As filed with the Securities and Exchange Commission on August 4, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
STARTEC GLOBAL COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
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MARYLAND 4813 52-1660985
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
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10411 MOTOR CITY DRIVE RAM MUKUNDA
BETHESDA, MD 20817 PRESIDENT AND CHIEF EXECUTIVE OFFICER
(301) 365-8959 10411 MOTOR CITY DRIVE
(Address, Including Zip Code, and Telephone BETHESDA, MD 20817
Number, Including Area Code, of Registrant's (301) 365-8959
Principal Executive Offices) (Name, Address, Including Zip Code, and
Telephone Number, Including Area Code, of
Agent for Service)
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COPIES TO:
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Thomas L. Hanley, Esq. John L. Sullivan, III, Esq.
Robert B. Murphy, Esq. David L. Kaye, Esq.
Yolanda Stefanou Faerber, Esq. Venable, Baetjer & Howard LLP
Shulman, Rogers, Gandal, Pordy & Ecker, P.A. 2010 Corporate Ridge, Suite 400
11921 Rockville Pike McLean, VA 22102
Rockville, MD 20852 (703) 760-1600
(301) 230-5200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS 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 this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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- -----------------------------------------------------------------------------------------------------------------------------------
PROPOSED
MAXIMUM
PROPOSED AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE PRICE FEE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value ...... 2,185,000 Shares(1) $11.00(2) $24,035,000(2) $7,284
===================================================================================================================================
</TABLE>
(1) Includes 285,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457 under the Securities Act.
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>
STARTEC GLOBAL COMMUNICATIONS CORPORATION
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
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FORM S-1 ITEMS AND CAPTIONS CAPTION IN PROSPECTUS
- --------------------------------------------------- ---------------------------------------------------
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1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus ......... Cover Page of Registration Statement; Cross Ref-
erence Sheet; Outside Front Cover Page of Pro-
spectus
2. Inside Front and Outside Back Cover Pages
of Prospectus ................................. Inside Front Cover Page of Prospectus; Outside
Back Cover Page of Prospectus
3. Summary Information, Risk Factors and Ra-
tio of Earnings to Fixed Charges ............ Prospectus Summary; Risk Factors
4. Use of Proceeds .............................. Use of Proceeds
5. Determination of Offering Price ............ Outside Front Cover Page of Prospectus; Risk
Factors; Underwriting
6. Dilution .................................... Dilution; Shares Eligible for Future Sale
7. Selling Security Holders ..................... Not Applicable
8. Plan of Distribution ........................ Outside Front Cover Page of Prospectus; Under-
writing
9. Description of Securities to be Registered .... Outside Front Cover Page of Prospectus; Pro-
spectus Summary; Description of Capital Stock;
Shares Eligible for Future Sale
10. Interests of Named Experts and Counsel ...... Legal Matters; Experts
11. Information with Respect to Registrant ...... Prospectus Summary; Risk Factors; The Com-
pany; Dividend Policy; Dilution;
Capitalization; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Management; Certain Transactions;
Principal Stockholders; Description of Capital
Stock; Financial Statements
12. Disclosure of Commission Position on In-
demnification for Securities Act Liabilities ... Not Applicable
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED __________, 1997
1,900,000 SHARES
STARTEC
The Star of Worldwide Communications
STARTEC GLOBAL COMMUNICATIONS CORPORATION
COMMON STOCK
------------
All of the shares of common stock, par value $0.01 per share (the "Common
Stock") offered hereby are being sold by Startec Global Communications
Corporation ("STARTEC" or the "Company"). Prior to this offering (the
"Offering"), there has been no public market for the Common Stock of the
Company. It is currently estimated that the initial public offering price will
be between $9.00 and $11.00 per share. For a discussion of the factors
considered in determining the initial public offering price, see "Underwriting."
Application will be made to have the shares of Common Stock approved for
quotation on the Nasdaq National Market under the symbol "STGC."
------------
SEE "RISK FACTORS" BEGINNING ON PAGE __ OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SHARES OF COMMON STOCK OFFERED HEREBY.
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.
- --------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
---------- ---------------- ------------
Per Share ...... $ $ $
Total(3) ...... $ $ $
- --------------------------------------------------------------------------------
(1) Excludes a non-accountable expense allowance payable to the Representatives
of the Underwriters equal to 1% of the gross proceeds of the Offering. The
Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $_____.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 285,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
------------
The shares of Common Stock are offered by the Underwriters named herein,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to their right to reject any order in whole or in
part. It is expected that delivery of certificates representing the shares of
Common Stock will be made against payment therefor at the offices of Ferris,
Baker Watts, Incorporated, 1720 Eye Street, N.W., Washington, D.C., or through
the Depositary Trust Company, on or about __________, 1997.
------------
FERRIS, BAKER WATTS BOENNING & SCATTERGOOD, INC.
Incorporated
The date of this Prospectus is __________, 1997
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>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING ENTERING INTO STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, including risk factors and
financial statements and notes thereto, appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. See "Underwriting." For
definitions of certain technical and other terms used in this Prospectus, see
"Glossary of Terms."
THE COMPANY
STARTEC is a rapidly growing, facilities-based international long distance
carrier which markets its services to select ethnic U.S. residential communities
that have significant international long distance usage. Additionally, to
maximize the efficiency of its network capacity, the Company sells its
international long distance services to some of the world's leading carriers.
The Company provides its services through a flexible network of owned and leased
transmission facilities, resale arrangements and a variety of operating
agreements and termination arrangements. The Company currently operates a switch
in Washington, D.C. and leases switching facilities from other
telecommunications carriers. The Company is in the process of constructing an
international gateway facility in New York City.
The Company's mission is to dominate select international telecom markets
by strategically building network facilities that allow it to manage both sides
of a telephone call. The Company intends to own multiple switches and other
network facilities which allow it to originate and terminate a substantial
portion of its own traffic. Further, the Company intends to implement a network
hubbing strategy, linking foreign-based switches and other telecommunications
equipment together with the Company's marketing base in the United States. To
implement this hubbing strategy, the Company intends to: (i) build transmission
capacity, including its ability to originate and transport traffic; (ii) acquire
additional termination options to increase routing flexibility; and (iii) expand
its customer base through focused marketing efforts.
STARTEC's residential customers access its network by dialing a carrier
identification code ("CIC Code") prior to dialing the number they are calling.
Using a CIC Code to access the Company's network is known as "dial-around" or
"casual calling" because customers can use the Company's services at any time
without changing their existing long distance carrier. Additionally, the
customer's monthly bill from the local exchange carrier ("LEC") reflects the
charges for the international carrier services rendered by the Company. As part
of the Company's marketing strategy, it maintains a comprehensive database of
customer information which is used for the development of marketing programs,
planning, and other strategic purposes.
Increased deregulation and the globalization of the telecommunications
industry have resulted in accelerated growth in the use of international long
distance services. The international switched telecommunications market was
approximately $56 billion in aggregate carrier revenues for 1995, of which $14
billion was U.S.-originated international traffic. According to the Company's
market research, during the period from 1990 to 1995, the U.S.-originated
international telecommunications market grew at an annual compound rate of 11.7%
from $8 billion to $14 billion, compared with an annual compound growth rate of
7.25% in the U.S. domestic long distance market. The Company believes that the
international telecommunications market will continue to experience growth for
the foreseeable future as a result of numerous factors, including: (i) global
economic development with corresponding increases in the number of telephones,
particularly in developing countries; (ii) continuing deregulation of foreign
telecommunications markets; (iii) reductions in rates stimulating higher traffic
volumes; (iv) increases in the availability of transmission capacity; and (v)
increases in investment in telephone infrastructure and consequent increases in
access to telecommunications services.
The Company currently markets its services to ethnic residential
communities throughout the United States through a variety of media including
print advertising, direct marketing, radio and television. These marketing
efforts have resulted in significant growth in the Company's residential billed
customer base from approximately 4,100 as of March 31, 1994 to over 33,700 as of
March 31, 1997.
3
<PAGE>
To achieve the economies of scale necessary to maintain cost effective
operations, the Company in late 1995 began reselling its international carrier
capacity to other carriers. As a result, STARTEC has experienced significant
growth in revenues and in the number of its carrier customers. As of March 31,
1997, the Company had 28 carrier customers who were active users of the
Company's international long distance services. Carrier revenues were $19.5
million for the fiscal year ended December 31, 1996 and reached approximately
$7.7 million for the three months ended March 31, 1997. The Company will
continue to market its international long distance services to existing and new
carrier customers.
RECENT DEVELOPMENTS
On July 1, 1997, the Company entered into a Secured Revolving Line of
Credit Facility Agreement with Signet Bank (the "Signet Agreement"), which
provides for maximum borrowings of up to $10 million through the end of 1997,
and the lesser of $15 million or 85% of eligible accounts receivable thereafter
until maturity on December 31, 1999. The Company has used some amounts available
under the Signet Agreement to begin implementing its strategic plan to build its
transmission capacity, acquire additional termination options, and expand its
customer base. Proceeds from the Signet Agreement have also been allocated to
the Company's marketing programs, the anticipated acquisition of rights in
transatlantic digital undersea fiber optic cable, and the addition of monitoring
equipment and software upgrades to help support the expanded network and the
anticipated increase in traffic.
------------------
The Company was incorporated in Maryland in 1989. The principal executive
offices of the Company are located at 10411 Motor City Drive, Bethesda, Maryland
20817, and its telephone number is (301) 365-8959. The Company recently changed
its name from STARTEC, Inc. to Startec Global Communications Corporation.
THE OFFERING
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Common Stock Offered by the Company ......... 1,900,000 shares
Common Stock to be Outstanding After the
Offering .................................... 7,297,999 shares(1)
Use of Proceeds .............................. The Company intends to use the net proceeds of the Offering as
follows: (i) to acquire cable facilities, switching,
compression and other related telecommunications equipment; (ii)
for marketing, (iii) to pay down amounts due under the Signet
Agreement, and (iv) for working capital and other general
corporate purposes, including possible future acquisitions and
strategic alliances. See "Use of Proceeds."
Proposed Nasdaq National Market symbol ...... STGC
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- ----------
(1) Includes 17,175 non-voting common shares which were converted to voting
common shares, and excludes 5,351 non-voting common shares which were
purchased and retired, subsequent to March 31, 1997. Excludes (i) 269,766
shares of Common Stock issuable upon the exercise of options under the
Amended and Restated Stock Option Plan; (ii) 750,000 shares of Common Stock
reserved for issuance under the Company's 1997 Performance Incentive Plan;
and (iii) 713,800 shares of Common Stock issuable pursuant to the exercise
of certain warrants and upon conversion of a note. See "Management -- Stock
Option Plans," "Description of Capital Stock -- Warrants and Registration
Rights," and "Underwriting."
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table presents summary financial data of the Company for the
years ended December 31, 1992, 1993, 1994, 1995 and 1996 and the three months
ended March 31, 1996 and 1997. The historical financial data for the years ended
December 31, 1994, 1995 and 1996 has been derived from the financial statements
of the Company which have been audited by Arthur Andersen LLP, independent
public accountants, as set forth in the financial statements and notes thereto
presented elsewhere herein. The financial data for the years ended December 31,
1992 and 1993, for the three months ended March 31, 1996 and 1997, and as of
March 31, 1997 has been derived from the Company's unaudited financial
statements in a manner consistent with the audited financial statements. In the
opinion of the Company's management, these unaudited financial statements
include all adjustments necessary for a fair presentation of such information.
Operating results for interim periods are not necessarily indicative of the
results that might be expected for the entire fiscal year. The following
information should be read in conjunction with the Company's financial
statements and notes thereto presented elsewhere herein. See "Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
-------- ----------- ----------- ------------ ------------ ----------- --------
(UNAUDITED) (UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Net revenues ........................ $2,394 $ 3,288 $ 5,108 $ 10,508 $ 32,215 $ 4,722 $12,372
Gross margin ..................... 809 198 407 1,379 2,334 255 1,607
Income (loss) from operations ...... 254 (1,610) (933) (1,112) (2,509) (444) 256
Net income (loss) .................. $ 208 $ (1,668) $ (979) $ (1,206) $ (2,830) $ (497) $ 137
PER SHARE DATA:
Net income (loss) per common and
equivalent share .................. $ 0.04 $ (0.34) $ (0.20) $ (0.22) $ (0.50) $ (0.09) $ 0.02
Weighted average common and equiva-
lent shares outstanding 4,868 4,888 4,888 5,609 5,695 5,695 5,695
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
-----------------------------
ACTUAL AS ADJUSTED(1)
----------- ---------------
(UNAUDITED)
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BALANCE SHEET DATA:
Cash and cash equivalents ........................... $ 239 $14,419
Working capital .................................... (6,941) 7,239
Total assets ....................................... 8,335 22,515
Long-term obligations, net of current portion ...... 573 608
Stockholders' (deficit) equity ..................... $ (5,941) $10,759
</TABLE>
- ----------
(1) Adjusted to give effect to (i) the sale of 1,900,000 shares of Common Stock
offered hereby (at an assumed initial public offering price of $10.00 per
share) and the application of the estimated net proceeds therefrom, (ii)
the fair value of 150,000 warrants issued to the underwriters and the fair
value of the Signet Bank warrants, which are not redeemable upon completion
of the Offering, and (iii) the acceleration of unearned compensation
expense related to stock options which vest upon the effective date of the
Offering.
5
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully by prospective investors
prior to making an investment in the Common Stock offered hereby. Information
contained in this Prospectus contains "forward-looking statements" which can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology or as discussions of
strategy. No assurance can be given that the future results covered by the
forward-looking statements will be achieved or that the events contemplated
thereby will occur or have the effects anticipated. The following matters
constitute cautionary statements identifying important factors with respect to
such forward-looking statements, including certain risks and uncertainties that
could cause actual results to vary materially from the future results covered in
such forward-looking statements. Other factors could also cause actual results
to vary materially from the anticipated results covered in such forward-looking
statements.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE OPERATING RESULTS
Although the Company has experienced significant revenue growth in recent
years, the Company had an accumulated deficit of approximately $7.0 million as
of March 31, 1997 and its operations have generated a net loss and negative
operating cash flows in each of the last three fiscal years. There can be no
assurance that the Company's revenue will continue to grow or be sustained in
future periods or that the Company will be able to achieve or maintain
profitability in any future period. See "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future as a result of a variety of factors
which can affect revenues, cost of services and other expenses. These factors
include costs relating to entry into new markets, variations in carrier revenues
return traffic under operating agreements, variations in user demand, the mix of
residential and carrier services sold, the introduction of new services by the
Company or its competitors, pricing pressures from increased competition, prices
charged by the Company's providers of leased facilities, and capital
expenditures and other costs relating to the expansion of operations. In
addition, general economic conditions, specific economic conditions affecting
the telecommunications industry, and the effects of governmental regulation or
regulatory changes on the telecommunications industry may also cause
fluctuations in the Company's quarterly operating results. Certain of these
factors are outside of the Company's control. In the event that one or more of
such factors cause fluctuations in the Company's quarterly operating results,
the price of the Common Stock could be materially adversely affected. "See
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL FINANCING
The Company believes that the net proceeds from this Offering, together
with amounts available under the Signet Agreement, will be sufficient to fund
the Company's capital needs for the next 18 months. The Company expects,
however, that it will need to raise additional capital from public or private
equity or debt sources in order to finance its future growth, including
financing construction or acquisition of additional transmission capacity,
expanding service within its existing markets and into new markets, and the
introduction of additional or enhanced services, all of which can be capital
intensive. In addition, the Company may need to raise additional capital to fund
unanticipated working capital needs and capital expenditure requirements and to
take advantage of unanticipated business opportunities, including accelerated
expansion, acquisitions, investments or strategic alliances. There can be no
assurance that additional financing will be available to the Company on
satisfactory terms or at all. Moreover, the Signet Agreement significantly
limits the Company's ability to obtain additional financing. If additional
financing is obtained through the issuance of equity securities, the percentage
ownership of the Company's then-current stockholders would be reduced and, if
such equity securities take the
6
<PAGE>
form of preferred stock, the holders of such preferred stock may have rights,
preferences or privileges senior to those of holders of Common Stock. If the
Company is unable to obtain additional financing in a timely manner on
satisfactory terms, it may be required to postpone or reduce the scope of its
expansion, which could adversely affect the Company's ability to compete and its
business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources and "Description of Capital Stock."
MANAGEMENT OF GROWTH
The Company's recent growth and its strategy to continue such growth has
placed, and is expected to continue to place, a significant strain on the
Company's management, operational and financial resources and increased demands
on its systems and controls. In order to manage its growth effectively, the
Company must continue to implement and improve its operational and financial
systems and controls, accurately forecast customer demand and its need for
transmission facilities, attract additional managerial, technical and customer
service personnel, and train and manage its personnel base. There can be no
assurance that the Company will be successful in these activities. Failure of
the Company to satisfy these requirements or the emergence of unexpected
difficulties in managing its expansion could materially adversely affect the
Company's business, results of operations and financial condition.
COMPETITION
The long distance telecommunications industry is intensely competitive. In
many of the markets targeted by the Company there are numerous entities which
are currently competing for the same residential and carrier customers and
others which have announced their intention to enter those markets.
International and interstate telecommunications providers compete on the basis
of price, customer service, transmission quality, breadth of service offerings
and value-added services. Residential customers frequently change long distance
providers in response to competitors' offerings of lower rates or promotional
incentives, and, in general, because the Company is a dial-around provider, the
Company's customers can switch carriers at any time. In addition, the
availability of dial-around long distance services has made it possible for
residential customers to use the services of a variety of competing long
distance providers without the necessity of switching carriers. The Company's
carrier customers generally also use the services of a number of international
long distance telecommunications providers. The Company believes that
competition in its international and interstate long distance markets is likely
to increase as these markets continue to experience decreased regulation and as
new technologies are applied to telecommunications. Prices for long distance
calls in several of the markets in which the Company competes have declined in
recent years and are likely to continue to decrease.
The U.S. based international telecommunications services market is
dominated by AT&T, MCI and Sprint. The Company also competes with numerous other
carriers in certain markets, some of which focus their efforts on the same
customers targeted by the Company. Recent and pending deregulation initiatives
in the U.S. and other countries may encourage additional new entrants. The
Telecommunications Act of 1996 (the "Telecommunications Act" or the "1996 Act"),
permits and is designed to promote additional competition in the intrastate,
interstate and international telecommunications markets by both U.S. based and
foreign companies, including the RBOCs. In addition, pursuant to the terms of
the WTO Agreement on basic telecommunications, countries who are signatories to
the agreement have committed, to varying degrees, to allow access to their
domestic and international markets to competing telecommunications providers, to
allow foreign ownership interests in existing telecommunications providers and
to establish regulatory schemes and policies designed to accommodate
telecommunications competition. The Company also is likely to be subject to
additional competition as a result of mergers or the formation of alliances
among some of the largest telecommunications carriers. Many of the Company's
competitors are significantly larger, have substantially greater financial,
technical and marketing resources than the Company, own or control larger
networks, transmission and termination facilities, offer a broader variety of
services than the Company, and have strong name recognition, brand loyalty, and
long-standing relationships with many of the Company's target customers. In
addition, many of the Company's competitors enjoy economies of scale that can
result in a lower cost structure for transmission and other costs of providing
services, which could cause significant pricing pressures within
7
<PAGE>
the long distance telecommunications industry. If the Company's competitors
were to devote significant additional resources to the provision of
international long distance services to the Company's target customer base, the
Company's business, results of operations and financial condition could be
materially adversely affected. See "Business -- Government Regulation,"
"Business -- Competition."
DEPENDENCE ON AVAILABILITY OF TRANSMISSION FACILITIES
Substantially all of the telephone calls made by the Company's customers to
date have been connected through transmission lines of facilities-based long
distance carriers which provide the Company transmission capacity through a
variety of lease and resale arrangements. The Company's ability to maintain and
expand its business is dependent, in part, upon whether the Company continues to
maintain satisfactory relationships with these carriers, many of which are, or
may in the future become, competitors of the Company. The Company's lease
arrangements generally do not have long terms and its resale agreements
generally permit price adjustments on short notice, which makes the Company
vulnerable to adverse price and service changes or termination. Although the
Company believes that its relationships with these carriers generally are
satisfactory, the failure to continue to maintain satisfactory relationships
with one or more of the carriers could have a material adverse effect upon the
Company's cost structure, service quality, network diversity, results of
operations and financial condition. During the fiscal year ended December 31,
1996, the Company's five largest carriers supplied the Company with
approximately 67% (on a cost of services basis) of its transmission capacity,
with one of the carriers accounting for approximately 25% of supplied
transmission capacity during 1996. During the three- month period ending March
31, 1997, the Company's five largest carriers supplied the Company with
approximately 53% (on a cost of services basis) of its transmission capacity,
with one of the carriers accounting for approximately 14% of supplied
transmission. See "Business -- The STARTEC Network."
The future profitability of the Company will depend in part on its ability
to obtain transmission facilities on a cost effective basis. Presently, the
terms of the Company's agreements for transmission lines subject the Company to
the possibility of unanticipated price increases and service cancellations.
Although the rates the Company is charged generally are less than the rates the
Company charges its customers for connecting calls through these lines, to the
extent these costs increase, the Company may experience reduced or, in certain
circumstances, negative margins for some services. As its traffic volume
increases in particular international markets, the Company may reduce its use of
variable usage arrangements and enter into fixed leasing arrangements on a
longer-term basis and/or construct or acquire additional transmission facilities
of its own. To the extent the Company enters into such fixed arrangements and/or
increases its owned transmission facilities and incorrectly projects traffic
volume in particular markets, it would experience higher fixed costs without any
concomitant increase in revenue.
Acquisition of ownership positions in, and other access rights to, digital
undersea fiber optic cable transmission lines is a key element of the Company's
business strategy. Because digital undersea fiber optic lines typically take
several years to plan and construct, international long distance service
providers generally make investments based on anticipated traffic. The Company
does not control the planning or construction of digital undersea fiber optic
cable transmission lines, and must seek access to such facilities through
partial ownership positions or through lease arrangements and other access
arrangements on negotiated terms that may vary with industry and market
conditions. There can be no assurance that digital undersea fiber optic cable
transmission lines will be available to the Company to meet its current and/or
projected international traffic volume, or that such lines will be available on
satisfactory terms or at all. See "Business -- The STARTEC Network."
DEPENDENCE ON FOREIGN CALL TERMINATION ARRANGEMENTS
The Company currently offers U.S.-originated international long distance
service globally through a network of operating agreements, resale arrangements,
transit and refile agreements, and various other foreign termination
arrangements. The Company's ability to terminate traffic in its targeted foreign
markets is an essential component of its service, and, therefore, the Company is
dependent upon its operating agreements and other termination arrangements. The
Company has been successful in nego-
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tiating and maintaining operating agreements and termination arrangements, and
no material agreements or arrangements through which the Company's traffic is
terminated have been cancelled or suspended to date. However, there can be no
assurance that the Company will be able to negotiate additional operating
agreements or termination arrangements or maintain agreements or arrangements
with its current foreign partners in the future. Cancellation of certain
operating agreements or other termination arrangements could have a material
adverse effect on the Company's business. Moreover, the failure to enter into
additional operating agreements and termination arrangements could limit the
Company's ability to increase its services to its current target markets, gain
entry into new markets, or otherwise increase its revenues.
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS
In the normal course of its business, the Company must record and process
significant amounts of data quickly and accurately in order to bill for the
services it has provided to customers and to ensure that it is properly charged
by vendors for services it has used. While the Company believes that its current
management information systems are sufficient to meet its current demands, these
systems have not grown at the same rate as the Company's business and it is
anticipated that additional investment will be needed. The successful
implementation and integration of any additional or new management information
systems resources is important to the Company's ability to monitor costs, bill
customers, achieve operating efficiencies and otherwise support its growth.
There can be no assurance, however, that the Company will not encounter
difficulties in the acquisition, implementation, integration and ongoing use of
any additional or new management information systems resources, including
possible delays, cost-overruns, or incompatibility with the Company's current
management information systems resources or its business needs. See "Business --
Management Information and Billing Systems."
CUSTOMER CONCENTRATION
During the fiscal year ended December 31, 1996, the Company's five largest
carrier customers, including one related party, accounted for approximately 40%
of the Company's net revenues, with one of the carrier customers accounting for
approximately 23% of net revenues during that year. In addition, during the
three month period ending March 31, 1997, the Company's five largest carrier
customers, including one related party, accounted for approximately 49% of the
Company's net revenues, with one of the carrier customers accounting for
approximately 34% of net revenues during that period. The Company's agreements
and arrangements with its carrier customers generally may be terminated on short
notice without penalty, and do not require the carriers to maintain their
current levels of use of the Company's services. Carriers may terminate their
relationship with the Company or substantially reduce their use of the Company's
services for a variety of reasons, including the entry of significant new
competitors offering lower rates than the Company, problems with transmission
quality and customer service, changes in the regulatory environment, increased
use of the carriers' own transmission facilities, and other factors. A loss of a
significant amount of carrier business could have a material adverse effect on
the Company's business, results of operations and financial condition.
