whatsoever which are imposed or
levied in, by or on behalf of the country in which we are/or the Borrower is
situated, and which are deducted from any payment hereunder and/or under the
Agreement. If the deduction of withholding taxes is required by law, then we
shall pay such additional amounts as may be necessary in order that the net
amounts received by you after such deduction shall equal the amount that would
have been receivable had no such deduction been required.
7. CURRENCY INDEMNITY. Payments made by us to you pursuant to a judgement or
order of a court or tribunal in a currency other than that of the Guarantee (the
"Guarantee Currency") shall constitute a discharge of our obligation hereunder
only to the extent of the amount of the Guarantee Currency that you, immediately
after receipt of such payment in such other currency, would be able to purchase
with the amount so received on a recognised foreign exchange market. If the
amount so received should be less than the amount due in the Guarantee Currency
under this Guarantee, then as a separate and independent obligation, which gives
rise to a separate cause of action, we are obliged to pay the difference.
8. LIMITATION OF SUBROGATION. So long as any sum remains payable under the
Agreement, we undertake not to assert any claim we may have against the Borrower
by reason of the performance of our obligations under this Guarantee, whether on
contractual grounds or on any other legal basis, until all amounts payable to
you under the Agreement have been fully and irrevocably received or recovered.
Any amount received or recovered by us from the Borrower shall be held in trust
for and immediately paid to you. If we make any payment to you hereunder.
<PAGE>
4
we shall only be subrogated in your rights against the Borrower once all amounts
payable to you under the Agreement have been fully and irrevocably received or
recovered by you.
9. DISSOLUTION/CHANGE OF STRUCTURE. The obligations under this Guarantee
shall remain in force notwithstanding any dissolution or change in the
structure or legal form of the Borrower.
10. RESTRUCTURING. You shall without our consent be entitled to reschedule or
restructure principal, interest and other amounts payable under the Agreement,
to release the Borrower from its obligations and/or to accept a new debtor if,
for reasons which you deem important, you or other companies of the Deutsche
Bank group agree to similar measures also with respect to your or their other
credits extended to entities in the country of the Borrower. Our liability under
this Guarantee shall not be affected by such measures, and we undertake to pay
to you upon first demand, in accordance with the terms hereof, all such amounts
in full and at such time as they would have become due and payable had the
Agreement and the Indebtedness remained effective and unaltered. Our consent to
the terms and documentation of such rescheduling, restructuring, release or debt
assumption shall not be required.
11. NEW MONEY. Should you agree, in connection with a debt restructuring or in
order to avoid such restructuring, to extend new credits ("New Money") to the
Borrower or other entities of the public or private sector in the country of the
Borrower and should your participation in such New Money be calculated on the
basis of credits extended by you and/or other companies of the Deutsche Bank
group to the Borrower or such other entities, we hereby irrevocably and
unconditionally guarantee, in accordance with the terms hereof, that portion of
the claims for principal, interest, cost, expenses, fees and other amounts
payable in respect of the New Money by which your participation in the New Money
is increased
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5
by virtue of the Indebtedness, regardless of whether you are legally obliged to
take part in the restructuring or the New Money. Our consent to the terms and
documentation of the New Money shall not be required.
12. MISCELLANEOUS. We represent and warrant that this Guarantee is binding,
valid and enforceable against us in accordance with its terms. We waive any
express acceptance of this Guarantee by you. We confirm that we have taken, and
will continue to take, all necessary steps to ensure that any amount claimed by
you from us hereunder can be transferred to you immediately, free of any
deduction, cost or charges whatsoever. We waive any right to require information
from you in respect of the Agreement and the Indebtedness.
13. TERM. This Guarantee is effective as of its date of issuance [and shall
expire once all amounts expressed to be payable by the Borrower to you under the
Agreement have been fully and irrevocably received by you]. Unless we shall have
received your demand hereunder in accordance with the aforementioned conditions
on or before dezember, 15, 2002, this Guarantee shall expire and be of no
further effect. However, should you thereafter become liable to return monies
received in payment of the Indebtedness as a result of any bankruptcy,
composition or similar proceedings affecting the Borrower, this Guarantee shall
be reinstated and become effective again notwithstanding such expiration.
14. PARTIAL INVALIDITY. Should any provision of this Guarantee be unenforceable
or invalid, the other provisions hereof shall remain in force.
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6
15. APPLICABLE LAW, JURISDICTION. This Guarantee and all rights and obligations
arising hereunder shall in all respects be governed by German law. We hereby
submit to the jurisdiction of the competent courts of Friedrichshafen, Germany.
We hereby irrevocably appoint DR. TORSTEN BARTSCH OF DOSER AMERELLER NOACK (fill
in name of the process agent) as our agent for service of process or other legal
summons in connection with any action or proceedings in Germany arising under
this Guarantee. We irrevocably waive any objection which we may now or hereafter
have that such proceedings have been brought in an inconvenient forum.
1/12/97 /s/ Kelly Enos
- ---------- --------------------------------
Date Signature
<PAGE>
EXHIBIT 10.35
NATIONSBANK NOTE AND SECURITY AGREEMENT
NationsBanc Leasing Corporation (FIXED RATE AND LEVEL PAYMENTS)
- -------------------------------------------------------------------------------
This Note and Security Agreement made as of the date set forth below sets forth
the terms and conditions governing the repayment of a loan made by NATIONSBANC
LEASING CORPORATION ("Secured Party") to the party identified below as "Debtor"
for the purpose of financing the personal property identified below as the
"Equipment", and the granting by Debtor to Secured Party of a security interest
in the Equipment and certain related property to secure the repayment of all
Debtor's obligations to Secured Party.
DATE: DECEMBER 18, 1997 AGREEMENT NUMBER: 09062-00701
SECURED PARTY: NationsBanc Leasing Corporation
2300 Northlake Centre Drive, Suite 300
Tucker, Georgia 30084-4007
DEBTOR: Star Telecommunications, Inc.
EQUIPMENT: One(1) 1997 Siemens Stromberg-Carlson Telephone Switch
together with all parts, additions, accessions accessories,
replacements and substitutions thereto or therefor; also
more fully described on invoice 00262168, 00262169, &
00262170.
2323 Bryan Street, Ste. 350
EQUIPMENT LOCATION: Dallas, TX 75201
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT OF LOAN: $549,320.68
NUMBER OF EACH REPAYMENT INSTALLMENTS: 37
AMOUNT OF EACH REPAYMENT INSTALLMENT: $13,976.29
AMOUNT OF FINAL REPAYMENT INSTALLMENT: $137,330.15
DUE DATE OF FIRST REPAYMENT INSTALLMENT: On the day Secured Party funds this
loan.
INTEREST RATE. A per annum rate of interest equal to (i) Eight and 83/100
percent (8.83%) or (ii) if less, the highest rate of interest permitted by
applicable law.
LOAN; TERMS OF REPAYMENT. In consideration of the making of a loan by Secured
Party to Debtor for the purpose of financing the Equipment specified above (the
"Loan"), Debtor promises and agrees to pay to the order of Secured Party, at
Secured Party's address stated above or at such other places as Secured Party
may from time to time designate in writing, the principal amount of the Loan,
together with interest calculated as hereinafter provided. Subject to Debtor's
right to prepay such principal amount in whole or in part as hereinafter
provided, Debtor shall pay such principal amount together with interest thereon
in consecutive monthly installments, each in the amount set forth above under
the heading "Amount of Each Repayment Installment," due and payable on the "Due
Date of First Repayment Installment" set forth above and continuing on a like
date of each calendar month thereafter until the Loan is fully repaid; provided,
however, that the last such installment shall be in the amount of the then
outstanding principal balance of the Loan together with interest thereon.
INTEREST. Interest shall be calculated on the basis of a year of three hundred
sixty (360) days. Each installment shall include all interest accrued through
the due date.
PREPAYMENTS. After one (1) year from the date Secured Party funds this Loan,
the outstanding principal balance of the Loan may be prepaid in whole or in
part at any time, together with all interest and late charges accrued through
the date of prepayment and a prepayment charge calculated as follows: one
percent (1%) of the amount prepaid multiplied by the number of years or
fraction thereof remaining under the term of this Agreement. Partial
prepayments shall be applied against principal installments in their inverse
order of maturity. Except as provided herein, the Loan may not be prepaid.
LATE CHARGES. To the extent permitted by applicable law, Debtor shall pay on
demand, as a late charge, an amount equal to five percent (5%) of each
installment or part thereof that is not paid within ten (10) days of the date
when due, but nothing in this paragraph alters the definitions of events of
default hereunder. Debtor shall pay the late charge, to the extent permitted by
applicable law, regardless of whether or not Debtor's failure to pay such
installment when due is or becomes a default hereunder and regardless of whether
or not Secured Party proceeds under the "Remedies" provisions hereof or takes
any other action, and demand for and collection of the late charge shall not be
deemed a waiver of default or of any other remedies or rights.
SECURITY INTEREST. Debtor hereby grants to Secured Party a security interest in
and security title to the personal property described above as the "Equipment",
together with all parts, additions, accessions, accessories, replacements and
substitutions thereto or therefor, and all proceeds therefrom (including any
proceeds of insurance against fire or other casualty whether or not the
insurance policy contains an endorsement in favor of Secured Party), all of
which is hereinafter called the "Collateral". This security interest is given to
secure payment to Secured Party of all present and future obligations of Debtor
to Secured Party, including without limitation the obligation of Debtor to repay
the Loan and all other liabilities arising under or in connection with this
Agreement; all future advances, if any, made by Secured Party to Debtor, whether
or not made pursuant to any commitment of Secured Party (and nothing in this
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<PAGE>
Agreement shall be construed to create or imply the existence of any such
commitment); and all other liabilities of Debtor to Secured Party now
existing or hereafter incurred, matured or unmatured, direct or contingent,
whether or not evidenced by a promissory note, and whether owing originally
to Secured Party or acquired by Secured Party from any other party, and any
renewals and extension thereof and substitutions therefor. (All of the above
obligations, including but not limited to obligations in respect of the Loan,
are hereinafter called the "Indebtedness.") The foregoing notwithstanding,
however, Secured Party's security interest in the Collateral shall be
released upon payment, fully and finally, of all scheduled payments hereunder
as and when the same become due and payable, but not by reason of prepayment
thereof, unless all liabilities and obligations of Debtor to Secured Party
have been paid finally and in full.
DEBTOR WARRANTS AND REPRESENTS THAT:
GOOD STANDING. Debtor is organized and existing in good standing under the laws
of the jurisdiction of its formation, has the power to own its property and to
carry on its business as now being conducted, and is duly qualified to do
business and is in good standing in each jurisdiction in which the character of
the property owned by it therein or the transaction of its business makes such
qualification necessary.
AUTHORITY. Debtor has full power and authority to enter into this Agreement, to
make the borrowing hereunder, and to incur the obligations provided for herein,
all of which have been duly authorized by all proper and necessary action. No
consent or approval of stockholders, partners, members or co-owners or of any
public authority is required as a condition to the validity of this Agreement.
BINDING AGREEMENT. This Agreement constitutes the valid and legally binding
obligation of Debtor enforceable in accordance with its terms.
LITIGATION. There are no proceedings pending or threatened before any court or
administrative agency that might materially adversely affect the financial
condition or operation of Debtor.
NO CONFLICTING AGREEMENTS. There is no charter, by-law, preference stock or
partnership agreement provision of Debtor and no provision of any other
organizational documents or existing mortgage, indenture, contract or agreement
binding on Debtor or affecting its property which would conflict with or in any
way prevent the execution, delivery or performance of the terms of this
Agreement.
OWNERSHIP FREE OF ENCUMBRANCES. Except for the security interest granted hereby,
Debtor now owns, or will use the proceeds hereof to become the owner of, the
Collateral free from any prior lien, security interest or encumbrance. No
financing statement covering the Collateral or any proceeds thereof is on file
in any public office, except for financing statements showing Secured Party as
the sole secured party thereunder. Debtor has a good right to grant a security
interest in the Collateral to Secured Party.
FIXTURES. None of the Collateral is now a part of or affixed to any real
property.
COLLATERAL LOCATION. Except for items of Collateral that constitute mobile goods
and that are in fact in use by Debtor in the ordinary course of its business at
other locations, all the Collateral comprising goods heretofore delivered to the
Debtor by the seller thereof is located either at (i) Debtor's address set forth
above or (ii) the "Equipment Location" set forth above.
DEBTOR COVENANTS AND AGREES THAT UNTIL ALL THE INDEBTEDNESS IS FULLY SATISFIED:
INSURANCE. Debtor shall maintain continuously, and pay when due all premiums
for, fire and casualty insurance with extended coverage on the Collateral,
insuring the same against loss by fire, explosion, theft and such other
casualties as are usually insured against by companies engaged in the same or
similar businesses with a responsible company or companies satisfactory to
Secured Party, in an amount not less than the unpaid balance of the Loan.
Each of such insurance policies shall have attached thereto a standard loss
payable endorsement, without contribution, in favor of Secured Party as its
interest may appear; shall provide that it may not be canceled without (30)
days' prior written notice to Secured Party; shall provide that, in respect of
Secured Party's interest in such policy, the insurance shall not be invalidated
by any action or inaction of Debtor or any other person (other than Secured
Party); shall insure Secured Party's interest in the Collateral as it may
appear, regardless of any breach or violation of any warranty, declaration or
condition contained in such policy by Debtor or any other person (other than
Secured Party); and shall otherwise be in form and substance acceptable to
Secured Party. Debtor shall deliver forthwith to Secured Party each such policy
(together with the loss payable endorsement), or certificates of insurance or
other evidence satisfactory to Secured Party of the existence of all required
insurance, its terms and conditions, and the payment of all applicable premiums.
Similar evidence of renewal coverage, satisfactory to Secured Party, shall be
delivered to Secured Party at least fifteen (15) days before the expiration of
any initial insurance coverage. In addition, Debtor shall maintain, and pay when
due all premiums for, liability and other insurance in such amounts and against
such risks as is customarily carried by persons in similar businesses owning
similar property. Debtor irrevocably appoints Secured Party as Debtor's
attorney-in-fact, with full power of substitution, during the existence of any
default under this Agreement, to execute loss claims and other applications for
payment of benefits under any insurance policy in the name of Debtor or Secured
Party, to receive all monies and to endorse drafts, checks and other instruments
for the payment of any proceeds of any insurance. This appointment shall be
deemed a power coupled with an interest and shall not be terminable by Debtor so
long as Debtor remains indebted to Secured Party.
MAINTENANCE AND CLEAR TITLE. Debtor shall keep the Collateral in good condition
and free from liens and security interests, shall not sign or suffer to be filed
any financing statements relating to the Collateral except those showing Secured
Party as sole secured party shall not sell or lease or offer to sell or lease or
otherwise encumber or dispose of any of the Collateral, shall defend the
Collateral against all claims and demands of all persons at any time claiming
any interest or right therein, and shall not use the Collateral illegally.
Secured Party may examine and inspect the Collateral at any time, wherever
located.
CHANGE OF NAME, RESIDENCE OR PLACE OF BUSINESS. Debtor shall not change its
name, residence or place of business or do business under any assumed or
fictitious name without giving Secured Party at least thirty (30) days prior
written notice.
CHANGE OF STRUCTURE. Debtor shall maintain its existence, and shall not be
prohibited from merging or consolidating with or into any other entity or sell
substantially all of its assets as long as Debtor is the surviving entity.
USE OF COLLATERAL. Debtor shall use the Collateral exclusively for business
operations.
FIXTURES. Debtor shall not permit any of the Collateral to become a part of or
affixed to any real property.
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<PAGE>
LOCATION OF COLLATERAL. Except for items of Collateral that constitute mobile
goods and that are in fact in use by Debtor in the ordinary course of business
at other locations, all the Collateral shall, from and after the moment that
Debtor acquires possession or control of it, be kept either at (i) Debtor's
address set forth above or (ii) the "Equipment Location" set forth above, and
all records relating to the Collateral shall likewise be kept only at such
location or locations. If at any time the Collateral, or any part thereof, is
removed to a new location, Debtor: (a) shall provide written notice thereof to
Secured Party within thirty (30) days from the date of such relocation; and (b)
either (i) the premises in which such Collateral will be installed will be owned
by Debtor free of any liens or encumbrances, or (ii) if not owned by Debtor free
of liens or encumbrances, the owner of such premises and/or the holder of any
such liens or encumbrances on such premises shall have consented and acknowledge
the superiority of Secured Party's interest in such Collateral.
INDEMNIFICATION. Debtor shall indemnify Secured Party against all claims arising
out of or connected with the ownership or use of the Collateral.
MOTOR VEHICLES. If the Collateral consists of or includes motor vehicles or
other equipment for which there is a certificate of title evidencing ownership
thereof, Debtor shall forthwith cause each certificate to be endorsed over and
the lien of Secured Party to be noted so as to show Secured Party's interest,
and Debtor shall deliver forthwith each such certificate to Secured Party.
TAXES. Debtor shall pay promptly when due all taxes, charges and assessments
that are or may become a lien on the Collateral or any part thereof, except to
the extent that the same are contested in good faith and by appropriate
proceedings.
FINANCIAL STATEMENTS. During the term of this Loan, Debtor (i) shall furnish
Secured Party annual balance sheets and profit and loss statements of Debtor and
of any guarantor of Debtor's obligations hereunder within 120 days after the end
of Debtor's (and any guarantor's) fiscal year, and (ii) at Secured Party's
request, shall furnish Secured Party all other financial information and reports
reasonably requested by Secured Party at any time, including quarterly or other
interim balance sheets and profit and loss statement of Debtor and of any such
guarantor. Debtor shall furnish such other information as Secured Party may
reasonably request at any time concerning the Debtor and its affairs, including
without limitation information concerning the Collateral. Debtor represents and
warrants that all information furnished and to be furnished by Debtor to Secured
Party is accurate and that all financial statements Debtor has furnished and
hereafter may furnish to Secured Party, including operating statement and
statements of condition, are and will be prepared in accordance with generally
accepted accounting principals, consistently applied, and reasonably reflect and
will reflect, as of their respective dates, results of the operations and
financial condition of Debtor and of any other entity they purport to cover.
REIMBURSEMENT FOR EXPENSES. At its option, and with no obligation to do so,
Secured Party may (i) if an event of default exists, discharge taxes or other
encumbrances on the Collateral, or pay for the repair, maintenance and
preservation of the Collateral and (ii) ten (10) days after notifying Debtor of
Secured Party's intent to do so, arrange and pay for insurance on the
Collateral. Debtor agrees to reimburse Secured Party on demand for any payments
so made; Debtor also agrees to reimburse and pay to Secured Party on demand all
expenses incurred or paid by Secured Party in perfecting the security interest
granted hereunder and in collecting the Indebtedness and in protecting or
enforcing Secured Party's rights under this Agreement, including but not limited
to reasonable attorney's fees and legal expenses. Until Debtor makes such
reimbursement, the amount of all such payments and expenses, with interest at
the rate then applicable to principal installments of the Loan not paid when
due, from the date of Payment until reimbursement, shall be added to the
Indebtedness and shall be secured by the security interest granted by Debtor
under this Agreement. Nothing in this paragraph relieves Debtor of the duty to
care for, insure and protect the Collateral and Secured Party's interests
therein and to pay tax on or related to the Collateral, or of any other duty.
SALE OR REPLACEMENT OF COLLATERAL. Debtor shall not sell or replace any item or
part of the Collateral without the prior written consent of Secured Party.
POST DEFAULT INTEREST. Any principal balance not paid when due (whether by
acceleration or otherwise) shall accrue interest at the "Default Rate" until
such principal balance is paid. "Default Rate" shall be a per annum rate of
interest equal to (i) fifteen percent (15.0%) or (ii), if less, the highest rate
of interest permitted by applicable law. Secured Party may, at its option,
apply late payments (either in full or partial) in the following manner; first
to interest, then to principal, and finally to late charges. To the extent
permitted by applicable law, Debtor shall pay interest on delinquent principal
installments on demand regardless of whether or not Secured Party proceeds under
the "Remedies" provisions hereof or takes any other action, and demand for and
collection of interest on such overdue installments at the Default Rate shall
not be deemed a waiver of default or of any other remedies or rights.
EVENTS OF DEFAULT. Debtor shall be in default under this Agreement upon the
happening of any of the following events or conditions, each of which is an
event of default:
1. Default shall be made in the payment of any installment of the Loan,
or in the payment of any other Indebtedness, when and as the same become due and
payable, whether at the stated maturity thereof or by acceleration or otherwise,
and such default shall continue unremedied for ten (10) days; or
2. Default shall be made in the due observance or performance of any
term, covenant or agreement contained in this Agreement (other than covenants
and agreements to pay Indebtedness), and such default shall continue unremedied
for ten (10) days after written notice thereof is given by Secured Party to
Debtor; or
3. Any representation or warranty made by Debtor in this Agreement, or
any statement or representation made in any certificate, report or opinion
delivered pursuant hereto, or in connection herewith, shall prove to have been
incorrect in any material respect when made; or
4. A default exists under any other agreement or instrument of Debtor's
with or in favor of Secured Party; or
5. The Collateral shall be lost, stolen, substantially damaged, destroyed
(unless (i) such occurrence is fully covered by insurance, and (ii) the Loan is
fully repaid within thirty (30) days after such occurrence), or shall be sold or
encumbered; or Debtor's rights in the Collateral shall be voluntarily or
involuntarily transferred, by way of sale, lease or creation of a security
interest, or by way of attachment, levy, garnishment or other judicial process,
or otherwise; or
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<PAGE>
6. Debtor shall become insolvent or be generally unable to meet its
obligations as they mature, make an assignment for the benefit of creditors,
admit in writing its inability to pay its debts as they mature, or suspend the
operation of its present business; or
7. A trustee, receiver or custodian shall be appointed for Debtor or for
a substantial part of its property without the consent of Debtor and not be
discharged within thirty (30) days; or
8. Bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings shall be instituted by or against Debtor, and, if instituted against
Debtor, be consented to or remain undismissed for a period of thirty (30) days;
or
9. An event described in Section 6, 7, or 8 shall occur with respect to
any party who is guarantor or surety for the Indebtedness; or
10. The Borrower shall fail to pay when due (whether at final maturity or
as a result of acceleration) principal or interest payments then due under the
terms of any bonds, notes debentures or other agreements evidencing, in the
aggregate, at least $2,000,000 of Debt (excluding, for purposes of this
calculation, payments required under this Agreement or any of the other Loan
Documents) and such non-payment shall continue beyond any period of grace
provided with respect thereto, or the Borrower shall default in the observance
or performance of any other agreement contained in any such bonds, notes,
debentures or other agreements evidencing indebtedness, and the effect of such
failure or default is to cause the indebtedness evidenced thereby to be
accelerated by the holders thereof prior to its stated date of maturity; or
11. Liquidation or dissolution of Debtor; or
12. Sale, transfer or exchange, directly or indirectly, in one or more
transactions, of a controlling stock interest in Debtor or the suspension of
Debtor's present business; or
13. The Pension Benefit Guaranty Corporation shall commence proceedings
under Section 4042 of the Employee Retirement Income Security Act of 1974 to
terminate any employee pension benefit plan of Debtor; or
14. The attempted repudiation of any guaranties for obligations of Debtor
to Secured Party.
REMEDIES. Upon any event of default and at any time thereafter, Secured
Party may declare all the Indebtedness immediately due and payable in full
(unless such event of default comprises one or more of the events described
in paragraphs 7 or 8 above, in which case all the Indebtedness shall become
immediately due and payable in full without declaration, notice or other
action on the part of Secured Party), and may proceed to enforce payment
thereof and exercise any and all of the rights and remedies provided by the
Uniform Commercial Code as well as all other rights and remedies of Secured
Party hereunder or under other applicable law. Upon the occurrence of an
event of default, Debtor shall, upon demand by Secured Party, assemble the
Collateral and make it available to Secured Party at a place designated by
Secured Party reasonably convenient to both parties. Secured Party may, at
its election, enforce its rights under this Agreement by a suit in equity for
specific performance. Debtor grants Secured Party the right to enter upon
premises of Debtor for the purpose of recovering possession of the Collateral
or any part thereof after the occurrence of an event of default, or for the
preservation or enforcement of Secured Party's other rights hereunder, all
without demand or notice to Debtor and without judicial hearing or
proceedings, which Debtor hereby expressly waives. The requirements of
reasonable notice shall be deemed met if such notice is mailed to an address
of Debtor shown at the beginning of this Agreement at least ten (10) days
before the time of the sale or disposition, but nothing contained herein
shall be construed to mean that other notice or a shorter period of time does
not constitute reasonable notice of the sale or other disposition of the
Collateral. Debtor shall reimburse Secured Party for all Secured Party's
expenses of retaking, holding, preparing for sale, selling or otherwise
dealing with disposing of the Collateral, including attorney's fees in the
amount of fifteen percent (15%) of the outstanding principal balance of and
interest on the Indebtedness (but not to exceed the amount of attorney's fees
actually incurred) if collection is by or through an attorney at law.
Subject to applicable law, Debtor shall pay any Indebtedness remaining unpaid
after sale or other disposition of any or all of the Collateral. Any surplus
proceeds from the sale or other disposition of the Collateral remaining after
full satisfaction of the Indebtedness shall be paid to Debtor or to such
other persons as may be entitled thereto under applicable law.
CUMULATIVE RIGHTS AND NO WAIVER. Each and every right granted Secured Party
hereunder or in connection herewith, or allowed it by law or equity, shall be
cumulative and may be exercised from time to time. No failure on the part of
Secured Party to exercise, and no delay in exercising, any right shall
operate as a waiver thereof, nor shall any single or partial exercise by
Secured Party of any right preclude any other or future exercise thereof or
the exercise of any other right.
FINANCING STATEMENTS. Debtor shall sign and deliver to Secured Party such
financing statements and other documents as Secured Party may deem necessary to
perfect, protect and continue its security interest in the Collateral, in form
satisfactory to Secured Party. Debtor will reimburse Secured Party for all
expenses incurred in the filing of financing statements, continuation
statements, termination statements and any other documents relating to the
perfection of Secured Party's security interest in the Collateral. A carbon,
photographic or other reproduction of this Agreement or of a financing statement
relating to the security interest herein granted is sufficient as a financing
statement. Debtor authorizes Secured Party to file financing statements as to
the Collateral signed only by Secured Party and not by Debtor.
SEVERABILITY. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction by ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.
ASSIGNABILITY. Debtor acknowledges that the rights of Secured Party may be
assigned to any person in whole or in part at the sole discretion of Secured
Party, and Debtor agrees that any defense it may have against Secured Party as
to events occurring prior to any assignment shall not be asserted, and shall be
void, against any assignee of the rights of Secured Party. Debtor shall not
assign any of its rights or obligations under this Agreement to any person
without the prior written consent of Secured Party, and in the absence of such
prior written consent, no such assignment of any right or obligation of Debtor
hereunder shall be binding on Secured Party. Subject to the foregoing
limitations, the terms and conditions of this Agreement shall be binding on and
shall inure to the benefit of the heirs, executors, administrators, successors,
and assigns of the parties.
WARRANTY DISCLAIMER. SECURED PARTY IS NOT A MANUFACTURER OR SELLER OF THE
COLLATERAL AND MAKES NO WARRANTIES WHATSOEVER WITH RESPECT TO THE COLLATERAL,
INCLUDING WITHOUT LIMITATION WARRANTIES OF TITLE,
Page 4 of 5
<PAGE>
MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE. DEBTOR SHALL NOT ASSERT
ANY BREACH OF ANY SUCH WARRANTY AS A DEFENSE TO ANY OF ITS OBLIGATIONS TO
SECURED PARTY UNDER THIS AGREEMENT; HOWEVER, NOTHING IN THIS AGREEMENT SHALL BE
CONSTRUED TO IMPAIR ANY OF DEBTOR'S REMEDIES FOR BREACH OF WARRANTY AGAINST ANY
SELLER OR MANUFACTURER OF THE COLLATERAL.
GOVERNING LAW; CONSENT TO VENUE AND PERSONAL JURISDICTION. THIS AGREEMENT SHALL
BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
STATE OF GEORGIA AS OF THE DATE HEREOF. IF THE ADDRESS OF DEBTOR'S RESIDENCE OR
PRINCIPAL PLACE OF BUSINESS SHOWN HEREIN IS NOT IN THE STATE OF GEORGIA, DEBTOR
CONSENTS TO THE EXERCISE OF PERSONAL JURISDICTION OVER DEBTOR BY ANY COURT OR
RECORD SITTING IN THE STATE OF GEORGIA IN CONNECTION WITH ANY ACTION ARISING OUT
OF THIS AGREEMENT, AND WAIVES ALL OBJECTIONS TO SERVICE OF PROCESS ON DEBTOR AT
SUCH ADDRESS.
WAIVER OF JURY TRIAL. SECURED PARTY AND DEBTOR EACH WAIVE TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES AGAINST THE
OTHER ON ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS
AGREEMENT.
IN WITNESS WHEREOF, the parties have caused their names to be signed and
their seals affixed as of the date first above written. By execution hereof,
each party intends and agrees to be legally bound by all the provisions of
this Agreement.
NATIONSBANC LEASING CORPORATION Star Telecommunications, Inc.
(Secured Party) (Debtor)
By: /s/ Damon R. Excell By: /s/ Kelly Enos
------------------------------- ------------------------------
Printed Name: DAMON R. EXCELL Printed Name: Kelly Enos
---------------------- ---------------------
Title: VICE PRESIDENT Title: CEO
---------------------------- ---------------------------
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<PAGE>
AMENDMENT OF LEASE
This Amendment of Lease (this "Agreement"), dated as of the 30th
day of September, 1997, 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 ("Landlord") and STAR
TELECOMMUNICATIONS, INC., a Delaware corporation, having an address at 740
State Street, Santa Barbara, CA 93101.
WITNESSETH:
WHEREAS:
A. Landlord and Star Vending, Inc., as Tenant was formerly known,
entered into a lease dated as of February 28, 1996 (the "Original Lease"), as
amended by amendment dated as of October 14, 1996 (the Original Lease, as so
amended, being referred to herein as the "Existing Lease") pursuant to which
Tenant leased portions of the 12th floor (the "Existing Premises") in the
building known as 60 Hudson Street, New York, New York (the "Building") for a
Term which is presently scheduled to expire on April 30, 2006.
B. On February 26, 1997, Star Vending, Inc. reincorporated in the
State of Delaware under the name Star Telecommunications, Inc. and
subsequently conducted an initial public offering of its common capital stock
(the "Offering").
C. Landlord and Tenant wish to increase the premises demised
under the Existing Lease by adding thereto the premises, located on the 13th
floor of the Building, shown hatched on Exhibit A annexed hereto (the "New
Premises"), to extend the Term of the Existing Lease, and to make certain
other changes in the Existing Lease.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants hereinafter contained, Landlord and Tenant agree that the Existing
Lease is hereby amended as follows:
1. All terms contained in this Agreement shall, for the purposes
hereof, have the same meanings ascribed to them in the Original Lease unless
otherwise defined herein. As used herein, the term "Lease" shall mean the
Existing Lease as amended by this Agreement and as the same may be hereafter
amended.
2. Effective as of the "New Premises Date," as hereinafter
defined, the "premises" or "demised premises" shall be the Existing Premises
plus the New Premises. The New Premises Date is the date on which Landlord
delivers possession of the New
<PAGE>
Premises to Tenant with all items of Landlord's Work (as hereinafter
defined), except the submeter installation and the window pane replacement,
substantially complete.
3. The Term of the Lease with respect to the entire demised premises
is extended to April 30, 2008.
4. Commencing on the New Premises Date, the annual Fixed Rent
payable under the Lease shall be increased to $578,179 per annum. On May 1,
2001, the annual Fixed Rent payable under the Lease shall be increased to
$600,277 per annum; on May 1, 2002, the annual Fixed Rent payable under the
Lease shall be increased to $630,377 per annum; and on May 1, 2006, the Fixed
Rent payable under the Lease shall be increased to $652,475 per annum.
Notwithstanding anything to the contrary contained herein, provided the Lease
is in full force and effect and Tenant is not in default thereunder beyond
any applicable notice and/or cure period, the Fixed Rent payable under the
Lease, as hereby increased, shall abate by $28,845.83 per month from the New
Premises Date to but not including the later to occur of May 1, 1998 or the
date that is seven (7) months after the New Premises Date (such later date
being the "Rent Commencement Date"), as the same may be extended pursuant to
Paragraph 5(c) hereof.
5. (a) Landlord will, with reasonable diligence after the
execution and exchange of this Agreement, perform the Landlord's Work, all at
Landlord's expense except for the submeter and the installation thereof,
which will be at Tenant's expense. Upon substantial completion of such work
(except the submeter installation and the window pane replacement), Landlord
shall deliver to Tenant, and Tenant shall accept, the demised premises in
their then "as is" broom-clean condition. Tenant acknowledges that Landlord
shall not be required to perform any work to prepare the demised premises for
Tenant's occupancy except for the Landlord's Work. 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 and the Landlord's
Work was substantially complete, except for the submeter installation, the
window pane replacement and any punchlist items of which Tenant notifies
Landlord within thirty (30) days after the New Premises Date. Landlord will
install the submeter, replace the broken window panes and complete the
punchlist items with reasonable diligence after the New Premises Date (but
Landlord shall not be required to use overtime labor or incur other
additional expense to do so), and, in the case of the window pane
replacement, not later than the date on which Tenant's work is completed.
(b) The "Landlord's Work" consists of the following:
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(1) Complete demolition of the existing improvements
in the premises, except for floor tile;
(2) installation of a submeter at Tenant's expense,
which expense shall be reimbursed to Landlord within fifteen (15) days after
Landlord bills Tenant therefor;
(3) construction of a Building standard demising
wall and entrance door; and
(4) replacement of broken window panes.
(c) If the New Premises Date has not occurred by October 15,
1997 for any reason other than force majeure or other events beyond
Landlord's reasonable control, the Rent Commencement Date shall be delayed by
one day for each day of delay, beyond October 15, 1997, in the occurrence of
the New Premises Date. (Thus, for example, if the New Premises Date were
delayed until October 18, 1997 by reason of events other than force majeure
or events beyond Landlord's reasonable control, the Rent Commencement Date
would be May 21, 1998.) In addition, if the New Premises Date has not
occurred by January 1, 1998 for whatever reason, Tenant shall have the right,
to be exercised by notice to Landlord given no later than January 15, 1998,
as to which date time shall be of the essence, but in any event not after the
occurrence of the New Premises Date, to cancel this Agreement ab initio, in
which event the Existing Lease shall continue as if this Agreement had never
been made and Landlord will return to Tenant any amounts paid to Landlord
hereunder (to the extent allocable to the New Premises).
6. If any friable asbestos (not including asbestos floor tile, as to
which Landlord shall have no responsibility) is discovered in the New
Premises that is not the responsibility of Tenant as provided in the Lease
and 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 remove or encapsulate such asbestos in accordance with Law.
Landlord will deliver to Tenant with reasonable promptness after the New
Premises Date a Form ACP-5 for the premises.
7. It is the intention of the parties that additional rent payable by
Tenant pursuant to the Lease be calculated separately for the Existing
Premises and the New Premises, with the calculations for the Existing
Premises being made pursuant to the provisions of Articles 37, 39 and 40 of
the Existing Lease as unmodified by this Agreement and the calculations for
the New Premises being made pursuant to the provisions of Articles 37, 39 and
40 of the Existing Lease with the following modifications:
(a) "Base Tax Year" for the New Premises shall mean the tax fiscal
year July 1, 1997 - June 30, 1998.
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<PAGE>
(b) "Base Year Taxes" for the New Premises shall mean the Real
Estate Taxes as finally determined for the Base Tax Year for the New Premises.
(c) "Subsequent Tax Year" for the New Premises shall mean any
tax fiscal year commencing on or after July 1, 1998.
(d) "Tenant's Proportionate Share" for the New Premises shall
mean 1.79%.
(e) "Base Operating Year" for the New Premises shall mean the
Operating Expenses incurred for 1997.
(f) "Operational Year" for the New Premises shall mean each
calendar year all or any part of which occurs during the Term commencing with
1998.
8. Effective as of the New Premises Date, Landlord shall furnish,
for Tenant's use in the New Premises, fifteen (15) watts per rentable square
foot of electric current at 120/208 volts, three phase, at a panel box in the
New Premises, upon and subject to the terms and conditions provided in
Article 42 of the Lease. If at any time during the Term, whether before or
after Tenant's power for the New Premises is increased or decreased, Landlord
reasonably determines that Tenant is not using any portion of the electric
capacity then servicing the New Premises, then Landlord shall have the right
to recapture any such power not then being used by Tenant without
compensation to Tenant. (If, with respect to the New Premises, Landlord
recaptures a portion of Tenant's original fifteen (15) watts per rentable
square foot, and at a later date Landlord provides Tenant with additional
current, Tenant shall only be required to pay the per amp charge set forth in
the Original Lease for total current in excess of fifteen (15) watts per
rentable square foot. As set forth in the Existing Lease, if, with respect
to the Existing Premises, Landlord recaptures a portion of Tenant's original
ten (10) watts per rentable square foot, and at a later date Landlord
provides Tenant with additional current, Tenant shall only be required to pay
the per amp charge set forth in the Original Lease for total current in
excess of ten (10) watts per rentable square foot.) Tenant's consumption of
energy in the New Premises will be measured by one or more submeters to be
installed by Landlord at Tenant's expense. Anything in the Lease to the
contrary notwithstanding, if the New Premises Date occurs prior to the
installation and proper calibration of the submeter(s), then (i) Tenant shall
pay Landlord for Tenant's consumption of electricity in the New Premises at
the rate of $1,881.25 per month during any period when construction is taking
place in the New Premises; and (ii) from and after the date on which Tenant
occupies all or a portion of the demised premises for the conduct of business
and until the installation and proper calibration of the submeter(s), Tenant
shall pay Landlord $3,762.50 per month on
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<PAGE>
account, such payments to be retroactively adjusted based on the average
kilowatts and kilowatt hours consumed over the first three (3) months after
installation and proper calibration of the submeter(s).
9. Simultaneously with the execution of this Agreement, Tenant has
delivered to Landlord a check subject to collection in the amount of $86,537.00,
increasing the amount of the Security Deposit to $172,935.00. Provided that
Tenant is not then in default, Tenant will be permitted to reduce the amount of
the Security Deposit by $57,691.00 on the third (3rd) anniversary of the Rent
Commencement Date. If the Security Deposit is in cash, Landlord will pay to
Tenant the amount of any applicable reduction within fifteen (15) business days
after Tenant's request therefor accompanied by the required certification. If
the Security Deposit is a Letter of Credit, Landlord will accept a Letter of
Credit in the proper reduced amount in exchange for the existing Letter of
Credit, or will enter into an amendment of the Letter of Credit reducing the
amount thereof to the proper reduced amount.
10. The covenants, agreements, terms and conditions contained in this
Agreement shall bind and inure to the benefit of the parties hereto and their
respective successors, and, except as otherwise provided in the Lease, their
respective assigns.
11. Except as amended by this Agreement, the Existing Lease and all
covenants, agreements, terms and conditions thereof shall remain in full force
and effect and the Existing Lease, as so amended, is hereby in all respects
ratified and confirmed.
12. Landlord and Tenant each covenants, represents and warrants to
the other that it has had no dealings or communications with any broker or
agent in connection with the consummation of this Agreement other than
Williams Real Estate Co. Inc. (representing Landlord) and Cushman &
Wakefield, Inc. (representing Tenant) (collectively, the "Broker") and each
party covenants and agrees to indemnify the other from and against all costs,
expenses (including reasonable attorneys' fees and disbursements) and
liability for any commission or other compensation claimed by any broker or
agent with whom the indemnifying party dealt (other than the Broker, whose
commission will be paid by Landlord pursuant to a separate agreement) with
respect to this Agreement.
13. Landlord acknowledges that neither the reincorporation nor the
Offering referred to in Recital B constitutes an assignment or subletting under
Articles 11 and 44 of the Lease.
14. Clause (iii) in the second sentence of Section 44(M) of the Lease
is amended to read as follows:
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<PAGE>
"(iii) any license shall be for equipment (and the monitoring,
repair, and maintenance thereof) only and shall not grant to the licensee the
right to occupy any portion of the Building or the demised premises except to
the extent that such occupancy is necessary or appropriate for such monitoring,
repair, and/or maintenance."
15. This Agreement may not be changed orally, but only by a writing
signed by the party against whom enforcement thereof is sought.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
HUDSON TELEGRAPH ASSOCIATES
By: PMFWH NEWCORP., INC.,
general partner
By: /s/ Nicholas Sardone
-------------------------------
Nicholas Sardone
Vice President
STAR TELECOMMUNICATIONS, INC.
By: /s/ Kelly Ewos
-------------------------------
Name: Kelly Ewos
Title: CFO
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<PAGE>
EXHIBIT 10.38
LEASE AGREEMENT
This LEASE AGREEMENT, is effective on July 29, 1996 between
TELECOMMUNICATIONS FINANCE GROUP (hereinafter "Lessor"), and STAR VENDING, INC.,
a California corporation with its principal office located at 740 State Street,
Suite 202, Santa Barbara, CA 93101, (hereinafter "Lessee").
1. LEASE.
Lessor, subject to the conditions set forth in Section 25 hereof, agrees
to lease to Lessee and Lessee agrees to lease from Lessor hereunder, those
items of personal property (the "equipment") which are described on Schedule
1 of Exhibit A hereto and amendments to Schedule 1. Lessee agrees to execute
and deliver to Lessor a certificate of delivery and acceptance in
substantively the form of Exhibit A hereto (a "Delivery Certificate")
immediately after Turnover of the equipment, and such execution shall
constitute Lessee's irrevocable acceptance of such items of equipment for all
purposes of this Lease. The Delivery Certificate shall constitute a part of
this Lease to the same extent as if the provisions thereof were set forth
herein.
2. DEFINITIONS.
"AMORTIZATION DEDUCTIONS" as defined in Section 11(b)(i) hereof.
"APPRAISAL PROCEDURE" shall mean the following procedure for determining
the Fair Market Sale Value of any item of equipment. If either Lessor or
Lessee shall request by notice (the "Appraisal Request") to the other that
such value be determined by the Appraisal Procedure, (i) Lessor and Lessee
shall, within 15 days after the Appraisal Request, appoint an independent
appraiser mutually satisfactory to them, or (ii) if the parties are unable
to agree on a mutually acceptable appraiser within such time, Lessor and
Lessee shall each appoint one independent appraiser (PROVIDED that if
either party hereto fails to notify the other party hereto of the identity
of the independent appraiser chosen by it within 30 days after the
Appraisal Request, the determination of such value shall be made by the
independent appraiser chosen by such other party), and (iii) if such
appraisers cannot agree on such value within 20 days after their
appointment and if one appraisal is not within 5% of the other appraisal,
Lessor and Lessee shall choose a third independent appraiser mutually
satisfactory to them (or, if they fail to agree upon a third appraiser
within 25 days after the appointment of the first two appraisers, such
third independent appraiser shall within 20 days thereafter be appointed by
the American Arbitration Association), and such value shall be determined
by such third independent appraiser within 20 days after his appointment,
after consultation with the other two independent appraisers. If the first
two appraisals are within 5% of each other, then the average of the two
appraisals shall be the Fair Market Sale Value. The fees and expenses of
all appraisers shall be paid by Lessee.
"BUSINESS DAY" shall mean a day other than a Saturday, Sunday or legal
holiday under the laws of the State of Florida.
"CODE" shall mean the Internal Revenue Code of 1954, as amended, or any
comparable successor law.
"COMMENCEMENT DATE" as defined in Section 3 hereof.
"DEFAULT" shall mean any event or condition which after the giving of
notice or lapse of time or both would become an Event of Default.
"DELIVERY CERTIFICATE" as defined in Section 1 hereof.
"EQUIPMENT" as defined in Section 1 hereof.
"EVENT OF DEFAULT" as defined in Section 18 hereof.
"EVENT OF LOSS" shall mean, with respect to any item of equipment, the
actual or constructive total loss of such item of equipment or the use
thereof, due to theft, destruction, damage beyond repair or rendition
thereof permanently unfit for normal use from any reason whatsoever, or the
condemnation, confiscation or seizure of, or requisition of title to or use
of such item of equipment.
"FAIR MARKET SALE VALUE" shall, at any time with respect to any item of
equipment, be equal to the sale value of such item of equipment which would
be obtained in an arm's-length transaction between an informed and willing
seller under no compulsion to sell and an informed and willing buyer-user
(other than a lessee currently in possession or a used equipment or scrap
dealer). For purposes of Section 7(b) hereof, Fair Market Sale Value
shall be determined by (i) an independent appraiser (at Lessee's expense)
selected by Lessor or (ii) by the Appraisal Procedure if the Appraisal
Request is made at least 90 days (but not more than 360 days) prior to the
termination or expiration of the Lease Term, as the case may be, which
determination shall be made (a) without deduction for any costs or expenses
of dismantling or removal; and (b) on the assumption that such item of
equipment is free and clear of all Liens and is in the condition and repair
in which it is required to be returned pursuant to Section 7(a) hereof.
For purposes of Section 19(c) hereof, Fair Market Sale Value shall be
determined (at Lessee's expense) by an independent appraiser selected by
Lessor, on an "as-is, where-is" basis, without regard to the provisions of
clauses (a) and (b) above; PROVIDED that if Lessor shall have sold any item
of equipment pursuant to Section 19(b) hereof prior to giving the notice
referred to in Section 19(c) hereof, Fair Market Sale Value of such item of
equipment shall be the net proceeds of such sale after deduction of all
costs and expenses incurred by Lessor in connection therewith; PROVIDED
FURTHER, that if for any reason Lessor is not able to obtain possession of
any item of equipment pursuant to Section 19(a) hereof, the Fair Market
Sale Value of such item of equipment shall be zero.
"IMPOSITION" as defined in Section 11(a) hereof.
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<PAGE>
"INDEMNITEE" as defined in Section 17 hereof.
"LATE CHARGE RATE" shall mean an interest rate per annum equal to the
higher of two percent (2%) over the Reference Rate or eighteen percent
(18%), but not to exceed the highest rate permitted by applicable law.
"LEASE" and the terms "hereof", "herein", "hereto" and "hereunder", when
used in this Lease Agreement, shall mean and include this Lease Agreement,
Exhibits and the Delivery Certificate hereto as the same may from time to
time be amended, modified or supplemented.
"LEASE TERM" shall mean, with respect to any item of equipment, the term of
the lease of such item of equipment hereunder specified in Section 3
hereof.
"LESSEE" as defined in the introductory paragraph to this Lease.
"LESSOR" as defined in the introductory paragraph of this Lease.
"LESSOR'S VALUE" shall mean, with respect to any item of equipment and
installation if applicable, the total amount set forth in Schedule 1 of
Exhibit A hereto.
"LESSOR'S LIENS" shall mean (i) any mortgage, pledge, lien, security
interest, charge, encumbrance, financing statement, title retention or any
other right or claim of any person claiming through or under Lessor, not
based upon or relating to ownership of the equipment or the lease thereof
hereunder and (ii) any mortgage, pledge, lien, security interest, charge,
encumbrance, financing statement, title retention or any other right or
claim of Owner (other than Lessor) claiming through or under Lessor in
connection with the transactions described in Section 21(b) hereof.
"LIENS" shall mean any mortgage, pledge, lien, security interest, charge,
encumbrance, financing statement, title retention or any other right or
claim of any person, other than any Lessor's Lien.
"LOSS PAYMENT DATE" shall mean with respect to any item of equipment the
date on which payment, as described in Section 16(b) hereof, is made to the
Lessor by the Lessee as the result of an Event of Loss with respect to such
item. The Loss Payment Date shall be within ninety (90) days of the said
Event of Loss.
"OWNER" shall mean the entity or person having ownership interest to the
equipment as contemplated by the provisions of Section 21(b) hereof and
may be a person other than Lessor.
"OWNER'S ECONOMICS" shall mean the after-tax yield and periodic after-tax
cash flow anticipated by Owner as of the date of this Lease, in connection
with the transactions contemplated by this Lease as determined by Owner
unless Lessor shall have transferred its interest in the equipment to
another person as contemplated by the provisions of Section 21(b) hereof in
which case "Owner's Economics" shall mean the after-tax yield and periodic
after-tax cash flow anticipated by such person as of the date of the lease
between such person and Lessor contemplated by said provisions, in
connection with the transactions contemplated by such lease as determined
by such person.
"RECOVERY DEDUCTIONS" as defined in Section 11(b)(i) hereof.
"REFERENCE RATE" shall mean the rate of interest publicly announced by
Citibank, N.A. in New York, New York from time to time as its prime rate.
The reference rate is not intended to be the lowest rate of interest
charged by Citibank, N.A. in connection with extensions of credit to
debtors. The Reference Rate shall be determined at the close of business on
the 15th day of each calendar month (if the 15th day is not a Business Day,
then on the first preceding Business Day) and shall become effective as of
the first day of the calendar month succeeding such determination and shall
continue in effect to, and including, the last day of said calendar month.
"RENT PAYMENT DATE" shall mean each date on which an installment of rent is
due and payable pursuant to Section 5(a) hereof.
"STIPULATED LOSS VALUE" shall mean, with respect to any item of equipment,
the amount determined by multiplying the Lessor's Value of such item of
equipment by the percentage set forth in Schedule A hereto opposite the
applicable Rent Payment Date; provided, that for purposes of Sections 16(b)
and 19(c) hereof, any determination of Stipulated Loss Value as of a date
occurring after the final Rent Payment Date with respect to such item of
equipment, shall be made as of such final Rent Payment Date.
"TAX BENEFITS" shall mean the right to claim such deductions, credits, and
other benefits as are provided by the Code to an owner of property,
including the Recovery Deductions and Amortization Deductions.
"TURNOVER" shall mean that point in time when the equipment installation
personnel complete testing of the equipment, or when the equipment is
placed into service, whichever first occurs.
All accounting terms not specifically defined herein shall be construed in
accordance with generally accepted accounting principles.
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<PAGE>
3. LEASE TERM.
The term of the lease of the equipment hereunder shall commence on the
Commencement Date specified in the Delivery Certificate ("Commencement Date")
and, unless earlier terminated pursuant to the provisions hereof or at law or
equity, shall continue for a term of sixty (60) months from such Commencement
Date. The Commencement Date specified in the Delivery Certificate shall be the
date on which Turnover occurs at a site provided by Lessee in accordance with
the provisions of Section 4 hereof.
4. INSTALLATION.
Lessor shall arrange for installation of the equipment, the cost of which
installation shall be deemed to be part of Lessor's Value. Exhibit A hereto
shall indicate whether such cost is included or excluded from the monthly rent
payments due in accordance with Section 5(a) hereof. If excluded from such
monthly rent payments, Lessor shall separately invoice Lessee for such
installation upon completion thereof and Lessee shall pay such invoice within
thirty (30) days from the date thereof. Lessee shall be obligated to timely
provide a suitable site for the installation of the equipment in accordance with
the equipment manufacturer's practices attached hereto as Exhibit C. Lessee
shall be responsible for compliance with environmental requirements and central
office grounding procedures specified in Exhibit C hereto and for providing
adequate space, lighting, heating, air-conditioning and A/C power at the
installation site. Unavailability of Lessee furnished facilities shall be cause
for adjustments to the installation price set forth in Schedule 1 of Exhibit A
hereto.
5. RENT; UNCONDITIONAL OBLIGATIONS.
(a) Lessee agrees to pay to Lessor, at the address specified in Section
24 hereof or at such other address as Lessor may specify, rent for the
initial equipment at a rate not to exceed $21,993 per $1,000 of the total
Lessor's Value of such items of equipment, as set forth in Schedule 1 of
Exhibit A dated July 29, 1996, (plus applicable sales or use taxes) per
month, in sixty (60) consecutive monthly installments, with the first
installment of rent being due on the Commencement Date unless the
Commencement Date is other than the first day of a calendar month, in which
event the first installment of rent shall be due on the first day of the
month following the Commencement Date, and succeeding installments being due
on the same date of each month thereafter. In the event of any additions to
the initially leased equipment, the rental rate on any additional equipment
will be the rate as shown on the Amendment to Schedule 1 of Exhibit A adding
the equipment to the lease.
(b) Lessee shall also pay to Lessor, on demand, interest at the late
Charge Rate on any installment of rent and on any other amount owing hereunder
which is not paid on its due date, for any period for which the same shall be
overdue. Each payment made under this Lease shall be applied first to the
payment of interest then owing and then to rent or other amounts owing
hereunder. Interest shall be computed on the basis of a 360-day year and actual
days elapsed.
(c) This Lease is a net lease, and Lessee's obligation to pay all rent
and all other amounts payable hereunder is ABSOLUTE AND UNCONDITIONAL under
any and all circumstances and shall not be affected by any circumstances of
any character whatsoever, including, without limitation, (i) any set-off,
counterclaim, recoupment, defense, abatement or reduction or any right which
Lessee may have against Lessor, the manufacturer or supplier of any of the
equipment or anyone else for any reason whatsoever; (ii) any defect in the
title, condition, design, or operation of, or lack of fitness for use of, or
any damage to, or loss of, all or any part of the equipment from any cause
whatsoever; (iii) the existence of any Liens with respect to the equipment;
(iv) the invalidity, unenforceability or disaffirmance of this Lease or any
other document related hereto; or (v) the prohibition of or interference with
the use or possession by Lessee of all or any part of the equipment, for any
reason whatsoever, including without limitation, by reason of (1) claims for
patent, trademark or copyright infringement; (2) present or future
governmental laws, rules or orders; (3) the insolvency, bankruptcy or
reorganization of any person; and (4) any other cause whether similar or
dissimilar to the foregoing, any present or future law to the contrary
notwithstanding. Lessee hereby waives, to the extent permitted by applicable
law, any and all rights which it may now have or which may at any time
hereafter be conferred upon it, by statute or otherwise, to terminate,
cancel, quit or surrender the lease of any equipment. If for any reason
whatsoever this Lease or any Supplement, other than pursuant to Section 16(b)
hereof, shall be terminated in whole or in part by operation of law or
otherwise, Lessee will nonetheless pay to Lessor an amount equal to each
installment of rent at the time such installment would have become due and
payable in accordance with the terms hereof. Each payment of rent or other
amount paid by Lessee hereunder shall be final and Lessee will not seek to
recover all or any part of such payment for Lessor for any reason whatsoever.
6. WARRANTY DISCLAIMER; ASSIGNMENT OF WARRANTIES.
(a) LESSOR NEITHER MAKES NOR SHALL BE DEEMED TO HAVE MADE AND LESSEE
HEREBY EXPRESSLY WAIVES ANY WARRANTY OR REPRESENTATION, EITHER EXPRESS OR
IMPLIED, AS TO THE EQUIPMENT, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF
MERCHANTABILITY OR FITNESS OF THE EQUIPMENT FOR ANY PARTICULAR PURPOSE, FREEDOM
FROM INTERFERENCE OR INFRINGEMENT OR THE LIKE, OR AS TO THE TITLE TO OR LESSOR'S
OR LESSEE'S INTEREST IN THE EQUIPMENT OR AS TO ANY OTHER MATTER RELATING TO THE
EQUIPMENT OR ANY PART THEREOF.
LESSEE CONFIRMS THAT IT HAS SELECTED THE EQUIPMENT AND EACH PART THEREOF ON
THE BASIS OF ITS OWN JUDGMENT AND EXPRESSLY DISCLAIMS RELIANCE UPON ANY
STATEMENTS, REPRESENTATIONS OR WARRANTIES MADE BY LESSOR.
LESSOR NEITHER MAKES NOR SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION OR
WARRANTY AS TO THE ACCOUNTING TREATMENT TO BE ACCORDED TO THE TRANSACTIONS
CONTEMPLATED BY THIS LEASE OR AS TO ANY TAX CONSEQUENCES AND/OR TAX TREATMENT
THEREOF.
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(b) LESSOR HEREBY ASSIGNS TO LESSEE SUCH RIGHTS AS LESSOR MAY HAVE (TO
EXTENT LESSOR MAY VALIDLY ASSIGN SUCH RIGHTS) UNDER ALL MANUFACTURERS' AND
SUPPLIERS' WARRANTIES WITH RESPECT TO THE EQUIPMENT; PROVIDED, HOWEVER, THAT THE
FOREGOING RIGHTS SHALL AUTOMATICALLY REVERT TO LESSOR UPON THE OCCURRENCE AND
DURING THE CONTINUANCE OF ANY EVENT OF DEFAULT HEREUNDER, OR UPON THE RETURN OF
THE EQUIPMENT TO LESSOR. LESSEE AGREES TO SETTLE ALL CLAIMS WITH RESPECT TO THE
EQUIPMENT DIRECTLY WITH THE MANUFACTURERS OR SUPPLIERS THEREOF, AND TO GIVE
LESSOR PROMPT NOTICE OF ANY SUCH SETTLEMENT AND THE DETAILS OF SUCH SETTLEMENT.