In addition, this concentration of carrier customers increases the risk of
non-payment or difficulties in collecting the full amounts due from customers.
The Company's four largest carrier customers represented 35% and 44% of gross
accounts receivable as of December 31, 1996 and March 31, 1997, respectively.
The Company performs initial and ongoing credit evaluations of its carrier
customers in an effort to reduce the risk of non-payment. Although the Company
believes that its allowance for doubtful accounts is sufficient, there can be no
assurance that the Company will not experience collection difficulties and that
its allowances will be adequate in the future. If the Company experiences
difficulties in collecting accounts receivable from its significant carrier
customers, its business, results of operations and financial condition could be
materially adversely affected. See "Business -- Customers."
RESPONSE RATES; RESIDENTIAL CUSTOMER ATTRITION
The Company is significantly affected by the residential customer response
rates to its marketing campaigns and residential customer attrition rates. While
the Company believes that its response rates and customer attrition rates are
better than industry averages, there can be no assurance that this will
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continue to be the case. Decreases in the residential customer response rate or
an increase in the Company's residential customer attrition rate, could have a
material adverse impact on the Company's business, results of operations and
financial condition.
RISKS OF INTERNATIONAL TELECOMMUNICATIONS BUSINESS
The Company has to date generated substantially all of its revenues by
providing international long distance telecommunications services and expects
that this will continue in the future. There are certain risks inherent in doing
business on an international level, such as unexpected changes in regulatory
requirements, tariffs, customs, duties and other trade barriers, political
risks, and other factors which could materially adversely impact the Company's
current and planned operations. The international telecommunications industry is
changing rapidly due to deregulation, privatization of Post Telephone and
Telegraphs (the "PTTs"), technological improvements, expansion of
telecommunications infrastructure and the globalization of the world's
economies. There can be no assurance that one or more of these factors will not
vary in a manner that could have a material adverse effect on the Company.
A key component of the Company's business strategy is its planned expansion
into additional international markets. The Company intends to pursue
arrangements with foreign correspondents to gain access to and terminate its
traffic in those markets. In many of these markets, the government may control
access to the local networks and otherwise exert substantial influence over the
telecommunications market, either directly or through ownership or control of
the PTT. In addition, incumbent U.S. carriers serving international markets may
have better brand recognition and customer loyalty, and significant operational
advantages over the Company. Further, the existing carrier may take many months
to allow competitors such as the Company to interconnect to its switches within
the market. The Company has limited recourse if its foreign partners fail to
perform under their arrangements with the Company, or if foreign governments,
PTTs or other carriers take actions that affect the Company's ability to gain
entry into those markets.
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 maintaining business. While
Company policy prohibits such actions, 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.
GOVERNMENT REGULATION
The Company's business is subject to varying degrees of federal and state
regulation. Federal laws and the regulations of the Federal Communications
Commission (the "FCC") apply to the Company's international and interstate
facilities-based and resale telecommunications services, while applicable state
regulatory authorities ("PSCs") have jurisdiction over telecommunications
services originating and terminating within the same state. At the federal level
the Company is subject to common carriage requirements under the Communications
Act of 1934, as amended (the "Communications Act"). Comprehensive amendments to
the Communications Act were made by the Telecommunications Act, which was signed
into law on February 8, 1996. In addition, although the laws of other countries
only directly apply to carriers doing business in those countries, the Company
may be affected indirectly by such laws insofar as they affect foreign carriers
with which the Company does business.
International telecommunications carriers are required to obtain authority
from the FCC under Section 214 of the Communications Act in order to provide
international service that originates or terminates in the United States. U.S.
international common carriers also are required to file and maintain tariffs
with the FCC specifying the rates, terms, and conditions of their services. In
1996, the FCC established new rules that streamlined its Section 214
authorization and tariff regulation processes to provide for shorter notice and
review periods for certain U.S. international carriers including the Company.
The Company has applied for global facilities-based Section 214 authority under
the FCC's new streamlined processing rules. A facilities-based global Section
214 authorization enables carriers to provide international basic switched,
private line, data, television and business services using previously
U.S.-authorized facilities to virtually all countries in the world. The Company
expects to receive global
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Section 214 authority from the FCC by August 27, 1997 if no opposition to its
application for such authority is received prior to August 13, 1997. Opposition
or rejection of the Company's application for global Section 214 authority would
delay the Company's plans to acquire international submarine cable facilities
for the expansion of its international facilities-based services. However,
rejection of the Company's application for global Section 214 authority would
not alter its existing FCC authority to provide facilities-based and resold
international services via satellite or from applying to the FCC for expanded
global authority to resell submarine cable facilities.
The FCC's streamlined rules also provide for global Section 214 authority
to resell switched and private line services of other carriers by non-dominant
international carriers. However, the FCC decides on a case-by-case basis whether
to grant Section 214 authority to U.S. carriers to resell the switched private
lines of affiliated foreign carriers to countries where a foreign carrier is
dominant based on a showing that there are equivalent resale opportunities for
U.S. carriers in the foreign carrier's market. To date, the FCC has found that
Canada, the U.K., Sweden and New Zealand do provide equivalent resale
opportunities. The FCC has found that equivalent resale opportunities do not
exist in Germany, Hong Kong and France. The FCC also is considering applications
for equivalency determinations with respect to Australia, Chile, Denmark,
Finland and Mexico. It is possible that interconnected private line resale to
additional countries may be allowed in the future. Pursuant to FCC rules and
policies, the Company's authorization to provide service via the resale of
interconnected international private lines will be expanded to include countries
subsequently determined by the FCC to afford equivalent resale opportunities to
those available under United States law, if any. As a result of the recent
signing of the WTO Agreement, the FCC has proposed to replace the equivalency
test with a rebuttable presumption in favor of resale of interconnected private
lines to WTO member countries. See "Business -- Government Regulation."
The FCC is currently considering whether to limit or prohibit the practice
whereby a carrier routes, through its facilities in a third country, traffic
originating from one country and destined for another country. The FCC has
permitted third country calling where all countries involved consent to this
type of routing arrangements, referred to as "transiting." Under certain
arrangements referred to as "refiling," the carrier in the destination country
does not consent to receiving traffic from the originating country and does not
realize the traffic it receives from the third country is actually originating
from a different country. The FCC to date has made no pronouncement as to
whether refile arrangements comport either with U.S. or ITU regulations. It is
possible that the FCC may determine that refiling, as defined, violates U.S.
and/or international law. To the extent that the Company's traffic is routed
through a third country to reach a destination country, such an FCC
determination with respect to transiting and refiling could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company must also conduct its international business in compliance with
the FCC's international settlements policy ("ISP"). The ISP establishes the
parameters by which U.S.-based carriers and their foreign correspondents settle
the cost of terminating each other's traffic over their respective networks. The
precise terms of settlement are established in a correspondent agreement (also
referred to as an "operating agreement"), which also sets forth the term of the
agreement, the types of service covered by the agreement, the division of
revenues between the carrier that bills for the call and the carrier that
terminates the call at the other end, the frequency of settlements, the currency
in which payments will be made, the formula for calculating traffic flows
between countries, technical standards, and procedures for the settlement of
disputes.
The Company's provision of domestic long distance service in the United
States is subject to regulation by the FCC and certain state PSCs, who regulate
to varying degrees interstate and intrastate rates, respectively, ownership of
transmission facilities, and the terms and conditions under which the Company's
domestic services are provided. In general, neither the FCC nor the PSCs
exercise direct oversight over cost justification for domestic carriers' rates,
services or profit levels, but either or both may do so in the future. Domestic
carriers such as the Company, however, are required by federal law and
regulations to file tariffs listing the rates, terms and conditions applicable
to their interstate services.
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The FCC adopted an order on October 29, 1996, eliminating the requirement
that non-dominant interstate carriers, such as the Company, maintain FCC tariffs
for domestic interstate long distance service. This order was to take effect as
of December 1997. However, on February 13, 1997, the U.S. Court of Appeals for
the DC Circuit ruled that the FCC's order be stayed pending judicial review of
appeals challenging the order. Should the appeals fail and the FCC's order
become effective, the Company may benefit from the elimination of FCC tariffs by
gaining more flexibility and speed in dealing with marketplace changes. The
absence of tariffs, however, will also require that the Company secure
contractual agreements with its customers regarding many of the terms of its
existing tariffs or face possible claims arising because the rights of the
parties are no longer clearly defined. To the extent that the Company's customer
base involves "casual calling" customers, the potential absence of tariffs would
require the Company to establish contractual methods to limit potential
liability to such customers.
In addition, the Company generally is also required to obtain certification
from the relevant state PSC prior to the initiation of intrastate service and to
file tariffs with such states. The Company currently has the certifications
required to provide service in 21 states, and has filed or is in the process of
filing requests for certification in 13 additional states. Although the Company
intends and expects to obtain operating authority in each jurisdiction in which
operating authority is required, there can be no assurance that one or more of
these jurisdictions will not deny the Company's request for operating authority.
Any failure to maintain proper federal and state certification or tariffs, or
any difficulties or delays in obtaining required certifications could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The FCC and certain PSCs also impose prior approval requirements on
transfers or changes of control, including pro forma transfers of control and
corporate reorganizations, and assignments of regulatory authorizations. Such
requirements may have the effect of delaying, deterring or preventing a change
in control of the Company. The Company also is required to obtain state approval
for the issuance of securities. Six of the states in which the Company is
certificated provide for prior approval or notification of the issuance of
securities by the Company. Although the necessary approvals are being sought
prior to the Offering, because of time constraints, the Company may not have
obtained such approval from the six states prior to consummation of the
Offering. Although these state filing requirements may have been preempted by
the National Securities Market Improvement Act of 1996, there is no case law on
this point. The Company believes the remaining approvals will be granted and
that obtaining such approvals subsequent to the Offering should not result in
any material adverse consequences to the Company, although there can be no
assurance that such consequence will not result.
The 1996 Act is designed to promote local telephone competition through
federal and state deregulation. As part of its pro-competitive policies, the
1996 Act frees the RBOCs from the judicial orders that prohibited their
provision of long distance services outside of their operating territories
(which are called, Local Access and Transport Areas ("LATAs"). The 1996 Act
provides specific guidelines that allow the RBOCs to provide long distance
interLATA service to customers inside the RBOC's region but not before the RBOC
has demonstrated to the FCC and state regulators that it has opened up its local
network to competition and met a "competitive checklist" of requirements
designed to provide competing network providers with nondiscriminatory access to
the RBOC's local network. To date, RBOCs in two states have filed applications
for in-region long distance authority with the FCC -- Ameritech Corporation in
Michigan and Southwestern Bell Corporation ("SBC") in Oklahoma. These
developments could permit RBOCs to compete with the Company in the provision of
domestic and international long distance services.
To originate and terminate calls in connection with providing their
services, long distance carriers such as the Company must purchase "access
services" from LECs or CLECs. Access charges represent a significant portion of
the Company's cost of U.S. domestic long distance services and, generally, such
access charges are regulated by the FCC for interstate services and by PSCs for
intrastate services. The FCC has undertaken a comprehensive review of its
regulation of LEC access charges to better account for increasing levels of
local competition. Under alternative access charge rate structures being
considered by the FCC, LECs would be permitted to allow volume discounts in the
pricing of access charges.
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While the outcome of these proceedings is uncertain, if these rate structures
are adopted, many long distance carriers, including the Company, could be placed
at a significant cost disadvantage to larger competitors.
In February 1997, the World Trade Organization ("WTO") announced that 69
countries, including the United States, Japan, and all of the member states of
the European Union ("EU"), reached an agreement within the framework of the
General Agreement of Trade Services ("GATS") to facilitate trade in basic
telecommunication services. The WTO Agreement becomes effective January 1, 1998.
Pursuant to the terms of the WTO Agreement, signatories to the WTO Agreement
have committed to varying degrees to allow access to their domestic and
international markets to competing telecommunications providers, allow foreign
ownership interests in domestic telecommunications providers and establish
regulatory schemes to develop and implement policies to accommodate
telecommunications competition. At this time, the Company is unable to predict
the effect the WTO Agreement and related developments might have on its
business, financial condition and results of operations.
There can be no assurance that future regulatory, judicial and legislative
changes will not have a material adverse effect on the Company, that U.S. or
foreign regulators or third parties will not raise material issues with regard
to the Company's compliance or noncompliance with applicable laws and
regulations, or that regulatory activities will not have a material adverse
effect on the Company's business, financial condition and results of operations.
Moreover, the FCC and the PSCs generally have the authority to condition,
modify, cancel, terminate or revoke the Company's operating authority for
failure to comply with federal and state laws and applicable rules, regulations
and policies. Fines or other penalties also may be imposed for such violations.
Any such action by the FCC and/or the PSCs could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Government Regulation."
EFFECT OF RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is characterized by rapid and significant
technological advancements and introductions of new products and services
employing new technologies. Improvements in transmission equipment, the
development of switching technology allowing the simultaneous transmission of
voice, data and video, and the commercial availability of Internet-based
domestic and international switched voice, data and video services at prices
lower than comparable services offered by the Company are all possible
developments that could adversely affect the Company. The Company's
profitability will depend on its ability to anticipate and adapt to rapid
technological changes, acquire or otherwise access new technology, and offer, on
a timely and cost-effective basis, services that meet evolving industry
standards. There can be no assurance that the Company will be able to adapt to
such technological changes, maintain competitive services and prices or obtain
new technologies on a timely basis or on satisfactory terms.
RISK OF NETWORK FAILURE
The success of the Company is largely dependent upon its ability to deliver
high quality, uninterrupted telecommunications services. Any failure of the
Company's network or other systems or hardware that causes interruptions in the
Company's operations could have a material adverse effect on the Company.
Increases in the Company's traffic and the build-out of its network will place
additional strains on its systems, and there can be no assurance that the
Company will not experience system failures. Frequent, significant or prolonged
system failures, or difficulties experienced by customers in accessing or
maintaining connection with the Company's network could substantially damage the
Company's reputation and result in lost goodwill, customer attrition, and
adverse financial consequences.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its management team and technical, marketing and customer
service personnel. The Company's success also will depend on its ability to
attract and retain additional qualified management, technical, marketing
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and customer service personnel. Competition for qualified employees in the
telecommunications industry is intense and, from time to time, there are a
limited number of persons with knowledge of and experience in particular sectors
of the telecommunications industry. The process of locating personnel with the
combination of skills and attributes required to implement the Company's
strategies is often lengthy, and there can be no assurance that the Company will
be successful in attracting and retaining such personnel. The loss of the
services of key personnel, or the inability to attract additional qualified
personnel, could have a material adverse effect on the Company's operations, its
ability to implement its business strategies, and its efforts to expand. Any
such event could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management."
RISKS RELATED TO USE OF STARTEC NAME
Certain other telecommunications companies and related businesses use names
or hold registered trademarks that include the word "star." In addition, several
other companies in businesses that the Company believes are not
telecommunications-related use variations of the "star-technology" word
combination (e.g., Startek and Startech). Although the Company holds a
registered trademark for "STARTEC," there can be no assurance that its continued
use of the STARTEC name will not result in litigation brought by companies using
similar names or, in the event the Company should change its name, that it would
not suffer a loss of goodwill.
RISKS ASSOCIATED WITH STRATEGIC ALLIANCES, ACQUISITIONS AND INVESTMENTS
The Company intends to pursue strategic alliances and to acquire assets and
businesses or make strategic investments in businesses that it believes are
complementary to the Company's current and planned operations. The Company,
however, has no present commitments, agreements or understandings with respect
to any strategic alliance, acquisition or investment. Any future strategic
alliances, acquisitions or investments would be accompanied by the risks
commonly encountered in strategic alliances with, or acquisitions of, or
investments in, other companies. Such risks include difficulty of assimilating
the operations and personnel of the companies, potential disruption of the
Company's ongoing business, inability of management to maximize the financial
and strategic position of the Company by the successful incorporation of the
acquired technology, know-how, and rights into the Company's business,
maintenance of uniform standards, controls, procedures and policies, and
impairment of relationships with employees and customers as a result of changes
in management. There can be no assurance that the Company would be successful in
overcoming these risks or any other problems encountered with such strategic
alliances, investments or acquisitions.
Further, if the Company were to proceed with one or more significant
strategic alliances, acquisitions or investments in which the consideration
given by the Company consists of cash, a substantial portion of the Company's
available cash could be used to consummate the strategic alliances, acquisitions
or investments. If the Company were to consummate one or more significant
strategic alliances, acquisitions or investments in which the consideration
given by the Company consists of stock, stockholders of the Company could suffer
a significant dilution of their interests in the Company. Many of the businesses
that might become attractive acquisition candidates for the Company may have
significant goodwill and intangible assets, and acquisitions of these
businesses, if accounted for as a purchase, would typically result in
substantial amortization charges to the Company. The financial impact of
acquisitions, investments and strategic alliances could have a material adverse
effect on the Company's business, financial condition and results of operations
and could cause substantial fluctuations in the Company's future quarterly and
yearly operating results.
CONTROL OF COMPANY BY CURRENT STOCKHOLDERS
After completion of this Offering, the executive officers and directors of
the Company will continue to beneficially own 4,015,991 shares of Common Stock,
representing 51.1% of the Common Stock, including options to purchase 125,116
shares of Common Stock exercisable over time following the completion of this
Offering. Of these amounts, Ram Mukunda, President of the Company will
beneficially own 3,579,675 shares of Common Stock. Mr. Mukunda, Vijay Srinivas
and Usha Srinivas have
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entered into a voting agreement dated as of July 31, 1997 (the "Voting
Agreement"), pursuant to which Mr. Mukunda has the power to vote all of the
shares held by Mr. and Mrs. Srinivas. The Voting Agreement will terminate
December 31, 1997, or at such other time as the parties may otherwise agree.
The Company's executive officers and directors as a group, or Mr. Mukunda,
acting individually, will exercise significant influence over such matters as
the election of the directors of the Company, amendments to the Company's
charter, and other fundamental corporate transactions such as mergers, asset
sales, and the sale of the Company. See "Principal Stockholders" and
"Description of Capital Stock."
RESTRICTIONS IMPOSED BY SIGNET AGREEMENT
The Signet Agreement contains a number of affirmative and negative
covenants, including covenants restricting the Company and its subsidiaries with
respect to the conduct of business and maintenance of corporate existence, the
incurrence of additional indebtedness, the creation of liens, transactions with
Company affiliates, the consummation of certain merger or consolidating
transactions or the sale of substantial amounts of the Company's assets, the
sale of capital stock of any subsidiary, the making of investments or
acquisition of assets, and the making of dividend and similar payments or
distributions. In addition, the Signet Agreement includes a number of financial
covenants, including covenants requiring the Company to maintain certain
financial ratios and thresholds. A breach of any of these obligations or
covenants could result in an event of default pursuant to which Signet Bank
could declare all amounts outstanding due and payable immediately. There can be
no assurance that the assets or cash flows of the Company, or other sources of
financing, would be sufficient to repay in full all borrowings outstanding under
the Signet Agreement. Beginning on January 1, 1998 (and extending to July 1,
1998 upon the occurrence of defined events), should Signet Bank determine and
assert based on its reasonable assessment that a material adverse change has
occurred, all amounts outstanding would be due and payable. The warrants issued
to Signet Bank in connection with the Signet Agreement also contain provisions
which may affect the Company's ability to raise additional capital through the
sale or issuance of its Common Stock, options, warrants or other rights to
purchase Common Stock, or securities convertible into Common Stock without
providing Signet Bank with the right to maintain its percentage ownership in the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
In addition, the Company's repayment and other obligations under the Signet
Agreement are secured by (i) a first priority security interest in all of the
Company's tangible and intangible assets, including all customer lists and other
intellectual property of all direct and indirect subsidiaries, (ii) a pledge of
all of the capital stock of the Company owned by Ram Mukunda, the Company's
President, Director and Principal Shareholder, and Vijay Srinivas, a Company
Director and his wife, Usha Srinivas, and (iii) all leased or owned real estate
and all fixtures and equipment. A breach of any of the Company's obligations or
covenants under the Signet Agreement could result in an event of default
pursuant to which Signet Bank could also seek to foreclose on the security
provided by the Company, Mr. Mukunda and Mr. and Mrs. Srinivas. If Signet Bank
were to take possession of and control over the shares subject to the pledge, it
would acquire voting control of more than 50% of the Company's issued and
outstanding shares of Common Stock. See "Description of Capital Stock -- Signet
Agreement."
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION, BYLAWS AND
MARYLAND LAW
The Company's Amended and Restated Articles of Incorporation (the
"Charter") and Bylaws (the "Bylaws") include certain provisions which may have
the effect of delaying, deterring or preventing a future takeover or change in
control of the Company unless such takeover or change in control is approved by
the Company's Board of Directors. Such provisions may also render the removal of
directors and management more difficult. In addition, the Company's Board of
Directors has the authority to issue up to 100,000 shares of preferred stock
(the "Preferred Stock") and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
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
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voting stock of the Company. The Company has no present plan to issue any shares
of Preferred Stock. The Company's Charter and Bylaws contain other provisions,
such as notice requirements for stockholders, staggered terms for its Board of
Directors, and limitations on the stockholders' ability to remove directors or
to present proposals to the stockholders for a vote, all of which may have the
further effect of making it more difficult for a third party to gain control or
to acquire the Company.
The Company is also subject to the anti-takeover provisions of the Maryland
General Corporation Law which prohibit the Company from engaging in a "business
combination" with an Interested Stockholder (as defined) for a period of five
years after the date of the transaction in which the person first becomes an
Interested Stockholder, unless the business combination is approved in a
prescribed manner. The Company is also subject to the control share acquisition
provisions of the Maryland General Corporation Law, which provide that shares
acquired by a person with certain levels of voting power have no voting rights
unless approved by a stockholder vote of two-thirds of the votes entitled to be
cast, excluding shares owned by the acquiror and by the Company's officers and
employee-directors, and in certain circumstances, such shares may be redeemed by
the Company. The application of these statutes and certain other provisions of
the Company's Charter could have the effect of discouraging, delaying or
preventing a change of control of the Company not approved by the Board of
Directors, which could adversely affect the market price of the Company's Common
Stock. Additionally, certain Federal regulations require prior approval of
certain transfers of control which could also have the effect of delaying,
deferring or preventing a change of control. See "Business -- Government
Regulation" and "Description of Capital Stock -- Certain Provisions of the
Company's Articles of Incorporation, Bylaws and Maryland Law."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop after the Offering, or that, if a public market develops, the
market price for the Common Stock will equal or exceed the initial public
offering price set forth on the cover page of this Prospectus. The initial
public offering price of the Common Stock offered hereby was determined by
negotiations between the Company and the Representatives of the Underwriters and
may bear no relationship to the price at which the Common Stock will trade after
completion of this Offering. The initial public offering price of the Common
Stock offered hereby does not necessarily bear any relationship to the Company's
earnings, assets, book value, or any other recognized measure of value. For
factors considered in determining the initial public offering price, see
"Underwriting."
Historically, the market prices for securities of emerging companies in the
telecommunications industry have been highly volatile. Future announcements
concerning the Company or its competitors, including results of operations,
technological innovations, government regulations, proprietary rights or
significant litigation, may have a significant impact on the market price of the
Common Stock. In addition, the stock markets recently have experienced
significant price and volume fluctuations that particularly have affected
telecommunications companies and resulted in changes in the market prices of the
stocks of many companies which have not been directly related to the operating
performance of those companies. Such market fluctuations may materially
adversely affect the market price of the Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and has no
plans to do so in the foreseeable future. The declaration and payment of any
dividends in the future will be determined by the Board of Directors, in its
discretion, and will depend on a number of factors, including the Company's
earnings, capital requirements, and overall financial condition. In addition,
the Company's ability to declare and pay dividends is substantially restricted
under the terms of the Signet Agreement. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," "Dividend Policy and "-- Restrictions Imposed by Signet
Agreement."
16
<PAGE>
DILUTION TO PURCHASERS OF COMMON STOCK
Purchasers of Common Stock in this Offering will experience immediate and
substantial dilution. To the extent outstanding options and warrants to
purchase shares of the Company's Common Stock are exercised in the future,
there will be further dilution. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock in the public market following this Offering
by the current stockholders of the Company, or the perception that such sales
could occur, could adversely affect the market price for the Common Stock. The
Company's principal stockholders hold a significant portion of the Company's
outstanding Common Stock and a decision by one or more of these stockholders to
sell shares pursuant to Rule 144 under the Securities Act or otherwise could
materially adversely affect the market price of the Common Stock.
On the date of this Prospectus, the 1,900,000 shares of Common Stock to be
sold in this Offering (together with shares sold upon exercise of the
Underwriters' over allotment option, if any) will be eligible immediately for
sale in the public market. An additional 2,070,790 shares will become eligible
for public sale beginning 180 days after the effective date of the Registration
Statement of which this Prospectus forms a part, subject to the provisions of
Rule 144 under the Securities Act. Certain of the Company's stockholders, and
certain holders of warrants to purchase shares of Common Stock, also have the
right to request the Company to register their shares for public sale. If a
large number of shares are registered and sold in the public market pursuant to
the exercise of such registration rights, such sales could have an adverse
effect on the market price of the Common Stock. See "Shares Eligible For Future
Sale" and "Description of Capital Stock -- Signet Agreement."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
in this Offering are estimated to be $16.7 million ($19.3 million 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 intends to use the net proceeds of the Offering as follows:
approximately $8.3 million to acquire cable facilities, switching, compression
and other related telecommunications equipment; approximately $4.2 million for
marketing; approximately $2.5 million to pay down amounts due under the Signet
Agreement, which matures on December 31, 1999 and bears interest, as of July 31,
1997, at a rate of 9.8%; and the balance for working capital and other general
corporate purposes, including possible future acquisitions and strategic
alliances. While the Company continually reviews possible acquisitions and
strategic alliances, it has not entered into any understanding or agreement with
respect to any future acquisition or strategic alliance. Pending application of
the net proceeds, the Company may invest such net proceeds in short-term,
interest-bearing investment grade securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
17
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock, nor does it expect to do so in the foreseeable future. It is anticipated
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 terms of the Signet
Agreement prohibit the payment of cash dividends without the lender's consent.
See "Risk Factors -- Dividend Policy" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
DILUTION
The deficit in net tangible book value of the Company as of March 31, 1997
was $5.9 million or $1.10 per share of Common Stock. The deficit in net tangible
book value per share represents the amount of total tangible assets of the
Company less the amount of its total liabilities and divided by the total number
of shares of Common Stock outstanding. After giving effect to the sale by the
Company of the 1,900,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $10.00 per share, net of underwriting discounts
and commissions, and receipt of the net proceeds therefrom, the pro forma net
tangible book value of the Company as of March 31, 1997 would have been $10.7
million, or $1.47 per share. This represents an immediate increase in net
tangible book value of $2.57 per share to existing stockholders and an immediate
dilution of $8.53 per share to investors purchasing shares of Common Stock in
the Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share .................................... $10.00
Net tangible book deficit per share as of March 31, 1997 before
Offering ......................................................... $(1.10)
Increase in net tangible book value per share attributable to
this Offering ...................................................... 2.57
--------
Pro forma net tangible book value per share as adjusted for this
Offering ............................................................ 1.47
-------
Dilution in net tangible book value per share to new investors ...... $8.53
=======
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 1997,
the differences between the existing stockholders and the new investors
purchasing Common Stock in the Offering with respect to the number of shares of
Common Stock purchased from the Company, the total consideration paid to the
Company and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders ...... 5,397,999 74.0% $ 1,003,259 5.0% $0.19
New investors ............... 1,900,000 26.0 19,000,000 95.0 10.00
---------- ------- ------------ ------- ------
Total ..................... 7,297,999 100.0% $20,003,259 100.0% $2.74
========== ======= ============ ======= ======
</TABLE>
The foregoing table assumes no exercise of the Underwriters' over allotment
option or the effect of convertible securities, options or warrants to purchase
additional shares of Common Stock. As of the date of this Prospectus, there were
options outstanding to purchase a total of 269,766 shares of Common Stock at a
weighted average exercise price of $1.44 per share, and warrants and other
rights outstanding to purchase a total of 713,800 shares. To the extent
outstanding options and warrants are exercised, there will be further dilution
to new investors. See "Management -- Stock Option Plans," "Principal
Stockholders," "Description of Capital Stock -- Warrants and Registration
Rights," and "Underwriting."
18
<PAGE>
CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table sets forth the capitalization of the Company (i) as of
March 31, 1997, (ii) pro forma to reflect the repayment of debt with proceeds
from the Signet Agreement and the conversion and retirement of non-voting common
stock as if such events had occurred as of March 31, 1997; and (iii) as adjusted
to reflect the sale and issuance of 1,900,000 shares of Common Stock by the
Company in the Offering (at an assumed initial public offering price of $10.00
per share, and assuming no exercise of the Underwriters' over-allotment option),
and the application of the estimated net proceeds therefrom as described under
"Use of Proceeds." This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and related notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
--------------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED
---------- -------------- ------------
<S> <C> <C> <C>
Cash and cash equivalents ................................................ $ 239 $ 239 $ 14,419
======= ======== =======
Current maturities of long-term obligations:
Receivables based credit facility .......................................... $ 1,846 $ -- $ --
Notes payable to related parties .......................................... 103 -- --
Notes payable to individuals and other .................................... 650 -- --
Capital lease obligations ................................................ 241 241 241
------- -------- -------
2,840 241 241
Long-term obligations, net of current portion:
Signet credit facility ................................................... -- 2,585 85
Redeemable Signet warrants(2) ............................................. -- 65 --
Capital lease obligations ................................................ 523 523 523
Notes payable to related parties .......................................... 50 -- --
------- -------- -------
573 3,173 608
------- -------- -------
Total long-term obligations ............................................. 3,413 3,414 849
------- -------- -------
Stockholders' (deficit) equity
Common Stock; $0.01 par value; 10,000,000 shares authorized on an actual and
pro forma basis, 20,000,000 shares authorized as adjusted; 5,380,824 shares
issued and outstanding, 5,397,999 pro forma and 7,297,999 as ad-
justed(3) ................................................................. 54 54 73
Non voting common stock; $1.00 par value; 25,000 shares authorized; 22,526
shares issued and outstanding, no shares outstanding pro forma and as
adjusted .................................................................. 23 -- --
Preferred stock, $1.00 par value; no shares authorized on an actual and pro
forma basis, 100,000 shares authorized as adjusted; no shares issued and
outstanding ............................................................... -- -- --
Additional paid-in capital ................................................ 1,063 1,041 17,042
Unearned compensation(2) ................................................ (120) (120) --
Warrants(2) ............................................................... -- -- 724
Accumulated deficit(2) ................................................... (6,961) (6,961) (7,080)
------- -------- --------
Total Stockholders' (deficit) equity .................................... (5,941) (5,986) 10,759
------- -------- --------
Total capitalization ................................................... (2,528) (2,572) 11,608
======= ======== ========
</TABLE>
- ----------
(1) Gives pro forma effect for (i) proceeds from the Signet Agreement used to
retire the receivables based credit facility, notes payable to related
parties, and notes payable to individuals and other, (ii) the fair value of
269,900 warrants granted to Signet Bank, which contain a repurchase
feature, recorded as a discount to the Signet Agreement, (iii) the
conversion of 17,175 shares of non voting common stock for voting Common
Stock, and (iv) the purchase and retirement of 5,351 shares of non voting
common stock.
(2) Reflects (i) the fair value of 150,000 warrants issued to the underwriters
and the fair value of the Signet Warrants, which are not redeemable upon
completion of the Offering, and (ii) the acceleration of unearned
compensation expense related to stock options which vest upon the effective
date of the Offering.
(3) Excludes (i) 269,766 shares of Common Stock issuable upon the exercise of
options under the Amended and Restated Stock Option Plan; (ii) 750,000
shares of Common Stock reserved for issuance under the Company's 1997
Performance Incentive Plan; and (iii) 713,800 shares of Common Stock
issuable pursuant to the exercise of certain warrants and upon conversion
of a note. See "Management -- Stock Option Plans," "Description of Capital
Stock -- Warrants and Registration Rights," and "Underwriting."
19
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table presents summary financial data of the Company for the
years ended December 31, 1992, 1993, 1994, 1995, 1996 and the three months ended
March 31, 1996 and 1997. The historical financial data as of December 31, 1994,
1995, 1996 and for each of the three years in the period ended December 31, 1996
have been derived from the financial statements of the Company which have been
audited by Arthur Andersen LLP, independent public accountants, as set forth in
the financial statements and notes thereto presented elsewhere herein. The
financial data as of December 31, 1992 and 1993, and for the years then ended
and for the three months ended March 31, 1996 and 1997 have been derived from
the Company's unaudited financial statements in a manner consistent with the
audited financial statements. In the opinion of the Company's management, these
unaudited financial statements include all adjustments necessary for a fair
presentation of such information. Operating results for interim periods are not
necessarily indicative of the results that might be expected for the entire
fiscal years. The following information should be read in conjunction with the
Company's selected financial statements and notes thereto presented elsewhere
herein. See "Financial Statements" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ -------------------
1992 1993 1994 1995 1996 1996 1997
-------- ----------- --------- ------------ ---------- --------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues ........................... $2,394 $ 3,288 $ 5,108 $ 10,508 $ 32,215 $ 4,722 $12,372
Cost of services ........................ 1,585 3,090 4,701 9,129 29,881 4,467 10,765
------- -------- -------- --------- --------- -------- --------
Gross margin ........................... 809 198 407 1,379 2,334 255 1,607
General and administrative expenses ...... 464 1,491 1,159 2,170 3,996 595 1,151
Selling and marketing expenses ......... 30 232 91 184 514 52 104
Depreciation and amortization ............ 61 85 90 137 333 52 96
------- -------- -------- --------- --------- -------- --------
Income (loss) from operations ............ 254 (1,610) (933) (1,112) (2,509) (444) 256
Interest expense ........................ 47 71 70 116 337 58 117
Interest income ........................... 1 13 24 22 16 5 1
------- -------- -------- --------- --------- -------- --------
Income (loss) before income tax
provision .............................. 208 (1,668) (979) (1,206) (2,830) (497) 140
Income tax provision ..................... -- -- -- -- -- -- 3
------- -------- -------- --------- --------- -------- --------
Net income (loss) ........................ $ 208 $ (1,668) $ (979) $ (1,206) $ (2,830) $ (497) $ 137
======= ======== ======== ========= ========= ======== ========
PER SHARE DATA:
Net income (loss) per common and
equivalent share ..................... $ 0.04 $ (0.34) $ (0.20) $ (0.22) $ (0.50) $ (0.09) $ 0.02
======= ======== ======== ========= ========= ======== ========
Weighted average common and equiva-
lent shares outstanding ................. 4,868 4,888 4,888 5,609 5,695 5,695 5,695
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, MARCH 31,
--------------------------------------------------------- ------------
1992 1993 1994 1995 1996 1997
--------- ----------- ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ..................... $ 230 $ 194 $ 257 $ 528 $ 148 $ 239
Working capital deficit ..................... (364) (2,097) (3,295) (3,744) (7,000) (6,941)
Total assets ................................. 1,606 1,176 1,954 4,044 7,328 8,335
Long-term obligations, net of current portion 165 248 6 361 646 573
Stockholders' deficit ........................ $ (207) $ (1,824) $ (2,803) $ (3,259) $ (6,089) $ (5,941)
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations should be read in conjunction with the financial
statements, related notes, and other detailed information included elsewhere in
this Prospectus. This discussion, including the Company's plans and strategy for
its business, contains forward-looking statements that involve certain risks and
uncertainties. The Company's actual results could differ materially from those
anticipated by the forward-looking statements as a result of certain factors,
including, but not limited to those discussed under "Risk Factors" and elsewhere
in this Prospectus.
OVERVIEW
The Company is a rapidly growing, facilities-based international long
distance carrier that has implemented a marketing strategy to serve ethnic
residential markets in the U.S. and some of the leading international long
distance carriers. The Company's quarterly revenues have increased nearly
fifteen fold over the last three years from approximately $863,000 in the
quarter ended March 31, 1994 to approximately $12.4 million in the quarter ended
March 31, 1997. The Company's residential billing customers increased to over
33,700 for March 1997 compared to approximately 4,100 for March 1994, as
measured over a 30 day period. Since its inception in 1989, the Company has
focused its marketing efforts on the residential consumer marketplace in ethnic
communities in which management believes there is a high demand for
international long distance services. To achieve the economies of scale
necessary to maintain cost effective operations, the Company began reselling its
capacity to other leading carriers in late 1995. The Company currently offers
U.S.-originated long distance service worldwide through a flexible network of
owned and leased transmission facilities, resale arrangements, as well as a
variety of operating agreements and termination arrangements.
Until 1995, the Company's business base was concentrated in the New York to
Washington, D.C. corridor and focused on the delivery of dial-around access
calling services to India. At the end of 1995, the Company expanded its customer
base to include the West Coast, and began targeting other ethnic groups in the
U.S., such as the Middle Eastern and Russian communities. This expansion was
facilitated by utilizing a portion of the proceeds of the sale of stock to Blue
Carol Enterprises Ltd., an affiliate of Portugal Telecom International. The
Company supported this expansion by leasing network capacity from other domestic
telecommunications companies, thereby experiencing higher per-minute costs. In
late 1995, the Company began to market its international long distance services
to other telecommunications carriers. While providing greater utilization of its
own network facilities, the carrier group allowed the Company to build
relationships with other carriers, which in turn, led to additional termination
options for its residential traffic. See "Business -- Strategy."
The Company's strategy is to serve its customers by building its own global
network, which will allow the Company to originate, transmit, and terminate
calls utilizing network capacity the Company manages. The Company anticipates
that this network expansion will allow it to achieve a per-minute cost advantage
over current arrangements. As the Company transitions from leasing facilities to
owning or managing its facilities, the Company's management believes economies
on the per-minute cost of a call will be realized, while fixed costs will
increase. Presently, the facilities owned by the Company are domestically based
and provide a cost advantage only with respect to origination costs. The Company
realizes a per-minute cost savings when it is able to originate calls on network
facilities it owns and manages ("on net") versus calls which must be originated
through the utilization of facilities the Company does not own ("off net"). For
the three months ended March 31, 1997 and for the year ended December 31, 1996,
approximately 57.5% and 44.9% of the Company's residential revenues were
originated on the Company's facilities, resulting in gross margins of 3.8% and
2.4% as compared to gross margins of 1.5% and 1.5% on residential revenues
originated on other carrier facilities during the respective periods. As a
higher percentage of calls are originated, transmitted, and terminated on the
Company's own facilities, per-minute costs are expected to decline, predicated
on call traffic volumes.
Revenues for telecommunication services provided to customers are
recognized as services are rendered, net of an allowance for revenue that the
Company estimates will ultimately not be realized. Revenues for return traffic
received according to the terms of the Company's operating agreements with
foreign PTT's,
21
<PAGE>
as described below, are recognized as revenue as the return traffic is received
and processed. There can be no assurance that traffic will be delivered back to
the United States or what impact changes in future settlement rates, allocations
among carriers or levels of traffic will have on net payments made and revenues
received and recorded by the Company.
The Company's cost of services consists of origination, transmission and
termination expenses. Origination costs include the amounts paid to LECs and
other domestic telecommunication network providers in areas where the Company
does not have its own network facilities. Transmission expenses are fixed,
month-to-month payments associated with capacity on satellites, undersea
fiber-optic cables, and other domestic and international leased lines. Leasing
this capacity subjects the Company to price changes and transmission costs that
are higher than transmission costs on the Company's owned network. As the
Company builds its own transmission capacity, the risk associated with price
fluctuations and the relative costs of transmission are expected to decrease,
however, fixed costs will increase. See "Risk Factors -- Potential Fluctuations
in Quarterly Operating Results"
Among the Company's various foreign termination arrangements, the Company
has entered into operating agreements with a number of foreign PTTs, under which
international long distance traffic is both delivered and received. Under these
agreements, the foreign carriers are contractually obligated to adhere to the
policy of the FCC, whereby traffic from the foreign country is routed through
U.S. international carriers, such as the Company, in the same proportion as
traffic carried into the country ("return traffic"). Mutually- exchanged traffic
between the Company and foreign carriers is reconciled through a formal
settlement arrangement at agreed upon rates. The Company records the amount due
to the foreign PTT as an expense in the period the traffic is terminated. When
the return traffic is received in the future period, the Company generally
realizes a higher gross margin on the return traffic as compared to the lower
margin on the outbound traffic. Return traffic accounted for 4.1% and 3.5% of
revenues in the quarter ended March 31, 1997 and the year ended December 31,
1996, respectively.
In addition to the operating agreements, the Company utilizes alternative
termination arrangements offered by third party vendors. The Company seeks to
maintain strong vendor diversity for countries where traffic volume is high.
These vendor arrangements provide service on a variable cost basis subject to
volume. These prices are subject to changes, generally with a seven-day notice.
As the international telecommunications marketplace has been deregulated,
per-minute prices for services have fallen and, as a consequence, related
per-minute costs for these services have also fallen. As a result, the Company
has not been adversely affected by the price reductions, although there can be
no assurance that this will continue. Although the Company has generated
positive net income as of March 31, 1997, the Company expects selling, general
and administrative costs to increase as it develops its infrastructure to manage
higher business volume. Thus, continued profitability is dependent upon
management's ability to successfully manage growth and operations. See "Risk
Factors -- Management of Growth."
22
<PAGE>
Results of Operations
The following table sets forth for the periods indicated certain financial
data as a percentage of net revenues.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------ -----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- --------- -------
Net revenues ........................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services ..................... 92.0 86.9 92.8 94.6 87.0
--------- --------- --------- --------- -------
Gross margin ........................ 8.0 13.1 7.2 5.4 13.0
General and administrative expenses .. 22.7 20.7 12.4 12.6 9.3
Selling and marketing expenses ...... 1.8 1.8 1.6 1.1 0.8
Depreciation and amortization ...... 1.8 1.3 1.0 1.1 0.8
--------- --------- --------- --------- -------
Income (loss) from operations ...... (18.3) (10.7) (7.8) (9.4) 2.1
Interest expense ..................... (1.4) (1.1) (1.1) (1.2) (1.0)
Interest income ..................... 0.5 0.2 0.1 0.1 --
--------- --------- --------- --------- -------
Income (loss) before income tax
provision .......................... (19.2) (11.6) (8.8) (10.5) 1.1
Income tax provision ............... -- -- -- -- --
--------- --------- --------- --------- -------
Net income (loss) .................. (19.2)% (11.6)% (8.8)% (10.5)% 1.1%
========= ========= ========= ========= =======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Net Revenues. Net revenues increased approximately $7.7 million or 163.8%,
to $12.4 million in the three months ended March 31, 1997 from $4.7 million for
the three months ended March 31, 1996. Residential revenue increased in
comparative periods by approximately $2.5 million or 119.0%, to $4.6 million in
the first quarter 1997 from $2.1 million in the first quarter 1996. The increase
in residential revenue is due to an increase in residential billing customers to
over 33,700 for March 1997 from approximately 15,700 for March 1996. Carrier
revenue increased approximately $5.2 million or 200.0%, to $7.8 million in the
first quarter 1997 from $2.6 million in the first quarter 1996. The increase in
carrier revenue is due to the execution of the Company's strategy to optimize
its capacity on its facilities, which has resulted in sales to additional
customers and increased sales to existing clients. Carrier revenue also improved
due to an increase in return traffic to approximately $512,000 for the three
months ended March 31, 1997 from approximately $300,000 for the three months
ended March 31, 1996.
Gross Margin. Total gross margin increased approximately $1.3 million to
$1.6 million for the quarter ended March 31, 1997 from $256,000 for the quarter
ended March 31, 1996. Gross margin improved as a percentage of net revenue to
13.0% for the first quarter 1997 from 5.4% for the first quarter 1996. The gross
margin on residential revenue increased to 9.6% in the quarter ended March 31,
1997 from 4.0% for the quarter ended March 31, 1996, due to an increase in the
percentage of residential traffic originated on net and improved termination
costs. In the three months ended March 31, 1997, 57.5% of residential revenue
originated on net, as compared to 46.8% in the three months ended March 31,
1996. The gross margin on carrier revenue increased to 15.0% in the quarter
ended March 31, 1997 from 6.6% in the quarter ended March 31, 1996. Excluding
the impact of return traffic, which is included in carrier revenue, the gross
margin on carrier revenue would have been 9.0% in the quarter ended March 31,
1997, and negative 5.4% in the quarter ended March 31, 1996. The improvement in
margin on carrier revenue is due to reduced termination costs pursuant to the
Company's strategy of diversifying its termination options.
The reported gross margin for the quarters ended March 31, 1997 and March
31, 1996 includes the effect of accrued disputed charges of approximately $8,000
and $231,000, respectively, which represents less than 1.0% and 5.0% of reported
revenues.
23
<PAGE>
General and Administrative. General and administrative expenses increased
approximately $605,000 or 101.7%, to $1.2 million for the three months ended
March 31, 1997 from $595,000 for the three months ended March 31, 1996. As a
percentage of net revenue, general and administrative expenses declined to 9.3%
from 12.6% for the respective periods. The increase in dollar amounts was
primarily due to an increase in personnel to 54 from 29 in the respective
periods and, to a lesser extent, an increase in billing processing fees.
Selling and Marketing. Selling and marketing expenses decreased as a
percentage of net revenue to 0.8% in the quarter ended March 31, 1997 from 1.1%
in the quarter ended March 31, 1996. In dollar amounts, selling and marketing
expenses increased to approximately $104,000 in the quarter ended March 31,
1997, from approximately $52,000 in the quarter ended March 31, 1996, as a
result of the Company's efforts to market to new customer groups.
Depreciation and Amortization. Depreciation and amortization expenses
increased to approximately $96,000 in the quarter ended March 31, 1997 from
$52,000 in the quarter ended March 31, 1996, primarily due to an increase in
capital expenditures for the expansion of the network infrastructure.
Interest. Interest expense increased to approximately $117,000 for the
quarter ended March 31, 1997 from $58,000 in the quarter ended March 31, 1996,
as a result of additional debt incurred by the Company to fund working capital
needs.
Net Income. Net income was approximately $137,000 for the quarter ended
March 31, 1997 as compared to a loss of $497,000 for the quarter ended March 31,
1996. The improvement in net income is largely attributable to the increase in
gross margin dollar amounts as described above.
1996 COMPARED TO 1995
Net Revenues. Net revenues increased approximately $21.7 million or 206.7%,
to $32.2 million for the year ended 1996 from $10.5 million in the year ended
1995. Residential revenue increased in comparative periods by approximately $7.4
million or 137.0%, to $12.8 million in 1996 from $5.4 million in 1995. The
increase in residential revenue is due to a concerted effort to expand marketing
to the West Coast and to target additional ethnic communities such as the Middle
Eastern, Philippine, and Russian communities. The Company's residential customer
base grew to approximately 27,800 customers as of December 31, 1996 from 10,700
customers as of December 31, 1995. Carrier revenue increased approximately $14.3
million or 280.4%, to $19.4 million in 1996 from $5.1 million in 1995. This
growth is a direct result of the Company's strategy to optimize network
utilization by offering its services to other carriers. In this regard, the
Company was successful in expanding its marketing and increased sales to first
and second-tier carriers. Return traffic decreased to $1.2 million in 1996 from
$2.0 million in 1995. Net revenues in 1995 reflect the receipt of previously
undelivered return traffic revenues to the Company.
Gross Margin. Total gross margin increased approximately $900,000 to $2.3
million in 1996 from $1.4 million for 1995. Gross margin decreased as a
percentage of net revenue to 7.2% for 1996 from 13.1% for 1995. The gross margin
on residential revenue decreased to 8.2% in 1996 from 10.4% in 1995 due to
initial expenses associated with the entry into new markets. As a result of the
expansion into additional ethnic markets and new geographic areas, on net
origination declined to 44.9% in 1996, as compared to 62.9% in 1995. The
relative decrease in on net originated traffic was due to customer base growth
prior to the expansion of owned or managed facilities. The gross margin on
carrier revenue, excluding return traffic, increased to 0.9% in 1996 from
negative 36.9% in 1995.
General and Administrative. General and administrative expenses increased
approximately $1.8 million or 81.8%, to $4.0 million for 1996 from $2.2 million
for 1995. However, as a percentage of net revenue, general and administrative
expenses declined to 12.4% from 20.7% in the respective periods. The increase in
dollar amounts in general and administrative expenses primarily resulted from
increased third party billing and collection fees of approximately $349,000 to
support higher calling volume; increased personnel expense to $1.5 million in
1996 from $1.1 million in 1995 as a result of new hires; as well as bad debt
losses of approximately $529,000 attributable to the bankruptcy of one former
customer.
24
<PAGE>
Selling and Marketing. Selling and marketing expenses decreased as a
percentage of net revenue to 1.6% in 1996 from 1.8% in 1995. In dollar amounts,
selling and marketing expenses increased to approximately $514,000 in 1996 from
$184,000 in 1995. The increase is attributable to the Company's efforts to enter
additional ethnic markets.
Depreciation and Amortization. Depreciation and amortization expenses grew
to approximately $333,000 in 1996 from $137,000 in 1995, primarily due to the
increase in capital expenditures.
Interest. Interest expense increased to approximately $337,000 for 1996
from $116,000 in 1995, primarily due to increased borrowings under a credit
facility to support growth in accounts receivable, and to a lesser extent,
increased borrowings from related and other parties.