HOWEVER, IN THE EVENT ANY WARRANTIES ARE NOT ASSIGNABLE, THE LESSOR AGREES TO
ACT ON BEHALF OF THE LESSEE IN SETTLING CLAIMS ARISING UNDER THE WARRANTY WITH
THE MANUFACTURER OR SUPPLIER.
(c) IN NO EVENT SHALL LESSOR BE LIABLE FOR LOSS OF REVENUE OR PROFITS,
SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY NATURE OR FROM ANY
CAUSE EVEN IF LESSOR HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
7. DISPOSITION OF EQUIPMENT.
(a) RETURN.
Lessee shall, upon the expiration or earlier termination of the Lease Term
of each item of equipment, subject to paragraph (b) below, return such item of
equipment to Lessor at such place within the continental United States of
America as Lessor shall designate in writing to Lessee. Until such item of
equipment is returned to Lessor pursuant to the provisions of this Section, all
of the provisions of this Lease with respect thereto shall continue in full
force and effect. Lessee shall pay all the costs and expenses in connection with
or incidental to the return of the equipment, including, without limitation, the
cost of removing, assembling, packing, insuring and transporting the equipment.
At the time of such return, the equipment shall be in the condition and repair
required to be maintained by Section 12 hereof and free and clear of all Liens.
(b) PURCHASE OPTION.
So long as no Default or Event of Default shall have occurred and be
continuing, Lessee may, by written notice given to Lessor at least 120 days (but
not more than 360 days) prior to the expiration date of the Lease Term of any
item of equipment (which notice shall be irrevocable), elect to purchase such
item of equipment on such expiration date for a cash purchase price equal to the
Fair Market Sale Value of such item of equipment determined as of such
expiration date, plus an amount equal to all taxes (other than income taxes on
any gain on such sale), costs and expenses (including legal fees and expenses)
incurred or paid by Lessor in connection with such sale. Upon payment by Lessee
of such purchase price, and of all other amounts then due and payable by Lessee,
Lessor shall transfer title, if any, to such items of equipment except computer
software to Lessee on an "as-is, where-is" basis, without recourse and without
representation or warranty of any kind, express or implied, other than a
representation and warranty that such item of equipment is free and clear of any
Lessor's Liens.
8. REPRESENTATION AND WARRANTIES.
In order to induce Lessor to enter into this Lease and to lease the
equipment to Lessee hereunder, Lessee represents and warrants that:
(a) ORGANIZATION.
Lessee is duly organized, validly existing and in good standing under the
laws of the State of California and is duly qualified to do business and is in
good standing in the State in which the equipment will be located.
(b) POWER AND AUTHORITY.
Lessee has full power, authority and legal right to execute, deliver and
perform this Lease, and the execution, delivery and performance hereof has been
duly authorized by Lessee's governing body or officer(s).
(c) ENFORCEABILITY.
This Lease has been duly executed and delivered by Lessee and constitutes a
legal, valid and binding obligation of Lessee enforceable in accordance with its
terms.
(d) CONSENTS AND PERMITS.
The execution, delivery and performance of this Lease does not require any
approval or consent of any trustee, shareholder, partner, sole proprietor, or
holders of any indebtedness or obligations of Lessee, and will not contravene
any law, regulation, judgment or decree applicable to Lessee, or the certificate
of partnership or incorporation or by-laws of Lessee, or contravene the
provisions of, or constitute a default under, or result in the creation of any
Lien upon any property of Lessee under any mortgage, instrument or other
agreement to which Lessee is a party or by which Lessee or its assets may be
bound or affected; and no authorization, approval, license, filing or
registration with any court or governmental agency or instrumentality is
necessary in connection with the execution, delivery, performance, validity and
enforceability of this Lease.
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(e) FINANCIAL CONDITION OF THE LESSEE.
The financial statements and any other financial information of lessee
heretofore finished to Lessor are complete and correct and fairly present the
financial condition of Lessee and the results of its operations for the
respective periods covered thereby, there are no known contingent liabilities or
liabilities for taxes of Lessee which are not reflected in said financial
statements and since the date thereof, there has been no material adverse change
in such financial condition or operations.
(f) NO LITIGATION.
There is no action, suit, investigation or proceeding by or before any
court, arbitrator, administrative agency or other governmental authority pending
or threatened against or affecting Lessee (A) which involves the transactions
contemplated by this Lease or the equipment; or (B) which, if adversely
determined, could have a material adverse effect on the financial condition,
business or operations of Lessee.
(g) UNITED STATES SOURCE INCOME.
No items of equipment shall be used in a way that results in the creation
of an item of income to Lessor, the source of which for Federal Income Tax
purposes is without the United States.
9. LIENS.
Lessee will not directly or indirectly create, incur, assume, suffer, or
permit to exist any Lien on or with respect to the equipment.
10. INSURANCE.
Lessee shall maintain at all times on the equipment, at its expense,
property damage, direct damage and liability insurance in such amounts, against
such risks, in such form and with such insurers as shall be reasonably
satisfactory to Lessor and any other Owner, provided, that the amount of direct
damage insurance shall not on any date be less than the greater of the full
replacement value or the Stipulated Loss Value of the equipment as of such date.
Each Insurance policy will, among other things, name Lessor and any other Owner
as an additional insured or as loss payee (as the case may be) as their
interests may appear, require that the insurer give Lessor and any such Owner at
Least thirty (30) days prior written notice of any alteration in or cancellation
of the terms of such policy, and require that the interest of Lessor and any
such Owner continue to be insured regardless of any breach of or violation by
Lessee of any warranties, declarations or conditions contained in such insurance
policy. Lessee shall furnish to Lessor and such Owner a certificate or other
evidence satisfactory to Lessor that such insurance coverage is in effect
provided, however, that Lessor and such Owner shall be under no duty to
ascertain the existence or adequacy of such insurance.
11. TAXES.
(a) GENERAL TAX PROVISIONS.
Lessee shall timely pay, and shall indemnify and hold Lessor harmless from
and against, all fees, taxes (whether sales, use, excise, personal property or
other taxes), imports, duties, withholdings, assessments and other governmental
charges of whatever kind or character, however designated (together with any
penalties, fines or Interest thereon), all of the foregoing being herein
collectively call "Impositions", which are at any time levied or imposed against
Lessor, Lessee, this Lease, the equipment of any part thereof by any Federal,
State, or Local Government or taxing authority in the United States or by any
foreign government of any subdivision or taxing authority thereof upon, with
respect to, as a result of or measured by (i) the equipment (or any part
thereof), or this Lease or the interests of the Lessor therein; or (ii) the
purchase, ownership, delivery, leasing, possession, maintenance, use,
operation, return, sale or other disposition of the equipment or any part
thereof; or (iii) the rentals, receipts or earnings payable under this Lease or
otherwise arising from the equipment or any part thereof; EXCLUDING, HOWEVER,
taxes based on or measured by the net income of Lessor that are imposed by (1)
the United States of America, or (2) the state of Florida or any political
subdivision of the State of Florida, or (3) any other State of the United States
of America or any political subdivision of any such State in which Lessor is
subject to Impositions as the result (whether solely or in part) of business or
transactions unrelated to this Lease. In case any report or return is required
to be filed with respect to any obligation of Lessee under this Section or
arising out of this Section, Lessee will notify Lessor of such requirement and
make such report or return in such manner as shall be satisfactory to Lessor,
PROVIDED, that the payment of any use taxes shall be made in such manner as
specified by Lessor in writing to Lessee; or (iv) The provisions of this Section
shall survive the expiration or earlier termination of this Lease.
(b) SPECIAL TAX PROVISIONS.
(i) The Owner of the items of equipment, shall be entitled to
take into account in computing its Federal income tax liability, Current Tax
Rate and such deductions, credits, and other benefits as are provided by the
Code to an owner of property, including, without limitation:
(A) Recovery deductions ("Recovery Deductions") under Section
168 (a) of the Code for each item of equipment in an amount determined,
commencing with the 1996 taxable year, by multiplying the Owner's Cost of such
item of equipment by the percentages applicable under Section 168 (b) of the
Code with respect to "(5)-year property" within the meaning of Section 168 (c)
(2) of the Code;
(B) Amortization of expenses ("Amortization Deductions") paid or
to be paid be Owner in connection with this Lease at a rate no less rapid than
straight line over the Lease Term.
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(ii) For the purposes of this Subsection 11 (b) only, the term
"Owner" shall include the "common parent" and all other corporations included in
the affiliated group, within the meaning of Section 1504 of the Code (or any
other successor section thereto), of which Owner is or becomes a member.
12. COMPLIANCE WITH LAWS; OPERATION AND MAINTENANCE.
(a) Lessee will use the equipment in a careful and proper manner, will
comply with and conform to all governmental laws, rules, and regulations
relating thereto, and will cause the equipment to be operated in accordance with
the manufacturer's or supplier's instructions or manuals.
(b) Lessee will, at its own expense, keep and maintain the equipment in
good repair, condition and working order and furnish all parts, replacements,
mechanisms, devices and servicing required therefor so that the value,
condition and operating efficiency therefor will at all times be maintained
and preserved, reasonable wear and tear excepted. Lessee will, at its own
expense, perform all required acts necessary to maintain any manufacturer's
warranties and guarantees respecting the equipment. All such repairs, parts,
mechanisms, devices and replacements shall immediately, without further act,
become the property of Lessor and part of the equipment.
(c) Lessee will not make or authorize any improvement, change, addition
or alteration to the equipment (i) if such improvement, change, addition or
alteration will impair the originally intended function or use of the
equipment or impair the value of the equipment as it existed immediately
prior to such improvement, change, addition or alteration; or (ii) if any
parts installed in or attached to or otherwise becoming a part of the
equipment as a result of any such improvement, change, addition or
alteration shall not be readily removable without damage to the equipment.
Any part which is added to the equipment without violating the provisions of
the immediately preceding sentence and which is not a replacement or
substitution for any property which was a part of the equipment, shall remain
the property of Lessee and may be removed by Lessee at any time prior to the
expiration or earlier termination of the Lease Term. All such parts shall be
and remain free and clear of any Liens. Any such part which is not so removed
prior to the expiration or earlier termination of the Lease Term shall,
without further act, become the property of Lessor.
13. INSPECTION.
Upon prior notice, Lessor or its authorized representatives may at any
reasonable time or times inspect the equipment when it deems it necessary to
protect its interest therein.
14. IDENTIFICATION.
Lessee shall, at its expense, attach to each item of equipment a notice
satisfactory to Lessor disclosing Owner's ownership of such item of equipment.
15. PERSONAL PROPERTY.
Lessee represents that the equipment shall be and at all times remain
separately identifiable personal property. Lessee shall, at its expense, take
such action (including the obtaining and recording of waivers) as may be
necessary to prevent any third party from acquiring any right to or interest in
the equipment by virtue of the equipment being deemed to be real property or a
part of real property or a part of other personal property, and if at any time
any person shall claim any such right or interest, Lessee shall, at its expense,
cause such claim to be waived in writing or otherwise eliminated to Lessor's
satisfaction within 30 days after such claim shall have first become known to
Lessee.
16. LOSS OR DAMAGE.
(a) All risk of loss, theft damage or destruction to the equipment or any
part thereof, however incurred or occasioned, shall be borne by Lessee and,
unless such occurrence constitutes an Event of Loss pursuant to paragraph (b) of
this Section, Lessee shall promptly give Lessor written notice hereof and shall
promptly cause the affected part or parts of the equipment to be replaced or
restored to the condition and repair required to be maintained by Section 12
hereof.
(b) If an Event of Loss with respect to any item of equipment shall occur,
Lessee shall promptly give Lessor written notice thereof, and Lessee shall pay
to Lessor as soon as it receives insurance proceeds with respect to said Event
of Loss but in any event no later than 90 days after the occurrence of said
Event of Loss an amount equal to the sum of (i) the Stipulated Loss Value of
such item of equipment computed as of the Rent Payment Date with respect to such
item of equipment on or immediately preceding the date of the occurrence of such
Event of Loss; and (ii) all rent and other amounts due and owing hereunder for
such item of equipment on or prior to the Loss Payment Date. Upon payment of
such amount to Lessor, the lease of such item of equipment hereunder shall
terminate, and Lessor will transfer within forty days to Lessee, Lessor's right,
title, if any, and interest in and to such item of equipment, on an "as-is,
where-is" basis, without recourse and without representation or warranty,
express or implied, other than a representation and warranty that such item of
equipment is free and clear of any Lessor's Liens.
(c) Any payments received at any time by Lessor or Lessee from any insurer
with respect to loss or damage to the equipment shall be applied as follows: (i)
if such payments are received with respect to an Event of Loss they shall be
paid to Lessor, but to the extent received by Lessor, they shall reduce or
discharge, as the case may be, Lessee's obligation to pay the amounts due to
Lessor under Section 16 (b) hereof with respect to such Event of Loss; or (ii)
if such payments are received with respect to any loss of or damage to the
equipment other than an Event of Loss, such payments shall, unless a Default or
Event of Default shall have occurred and be continuing, be paid over to Lessee
to reimburse Lessee for its payment of the costs and expenses incurred by Lessee
in replacing or restoring pursuant to Section 16 (a) hereof the part or parts of
the equipment which suffered such loss or damage.
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17. GENERAL INDEMNITY.
Lessee assumes liability for, and shall indemnify, protect save and
keep harmless Lessor, the partners comprising Lessor, its and their directors,
officers, employees, agents, servants, successors and assigns (an "Indemnitee")
from and against any and all liabilities, obligations, losses, damages,
penalties, claims, actions, suits, costs and expenses, including reasonable
legal expenses, of whatsoever kind and nature, imposed on, incurred by or
asserted against any Indemnitee, in any way relating to or arising out of this
Lease or the enforcement hereof, or the manufacture, purchase, acceptance,
rejection, ownership, possession, use, selection, delivery, lease, operation,
condition, sale, return or other disposition of the equipment or any part
thereof (including, without limitation, latent or other defects, whether or not
discoverable by Lessee or any other person, any claim in tort whether or not for
strict liability and any claim for patent, trademark, copyright or other
intellectual property infringement); provided, however, that Lessee shall not be
required to indemnify any Indemnitee for loss or liability arising from acts or
events which occur after the equipment has been returned to Lessor in accordance
with the Lease, or for loss or liability resulting solely from the willful
misconduct or gross negligence of such indemnitee. The provisions of this
Section shall survive the expiration or earlier termination of this Lease.
18. EVENTS OF DEFAULT.
The following events shall each constitute an event of default (herein
called "Event of Default") under this Lease:
(i) Lessee shall fail to execute and deliver to Lessor (or Lessor's
agent) the "Delivery Certificate" within twenty-four (24) hours of Turnover of
the equipment to Lessee.
(ii) Lessee shall fail to commence lease payments on the first day of
the month following the Commencement Date, or such other initiation of lease
payments as specified in Section 5 of this Lease.
(iii) Lessee shall fail to make any payment of rent or other amount
owing hereunder or otherwise after notice has been given that payment is past
due; or
(iv) Lessee shall fail to maintain the insurance required by Section
10 hereof or to perform or observe any of the covenants contained in Sections 21
or 22 hereof; or
(v) Lessee shall fail to perform or observe any other covenant,
condition or agreement to be performed or observed by it with respect to this
Lease or any other agreement between Lessor and Lessee and such failure shall
continue unremedied for 30 days after the earlier of (a) the date on which
Lessee obtains, or should have obtained knowledge of such failure; or (b) the
date on which notice thereof shall be given by Lessor to Lessee; or
(vi) Any representation or warranty made by Lessee herein or in any
document, certificate or financial or other statement now or hereafter furnished
Lessor in connection with this Lease shall prove at any time to have been
untrue, incomplete or misleading in any material respect as of the time when
made; or
(vii) The entry of a decree or order for relief by a court having
jurisdiction in respect of Lessee, adjudging Lessee a bankrupt or insolvent, or
approving as properly filed a petition seeking a reorganization, arrangement,
adjustment or composition of or in respect of Lessee in an involuntary
proceeding or case under the Federal bankruptcy laws, as now or hereafter
constituted, or any other applicable Federal or State bankruptcy, insolvency or
other similar law, or appointing a receiver, liquidator, assignee, custodian,
trustee or sequestrator (or similar official) of Lessee or of any
substantial part of its property, or ordering the winding-up or liquidation
of its affairs, and the continuance of any such decree or order unstayed and
in effect for a period of 30 days; or
(viii) The institution by Lessee of proceedings to be adjudicated a
bankrupt or insolvent, or the consent by it to the institution of bankruptcy
or insolvency proceedings against it, or the commencement by Lessee of a
voluntary proceeding or case under the Federal bankruptcy laws, as now or
hereafter constituted, or any other applicable Federal or state bankruptcy,
insolvency or other similar law, or the consent by it to the filing of any
such petition or to the appointment of or taking possession by a receiver,
liquidator, assignee, trustee, custodian or sequestrator (or other similar
official) of Lessee or of any substantial part of its property, or the making
by it of any assignment for the benefit of creditors or the admission by it
of its inability to pay its debts generally as they become due or its
willingness to be adjudicated a bankrupt or the failure of Lessee generally
to pay its debts as they become due or the taking of corporate action by
Lessee in furtherance of any of the foregoing.
19. REMEDIES.
If an Event of Default specified in Subsection 18(vii) or (viii)
above shall occur, then, and in any such event, Lessor shall not be obligated
to purchase or lease any of the equipment and this Lease shall, without any
declaration or other action by Lessor, be in default. If an Event of Default,
other than an Event of Default specified in Subsection 18(vii) or (viii)
above, shall occur, Lessor may, at its option, declare this Lease to be in
default. At any time after this Lease is in default under the first sentence
of this Section 19, Lessor has declared this Lease to be in default under the
second sentence of this Section 19, Lessor and/or its representative may do
any one or more of the following with respect to all of the equipment or any
part thereof as Lessor in its sole discretion shall elect, to the extent
permitted by applicable law then in effect:
(a) demand that Lessee, and Lessee shall at its expense upon such
demand, return the equipment promptly to Lessor at such place in the continental
United States of America as Lessor shall specify, or Lessor and/or its agents,
at its option, may with or without entry upon the premises where the equipment
is located and disable the equipment, or make the equipment inoperable
permanently or temporarily in Lessor's sole discretion, and/or take immediate
possession of the equipment and remove the same by summary proceedings or
otherwise, all without liability for or by reason of such entry or taking of
possession, whether for the restoration of damage to property caused by such
taking or for
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disabling or otherwise;
(b) sell the equipment at public or private sale, with or without
notice, advertisement or publication, as Lessor may determine, or otherwise
dispose of, hold, use, operate, lease to others or keep idle the equipment as
Lessor in its sole discretion may determine, all free and clear of any rights of
Lessee and without any duty to account to Lessee with respect to such action or
inaction or for any proceeds with respect thereto;
(c) by written notice to Lessee specifying a payment date which shall
be not earlier than 20 days after the date of such notice, demand that Lessee
pay to Lessor, and Lessee shall pay to Lessor, on the payment date specified in
such notice, as liquidated damages for loss of a bargain and not as a penalty,
all accrued and unpaid rent for the equipment due on all Rent Payment Dates up
to and including the payment date specified in such notice PLUS an amount
(together with interest on such amount at the Late Charge Rate, from the payment
date specified in such notice to the date of actual payment) equal to the
excess, if any, of the Stipulated Loss Value of the equipment as of the payment
date specified in such notice over the Fair Market Sale Value of the equipment
as of such date;
(d) Lessor may exercise any other right or remedy which may be
available to it under applicable law or proceed by appropriate court action to
enforce the terms hereof or to recover damages for the breach hereof or to
rescind this Lease. Lessor is entitled to recover any amount that fully
compensates the Lessor for any damage to or loss of the Lessor's residual
interest in the equipment caused by the Lessee's default.
In the event any present value discounting is applied, the discount
rate used shall be the Federal Reserve Board Discount Rate.
In addition, Lessee shall be liable for any and all unpaid rent and
other amounts due hereunder before or during the exercise of any of the
foregoing remedies and for all reasonable legal fees and other costs and
expenses incurred by reason of the occurrence of any Event of Default or the
exercise of Lessor's remedies with respect thereto, including all reasonable
costs and expenses incurred in connection with the placing of the equipment in
the condition required by Section 12 hereof.
No remedy referred to in this Section 19 is intended to be exclusive,
but each shall be cumulative and in addition to any other remedy referred to
herein or otherwise available to Lessor at law or in equity; and the exercise or
beginning of exercise by Lessor of any one or more of such remedies shall not
preclude the simultaneous or later exercise by Lessor of any or all such other
remedies. No express or implied waiver by Lessor of an Event of Default shall in
any way be, or be construed to be, a waiver of any future or subsequent Event of
Default. To the extent permitted by applicable law, Lessee hereby waives any
rights now or hereafter conferred by statute or otherwise which may require
Lessor to sell or lease or otherwise use the equipment in mitigation of Lessor's
damages or losses or which may otherwise limit or modify any of Lessor's rights
or remedies under this Lease.
20. LESSOR'S RIGHT TO PERFORM.
If Lessee fails to make any payment required to be made by it
hereunder or fails to perform or comply with any of its other agreements
contained herein, Lessor may itself make such payment or perform or comply with
such agreement, and the amount of such payment and the amount of the reasonable
expenses of Lessor incurred in connection with such payment or the performance
of or compliance with such agreement, as the case may be, together with interest
thereon at the Late Charge Rate, shall be deemed to be additional rent, payable
by Lessee within 30 days of notice.
21. LOCATION; ASSIGNMENT OR SUBLEASE; TITLE TRANSFER.
(a) LESSEE WILL NOT REMOVE THE EQUIPMENT FROM THE LOCATION SPECIFIED
IN SCHEDULE 1 OF EXHIBIT A WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR, SUCH
CONSENT NOT TO BE UNREASONABLY WITHHELD, EXCEPT REMOVAL OUTSIDE THE CONTINENTAL
U.S. IS NOT PERMITTED. THE EQUIPMENT SHALL AT ALL TIMES BE IN THE SOLE
POSSESSION AND CONTROL OF LESSEE AND LESSEE WILL NOT, WITHOUT THE PRIOR WRITTEN
CONSENT OF LESSOR, ASSIGN THIS LEASE OR ANY INTEREST HEREIN OR SUBLEASE OR
OTHERWISE TRANSFER ITS INTEREST IN ANY OF THE EQUIPMENT, AND ANY ATTEMPTED
ASSIGNMENT, SUBLEASE OR OTHER TRANSFER BY LESSEE IN VIOLATION OF THESE
PROVISIONS SHALL BE VOID.
(b) LESSOR AND LESSEE ACKNOWLEDGE THAT LESSOR (i) MAY TRANSFER ITS
INTEREST IN THE EQUIPMENT TO AN OWNER OTHER THAN LESSOR. LESSOR MAY
CONTEMPORANEOUSLY THEREWITH LEASE THE EQUIPMENT BACK FROM SUCH OWNER AND (ii)
MAY ASSIGN THIS LEASE. LESSEE HEREBY CONSENTS TO EACH OF THE ABOVE-DESCRIBED
TRANSACTIONS, FURTHER LESSEE DOES HEREBY ACKNOWLEDGE (i) THAT ANY SUCH TRANSFER
AND/OR ASSIGNMENT BY LESSOR DOES NOT MATERIALLY CHANGE LESSEE'S DUTIES AND
OBLIGATIONS HEREUNDER. (ii) THAT SUCH TRANSFER AND/OR ASSIGNMENT DOES NOT
MATERIALLY INCREASE THE BURDENS OR RIGHTS IMPOSED ON THE LESSEE, AND (iii) THAT
THE ASSIGNMENT IS PERMITTED EVEN IF THE ASSIGNMENT COULD BE DEEMED TO MATERIALLY
AFFECT THE INTEREST OF THE LESSEE.
22. STATUS CHANGES IN LESSEE.
Lessee will not without thirty (30) days prior written notice to
Lessor, (a) enter into any transaction of merger or consolidation unless it is
the surviving corporation or after giving effect to such merger or consolidation
its net worth equals or exceeds that which existed prior to such merger or
consolidation; or (b) change the form of organization of its business; or (c)
change its name or its chief place of business. Lessee must obtain Lessor's
prior written concurrence before Lessee may undertake any actions to (a)
liquidate, dissolve or any such similar action of the Lessee's organization, or
(b) sell, transfer or otherwise dispose of all or any substantial part of
Lessee's assets.
-8-
<PAGE>
23. FURTHER ASSURANCES; FINANCIAL INFORMATION.
(a) Lessee will, at its expense, promptly and duly execute and deliver to
Lessor such further documents and assurances and take such further action as
Lessor may from time to time reasonably request in order to establish and
protect the rights, interests and remedies created or intended to be created in
favor of Lessor hereunder, including, without limitation, the execution and
filing of Uniform Commercial Code financing statements covering the equipment
and proceeds therefrom in the jurisdictions in which the equipment is located
from time to time. To the extent permitted by applicable law, Lessee hereby
authorizes Lessor to file any such financing statements without the signature of
Lessee.
(b) Lessee will qualify to do business and remain qualified in good
standing, in each jurisdiction in which the equipment is from time to time
located.
(c) Lessee will furnish to Lessor as soon as available, but in any event
not later than 90 days after the end of each fiscal year of Lessee, a
consolidated balance sheet of Lessee as at the end of such fiscal year, and
consolidated statements of income and changes in financial position consistently
maintained throughout the period involved. These reports will not be disclosed
to anyone other than the Lessor and/or the Owner as provided in Section 21(b).
24. NOTICES.
All notices, demands and other communications hereunder shall be in
writing, and shall be deemed to have been given or made when deposited in the
United States mail, first class postage prepaid, addressed as follows or to such
other address as any of the authorized representatives of the following entities
may from time to time designate in writing to the other listed below:
Lessor: TELECOMMUNICATIONS FINANCE GROUP
400 Rinehart Road
Lake Mary, Florida 32746
Lessee: STAR VENDING, INC.
740 State Street, Suite 202
Santa Barbara, CA 93101
25. CONDITIONS PRECEDENT:
(a) Lessor shall not be obligated to lease the items of equipment described
herein to Lessee hereunder unless:
(i) Such Uniform Commercial Code financing statements covering
equipment and proceeds therefrom and landlord and/or mortgage waivers or
disclaimers and/or severance agreements with respect to the items of equipment
covered by this Lease as Lessor shall deem necessary or desirable in order to
perfect and protect its interests therein shall have been duly executed and
filed, at Lessee's expense, in such public offices as Lessor shall direct;
(ii) All representations and warranties of Lessee contained
herein or in any document or certificate furnished Lessor in connection herewith
shall be true and correct on and as of the date of this Lease with the same
force and effect as if made on and as of such date; no Event of Default or
Default shall be in existence on such date or shall occur as a result of the
lease by Lessee of the equipment specified in Schedule I of Exhibit A;
(iii) In the sole judgment of Lessor, there shall have been no
material adverse change in the financial condition or business of Lessee;
(iv) All proceedings to be taken in connection with the
transactions contemplated by this Lease, and all documents incidental thereto,
shall be satisfactory in form and substance to Lessor and its counsel;
(v) Lessor shall have received from Lessee, in form and substance
satisfactory to it, such other documents and information as Lessor shall
reasonable request;
(vi) All legal matters in connection with the transactions
contemplated by this Lease shall be satisfactory to Lessor's counsel; and
(vii) No Change in Tax Law, which in the sole judgment of Lessor
would adversely affect Lessor's Economics, shall have occurred or shall appear,
in Lessor's good faith judgment, to be imminent.
26. SOFTWARE LICENSE.
Reference is made to the form of Software Product License Agreement
attached hereto as Exhibit B (the "License Document"). Lessor has arranged for
the equipment manufacturer to grant Lessee a license to use the Software as
defined in the License Document in conjunction with the equipment leased
hereunder in accordance with the terms of the License Document. The original
license fee is contained in the lease rate. To avail itself of the license
grant, Lessee must execute the License Document, upon Commencement of the Lease.
"Buyer" and "Licensee" as used in the License Document are synonymous with
lessee.