Net Loss. The Company experienced a net loss of approximately $2.8 million
in 1996 as compared to a net loss of $1.2 million in 1995.
1995 COMPARED TO 1994
Net Revenues. Net revenues increased approximately $5.4 million or 105.9%,
to $10.5 million for the year ended 1995 from $5.1 million in the year ended
1994. Residential revenue increased in comparative periods by approximately $2.0
million or 58.8% , to $5.4 million in 1995 from $3.4 million in 1994. The
increase in residential revenue was due to an increase in the number of
customers to approximately 10,700 by the end of 1995 from approximately 6,300 at
the end of 1994. Carrier revenue increased approximately $3.4 million or 200.0%,
to $5.1 million in 1995 from $1.7 million in 1994. The increase in carrier
revenue was primarily the result of both increased sales to existing customers
and an increase in return traffic to approximately $2.0 million in 1995 from
$174,000 in 1994.
Gross Margin. Total gross margin increased approximately $972,000 to $1.4
million in 1995 from $407,000 for 1994. Gross margin increased as a percentage
of net revenue to 13.1% for 1995 from 8.0% for 1994. The gross margin on
residential revenue decreased to 10.4% in 1995 from 17.0% in 1994 due to an
expansion from the Company's Mid-Atlantic customer base. The Company elected to
expand its business base in advance of acquiring facilities, thereby reducing
the percentage of on net originating traffic. In 1995, 62.9% of residential
revenue originated on net, as compared to 75.8% in 1994. The gross margin on
carrier revenue, excluding the impact of return traffic, decreased to negative
36.9% in 1995 from negative 23.6% in 1994.
General and Administrative. General and administrative expenses increased
approximately $1.0 million or 83.3%, to $2.2 million for 1995 from $1.2 million
for 1994. As a percentage of revenue, general and administrative expenses
declined to 20.7% from 22.7% in the respective periods. The increase in dollar
amounts was primarily due to increased personnel and commission expenses
incurred to develop new markets.
Selling and Marketing. Selling and marketing expenses remained
approximately the same as a percentage of net revenue in 1995 and 1994 at 1.8%.
In dollar amounts, selling and marketing expenses increased to approximately
$184,000 in 1995 from $91,000 in 1994. The increase in dollar amounts is
attributable to the Company's efforts to enter additional ethnic markets.
Depreciation and Amortization. Depreciation and amortization expenses
increased to approximately $137,000 in 1995 from $90,000 in 1994, primarily due
to an increase in capital expenditures for the expansion of the network
infrastructure.
Interest. Interest expense increased to approximately $116,000 for 1995
from $70,000 in 1994, primarily as a result of increased borrowings under a
credit facility to support growth in accounts receivable.
Net Income. The Company experienced a net loss of approximately $1.2
million in 1995 as compared to a loss of $979,000 in 1994.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial data
for each of the quarters in the year ended December 31, 1995, the year ended
December 31, 1996, and the three months ended March 31, 1997. This quarterly
information has been derived from and should be read in conjunction
25
<PAGE>
with the Company's financial statements and the notes thereto included elsewhere
in this Prospectus, and, in management's opinion, reflects all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information. Operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1995 1996 1996 1996 1996 1997
---------- ---------- ----------- ---------- ---------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues ................. $ 1,462 $ 1,860 $ 2,762 $ 4,424 $ 4,722 $ 8,485 $ 7,652 $ 11,356 $12,372
Cost of services .............. 1,137 1,533 2,363 4,096 4,467 7,922 6,763 10,729 10,765
------- ------- ------ ------- ------- ------- ------ --------- --------
Gross margin(1) .............. 325 327 399 328 255 563 889 627 1,607
General and administrative
expenses .................... 449 460 484 777 595 778 1,370 1,253 1,151
Selling and marketing expenses.. 30 30 39 85 52 101 166 195 104
Depreciation and amortization .. 29 31 32 45 52 93 93 95 96
------- ------- ------ ------- ------- ------- ------ --------- --------
Income (loss) from operations.. (183) (194) (156) (579) (444) (409) (740) (916) 256
Interest expense .............. 22 23 25 46 58 60 80 139 117
Interest income .............. 5 5 6 6 5 4 5 2 1
------- ------- ------ ------- ------- ------- ------ --------- --------
Income (loss) before income tax
provision .................... (200) (212) (175) (619) (497) (465) (815) (1,053) 140
Income tax provision ........... -- -- -- -- -- -- -- -- 3
------- ------- ------ ------- ------- ------- ------ --------- --------
Net income (loss) ........... $ (200) $ (212) $ (175) $ (619) $ (497) $ (465) $ (815) $ (1,053) $ 137
======= ======= ====== ======= ======= ======= ====== ========= ========
</TABLE>
- ----------
(1) During the first quarter of 1997, the Company's gross margin improved by
approximately $1.0 million over the fourth quarter 1996. The improvement
was due to (i) approximately $500,000 in costs accrued in the fourth
quarter 1996 for disputed vendor obligations as compared to approximately
$8,000 in costs accrued during the first quarter of 1997, (ii)
approximately $400,000 due to cost reductions in 1997 resulting from an
increase in the utilization of alternative termination options, and (iii)
to a lesser extent, an increase in the percentage of retail traffic
originated on net.
LIQUIDITY AND CAPITAL RESOURCES
Although founded in 1989, the Company's rapid growth commenced in 1995 as
the Company began actively marketing international services to additional ethnic
communities in major metropolitan areas in the U.S. and to other
telecommunication carriers. This growth required an investment in working
capital to finance the net loss that was incurred through 1996 and the increase
in accounts receivable. However, until the first quarter of 1997, operating
activities were a net use of cash. Net cash used in operating activities was
$76,000 in 1994, $768,000 in 1995 and $1.4 million in 1996. In the first quarter
of 1997, operating activities generated net cash of approximately $177,000. To
facilitate this growth, the Company made investments in property and equipment
of approximately $44,000 in 1994, $200,000 in 1995, $520,000 in 1996 and $64,000
in the first quarter of 1997. Through 1996, the Company funded its growth
primarily through borrowings under its receivable credit facility, notes payable
to individuals and the issuance of voting common stock. Net cash provided by
financing activities was approximately $183,000 in 1994, $1.2 million in 1995,
$1.5 million in 1996, and approximately $23,000 of net cash was used in
financing activities in the first quarter of 1997.
On July 1, 1997, the Company entered into the Signet Agreement, which
provides for maximum borrowings of up to $10 million through December 31, 1997,
and the lesser of $15 million or 85 percent of eligible accounts receivable, as
defined, thereafter until maturity on December 31, 1999. The Company may elect
to pay quarterly interest payments at the prime rate, plus 2 percent, or the
adjusted LIBOR, plus 4 percent. The Signet Agreement required a $150,000
commitment fee to be paid at closing, and a quarterly commitment fee of one
quarter percent of the unborrowed portion. The Signet Agreement is secured by
substantially all of the Company's assets. It contains certain financial and
non-financial covenants, including, but not limited to, ratios of monthly net
revenue to loan balance, interest coverage, and cash flow leverage, minimum
subscribers, limitations on capital expenditures, additional indebtedness,
acquisition or transfer of assets, payment of dividends, new ventures or
mergers, and issuance of additional equity. Beginning on January 1, 1998 (and
extending to July 1, 1998 upon the occurrence of defined events), should Signet
Bank determine and assert based on its reasonable assessment that a material
adverse change has occurred, all amounts outstanding would be due and payable.
26
<PAGE>
The Signet Agreement provides that Signet Bank (the "Lender" or "Signet
Bank") receive warrants to purchase up to 539,800 shares of the Company's voting
common stock, which represents ten percent of the issued and outstanding shares
of the Company as of July 1, 1997. Warrants representing five percent of the
issued and outstanding shares are immediately exercisable. The exercise price of
these warrants is $8.46. Further, beginning in the fourth calendar quarter of
1997, and continuing until the Company completes an initial public offering, an
additional one percent each calendar quarter will vest in the Lender. The
exercise price of these warrants will be set at a price which values the Company
at 10 times revenue for the immediately preceding month. So long as the Offering
is completed by December 31, 1997, the Lender will only receive warrants to
purchase 269,900 shares, representing five percent of the issued and outstanding
shares of the Company as of July 1, 1997. Until the Offering has been completed,
the Company is obligated to repurchase the shares under warrant in certain
circumstances at the then fair value of the Company as determined by an
independent appraisal. The Lender has certain registration rights with respect
to the shares under warrant. See "Description of Capital Stock -- Signet
Agreement."
The Company will be reporting the warrants to purchase 269,900 shares of
the Company's Common Stock, which are currently exercisable, as a discount to
the loan, which will be amortized to interest expense over the term of the loan.
Until the Offering has been completed, amounts ascribed to the warrants will be
reflected as a liability and will be adjusted based upon their redemption value.
Additional warrants which may become exercisable in the event that the Company
does not complete the Offering in 1997 will be valued at their fair value when
and if exercisable and will be charged to interest expense over the balance of
the term of the loan.
Prior to the execution of the Signet Agreement, the Company had a credit
and billing arrangement with a third party. This facility allowed the Company to
receive advances of 70% of all records submitted for billing. These advances
were secured by receivables involved. The credit limit under the agreement was
$3 million and bore an interest rate of prime plus four percent.
The Company is continuing to pursue a flexible approach to expand its
markets and enhance its network facilities by investing in marketing, and in
switching and transmission facilities, where anticipated traffic volumes justify
such investments. Historically, the Company has achieved market penetration with
only modest investments in marketing. There can be no assurance that the
Company's prior marketing achievements can be replicated with increased
marketing investments. A number of factors, including market share, competitor
rates and quality of service determine the effectiveness of the market entry
strategy.
The Company has planned capital expenditures through 1998 of $8.5 million.
Additionally, marketing expenditures for 1997 and 1998 are expected to reach
$4.5 million in the aggregate. These capital needs are expected to be met by
cash from operations, amounts available under the line of credit and the
proceeds of the Offering. See "Use of Proceeds." These capital needs will
continue to expand as the Company executes its business strategy. See "Risk
Factors -- Capital Requirements; Need for Additional Financing."
The Company accrued approximately $1.4 million and $643,000 during 1996 and
1995, respectively, for disputed vendor obligations asserted by one of the
Company's foreign carriers for minutes processed in excess of the minutes
reflected on the Company's records. If the Company prevails in its dispute,
these amounts or portions thereof would be credited to operations in the period
of resolution. Conversely, if the Company does not prevail in its dispute, these
amounts or portions thereof would be paid in cash.
NEW ACCOUNTING STANDARDS
In 1997 the Financial Accounting Standards Board released Statement No.
128, "Earnings Per Share." Statement 128 requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all periods
presented. Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution that
27
<PAGE>
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted earnings per share
is computed similarly to fully diluted earnings per share pursuant to Accounting
Principles Bulletin No. 15. Statement 128 is effective for fiscal periods ending
after December 15, 1997, and when adopted, will require restatement of prior
periods' earnings per share.
The requirements of the Securities and Exchange Commission require the
dilutive effects of common stock and stock rights issued within twelve months of
an initial public offering be included in the computation of both basic and
dilutive earnings per share. Accordingly, management anticipates that Statement
128 will not have a material impact upon reported earnings per share.
EFFECTS OF INFLATION
Inflation is not a material factor affecting the Company's business and has
not had a significant effect on the Company's operations to date.
28
<PAGE>
BUSINESS
GENERAL
STARTEC is a rapidly growing, facilities-based international long distance
carrier which markets its services to select ethnic U.S. residential communities
that have significant international long distance usage. Additionally, to
maximize the efficiency of its network capacity, the Company sells its
international long distance services to some of the world's leading carriers.
The Company provides its services through a flexible network of owned and leased
transmission facilities, resale arrangements and a variety of operating
agreements and termination arrangements. The Company currently operates a switch
in Washington, D.C. and leases switching facilities from other
telecommunications carriers. The Company is in the process of constructing an
international gateway facility in New York City.
The Company's mission is to dominate select international telecom markets
by strategically building network facilities that allow it to manage both sides
of a telephone call. The Company intends to own multiple switches and other
network facilities which allow it to originate and terminate a substantial
portion of its own traffic. The Company believes that building network
facilities, acquiring additional termination options and expanding its proven
marketing strategy should lead to continued growth and improved profitability.
INDUSTRY BACKGROUND
The international telecommunications industry consists of transmissions of
voice and data that originate in one country and terminate in another. This
industry is experiencing a period of rapid change which has resulted in a
substantial growth in international telecommunications traffic. For domestic
carriers, the international market can be divided into two major segments: the
U.S.-originated market, which consists of all international calls which either
originate or are billed in the United States, and the overseas market, which
consists of all calls billed outside the United States. According to the
Company's market research, the international telecommunications services market
was approximately $56 billion in aggregate carrier revenues for 1995, and the
volume of international traffic on the public telephone network is expected to
grow at a compound annual growth rate of 10% or more from 1997 through the year
2000. The U.S.-originated international market has experienced substantial
growth in recent years, with revenues rising from approximately $8 billion in
1990 to approximately $14 billion in 1995.
The Company believes that the international telecommunications market will
continue to experience strong growth for the foreseeable future as a result of
the following developments and trends:
- Global Economic Development and Increased Access to Telecommunications
Services. The dramatic increase in the number of telephone lines around the
world, stimulated by economic growth and development, government mandates
and technological advancements is expected to lead to increased demand for
international telecommunications services in those markets.
- Deregulation of Telecommunications Markets. The continuing deregulation
and privatization of telecommunications markets has provided and continues
to provide opportunities for carriers who desire to penetrate those
markets.
- Reduced Rates Stimulating Higher Traffic Volumes. The reduction of outbound
international long distance rates, resulting from increased competition and
technological advancements, has made, and continues to make international
calling available to a much larger customer base thereby stimulating
increased traffic volumes.
- Increased Capacity. The increased availability of higher-quality digital
undersea fiber optic cable has enabled international long distance carriers
to improve service quality while reducing costs.
- Popularity and Acceptance of Technology. The proliferation of
communications devices, including cellular telephones, facsimile machines
and communications equipment has led to a general increase in the use of
telecommunications services.
- Bandwidth Needs. The demand for bandwidth-intensive data transmission
services, including Internet-based demand, has increased rapidly and is
expected to continue in the future.
29
<PAGE>
Development of U.S. and Foreign Telecommunications Markets
The 1984 court-ordered divestiture of AT&Ts monopoly over local and long
distance telecommunications fostered the emergence of new U.S. long distance
companies. Today there are over 500 U.S. long distance companies, most of which
are small- or medium-sized companies, serving residential and business customers
and other carriers. In order to be successful, these small- and medium-sized
companies must offer customers a full range of services, including international
long distance. However, management believes most of these carriers do not have
the critical mass of traffic to receive volume discounts on international
transmission from the larger facilities-based carriers such as AT&T, MCI and
Sprint, or the financial ability to invest in international facilities.
Alternative international carriers, such as the Company, have capitalized on the
demand created by these small- and medium-sized companies for less expensive
international transmission facilities. These carriers are able to take advantage
of larger traffic volumes to obtain discounts on international routes (through
resale) and/or invest in facilities when volume on particular routes justify
such investments. As these emerging international carriers have become
established, they have also begun to carry overflow traffic from larger long
distance providers which own international transmission facilities.
Liberalization and privatization have also allowed new long distance
providers to emerge in foreign markets. Liberalization began in the U.K. in 1981
when Mercury, a subsidiary of Cable & Wireless plc, was granted a license to
operate a facilities-based network and compete with British Telecom. The 1990
adoption of the "Directive on Competition in the Market for Telecommunications
Services" announced the beginning of deregulation in Europe, and a series of
subsequent EU directives, reports and actions are expected to result in
substantial deregulation of the telecommunications industries in most EU member
states by 1998. Liberalization is also occurring on a global basis as many
governments in Eastern Europe, Asia and Latin America privatize government-owned
monopolies and open their markets to competition. Also, signatories to the WTO
Agreement have committed to varying degrees to allow access to their domestic
and international markets to competing telecommunications providers, allow
foreign ownership interests in existing telecommunications providers and
establish regulatory schemes to develop and implement policies to accommodate
telecommunications competition.
As liberalization erodes the traditional monopolies held by single national
providers, many of which are wholly or partially government-owned PTT's, U.S.
long distance providers have the opportunity to negotiate more favorable
agreements with both the traditional and newly-emerging foreign providers.
Further, deregulation in certain countries is enabling U.S.-based providers to
establish local switching and transmission facilities in those countries,
allowing them to terminate their own traffic and begin to carry international
long distance traffic originating in those countries.
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. In the U.S., an
international long distance call typically originates on a LEC's network and is
transported to the caller's domestic long distance carrier. The domestic long
distance provider picks up the call and carries the call to its own or another
carrier's international gateway switch, where an international long distance
provider picks it up and sends it directly or through one or more other long
distance providers to a corresponding gateway switch in the destination country.
Once the traffic reaches the destination country, it is routed to the party
being called through that country's domestic telephone network.
International long distance carriers are often categorized according to
ownership and use of transmission facilities and switches. No carrier utilizes
exclusively-owned facilities for transmission of all of its long distance
traffic. Carriers vary from being primarily facilities-based, meaning that they
own and operate their own land-based and/or undersea cable and switches, to
those that are purely resellers of another carrier's transmission network. The
largest U.S. carriers, such as AT&T, MCI, Sprint and WorldCom primarily use
owned transmission facilities and switches and may transmit some of their
overflow traffic through other long distance providers, such as the Company.
Only very large carriers have the transmission facilities and operating
agreements necessary to cover the over 200 countries to which major long
distance providers generally offer service. A significantly larger group of long
distance
30
<PAGE>
providers own and operate their own switches but use a combination of resale
agreements with other long distance providers and leased and owned facilities to
transmit and terminate traffic, or rely solely on resale agreements with other
long distance providers. For a discussion of the Company's analysis of the mix
of providers in the long distance market see "STARTEC's Industry Paradigm."
Operating Agreements. Traditional operating agreements provide for the
termination of traffic in, and return traffic to, the international long
distance carriers' respective countries for mutual compensation at an
"accounting rate" negotiated by each country's dominant carrier. Under such
traditional operating agreements, the international long distance provider that
originates more traffic compensates the long distance provider in the other
country by paying an amount determined by multiplying the net traffic imbalance
by half of the accounting rate.
Under a typical operating agreement, each carrier owns or leases its
portion of the transmission facilities between two countries. A carrier gains
ownership rights in digital undersea digital fiber optic cable by: (i)
purchasing direct ownership in a particular cable (usually prior to the time the
cable is placed into service); (ii) acquiring an IRU in a previously installed
cable; or (iii) by leasing or otherwise obtaining capacity from another long
distance provider that has either direct ownership or IRU rights in a cable. In
situations in which a long distance provider has sufficiently high traffic
volume, routing calls across cable that is directly owned by a carrier or in
which a carrier has an IRU is generally more cost-effective than the use of
short-term variable capacity arrangements with other long distance providers or
leased cable. Direct ownership and IRU rights, however, require a carrier to
make an initial capital commitment based on anticipated usage.
Transit Arrangements. In addition to using traditional operating
agreements, an international long distance provider may use transit
arrangements, pursuant to which a long distance provider in an intermediate
country carries the traffic to the destination country. Transit arrangements
require agreement among all of the carriers of the countries involved in the
transmission and termination of the traffic, and are generally used for overflow
traffic or in cases in which a direct circuit is unavailable or not volume
justified.
Switched Resale Arrangements. Switched resale arrangements typically
involve the carrier purchase and sale of termination services between two long
distance providers on a variable, per minute basis. The resale of capacity was
first permitted as a result of the deregulation of the U.S. telecommunications
market, and has fostered the emergence of alternative international long
distance providers which rely, at least in part, on transmission services
acquired on a carrier basis from other long distance providers. A single
international call may pass through the facilities of multiple resellers before
it reaches the foreign facilities-based carrier which ultimately terminates the
call. Resale arrangements set per minute prices for different routes, which may
be guaranteed for a set period of time or may be subject to fluctuation
following notice. The resale market for international transmission capacity is
continually changing, as new long distance resellers emerge and existing
providers respond to changing costs and competitive pressures. In order to be
able to effectively manage costs when using resale arrangements, long distance
providers must have timely access to changing market prices and be able to react
to changes in costs through pricing adjustments and routing decisions.
Alternative Transit/Termination Arrangements. As the international long
distance market began to deregulate, long distance providers developed
alternative transit/termination arrangements in an effort to decrease their
costs of terminating international traffic. Some of the more significant of
these arrangements include refiling, international simple resale ("ISR"), and
ownership of switching facilities in foreign countries. Refiling of traffic,
which takes advantage of disparities in settlement rates between different
countries, allows traffic to a destination country to be treated as if it
originated in another country which enjoys lower settlement rates with the
destination country, thereby resulting in a lower overall termination cost.
Refiling is similar to transit, except that with respect to transit, the
facilities-based long distance provider in the destination country has a direct
relationship with the originating long distance provider and is aware of the
transit arrangement, while with refiling, it is likely that the long distance
provider in the destination country is not aware that the received traffic
originated in another country with another carrier. To date, the FCC has made no
pronouncement as to whether refiling complies with U.S. or ITU regulations,
although it is considering such issues in an existing proceeding.
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<PAGE>
With ISR, a long distance provider completely bypasses the accounting rates
system by connecting an international leased private line to the public switched
telephone network of a foreign country or directly to the premises of a customer
or foreign partner. Although ISR is currently sanctioned by applicable
regulatory authorities only on a limited number of routes (including U.S.-U.K.,
U.S.-Canada, U.S.-Sweden, U.S.-New Zealand, U.K.-worldwide and Canada-U.K.), its
use is increasing and is expected to expand significantly as deregulation
continues in the international telecommunications market. In addition,
deregulation has made it possible for U.S.-based long distance providers to
establish their own switching facilities in certain foreign countries, allowing
them to directly terminate traffic. See "-- Government Regulation."
STARTEC'S INDUSTRY PARADIGM
It is common in the industry to classify and identify different
telecommunications companies as "first-tier," "second-tier" or "third tier"
carriers based primarily on their revenue size. The Company analyzes its
competitive market position and its strategy based on a more comprehensive set
of criteria, focusing on technology, network infrastructure and margins.
Broadly, the Company's Industry Paradigm is comprised of four identifiable
segments: Switchless Reseller, Switch-Based Reseller, Single-Sided
Facilities-Based Carrier and Dual-Sided Facilities-Based Carrier.
<TABLE>
<CAPTION>
STARTEC'S INDUSTRY PARADIGM
CHARACTERISTICS
<S> <C>
DUAL SIDED o Sophisticated technology
FACILITIES BASED o Highly competent network operations
CARRIER o Highest margin
SINGLE SIDED o Higher technology
FACILITIES BASED o Competent network managment
CARRIER o Higher margin
SWITCH BASED o Limited technology
RESELLER o Limited network
o High margin
SWITCHLESS RESELLER o No technology
o No network
o Low margin
</TABLE>
At the bottom of the Industry Paradigm are the Switchless Resellers, which
do not own switching facilities and rely solely on resale agreements with other
long distance carriers to transport and terminate their traffic. Although these
companies generally are able to keep overhead costs down, since they are not
burdened with the costs associated with ownership of facilities, their
dependence on other companies for capacity and service substantially reduces
their ability to control variable costs associated with origination, transport
and termination of telephone calls.
Switch-Based Resellers occupy the next level of the Industry Paradigm.
Companies at this level usually own a switch, which may or may not embody the
most current technology, and may even do their own billing and collection of
customer accounts. While the margins at this level generally are better than for
Switchless Resellers, these companies are also substantially dependent upon
resale agreements with facilities-based long distance carriers to transport and
terminate their traffic.
At the level above the Switch-Based Resellers are the Single-Sided
Facilities-Based Carriers. The move up from the reseller levels to the
facilities-based carrier levels is a significant one in terms of costs, required
technology, and available margins. Single-Sided Facilities-Based Carriers
generally operate multiple switches, have the ability to originate at least some
of their own calls, and maintain network management facilities.
32
<PAGE>
The top level of the Industry Paradigm consists of Dual-Sided
Facilities-Based Carriers. The domestic carriers at this level generally own
multiple switches, and other facilities which allow them to originate and
terminate a substantial portion of their own traffic. In addition, the
international carriers at this level also have ownership rights, IRUs or other
arrangements to use undersea fiber optic cable lines and satellite facilities,
operating agreements and other termination arrangements with foreign
telecommunications providers, and may even have switches in foreign countries
which allow them to terminate their own traffic. The domestic and the
international Dual-Sided Facilities-Based Carriers use the latest technology,
have sophisticated network operations, and are best able to control the quality
of their services. The margins are potentially the highest at this level, as the
carriers have the greatest control over costs of service.
STRATEGY
The Company began and has historically operated as a switch-based reseller.
The Company is investing in network infrastructure which will allow it to
operate as a single-sided facilities-based carrier. Utilizing a portion of the
net proceeds from this Offering, the Company intends to invest in additional
network infrastructure with the objective of becoming an international
dual-sided facilities-based carrier.
The Company intends to implement a network hubbing strategy, linking
foreign-based switches and other telecommunications equipment together with the
Company's marketing base in the United States. To implement this hubbing
strategy, the Company intends to: (i) build transmission capacity, including its
ability to originate and transport traffic; (ii) acquire additional termination
options to increase routing flexibility; and (iii) expand its customer base
through focused marketing efforts.
A "hub" will consist of a switch and/or other telecommunications equipment,
including cables and compression equipment. Hub locations will be selected based
on their similarity to the established U.S. model, in which identifiable
international ethnic communities are accessible, and where it is possible to
connect with some of the leading international carriers. Once established, these
hubs will be connected to the Company's marketing base in the United States.
Management believes the hubbing strategy will allow the Company to move up the
Industry Paradigm, from a single-sided facilities-based carrier to a dual-sided
facilities-based carrier serving ethnic communities and telecommunication
carriers in select markets worldwide.
To implement this hubbing strategy, the Company intends to:
Build Transmission Capacity. The Company originates and transports customer
traffic through a network of Company-owned and managed facilities and facilities
leased or acquired through resale arrangements from other facilities-based long
distance carriers. The additional traffic generated by the Company's expanded
customer base and increased usage of its long distance services will necessitate
the acquisition of additional switching and transmission capacity. To meet these
needs, the Company has begun to implement a strategic build-out of its network,
including installation of improved switching facilities, planned acquisition of
ownership interests in and/or rights to use digital undersea fiber optic cables,
and installation of compression equipment to increase capacity on those cables.
The Company has also taken steps to improve its systems supporting the network
and further enhance the quality of its services by adding equipment upgrades in
its network monitoring and customer service centers, and it plans to install
enhanced software which will allow it to monitor call traffic routing, capacity,
and quality. Building additional switching and transmission capacity will
decrease the Company's reliance on leased facilities and exposure to price
fluctuations. The Company's goal in taking these actions is to improve its gross
margin and provide greater assurance of the quality and reliability of its
services.
Acquire Additional Termination Options. Customer traffic is terminated in
the destination country through a variety of arrangements, including
international operating agreements. The anticipated expansion of the Company's
customer base in existing and new target markets, and the resulting increase in
traffic, will require the Company to provide additional methods to terminate
that traffic. As part of its hubbing strategy, the Company plans to explore a
number of options including, additional operating agreements, strategic
alliances, transit and refile arrangements, and the acquisition of switching
facilities in foreign countries. The increase in termination options is expected
to provide greater routing flexibility and reliability, as well as achieving
greater management and control over the cost of transmitting customers' calls.
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Expand Customer Base. The Company will continue to target additional ethnic
U.S. residential communities with significant international long distance usage.
In addition, the Company plans to extend its marketing efforts outside the U.S.
into countries which have ethnic communities which the Company believes are
potential customers, and to begin marketing its long distance services to
U.S.-based small businesses which have an international focus. The Company will
also consider opportunities to increase its residential customer base through
strategic alliances and acquisitions. By increasing its residential customer
base, the Company's goal is to capture operating efficiencies associated with
high traffic volumes and to increase its margins.
The Company's marketing strategy, which targets selected ethnic communities
is attractive to foreign carriers who enter into agreements with STARTEC in
order to capture outgoing international U.S. traffic from customers located in
their corresponding U.S. ethnic communities. As a result of the relationships
established by these agreements, STARTEC expects that its global
telecommunications network will become more cost effective and will make the
Company an attractive supplier to the world's leading carriers. The Company also
anticipates that its hubbing strategy will also allow it to serve carrier
customers over a wider geographical area.
CUSTOMERS
The number of the Company's residential customers has grown significantly
over the past three years, from approximately 4,100 as of March 31, 1994 to more
than 33,700 as of March 31, 1997 (as measured over a 30 day period). These
customers generally are members of ethnic groups that tend to be concentrated in
major U.S. metropolitan areas, including Middle Eastern, Indian, Russian,
African and Southeast Asian communities. Net revenues from residential customers
accounted for 40% and 37% of the Company's net revenues in the year ended
December 31, 1996 and the three month period ended March 31, 1997, respectively.
No single residential customer accounted for more than one percent of the
Company's revenues during those periods.
The number of the Company's carrier customers also has grown significantly
since the Company first began marketing its services to this segment in late
1995. As of March 31, 1997, the Company had 28 active carrier customers, with
revenues from carrier customers accounting for 60% and 63% of the Company's net
revenues in the year ended December 31, 1996 and the three month period ended
March 31, 1997, respectively. One of these carrier customers, WorldCom,
accounted for approximately 23% of total revenues in the year ended December 31,
1996. WorldCom accounted for approximately 34% of total revenues and Frontier
Communications Services, Inc. accounted for approximately 15% of net revenues
for the first quarter ended March 31, 1997. In a number of cases, the Company
provides services to carriers which are also suppliers to the Company.
The Company has entered into operating agreements with telecommunication
carriers in foreign countries under which international long-distance traffic is
both delivered and received. Under these agreements, the foreign carriers are
contractually obligated to adhere to the policy of the FCC, which requires that
traffic from the foreign country is routed to international carriers, such as
the Company, in the same proportion as traffic carried into the country.
Mutually exchanged traffic between the Company and foreign carriers is settled
through a formal settlement policy at agreed upon rates per-minute. The Company
records the amount due to the foreign partner as an expense in the period the
traffic is terminated. When the return traffic is received in the future period,
the Company generally realizes a higher gross margin on the return traffic
compared to the lower margin (or sometimes negative margin) on the outbound
traffic. Revenue recognized from return traffic was approximately $174,000,
$1,959,000, and $1,121,000 or 3%, 19% and 3% of net revenues in 1994, 1995, and
1996, and $298,000 and $513,000 or 6% and 4% of net revenues in the three-month
periods ended March 31, 1996 and 1997, respectively. There can be no assurance
that traffic will be delivered back to the United States or what impact changes
in future settlement rates, allocations among carriers or levels of traffic will
have on net payments made and revenues received.
SERVICES AND MARKETING
STARTEC focuses primarily on the provision of international long distance
services to targeted residential customers in major U.S. metropolitan areas.
STARTEC also offers international long distance services to other
telecommunications carriers and interstate long distance services in the U.S.
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Using part of the proceeds obtained under the Signet Agreement, the Company
recently expanded its residential marketing program, targeting additional ethnic
communities with significant international long distance usage and increasing
its efforts within its current target markets. The Company intends to use a
portion of the proceeds of the Offering to expand significantly its residential
marketing programs in the U.S., and to implement its marketing strategy abroad.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Residential Customers
The Company generally provides international and interstate residential
long distance customers with dial-around long distance service. Residential
customers access STARTEC's network by dialing its CIC code before dialing the
number they are calling. Using a CIC Code to access the Company allows customers
to use the Company's services at any time without changing their existing long
distance carrier. It is also possible for a customer to select STARTEC as its
default long distance carrier. In this instance, the LEC would automatically
route all of that customer's long distance calls through STARTEC's network. As
part of its marketing strategy, the Company maintains a comprehensive database
of customer information which is used for the development of marketing programs,
strategic planning, and other purposes.
The Company invests substantial resources in identifying and evaluating
potential markets for its services. In particular, the Company looks for ethnic
groups having qualities and characteristics which indicate a large potential for
high-volume international telecommunications usage. Once a market has been
identified, the Company evaluates the opportunity presented by that market based
upon factors that include the credit characteristics of the target group,
switching requirements, network access and vendor diversity. Assuming that the
target market meets the Company's criteria, the Company implements marketing
programs targeted specifically at that ethnic group, with the goal of generating
region- specific international long distance traffic. The Company markets its
residential services under the "STARTEC" name through a variety of media,
including low-cost print advertising, radio and television advertising on ethnic
programs and direct mail, all in the customers native language. The Company also
sponsors and attends community events and trade shows.
Potential customers call a toll free number and are connected to a
multilingual customer service representative. The Company uses this opportunity
to obtain detailed information regarding, among other things, customers
anticipated calling patterns. The customer service representative then sends out
a welcome pack explaining how to use the services. Once the customer begins to
use the services, the Company monitors usage and periodically communicates with
the customer to gauge service satisfaction. STARTEC also uses proprietary
software to assist it in tracking customer satisfaction and a variety of
customer behaviors, including turnover ("churn"), retention and frequency of
usage.
The Company currently markets its services to the Middle Eastern, Indian,
Russian, African and Southeast Asian communities in the U.S. In addition, the
Company is considering marketing its services in countries such as Canada and
the United Kingdom, which also have ethnic communities which may meet the
Company's criteria for potential target markets.
In addition to its current long distance services, the Company continually
evaluates potential new service offerings in order to increase traffic and
customer retention and loyalty. New services the Company expects to introduce
include Home Country Direct Services, which provides customers with access to
STARTEC's network from any country and allows them to place either collect or
credit/debit card calls, and Prepaid Domestic and International Calling Cards
which can be used from any touch tone telephone in the United States, Canada or
the United Kingdom.
Carrier Customers
To maximize the efficiency of its network capacity, the Company sells its
international long distance services to other telecommunication carriers.
STARTEC has been actively marketing its services to carrier customers since late
1995 and believes that it has established a high degree of credibility and
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valuable relationships with the leading carriers. The Company participates in
international carrier membership organizations, trade shows, seminars and other
events that provide its marketing staff with opportunities to establish and
maintain relationships with other carriers that are potential customers. The
Company generally avoids providing services to lower-tiered carriers because of
potential difficulties in collecting accounts receivable.
THE STARTEC NETWORK
The Company provides its services through a flexible network of owned and
leased transmission facilities, resale arrangements, and a variety of operating
agreements and termination arrangements. The Company has been expanding its
network to match increases in its long distance traffic volume, and has recently
begun to implement plans for a significant strategic build-out of the STARTEC
network. The purpose of the build-out is to increase profitability by
controlling costs, while maintaining a high degree of network quality and
reliability. The network employs advanced switching technologies and is
supported by monitoring facilities and the Company's technical support
personnel.
Switching and Transmission Facilities
The Company currently owns and operates a switch in Washington, D.C. and
leases a line to New York City where major telephone cables are terminated. New
switching equipment is expected to be installed and placed in service at a new
facility in New York City by the end of the fourth fiscal quarter of 1997. At
that time, the Company intends that its switching functions will be transferred
to the New York City facility and the Washington, D.C. location will become a
point-of-presence. Relocating the switch to New York City is expected to reduce
leased line charges and increase the Company's ability to originate traffic on
its own network. In addition, the New York City facility is larger than the
Company's Washington, D.C. facility, thereby allowing the Company to install a
larger and more cost effective switch. In the future, the Company intends to
upgrade its existing facilities and add switches in key locations, such as
California, which is a gateway to the Asia/Pacific market.
International long distance traffic is transmitted through an international
gateway switch, across undersea digital fiber optic cable lines or via
satellite, to the destination country. STARTEC currently has access to digital
undersea fiber optic cable and satellite facilities through arrangements with
other carriers. The Company intends to acquire IRUs in three other
trans-Atlantic cables such as Columbus, Canus-1, Cantat-3 and Americus-1 and is
also exploring the possibility of acquiring IRUs in trans-Pacific cables. The
Company believes that it may achieve substantial savings by acquiring additional
IRUs, which would reduce its dependence on leased cable access. Having an
ownership interest rather than a lease interest in undersea cable enables the
Company to increase its capacity without a significant increase in cost, by
utilizing digital compression equipment, which it cannot do under leasing or
similar access arrangements. Digital compression equipment enhances the traffic
capacity of the undersea cable, which permits the Company to maximize cable
utilization while reducing the Company's need to acquire additional capacity.
The Company enters into lease arrangements and resale agreements with other
telecommunications carriers when cost effective. The Company purchases switched
minute capacity from various carriers and depends on such agreements for
termination of its traffic. The Company currently purchases capacity from
approximately 20 carriers. During the fiscal year ended December 31, 1996,
purchases from the five largest suppliers of capacity represented 67% of the
Company's total cost of services and 53% as of March 31, 1997. During the fiscal
year ended December 31, 1996, VSNL, Cherry Communications, Inc., and WorldCom
accounted for 25%, 13% and 13% of total cost of services, respectively. During
the quarter ended March 31, 1997, WorldCom, VSNL and Star Telecommunications
accounted for 14%, 14% and 13% of total costs of services, respectively.
Further, the Company utilizes the services of several alternate, cost
effective carriers in order to transport and terminate its traffic. These
alternative carriers provide the Company with substantial flexibility and cost
efficiency, as well as diversity, in the event one carrier's charges increase or
such carrier is not capable of providing the services STARTEC needs in order to
transport and terminate its traffic.
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The Company's efforts to build additional switching and transmission
capacity are intended to decrease the Company's reliance on leased facilities
and resale agreements. The strength of the Company's international operations is
based upon the diversity of its cost effective routes to terminal points. The
primary benefits of owning and operating additional network facilities instead
of leasing or reselling another carrier's capacity arise from reduced
transmission costs and greater control over service quality and reliability. The
transmission cost for a call that is not routed on net through the Company's
owned facilities is dependent upon the cost per minute paid to the underlying
carrier. In contrast, the cost of a call routed on net through the Company's
owned facilities is dependent upon the total fixed costs associated with owning
and operating those facilities. As traffic across the owned facilities
increases, management believes the Company can capture operating efficiencies
and improve its margins.
Termination Arrangements
STARTEC attempts to retain flexibility and maximize its termination options
by using a mix of operating agreements, transit and refile arrangements, resale
agreements and other arrangements to terminate its traffic in the destination
country. The Company's approach is designed to enable it to take advantage of
the rapidly evolving international telecommunications market in order to provide
low cost international long distance services to its customers.
The Company currently has operating agreements with the national
telecommunications administrations of India, Uganda and Syria under which it
exchanges traffic. The Company continually pursues additional operating
agreements with other foreign governments and administrations. In addition, the
Company uses resale agreements and transit and refile arrangements to terminate
its traffic in countries with which it does not have operating agreements. These
agreements and arrangements provide the Company with multiple options for
routing traffic to each destination country.
The Company is also exploring the possibility of acquiring switching
facilities in certain foreign countries. This option is becoming increasingly
available as deregulation continues in the international telecommunications
market, and would provide the Company with opportunities to terminate its own
traffic and better control customer calls.
Network Operations, Technical Support and Customer Service
The Company uses proprietary routing software to maximize routing
efficiency. Network operations personnel continually monitor pricing changes by
the Company's carrier-suppliers and adjust call routing to make the most cost
efficient use of available capacity. In addition, the Company provides 24-hour
network monitoring, trouble reporting and response procedures, service
implementation coordination and problem resolution. The Company has developed
and uses proprietary software which allows it to monitor, on a minute by minute
basis, all key aspects of its services. Recent software upgrades and additional
network monitoring equipment have been installed to enhance the Company's
ability to handle increased traffic and monitor network operations. The
Company's customer service center, which services the residential customer base,
is staffed by trained, multilingual customer service representatives, and
operates 12 hours per day during the week and eight hours per day on the
weekends. The customer service center uses advanced ACD software to distribute
incoming calls to its customer service representatives. Over time, the Company
plans to increase its customer service coverage and eventually operate 24-hours
per day, 7 days per week.
The Company generally utilizes redundant, highly automated state-of-the-art
telecommunications equipment in its network and has diverse alternate routes
available in cases of component or facility failure, or in the event that cable
transmission wires are inadvertently cut. Back-up power systems and automatic
traffic re-routing enable the Company to provide a high level of reliability for
its customers. Computerized automatic network monitoring equipment allows fast
and accurate analysis and resolution of network problems. In general, the
Company relies upon other carriers' networks to provide redundancy in the event
of technical difficulties in the network. The Company believes that this is a
more cost effective strategy than purchasing or leasing its own redundant
capacity.
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MANAGEMENT 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. The Company's systems enable it, on a real time basis, to
determine the most cost effective termination alternatives, monitor customer
usage and manage profit margins. The Company's systems also enable it to ensure
accurate and timely billing and reduce routing errors.
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
additional reports, as needed, including customer usage, country usage, vendor
rates, vendor usage by minute, dollarized vendor usage, and loss reports.
The Company has built multiple redundancies into its billing and call data
collection systems. Two call collector computers receive redundant call
information simultaneously, one of which produces a file every 24 hours for
filing purposes while the other immediately forwards the called data to
corporate headquarters for use in customer service and traffic analysis. The
Company 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 drive and redundant storage devices.
Residential customers are billed for the Company's services through the
LEC, with the Company's charges appearing directly on the bill each residential
customer receives from its LEC. The Company utilizes a third party billing
company to facilitate collections of amounts due to the Company from the LECs.
The third party billing company receives collections from the LEC and transfers
the sums to the Company, after withholding processing fees, applicable taxes,
and provisions for credits and uncollectible accounts. As part of its strategy,
the Company also plans to enter into billing and collection agreements directly
with certain LECs, which will provide the Company with opportunities to decrease
some of the costs currently associated with billing and collection.
COMPETITION
The long distance telecommunications industry is intensely competitive. In
many of the markets targeted by the Company there are numerous entities which
are currently competing for the same residential and carrier customers and
others which have announced their intention to enter those markets.
International and interstate telecommunications providers compete on the basis
of price, customer service, transmission quality, breadth of service offerings
and value-added services. Residential customers frequently change long distance
providers in response to competitors' offerings of lower rates or promotional
incentives, and, in general, the Company's customers can switch carriers at any
time. In addition, the availability of dial-around long distance services has
made it possible for residential customers to use the services of a variety of
competing long distance providers without the necessity of switching carriers.
The Company's carrier customers generally use the services of a number of
international long distance telecommunications providers, including the
Company's. The Company believes that competition in its international and
interstate long distance markets is likely to increase as these markets continue
to experience decreased regulation and as new technologies are applied to
telecommunications. Prices for long distance calls in several of the markets in
which the Company competes have declined in recent years and are likely to
continue to decrease. While the Company competes generally with the domestic and
international carriers discussed herein, it believes that STARTEC is a leader in
its chosen business niche -- the provision of international long distance
services to residential customers in targeted ethnic markets.
The U.S.-based international telecommunication services market is dominated
by AT&T, MCI and Sprint. The Company also competes with numerous other carriers
in certain markets, including WorldCom, Inc., TresCom International, Inc., and
STAR Telecommunications, Inc. Some of these competitors focus their efforts on
the same customers targeted by the Company. In addition, many of the
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Company's current competitors are also Company customers. The Company's
business could be materially adversely affected if a significant number of
those customers reduce or cease doing business with the Company for competitive
reasons. See "Risk Factors -- Competition."
Recent and pending deregulation initiatives in the U.S. and other countries
may encourage additional new industry entrants. The Telecommunications Act
permits and is designed to promote additional competition in the intrastate,
interstate and international telecommunications markets by both U.S.-based and
foreign companies, including the RBOCs. In addition, pursuant to the terms of
the WTO Agreement, countries who are signatories to the agreement are expected
to allow access to their domestic and international markets to competing
telecommunications providers, allow foreign ownership interests in existing
telecommunications providers and establish regulatory schemes and policies
designed to accommodate telecommunications competition. The Company also is
likely to be subject to additional competition as a result of mergers or the
formation of alliances among some of the largest telecommunications carriers.
Recent examples of mergers and alliances include the planned merger of British
Telecom and MCI and the "Global One" alliance among Sprint, Deutsche Telekom and
France Telecom.
Many of the Company's competitors are significantly larger, have
substantially greater financial, technical and marketing resources than the
Company, own or control larger networks, transmission and termination
facilities, and offer a broader variety of services than the Company, and have
strong name recognition, brand loyalty, and long-standing relationships with the
many of the Company's target customers. In addition, many of the Company's
competitors enjoy economies of scale that can result in a lower cost structure
for transmission and other costs of providing services, which could cause
significant pricing pressures within the long distance telecommunications
industry. If the Company's competitors were to devote significant additional
resources to the provision of international long distance services to the
Company's target customer base, the Company's business, results of operations
and financial condition could be materially adversely affected. See "--
Government Regulation" and "Risk Factors -- Competition."
The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new product and service offerings and
increasing satellite and undersea cable transmission capacity for services
similar to those provided by the Company. Such technologies include satellite
and ground based systems, utilization of the Internet for voice, data and video
communications, and digital wireless communication systems such as personal
communications services ("PCS"). The Company is unable to predict which of many
future product and service offerings will be important to maintain its
competitive position or the expenditures that may be required to acquire,
develop or otherwise provide such products and services.
GOVERNMENT REGULATION
Overview
The Company's business is subject to varying degrees of federal and state
regulation. Federal laws and the regulations of the FCC apply to the Company's
international and interstate facilities-based and resale telecommunications
services, while applicable PSCs have jurisdiction over telecommunications
services originating and terminating within the same state. At the federal level
the Company is subject to common carriage requirements under the Communications
Act. Comprehensive amendments to the Communications Act were made by the
Telecommunications Act. The purpose of the 1996 Act is to promote competition in
all areas of telecommunications by reducing unnecessary regulation at both the
federal and state levels to the greatest extent possible. The FCC and PSCs are
in the process of implementing the 1996 Act's regulatory reforms.
In addition, although the laws of other countries only directly apply to
carriers doing business in those countries, the Company may be affected
indirectly by such laws insofar as they affect foreign carriers with which the
Company does business. There can be no assurance that future regulatory,
judicial and legislative changes will not have a material adverse effect on the
Company, that U.S. or foreign regulators or third parties will not raise
material issues with regard to the Company's compliance or noncompliance with
applicable laws and regulations, or that regulatory activities will not have a
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material adverse effect on the Company's business, financial condition and
results of operations. Moreover, the FCC and the PSCs generally have the
authority to condition, modify, cancel, terminate or revoke the Company's
operating authority for failure to comply with federal and state laws and
applicable rules, regulations and policies. Fines or other penalties also may be
imposed for such violations. Any such action by the FCC and/or the PSCs could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors -- Government Regulation."
Federal and State Transactional Approvals
The FCC and certain PSCs also impose prior approval requirements on
transfers or changes of control, including pro forma transfers of control and
corporate reorganizations, and assignments of regulatory authorizations. Such
requirements may have the effect of delaying, deterring or preventing a change
in control of the Company. The Company also is required to obtain state approval
for the issuance of securities. Six of the states in which the Company is
certificated provide for prior approval or notification of the issuance of
securities by the Company. In five of these states, the Company's intrastate
revenues for the first quarter of 1997 were less than $1,000 per state. In the
remaining state, New York, the intrastate revenues exceeded $1,000 for the first
quarter but were only 1.2% of the Company's total residential revenues from that
state. Although the necessary approvals will be sought prior to the offering,
because of time constraints, the Company may not have obtained such approval
from the six states prior to consummation of the Offering. Although these state
filing requirements may have been preempted by the National Securities Market
Improvement Act of 1996, there is no case law on this point. After consultation
with counsel, the Company believes the approvals will be granted and that
obtaining such approvals subsequent to the Offering should not result in any
material adverse consequences to the Company, although there can be no assurance
that such consequence will not result.
International Services
International telecommunications carriers are required to obtain authority
from the FCC under Section 214 of the Communications Act in order to provide
international service that originates or terminates in the United States. U.S.
international common carriers also are required to file and maintain tariffs
with the FCC specifying the rates, terms, and conditions of their services. In
1989, the Company received Section 214 authority from the FCC to acquire and
operate facilities for the provision of direct international service to Italy,
Israel, Kenya, India, Iran, Saudi Arabia, Pakistan, Sri Lanka, South Korea and
the United Arab Emirates ("UAE"). The Company also is authorized to resell
services of other common carriers for the provision of switched voice, telex,
facsimile and other data services, and for the provision of INTELSAT Business
Services ("IBS") and international television services to various overseas
points.
In 1996, the FCC established new rules that streamlined its Section 214
authorization and tariff regulation processes to provide for shorter notice and
review periods for certain U.S. international carriers including the Company.
The FCC established streamlined regulation for "non-dominant" carriers --
service providers found to lack market power on the routes served. The Company
is classified by the FCC as a non-dominant carrier on its international and
domestic routes. The Company has applied for global facilities-based Section 214
authority under the FCC's new streamlined processing rules. A facilities-based
global Section 214 authorization enables carriers to provide international basic
switched, private line, data, television and business services using authorized
facilities to virtually all countries in the world.