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<PAGE>
27. LIMITATION OF LIABILITY.
LESSOR SHALL NOT BE LIABLE FOR LOST PROFITS OR REVENUE, SPECIAL, INDIRECT,
INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES OF ANY NATURE OR FROM ANY CAUSE
WHETHER BASED IN CONTRACT OR TORT, INCLUDING NEGLIGENCE, OR OTHER LEGAL THEORY
EVEN IF LESSOR HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. LESSEE
HEREBY AGREES THAT LESSOR WILL NOT BE LIABLE FOR ANY LOST PROFITS OR REVENUE OR
FOR ANY CLAIM OR DEMAND AGAINST LESSEE BY ANY OTHER PARTY.
28. MISCELLANEOUS.
(a) Any provision of this Lease which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provisions in
any other jurisdiction. To the extent permitted by applicable law, Lessee
hereby waives any provision of law which renders any provision hereof
prohibited or unenforceable in any respect.
(b) No items or provisions of this Lease may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which the enforcement of the change, waiver, discharge or termination is
sought. No delay or failure on the part of Lessor to exercise any power or
right hereunder shall operate as a waiver thereof, nor as an acquiescence in any
default, nor shall any single or partial exercise of any power or right preclude
any other or further exercise thereof, or the exercise of any other power or
right. After the occurrence of any Default or Event of Default, the acceptance
by Lessor of any payment of rent or other sum owed by Lessee pursuant hereto
shall not constitute a waiver by Lessor of such Default or Event of Default,
regardless of Lessor's knowledge or lack of knowledge thereof at the time of
acceptance of any such payment, and shall not constitute a reinstatement of this
Lease, if this Lease shall have been declared in default by Lessor pursuant to
Section 18 hereof or otherwise, unless Lessor shall have agreed in writing to
reinstate the Lease and to waive the Default or Event of Default.
In the event Lessee tenders payment to Lessor by check or draft containing a
qualified endorsement purporting to limit or modify Lessee's liability or
obligations under this Lease, such qualified endorsement shall be of no force
and effect even if Lessor processes the check or draft for payment.
(c) This Lease with exhibits contains the full, final and exclusive
statement of the agreement between Lessor and Lessee relating to the lease of
the equipment.
(d) This Lease shall constitute an agreement of an operating lease, and
nothing herein shall be construed as conveying to Lessee any right, title or
interest in the equipment except as Lessee only.
(e) This Lease and the covenants and agreements contained herein shall
be binding upon, and inure to the benefit of, Lessor and its successors and
assigns and Lessee and, to the extent permitted by Section 21 hereof, its
successors and assigns.
(f) The heading of the Sections are for convenience of reference only, are
not a part of this Lease and shall not be deemed to affect the meaning or
construction of any of the provisions hereof.
(g) This lease may be executed by the parties hereto on any number of
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute but one and the
same instrument.
(h) This Lease is deemed made and entered into the State of Florida and
shall be governed by and construed under and in accordance with the laws of the
State of Florida as if both parties were residents of Florida.
(i) Lessee hereby irrevocably consents and agrees that any legal action,
suit, or proceeding arising out of or in any way in connection with this Lease
shall be instituted or brought in the courts of the State of Florida, or in the
United States Courts for the District of Florida, and by execution and delivery
of this Lease, Lessee hereby irrevocably accepts and submits to, for itself and
in respect of its property, generally and unconditionally, the non-exclusive
jurisdiction of any such court, and to all proceedings in such courts. Lessee
irrevocably consents to service of any summons and/or legal process by
registered or certified United States mail, postage prepaid, to Lessee at the
address set forth in Section 24 hereof, such method of service to constitute, in
every respect, sufficient and effective service of process in any legal action
or proceeding. Nothing in this Lease shall affect the right to service of
process in any other manner permitted by law or limit the right of Lessor to
bring actions, suits or proceedings in the court of any jurisdiction. Lessee
further agrees that final judgment against it in any such legal action, suit or
proceeding shall be conclusive and may be enforced in any other jurisdiction,
within or outside the United States of America, by suit on the judgment, a
certified or exemplified copy of which shall be conclusive evidence of the fact
and the amount of the liability.
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<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have each caused this Lease to be duly
executed as of the day and year first above written and by its signature
below Lessee expressly acknowledges that this Lease may not be modified
unless done so in a writing signed by each of the parties hereto or their
successors in interest.
STAR VENDING INC. (Lessee)
By: /s/ Mary Casey
----------------------------------
Mary Casey President
--------------------------------------
(Name & Title)
Date Signed: 9-6-96
----------------------------
TELECOMMUNICATIONS FINANCE GROUP (Lessor)
By: /s/ C C Calloway
-------------------------------------
-----------------------------------------
Authorized Representative
Date Signed: 10/15/96
----------------------------
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<PAGE>
EXHIBIT 10.39
PROMISSORY NOTE
SECURED BY SHARES OF STOCK
1. FUNDAMENTAL PROVISIONS
The following terms will be used as defined terms in this Note:
DATE OF THIS NOTE: November 26, 1997
BORROWER: Christopher E. Edgecomb
LENDER: Star Telecommunications, Inc., a Delaware
corporation
PRINCIPAL AMOUNT: $8,000,000
INTEREST RATE: Seven percent (7%) per annum
MATURITY DATE: On demand.
SECURITY: The shares of stock of the Lender owned by the
Borrower as set forth in that certain Stock Pledge
Agreement between the parties of even date with
this Note.
2. PROMISE TO PAY
For good and valuable consideration, Borrower promises to pay to Lender,
or order, the Principal Amount with interest at the Interest Rate from the
date of this Note, until paid, in accordance with the terms contained in this
Note. Interest shall be computed on the basis of a 360-day year and the
actual number of days elapsed.
3. PAYMENT SCHEDULE
Borrower shall pay the entire Principal Amount and accrued interest and
all other amounts due hereunder on the demand of Lender, or if no demand is
made, then on January 31, 1998. All payments shall be applied first to any
charges due hereunder, then to accrued interest, and then to the principal
balance.
4. PLACE AND MANNER OF PAYMENT
All payments shall be made to Lender at 223 East De La Guerra Street,
Santa Barbara, California, 93101 or at such other place as the holder of this
Note may from time to time designate. All payments shall be made in lawful
money of the United States. Checks will constitute payment only when
collected.
5. PREPAYMENTS
All amounts due under this Note may be prepaid without penalty.
6. EVENT OF DEFAULT
At the option of Lender, it shall be an "Event of Default" if (a)
Borrower fails to pay when due any sum payable under this Note, (b) Borrower
fails to perform any obligation or commits a breach of any agreement set
forth in this Note, or (c) any default or event of default occurs under the
Stock Pledge Agreement (defined below).
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<PAGE>
7. STOCK PLEDGE AGREEMENT
This Note is secured by the shares of stock described in the Stock
Pledge Agreement of even date executed by Borrower in favor of Lender (the
"Stock Pledge Agreement").
8. ATTORNEYS' FEES
If Lender refers this Note to an attorney to enforce, construe or defend
any provision hereof, or as a consequence of any Event of Default hereunder,
with or without the filing of any legal action or proceeding, Borrower shall
pay to Lender upon demand the amount of all attorneys' fees, costs and other
expenses incurred by Lender in connection therewith, together with interest
thereon from the date of demand at the rate applicable to the principal
balance of this Note.
9. WAIVER
No delay or omission of Lender in exercising any right or power arising
in connection with any Event of Default shall be construed as a waiver or as
an acquiescence therein, nor shall any single or partial exercise thereof
preclude any further exercise. Lender may, at its option, waive any of the
conditions herein and no such waiver shall be deemed to be a waiver of
Lender's rights hereunder, but rather shall be deemed to have been made in
pursuance of this Note and not in modification. No waiver of any Event of
Default shall be construed to be a waiver of or acquiescence in or consent to
any preceding or subsequent Event of Default.
10. WAIVER OF NOTICES
Borrower, and all endorsers, all guarantors and all persons liable or to
become liable on this Note waive presentment, protest, demand, notice of
protest, dishonor or non-payment of this Note, and any and all other notices
or matters of a like nature, consent to any and all renewals and extensions
of the time of payment hereto, and agree further that at any time and from
time to time without notice, the terms of payment hereof may be modified, or
the security described in the Stock Pledge Agreement at any time securing
this Note may be released in whole or in part, or increased, changed or
exchanged by agreement between the holder hereof and any collateral affected
thereby, without in any way affecting the liability of any party to this
Note, any endorser, any guarantor, or any person liable or to become liable
with respect to any indebtedness.
11. GENERAL PROVISIONS
No provision of this Note may be amended, modified, supplemented,
changed, waived, discharged or terminated unless Lender consents thereto in
writing. In case any one or more of the provisions contained in this Note
should be held to be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired. This Note shall be
binding upon and inure to the benefit of Borrower, Lender and their
respective successors and assigns. This Note is not assumable. Time is of the
essence of this Note and the performance of each of the covenants and
agreements contained in this Note. This Note shall be governed by and
construed in accordance with the laws of the State of California.
IN WITNESS WHEREOF, Borrower has executed this Note on the Date of this Note.
BORROWER
/s/ Christopher E. Edgecomb
---------------------------
Christopher E. Edgecomb
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<PAGE>
EXHIBIT 10.40
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT (this "Pledge Agreement") is made and entered
into on November 26, 1997, between CHRISTOPHER E. EDGECOMB ("Shareholder"),
and STAR TELECOMMUNICATIONS, INC., a Delaware corporation ("Company") with
reference to the following facts:
RECITALS
A. Company is lending shareholder $8,000,000 pursuant to that certain
Promissory Note Secured by Share of Stock of even date (the "Note") with
this Pledge Agreement.
B. The parties have agreed that 1,000,000 of Shareholder's shares in
the Company (the "Shares") shall be pledged as security on the Note.
AGREEMENT
NOW, THEREFORE, the parties, intending to be legally bound, agree as
follows:
1. GRANT OF SECURITY INTEREST
Shareholder grants a security interest to Company in the following
(collectively, the "Collateral"):
1.1 SHARES. The Shares;
1.2 REPLACEMENT SHARES. Any and all new or substituted shares, other
securities or other property distributed with respect to the Shares as a
result of any merger, consolidation or reorganization of the Company or any
recapitalization, stock dividend, stock split-up, reclassification or other
change declared or made in the capital structure of the Company; and
1.3 DISTRIBUTIONS. Subject to the provisions of Section 4, below, all
income and profits from, distributions on, and proceeds of, the Shares, and
any sums paid upon or in respect of any of the Shares upon the liquidation or
dissolution of the Company.
2. PERFECTION OF SECURITY INTEREST
2.1 DELIVERY OF SHARE CERTIFICATE. In order to perfect the security
interest granted to Company, concurrently with its execution of this Pledge
Agreement, Shareholder shall deliver to Company an undated Stock Power in the
form attached as EXHIBIT A with respect to the Shares, duly executed in blank.
2.2 DELIVERY OF ADDITIONAL PROPERTY. If at any time during the term of
this Pledge Agreement Shareholder receives or becomes entitled to receive any
stock certificate evidencing all or any portion of the Shares, or any other
certificates, documents, instruments, money or property constituting
Collateral, Shareholder agrees to accept the same as agent for Company, to
hold the same in trust on behalf of Company and to deliver the same promptly
to Company in the exact form received with any appropriate endorsements,
along with undated stock powers duly executed in blank where appropriate.
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<PAGE>
3. SECURED OBLIGATIONS
The security interest granted by Shareholder to Company hereunder is
given as Collateral for the performance by Shareholder of all of his
obligations and liabilities under this Pledge Agreement and the Note.
4. EVENTS OF DEFAULT
An Event of Default shall exist under this Pledge Agreement if
Shareholder breaches any of his obligations under this Pledge Agreement and
such breach continues for a period of five days after written notice of
breach, specifying the basis therefor, has been given to Shareholder by
Company, or the Shareholder breaches any of his obligations under the Note.
5. REMEDIES OF COMPANY
Upon the occurrence of an Event of Default under Section 4. Company may
take any action(s) pertaining to the Collateral as may be permitted under the
California Uniform Commercial Code.
6. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER
6.1 POWER AND AUTHORITY TO CREATE LIEN. Shareholder represents and
warrants to Company that (a) Shareholder is the legal record and beneficial
owner of, and has good title to, the Shares, (b) Shareholder has full power
to pledge all of the Shares pursuant to this Pledge Agreement, and (c) the
pledge of the Shares pursuant to this Pledge Agreement creates a valid,
first security interest in the Company, and the proceeds thereof, subject to
no other liens or agreements purporting to create a security interest in
favor of any third party.
6.2 DEFENSE OF TITLE. Shareholder covenants and agrees to defend the
right, tide and security interest of Company in the Collateral and the
proceeds thereof against the claims and demands of all persons.
7. TERMINATION
7.1 EXPIRATION OF SECURITY INTEREST. Unless Company has exercised its
remedies in accordance with the provisions of Section 5, above, this Pledge
Agreement shall terminate upon payment in full of the obligations secured
hereby in accordance with their terms.
7.2 SURRENDER OF COLLATERAL. Upon satisfaction in full of the
Shareholder's obligation to the Company as set forth in the Note, Company
shall return to Shareholder any of the Collateral then in possession of
Company.
8. GENERAL PROVISIONS
8.1 WAIVER. Neither the acceptance of any partial or delinquent
payment by Company nor Company's failure to exercise any of its rights or
remedies upon an Event of Default by Shareholder shall constitute a waiver of
such default, a modification of this Pledge Agreement or a waiver of
Shareholder's Obligations under this Pledge Agreement.
8.2 BINDING EFFECT. All of the terms, conditions and provisions of
this Pledge Agreement shall be binding upon and shall inure to the benefit
of and be enforceable by the successors, assigns and personal representatives
of each of the parties.
8.3 ATTORNEY'S FEES. Should any action or proceeding be brought to
construe or enforce the terms and conditions of this Pledge Agreement or the
rights of the parties hereunder, the party
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<PAGE>
prevailing in such action or proceeding shall be entitled to recover all
court costs and reasonable attorney's fees.
8.4 FURTHER ASSURANCES. Each of the parties hereto agrees to perform
all such acts (including, but not limited to, executing and delivering any
necessary or appropriate instruments and documents) as may reasonably be
necessary or appropriate to effectuate fully the purposes and intent of this
Pledge Agreement.
8.5 GOVERNING LAW. This Pledge Agreement, the construction of its
terms and the interpretation of the rights and duties of the parties
hereunder shall be governed by the laws of the State of California.
8.6 COMPLETE AGREEMENTS. The provisions of this Pledge Agreement
constitute the entire understanding and agreement between the parties
regarding its subject matter. It may not be altered, amended or extended
except by instrument in writing signed by the parties hereto after the
execution of this Pledge Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Pledge Agreement
on the date set forth opposite their respective names.
SHAREHOLDER
/s/ Christopher E. Edgecomb
- -------------------------------- ------------------------------------
Date Christopher E. Edgecomb
COMPANY
STAR Telecommunications, Inc.,
a Delaware corporation
/s/ Mary Casey
- -------------------------------- ------------------------------------
Date Mary Casey, President
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<PAGE>
EXHIBIT 10.41
Commercial Lease
- -------------------------------------------------------------------------------
Between
Prinzenpark GbR
Kanzlerstr. 4
40472 Dusseldorf
-hereinafter referred to as Lessor-
and
Star Telecommunications
Deutschland GmbH
Beethovenstrasse 8-10
60325 Frankfurt/Main
-hereinafter referred to as Lessee-
the following Lease is signed:
SECTION 1
LEASED PROPERTY
1. ACCORDING TO THE GROUND PLAN ATTACHED AS APPENDIX, which forms part of
this Lease, Lessor grants Lessee a Lease of the following areas for the
establishment of an office business within the building Prinzenallee 7,
erected on the premises Prinzenallee 5-21/Hansaallee 101,40549 Dusseldorf:
a) PRINZENALLEE 7, OFFICE AREA ON THE GROUND FLOOR OF APPROX. 1,122.12 m(2)
b) PRINZENALLEE 7, OFFICE AREA IN THE BASEMENT OF APPROX. 112,09 m(2)
c) PRINZENALLEE 7, STORAGE AREA IN THE BASEMENT OF APPROX. 124.76 m(2)
d) 6 PARKING SPACES IN THE UNDERGROUND CAR PARK (NOS. 391 TO 396)
e) 2 PARKING SPACES OUTSIDE (NO. 29 AND 30)
2. In the ground plans attached AS APPENDIX, the leased areas according to
subparagraph 1 a) TO c) are marked in red outline and determined by the
area between the inside of the demarcation walls of the building, so that
possibly existing movable lightweight or partition walls and interior
stairs as well as other similar building components are not deducted but
regarded as leased area. Non-usable traffic areas and suchlike have been
taken into consideration when calculating the amount of rent.
The areas mentioned in sub-paragraph 1 d) AND e) are determined bindingly
by the two parties, so that the location can be taken from plans as well.
If a later measurement results in deviations of less than 2.5%, none of
the two parties shall be entitled to demand an adjustment of rent for
this reason.
<PAGE>
3. The ground plan serves exclusively for determining the situation of the
Leased Property.
4. The Leased Property is provided ACCORDING TO THE GROUND PLAN ATTACHED AS
APPENDIX, interior works completed.
Lessor reserves the right of minor alterations which do not interfere
with Lessee's business operation or which are advisable on the basis of
conditions imposed by the authorities or technical requirements.
Lessee shall take into account the necessary escape routes when
establishing and operating the Leased Property - if necessary according
to Lessor's instructions - and to keep them permanently clear for
unhindered passage.
On the occasion of handing over, a handing over protocol shall be
prepared. Any possible defects, considerably reducing the Leased
Property's suitability for contractual use, are to be listed therein.
These defects are to be remedied by Lessor within a reasonable period of
time.
By taking over, Lessee agrees that in other respects, the Leased Property
is in a condition suitable for contractual use.
5. To the extent that Lessee requires alterations to the Leased Property
exceeding those of the present equipping and of the GROUND PLAN ATTACHED
AS APPENDIX, these alterations are subject to Lessor's prior written
consent in each individual case. Consent may be denied for substantial
reasons only. If consent is granted, Lessee may carry out these
alterations at its own expense.
Lessee shall have these works carried out in accordance with Lessor's
supervision of works. Lessor is entitled to make its consent dependent on
compliance with supplementary terms.
6. Lessor does not warrant that the leased areas have been designed
according to ground plan down to the last detail.
7. The carrying capacity of the ceilings is:
- on the ground floor =500 kg/m(2)
- on the first floor to upper story =350 kg/m(2)
including allowance for partition walls.
SECTION 2
BEGINNING OF LEASE
1. The Lease begins on the handing over date, probably on
JANUARY 1ST, 1998
2. The contractual relationship shall begin on signing the contract, the
Lease on handing over.
3. The construction period required for special facilities and special
requests of Lessee is to be regarded as rental period, unless its
execution runs parallel to the completion to be effected by Lessor
requiring additional time.
<PAGE>
SECTION 3
DURATION OF LEASE
1. The Lease is contracted for a duration of ten years. It begins on handing
over.
2. LESSOR GRANTS LESSEE THE OPTION TO RENEW THE LEASE FOR ANOTHER FIVE YEARS.
LESSEE'S DECLARATION TO EXERCISE ITS RIGHT OF OPTION HAS TO BE RECEIVED BY
LESSOR NOT LATER THAN 12 MONTHS PRIOR TO EXPIRY OF THE TENTH YEAR OF
CONTRACT. THE DECLARATION MUST BE MADE IN WRITING.
3. WHEN LESSEE REMAINS IN POSSESSION OF THE LEASED PROPERTY AFTER EXPIRY OF
THE LEASE, THE LEASE IS NOT TO BE REGARDED AS RENEWED. SECTION 568 GERMAN
CIVIL CODE BGB IS NOT APPLICABLE. CONTINUATION OR RENEWAL OF LEASE AFTER
ITS TERMINATION MUST BE AGREED IN WRITING.
SECTION 4
CANCELLATION
1. Lessor is entitled to terminate the Lease without notice, if and when
a) Lessee is in arrears with the payment of rent and/or payment of costs
according to Section 6 of this contract despite written reminder, with a
sum REACHING the amount of two monthly rents (see Section 6, sub-paragraph
1) or, in the case of incidental expenses, the quarterly payment.
b) Lessee continues to use the property in a manner contrary to the terms of
the Lease, or if Lessee otherwise considerably or lastingly infringes the
rights of Lessor or other lessees, or leaves the Property to a third
party without authorization, and if it fails to take corrective action
despite written caution by registered letter specifying a reasonable time
limit.
c) a petition in bankruptcy or for the institution of composition
proceedings has been filed with respect to Lessee's assets, or if a
petition in bankruptcy is dismissed for lack of assets or if Lessee has
otherwise suspended payments or enters into extrajudicial composition
proceedings.
d) the contractually agreed type of use is changed without Lessor's consent
and no corrective action is taken despite written caution by registered
letter specifying a reasonable time limit.
2. LESSEE IS ENTITLED TO TERMINATION OF LEASE WITHOUT NOTICE, PROVIDED
LESSOR FAILS TO COMPLY WITH ESSENTIAL CONTRACTUAL OBLIGATIONS DESPITE
WRITTEN CAUTION SPECIFYING A REASONABLE TIME LIMIT OR IF CIRCUMSTANCES AS
DESCRIBED UNDER SECTION 4, SUBPARAGRAPH 1.c) ARE APPLICABLE TO LESSOR.
3. The notice of termination must be given in writing. It becomes effective
on receipt.
<PAGE>
4. In the case of premature termination of Lease subject to Lessee's
responsibility, Lessee shall be liable for the loss of rent, incidental
expenses and other payments for the contractual duration of Lease as well
as for any other loss suffered by Lessor due to the premature
cancellation of Lease with respect to the Leased area, unless Lessor is
indemnified by a new, adequate lease of the rooms. THE COSTS ACCRUED IN
THIS RESPECT (IN PARTICULAR INSERTION EXPENSES AND BROKER'S COMMISSION)
ARE TO BE BORNE BY LESSEE. LESSOR SHALL MAKE ANY EFFORT TO FIND A
SUITABLE NEW LESSEE. IT WILL ACCEPT A NEW LESSEE PRESENTED BY LESSEE,
PROVIDED THE NEW LESSEE EQUALS LESSEE WITH RESPECT TO KIND OF BUSINESS AND
FINANCIAL SOUNDNESS.
SECTION 5
OBLIGATIONS ON TERMINATION OF LEASE
1. On termination of Lease on any legal ground whatsoever, Lessee shall
return the Leased Property to Lessor in an expertly renovated and cleaned
condition, not later than on the last calendar day of the rental period.
The obligation to renovate does not refer to normal wear and tear
regarding roof and compartment of the Property. IN OTHER RESPECTS, IT
ONLY REFERS TO THOSE ITEMS CLASSIFIED AS SUBJECT TO DECORATIVE REPAIRS
ACCORDING TO SECTION 28, SUB-PARAGRAPH 4, SENTENCE 5 II OF THE OPERATING
AGREEMENT BV (AS AMENDED ON OCT. 12, 1990), AND TO CARPETS, IF THESE HAD
BEEN PROVIDED BY LESSOR ON MOVE.
2. By the end of the rental period, Lessee shall have removed any
installations and structural alterations executed by Lessee prior to or
after moving in, and Lessee shall restore the state of the building
originally planned or existing. If and to such an extent as allowed by
Lessor, Lessee is entitled not to remove installations or structural
alterations. In this case, Lessor is entitled to acquire them, wholly or
in part, against payment of A REASONABLE compensation. THIS DOES NOT
APPLY TO ANY OBJECTS SUBJECT TO LESSOR'S CONTRIBUTION TO EXPENSES ON
FITTING OUT UNDER SECTION 17, SUB-PARAGRAPH 1 OF THIS LEASE. The
obligation to execute decorative repairs according to Section 10 remains
unaffected.
3. Additionally, Lessee shall indemnify for any loss suffered by Lessor due
to delayed return of the leased rooms.
4. On Lessor's demand to remove the installations/alterations, Lessee is
obligated to restore the original condition, or the condition originally
agreed, at its own expense, including each and every necessary secondary
work.
SECTION 6
SUBLEASING
1. Lessor is entitled to sublease or sublet the Leased Property, subject to
Lessor's prior written consent, but only
a) for the same or similar purposes of use, for which the rooms are leased
to Lessee and
b) to a sublessee convenient to Lessor. Lessor may reject a sublessee only,
if sublessee's person, branch of business or company gives substantial
cause for such a rejection.
2. Subleasing for the purpose of a changed use of the Leased Property
requires Lessor's special written consent.
<PAGE>
SECTION 7
AMOUNT OF RENT AND INCIDENTAL EXPENSES
1. The monthly rent for the leased areas shown in Section 1 amounts to
a) approx. 1,122.12 m(2) X DM 27.50 = DM 30,858,30
b) approx. 112.09 m(2) X DM 20.00 = DM 2,241.80 (offices)
c) approx. 124.76 m(2) X DM 12.00 = DM 1,497.12 (storage area 1)
d) 6 parking spaces undergr.c.p. X DM 110.00 = DM 660.00
e) 2 parking spaces outside X DM 60.00 = DM 120.00
----------------------------------------------------------
total = DM 35,377.22
------------
------------
LESSOR ALLOWS LESSEE THE USE OF THE LEASED PROPERTY FREE OF RENT FOR THE
FIRST THREE MONTHS OF LEASE AFTER HANDING OVER (POSSIBLY EARLIER REGARDING
PARTIAL AREAS), NOT LONGER, HOWEVER, THAN UNTIL MARCH 31ST, 1998. THE ADVANCE
PAYMENT FOR THE OPERATING EXPENSES IS DUE ON HANDING OVER OF THE RESPECTIVE
LEASED AREA (INCLUDING PARTIAL AREAS).
2. The incidental expenses listed in the following are not covered by the
rent payment:
- real estate and building insurance
- real property tax
- cost of water and waste water
- cleaning expenses streets, paths and squares
- upkeep of decorative elements and of general green areas including
purchasing costs of new plants
- costs of fire alarm and extinguishing systems, safety contrivances of
all kinds (if available)
- costs of caretaker or in-house technician
- costs of house cleaning
- costs of the heating system including consumption
- general current, lamps
- metering and accounting expenses of consumption
- elevator costs
- refuse collection - unless separate agreement
- cost of ventilation, air conditioning equipment
- wide band supply
- upkeep and repair of interior and exterior general areas, except for
roof, outer facades and load-bearing elements
<PAGE>
- house management
Lessee shall bear these costs according to actual consumption or to the
corresponding expenses incurred.
Industrial waste, e.g. office paper, overstepping the mark, is to be
removed by Lessee.
To the extent that costs are apportioned, Lessee shall be treated as
equivalent to the other lessees (applying the same basis for allocation),
irrespective of the operating expenses.
A monthly advance payment of DM 5.50 per m(2) shall be collected for the
above mentioned incidental expenses for the offices and the supplementary
area. This advance payment is to be effected together with the rent
payment. In the case of a change of these incidental expenses or if new
real property liens arise, Lessor shall be entitled to reassess the
advance payments.
Settlement of accounts with respect to the advance payments will be
effected once a year. If the settlement of accounts shows an overpayment,
a corresponding credit note in favor of Lessee will be issued. If the
costs to be settled exceed the advance payments, Lessor shall claim a
corresponding payment. Provided economically justifiable, corresponding
supply meters are to be installed for the determination of consumption.
Unless a direct determination of such costs is possible, Lessee shall be
charged with these costs in proportion of its leased area to the overall
leased area of the Property. In the case of a breakdown of the metering
devices or if such devices do not work properly, Lessor is entitled to
allocate costs by way of assessment.
The accounting documents shall be available for inspection according to
Lessor's provisions for one month after dispatch of the settlement of
accounts to lessees.
3. Lessee shall pay a monthly flat charge of 1% of the net rent agreed under
Section 7, sub-paragraph 1, for the proportionate administrative expenses.
4. In addition to the rent, any value added tax to the extent assessed and
due shall be owed by Lessee. This also applies to incidental and
administrative expenses listed above.
SECTION 8
PAYMENT OF RENT AND INCIDENTAL EXPENSES
1. The rent and the advance payment for incidental and administrative
expenses are to be paid to Lessor or to a person or institution
authorized by lessor for acceptance monthly in advance not later than on
the third working day of the respective month. For the first time, these
payments are to be effected for the period from the day of handing over
the Leased Property.
2. On delay in payment, Lessor is entitled to charge default interest of 4%
above the respective discount rate of the Deutsche Bundesbank as well as
dunning costs to the extent of DM 5.00 PER REMINDER. The assertion of
further damages caused by delay remains unaffected.
3. In the case of partial payments on the part of Lessee, Lessor is entitled
to offset according to Section 366 II German Civil Code BGB, irrespective of
any statements by Lessee.