The FCC's streamlined rules also provide for global Section 214 authority
to resell switched and private line services of other carriers by non-dominant
international carriers. However, the FCC decides on a case-by-case basis whether
to grant Section 214 authority to U.S. carriers to resell the switched private
lines of affiliated foreign carriers to countries where a foreign carrier is
dominant based on a showing that there are equivalent resale opportunities for
U.S. carriers in the foreign carrier's market. To date, the FCC has found that
Canada, the U.K., Sweden and New Zealand do provide equivalent resale
opportunities. The FCC has found that equivalent resale opportunities do not
exist in Germany, Hong Kong and France. The FCC also is considering applications
for equivalency determinations with
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respect to Australia, Chile, Denmark, Finland and Mexico. It is possible that
interconnected private line resale to additional countries may be allowed in the
future. Pursuant to FCC rules and policies, the Company's authorization to
provide service via the resale of interconnected international private lines
will be expanded to include countries subsequently determined by the FCC to
afford equivalent resale opportunities to those available under United States
law, if any. As a result of the recent signing of the WTO Agreement, the FCC has
proposed to replace the "equivalency" test with a rebuttable presumption in
favor of resale of interconnected private lines to WTO member countries.
The Company must also conduct its international business in compliance with
the ISP. The ISP establishes the parameters by which U.S.-based carriers and
their foreign correspondents settle the cost of terminating each other's traffic
over their respective networks. The precise terms of settlement are established
in a correspondent agreement (also referred to as an "operating agreement"),
which also sets forth the term of the agreement, the types of service covered by
the agreement, the division of revenues between the carrier that bills for the
call and the carrier that terminates the call at the other end, the frequency of
settlements, the currency in which payments will be made, the formula for
calculating traffic flows between countries, technical standards, and procedures
for the settlement of disputes. The amount of payments (the "settlement rate")
is determined by the negotiated accounting rate specified in the operating
agreement. Under the ISP, the settlement rate generally must be one-half of the
accounting rate. Carriers must obtain waivers of the FCC's rules if they wish to
use an accounting rate that differs from the prevailing rate or vary the
settlement rate from one-half of the accounting rate.
The ISP is designed to eliminate foreign carriers' incentives and
opportunities to discriminate in their operating agreements among different
U.S.-based carriers through a practice referred to as "whipsawing." Whipsawing
involves a foreign carrier varying the accounting and/or settlement rate offered
to different U.S.-based carriers for the benefit of the foreign carrier, which
could secure various incentives by favoring one U.S.-based carrier over another.
Under the uniform settlements policy, U.S.-based carriers can only enter into
operating agreements that contain the same accounting rate and settlement terms
offered to all U.S.-based carriers in that country and provide for proportionate
return traffic. When a U.S.-based carrier negotiates an accounting rate with a
foreign carrier that is lower than the accounting rate offered to another
U.S.-based carrier for the same service, the U.S.-based carrier with the lower
rate must file a notification letter with the FCC. If a U.S.-based carrier does
not already have an operating agreement in effect, it must file a request with
the FCC to modify the accounting rate for that country to introduce service with
the foreign correspondent in that country. A U.S.-based carrier also must
request modification authority from the FCC for any proposal that is not
prospective, that is not a simple reduction in the accounting rate, or that
changes the terms and conditions of an existing operating agreement. The
notification and modification procedures are intended to provide all U.S.-based
carriers with an opportunity to compete in foreign markets on a
nondiscriminatory basis. Among other efforts to counter the practice of
whipsawing and inequitable treatment of similarly situated U.S.-based carriers,
the FCC adopted the principle of proportionate return -- which requires that the
U.S. carrier terminate U.S.-inbound traffic in the same proportion as the
U.S-outbound traffic that it sends to the foreign correspondent -- to assure
that competing U.S.-based carriers have roughly equitable opportunities to
receive the return traffic that reduces the marginal cost of providing
international service.
Consistent with its pro-competition policies, the FCC also prohibits
U.S.-based carriers from agreeing to accept special concessions from any foreign
carrier or administration. A special concession is any arrangement that affects
traffic flow to or from the U.S. that is offered exclusively by a foreign
carrier or administration to a particular U.S. carrier that is not offered to
similarly situated U.S. carriers authorized to serve a particular route. With
the adoption of the WTO agreement this year, the FCC is considering modifying
its no-special concessions rule to prohibit only those exclusive arrangements
granted by a foreign correspondent with market power.
In 1996, the FCC amended the ISP to provide carriers with flexibility to
introduce alternative payment arrangements that deviate from the ISP with
foreign correspondents in any foreign country where the FCC has previously
determined that effective competitive opportunities ("ECO") exist. Alternative
arrangements that deviate from the ISP also may be established for international
switched traffic between the U.S. and countries that have not previously been
found to satisfy the ECO test where
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<PAGE>
the U.S. carrier can demonstrate that deviation from the ISP will promote
market-oriented pricing and competition, while precluding abuse of market power
by the foreign correspondent. As a result of the WTO Agreement, the FCC has
proposed to replace the ECO test with a rebuttable presumption in favor of
alternative payment arrangements with WTO member countries. While these rule
changes may provide more flexibility to the Company to respond more rapidly to
changes in the global telecommunications market, it will also provide similar
flexibility to the Company's competitors. The Company intends, where possible,
to take advantage of lowered accounting rates and more flexible settlement
arrangements. In addition, the FCC has also recently proposed revisions to
reduce the level and increase enforcement of its international settlement
"benchmark" rates, which are the FCC's target ceilings for prices that U.S.
carriers should pay to foreign carriers for terminating U.S. calls overseas.
Pursuant to FCC regulations, U.S. international telecommunications carriers
are required to file copies of their contracts with foreign correspondents,
including operating agreements, with the FCC within 30 days of execution. The
Company has filed each of its operating agreements with the FCC. The FCC's rules
also require the Company to file periodically a variety of reports regarding its
international traffic flows and use of international facilities. The FCC is
engaged in a rulemaking proceeding in which it has proposed to reduce certain
reporting requirements of common carriers. The Company is unable to predict the
outcome of this proceeding or its effect on the Company. The Company currently
has on file with the FCC operating agreements and accounting rate modifications
for India, Syria and Uganda. In addition, the Company has on file and maintains
with the FCC annual circuit status reports and traffic data reports.
The FCC is currently considering whether to limit or prohibit the practice
whereby a carrier routes, through its facilities in a third country, traffic
originating from one country and destined for another country. The FCC has
permitted third country calling where all countries involved consent to this
type of routing arrangements, referred to as "transiting." Under certain
arrangements referred to as "refiling," the carrier in the destination country
does not consent to receiving traffic from the originating country and does not
realize the traffic it receives from the third country is actually originating
from a different country. The FCC to date has made no pronouncement as to
whether refile arrangements comport either with U.S. or ITU regulations. It is
possible that the FCC may determine that refiling, as defined, violates U.S.
and/or international law. To the extent that the Company's traffic is routed
through a third country to reach a destination country, such an FCC
determination with respect to transiting and refiling could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The FCC also regulates the ability of U.S.-based international carriers
affiliated with foreign carriers to serve markets where the foreign affiliate is
dominant. U.S.-based carriers must report to the FCC a 10% ownership affiliation
with a foreign carrier. A U.S. international carrier is required to notify the
FCC prior to entering into an agreement that would provide a foreign carrier
with a 10% or greater interest in the U.S. carrier. This notification is subject
to a public notice and comment period and FCC review to determine whether a U.S.
carrier should be regulated as dominant on routes where the foreign affiliate is
dominant. The Company has provided notification to the FCC of the 15% investment
in the Company by an affiliate of Portugal Telecom, a foreign carrier from a WTO
member country and signatory to the WTO Agreement. Currently, the FCC considers
a U.S. international carrier to be dominant, and will limit its entry, on routes
where a foreign carrier has a 25% or greater or a controlling interest in the
U.S. carrier or where the U.S. carrier has a 25% or greater or controlling
interest in the foreign carrier. In order for a U.S. carrier that has a 25% or
greater affiliation with or controls or is controlled by a foreign carrier to
receive authority from the FCC to enter markets where the foreign carrier is
dominant, the U.S. carrier is required to show to the FCC that it meets the ECO
test, i.e. that effective opportunities exist for other U.S. carriers to compete
in the foreign market. As a result of WTO Agreement, the FCC has proposed to
replace the ECO test with a rebuttable presumption in favor of foreign market
entry by U.S. carriers with foreign affiliates in WTO member countries. If
adopted, the FCC's liberalized foreign market entry policies may have a two-fold
effect on the Company: (i) increased opportunities for foreign investment in and
by the Company and entry by the Company into WTO member countries; and (ii)
increased competition for the Company from other U.S. international carriers
serving or seeking to serve WTO member countries.
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The FCC may condition, modify or revoke any of the Section 214
authorizations granted to the Company for violations of the Communications Act,
the FCC's rules and policies or the conditions of those authorizations or may
impose monetary forfeitures for such violations. Any such action on the part of
the FCC may have a material adverse effect on the Company's business, financial
condition and results of operations
Interstate and Intrastate Services
The Company's provision of domestic long distance service in the United
States is subject to regulation by the FCC and certain state PSCs, who regulate
to varying degrees interstate and intrastate rates, respectively, ownership of
transmission facilities, and the terms and conditions under which the Company's
domestic services are provided. In general, neither the FCC nor the PSCs
exercise direct oversight over cost justification for domestic carriers' rates,
services or profit levels, but either or both may do so in the future. Domestic
carriers such as the Company, however, are required by federal law and
regulations to file tariffs listing the rates, terms and conditions applicable
to their interstate services. The Company has filed domestic long distance
tariffs with the FCC. The FCC adopted an order on October 29, 1996 eliminating
the requirement that non-dominant interstate carriers, such as the Company,
maintain FCC tariffs for domestic interstate long distance service. This order
was to take effect as of December 1997. However, on February 13, 1997, the U.S.
Court of Appeals for the DC Circuit ruled that the FCC's order be stayed pending
judicial review of appeals challenging the order. Should the appeals fail and
the FCC's order become effective, the Company may benefit from the elimination
of FCC tariffs by gaining more flexibility and speed in dealing with marketplace
changes. The absence of tariffs, however, will also require that the Company
secure contractual agreements with its customers regarding many of the terms of
its existing tariffs or face possible claims arising because the rights of the
parties are no longer clearly defined. To the extent that the Company's customer
base involves "casual calling" customers, the potential absence of tariffs would
require the Company to establish contractual methods to limit potential
liability.
In addition, the Company generally is also required to obtain certification
from the relevant state PSC prior to the initiation of intrastate service and to
file tariffs with such states. The Company currently has the certifications
required to provide service in 21 states, and has filed or is in the process of
filing requests for certification in 13 additional states. Although the Company
intends and expects to obtain operating authority in each jurisdiction in which
operating authority is required, there can be no assurance that one or more of
these jurisdictions will not deny the Company's request for operating authority.
Any failure to maintain proper federal and state certification or tariffs, or
any difficulties or delays in obtaining required certifications could have a
material adverse effect on the Company's business, financial condition and
results of operations. Many states also impose various reporting requirements
and/or require prior approval for transfers of control of certified carriers,
corporate reorganizations, acquisitions of telecommunications operations,
assignments of carrier assets, carrier stock offerings, and incurrence by
carriers of significant debt obligations. Certificates of authority can
generally be conditioned, modified, canceled, terminated, or revoked by state
regulatory authorities for failure to comply with state law and/or the rules,
regulations, and policies of the PSCs. Fines and other penalties also may be
imposed for such violations. Any such action by the PSCs could have a material
adverse effect on the Company's business, financial condition and results of
operations The Company monitors regulatory developments in all 50 states to
ensure regulatory compliance.
Casual Calling Issues
The FCC is currently engaged in a rulemaking to expand the number of codes
available for casual calling services. An increase in the number of codes
available for casual calling will allow for increased competition in the casual
calling industry. In addition, the FCC is considering rules to require dominant
local exchange carriers and competitive local exchange carriers to make billing
arrangements available on a nondiscriminatory basis to casual calling service
providers. The Company already has LEC billing arrangements in place but may
wish to take advantage of rules the FCC may adopt to develop new billing
arrangements with competing LECs. Competing casual calling providers without
billing arrangements also would benefit from such a nondiscriminatory billing
obligation.
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Other Legislative and Regulatory Initiatives
The 1996 Act is designed to promote local competition through state and
federal deregulation. As part of its pro-competitive policies, the 1996 Act
frees the RBOCs from the judicial orders that prohibited their provision of long
distance services outside of their operating territories (LATAs). The 1996 Act
provides specific guidelines that allow the RBOCs to provide long distance
inter-LATA service to customers inside the RBOC's region but not before the RBOC
has demonstrated to the FCC and state regulators that it has opened up its local
network to competition and met a "competitive checklist" of requirements
designed to provide competing network providers with nondiscriminatory access to
the RBOC's local network. To date, RBOCs in two states have filed applications
for in-region long distance authority with the FCC -- Ameritech Corporation in
Michigan and SBC in Oklahoma. Ameritech has been required to refile the Michigan
application which is pending before the FCC. The SBC application was denied by
the FCC, and the denial is pending judicial review. These developments could
permit RBOCs to compete with the Company in the provision of domestic and
international long distance services. The FCC also has proposed rules to govern
the RBOCs's provision of affiliated out-of-region interstate, interexchange
services. Among other things, the FCC has proposed to allow affiliates of RBOCs
that provide out-of-region interstate, interexchange service to be regulated as
non-dominant carriers, under certain circumstances.
The 1996 Act also contains provisions that will permit the FCC to forbear
from any provision of the Communications Act or FCC regulation upon a finding
that forbearance will promote competition and that the carrier seeking
forbearance does not possess market power. FCC forbearance could reduce some of
the Company's regulatory requirements, such as filing specific rates for its
domestic interstate interexchange services.
To originate and terminate calls in connection with providing their
services, long distance carriers such as the Company must purchase "access
services" from LECs or CLECs. Access charges represent a significant portion of
the Company's cost of U.S. domestic long distance services and, generally, such
access charges are regulated by the FCC for interstate services and by PSCs for
intrastate services. The FCC has undertaken a comprehensive review of its
regulation of LEC access charges to better account for increasing levels of
local competition. Under alternative access charge rate structures being
considered by the FCC, LECs would be permitted to allow volume discounts in the
pricing of access charges. While the outcome of these proceedings is uncertain,
if these rate structures are adopted, many long distance carriers, including the
Company, could be placed at a significant cost disadvantage to larger
competitors.
Certain additional provisions of the 1996 Act, and the rules that have been
proposed to be adopted pursuant thereto, could materially affect the growth and
operation of the telecommunications industry and the services provided by the
Company. Further, certain of the 1996 Act's provisions have been, and likely
will continue to be, judicially challenged. The Company is unable to predict the
outcome of such rulemakings or litigation or the substantive effect of the new
legislation and the rulemakings on the Company's business, operations and
financial condition.
WTO Agreement on Basic Telecommunications
In February 1997, the WTO announced that 69 countries, including the United
States, Japan, and all of the member states of the EU, agreed on the WTO
Agreement to facilitate competition in basic telecommunications services. The
WTO Agreement becomes effective January 1, 1998. Pursuant to the terms of the
WTO Agreement, signatories to the WTO Agreement have committed to varying
degrees to allow access to their domestic and international markets to competing
telecommunications providers, allow foreign ownership interests in existing
telecommunications providers and establish regulatory schemes to develop and
implement policies to accommodate telecommunications competition.
The FCC has initiated certain proceedings which must be completed by the
end of the year to review, and modify if necessary, its current international
telecommunications policies in light of U.S. obligations under the WTO
Agreement. These proceedings address, among other issues, the viability of
equivalency and other reciprocity principles currently applicable to
international facilities-based and
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resale services, foreign ownership limitations, foreign carrier entry into the
U.S. market, and accounting rate benchmarks. Correspondingly, telecommunications
markets in many foreign countries are expected to be significantly liberalized,
creating additional competitive market opportunities for U.S. telecommunications
businesses such as the Company. Although many countries have agreed to make
certain changes to increase competition in its respective markets, there can be
no assurance that countries will enact or implement the legislation required to
effect the changes contained the offers in a timely manner or at all. Failure by
a country to meet commitments made under the WTO Agreement may give rise to a
cause of action for the injured foreign countries to lodge a trade dispute with
the WTO. At this time, the Company is unable to predict the effect the WTO
Agreement and related developments might have on its business, financial
condition and results of operations.
EMPLOYEES
As of August 1, 1997, the Company had 49 full time employees and 33 part
time employees. None of the Company's employees are currently represented by a
collective bargaining agreement. The Company believes that its relations with
its employees are good.
PROPERTIES
The Company's headquarters are located in approximately 18,500 square feet
of space in Bethesda, Maryland. The Company leases this space under an agreement
under which it pays $15,226 per month, which expires on November 1, 1999. The
Company also is a party to a co-location agreement whereby it has the right to
occupy certain space in Washington, D.C. as a site for its switching facilities,
under which it pays $250 per month, and is in the process of negotiating a
co-location agreement with another party for approximately 2,000 square feet in
New York City to house new switching facilities. The Washington, D.C.
co-location agreement is currently renewable on a year-to-year basis, and the
New York City co-location agreement is expected to have a term of five years,
with a five year renewal option. The Company anticipates that it will incur
additional lease and co-location expenses as it adds additional switching
capacity.
LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incidental to the
conduct of its business. The Company is not currently a party to any lawsuit or
proceeding which, in the opinion of management, is likely to have a material
adverse effect on the Company's business, financial condition and results of
operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of July 31, 1997, certain information
regarding the Company's directors and executive officers.
<TABLE>
<CAPTION>
YEAR OF EXPIRATION
NAME AGE POSITION OF TERM AS DIRECTOR
- -------------------------- ----- ----------------------------------------- --------------------
<S> <C> <C> <C>
Ram Mukunda ............ 38 President, Chief Executive Officer, 2000
Treasurer and Director
Prabhav V. Maniyar ...... 38 Senior Vice President, Chief Financial 1999
Officer, Secretary and Director
Anthony Das ............ 43 Vice President, International Relations N/A
Gustavo Pereira ......... 43 Vice President, Engineering N/A
Nazir G. Dossani ......... 55 Director 1998
Richard K. Prins ......... 40 Director 1998
Vijay Srinivas ......... 44 Director 1999
</TABLE>
RAM MUKUNDA is the founder and majority owner of STARTEC. Prior to
founding STARTEC in 1989, Mr. Mukunda was Advisor, Strategic Planning with
INTELSAT, an international consortium responsible for global satellite
services. While at INTELSAT, he was responsible for issues relating to
corporate, business, financial planning and strategic development. Mr. Mukunda
earned a M.S. in Electrical Engineering from the University of Maryland. Mr.
Mukunda and Mr. Srinivas are brothers-in-law.
PRABHAV V. MANIYAR joined STARTEC as Chief Financial Officer in January
1997. From June 1993 until he joined the Company, Mr. Maniyar was the Chief
Financial Officer of Eldyne, Inc., Unidyne Corporation and Diversified Control
Systems, LLC collectively know as the Witt Group of Companies. The Witt Group
of Companies was acquired by the Titan Corporation in May 1996. From June 1985
to May 1993, he held progressively more responsible positions with NationsBank.
Mr. Maniyar earned a B.S. in Economics from Virginia Commonwealth University
and M.A. in Economics from Old Dominion University. Mr. Maniyar currently
serves as a director of Teletronics, Inc., a wireless modem product company.
ANTHONY DAS joined STARTEC as Vice President of International Relations in
February 1997. Prior to joining the Company, Mr. Das was a Senior Consultant at
Armitage Associates from April 1996 to January 1997. Prior to joining Armitage
Associates, he served as a Senior Career Executive in the Office of the
Secretary, Department of Commerce from 1993 to 1995, from 1990 to 1993, Mr. Das
was the Director of Public Communication at the State Department. Mr. Das is a
graduate of the Fletcher School of Law and Diplomacy, Tufts University.
GUSTAVO PEREIRA joined STARTEC in August, 1995 and is Vice President for
Engineering. From 1989 until he joined the Company in 1995, Mr. Pereira served
as Director of Switching Systems for Marconi in Portugal. In this capacity he
supervised more than 100 engineers, he was responsible for Portugal's
international telecommunications network.
NAZIR G. DOSSANI will join STARTEC as a director immediately upon
completion of the Offering. Mr. Dossani has been Vice President for
Asset/Liability Management at Freddie Mac since January 1993. Prior to this
position, Mr. Dossani was Vice President -- Pricing and Portfolio Analysis at
Fannie Mae. Mr. Dossani received a Ph.D. in Regional Sciences from the
University of Pennsylvania and an MBA from Wharton School of Business.
RICHARD K. PRINS will join STARTEC as a director immediately upon
completion of the Offering. Mr. Prins is currently Senior Vice President with
Ferris, Baker Watts, Incorporated. From July 1988 through March 1996, he served
as Managing Director of Investment Banking with Crestar Securities
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Corporation. Mr. Prins received an MBA from Oral Roberts University and a B.A.
from Colgate University. He currently serves on the Board of Directors for Path
Net, Inc., a domestic telecommunications company, and The Association for
Corporate Growth, National Capital Chapter.
VIJAY SRINIVAS is the brother-in-law of Ram Mukunda and is a founding
director of the Company. He has a Ph.D. in Organic Chemistry from the University
of North Dakota and is a senior research scientist at ELF Atochem, North
America, a diversified chemical company.
CERTAIN KEY EMPLOYEES
SUBHASH PAI joined STARTEC in January, 1992 and is Controller and
Assistant Secretary. Mr. Pai is a CA/CPA. Prior to joining STARTEC, he held
various positions with a multinational shipping company in India.
DHRUVA KUMAR joined STARTEC in April, 1993 and is Director of Global
Carrier Services. Prior to managing the Carrier Services group, Mr. Kumar held a
series of progressively more responsible positions within the Company.
T.J. MASTER joined STARTEC in May, 1993 and is Manager of Switched
Services. Mr. Master is responsible for the Company's residential marketing
efforts. Previously he was Marketing Executive at the Times of India
publication group in New Delhi.
TEFERI DEJENE joined STARTEC in October, 1992 and is Manager, Network
Switching. Since 1992, Mr. Dejene held a series of progressively more
responsible positions in network operations.
SOSSINA TAFARI joined STARTEC in May, 1993 and is Manager, Network
Operations. Ms. Tafari manages Network Operations for the Company. Previously
she worked in network maintenance for MCI.
CLASSIFIED BOARD OF DIRECTORS
Pursuant to its Charter, the Company's Board of Directors is divided into
three classes of directors each containing, as nearly as possible, an equal
number of directors. Directors within each class are elected to serve three-year
terms, and approximately one-third of the directors stand for election at each
annual meeting of the Company's stockholders. A classified Board of Directors
may have the effect of deterring or delaying any attempt by any person or group
to obtain control of the Company by a proxy contest since such third party would
be required to have its nominees elected at two separate annual meetings of
stockholders in order to elect a majority of the members of the Board. See
"Control of Company by Current Stockholders" and Certain Provisions of the
Company's Articles of Incorporation, Bylaws and Maryland Law."
COMMITTEES OF THE BOARD
Following completion of the Offering, the Board of Directors will
establish two standing committees: the Audit Committee and the Compensation
Committee.
The Audit Committee will be charged with recommending the engagement of
independent accountants to audit the Company's financial statements, discussing
the scope and results of the audit with the independent accountants, reviewing
the functions of the Company's management and independent accountants pertaining
to the Company's financial statements, reviewing management's procedures and
policies regarding internal accounting controls, and performing such other
related duties and functions as are deemed appropriate by the Audit Committee
and the Board of Directors. Upon completion of the Offering, Messrs. Dossani and
Prins will serve as the members of the Committee.
The Compensation Committee will be responsible for reviewing and approving
salaries, bonuses and benefits paid or given to all executive officers of the
Company and making recommendations to the Board of Directors with regard to
employee compensation and benefit plans. The Compensation Committee will also
administer the Company's Restated Stock Option Plan and 1997 Performance
Incentive Plan. Upon completion of the Offering, Messrs. Dossani and Prins will
serve as the members of the Compensation Committee.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors did not have a Compensation Committee prior to the
Offering. Accordingly, the entire Board of Directors, including directors who
are executive officers of the Company, made all determinations concerning
compensation of executive officers. Following the completion of the Offering,
the Board of Directors will establish a Compensation Committee which will
consist entirely of directors who are not employees of the Company. See "--
Committees of the Board."
COMPENSATION OF DIRECTORS
Currently, the Company's directors do not receive cash compensation for
their service on the Board of Directors. Following completion of the Offering,
directors who are not executive officers or employees of the Company may receive
meeting fees, committee fees and other compensation. Members of the Board who
are not officers of the Company are entitled to receive a grant of options to
purchase 5,000 shares of the Company's Common Stock upon joining the Board and
additional options to purchase 2,000 shares per year thereafter. All directors
will be reimbursed for reasonable out-of-pocket expenses incurred in connection
with attendance at board and committee meetings.