4. Lessor shall not pay any interests on advance payments for incidental
expenses.
5. THE RETENTION OF PAYMENTS TO BE EFFECTED BY THE PARTIES UNDER THIS
CONTRACT AND THEIR OFFSET AGAINST ANY CLAIMS IS EXCLUDED, UNLESS
ACKNOWLEDGED OR RECOGNIZED BY DECLARATORY JUDGEMENT BY THE OTHER PARTY.
LESSEE'S RIGHT TO CLAIM REDUCTION OF RENT REMAINS UNAFFECTED.
<PAGE>
Lessor's banking connection:
Bayerische Landesbank
account no. 58 301
bank identification no. BLZ 700 500 00
SECTION 9
RENT ADJUSTMENT/VALUE GUARANTY
1. The rent agreed under Section 6, sub-paragraph 1 is to be considered as
fixed until December 31st, 1998. After that date, it shall be increased
or reduced in percentages for the following year according to
cost-of-living index of an employee's family of four with an average
income of the sole breadwinner, as published by the Statistisches
Landesamt NRW (Land Statistical Office of North Rhine-Westphalia) on the
basis of 1991 = 100 points, with 75% corresponding to the increase or
decrease of the index.
2. A FIRST ADJUSTMENT OF RENT WILL BE EFFECTED ON JANUARY 1ST, 1999. THE
CHANGE OF INDEX FROM DECEMBER 1997 (BASE INDEX) TO DECEMBER 1998 IS
AUTHORITATIVE FOR THIS ADJUSTMENT. SUBSEQUENTLY, THE RENT ADJUSTMENT
SHALL BE EFFECTED ON JANUARY 1ST OF EACH YEAR OF LEASE, ALSO ACCORDING TO
THE RESPECTIVE CHANGE OF INDICES FROM DECEMBER OF THE PREVIOUS YEAR IN
RELATION TO DECEMBER OF THE YEAR BEFORE.
In the following years of Lease, a corresponding adjustment of rent shall
be effected on January 1st respectively.
2. If in future this adjustment becomes legally impossible for any reason
whatsoever, e.g. because this index is no longer officially determined or
published or if the connection hereto becomes legally impossible for any
reason whatsoever, the contracting parties are bound to come to an
agreement on a reasonable adjustment of rent which is permitted by
statute and the content of which is economically as similar as possible
to the value clause agreed hereunder.
3. The contracting parties are aware of the fact that the legal effect of the
above value clause is dependent on the approval by the Land central bank.
Lessor will endeavor immediately to obtain such approval. The legal
effect of the other provisions of this contract remain unaffected, as
long as the approval by the Land central bank has not been obtained or if
it is denied. In that case, the contracting parties are bound to work on
a permissible wording in order to achieve a corresponding rent
restriction to the development of the cost of living.
SECTION 10
MAINTENANCE AND REPAIR
1. On beginning of contract, the leased rooms are handed over to Lessee in a
new, perfect condition. Prior to move, any possible defects are recorded
in a handing
<PAGE>
over protocol. During the rental period, the leased rooms are to be kept
in a proper, unobjectionable condition and are to be treated with care.
2. During the rental period, Lessee shall additionally be responsible for
all repairs within the Leased Property caused by its own fault or by
inexpert handling (repair, maintenance) and for all the interior
decorative repairs. Lessee shall perform expert interior decorative
repairs at its own expense at reasonable intervals, not later than every
3 years.
3. Lessee shall remove immediately any damages, he is responsible for. If
Lessee fails to comply with this provision within a reasonable period of
time, Lessor may have the necessary works executed at Lessee's expense.
4. In the case of damages causing any imminent dangers or in the case of
unknown abode of Lessee, a written caution or the fixing of time limit is
not required. In such cases, Lessor is entitled to execute damage removal
at Lessee's expense.
SECTION 11
INSURANCE, LIABILITY
1. Insurance of Lessee's fittings and of stored assets against fire, water,
burglary and housebreaking or other damages is within Lessee's
responsibility.
2. In particular, Lessee is liable for the following damages to the Leased
Property:
a) any damages to the fittings and other objects brought in by Lessee,
caused by fire or tap water, including the risks of sewage water and
inappropriate penetration of sprinkler water;
b) any personal injury and damage to property to an extent customary in
Lessee's line of business
c) broken glass
d) any damages resulting from burglary and housebreaking.
3. Lessee shall effect insurances covering the risks mentioned under a-d.
Lessor may demand presentation of the corresponding insurance policies in
regular intervals, including a written declaration by the insurance
company confirming that a corresponding examination has not shown a case
of underinsurance.
4. Lessor assumes no liability whatsoever for any possible damages to
fittings, unless the damage has been NEGLIGENTLY caused by Lessor or by
its vicarious agents. LESSOR, HOWEVER, SHALL BE LIABLE FOR ANY DEFECTS,
LESSEE IS EXPRESSLY NOT LIABLE FOR ACCORDING TO THE FOLLOWING.
5. In the case of subleasing, Lessee shall indemnify Lessor against any
claims to such an extent as such claims against Lessor are excluded for
Lessee itself according to the terms of this contract. This also applies
to non-contractual foundations for claims.
6. LESSEE IS LIABLE FOR ANY DAMAGES NEGLIGENTLY CAUSED BY ITS FAILURE TO
EXERCISE PROPER CARE, INCLUDING WITHOUT LIMITATION, IN PARTICULAR,
INEXPERT HANDLING OF SUPPLY PIPES OR DRAINS, TOILETS AND HEATING PLANTS
OR OF ELECTRICAL EQUIPMENT WITHIN THE LEASED ROOMS, AND FAILURE TO
PROTECT THEM SUFFICIENTLY FROM FROST OR OTHER INFLUENCES. AT ALL EVENTS,
OCCLUSIONS OF PIPES ARE TO BE REMOVED BY LESSEE UP TO THE MAIN PIPE AT
ITS OWN EXPENSE.
<PAGE>
7. IN THE SAME WAY, LESSEE IS LIABLE FOR ANY DAMAGES NEGLIGENTLY CAUSED TO
THE PROPERTY BY ITS EMPLOYEES OR SUBLESSEES. IF SUCH A DAMAGE IS CAUSED
BY LESSEE'S OR SUBLESSEE'S VISITORS OR SUPPLIERS, LESSEE IS LIABLE ONLY,
IF IT FAILS TO INFORM LESSOR ABOUT THE FULL NAME AND ADDRESS OF THE
VISITOR OR SUPPLIER (SPECIFIC EXECUTING PERSON).
LESSEE SHALL MAINTAIN ANY PIPES AND PLANTS RELATING TO ELECTRICITY, GAS
AND SANITATION, LOCKS, BLINDS, AND SIMILAR EQUIPMENT IN A SERVICEABLE
CONDITION.
LESSEE IS FURTHER LIABLE FOR ANY DAMAGES CAUSED BY INEXPERT HANDLING OF
WATER, LIGHT AND POWER MAINS, AND FOR ANY DAMAGES TO TOILETS, SANITATION
OR HEATING PLANT AS WELL AS VENTILATION, SMOKE ALARMS AND ACOUSTIC
EQUIPMENT (IF AVAILABLE) CAUSED BY LEAVING DOORS OPEN, BY STRUCTURAL
MEASURES TAKEN BY LESSEE, BY ADVERTISING EQUIPMENT INSTALLED BY LESSEE OR
BY FAILURE TO COMPLY WITH THE OTHER OBLIGATIONS ASSUMED BY LESSEE.
Lessee is liable to Lessor for any damages to buildings, doors, gates,
elevators, parking lots, traffic ways etc., caused by delivery traffic
and exceeding customary wear and tear.
8. AT ALL EVENTS, LESSOR SHALL REPLACE AT ITS OWN EXPENSE ANY DAMAGED GLASS
PANES AND MIRRORS AND IF NECESSARY, LESSOR SHALL EFFECT A GLASS
INSURANCE. NOT CLOSING TOILETS AND SINKS, CAUSING WATER TO FLOW
CONTINUOUSLY THROUGH LEAKY VALVES THUS RESULTING IN CONSIDERABLE WATER
CONSUMPTION, ARE IMMEDIATELY TO BE REPORTED TO LESSOR. DELAYED REPORTS
MAY RESULT IN DAMAGE CLAIMS. ON REQUEST, ANY POSSIBLE CLAIMS AGAINST
THIRD PARTIES AT FAULT ARE ASSIGNED TO LESSOR BY LESSEE.
9. Lessee is responsible for not exceeding the indicated carrying capacity
of the bearing plate.
10. Lessee shall immediately remove any damages it is responsible for
according to the above provisions at its own expense. On Lessee's
failure to do so despite written caution and fixing of an appropriate time
limit by Lessor, Lessor may have the corresponding work executed at
Lessee's expense. In the case of damages causing any imminent dangers or
in the case of unknown abode of Lessee, a written caution or fixing of
time limit is not required.
11. Lessor shall arrange for the examination of plants jointly used by
several lessees or belonging to the commonly used facilities. Lessor is
entitled to sign appropriate fully comprehensive maintenance agreements.
Costs shall be apportioned to the lessees. The required examination of
plants exclusively used by Lessee or installed by Lessee is to be arranged
for by Lessee at its own expense. Lessee is obligated to observe and
comply with each and every statutory or public law provision with respect
to its place of business.
<PAGE>
12. Plants and components left for Lessee's sole use are to be maintained,
attended to and kept up in such a way, that they are returned in a
serviceable condition after termination of contract.
SECTION 12
PREMATURE TERMINATION OF LEASE
1. Lessor generally agrees to give its consent to annulment of contract in
the case that Lessee demands early termination of contract for
substantial reasons, provided that Lessee presents an equivalent and
solvent new lessee with whom a contract of lease is entered into, in which
the new lessee succeeds to each and every right and obligation under this
contract.
The new lessee's use of the Leased Property for other than the previous
purposes is subject to Lessor's consent. Lessor may deny such consent,
if any non-competitive clauses agreed by Lessor or justified interests of
other lessees or the mixture of branches are adverse to such use.
2. Additionally, a precondition for Lessor's consent is that Lessee or the
new lessee binds itself by contract with Lessor to bear all the expenses
involved in the change of lessee (including commercial agency's charges)
and finally that Lessee assumes the absolute guaranty for the performance
of the financial obligations of the new lessee against Lessor for the
time up to the first possible date of termination.
SECTION 13
STRUCTURAL ALTERATIONS AND INSTALLATIONS BY LESSEE
1. Prior to and during the rental period, any structural alterations within
and outside the leased rooms are subject to Lessor's written consent.
Lessee is entitled to install advertising writings or signs in areas of
the Leased Property earmarked by Lessor. In order to achieve a uniform
design of the overall property, however, Lessee is obligated to have such
exterior advertising approved by Lessor in advance. Any possible official
permits required are to be obtained in advance by Lessee at its own
expense. Even if Lessor grants its consent to structural alterations and
installations, Lessee is obligated to remove such installations and to
restore the original condition on termination of Lease.
Subject to Lessor's consent, Lessee may leave any objects affixed to the
building to Lessor free of charge. Lessee may also have its company name
installed in the entrance area of the building at its own expense,
uniform with the other users of the building and in accordance with
Lessor (a uniform sign board is planned for all the lessees, divided up
into individual signs).
Lessee is entitled to equip the rooms at its own expense with additional
installations and special facilities which are useful and necessary for
the performance of its business.
As soon as possible after completion of the contract, Lessee shall draw
up a catalogue with such items and submit it to Lessor for approval.
Planning, installation or delivery of Lessee's special facilities is
within Lessee's responsibility. In agreement with Lessor's architect,
however, it may make use of his expert assistance against payment of a
reasonable remuneration.
<PAGE>
2. Regarding the electric installations required and ordered by Lessee, which
are subject to VDE/TUV, Lessee is obligated to entrust an expert company.
Upon Lessor's demand, Lessee shall present the electricity plans.
SECTION 14
REPAIR AND STRUCTURAL ALTERATIONS BY LESSOR
1. Even without Lessee's consent, Lessor may perform any repairs and
structural alterations becoming necessary for the maintenance of the
building or of the Lease Property, for averting imminent dangers, for
the removal of damages or because of other lessees moving in/out.
This shall also apply to works which are not necessary but useful, as for
instance modernization of the building and of the Leased Property. DURING
THE FIRST TEN YEARS OF LEASE, A MODERNIZATION OF LESSEE'S ROOMS IS
SUBJECT TO LESSEE'S PRIOR CONSENT. Lessee shall maintain accessible the
rooms concerned. Lessee must not hinder or delay the execution of the
works.
2. Provided Lessee is bound to tolerate the works, it is not entitled to
rent reduction nor to exercise a right of retention. Lessor, however, is
obligated to have such works executed outside Lessee's usual business
hours, if possible, in order to avoid a substantial interference with
Lessee's business operation.
SECTION 15
JURISDICTION AND PLACE OF PERFORMANCE
1. Place of jurisdiction and place of performance is Dusseldorf.
SECTION 16
SECURITY FOR RENT
1. Lessee shall provide a guaranty to the extent of SIX NET MONTHLY RENTS to
provide security for its obligations under this contract. This guaranty
may be effected in the form of a bank guaranty issued for an unlimited
period of time. On termination of Lease, the security is returned to the
full extent, provided this contract of Lease is perfectly fulfilled and
all other obligations in connection with this Lease are complied with.
Otherwise, the security provided shall be set off against Lessor's claims.
Lessor may demand that the suretyship is increased corresponding to a
rent increase as per Section 8 of this contract. Accordingly, the
security is to be increased on Lessor's first demand in such a way, that
it always matches SIX current net monthly rent payments.
<PAGE>
2. If the security or an appropriate guaranty is not received by Lessor
within 14 days after handing over of contract, Lessor is entitled to
withdraw from contract after another written caution of 14 days.
SECTION 17
SPECIAL CONDITIONS
1. LESSEE IS GRANTED AN ADDITIONAL CONTRIBUTION TO EXPENSES ON FITTING OUT
IN THE GROSS AMOUNT OF DM 350,000.00, IN ADDITION TO THE CONVENTIONAL
DESIGN.
THIS CONTRIBUTION MAY BE USED FOR FALSE FLOOR, AIR CONDITIONING IN
VARIOUS AREAS, ADDITIONAL STEEL DOORS AND FOR ADDITIONAL LAMPS AND OTHER
SPECIAL REQUIREMENTS, WHICH ARE NOT INCLUDED IN THE STANDARD BUILDING
SPECIFICATIONS.
2. Lessor assumes the obligation of cleaning the pavement including snow
removal and gritting in icy weather of the pavements and pedestrian areas
in front of the building, complying with the municipality's provisions.
The corresponding expenses will be apportioned to the lessees in
accordance with Section 6, sub-paragraph 2.
3. Lessee agrees furthermore to clean windows and window frames regularly.
This also applies to sun protection facilities. If cleaning contractors
are entrusted with attending to the overall property, Lessee may join
such an agreement, provided it bears the proportionate expenses.
4. The house regulations attached form part of this Lease and shall be signed
by the two parties as well. The legal provisions shall apply
supplementary to these terms of contract.
5. Annulment, amendments and supplements to this contract must be made in
writing. Any verbal agreements, in particular on cancellation of the
written form, are ineffective. EACH PARTY IS ENTITLED TO AFFIX ANY
AGREEMENTS ON AMENDMENTS OR SUPPLEMENTS REGARDING THIS LEASE TO THIS DEED.
6. If any provisions of this contract prove to be or become legally
ineffective, the validity of the other provisions of this Lease shall
remain unaffected. The contracting parties, however, agree to ensure that
the ineffective provisions are replaced by other, economically equivalent,
effective provisions, if possible.
7. The following appendices form part of this contract:
a) BUILDING SPECIFICATIONS dd. OCTOBER 23RD, 1997
b) GROUND PLANS OF OFFICE AND STORAGE AREA
c) HOUSE REGULATIONS
(------------------------------------------------------------------------------)
Dusseldorf, Frankfurt, October 31st, 1997
( )
- --------------------------- ---------------------------
-Lessor- -Lessee-
<PAGE>
EXHIBIT 10.42
PAGE 1
LEASE
BETWEEN STAR TELECOMMUNICATIONS DEUTSCHLAND GmbH
VOLTASTRASSE 1a
60486 FRANKFURT/MAIN
REPRESENTED BY
-LESSEE-
AND WSL WESTSTADT LIEGENSCHAFTS GmbH
IM BRUHL 19
61476 KRONBERT/TS.
REPRESENTED BY MRS. SYBILLE KIRSTEIN
-LESSOR-
<PAGE>
PAGE 2
SECTION 1
LEASED PROPERTY
1. Lessor grants a lease of training and office building with underground
parking lot in the premises in Frankfurt-West, Voltastrasse 1a.
2. Following premises will be let to less in the building set forth in
sub-paragraph 1, as indicated in the ground plan, Appendix 1:
2
a) approx. 2,586m of offices, technical areas, social rooms and
secondary areas on the 1st and 2nd floor.
2
b) m of storage space in the basement and attic story
c) car parking spaces in the underground parking lot
car parking spaces in the underground parking lot
of Novotel.
The final area leased results from the dimension of the leased area, which
will be prepared together with the handing over protocol in accordance with
the calculation of area attached to this contract, Appendix 2.
3. The floor plan of the leased areas and the required fittings will be set
forth in Appendix 1. Any additional costs accrued due to later special
requests by lessee have to be borne by lessee. Before executing special
requests on part of lessee, lessee has to be provided with a quotation,
including a statement of a possible delay with respect to the handing over
date. Special requests may not be executed until lessee has given its
consent to the execution according to the submitted quotation. The final
state of the floor plan and fittings of the rooms is subject to the
building authority's regulations.
SECTION 2
PURPOSE OF USE
1. The lease is made for entrepreneurial purposes in terms of the Turnover Tax
Law.
Lessee will make use of the leased areas as offices and technical areas
with social rooms and secondary areas as it is common practice.
2. Lessee is not entitled to use the leased premises for another purpose than
contractually agreed. A change of use is subject to prior written consent
by lessor, who shall not unreasonably withhold its consent.
<PAGE>
PAGE 3
SECTION 3
DURATION OF LEASE
1. The lease commences on January 2nd, 1998. The lease is contracted for a
duration of 10 years. It is renewed for another 2 years, unless it is
terminated at least 6 months before end of the term of lease by one of the
contracting parties. The notice of termination of the lease must be given
in writing.
2. Lessee is entitled to start with the installation of operational equipment
before the stipulated date. It is obligated, however, to integrate the
works into the schedule of the building site. The leased premises are
regarded as complete particularly even if remaining structural work and
removal of defects are still to be attended to, provided that these works
and defects will only insignificantly affect the use. In case of a delay in
handing over, lessee shall not be entitled to terminate this contract or to
withdraw from this contract unless the handing over of the leased property
is not effected until February 28th, 1998 at the latest.
In case of termination of the lease due to rent arrears, rent shall include
incidental expenses as well.
SECTION 4
AMOUNT OF RENT
1. The monthly total amount of rent for the described leased areas in the
building indicated in the Appendix is
<TABLE>
<S> <C>
net rent per month DM 71,115.00
plus VAT, at present 15% DM 10,667.25
------------
GROSS RENT PER MONTH DM 81.782.25
</TABLE>
2. The total amount of rent is calculated on the basis of the calculation of
the leased area and of the following table of rent:
2
a) approx. 2,586m of offices, technical areas,
social rooms and secondary areas
on the 1st and 2nd floor. DM 27.50
2
b) m of storage space in the basement
and attic story DM 15.00
c) car parking spaces in the underground
parking lot
car parking spaces in the underground
parking lot of Novotel DM 120.00
3. In addition to the rent, advance payments have to be made for the accruing
incidental expenses - including heating costs according to Section 5, in
the amount of DM 4.00/m(squared) leased area plus 15% VAT.
net apportionment per month DM 10,344.00
plus 15% VAT DM 1,551.60
------------
GROSS APPORTIONMENT PER MONTH DM 11,895.60
<PAGE>
PAGE 4
SECTION 5
INCIDENTAL EXPENSES
1. Lessee shall bear the following incidental expenses plus VAT in proportion
of the areas leased by lessee to the total of the leased area of the
building (according to Section 1, Appendix 1), for which an advance payment
according to Section 4, sub-paragraph 3, has to be made. Incidental
expenses shall include all current costs incurred by lessor due to
ownership of the premises, grounds and fittings, including areas used by
the public. These costs are the following:
Insurance, water charges, canal dues, fees for refuse collection, land tax,
energy consumption in the general areas, chimney sweeping, street cleaning,
cleaning of building and facade, attention to grounds and green areas on
the whole of the premises, snow removal and gritting in icy weather,
janitor as well as costs of property management (3.5% of the total annual
gross rent), operation of passenger and goods elevators (firemen's
elevators) including complete maintenance and, if available, maintenance of
elevator emergency call device, interior decorative repairs in the general
areas, cost of maintenance, repair, upkeep, reconditioning, operation and
checking of the technical equipment (like for instance the heating system,
lifting facilities, fire alarm, access control facilities, facilities for
protection against the sun, ventilation and air conditioning equipment,
emergency power generating unit, supply meters etc.), maintenance of roof's
covering with greenery and of the waterproof sheetings as well as checking,
refilling and replacement of hand fire extinguishers.
If costs for heating, air conditioning or hot-water are determined
separately by intermediate meters for the area leased by lessee, lessee
shall bear these individually determinable consumption-based costs. If
that is not the case, the accruing expenditure on consumption will be
distributed at 33 per cent according to the size of the leased area and at
70% according to consumption determined by measuring facilities.
If water consumption is determined separately, lessee shall bear 100% of
the individual consumption costs. This applies to canal dues accordingly.
Not later than Sept. 30th of the subsequent year, lessor is obligated to
settle accounts with lessee on the incidental costs accrued during one year
of management (Jan. 1st to Dec. 31st), taking into account the advance
payments made according to Section 4, sub-paragraph 3.
Additional or short payments have to be mutually compensated immediately.
In the case of an increase or decrease in operating expenses, lessor shall
reassess the monthly advance payment correspondingly.
2. If the increase or the new introduction of operating expenses agreed by the
two parties causes lessor an additional financial burden, lessee is
obligated to pay the respective additional amount on a pro rata basis as
from receipt of a corresponding notification.
3. Lessor shall be entitled to alter the distribution code and the accounting
period in its fair judgment.
4. Registration with the competent public utilities shall be effected by
lessee in due time before commencement of lease.
<PAGE>
PAGE 5
SECTION 6
CENTRAL HEATING AND HOT-WATER CONSUMPTION
1. Lessor is obligated to maintain operation of the central heating during
usual business hours if the outdoor temperature so requires, at least,
however, in the time from October 1st to April 30th. Ventilation and air
conditioning equipment - if available - are to be operated all the year
round.
2. Hot-water supply, if not effected by the central heating, has to be
provided at any time during usual business hours.
3. A fuel shortage beyond lessor's control, resulting in partial or complete
suspension of heating, does not entitle lessee to claim reduction or to
claim for damages. This also applies to the inevitable interruption of
operation of the heating facilities due to repair or maintenance purposes.
SECTION 7
ALTERATION OF THE AMOUNT OF RENT
1. The amount of rent remains unchanged during the first year after
commencement of lease.
After that date, the agreed amount of rent will change as soon as the
cost-of-living index determined by the Federal Statistical Office
(Statistisches Bundesamt) for a worker's family of 4 earning an average
income, assessed in the base year 1985 at 100 points, has increased or
decreased as compared with the corresponding level at commencement of
lease. In this case, the agreed amount of rent will be changed according
to the extent of change occurred. The altered amount of rent, determined
as described above, will be valid, in turn, for another period of at least
12 months. If then the above mentioned index will have increased or
decreased as compared to the last change of rent, the amount of rent will
be adjusted for a subsequent period of at least 12 months. The change of
the amount of rent is subject to a written request by the party entitled.
The altered amount of rent is due for payment on the 3rd business day of
the month following the receipt of the request.
2. In order to become effective, this agreement requires the approval by the
Land central bank (Landeszentralbank), to be obtained by lessor. In case
of refusal of this approval, however, the provisions agreed by the parties
shall remain valid. In this case, the parties will change the index clause
that way, that it will be approved and will be economically as similar to
the original clause as possible.
<PAGE>
PAGE 6
SECTION 8
PAYMENT OF RENT
1. Rent, advance payment of incidental expenses and value added tax have to be
transferred, post-free and charges paid, monthly in advance, on the 2nd
business day of each month at the latest to lessor's account no.
11 00 58 195, Bank Code Number BLZ 550 500 00, Landesbank Rheinland-Pfalz
in Mainz.
2. Delay in payment entitles lessor to charge dunning costs of DM 15.00 per
reminder, incl. VAT plus postage and default interest of 2% p.a. above the
current discount rate of the Central Bank of Germany (Deutsche Bundesbank).
3. If lessee effects part payments on the accounts payable, lessor may set
these payments at its own option against the unsettled accounts, not paying
consideration to declarations made by lessee.
SECTION 9
SET-OFF, RETENTION
1. Lessee may claim the reduction of the amount of rent only with prior
written notification to lessor.
A set-off and retention by the two parties is possible only if undisputed
claims or claims raised with final and binding effect are concerned.
2. A retention and set-off due to claims arising from other obligations is
excluded. Claims for compensation according to Section 538 of the Civil
Code (BGB) are excluded, unless lessor has acted intentionally or with
gross negligence.
SECTION 10
SUBLETTING TO THIRD PARTIES
1. Lessee is not entitled to subletting or subleasing the premises to third
parties without prior written consent given by lessor. Lessor may only
refuse its consent if there are objective material reasons against such
subleasing. Subleasing to companies or subsidiaries of the same group is
exempt from this provision (Section 2, subparagraph 1 applies accordingly
to a possible sublessee).
2. In case of subleasing or subletting, lessee shall be liable for all acts or
failures by sublessee or that party, to whom it has sublet the use of the
leased premises.
<PAGE>
PAGE 7
SECTION 11
PLAQUES, ADVERTISING EQUIPMENT
1. Lessee is entitled to fix a company plaque at the main entrance. The
lessor will indicate the position of the advertising equipment, its
possible dimensions as well as the possible design according to the
planned design of the exterior and considering the official guidelines.
2. Upon termination of lease, lessee is obligated to remove plaques and
advertising equipment as well as the damages caused by fixing, operation
and removal.
SECTION 12
USE OF THE ELEVATORS
1. Existing elevators will be in operation 24 hours a day.
2. In case of operational failures lessee is not entitled to uninterrupted
service. A control of the elevators is not provided. Failures have to be
communicated immediately to lessor or its representative.
SECTION 13
ELECTRICITY, GAS, WATER, HEATING FUEL
1. Existing electricity (incl. possibly existing telecom and antennae
cabling) networks as well as gas and water pipe networks may only be
used by lessee to such an extent, that no overstressing will occur. An
increased demand may be met by Lessee by extending supply pipes or lines
at its own expense after prior written consent of lessor. The laying of
any additional pipe or line network within the building is subject to
lessor's prior written consent.
2. In case of failures or damages of the supply network, lessee shall
provide for immediate cutoff and inform lessor. In case of imminent
danger, lessee is obligated to eliminate this imminent danger at once by
itself. Further repair of the damage shall be arranged for by lessor,
unless according to this contract the maintenance and repair are
incumbent on lessee. If the latter is not the case, lessor shall also
bear the cost incurred due to elimination of the imminent danger.
3. An alteration of the energy supply, in particular a change of the
current voltage, does not entitle lessee to assert claim for damages
against lessor. In such a case, however, lessee is entitled to
exceptional termination of contract.
<PAGE>
PAGE 8
4. If power, gas or water supply or drainage is interrupted by
circumstances beyond lessor's control, if irregularities occur with
respect to supply or in case of floods or other catastrophes, lessee
shall have no right to claim reduction of rent or damages against
lessor. This applies to heating fuel supply accordingly, as long as it
is effected by the public utilities.
If the terms of delivery stipulated by the public utilities, from which
lessor purchases power or water, provide undertakings' liability for
interruptions in supply and for irregularities in delivery, lessor
hereby assigns any claims it may have against the public utilities to
lessee. Additional claims are not asserted by lessee, unless they could
be asserted by lessor as well.
SECTION 14
OFFICIAL PERMITS AND
OPERATING EQUIPMENT OF LESSEE
1. Lessor does not assume any liability for the fact that the permits
granted for the operation known and planned at present and for the
equipment required will continue until after the date of handing over
of the leased property (Section 3, sub-paragraph 1). Lessor warrants,
however, that a commercial use within the scope of lease set forth in
Section 2, sub-paragraph 1, is permitted. This applies in particular to
licenses as well. Lessee has to bear all the costs required for the
creation and maintenance of the preconditions for the operation of its
business. This also applies to advertising equipment etc.; obligations
imposed by the trade supervision or other authorities with respect to
lessee's business have to be complied with at lessee's own expense.
2. Before installing machines, heavy objects, other plant and equipment in
the leased premises, lessee shall ask lessor about the approved limit of
load and obtain lessor's written consent. Lessee is liable for damages
caused by failure to comply with this provision. If the installation of
this plant and equipment has an adverse effect on the building -
tremors, cracks, etc. - lessor may withdraw the granted permit if lessee
fails to take remedial action in the due course of time to be
stipulated. Lessee is liable for all plant and equipment brought in or
operated by lessee. If the installation or operation of lessee's plant
and equipment results in unreasonable disadvantages or detriments,
lessee is obligated to remove them or to discontinue operation unless it
can take remedial action.
3. Obligations within the scope of the building permit, imposed by the
construction supervision authorities with respect to lessee's operating
equipment, have to be complied with at lessee's own expense.
<PAGE>
PAGE 9
SECTION 15
MAINTENANCE AND REPAIR OF LEASED PROPERTY
1. Lessee shall provide for sufficient cleaning, ventilation and heating of
the leased property and treat the rooms and the plant and equipment therein
with care and keep it free from pests.
2. Lessee is liable for any damages of and in the leased property and for
damages of the open space belonging to it, as long as these damages are
caused by itself, its employees, family members, vicarious agents,
sublessees, visitors, suppliers, customers and workmen, acting with gross
negligence.
3. Lessee is obligated, in particular, to have interior decorative repairs
of the leased premises executed at its own expense (repapering and/or
painting of the walls and ceilings, and, as agreed with lessor, painting
of coated floors, radiators, visible mains, rusts, doors, windows or
other parts, unless they have a coated, eloxed, varnished, galvanized or
similar surface) within reasonable intervals, and to exchange upper floor
coverings. Lessee shall maintain and repair lighting installations, bell
systems, thermometers, locks, water cocks, water closet flushing
apparatuses, wash-basins and sinks, stoves, gas burning installations,
electric appliances, ventilating equipment, water heaters and similar
technical installations, exclusively used for lessee's supply, including
the corresponding feeding pipes or lines and sewage pipes.
4. Lessee shall inform lessor immediately about any damage occurred with
respect to the leased property. Lessee is liable for consequential damages
caused by delayed notification.
5. Lessor is not liable for damages suffered by lessee or third parties with
respect to stored goods and fittings, irrespective of nature, origin,
duration or scope of influence, unless lessor has caused the damage
intentionally or by gross negligence. In other respects, lessor's
liability is limited to the coverage and the scope of the liability
insurance, unless lessor has caused the damage intentionally or by gross
negligence. The amount covered by the houseowner's liability insurance
amounts to DM 1,000,000.00 for property damage and pecuniary loss and to
DM 2,000,000.00 for bodily injury.
SECTION 16
ALTERATION OF AND IN THE LEASED PROPERTY BY LESSEE
1. Alterations of and in the leased property, in particular structural
alterations, built-ins, installations and the like, are subject to
lessor's prior written consent. It is lessee's sole responsibility
to obtain all the official permits required as well as to comply with
all the laws and regulations enacted in this respect. Lessor shall,
however, be of assistance - as far as possible - in obtaining contingent
official permits.
<PAGE>
PAGE 10
Lessee shall bear all the respective costs and the costs for structural
alterations. On lessor's demand, lessee is obligated to remove the
structural alterations or built-ins partly or in full when moving and
to restore the former condition without requiring a reservation on the
part of lessor when giving its consent. Lessee is liable for any damages
occurring in connection with the structural alterations performed by
lessee.
2. If on termination of lease lessee intends to remove the installations it
has fitted to the leased property, it may offer these to be taken over
by lessor. In doing so, lessee shall make a price proposal, proving
production costs and day of manufacture. If lessor wishes to take over
the fittings, lessee has to be reasonably compensated. If lessor rejects
the fittings, lessee is obligated to restore the original condition of the
leased property.
SECTION 17
STRUCTURAL ALTERATIONS AND REPAIRS
BY LESSOR
1. Lessor may executed repair work and structural alterations, which may
become necessary for maintenance or economic exploitation of the property
or for enlargement of the building or for the elimination of damages,
without prior consent of lessee. This also applies to works and structural
measures, which are not strictly necessary but suitable, and will serve,
in particular, to modernize the building. Lessee shall provide access to
the rooms to be considered and must not hinder or delay the execution of
the works. Otherwise lessee shall compensate for damages caused by such
hindrance or delay. In the cases set forth above, lessee is not entitled
to claim reduction of rent unless insufficient consideration is taken of
lessee's interests, thus causing detriments to lessee.
SECTION 18
ADMITTANCE TO LEASED PROPERTY
1. During normal business hours, lessee shall ensure, that surveyors and
interested parties authorized by lessor may view and have access to the
leased property for the purpose of determination of the state of repair,
state of the building site, releasing, sale etc., after the visit having
been announced in due course of time. In case of emergency, the access has
to be possible at all hours of the day and night.
SECTION 19
DUTY TO SAFEGUARD TRAFFIC
1. Lessee is subject to the duty to safeguard traffic within its area of
lease, according to the legal provisions. In this respect, lessee
releases lessor from third party claims.
<PAGE>
PAGE 11
SECTION 20
INSURANCE
1. Fire insurance, insurance against damages caused by tap water, storm and
tempest and EC, property liability insurance, fire liability and glass
insurance of the building are within lessor's responsibility. The
insurance premiums incurring in this respect have to be paid by lessee
as a part of the incidental costs.
2. Insurance of the objects, goods and built-ins as well as advertising
and operational equipment brought in by lessee is within lessee's
responsibility. Lessee is obligated to effect and maintain a business
liability insurance and a leased property damage insurance and to prove
on request the existence of insurance coverage to lessor.
SECTION 21
TERMINATION OF LEASE/
EXCEPTIONAL TERMINATION
1. On termination of lease, lessee shall return the leased property to
lessor in a state of expert redecoration (walls and ceilings repainted).
If floor coverings show signs of wear and tear to an extend exceeding
wear and tear caused by usual use, lessee shall have the coverings
replaced by a specialized company. If lessee fails to comply with this
obligation, lessor may have the leased property redecorated at lessee's
expense.
Lessee's obligation of vacation of premises covers all objects situated
within the area of the leased property unless they are owned by lessor. If
lessee fails to comply with its obligation of vacation, lessor is entitled
to have the vacation executed at lessee's expense. There is no obligation
on part of lessor to preserve such objects still within the area of the
leased property after termination of lease.
2. Lessor may immediately terminate the lease for material reasons, if:
a) lessee is in arrears with its rent payments or with other financial
obligations amounting to a month's rent for more than a month;
b) lessee continues the use of the leased property in breach of contract
or the unauthorized subletting to a third party despite admonition by
lessor;
c) a petition has been filed for institution of composition proceedings
or in bankruptcy with respect to lessee's assets or if lessee has made an
affirmation in lieu of an oath according to Section 807 of the Code of
Civil Procedure (ZPO) or if lessee discontinues payments;
d) lessee fails to comply with its essential contractual obligations
within a reasonable period of time despite written admonition by lessor;
<PAGE>
PAGE 12
Lessee is entitled to a corresponding right of termination, if lessor
fails to comply with its obligations according to subparagraph 2 c/d above.
3. In case of termination of lease without notice, lessee is liable for any
loss of rent until termination of the agreed period of lease, which is
caused by the leased property not being rented or by the fact that in
case of a new lease the previous amount of rent cannot be achieved.
Lessor is obligated to do everything possible in order to find a new
lessee to take over the leased property. Lessor will accept a new lessee
provided by lessee, under the condition that the new lessee is comparable
to lessee in terms of kind and scope of operating business and with regard
to financial soundness.
4. On termination of lease, lessee shall hand over all the keys, including
those it has had made, to lessor.
SECTION 22
OTHER AGREEMENTS
1. Lessor is entitled to transfer any rights and obligations on the part of
lessor under this contract to third parties with the effect of discharging
debts, without lessee being in a position to derive any rights of any
nature from this fact.
2. Refuse originated by lessee's business activities, except office refuse,
may not be disposed of in the dustbins provided by lessor for general use,
but has to be disposed of by lessee itself.
SECTION 23
PROVISION OF SECURITY
1. In order to secure lessor's claims under this agreement, lessee is
obligated to provide a promise of surety by an important German bank
or Sparkasse (savings bank) amounting to 12 gross monthly rents incl.
incidental costs, immediately after signing of contract or to submit
a letter of support of its American parent company.
<PAGE>
PAGE 13
SECTION 24
EFFECTIVENESS OF PROVISIONS OF CONTRACT
1. Later modifications and supplements to this contract must be made in
writing. It cannot be contracted out verbally. If any of the provisions
of this contract becomes legally invalid, be it partly or in full, the
validity of the other provisions shall remain unaffected. In such a case,
the contract has to be fulfilled correspondingly.
If the invalidity is caused by a determination of performance or time, it
will be replaced by the performance or time permitted by statute.
2. Place of jurisdiction is Frankfurt am Main.
- ------------------------------ -------------------------------
-lessee- -lessor-
<PAGE>
EXHIBIT 10.43
L E A S E
between
Airport-Center
KGHP Gewerbebau GmbH & Cie
Leinpfad 75
22299 Hamburg
-Lessor-
and
Star Telecommunications
Deutschland GmbH
Beethovenstrasse 8 - 10
60352 Frankfurt am Main
-Lessee-
PRELIMINARY STATEMENT
Lessor has erected a building (Airport Center) with offices, service areas,
halls and basement as well as with park, traffic and green areas on the
premises in Hamburg, Langenhorner Chaussee/Ecke Flughafenstrasse.
Subject to this preliminary statement, the two parties agree as follows:
<PAGE>
TABLE OF CONTENTS
Preliminary Statement
Section 1 Leased Property
Section 2 Use of Leased Property, Non-competitive Clause
Section 3 Duration of Lease
Section 4 Amount of Rent and Incidental Expenses
Section 5 Value Guarantee
Section 6 Insurance
Section 7 Structural Design and Alterations
Section 8 Liabilities, Maintenance of Leased Property
Section 9 Entering of Leased Property by Lessor
Section 10 Termination of Lease
Section 11 Security for Rent
Section 12 Subleasing
Section 13 Right of Exceptional Termination
Section 14 Final Clauses
Section 15 Place of Jurisdiction
APPENDICES: 1 - Suretyship (binding model)
2 - Debit Order (model)
3 - Business Description
4 - Building Specification
5 - Planning Documents
6 - Composition of Rent
<PAGE>
SECTION 1
LEASED PROPERTY
1. Lessor grants Lessee a lease of office and hall/ service areas (BGF)
including outside areas as well as 9 outside parking spaces (Leased
Property) located in the Airport Center, building part L (Langenhomer
Chaussee 42).
General areas, as for instance foyer and elevator anterooms, are
proportionately included in the lease.
Airport Center and the Leased Property are known to Lessee.
2. Location, size and design of the Leased Property can be taken from the
Planning Documents attached, signed by the two parties
[plan no. 1, 2 and 3 (Appendix 5)], and from the Building Specification
(Appendix 4), both of which form part of this lease. The leased building
areas are to be considered as agreed and are marked in red outline, the
leased parking spaces and outside areas are marked in green outline.
3. Lessor reserves the right to alter the overall planning of the Airport
Center.
SECTION 2
USE OF LEASED PROPERTY, NON-COMPETITIVE CLAUSE
1. a. Lessee shall make use of Leased Property only as offices, service
areas or for storing as well as for the operation of line-based
telecommunication systems according to the Business Description
(Appendix 3) forming part of this lease. The outside areas may not
be used for storing purposes.
Deliveries of storage material through the entrance area is
possible only for products, the size and type of which is
reasonable for an office operation.
A change of use is subject to Lessor's prior written consent.
Consent may not be withhold, unless the change of use has negative
consequences for Lessor, be it economic or other. Possible
declarations of consent are made - even if not explicitly stated -
subject to the required official permits.
<PAGE>
Any expenses caused by particular requirements, activities or
products on the part of Lessee (e.g. easily flammable products,
materials hazardous to ground water, operation of service,
exhibitions, trainings, air-conditioning etc.) and by the
respective installations or the resulting obligations imposed by
authorities, trade associations or by insurance companies, are
to be borne by Lessee.
Lessee shall procure the permits required for its business and
shall comply with possible obligations and conditions.
b. On the part of Lessee, no hazardous materials (e.g. explosives,
toxicants) may be stored or processed and no activities may be
performed implying an aggravation of the insured risks or
contradicting official permits, as for instance provisions of the
zoning plan.
No objects whatsoever may be stored and no works may be performed
on part of Lessee outside the Leased Property, i.e. in and on the
commonly used rooms and areas - including those leased
proportionately - and in the leased delivery area. Vehicles of
Lessee, its visitors and its employees may only be parked within
designated spaces. Other vehicles may only stay temporarily on the
premises for the time required for loading and unloading. According
to official requirements, escape routes are to be kept clear.
On the occasion of any bigger events (e.g. training courses),
lessee is obligated to expressly point out to its visitors that
they may park their cars only in the leased parking lots or
outside the Airport Center. On Lessee's failure to comply with this
provision, Lessor may claim from lessee a reasonable compensation
without prejudice to its other rights.
2. Lessee shall inform Lessor immediately in writing of each and every
change with regard to Lessee which is of importance in connection with
this Lease (in particular change of legal structure, business license,
transfer of the company's domicile).
3. Lessee shall use the sanitary facilities on the first floor together
with the other lessees.
<PAGE>
4. Lessee is entitled to share the use of the elevator. Lessee is obligated
to comply with the elevator regulations in all points. In case of an
operational breakdown, Lessee shall not have the right to claim
uninterrupted service. A control of the elevator is not provided.
5. Lessor does not grant Lessee any protection against competition with
respect to Lessee's area of business.
6. Lessee knows that no gas-driven vehicles may be parked on interior parking
lots lease be Lessee.
SECTION 3
DURATION OF LEASE
1. The Lease begins on January 1st, 1998 (Beginning of Lease). It is
contracted for a duration of 10 years. The period of lease will end on
December 31st, 2007.
After termination of the agreed duration of lease, the Lease is renewed
for another 2 years, unless terminated by one of the contracting parties
observing a notice period of one year.
Section 568 BGB (Civil Code) is not applicable.
2. Leased Property is handed over to Lessee ready for occupation. Ready for
occupation means to the two parties, that the leased property is completed
according to the planning documents and the building specification, so
that occupation and contractual use by the lessee according to Section 2,
sub-paragraph 1 of this contract is possible. Defects or remaining
structural work, including construction of the exterior grounds, which do
not essentially hinder occupation and use are not contradictory to the
completion of readiness for occupation as defined by this Lease.
On the day of completion of readiness for occupation, the Leased Property
is handed over to lessee for use. The parties draw up a take-over
protocol, determining possible defects of the leased property with binding
force and covering remaining structural work. Lessor shall remedy or
execute these without delay according to a defined schedule. Lessee shall
allow work designed to remedy defects during its business hours as
well.
Prospectively, Lessor shall have the leased object ready for occupation
by lessee, except for remaining work on exterior grounds due to bad
weather, by January 1st, 1998 (date of completion of readiness for
occupation).
<PAGE>
Lessee shall submit its schedule for the finishing works not later than
November 15th, 1997. Any delays due to special finishing work on
Lessee's request or delayed information to Lessor are on Lessee's expense.
In the case of delays in completion of readiness for occupation caused by
requests for alteration made by Lessee after signing this contract of
lease, the Lease and liability to pay rent, will begin on the day, on
which the handing over could have taken place without the request for
alteration.
Delays in completion of readiness for occupation, in particular due to
strikes, lock-out, war, force majeure, fire and to days of bad weather
as approved by the Arbeitsamt (government employment office), are not
within Lessor's liability.
SECTION 4
AMOUNT OF RENT AND INCIDENTAL EXPENSES
1. The flat-rate amount of rent per month for the leased object is DM
20,288.24 (IN WORDS: TWENTY THOUSAND TWO HUNDRED AND EIGHTY-EIGHT 24/100TH
DEUTSCHE MARK) plus advance on the incidental expenses and respective
statutory value added tax (at present 15%), in the following referred to
as gross rent.
The rent for the month of May 1997 is reduced by DM 1,441,20 (IN WORDS:
ONE THOUSAND FOUR HUNDRED AND FORTY-ONE 20/100TH DEUTSCHE MARK).
Lessee represents and warrants to be entitled to complete input tax
deduction. In the case of a change of this circumstance, causing the
elimination of the preconditions for Lessor's turnover tax option under
Section 9 sub-paragraph 2 of the Turnover Tax Law UStG, Lessor is no
longer bound to list the turnover tax separately, with the consequence
that the previous gross rent is paid as monthly flat-rate amount of rent
in future. If the absence of the precondition for the option becomes
known later, Lessor shall be entitled to rectify the invoices made out
so far in such a way that the contractual gross rent paid so far
subsequently corresponds to the monthly flat-rate rent. In the case of
absence of the precondition for option, compensation is reserved. On
Lessor's demand, Lessee is obligated to submit a corresponding
confirmation given by Lessee's tax adviser.
Payment of gross rent is to be effected, post and expenses paid, on an
account to be indicated by Lessor, not later than the 3rd work day of
each month.
<PAGE>
With respect to punctuality of payment, receipt of payment by Lessor is
decisive. On delay in payment, default interest of 4% above the respective
discount rate of the Deutsche Bundesbank as well as dunning costs to the
extent of DM 10.00 are agreed. The assertion of further damages caused by
delay is reserved.
Lessee shall grant Lessor a direct debit authorization for the gross rent
corresponding to Appendix 2 to this contract of lease, not later than one
month before beginning of lease.
2. Rent and value added tax are to be paid from May 1st, 1998. Incidental
expenses and value added tax are to be paid from date of completion of
readiness for occupation according to Section 3, sub-paragraph 2 of this
contract.
3. The accruing incidental expenses are to be paid separately by Lessee. In
detail, the following shall apply in this respect:
a. Subject to official regulations, domestic waste collection is
effected by Lessor and apportioned with the incidental expenses to
the individual lessees. All other kinds of garbage disposal are
effected by Lessee subject to statutory provisions, each and every
accruing garbage collection fee being paid by Lessee directly to the
corresponding authority. In the case that Lessee effects the garbage
disposal itself, Lessee undertakes to use only closed containers for
garbage disposal. In case a change of official regulations, Lessor
reserves the right to handle domestic refuse collection like the
above mentioned types of garbage.
b. Lessee pays fees and costs of its consumption of gas, long-distance
energy and other energy consumption as well as counter fees and
installation costs directly to the energy supplier.
c. Lessee pays fees and costs of its consumption of gas,
long-distance energy, water and hot water as well as counter fees and
installation costs.
Operation costs of the central heating system are distributed
according to the regulation on heating expenses, with 70% of the
costs being apportioned based on consumption.
d. If applicable, Lessee shall bear the proportionate operating and
maintenance costs with respect to the overall property, in particular
for:
<PAGE>
General power, exterior lighting, lighting of underground car park,
parking lot and multistory car park; garbage disposal; canal dues;
cleaning of street, footpath, multistory car park, underground car
park, parking lot and facade as well as cleaning and maintenance of
the other made up exterior areas, including snow and ice removal;
cleaning of sanitary facilities, foyer, stairwell and windows as well
as cleaning of the commonly used toilets and their repair;
elimination of pests; chimney-sweep; janitor; property tax;
maintenance and repair (including examinations by TUV) of sanitary
and heating facilities, of air-conditioning and electric facilities,
of windows, doors, and gates, of drainage lifting facilities
(including storm water reservoir), of the multistory car park,
underground car park, barrier and parking routing facilities, of smoke
alarms and emergency power generating units, of transformers,
lighting guard, of elevators, emergency call facilities, of the fire
alarm unit, of the sprinkler system, of the barrier and video system,
the code card system, safety lighting, of the roof, of smoke and
warmth outlet systems, of hydrants and fire extinguishers, of blinds,
of water heating systems and hot-water supply systems, building
insurance (covering fire, storm and tempest, damages caused by water
from the main, extended coverage, glass in general areas) and
building and houseowner's liability insurance; upkeep, maintenance,
and design of green areas, hydrocultures, and of the commonly used
areas of building, street and exterior; safeguarding of traffic,
security service; doorman's service; property administration (the
latter amounting to 4% of the rent, even if administration is
effected by Lessor). Proportionate repairs exceeding the amount of
10% of the annual gross rent (Section 4, sub-paragraph 1) per
calendar year are not to be borne by Lessee.
e. If the fees and expenses listed under c. and d. are directly
assignable to Lessee, they will be allocated this way. If not, Lessee
will be charged on a pro-rata basis. Lessee's share of the rented
areas of the whole building or of the respective part of the building
shall be taken as the key to distribution of proportionate expenses.
Key to distribution of costs with respect to multistory car park or
to underground car park shall be Lessee's share of leased parking
spaces in the multistory car park or underground car park. Lessee's
share of the general areas shall be taken as the key to distribution
of costs with regard to general areas leased on a pro-rata basis.
Lessor may change the key to distribution at its reasonably exercised
discretion, if this will lead to a more objective cost allocation.
Lessor is entitled to demand monthly prepayment of all prospective
incidental expenses, provided they are not to be paid by Lessee
directly. Settlement of accounts for the calendar year is effected
once a year. On termination of lease during an accounting period,
settlement of accounts is not effected in the meantime but within the
scope of the general settlement of accounts. On this occasion,
prepayments for incidental expenses are set off.
<PAGE>
Possible compensation payments are to be effected on
the date of rent payment following the settlement of
accounts. Vouchers concerning the respective
settlement of accounts of incidental expenses may be
inspected by Lessee in Lessor's offices during usual
working hours within six weeks after sending off the
statement of accounts of incidental expenses.
Lessor reserves the right to review the monthly
prepayment of incidental expenses on a regular basis
and, if necessary, to increase them due to a
substantiated increase in costs and to demand single
prepayments for higher amounts of incidental expenses,
payable at the following rent payment date. For the
time being, prepayment of incidental expenses to be
paid by Lessee from handing over date on, is fixed at
DM 3,327.80 (IN WORDS: THREE THOUSAND THREE HUNDRED
AND TWENTY-SEVEN 80/100TH DEUTSCHE MARK) per month plus
statutory value added tax (at present 15%).
If public fees whatsoever or any other incidental
expenses in connection with Lessee's business or with
the leased property become due after signing this
contract of lease, Lessor shall be entitled to demand
corresponding payments from Lessee from handing over
date on.
4. With respect to claims for rent or incidental expenses, no
rights of setoff, rent reduction nor rights of retention
can be claimed unless Lessee's claim is undisputed or has
become res judicata.
5. Lessee shall not exercise a possible right of setoff, rent
reduction or retention because of an undisputed or res
judicata counterdemand, unless Lessee has announced such
intention to Lessor in writing not later than one month
before the next rent payment concerned is due.
6. If Lessee fails to pay the rent, the incidental expenses
and/or the value added tax on time, possible payments will
be set off against claims soon coming under the statute of
limitations, then against the rent and other debts as for
instance costs and interests.
<PAGE>
SECTION 5
VALUE GUARANTEE
1. The rent according to Section 4, sub-paragraph 1, shall
increase or decrease corresponding to changes of the overall
cost-of-living index after expiry of 12 months after
beginning of lease. The monthly price index for the cost of
living of all private households in Germany as determined by
the Statistisches Bundesamt (Federal Statistical Office) in
Wiesbaden is authoritative. The parties agree on the
overall cost-of-living index in the month of signing the
contract as figure of reference on the basis of 1991 = 100.
2. If the above value guarantee gives rise to a change of rent,
the clause will become applicable again after expiry of 12
months according to the provision of the previous paragraph,
and the rent will be adjusted correspondingly.
3. The parties know that this value guarantee is to be approved
by the competent Land central bank. Approval is to be
obtained by Lessor.
If the Land central bank denies its approval, the parties
are bound to look for another solution as close as possible
to the purpose intended and permitted by statute.
4. If the cost-of-living index 1991 = 100 can no longer be
determined, a transition by conversion to the basis of the
next published cost-of-living index should be effected. In
other respects, the above procedure remains unchanged. This
applies to each and every later conversion of the
cost-of-living index to another base year.
SECTION 6
INSURANCE
1. The usual building insurance (covering fire, storm and
tempest, damages caused by water from the main, extended
coverage, glass in general areas) and building and
houseowner's liability insurance are effected by Lessor at
Lessee's expense.
<PAGE>
2. Installations, finishing works or rebuilding of the Leased
Property by Lessee, exceeding those stated in the Planning
Documents and the Building Specification, are not covered by
the building insurance, unless notified to Lessor by Lessee
in writing before beginning of the respective installations,
finishing works or rebuilding, requesting an increase of
insurance coverage. The expenses of such installations,
finishing works or rebuildings have to be proved by Lessee
by presenting corresponding invoices. Lessor is entitled to
consult a surveyor at free choice in order to determine the
value of the corresponding installations, extensions or
rebuildings. All the costs involved are borne by the two
parties at equal shares. The additional insurance for the
respective installations, finishing works or rebuildings of
the Leased Property by the building and houseowner's
liability insurance is not given until Lessor has received
the respective written confirmation of cover by the
corresponding insurance company. The cost of additional
insurance shall be borne by Lessee.
Lessor has not effected a vehicle and luggage insurance for
the cars parked in the Airport Center.
3. For the period of lease, Lessee is bound to effect and
maintain at its own expense each and every insurance
necessary and common for its business, like for instance a
manufacturer's liability insurance, a burglary and
housebreaking insurance and, if the Leased Property is not
used for office purposes only, an environmental liability
insurance. It is, furthermore, within Lessee's
responsibility to ensure sufficient insurance coverage
against damages of fittings and other objects brought in.
Lessor is entitled to demand a corresponding written
confirmation by the insurance company as a proof that these
insurances are duly effected and maintained.
4. It is pointed out to Lessee that it may include the
insurance of indemnity obligations against Lessor into its
manufacturer's liability insurance.
SECTION 7
STRUCTURAL DESIGN AND ALTERATIONS
1. The Leased Property is built according to the Planning
Documents attached. Lessor reserves the right to perform
structural alterations of the Leased Property subject to
official or statutory conditions for the purpose of
improvement, for reasons of an economic time schedule or
construction, as well as to deviate from the Planning
Documents and Building Specification not causing a decrease
in value.
<PAGE>
Lessor shall notify Lessee, if the Leased Property is essentially affected
by these measures.
2. Lessee's requests for alterations regarding finishing works and design of
the Leased Property put forward during construction are taken into
consideration by Lessor only, if these requests do not result in essential,
in particular structural modifications of the Leased Property and do not
cause the building costs to be higher than estimated.
As far as Lessee's requests for alterations result in higher building costs
or prolong the construction time, Lessor will essentially consent to these
requests for alterations, if the type of the Leased Property remains
basically unchanged by the alterations and if Lessee bears the additional
costs, including but not limited to any loss of rent caused by the delay in
construction with a time limit, previously to be agreed by the contracting
parties.
If Lessee's requests for alterations cause any additional costs in
connection with planning and engineering, these shall be borne by Lessee.
3. Lessee is entitled to decorate the interior of the Leased Property at its
own expense and according to its own needs. Essential structural
modifications, however, are subject to Lessor's prior written consent. The
required official permits are to be procured, if possible, directly by
Lessee; in any case, the costs of planning and permits are to be borne by
Lessee.
4. During the Period of Lease, Lessee is entitled to effect structural
modifications of the Leased Property, which it considers to be necessary,
at its own expense, unless these modifications require changes of statics,
affect wires or pipes of the building or essentially change the character
of the Leased Property. The implementation of such alterations is subject
to Lessor's prior written consent which is to be obtained by submitting
plans. Lessor will grant its consent, provided the alterations will not
have any adverse effects, economic or other, on the leased property.
Lessee shall bear all the costs accrued by the structural alterations
effected by Lessee and the respective maintenance and repair, including but
not limited to costs for permits and auditing plans, which have to be sent
to Lessor immediately on completion of such works. Lessee indemnifies
Lessor from all conceivable liabilities in connection with the structural
alterations.