COMPENSATION OF EXECUTIVE OFFICERS
The following Summary Compensation Table sets forth the compensation earned
by the Company's President and Chief Executive Officer and the Vice President
for Engineering (the "Named Officers") during the three years ended December 31,
1994, 1995 and 1996. No other executive officer earned in excess of $100,000 for
services rendered in all capacities to the Company during the three years ended
December 31, 1994, 1995 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------
NAME AND OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- ---------------------------------------- ------ ---------- ------- -------------
<S> <C> <C> <C> <C>
Ram Mukunda ........................... 1996 $165,875 N/A $18,000(1)
President and Chief Executive Officer 1995 150,000 N/A N/A
1994 127,000 N/A N/A
Gustavo Pereira(2) ..................... 1996 110,000 N/A N/A
Vice President, Engineering 1995 32,000 N/A N/A
1994 N/A N/A N/A
</TABLE>
- ----------
(1) This amount represents the value of an automobile allowance.
(2) Mr. Pereira joined the Company in August 1995.
STOCK OPTION GRANTS
During the year ended December 31, 1996, the Named Officers were not
awarded any options to purchase any securities of the Company, nor were the
Named Officers granted any stock appreciation rights during fiscal 1996.
OPTION EXERCISES AND HOLDINGS
There were no options exercised by the Named Officers for the fiscal year
ended December 31, 1996 or outstanding at the end of that year, nor were any
stock appreciation rights exercised during such year or outstanding at the end
of that year.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Ram Mukunda on July
1, 1997 (the "Mukunda Employment Agreement"), pursuant to which Mr. Mukunda
holds the positions of President, Chief Executive Officer and Treasurer of the
Company, is paid an annual base salary of $250,000
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<PAGE>
per year, is entitled to participate in the Company's 1997 Performance Incentive
Plan, and is eligible to receive a bonus, as determined by the Board of
Directors of the Company based upon the financial and operating performance of
the Company. In addition, the Mukunda Employment Agreement provides that if
there is a "Change of Control" (as defined below), Mr. Mukunda will receive, for
the longer of twelve (12) months or the remainder of what would have been the
balance of the term under his employment agreement (which initially could be for
a period of up to three years), the following benefits: (1) a severance payment
equal to $20,830 per month, (2) a pro rata portion of the bonus applicable to
the calendar year in which such termination occurs, (3) all accrued but unpaid
base salary and other benefits as of the date of termination, and (4) such other
benefits as he was eligible to participate in at and as of the date of
termination.
The Company also entered into an employment agreement with Prabhav Maniyar
on July 1, 1997 (the "Maniyar Employment Agreement"), pursuant to which Mr.
Maniyar holds the positions of Vice President, Chief Financial Officer and
Secretary of the Company, is paid an annual base salary of $175,000 per year, is
entitled to participate in the Company's 1997 Performance Incentive Plan, and is
eligible to receive a bonus, as determined by the Board of Directors of the
Company based upon the financial and operating performance of the Company. In
addition, the Maniyar Employment Agreement provides that if there is a "Change
of Control" (as defined below), Mr. Maniyar will receive, for the longer of
twelve (12) months or the remainder of what would have been the balance of the
term under his employment agreement (which initially could be for a period of up
to three years), the following benefits: (1) a severance payment equal to
$14,580 per month, (2) a pro rata portion of the bonus applicable to the
calendar year in which such termination occurs, (3) all accrued but unpaid base
salary and other benefits, and (4) such other benefits as he was eligible to
participate in at and as of the date of termination.
The Mukunda Agreement and the Maniyar Agreement each have an initial term
of three years and are renewable for successive one year terms. In addition, the
agreements also contain provisions which restrict the ability of Messrs. Mukunda
and Maniyar to compete with the Company for a period of one year following
termination.
A "Change of Control" shall be deemed to have occurred, with respect to the
terms and conditions set forth in each of the Mukunda Employment Agreement and
the Maniyar Employment Agreement, if (A) any person becomes a beneficial owner,
directly or indirectly, of securities of the Company representing 30% or more of
the combined voting power of all classes of the Company's then outstanding
voting securities; or (B) during any period of two consecutive calendar years
individuals who at the beginning of such period constitute the Board of
Directors, cease for any reason to constitute at least a majority thereof,
unless the election or nomination for the election by the Company's shareholders
of each new director was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning of the
two-year period or whose election or nomination for election was previously so
approved; or (C) the shareholders of the Company approve a merger or
consolidation of the Company with any other company or entity, other than a
merger or consolidation that would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent more than
50% of the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation
(exclusive of the situation where the merger or consolidation is effected in
order to implement a recapitalization of the Company in which no person acquires
more than 30% of the combined voting power of the Company's then outstanding
securities); or (D) the shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
STOCK OPTION PLANS
Amended and Restated Stock Option Plan
The Company adopted the STARTEC, Inc. Stock Option Plan (the "Option Plan")
in 1993 to encourage stock ownership by key management employees of the Company,
to provide an incentive for such employees to expand and improve the profits and
prosperity of the Company and to assist the
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<PAGE>
Company in attracting and retaining key personnel through the grant of options
to purchase shares of Common Stock. The Board of Directors amended and restated
the Option Plan in January 1997 to establish a determinable date for the
exercisability of options granted under the Option Plan and to make other
changes and updates.
The Option Plan provided for the grant of options to purchase up to an
aggregate of 270,000 shares of Common Stock to selected full-time employees of
the Company. Options granted may be exercised only upon the occurrence of a sale
of more than fifty percent of the Common Stock in one transaction, a dissolution
or liquidation of the Company, a merger or consolidation of the Company in which
it is not the surviving corporation, a filing by the Company of an effective
registration statement under the Securities Act, or the seventh anniversary of
the date the participant is first hired as a full-time employee of the Company.
All such options terminate and expire under the Option Plan on the earlier of
ten years from the date of grant or the date the participant is no longer
employed by the Company as a full-time employee and such participant's
employment was not terminated as a result of death or permanent disability of
the participant, or the Company's termination of the participant's full-time
employment without cause.
As of March 31, 1997, options to purchase an aggregate of 269,766 shares of
Common Stock have been granted to 32 persons with exercise prices ranging from
$0.30 to $1.85 per share. Pursuant to resolution of the Board of Directors, no
further awards may be made under the Option Plan.
1997 Performance Incentive Plan
On August 1, 1997, the Board of Directors approved and recommended that the
stockholders approve the Company's 1997 Performance Incentive Plan (the
"Performance Plan"). The purpose of the Performance Plan is to support the
Company's ongoing efforts to develop and retain qualified directors, employees
and consultants and to provide the Company with the ability to provide
incentives more directly linked to the profitability of the Company's business
and increases in stockholder value. The Company anticipates its stockholders
will approve the Performance Plan on August 15, 1997.
The Performance Plan provides for the award to eligible employees of the
Company of stock options, stock appreciation rights, restricted stock, and other
stock-based awards, as well as cash-based annual and long-term incentive awards.
The Performance Plan reserves 750,000 shares of Common Stock for issuance,
representing 10% of the shares of Common Stock outstanding including the shares
offered hereby. The Company may grant options to acquire up to 480,000 shares of
Common Stock without triggering the antidilution provisions of the warrants
issued to Signet Bank. The Performance Plan will be administered by a committee
of the Board of Directors. This committee will select the employees to whom
awards will be granted and will set the terms and conditions of such awards. The
shares of Common Stock subject to any award that terminates, expires or is
cashed out without payment being made in the form of Common Stock will again be
available for distribution under the Performance Plan, as will shares that are
used by an employee to pay withholding taxes or as payment for the exercise
price of an award.
Awards under the Performance Plan are not transferable except in the event
of the employee's death or unless otherwise required by law. Other terms and
conditions of each award will be set forth in award agreements. The Performance
Plan constitutes an unfunded plan for incentive compensation.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Company's Charter provides that the Company shall indemnify its current
and former officers and directors against any and all liabilities and expenses
incurred in connection with their services in such capacities to the maximum
extent permitted by Maryland law, as from time to time amended. The Charter
further provides that the right to indemnification shall also include the right
to be paid by the Company for expenses incurred in connection with any
proceeding arising out of such service in advance of its final disposition. The
Charter further provides that the Company may, by action of its Board of
Directors, provide indemnification to such of the employees and agents of the
Company and such other persons serving at the request of the Company as a
director, officer, partner, trustee, employee or agent
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of another corporation, partnership, joint venture, trust, or other enterprise
to such extent and to such effect as is permitted by Maryland law and the Board
of Directors may determine. The Company expects to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee,
or agent of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, or other enterprise against any expense, liability, or loss
incurred by such person in any such capacity or arising out of his status as
such, whether or not the Company would have the power to indemnify him against
such liability under Maryland law. The Charter provides that (i) the foregoing
rights of indemnification and advancement of expenses shall not be deemed
exclusive of any other rights to which any officer, director, employee or agent
of the Company may be entitled (ii) neither the amendment nor repeal of the
Charter, nor the adoption of any additional or amendment provision of the
Charter or the By-laws shall apply to or affect in any respect the applicability
of the Charter's provisions with respect to indemnification for any act or
failure to act which occurred prior to such amendment, repeal or adoption.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information as of July 31, 1997 and as
adjusted to reflect the sale of the Common Stock offered hereby concerning: (i)
each person or group known to the Company to be the beneficial owner of more
than 5% of the Common Stock, (ii) each director of the Company, (iii) each of
the Named Officers, and (iv) all directors and executive officers of the Company
as a group. All information with respect to beneficial ownership has been
furnished to the Company by the respective stockholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
----------------------------------------------------
PERCENT OF CLASS
NUMBER OF --------------------------------------
BENEFICIAL OWNER(1) SHARES(2) BEFORE OFFERING AFTER OFFERING(3)
- ------------------------------------------------ ----------- ----------------- ------------------
<S> <C> <C> <C>
Ram Mukunda(4) .............................. 3,579,675 60.1% 45.5%
Blue Carol Enterprises Ltd(5) .................. 807,124 13.5% 10.3%
Vijay Srinivas(6) ........................... 311,200 5.2% 4.0%
Prabhav V. Maniyar ........................... 107,616 1.8% 1.4%
Signet Bank(7) ................................. 269,900 4.5% 3.4%
Nazir G. Dossani(8) ........................... 5,000 * *
Richard K. Prins(9) ........................... 5,000 * *
Gustavo Pereira .............................. 0 -- --
All Directors and Executive Officers as a Group
( 7 persons) ............................... 4,015,991 67.4% 51.1%
</TABLE>
- ----------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.
(1) Unless otherwise noted, the address of all persons listed is c/o Startec
Global Communications Corporation, 10411 Motor City Drive, Bethesda, MD
20817.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission. Shares of Common Stock subject to options, warrants or other
rights to purchase which are currently exercisable or are exercisable
within 60 days of July 31, 1997 are deemed outstanding for computing the
percentage ownership of the persons holding such options, warrants or
rights, but are not deemed outstanding for computing the percentage
ownership of any other person. Unless otherwise indicated, each person
possesses sole voting and investment power with respect to the shares
identified as beneficially owned.
(3) Assumes no exercise of the Underwriters' over-allotment option.
(4) Mr. Mukunda has pledged all of his shares of Common Stock as security for
the Company's obligations under the Signet Agreement. In addition, Mr.
Mukunda and Mr. and Mrs. Srinivas have entered into a Voting Agreement
dated as of July 31, 1997 pursuant to which Mr. Mukunda has the power to
vote all of the shares held by Mr. and Mrs. Srinivas. See "Description of
Capital Stock -- Signet Agreement."
(5) The address of Blue Carol Enterprises Ltd. is 930 Ocean Center Harbour
City, Kowloon, Hong Kong. Blue Carol Enterprises Ltd. is an subsidiary of
Portugal Telcom International.
(6) Such shares are held by Mr. Srinivas and his wife as joint tenants. Mr. and
Mrs. Srinivas have pledged all of their shares of Common Stock as security
for the Company's obligations under the Signet Agreement. See "Description
of Capital Stock -- Signet Agreement." In addition, Mr. Mukunda and Mr. and
Mrs. Srinivas has entered into a Voting Agreement dated as of July 31, 1997
pursuant to which Mr. Mukunda has the power to vote all of the shares held
by Mr. and Mrs. Srinivas.
(7) In connection with the Signet Agreement, the Company issued to Signet Bank
warrants to purchase 539,800 shares of Common Stock. Warrants with respect
to 269,900 shares are currently vested. The remaining 269,900 shares will
not vest if the Company completes the Offering prior to December 31, 1997.
See "Description of Capital Stock -- Signet Agreement." The address for
Signet Bank is 7799 Leesburg Pike, Suite 500, Falls Church, VA 22043.
(8) Upon joining the Company's Board of Directors, Mr. Dossani will receive
options to purchase 5,000 shares of the Company's Common Stock.
(9) Upon joining the Company's Board of Directors, Mr. Prins will receive
options to purchase 5,000 shares of the Company's Common Stock. In
addition, Mr. Prins is a Senior Vice President of Ferris, Baker Watts,
Incorporated, one of the Representatives of the Underwriters. Ferris, Baker
Watts, Incorporated will receive warrants to purchase up to 150,000 shares
of the Company's Common Stock upon the completion of the Offering. See
"Underwriting." Mr. Prins expressly disclaims beneficial ownership of such
warrants and shares.
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<PAGE>
CERTAIN TRANSACTIONS
The Company has an agreement with Companhia Portuguesa Radio Marconi, S.A.
("Marconi"), an affiliate of Blue Carol Enterprises Ltd. ("Blue Carol"), which
currently holds 15% of the Company's Common Stock for the purchase and sale of
long distance services. Revenues generated from this affiliate amounted to
approximately $625,000, $1,035,000 and $1,051,000, or 12%, 10% and 5% of the
Company's total revenues for the years ended December 31, 1994, 1995 and 1996,
respectively. Services provided to the Company by this affiliate amounted to
approximately $134,000 and $663,000 of the Company's costs of services for the
years ended December 31, 1995 and 1996, respectively. No services were purchased
from this affiliate in fiscal 1994. The Company also has a lease agreement with
Marconi for rights to use undersea fiber optic cable under which the Company is
obligated to pay Marconi $38,330 semi-annually for five years on a resale basis.
Pursuant to the terms of a Subscription Agreement and an Agreement for
Management Participation by and among Blue Carol Enterprises, Limited, Startec,
Inc. and Ram Mukunda dated as of February 8, 1995, the Company and Mr. Mukunda
granted Blue Carol certain management rights in the Company. The agreement was
subsequently amended in June 1997 to remove certain restrictions applicable to
the Company. This agreement terminates, and all of Blue Carol's management
rights expire, upon the completion of this Offering.
The Company provided long distance services to EAA, Inc. ("EAA"), an
affiliate owned by Ram Mukunda, the Company's President and Chief Executive
Officer. Payments received by the Company from EAA amounted to approximately
$396,000 and $262,000 for the years ended December 31, 1995 and 1996,
respectively. Accounts receivable from EAA were $167,000 and $64,000 for the
years ended December 31, 1995 and 1996, respectively. There were no transactions
with EAA in 1994. The Company believes that the services provided were on
standard commercial terms.
The Company was indebted to Vijay and Usha Srinivas and Mrs. B.V. Mukunda
under certain notes payable in the amounts of $46,000 and $100,000,
respectively as of March 31, 1997. Mr. and Mrs. Srinivas are the brother-in-law
and sister, and Mrs. B.V. Mukunda is the mother of Ram Mukunda, the Company's
President and Chief Executive Officer. The interest rates on these notes ranged
from 15% to 25%. These amounts were repaid in July 1997.
In July 1997, the Company offered to exchange shares of its voting Common
Stock for all of the issued and outstanding shares of its non-voting stock, or
alternatively, to repurchase such shares of non-voting stock for cash. In
connection therewith, Mr. Mukunda exchanged 17,175 shares of non-voting stock
for an equal number of shares of voting Common Stock.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this offering, the Company will be authorized to
issue 20,000,000 shares of Common Stock, par value $.01 per share and 100,000
shares of Preferred Stock, par value $1.00 per share.
COMMON STOCK
As of July 31, 1997, there were 5,397,999 shares of Common Stock
outstanding held of record by 15 stockholders. As of July 31, 1997, options to
purchase an aggregate of 269,766 shares of Common Stock were outstanding, of
which no options were exercisable, warrants and other rights to purchase an
aggregate of 563,800 shares of Common Stock were also outstanding of which
options and warrants to purchase 269,900 shares were then exercisable. After
giving effect to the sale of 1,900,000 shares of Common Stock by the Company in
this Offering, there will be 7,297,999 shares of Common Stock outstanding
(7,582,999 shares if the Underwriters' over-allotment option is exercised in
full).
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders, including with respect to the election
of directors. There are no cumulative voting rights in the election of
directors. Subject to the prior rights of holders of Preferred Stock, if any,
the holders of Common Stock are entitled to receive such dividends, if any, as
may be declared from time to time by the Board of Directors in its discretion
from funds legally available therefor. Upon liquidation or dissolution of the
Company, the remainder of the assets of the Company will be distributed ratably
among the holders of Common Stock after payment of liabilities and the
liquidation preferences of any outstanding shares of Preferred Stock. The Common
Stock has no preemptive or other subscription rights and there are no conversion
rights or redemption or sinking fund provisions with respect to such shares. All
of the outstanding shares of Common Stock are, and the shares to be sold in this
offering will be, fully paid and nonassessable.
Prior to the Offering, the Company's capital structure consisted of two
classes of common stock, one class with voting rights and one class without
voting rights. In July 1997, the Company offered to exchange shares of voting
Common Stock for all of its issued and outstanding shares of non-voting common
stock, or, alternatively to repurchase such shares of non-voting common stock
for cash. All of the shares of non-voting common stock were exchanged or
repurchased pursuant to the offer and the class of non-voting common stock has
been eliminated.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 100,000 shares of
Preferred Stock in one or more series and to fix the price, 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 a series or the
designation of such series, without any further vote or action by the Company's
stockholders. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could 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 market price of, and the voting and other rights of, the
holders of Common Stock. There are no shares of Preferred Stock outstanding, and
the Company has no current plans to issue any shares of Preferred Stock.
SIGNET AGREEMENT
In connection with the Signet Agreement, the Company issued to Signet Bank
warrants (the "Signet Warrants") to purchase 539,800 shares of Common Stock,
representing 10% of the outstanding Common Stock, on a fully-diluted basis on
the date of issuance. Warrants with respect to 269,900 of such shares vested
fully on the date of issuance. No additional Signet Warrants will vest if the
Company consummates an initial public offering prior to December 31, 1997. The
exercise price of the Signet
54
<PAGE>
Warrants is $8.46 per share, and the warrants expire July 1, 2002. The holders
of the Signet Warrants will have no voting or other stockholder rights unless
and until the Signet Warrants are exercised. The number of shares of Common
Stock issuable and the exercise price of the Signet Warrants are subject to
anti-dilution adjustments in the event the Company issues additional shares of
Common Stock or options to purchase shares of Common Stock (except pursuant to
certain outstanding warrants, existing employee options, and up to 750,000
shares that may be issued in connection with issuances of options under employee
incentive plans). The intent of the antidilution provisions is to permit Signet
Bank to maintain its percentage ownership after the Offering, which will be
3.4%, regardless of future sales or issuance by the Company of its Common Stock,
options, warrants or other rights to purchase Common Stock, or securities
convertible into Common Stock (subject to the exceptions outlined above) and to
give Signet Bank price protection such that the $8.46 purchase price will be
adjusted downward in the event of future sales or issuances by the Company at an
effective price which is below that exercise price. The antidilution provisions
will survive the Offering and may affect the Company's ability to raise
additional capital through the sale or issuance of its Common Stock, options,
warrants or other rights to purchase Common Stock or securities convertible into
Common Stock.
In addition, in connection with the Signet Agreement and the issuance of
the Signet Warrants, the Company agreed to provide the holders of the Signet
Warrants with certain rights to request the Company to register the shares of
Common Stock underlying the Signet Warrants under the Securities Act. At any
time after 90 days following the date of this Prospectus, the warrant holders
may twice demand that the Company register, at the Company's expense, at least
50% of the shares of Common Stock underlying the Signet Warrants. Signet Bank
has agreed to refrain from selling or otherwise transferring any shares
underlying the Signet Warrants for a period of 180 days following the date of
this Prospectus. In addition to the demand registration rights, the warrant
holders also have "piggy-back" registration rights with respect to any offering
by the Company following this Offering.
The Company's repayment and other obligations under the Signet Agreement
are secured by, among other things, a pledge of all of the capital stock of the
Company owned by Ram Mukunda, the Company's President, Director and Principal
Shareholder, and Vijay Srinivas, a Company Director and his wife, Usha Srinivas.
Beginning on January 1, 1998 (and extending to July 1, 1998 upon the occurrence
of defined events), should Signet Bank determine and assert based on its
reasonable assessment that a material adverse change has occurred, all amounts
outstanding would be due and payable. Under certain circumstances, if an event a
default occurs under the Signet Agreement which would permit Signet Bank to take
possession and control over the shares subject to the pledge, Signet Bank would
acquire voting control of more than 50% of the Company's issued and outstanding
shares of Common Stock.
WARRANTS AND REGISTRATION RIGHTS
The Company has agreed to issue to the Representatives of the Underwriters,
for consideration of $.01 per warrant, warrants (the "Representatives'
Warrants") to purchase up to 150,000 shares of the Common Stock at an exercise
price per share equal to 110% of the initial public offering price. The
Representatives' Warrants are exercisable for a period of five years beginning
one year from the date of this Prospectus. The holders of the Representatives'
Warrants will have no voting or other stockholder rights unless and until the
Representatives' Warrants are exercised. See "Underwriting."
In connection with the issuance to the Representatives of the
Representatives' Warrants, the Company will agree to provide the holders of the
Representatives' Warrants with certain rights to request the Company to register
the shares of Common Stock underlying the Representatives' Warrants under the
Securities Act. The warrant holders also will be given "piggy-back" registration
rights with respect to certain offerings by the Company following this Offering.
See "Underwriting."
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION, BYLAWS AND
MARYLAND LAW
Amended and Restated Articles of Incorporation and Bylaws
The Company's Charter and Bylaws include certain provisions which may have
the effect of delaying, deterring or preventing a future takeover or change in
control of the Company, by proxy contest,
55
<PAGE>
tender offer, open-market purchases or otherwise, unless such takeover or change
in control is approved by the Company's Board of Directors. Such provisions may
also make the removal of directors and management more difficult.
In this regard, the Charter and Bylaws provide that the number of directors
shall be five but may not consist of fewer than three nor more than twenty-five
members. The Charter divides the Board of Directors into three classes, with one
class having a term of one year, one class having a term of two years, and one
class having a term of three years. Each class is to be as nearly equal in
number as possible. At each annual meeting of stockholders, directors will be
elected to succeed those directors whose terms have expired, and each newly
elected director will serve for a three-year term. In addition, the Charter and
Bylaws provide that any director or the entire Board may be removed by
stockholders only for cause and with the approval of the holders of 80% of the
total voting power of all outstanding securities of the Company then entitled to
vote generally in the election of directors, voting together as a single class.
The Charter and Bylaws also provide that all vacancies on the Board of
Directors, including those resulting from an increase in the number of
directors, may be filled solely by a majority of the remaining directors even if
they do not constitute a quorum; provided, however, that if the vacancy occurs
as a result of the removal of a director, the stockholders may elect a successor
at the meeting at which such removal occurs.
The classification of directors and the provisions in the Charter that
limit the ability of stockholders to remove directors and that permit the
remaining directors to fill any vacancies on the Board, will have the effect of
making it more difficult for stockholders to change the composition of the Board
of Directors. As a result, at least two annual meetings of stockholders will be
required, in most cases, for the stockholders to change a majority of the
directors, whether or not a change in the Board of Directors would be beneficial
to the Company and its stockholders and whether or not a majority of the
Company's stockholders believes that such a change would be desirable.
The Bylaws also contain provisions relating to the stockholders' ability to
call meetings of stockholders, present stockholder proposals, and nominate
candidates for the election of directors. The Bylaws provide that special
meetings of stockholders can be called only by the Chairman of the Board of
Directors, the President, the Board of Directors, or by the Secretary at the
request of holders of at least 25% of all votes entitled to be cast. These
provisions may have the effect of delaying consideration of a stockholder
proposal until the next annual meeting unless a special meeting is called. In
addition, the Charter and Bylaws establish procedures requiring advanced notice
with regard to stockholder proposals and the nomination of candidates for
election as directors (other than by or at the direction of the Board of
Directors or a committee of the Board of Directors). Pursuant to these
procedures, stockholders desiring to introduce proposals or make nominations for
the election of directors must provide written notice, containing certain
specified information, to the Secretary of the Company not less than 60 nor more
than 90 days prior to the meeting. If less than 30 days' notice or prior public
disclosure of the date of the meeting is given, the required notice regarding
stockholder proposals or director nominations must be in writing and received by
the Secretary of the Company no later than the tenth day following the day on
which notice of the meeting was mailed. The Company may reject a stockholder
proposal or nomination that is not made in accordance with such procedures.