<PAGE>
This shall include, that Lessee indemnifies Lessor for the loss of possible
warranties against defects with regard to the building workers involved.
It is possible, that structural alterations are subject to an official
permit for change of use. Any costs in connection with the change of use,
regardless whether they are caused by the structural alterations or by
complying with official obligations, are to be borne by Lessee.
5. Changes to the outer appearance of the Leased Property - in particular to
the exterior facade, window design, made up exterior and green areas - are
subject to Lessor's prior written consent which is at Lessor's complete
discretion. This applies as well to installations in connection with the
installation of alarm and/or fire alarm systems.
6. Lessor will mark the parking spaces leased by Lessee on Lessee's expense,
using signs chose by Lessee.
7. In front of each entrance Lessor has put up a plate indicating the
companies. On the spaces destined, Lessee is entitled to attach its company
name/logo in accordance with Lessor. The cost of labeling is to borne by
Lessee.
Exterior advertising on the part of Lessee is not permitted.
8. In the hall, Lessor shall have a suspended ceiling installed [lowered area
approx. 500 m(2), type Odenwald-mineral fiber plate ceiling (narrow edge
3)].
9. Subject to sub-paragraphs above, Lessee shall be given the opportunity to
establish line-based connections to alternative suppliers of
telecommunications infrastructure.
SECTION 8
LIABILITIES, MAINTENANCE OF LEASED PROPERTY
1. It is within Lessee' responsibility to treat the Leased Property with care
and to maintain its working order. Damages to the Leased Property or
necessary works within the scope of property management have to be reported
to Lessor in writing or via telefax immediately after knowledge has been
obtained.
<PAGE>
2. It is Lessee's obligation to make the Leased Property safe for persons or
vehicles and it is reliable for each and every culpable breach of this
duty. Lessee releases Lessor from all third party claims originated by a
breach of the obligation to make premises safe for persons or vehicles.
As from beginning of Lease, Lessee is liable to Lessor for all damages
culpably caused by members of its business, its visitors and guests, by
people engaged by Lessee (workmen, deliverymen) as well as by sublessees
and their auxiliary staff. Lessee is liable, in particular, for such
damages, which are caused by negligent treatment of water pipes, gas lines,
electric lighting circuits or power cables, by leaving doors, gates and
windows open, by insufficient precautions against frost damages or by
failure to comply with duties incumbent on Lessee according to this
contract or to official and statutory provisions (lighting, obligation to
strew sand or salt in case of snow or icy conditions etc.). It is incumbent
on Lessee to prove that such culpable conduct was not the case.
Lessee shall inform Lessor immediately about any loss of keys of the lock
system and shall indemnify Lessor for any damages hereby caused.
Lessor is not liable for any damages other than those covered by an
existing building and houseowner's liability insurance, unless in case of
intention or gross negligence.
Lessor is not liable for any damages suffered by Lessee in connection with
the use of or due to defects of the Leased Property, unless caused
deliberately or with gross negligence on the part of Lessor. Lessee shall
release Lessor from all third party claims, asserted by third parties
against Lessor because of defects of the Leased Property, unless caused by
Lessor deliberately or with gross negligence.
3. Lessee is obligated to perform interior decorative repairs (for example
interior painting, wallpaper, floor and floor coverings, inner and other
doors) every 3 years thus maintaining the Leased Property in a reasonable
and well looked after condition. Furthermore, Lessee is obligated to
ensure, at its own expense, that doors, gates, windows, blinds, electric
and sanitary facilities, locks, fire extinguishers, water taps, wash basins
and sinks and similar facilities, including feeding lines and drainage, are
always maintained in working order. Additionally, Lessee is obligated to
ensure, at its own expense, that broken glass panes, mirrors or other
objects of glass and defect lighting fixtures of the Leased Property are
replaced without delay. Lessee is further obligated to always maintain its
exterior, traffic and park areas in working order.
<PAGE>
Lessee is also liable for all damages of the leased parking spaces and
their surroundings, for example soiling of floor and walls by leaking oil,
soot, or exhaust gases culpably caused by itself, its visitors, guests or
by individuals engaged by Lessee. Lessee is obligated to have the
corresponding necessary maintenance work professionally executed.
For other minor repairs, Lessee shall bear the costs up to DM 500 plus
statutory value added tax (at present 15%) in each individual case, not
exceeding, however, an amount according to Section 4, sub-paragraph 3 d.
The parties agree that for January 1st of each calendar year, this sum will
be increased for the following year corresponding to the percentage
increase of the total cost-of-living index according to Section 5,
sub-paragraph 1, sentence 1 and 2.
4. It is incumbent on Lessee to keep the Leased Property clean.
Maintenance of the green areas and cleaning and repair of made up exterior
areas of the Airport Center are effected by Lessor or its agents. Lessee
shall ensure that these areas are easily accessible for the execution of
these works.
5. Lessee may not claim damages or reduction of rent because of a defect of
the Leased Property or because of a breakdown of the operation of the
building or its technical facilities, unless Lessor is provably responsible
for the defect as a consequence of intentional or gross negligent conduct.
This applies to each and every claim of Lessee subject to Section 538,
sub-paragraph 1 BGB (Civil Code). It is expressly referred to Lessee's
liability to effect an insurance of its fittings brought in according to
Section 6 of this contract.
6. Lessee is aware of the fact that the Airport center described in the
Preliminary Statement is used by other lessees as well. If necessary, house
regulations determining the limits of rights and obligations of individual
lessees will be agreed together with the other lessees and then become part
of this contract.
7. Lessor may perform structural works which become necessary for the
development, maintenance or improvement of the real estate or the Leased
Property or for averting imminent dangers or for elimination of defects,
even without Lessee's consent.
Repairs and structural alterations of the Leased Property, which are not
necessary but appropriate, may be performed with Lessee's consent, if these
works only marginally interfere with Lessee.
<PAGE>
8. When installing heavy equipment (machines etc.), Lessee shall ask Lessor
about the carrying capacity of the floors. It has to satisfy itself
regularly and carefully that the floors' carrying capacity according to
Building Specification is not exceeded. On failure to comply with this
provision, Lessee is liable for all damages and consequential damages
hereby caused and is obligated to release Lessor from all possible third
party claims arising from this disregard.
9. Reduction of rent and damage claims on the part of Lessee based on
immissions or obstructions of the accesses to the building beyond Lessor's
control or on works according to sub-paragraph 7 above or on construction
work performed by third parties outside the building, are excluded.
SECTION 9
ENTERING OF LEASED PROPERTY BY LESSOR
1. After prior arrangement, Lessor or its agent may enter the Leased Property
during business hours in order to determine the necessity of possible
mending or to execute repair and maintenance work. On the occasion of such
inspections or works, Lessee is entitled to send an accompanying person
along. Lessee already now declares its consent to possibly necessary works
on feeding lines on part of the other lessees of the whole property. This
consent also applies to the case that other lessees have to effect works on
the feeding lines.
In cases of imminent danger, Lessor may enter or force an entry into the
Leased Property at all hours of the day and night.
Access to skylight, service facilities and inner courtyards are to be
provided at any time.
2. If Lessor intends to sell the real estate, Lessor may enter the Leased
property at usual times after arrangement with Lessee. On Sundays and
public holidays, however, this shall require Lessee's express
authorization.
3. On termination of Lease, or if the existing Lease is not renewed 12 months
before expiration of Lease at the latest, the previous paragraph shall
apply to the entering of the Leased Property by Lessor with a new
prospective lessee.
<PAGE>
SECTION 10
TERMINATION OF LEASE
1. On termination of Lease, the Leased Property is to be returned in an
expertly renovated and repaired condition and together with all the keys.
This obligation shall be in force irrespective of the fact whether or not a
periodical renovation would have been due.
If Lessee fails to effect the incumbent renovation works until the end of
Lease, Lessor may commission the execution of the work on Lessee's expense
after having once granted a grace period. In this case, Lessee shall be
liable for any damages suffered by Lessor because of the delayed execution
of the work (in particular loss of rent).
2. Facilities (e.g. controlling equipment, communication facilities, alarm
systems etc.), including advertising facilities installed by Lessee, may or
- on Lessor's request - must be removed.
If Lessee takes the fittings with it, it shall restore the former state at
its own expense, if so required by Lessor.
Lessee will have the suspended ceiling in the hall, which had been
installed on its request, expertly removed at its own expense.
3. In the case that Lessee has performed structural alterations, Lessor may,
at its option, demand either the restoration of the original state free of
charge or reimbursement of the costs accrued by such restoration. Lessee's
compensation for expenses caused by structural alterations is excluded at
any rate, regardless whether or not Lessor demands restoration of the
original condition. If structural alterations are not removed, these shall
pass into Lessor's ownership without requiring an indemnification nor a
compensation to be paid to Lessee.
4. On termination of Lease, the objects installed by Lessor remain within the
Leased Property.
5. A return of the Leased Property prior to termination of Lease is subject to
Lessor's express prior written consent.
<PAGE>
SECTION 11
SECURITY FOR RENT
1. Not later than 2 weeks prior to the handing over of the Leased Property,
Lessee is obligated to procure the absolute bank suretyship of a big
German, American or Japanese bank resident in Germany corresponding to
Appendix 1 to this Lease, amounting to three month's rents plus advance
payments of incidental expenses and the respective statutory value added
tax (at present 15 %) plus an amount of DM 375,000 plus statutory value
added tax (at present 15 %), covering each and every financial obligation
on part of Lessee subject to this contract. If finishing works on
Lessee's demand are to be effected by Lessor, the suretyship is to be
submitted prior to placing the order for the finishing works. Lessor
shall inform Lessee about the date of placing the order.
The guarantor is obligated to pay upon Lessor's first demand. Guarantor
waives its right to defense of the surety, due to Lessee and guarantor
under the law, in particular defenses of defeasibility, of offset, and of
failure to pursue remedies (Sections 768, 770, 771 BGB, Civil Code), and
the possibility of depositing. Lessor is entitled, but not obligated, to
satisfy its claims with the suretyship.
2. In the case that the suretyship is not provided within the period
stipulated, the Leased Property will not be handed over. Lessee is
responsible for any delays due to such circumstance; Lessee is not
released from the obligation to pay rent according to Section 4,
sub-paragraph 1.
On delay in procuring the suretyship on part of Lessee, Lessor may demand
that instead of the suretyship, Lessee has to procure a security of the
same amount in cash which Lessor is not to pay interest on.
3. If Lessor makes use of the suretyship, Lessee shall be obligated to
replenish the suretyship upon Lessor's first demand.
<PAGE>
4. In the case of changes with respect to rent, monthly prepayment for
incidental expenses or to the statutory value added tax, suretyship is to
be adjusted to the change on Lessor's demand within one month after the
corresponding effective date.
5. The obligation of suretyship terminates on Lessor's return of the surety
bond to guarantor. This return is to be effected as soon as each and
every financial obligation of Lessee with respect to the Lease are
fulfilled after termination of Lease.
6. With respect to the security in cash (Section 11, sub-paragraph 2,
sentence 3), the previous provisions as to the suretyship shall apply
accordingly.
SECTION 12
SUBLEASING
1. Lessee may sublease the Leased Property, in full or in part, subject to
Lessor's prior written consent and provided that sublessee uses the
Leased Property within the scope of this contract of lease - in
particular with regard to Section 2, sub-paragraph 1 - and that sublessee
assumes all obligations resulting from this contract. On subleasing,
Lessee remains responsible to the full extent, including but not limited
to the payment of rent.
Lessor points out that it will deny its consent to subleasing or
permission of use of lease by third parties, unless the third party
commits itself to use the Leased Property, which is subject-matter of its
contract with Lessee, exclusively for sales allowing input tax deduction.
In other respects, Lessor will refuse its consent to subleasing for
substantial reasons only.
If Lessee realizes a higher amount of rent than agreed with Lessor, the
excess amount is due to Lessor. Partial areas within the hall (technical
areas) are expressly exempt from this provision.
On denied consent, Lessee has no right of termination according to Section
549, sub-paragraph 1 BGB (Civil Code).
2. Lessee already now assigns its claims against sublessee with regard to
rent payments to Lessor, granting Lessor the right to demand direct
payment of subrent to Lessor.
<PAGE>
SECTION 13
RIGHT OF EXCEPTIONAL TERMINATION
Lessor shall have the right to terminate the lease with immediate effect
without observing a period of notice, if
a. Lessee has been in delay with rent payment or a considerable part of the
rent payment for two subsequent payment dates,
or if Lessee is in delay with rent payments to the extent of an amount
corresponding to two month's rent payments for a period of time covering
more than two dates;
b. Lessee or sublessee use the Leased Property in breach of contract or
permit the use of Leased Property to third parties without authorization
despite written caution by Lessor;
c. an administrator is appointed to realize and distribute Lessee's assets
or composition proceedings are instituted or on dismissal of a petition
in bankruptcy for lack of assets;
d. Lessee considerably molests the other lessees despite written caution;
e. Lessee is not granted the official permits necessary for its business or
if these official permits are withdrawn. Notice of termination may not be
given until Lessee has received three cautions and continues its conduct
in breach of contract.
If Lessee is responsible for the reason for the termination, Lessee shall be
liable against Lessor for the total damage caused by the termination,
including in particular, but not limited to, loss of rent, of incidental
expenses and of value added tax.
Section 19, sentence 2 KO (Chandler Act) remains unaffected. For the duration
of this liability, Lessee has to release Lessor from all third party claims
originating from termination according to Section 13. In this case, Lessor is
obligated to take up leasing activities without delay and to examine
appropriate subsequent lessees.
SECTION 14
FINAL CLAUSES
1. In the case of the Leased Property being sold, Lessor's liability
according to Section 571, sub-paragraph 2 BGB (Civil Code) is excluded.
<PAGE>
2. The contract on hand and the Appendices 1 to 6 contain all provisions
agreed. Modifications and amendments to this contract must be made in
writing. This also applies to the annulment of the written form itself.
No verbal supplements have been agreed.
If a present or future provision of this contract is or becomes
ineffective, inoperative or unpracticable, the validity of the other
provisions of this contract remain unaffected. The same applies, if a gap
to be filled becomes evident after signing this contract.
The parties shall replace the inefficient or void provision or gap to be
filled by an efficient provision, corresponding to the legal and economic
content of the inefficient or void provision and to the overall purpose
of this contract.
SECTION 15
PLACE OF JURISDICTION
Place of jurisdiction and place of performance is Hamburg.
Hamburg,........
- ------------------------------- -------------------------------
Star Telecommunications Airport-Center
Deutschland GmbH KGHP Gewerbebau GmbH & Cie
-Lessee- -Lessor-
REPRESENTED BY:
- -------------------------------
<PAGE>
L E A S E
between
STAR
Telecommunications Deutschland GmbH
Beethovenstrasse 8 - 10, 60352 Frankfurt am Main
- hereinafter referred to as 'Lessee' -
and
DIFA
DEUTSCHE IMMOBILIEN FONDS AKTIENGESELLSCHAFT
Valentinskamp 20, 20354 Hamburg
- hereinafter referred to as 'Lessor' -
Lease No. 0344
(please indicate in every correspondence and payment)
Property: 80807 Munchen, Leopoldstrasse 236, 'Pallas Haus'
<PAGE>
TABLE OF CONTENTS
OF THE LEASE
between
STAR
Telecommunications Deutschland GmbH
and
DIFA
DEUTSCHE IMMOBILIEN FONDS AKTIENGESELLSCHAFT
Page
Section 1 Leased Property 3
Section 2 Handing Over of Leased Property and Purpose of Lease 4
Section 3 Beginning and Duration of Lease 5
Section 4 Cancellation of Lease 6
Section 5 Amount of Rent - Value Guarantee 7
Section 6 Payment of Rent - Security for Rent 9
Section 7 Incidental Expenses 10
Section 8 Heating Expenses 12
Section 9 Breakdown of the Heating Plant, of Technical Equipment,
and of Supply 13
Section 10 Maintenance and Use of Property and of Leased Property 13
Section 11 Subleasing 15
Section 12 Installations and Structural Alterations by Lessee and
Advertising and Special Works Equipment 16
Section 13 Repairs and Structural Alterations performed by Lessor 17
Section 14 Liability of Lessor - Nuisance by Third Parties 18
Section 15 Insurance 18
Section 16 Access to Leased Property 19
Section 17 Termination of Lease 19
Section 18 Sale of Property 20
Section 19 Final Clauses 20
Section 20 Supplementary Agreements 21
<PAGE>
SECTION 1
LEASED PROPERTY
1. Lessor is owner of the premises at 80807 MUNCHEN, LEOPOLDSTRASSE 236,
'PALLAS HAUS'(1), hereinafter also referred to as 'Property'
2. Lessor grants Lessee a lease of the following areas ('Leased Area') and
parking spaces(2), hereinafter collectively referred to as 'Leased
Property', the location of which can be taken from the plan attached as
APPENDIX 1:
2.1 Office area on the 1st FLOOR approx. 1,152.81 m(2)
2.2 Proportionate general area approx. m(2)
2.3 Archives area on approx. m(2)
2.4 Storage area approx. m(2)
2.5 Service area approx. m(2)
2.6 Parking spaces in the underground car park/
in the multi-story car park 6 units
2.7 Parking spaces outside units
2.8
2.9
2.10
3. The size of the above mentioned Leased Area is agreed ACCORDING TO DIN
277 BGF.
4. A possible deviation of the size of the Leased Area indicated in
sub-paragraph 2. from the actual conditions by up to 1.5% (one and a half
per cent) of the total of the Leased Area mentioned in sub-paragraph 2.
does entitle neither Lessor nor Lessee to change the amount of rent.
In the case of a deviation of more than 1.5%, the amount of rent shall
be adjusted according to the full deviation. After expiry of one year
after handing over of the Leased Property, neither Lessor nor Lessee may
demand such adjustment of rent.
- ------------------------
(1) Exact address including postal zone number
(2) cf. Section 20, sub-paragraph 1.
<PAGE>
SECTION 2
HANDING OVER OF LEASED PROPERTY AND PURPOSE OF LEASE
1. The Leased Property shall be handed over to Lessee at the beginning of
Lease. On this occasion, a joint handing over protocol shall be prepared
to include possible defects and remaining works, which have to be
immediately remedied or executed by Lessor.
By signing this handing over protocol, Lessor acknowledges the condition
of the Leased Property as contractually agreed, except for hidden
defects, unless any defects/remaining works are mentioned in the
handing over protocol.
2. On the occasion of taking over, Lessee shall receive a set of keys and a
code-card for each parking space in the underground car park. Any
additional keys or code-cards required by Lessee will be provided
immediately at Lessee's expense.
3. Any company signs in the central entrance area are designed and
installed on the same lines. To the extent permitted by the necessary
uniform design, Lessor will take into account any requests expressed by
Lessee. This shall apply correspondingly to a possible routing system.
Costs of such uniform company signs and of a possible routing system and
the corresponding installation shall be borne by Lessor. Costs of
modifications and special requests are to be borne by Lessee.
4. For the duration of Lease, Lessee shall and will run an OFFICE in the
Leased Property. Each change of business/occupation exercised in the
Leased Property is subject to Lessor's prior written consent. It is
within Lessee's sole responsibility to ensure that the Leased Property
is economically suited for the use hereunder agreed.
5. LESSOR HAS OPTED FOR THE VALUE ADDED TAX FOR THE PROPERTY ACCORDING TO
SECTION 9, SUB-PARAGRAPH 2 OF THE TURNOVER TAX LAW (UStG).(3) LESSEE
WILL USE THE LEASED PROPERTY EXCLUSIVELY FOR TURNOVERS WHICH ARE SUBJECT
TO INPUT TAX DEDUCTION. IF LESSEE USES THE PROPERTY FOR TURNOVERS
EXCLUDING INPUT TAX DEDUCTION IN BREACH OF THE ABOVE PROVISION, LESSEE
SHALL INFORM LESSOR IMMEDIATELY. IN THIS CASE, LESSEE IS BOUND TO
COMPENSATE LESSOR FOR ANY DISADVANTAGES CAUSED BY THE LOSS OF INPUT TAX
DEDUCTION. ADDITIONALLY, LESSEE WILL PROVIDE LESSOR WITH A WRITTEN
DECLARATION CONFIRMING THAT LESSEE WILL USE THE LEASED PROPERTY ONLY FOR
TURNOVERS WHICH WILL NOT EXCLUDE INPUT TAX DEDUCTION. IN THE CASE OF
THAT LESSOR MUST PROVIDE THE FINANCE AUTHORITIES WITH MORE EXTENSIVE
EVIDENCE IN THIS RESPECT, LESSEE SHALL BE OBLIGATED TO SUBMIT LESSOR THE
CORRESPONDING DOCUMENTATION OR TO SUBMIT SUCH DOCUMENTATION DIRECTLY
TO THE FINANCE AUTHORITIES, IF THIS IS SUFFICIENT TO COMPLY WITH LESSOR'S
OBLIGATIONS.
- ------------------------
(3) According to Section 9, sub-paragraph 2 Turnover Tax Law UStG, this
option is allowed for the lease and demise of premises only, if Lessee
uses or intends to use the premise for turnover only which do not
exclude input tax deduction.
<PAGE>
6. Any orders or conditions imposed by the authorities, which are
exclusively based on the overall nature and/or the location of the
Property, have to be complied with by Lessor. If any conditions imposed
by the authorities or the procurement/maintenance of official permits
are EXCLUSIVELY based on personal or particular operational
circumstances with regard to Lessee or on particular circumstances of
Lessee's business enterprise, the measures and costs hereto connected
shall be borne exclusively by Lessee. In this respect, Lessee has also
to comply at its own expense with any future orders or conditions by the
authorities with regard to the use of the Leased Property, even if such
orders or conditions are directed against Lessor.
7. It is left to Lessor's sole discretion to lease other areas within the
Property to third parties pursuing the same purpose of lease as Lessee
as put forth in sub-paragraph 4. Lessee is not granted any protection
from competition.
SECTION 3
BEGINNING AND DURATION OF LEASE
1. The Lease shall begin on the day of handing over the Leased Property.
Handing over will prospectively take place on February 2nd, 1998. Lessor
shall communicate in writing the expected week of handing over two
months and the exact day of handing over two weeks prior to the handing
over date. Lessor shall take over the Leased Property on this
communicated date. The dates resulting from the above may be postponed
due to strike and/or force majeure. [If and to that extent Lessor is
provided with material required for the completion of the Leased
Property (e.g. parting walls, doors) by third parties, the dates
resulting from the above are subject to complete, correct and timely
supply, unless non-supply or delay is caused by Lessor's negligence.]
2. If the handing over date resulting from subparagraph 1. is delayed by
more than 2 months, Lessee may withdraw from contract. Any other claims
whatsoever on the part of Lessee are excluded, unless Lessor has acted
willfully or negligently.
3. THE LEASE IS CONTRACTED FOR THE DURATION OF TEN YEARS, FROM THE FIRST
DAY OF THE MONTH FOLLOWING THE HANDING OVER DATE.
One year prior to expiry of the fixed duration of lease at the latest,
not earlier, however, than after expiry of eight years of lease, Lessee
may demand in writing the opening of negotiations with respect to the
renewal of the Lease by up to ten years, renegotiating rent payments and
terms of contract. The rent to be renegotiated shall correspond to the
rent which can be realized at the location of the Property at the
beginning of the last year of the fixed period of lease, at least,
however, to the rent due for the last year of Lease according to Section
5.
<PAGE>
If the contracting parties cannot come to an agreement on the new rent
payment and on the new terms of contract of lease by signing a new and
legally valid contract of lease within the first three months of the
last year of Lease, this Lease will terminate on expiry of the last year
of Lease without requiring a notice of termination.
4. If Lessee does not demand the opening of negotiations with respect to a
renewal of this Lease according to sub-paragraph 3 above, the Lease
shall continue for an unlimited period of time, unless terminated by one
of the contracting parties not later than nine months prior to
termination of the fixed period of lease. If the Lease continues for an
unlimited period, it is subject to termination with a notice period of 9
months for the end of a month.
5. When the Lessee remains in possession of the Leased Property after
expiry of the Lease, the Lease is not to be regarded as renewed. Section
568 German Civil Code BGB is contracted out.
6. In the case of the complete destruction or the destruction of a major
part of the Leased Property by an event beyond Lessor's control (e.g.
fire etc.), Lessor shall inform Lessee immediately about the plans and
the expected duration of the reconstruction, if Lessor decides on
reconstruction.
SECTION 4
CANCELLATION OF LEASE
1. Each cancellation of Lease must be made in writing. Receipt of the
written notice of cancellation and not its dispatch date is
authoritative for the timeliness of cancellation.
2. Lessor and Lessee may terminate the Lease upon good cause without due
notice. Lessor may further terminate the Lease without due notice, if
and when
2.1. Lessee has been in delay with rent payment or a considerable part of the
rent payment for two subsequent payment dates (Section 554, sub-section
(1), sub-paragraph 1 German Civil Code BGB, or
2.2. Lessee is in delay with rent payments to the extent of an amount
corresponding to two month's rent payments for a period of time covering
more than two dates (Section 554, sub-section (1), sub-paragraph 2
German Civil Code BGB), or
2.3. Lessee has filed a petition in bankruptcy or for institution of
composition proceedings with regard to its assets, if it must make a
written verification pursuant to Section 807 Federal Rules of Civil
Procedure ZPO, if extrajudicial proceedings for the payment of debts
have been instituted or if Lessee has suspended payments, or
<PAGE>
2.4 composition or bankruptcy proceedings with regard to Lessee's
assets have been instituted or if the commencement of such
proceedings is rejected for lack of assets or for other
reasons, Lessee is responsible for,
2.5 Lessee is in delay with the provision of the security and if this
security for rent is not provided within a grace period of two weeks.
SECTION 5
AMOUNT OF RENT -- VALUE GUARANTEE
<TABLE>
<S> <C> <C>
1. The monthly amount of rent is composed as follows:
1.1. approx. 1,152.81 m squared office area on the 1ST FLOOR = DM 33,431.49
1.2. approx. m squared proportionate common area = DM
1.3. approx. m squared archives area = DM
1.4. approx. m squared storage area = DM
1.5. 6 items parking spaces in the underground
1.6. car/park multi-story car park = DM 660.00
1.7. items parking spaces outside = DM
1.8. = DM
1.9. = DM
1.10. = DM
1.11. subtotal I = DM 34,091.49
1.12. advance payment on incidental expenses (Section 7) = DM 5,187.65
1.13. advance payment on heating expenses (Section 8) = DM 1,152.81
1.14. flat charge (Section 10, sub-paragraph 2.) = DM 230.56
-----------------
1.15. subtotal II = DM 40,662.51
1.16. plus statutory value added tax (at present 15%) = DM 6,099.38
-----------------
1.17. TOTAL MONTHLY AMOUNT OF RENT = DM 46,761.89
-----------------
-----------------
</TABLE>
2. Lessee's obligation to pay the amount of rent stipulated in sub-paragraph
1. shall begin as of beginning of Lease according to Section 3.
This applies as well, if Lessee stays away from handing over of Leased
Property despite timely information about the handing over date by Lessor
or if the handing over does not take place because of failure to provide
the security for rent.
<PAGE>
3. The partial amounts agreed under Section 5, sub-paragraph 1.1 to
1.10 and the flat charge agreed according to Section 10,
sub-paragraph 2 of this Lease are subject to value guaranty as follows:
3.1. Effective beginning of the 13th month from beginning of Lease on
(beginning of the second year of Lease), the partial amounts as per
sub-paragraph 1.1 to 1.10 and the flat charge according to
sub-paragraph 1.14 shall be adjusted corresponding to the change
of the cost of living index of all private households in Germany
(all-German index; base year 1991 = 100) as compared with the index
level in the month of beginning of Lease (Base Month).
3.2. Then, the sums mentioned in sub-paragraph 3.1 shall be adjusted for
every following year of Lease corresponding to the change of index,
comparing the value taken as a basis for the last adjustment with the
index of the last month of the expired year of Lease. Each adjustment
shall be effective from the first month of the new year of Lease on.
3.3. The above mentioned adjustments are effected automatically, so that
the amount adjusted to the change of index is due without special
demand from beginning of the new year of Lease. Unless Lessee has
received a recalculation in writing from Lessor, effects of delay in
payment (Section 6, sub-paragraph 2) cannot originate.
4. The contracting parties agree that this index clause is subject to the
approval by the Land central bank in order to be valid. The approval
shall be obtained by Lessor. If the index clause is not approved by the
Land central bank, the contracting parties undertake to come to an
arrangement that can be approved and which is as similar as possible to
the terms agreed in this contract.
5. If an index clause as per sub-paragraph 3.1 and 3.2 cannot be
approved of (e.g. because of the duration), the partial amounts as per
sub-paragraph 1.1 to 1.10 and the flat charge as per sub-paragraph 1.14
shall be adjusted according to the following procedure: if the index
mentioned in sub-paragraph 3.1 changes as compared with the index of
the base month, both the contracting parties agree to negotiate on an
adjustment of the partial amounts as per sub-paragraph 1.1 to 1.10 and
of the flat charge as per sub-paragraph 1.14 after expiry of the first
year of lease. This adjustment shall become effective beginning of the
second year of lease. If the parties do not reach an agreement with
respect to the adjustment within two months, the decision shall be taken
by an arbitrator, who shall be appointed by the local competent Chamber
of Industry and Commerce on application filed by one party. Arbitrator
may only be a person who is an executive of a regionally or
internationally lending Realtor enterprise. The arbitrator shall adjust
the partial amounts as per sub-paragraph 1.1 to 1.10 and the flat charge
as per sub-paragraph 1.14 taking into account the above mentioned index
development, considering also the rents then agreed for commercial
buildings comparable to the Leased Property. The parties, however, agree
that a reduction of the partial amounts as per sub-
<PAGE>
paragraph 1.1 to 1.10 and of the flat charge as per sub-paragraph 1.14
can be demanded only, if the changed index is lower than the value of
the base index, even if an arbitrator's expert opinion in on hand. The
above provision applies to the following years of Lease
correspondingly. The costs of the expert opinion are shared. In the
case of a lawsuit, however, the court order as to costs shall apply to
the costs of the expert opinion as well.
SECTION 6
PAYMENT OF RENT - SECURITY FOR RENT
1. Payment of rent is to be effected monthly in advance, post and expenses
paid, on Lessor's account No. 00 1009 6060 with DG BANK Deutsche
Genossenschaftsbank, Hamburg (bank identification number BLZ 200 600
00) indicating lessee identification number, by the 3rd working day of
each month at the latest. Crediting of the money and not its dispatch is
decisive for punctuality.
2. In the case of delay in payment on the part of Lessee, Lessor is
entitled to charge penal interest to the extent of 5% (five per cent)
p.a. above the discount rate of the Deutsche Bundesbank, unless Lessor
can prove a loss of a higher degree or Lessee can prove a loss of a
lower degree in the individual case. Lessor's right of termination
according to Section 4 remains unaffected.
3. Not later than FOUR WEEKS PRIOR TO HANDING OVER, Lessee shall
provide a security for rent
3.1 by bank guaranty of a German bank or savings bank according to
APPENDIX 2
to the amount of treble monthly rent (Section 5, sub-paragraph 1.17),
that is of
DM 140,286.00
(IN WORDS: DEUTSCHEMARKS ONE HUNDRED AND FORTY THOUSAND TWO HUNDRED
AND EIGHTY-SIX)
waiving defense of defeasibility and of setoff and of failure to
pursue remedies.
3.2 deleted
4. In the case the Property being sold, Lessor is entitled and
obligated to transfer the security for rent to the buyer.
5. Landlord's lien is subject to legal provisions.
<PAGE>
SECTION 7
INCIDENTAL EXPENSES
1. The advance payment for incidental expenses agreed in Section 5,
sub-paragraph 1.12 is effected to cover the incidental expenses of the
Property described hereinafter. As advance payment of the incidental
expenses shown below, Lessee pays monthly in advance
DM 5,187.65
(IN WORDS: DEUTSCHEMARKS FIVE THOUSAND ONE HUNDRED AND EIGHTY-SEVEN
65/100) plus statutory value added tax.
2. In terms of this Lease, incidental expenses are any taxes,
contributions, fees and expenses incurred or accrued by Lessor due to
ownership/lease in perpetuity of the Property and/or due to the agreed
use of property, building or economic unit (the latter includes
adjoining buildings, multi-story car parks/underground car parks, plants
and facilities), in particular costs of:
2.1 the total of the current public taxes, property tax,
domestic waste disposal, collection of recycling materials,
chimney-sweeping, canal dues, water-supply, sewage and drainage
(including rainwater/surface water) and the corresponding metering
devices and their rent and calibration;
2.2 street cleaning, snow and ice removal/gritting, cleaning and
maintenance of sidewalks, multi-story car parks/underground car parks
including maintenance of the equipment required and of the upkeep and
cleaning of all exterior grounds and playgrounds, green areas and
gardens including replacement or supply of plants and trees;
2.3 cleaning of the building including common areas, rooms and
facilities, entrance halls, elevators, stairwells and of the other
commonly used parts of the building, cleaning and maintenance of the
outer glass surfaces and facades (except display windows and entrance
facilities) and of pest control;
2.4 operation and lighting of the common areas and rooms as well as of
common facilities and grounds, entrance halls, elevators,
stairwells, parking lots, multi-story car parks/underground car
parks, as well as of other commonly used parts of the building
including replacement of defect bulbs and lamps and costs of
regular safety checks;
<PAGE>
2.5 operation and maintenance of the common technical equipment
and facilities (in particular routing facilities of the building,
elevators and hoists including emergency call facilities in elevators
and their rent, escalators, fire alarm system, CO2 alarm system,
sprinkler systems, butterfly dampers and smoke funnels, air
conditioning equipment, aerators, outer grounds fit for traffic,
gasoline separators, lifting facilities, pressure intensifiers etc.)
including each and every measuring system and the respective rent and
calibration, use of common communication systems (e.g. large-band
cable);
2.6 insurance(4) against fire, storm and tempest, water damage,
(including EC-coverage) and against loss of rent suffered by Lessor,
liability insurance as well as costs of safety checks required by
insurance contract;
2.7 janitor or of other janitor services as well as guards and
doorman;
2.8 any other expenses subject to apportionment as operating costs as
per Appendix 3 of Section 27, sub-paragraph 1 of the II, order as
to charges(5) as amended at the time when the costs are incurred.
2.9 property management and care-taking (both management by third
parties and self-management) at a flat charge of 3.5% (THREE POINT
FIVE per cent) of the partial amount agreed under Section 5,
sub-paragraph 1.1 to 1.10.
3. If new incidental expenses according to sub-paragraph 2. incur or
if incidental expenses increase, Lessor may apportion these expenses to
the lessees of the Leased Property from the date of the
accrual/increase on and Lessor may fix reasonable advance payments.
Unless Lessor disposes of current assessment notices as to property
tax, these shall be replaced by calculations of the expected property
tax burden.
4. If the above mentioned incidental expenses are apportioned to the
lessees of the Leased Property, the criteria for apportionment and the
accounting period are fixed by Lessor in its fair judgment, taking into
account the principle of equal treatment of all the lessees and
considering imperative provisions of the law. In doubt, accounting of
incidental expenses is effected according to the share of the
respective leased area in relation to the total of the leased area in
the Property.
5. Notwithstanding the above provision, Lessor is entitled - to the
extent technically possible - to demand from Lessee a direct settlement
of individual incidental expenses (e.g. water consumption) with the
respective supplier or to allocate costs corresponding to the
individual use of services by the lessees of the Property. Lessee is
obligated to provide access to supply meters and other measuring
facilities at any time.
- ----------------
(4) cf. Section 15, sub-paragraph 1.
(5) Order regulating housing charges
<PAGE>
6. The proper disposal of refuse not subject to domestic waste collection
(in particular hazardous waste and hazardous materials as well as bulky
refuse like packing material etc.) is incumbent on Lessee. The temporary
proper storage of such refuse until their collection is also incumbent
on Lessee. Lessor, however, shall endeavor to help with this according
to local possibilities. Garbage skips may only be put up in areas
especially earmarked by Lessor. Outside these areas, neither refuse nor
materials destined for recycling may be stored.
7. Lessor shall settle accounts of advance payments effected by Lessee once
a year, not requiring supporting documents on the cost of management
flat charge agreed in sub-paragraph 2.9. A possible difference between
advance payment and account in favor of Lessor/Lessee is to be settled
by Lessee/Lessor within one month after receipt of settlement of
accounts. In the case of Lessee's moving during an accounting period,
apportionment is effected with the following settlement of accounts in
relation of leasing period to accounting period, when in doubt. On
expiry of one year as from the day of receipt of the settlement of
accounts, objections to accuracy are excluded.
8. If Lessor furnishes proofs of the fact that the monthly advance payment
is insufficient for coverage of the incidental expenses, Lessor may adjust
the advance payment accordingly, also during a running accounting
period. If the settlement of accounts issued by Lessor shows a reduction
of the incidental expenses, the advance payments for the following
accounting period shall be reduced accordingly.
SECTION 8
HEATING EXPENSES
1. The advance payment of the heating expenses agreed in Section 5,
sub-paragraph 1.13 is effected for the heating expenses described
hereinafter. As advance payment of the heating expenses shown below,
Lessee pays monthly in advance.
DM 1,152.81
(IN WORDS: DEUTSCHEMARKS ONE THOUSAND ONE HUNDRED AND FIFTY-TWO 81/109)
plus statutory value added tax.
2. In terms of this contract of Lease, heating expenses are in particular
costs of fuel and its delivery, operating current, operation,
maintenance, control, and attending of heating plant, combustion
chamber, and of the flue gas system, costs or regular readiness and
reliability check with regard to service including control by an expert,
cleaning of plants and of operational premises, metering according to
the federal protective law on emissions (Bundesemissionsschutzgesetz),
lease or other kinds of transferal for use of equipment for measuring
consumption as well as the costs of use of an equipment for measuring
consumption and its calibration including the costs of calculation and
allocation. In the case of long-distance energy, the total of the costs
of heating supply and the costs of operation of the corresponding
in-house plants and the above mentioned costs are part of the heating
expenses.
<PAGE>
3. To the extent that Lessor provides the Leased Property with hot water
for sanitary purposes, the costs of the hot water supply system shall
form part of the heating expenses. Sub-paragraph 2, sentence 2 applies
to long-distance hot water correspondingly.
4. Every year, accounts are settled with respect to the advance payments in
compliance with the regulation on heating expenses (Heizkostenverordnung).
In the case of long-distance energy supply, the proportionate consumption
of the energy obtained is determined by means of sub-meters, calibrated
according to statutory provisions. In other respects, the provisions of
Section 7 shall apply accordingly.
SECTION 9
BREAKDOWN OF THE HEATING PLANT, OF TECHNICAL EQUIPMENT, AND OF SUPPLY
1. In the case of technical breakdowns, force majeure, official directives
or other complete or partial impossibility if performance, heating of
the Property and/or operation of technical equipment cannot be claimed.
Local fuel shortage is to be regarded as force majeure.
Lessor is obligated to arrange for the measures necessary and reasonable
in order to remedy the failure. Lessee's right to claim reduction of
rent in the case of a not only temporary breakdown of the heating of the
Leased Property and/or of the operation of technical equipment remains
unaffected.
2. Lessor is obligated to operate the central heating system, if the
weather so requires, at least, however in the time from October 1st to
April 30th.
SECTION 10
MAINTENANCE AND USE OF PROPERTY AND OF LEASED PROPERTY
1. Lessor shall assume the maintenance of the exterior of the Property and
shall bear the respective costs.
2. Additionally, Lessor shall assume
2.1 the maintenance and repair of the common areas, the common
technical facilities and plants outside the Leased Property and
replacement of broken outer windows;
2.2 the remedy of damages to the building and/or grounds caused by
third parties like for example visitors or customers of Lessee;
<PAGE>
2.3 the purchase (including deduction for depreciation) of
equipment used for cleaning, snow and ice removal and for the
maintenance of grounds and building including multi-story car
park/underground car park as well as for maintenance and cleaning
of all the exterior grounds like green areas and gardens.
2.4 Maintenance, repair and upkeep of bell system, intercom and buzzers.
For a lump sum payment for costs connected with these measures
incurred by Lessor, Lessee shall pay monthly DM 0.20/m-squared,
irrespective of the amounts actually incurred. This payment shall
be adjusted to the respective change of the cost-of-living index
according to Section 5, sub-paragraph 3 of this Lease plus
statutory value added tax.
Any damage claims on the part of Lessor against Lessee resulting from
statutory or contractual provisions regarding liability remain
unaffected by the above provision.
3. Maintenance, repair and upkeep within the Leased property are within
Lessee's responsibility and have to be effected at Lessee's expense.
Among these are in particular maintenance, repair and upkeep of
electric power plants, light installations, and electric bell systems,
sanitation, gas boilers and suchlike, kitchen utensils, mountings,
locks, windows (inside), sunshades (inside and outside), internal
partitionings, air conditioning equipment and ventilation systems
(provided situated within the Leased Property). Lighting fixtures and
bulbs and tubes within the Leased Property are to be replaced by Lessee
at its own expense. Regular check, maintenance and replacement of fire
extinguishers within the Leased Property, even of those provided by
Lessor, is incumbent on Lessee.
4. Display windows and entrance facilities are to be cleaned by Lessee
at regular intervals.
5. Interior decorative repairs within the Leased Property are to be
executed by Lessee at regular intervals.
6. Prior to the installation or modification of technical plants which
may molest third parties or endanger grounds or building due to their
operation (e.g. concussion, noise, odor, vibration, contaminants,
radiation, dust, gases, parasitic current), Lessee shall inquire about
the relevant provisions (including those of trade associations) and
standards and obtain Lessor's written consent presenting the
aforementioned information. Lessee is entitled to be granted such
consent, provided any adverse effects on third parties, grounds or
building are excluded. If such technical plants, however, cause any
nuisance to third parties or adverse effects on grounds or building,
Lessor may withdraw the previously granted consent and demand removal
of such plants. If such plants cause any damages to grounds and/or
building, Lessee shall pay damages. This also applies to the
installation of heavy apparatuses, machines, safes, and suchlike in the
Leased Property with respect to the inherent dangers.
<PAGE>
7. If Lessee handles materials which may be detrimental to health or
environment (e.g. toxic, unhealthy, fiery, inflammable, explosive,
irritant, corrosive, carcinogenic substances or materials hazardous to
ground water), Lessee is obligated to comply with all the relevant
regulations as to handling of these dangerous materials and to release
Lessor from any risks and official obligations connected hereto.
Lessor is entitled to demand from Lessee to effect and maintain a
reasonable liability insurance covering any risk involved by the
handling of such substances. On demand, Lessee shall prove the
conclusion of such an insurance contract, the insured sum, and the
continuance of coverage to Lessor at any time. Lessee shall indemnify
for any loss caused by the use of hazardous materials (including
preservation/storage) attributable to Lessee.
8. Any damages to grounds or building are to be reported to Lessor or
its representative as soon as noticed by Lessee. In the case of
imminent danger, Lessee shall take appropriate action if possible.
9. Lessee is responsible to Lessor for any damages caused by its
failure to exercise proper care incumbent on Lessee, in particular in
the case of improper handling of plants, objects or substances put
forth in sub-paragraph 6. and 7.
10. Lessee shall immediately remedy any damages it is liable for in
accordance with Lessor. If Lessee fails to comply with this provision
within a reasonable period of time despite written caution by Lessor,
Lessor may have the necessary work executed at Lessee's expense. In the
case of imminent danger, a written caution and setting of a time limit
is not required.
SECTION 11
SUBLEASING
1. The complete or partial leaving of the Leased Property to a third
party for the purpose agreed in Section 2, sub-paragraph 4, is subject
to Lessor's prior written consent. To this end, Lessee shall first
submit the contract of subleasing to Lessor. Lessor shall refuse its
consent to subleasing for substantial reasons only. Lessor may withdraw
a consent previously granted, if the third party's person or conduct
justified a termination of Lease without notice if they were the case
with Lessee. Denial and withdrawal of Lessor's consent as agreed above
do not entitle Lessee to termination of contract.
<PAGE>
2. By signing the Lease, Lessee assigns its claims against sublessee
including lessor's lien to Lessor, in order to provide security for
all claims due to Lessor subject to this Lease and Lessor accepts
such assignment. This applies to subleasing with Lessor's consent
and to subleasing without Lessor's consent and to each and every other
permission of use. If Lessee realizes by subleasing a higher amount
of rent per m(2) than agreed in Section 5, sub-paragraph 1.1 to 1.10,
50% (fifty per cent) of the excess amount is due to Lessor, payable
retroactively each month.
3. In the case of subleasing or other permission of use, Lessor shall be
liable for each and every act and omission by sublessee/user irrespective
of its own negligence, as if it had been its own conduct.
SECTION 12
INSTALLATION AND STRUCTURAL ALTERATIONS BY LESSEE AND
ADVERTISING AND SPECIAL WORKS EQUIPMENT
1. Any installations and structural alterations of the Leased Property by
Lessee including but not limited to installation/modification of built-in
facilities are subject to Lessor's written consent. Lessee shall submit
appropriate plans in advance. The above shall apply accordingly to
installation/modification of customary advertising equipment, signs and
other special works equipment outside the Leased Property. Lessor shall
refuse or withdraw its consent for substantial reasons only. Lessor may
make its consent to such installations outside the Leased Property
dependent on payment of a compensation for use. Supplementary it is
referred to Section 10, sub-paragraph 10.
2. Obtaining and maintenance of official permits required for the above
mentioned measures is incumbent on Lessee. Lessee shall furthermore
bear all the costs involved in such measures. If technical plants are
subject to official approval and/or regular examinations (e.g. by the
Technical Control Association TUV), approval and examination are to be
arranged by Lessee at Lessee's expense. Lessee shall prove to Lessor the
execution of such approval and examination and submit the corresponding
results. On termination of Lease, Lessee shall restore the original
condition or leave the installations and structural alterations or any other
facilities to Lessor without claiming indemnification.
<PAGE>
SECTION 13
REPAIRS AND STRUCTURAL ALTERATIONS PERFORMED BY LESSOR
1. Subject to timely agreement of a date, Lessor is entitled to make
repairs or structural alterations which are necessary for the
maintenance of grounds, building or the economic unit, for averting
dangers or for elimination of damages, even without Lessee's consent.
This shall also apply to works and structural measures which are not
necessary but appropriate, in particular such works which serve to
improve exploitation or to build up the Property (including heightening
of the building) including but not limited to structural alterations
performed in connection with a new lease of single rooms or with the
redevelopment of the Property.
2. Lessor shall pay necessary regard to Lessee's interests when performing
the works. It shall inform Lessee timely prior to beginning of the works
and present the plans for the structural alteration/building up. Lessee
shall keep the rooms and areas of the Leased Property affected by these
measures accessible to a reasonable extent.
3. Deleted.
4. Lessee is entitled to rent reduction or to make use of the right of
retention, if such works exclude fully or in part the use of the Leased
Property for the agreed purpose or interfere substantially with the use.
Section 541 b sub-paragraph (2) German Civil Code BGB is contracted out.
Any claims for damages on the part of Lessee are limited in accordance
with Section 14.
5. Lessee shall tolerate to a reasonable extent any measures for
modernization and improvement within the Leased Property, subject to timely
agreement of date. Sub-paragraph 1 to 4 shall apply accordingly.
6. If the necessity arises to provide Lessee temporarily with other areas
for lease because of the measures described in sub-paragraph 1., the
contracting parties will enter into a separate agreement on this subject,
with Lessor undertaking to bear the moving expenses.
<PAGE>
7. Lessor is entitled to lease outer facades and roofs of the Property to
third parties for advertising installations and suchlike, safeguarding
Lessee's legitimate interests.
SECTION 14
LIABILITY OF LESSOR - NUISANCE BY THIRD PARTIES
1. Any claims for damages on the part of Lessee, including any claims,
arising from obligations prior to contract and from tort, can only
be put forward if they are due to:
1.1 intention or gross negligence on the part of Lessor or its vicarious
agents or
1.2 negligent failure to comply with an essential contractual obligation
on the part of Lessor or its vicarious agents or
1.3 the lack of a guaranteed feature of the Leased Property.
2. Lessor is not liable for any disturbance of the use of the Leased Property
caused by third parties including other lessees of Property. It will,
however, endeavor to use its influence to eliminate any disturbances
reported to him, safeguarding the interests of the lessees.
3. Any disturbances of the use of the Leased Property caused by external
factors (such as traffic diversions, digging up, roadblocks, annoyance
caused by noise, bad smell and dust and concussions) shall substantiate
warranty claims by Lessee only if these factors essentially impair the
contractual use of the Leased Property and if Lessor is not in a position
to limit these disturbances to a reasonable extent. Short-term
disturbances as described above shall not substantiate any warranty claims
on the part of Lessee.
4. Each and every exclusion of and limitation on liability under this
contract is also applicable in favor of Lessor's vicarious agents.
SECTION 15
INSURANCE
1. At the expense of the incidental expenses as per Section 7, sub-paragraph
2.6, Lessor is entitled to insure the building against the risk of fire,
storm and tempest, and water damage, (including EC-coverage) and against
loss of rent(6) suffered by Lessor, and to effect a liability insurance
to an extent reasonable with regard to the risks involved.
- ---------------
(6) Covers exclusively indemnification for loss of rent in the case of
destruction of/damage to Leased Property, e.g. by fire, lightening.
<PAGE>
2. Lessee is obligated to inform Lessor immediately in writing of any
installations and alterations in and of the Leased property causing a value
increase and, in particular, of any alteration as of the class of risks
with regard to the terms of fire and liability insurance. Possible costs
of respective extra charges are to be borne by Lessee.
3. Insurance of objects, technical equipment and installations brought in by
Lessee against damages of all types is incumbent on Lessee.
SECTION 16
ACCESS TO LEASED PROPERTY
During usual business hours, Lessor and its vicarious agents may enter the
Leased Property together with interested parties, experts or witnesses for
the purpose of exercising landlord's statutory lien, examination of the
structural condition of the Leased Property and of the operativeness and
safety of technical installations in the Leased Property, for the purpose
of subletting or sale of the Leased Property, or in similar cases. Except
for cases of imminent danger, timely announcement is required.
SECTION 17
TERMINATION OF LEASE
1. By termination of Lease, Lessee shall remove any damages caused by the use
and any hazardous substances possibly brought in while using the Leased
Property and shall effect due interior decorative repairs. In due time
prior to termination of Lease, a common protocol shall be prepared, stating
any damages caused by the use, due interior decorative repairs (including
of floor coverings) and installations and structural alterations and/or
other facilities to be removed by Lessee.
2. If the Leased Property was handed over to Lessee in a renovated condition
or if Lessor paid Lessee the costs of renovation, Lessee is obligated to
completely renovate the Leased Property (excluding common areas) - IN
DEROGATION OF THE PROVISION AGREED IN SUB-PARAGRAPH 1 -. This obligation
to renovate shall include in any case the replacement of wallpaper or
repainting of walls and ceilings and the replacement of carpets and other
floor coverings subject to wear and tear, using the same quality as
provided when handing over the Leased Property. Colors and patterns of
carpets and wallpaper and of the paints used for walls and ceilings are to
be agreed with Lessor. Instead of a renovation effected by Lessee, Lessor
is entitled to demand from Lessee a redemption of 100% of the costs charged
for the renovation by an expert firm. If the contracting parties doe not
reach an agreement as to the amount of such renovation costs, an expert
appointed by the local chamber of crafts shall act as an arbitrator in this
matter. Costs of the arbitrator are shared between the contracting parties
at equal moieties.
<PAGE>
3. On termination of Lease, Lessee shall return the Leased Property, according
to the terms of this Lease, duly vacated, with all the keys, including any
additional keys possibly manufactured by Lessee, and with all the code
cards, by the date agreed with Lessor. On Lessee's failure to do so
despite caution and granting of a grace period, Lessor is entitled to
exchange the corresponding locks at Lessee's expense and to have new keys
and code cards made. On return of the Leased Property, Lessor shall
prepare a detailed protocol of the condition of the Leased Property.
Lessee shall assist personally in drawing up this protocol or shall be
represented by a person authorized in writing.
4. If the works on the Leased Property to be effected by Lessee are not
completed on termination of Lease, the rent plus incidental expenses shall
be paid until the end of the month of completion of such works. Any
additional claims on the part of Lessor remain unaffected.
5. In the case of Lessee's premature moving, Lessor is entitled to have other
repairs and structural alterations done in the Leased Property without
giving rise to additional claims for crediting rent or suchlike on the part
of Lessee.
SECTION 18
SALE OF PROPERTY
1. Lessor reserves the right to sell the Property. In this case, it shall
induce the buyer to succeed to Lessor's rights and obligations under this
Lease on the day of taking over the Property. Subject to this and by
signing this Lease, Lessee waives its rights according to Section 571,
sub-paragraph (2) German Civil Code BGB (Liability of Lessor who sells the
Leased Property with respect to further performance of Lease by the buyer).
2. In the case of the Property being sold, Lessor is entitled to ask from
Lessee a declaration of completeness, enclosing documentation of Lease.
Lessee is then bound to inform Lessor within a period of four weeks,
whether the list submitted by Lessor is complete and correct as regards the
subject matter.
SECTION 19
FINAL CLAUSES
1. Deleted.
<PAGE>
2. If one or more of the provisions of this contract are or become
inoperative for any reason whatsoever, the validity of the Lease shall
remain unaffected. In such a case, the parties shall agree on an
operative provision, which is as close as possible to the economic
purpose of the inoperative provision.
3. No verbal collateral agreements have been entered into. Any
modifications or amendments to this Lease and all other declarations of
intention made to the other contracting party must be made in writing in
order to be valid. The mandatory written form applies, in particular, to
agreements entered into by the parties with regard to the completion of
the interior of the Leased Property.
4. The contracting parties undertake to perform any actions and to
make any declarations, which are necessary for complying with the
statutory request for the written form, mandatory in particular for the
signing of additional, amending and supplementary contracts, and until
then not to terminate the Lease prematurely invoking failure to comply
with the mandatory written form.
SECTION 20
SUPPLEMENTARY AGREEMENTS
Supplementing the above terms of contract, the following is agreed additionally:
1. Lessor reserves the right to include the parking lots of the
Property into an parking lot management system. In such a case, only a
locally not determined parking space can be provided. As a compensation,
the rent for the parking spaces concerned shall be considerably reduced.
By signing this contract, Lessee declares its general consent to such a
modification of contract and its willingness to enter into corresponding
agreements with Lessor at the appropriate time.
2. The security for rent to be provided by Lessee according to Section
6, sub-paragraph 3 is provided by bank guaranty.
3. Lessor grants Lessee a contribution to construction costs required
in respect of alteration/completion of the leased area of up to DM
300,000.00 against presentation of proof and invoicing.
<PAGE>
4. APPENDICES 1 AND 2 attached are part of this Lease.
(
Santa Barbara, Nov. 19, 1997
Hamburg, _________________________ -----------------------------
DIFA
DEUTSCHE IMMOBILIEN FONDS AG
- -------------------------------- -----------------------------
(Lessor) (Lessee)
)
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Arvilla Telecommunications, Inc.
IIWII Corp.
L.D. Services, Inc.
T-One Corp.
Helvey Com., Inc.
Lucius Enterprises, Inc.
STAR Europe, Ltd.
Romborg Holding, B.V.
STAR Telecommunications Deutschland, GmbH
Grupo Industriale Arvilla SA de CV
Servicios Sumosierra SA de CV
<PAGE>
EXHIBIT 23.1
[LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports dated February 12, 1998 and to all references to our firm included in
or made a part of this registration statement on Form S-1.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH
FLOWS FOUND ON PAGES F-3, F-4 AND F-6 OF THE COMPANY'S REGISTRATION STATEMENT
ON FORM S-1 FOR THE YEAR TO DATE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,458
<SECURITIES> 18,579
<RECEIVABLES> 50,152
<ALLOWANCES> 7,745
<INVENTORY> 0
<CURRENT-ASSETS> 73,114
<PP&E> 39,995
<DEPRECIATION> 5,638
<TOTAL-ASSETS> 113,553
<CURRENT-LIABILITIES> 57,268
<BONDS> 0
0
0
<COMMON> 34
<OTHER-SE> 43,980
<TOTAL-LIABILITY-AND-EQUITY> 113,553
<SALES> 376,198
<TOTAL-REVENUES> 376,198
<CGS> 325,237
<TOTAL-COSTS> 39,912
<OTHER-EXPENSES> 2,586
<LOSS-PROVISION> 7,695
<INTEREST-EXPENSE> 1,633
<INCOME-PRETAX> 8,463
<INCOME-TAX> 2,895<F1>
<INCOME-CONTINUING> 5,568
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,568<F2>
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.17
<FN>
<F1>PRO FORMA TAX IS 3,090
<F2>PRO FORMA NET INCOME IS 5,373
</FN>
</TABLE>