The Charter also includes certain "super-majority" voting requirements,
which provide that the affirmative vote of the holders of at least 80% of the
aggregate combined voting power of all classes of capital stock entitled to vote
thereon, voting as one class, is required to amend certain provisions of the
Charter, including those provisions relating to the number, election, term of
and removal of directors; the amendment of the Bylaws; and the provision
governing applicability of the Maryland Control Share Act (summarized below). In
addition, the Charter includes provisions which require the vote of a simple
majority of the Company's issued and outstanding Common Stock to approve certain
significant corporate transactions, including the sale of all or substantially
all of the Company's assets, rather than the vote of two-thirds of the issued
and outstanding Common Stock. The effect of these provisions will be to make it
more difficult to amend provisions of the Charter, even if such amendments are
favored by a majority of stockholders.
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The description of the Charter and Bylaw provisions set forth above are
intended to be summaries only. The forms of Charter and Bylaws, as amended and
restated, are filed as exhibits to the Registration Statement filed with the
Commission of which this Prospectus forms a part. This summary is qualified in
its entirety by reference to such documents. See "Risk Factors -- Control of
Company by Current Stockholders" and "-- Certain Provisions of the Company's
Articles of Incorporation, Bylaws and Maryland Law."
Maryland Law
Section 3-601, et seq. of the Maryland General Corporation Law (the
"Business Combination Statute"), and Section 3-701 et seq. of the Maryland
General Corporation Law with respect to acquisitions of "control shares" may
also have the effect of delaying, deterring or preventing a future takeover or
change in control of the Company, by proxy contest, tender offer, open-market
purchases or otherwise.
Under the Business Combination Statute, certain "business combinations"
(including mergers or similar transactions subject to a statutory stockholder
vote and additional transactions involving transfers of assets or securities in
specified amounts) between a Maryland corporation subject to the Business
Combination Statute and an Interested Stockholder, or an affiliate thereof are
prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder unless an exemption is available.
Thereafter, any such business combination must be recommended by the board of
directors of the corporation and approved by the affirmative vote of at least:
(i) 80% of the votes entitled to be cast by all holders of outstanding shares of
voting stock of the corporation; and (ii) two-thirds of the votes entitled to be
cast by holders of voting stock of the corporation other than voting stock held
by the Interested Stockholder who will or whose affiliate will be a party to the
business combination voting together as a single voting group, unless the
corporation's stockholders receive a minimum price (as described in the Business
Combination Statute) for their stock and the consideration is received in cash
or in the same form as previously paid by the Interested Stockholder for its
shares. The Business Combination Statute defines an "Interested Stockholder" as
any person who is the beneficial owner, directly or indirectly, of 10% or more
of the outstanding voting stock of the corporation after the date on which the
corporation had 100 or more beneficial owners of its stock; or any affiliate or
associate of the corporation who, at any time within the two-year period
immediately prior to the date in question was the beneficial owner of 10% or
more of the voting power of the then-outstanding stock of the corporation.
These provisions of the Business Combination Statute do not apply, unless
the corporation's charter or Bylaws provide otherwise, to a corporation that on
July 1, 1983 had an existing Interested Stockholder, unless, at any time
thereafter, the Board of Directors elects to be subject to the law. These
provisions of the Business Combination Statute also would not apply to business
combinations that are approved or exempted by the Board of Directors of the
corporation prior to the time that any other Interested Stockholder becomes an
Interested Stockholder. A Maryland corporation may adopt an amendment to its
charter electing not to be subject to the special voting requirements of the
Business Combination Statute. Any such amendment would have to be approved by
the affirmative vote of at least 80% of the votes entitled to be cast by all
holders of outstanding shares of voting stock of the corporation voting together
as a single voting group, and 66 2/3% of the votes entitled to be cast by
persons (if any) who are not Interested Stockholders of the corporation or
affiliates or associates of Interested Stockholders voting together as a single
voting group. The Company has not adopted such an amendment to its Charter.
In addition to the Business Combination Statute, Section 3-701 et seq. of
the Maryland General Corporation Law provides that "control shares" of a
Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by the stockholders at a special meeting by
the affirmative vote of two-thirds of all the votes entitled to be cast on the
matter, excluding all interested shares. "Control shares" are voting shares of
stock which, if aggregated with all other such shares previously acquired by the
acquiror, or in respect of which the acquiror is able to exercise or direct the
exercise of voting power, would entitle the acquiror, directly or indirectly, to
exercise or direct the exercise of the voting power in electing directors within
any one of the following ranges of voting
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power: (i) 20% or more but less than 33 1/3%; (ii) 33 1/3% or more but less than
a majority or (iii) a majority or more of all voting power. Control shares do
not include shares the acquiror is then entitled to vote as a result of having
previously obtained stockholder approval. A "control share acquisition" means
the acquisition, directly or indirectly, by any person, of ownership of, or the
power to direct the exercise of voting power with respect to, issued and
outstanding control shares.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses and
delivery of an "acquiring person statement"), may compel a corporation's board
of directors to call a special meeting of stockholders to be held within 50 days
of a demand to consider the voting rights to be accorded the shares acquired or
to be acquired in the control share acquisition. If no request for a meeting is
made, the corporation may itself present the question at any stockholders'
meeting. Unless the charter or bylaws provide otherwise, if the acquiring person
does not deliver an acquiring person statement within 10 days following a
control share acquisition then, subject to certain conditions and limitations,
the corporation may redeem any or all of the control shares (except those for
which voting rights have previously been approved) for fair value determined,
without regard to the absence of voting rights for the control shares, at any
time during a period commencing on the 11th day after the control share
acquisition and ending 60 days after a statement has been delivered. Moreover,
unless the charter or bylaws provide otherwise, if voting rights for control
shares are approved at a stockholders' meeting and the acquiror becomes entitled
to exercise or direct the exercise of a majority or more of all voting power,
other stockholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws of
the corporation. The shares of Common Stock held by Ram Mukunda and his family
are not subject to the restrictions imposed by the Maryland Control Share Act.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is
- -----------------.
LISTING
The Company will apply for quotation of the Common Stock on the Nasdaq
National Market under the symbol "STGC."
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 7,297,999
outstanding shares of Common Stock, and options, warrants and other rights to
purchase up to an additional 983,566 shares of Common Stock (of which 563,666
currently are exercisable) at prices ranging from $0.30 to $11.00 per share.
Of the Common Stock outstanding upon completion of the Offering, the
1,900,000 shares of Common Stock (excluding the Underwriters' over-allotment)
sold in the Offering will be freely tradeable without restriction or further
registration under the Securities Act, except for any shares held by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act, and the regulations promulgated thereunder (an "Affiliate"), or
persons who have been Affiliates within the preceding three months. The
remaining 2,070,790 outstanding shares of Common Stock will be "restricted
securities" as that term is defined in Rule 144 and may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rule 144, as described below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
restricted securities for a period of at least one year from the later of the
date such restricted securities were acquired from the Company and the date they
were acquired from an Affiliate, is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of 1% of the then
outstanding shares of Common Stock and the average weekly trading volume in the
Common Stock during the four calendar weeks preceding such sale. Sales under
Rule 144 are also subject to certain provisions relating to the manner and
notice of sale and the availability of current public information about the
Company. Further, under Rule 144(k), if a period of at least two years has
elapsed between the later of the date restricted securities were acquired from
the Company and the date they were acquired from an Affiliate of the Company, a
holder of such restricted securities who is not an Affiliate at the time of the
sale and has not been an Affiliate for at least three months prior to the sale
would be entitled to sell the shares immediately without regard to the volume
and manner of sale limitations described above. In addition, Rule 701 under the
Securities Act also permits resales of shares acquired pursuant to certain
compensation plans and arrangements. Shares issued pursuant to the Company's
option plans and certain other compensation arrangements may be resold in
reliance upon Rule 144, but without compliance with certain of Rule 144's
restrictions, including the holding period requirement.
The Company and its executive officers, directors and all stockholders,
have agreed that for a period of 180 days following the Offering, without the
prior written consent of the Representatives, they will not, directly or
indirectly, offer or agree to sell, sell, hypothecate, pledge or otherwise
dispose of any shares of Common Stock (or securities convertible into,
exchangeable for or exercisable for or evidencing the right to purchase shares
of Common Stock). In addition, Signet Bank has agreed to refrain from selling or
otherwise transferring any shares underlying the Signet Warrants for a period of
180 days following the Offering. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rule 144 or Rule 701 under the Securities Act, the terms of the Signet Warrants
or otherwise, shares subject to lock-up agreements will not be saleable until
such agreements expire.
In addition, the Company intends to register on Form S-8 under the
Securities Act approximately 269,766 shares of Common Stock issuable under
options subject to the Company's Amended and Restated Stock Option Plan and its
1997 Performance Incentive Plan. Shares issued under these plans (other than
shares issued to affiliates) generally may be sold immediately in the public
market, subject to vesting requirements and lock-up agreements. The Company has
also agreed to provide certain holders of warrants to purchase its Common Stock
with rights to request the registration of the shares underlying the warrants
under the Securities Act. See "Description of Capital Stock -- Warrants and
Registration Rights."
Future sales of Common Stock in the public market following this Offering
by the current stockholders of the Company, or the perception that such sales
could occur, could adversely affect the market price for the Common Stock. The
Company's principal stockholders hold a significant portion of the
59
<PAGE>
Company's outstanding Common Stock and a decision by one or more of these
stockholders to sell shares pursuant to Rule 144 under the Securities Act or
otherwise could materially adversely affect the market price of the Common
Stock.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the underwriters named
below (the "Underwriters"), for whom Ferris, Baker Watts, Incorporated and
Boenning & Scattergood, Inc. are acting as representatives (the
"Representatives"), and each of the Underwriters has severally agreed to
purchase from the Company, the respective number of shares of Common Stock set
forth opposite its name below:
NUMBER OF
UNDERWRITER SHARES
------------------------------------------ ----------
Ferris, Baker Watts, Incorporated ......
Boenning & Scattergood, Inc ............
Total ................................. 1,900,000
==========
The nature of the respective obligations of the Underwriters is such that
all of the shares of Common Stock must be purchased if any are purchased. The
Underwriting Agreement provides that the obligations of the Underwriters to pay
for and accept delivery of the shares of Common Stock are subject to certain
conditions, including the approval of certain legal matters by counsel.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock initially at the public offering
price set forth on the cover page of this Prospectus and to certain selected
dealers at such price less a concession not to exceed $___ per share; that the
Underwriters may allow, and such selected dealers may reallow, a concession to
certain other dealers not to exceed $___ per share; and that after the
commencement of the Offering, the public offering price and the concessions may
be changed.
The Company has granted the Underwriters an option to purchase in the
aggregate up to 285,000 additional shares of Common Stock solely to cover
over-allotments, if any. The option may be exercised in whole or in part at any
time within 30 days after the date of this Prospectus. To the extent the option
is exercised, the Underwriters will be severally committed, subject to certain
conditions, to purchase the additional shares of Common Stock in proportion to
their respective purchase commitments as indicated in the preceding table.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and, where such
indemnification is unavailable, to contribute to payments that the Underwriters
may be required to make in respect of such liabilities.
The executive officers, directors and stockholders of the Company have
agreed that they will not offer, sell, contract to sell or grant an option to
purchase or otherwise dispose of any shares of the Company's Common Stock,
options to acquire shares of Common Stock or any securities exercisable for, or
convertible into Common Stock owned by them, for a period of 180 days from the
date of this Prospectus, without the prior written consent of the
Representatives. The Company also has agreed not to offer, sell, or issue any
shares of Common Stock, options to acquire Common Stock or any securities
exercisable for, or convertible into Common Stock, for a period of 180 days from
the date of this Prospectus, without the prior written consent of the
Representatives, except that the Company may issue securities pursuant to the
Company's stock option and incentive plans and upon the exercise of any
outstanding options and warrants. In addition, Signet Bank has agreed to refrain
from selling or otherwise transferring any shares of Common Stock underlying the
Signet Warrants for a period of 180 days following the Offering.
Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price for the shares of Common Stock included
in this Offering will be determined by negotiation among the Company and the
Representatives. Among the factors to be considered in determining
60
<PAGE>
such price will be the history of and prospects for the Company's business and
the industry in which it operates, an assessment of the Company's management,
past and present revenues and earnings of the Company, the prospects for growth
of the Company's revenues and earnings and currently prevailing conditions in
the securities markets, including current market valuations of publicly traded
companies which are comparable to the Company. There can be no assurance,
however, that the prices at which the shares of Common Stock will sell in the
public market after this Offering will not be lower than the price at which it
is sold by the Underwriters.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Certain persons participating in the Offering may over allot or engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock, including entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting any purchase for the purpose of pegging, fixing
or maintaining the price of the Common Stock of the Company. A syndicate
covering transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created in
connection with the offering. A penalty bid means an arrangement that permits
the Underwriters to reclaim a selling concession from a syndicate member in
connection with the offering when the Common Stock of the Company sold by the
syndicate member is purchased in syndicate covering transactions. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail in
the open market. Such stabilizing activities, if commenced, may be discontinued
at any time.
The Company has agreed to issue to the Representatives, for consideration
of $.01 per warrant, warrants (the "Representatives' Warrants") to purchase up
to 150,000 shares of the Common Stock at an exercise price per share equal to
110% of the initial public offering price. The Representatives' Warrants are
exercisable for a period of five years beginning one year from the date of this
Prospectus. The holders of the Representatives' Warrants will have no voting or
other stockholder rights unless and until the Representatives' Warrants are
exercised. In addition, the Company has granted the holders of the
Representatives' Warrants certain rights to register the shares of Common Stock
underlying the Representatives' Warrants under the Securities Act.
The Company has also agreed to pay the Representative a non-accountable
expense allowance equal to 1.0% of the gross proceeds of the Offering for
expenses incurred in connection therewith.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Shulman, Rogers, Gandal, Pordy & Ecker, P.A., Rockville,
Maryland. Certain legal matters in connection with the Offering will be passed
upon for the Underwriters by Venable, Baetjer & Howard LLP, McLean, Virginia.
EXPERTS
The financial statements of the Company included in this Prospectus and the
financial statement schedule included in the Registration Statement of which
this Prospectus forms a part have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement
61
<PAGE>
and the exhibits and schedules to the Registration Statement. For further
information with respect to the Company and such Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed as a part of the Registration Statement. Statements contained in this
Prospectus concerning the contents of any contract or any other document
referred to are not necessarily complete and in each instance reference is made
to the copy of such contract or document filed as an exhibit to the Registration
Statement. Each such statement is qualified in all respects by such reference to
such exhibit. The Registration Statement, including exhibits and schedules
thereto, as well as the reports and other information filed by the Company with
the Commission, may be inspected without charge at the Public Reference Room of
the Commission's principal office at 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 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can also be
obtained at prescribed rates from the Public Reference Section of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Electronic
filings made through the Electronic Data Gathering Analysis and Retrieval System
are also publicly available through the Commission's Web Site
(http://www.sec.gov).
The Company is not currently subject to the periodic reporting and
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). As a result of the Offering, the Company will be required
to file reports and other information with the Commission pursuant to the
requirements of the Exchange Act. Such reports and other information may be
obtained from the Commission's Public Reference Section and copied at the public
reference facilities and regional offices of the Commission referred to above.
The Company intends to furnish holders of the Common Stock with annual reports
containing financial statements audited by an independent public accounting firm
and with quarterly reports containing unaudited summary financial statements for
each of the first three quarters of each fiscal year.
62
<PAGE>
GLOSSARY OF TERMS
Access Charges: The fees paid by long distance carriers to LECs for
originating and terminating long distance calls on their local networks.
Accounting or Settlement Rate: The per minute rate negotiated between
carriers in different countries for termination of international long distance
traffic in, and return traffic to, the carriers' respective countries.
Call reorigination: a form of dial up access that allows a user to access a
telecommunications company's network by placing a telephone call and waiting for
an automated callback. The callback then provides the user with dial tone which
enables the user to place a call.
CLEC: Competitive Local Exchange Carrier.
Correspondent agreement: Agreement between international long distance
carriers that provides for the termination of traffic in, and return traffic to,
the carriers' respective countries at a negotiated per minute rate and provides
for a method by which revenues are distributed between the two carriers (also
known as an "operating agreement").
Dedicated access: A means of accessing a network through the use of a
permanent point-to-point circuit typically leased from a facilities-based
carrier. The advantage of dedicated access is simplified premises-to-anywhere
calling, faster call set-up times and potentially lower access costs (provided
there is sufficient traffic over the circuit to generate economies of scale).
Dial up access: A form of service whereby access to a network is obtained
by dialing a toll-free number or a paid local access number.
Direct access: A method of accessing a network through the use of private
lines.
EU (European Union): Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden,
and the United Kingdom.
Facilities-based carrier: A carrier which transmits a significant portion
of its traffic over owned or leased transmission facilities.
FCC: Federal Communications Commission.
Fiber optic: A transmission medium consisting of high-grade glass fiber
through which light beams are transmitted carrying a high volume of
telecommunications traffic.
International gateway: A switching facility that provides connectivity
between international carriers and performs any necessary signaling conversions
between countries.
IRU (Indefeasible Rights of Use): The rights to use a telecommunications
system, usually an undersea cable, with most of the rights and duties of
ownership, but without the right to control or manage the facility and,
depending upon the particular agreement, without any right to salvage or duty to
dispose of the cable at the end of its useful life.
ISDN (Integrated Services Digital Network): A hybrid digital network
capable of providing transmission speeds of up to 128 kilobits per second for
both voice and data.
ISR (International Simple Resale): The use of international leased lines
for the resale of switched telephony to the public, bypassing the current system
of accounting rates.
ITO (Incumbent Telecommunications Operator): The dominant carrier in each
country, often government-owned or protected; commonly referred to as the
Postal, Telephone and Telegraph Company, or PTT.
ITU: The International Telecommunications Union.
LEC (Local Exchange Carrier): Companies from which the Company and other
long distance providers must purchase "access services" to originate and
terminate calls in the U.S.
G-1
<PAGE>
Local connectivity: Physical circuits connecting the switching facilities
of a telecommunications services provider to the interexchange and transmission
facilities of a facilities-based carrier.
Local exchange: A geographic area determined by the appropriate regulatory
authority in which calls generally are transmitted without toll charges to the
calling or called party.
Long distance carriers: Long distance carriers provide services between
local exchanges on an interstate or intrastate basis. A long distance carrier
may offer services over its own or another carriers facilities.
PBX (Public Branch Exchange): Switching equipment that allows connection
of private extension telephones to the PSTN or to a private line.
PSTN (Public Switched Telephone Network): A telephone network which is
accessible by the public at large through private lines, wireless systems and
pay phones.
PTT: A foreign telecommunication carrier that has been dominant in its home
market and which may be wholly or partially government-owned, often referred to
as Post Telephone and Telegraph or "PTT".
Private line: A dedicated telecommunications connection between end-user
locations.
Proportional return traffic: Under the terms of the operating agreements,
the foreign partners are required to deliver to the U.S. carriers the traffic
flowing to the U.S. in the same proportion as the U.S. carriers delivered
U.S.-originated traffic to the foreign carriers.
RBOC (Regional Bell Operating Company): The seven local telephone companies
established by the 1982 agreement between AT&T and the Department of Justice.
Resale: Resale by a provider of telecommunications services of services
sold to it by other providers or carriers on a wholesale basis.
Switched minutes: The number of minutes of telephone traffic carried on a
network using switched access.
Switch: Equipment that accepts instructions from a caller in the form of a
telephone number. Like an address on an envelope, the numbers tell the switch
where to route the call. The switch opens or closes circuits or selects the
paths or circuits to be used for transmission of information. Switching is a
process of interconnecting circuits to form a transmission path between users.
Switches allow telecommunications service providers to connect calls directly to
their destination, while providing advanced features and recording connection
information for future billing.
Voice telephony: A term used by the EU, defined as the commercial provision
for the public of the direct transport and switching of speech in real-time
between public switched network termination points, enabling any user to use
equipment connected to such a network termination point in order to communicate
with another termination point.
G-2
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants ............................................. F-2
Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997 .................. F-3
Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and
the Three Months ended March 31, 1996 and 1997 ....................................... F-4
Statements of Changes in Stockholders' Deficit for the years ended December 31, 1994,
1995 and 1996 and the Three Months ended March 31, 1997 .............................. F-5
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and
the Three Months ended March 31, 1996 and 1997 ....................................... F-6
Notes to Financial Statements ......................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Startec, Inc.:
We have audited the accompanying balance sheets of Startec, Inc. (a
Maryland corporation), as of December 31, 1995 and 1996, and the related
statements of operations, changes in stockholders' deficit, and cash flows for
each of the three years in the period ended December 31, 1996. 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 an 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 Startec, Inc., as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
August 1, 1997
F-2
<PAGE>
STARTEC, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996 AND MARCH 31, 1997
<TABLE>
<CAPTION>
MARCH 31,
1995 1996 1997
------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 528,198 $ 148,469 $ 239,280
Accounts receivable, net of allowance for doubtful accounts
of approximately $457,000, $1,079,000 and $1,307,000 ......... 2,220,755 5,334,183 5,918,899
Accounts receivable, related party ........................... 319,040 78,347 378,203
Other current assets .......................................... 130,449 210,522 225,690
------------ ------------ ------------
Total current assets ....................................... 3,198,442 5,771,521 6,762,072
------------ ------------ ------------
PROPERTY AND EQUIPMENT:
Long distance communications equipment ........................ 906,568 1,773,137 1,856,669
Computer and office equipment ................................. 215,685 392,238 420,765
Less -- Accumulated depreciation and amortization ............ (456,527) (789,053) (884,553)
------------ ------------ ------------
Total property and equipment, net ........................... 665,726 1,376,322 1,392,881
------------ ------------ ------------
Restricted cash ................................................ 180,000 180,000 180,000
------------ ------------ ------------
Total assets ................................................ $ 4,044,168 $ 7,327,843 $ 8,334,953
============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ............................................. $ 4,655,119 $ 7,170,904 $ 7,931,483
Accrued expenses ............................................. 1,279,506 2,858,090 2,930,976
Receivables based credit facility ........................... 570,446 1,812,437 1,846,491
Capital lease obligations .................................... 79,100 226,464 241,163
Notes payable to related parties .............................. 58,160 53,160 103,160
Notes payable to individuals and other ........................ 300,000 650,000 650,000
------------ ------------ ------------
Total current liabilities .................................... 6,942,331 12,771,055 13,703,273
------------ ------------ ------------
Capital lease obligations, net of current portion ............ 260,861 545,643 522,541
Notes payable to related parties, net of current portion ...... 100,000 100,000 50,000
------------ ------------ ------------
Total liabilities .......................................... 7,303,192 13,416,698 14,275,814
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT (NOTES 5 AND 12):
Voting common stock, $.01 par value; 10,000,000 shares au-
thorized; 5,380,824 shares issued and outstanding ............. 53,808 53,808 53,808
Nonvoting common stock, $1.00 par value; 25,000 shares au-
thorized; 22,526 shares issued and outstanding ................ 22,526 22,526 22,526
Additional paid-in capital .................................... 932,276 932,276 1,063,283
Unearned compensation ....................................... -- -- (119,765)
Accumulated deficit .......................................... (4,267,634) (7,097,465) (6,960,713)
------------ ------------ ------------
Total stockholders' deficit ................................. (3,259,024) (6,088,855) (5,940,861)
------------ ------------ ------------
Total liabilities and stockholders' deficit .................. $ 4,044,168 $ 7,327,843 $ 8,334,953
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
STARTEC, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1994 1995 1996 1996 1997
------------- ---------------- -------------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues .............................. $ 5,108,709 $ 10,507,450 $ 32,214,506 $ 4,722,032 $12,372,102
Cost of services ........................ 4,701,262 9,128,609 29,880,629 4,466,488 10,764,880
----------- ------------- ------------- ----------- ------------
Gross margin ........................... 407,447 1,378,841 2,333,877 255,544 1,607,222
General and administrative expenses ...... 1,159,382 2,169,946 3,995,966 595,096 1,151,444
Selling and marketing expenses ............ 91,062 183,927 514,298 52,233 104,371
Depreciation and amortization ............ 90,069 137,019 332,526 51,804 95,500
----------- ------------- ------------- ----------- ------------
Income (loss) from operations ............ (933,066) (1,112,051) (2,508,913) (443,589) 255,907
Interest expense ........................ 70,015 115,713 336,887 58,315 117,369
Interest income ........................... 24,244 21,750 15,969 4,816 1,056
----------- ------------- ------------- ----------- ------------
Income (loss) before
income tax provision ..................... (978,837) (1,206,014) (2,829,831) (497,088) 139,594
Income tax provision ..................... -- -- -- -- 2,842
----------- ------------- ------------- ----------- ------------
Net (loss) income ........................ $ (978,837) $ (1,206,014) $ (2,829,831) $ (497,088) $ 136,752
=========== ============= ============= =========== ============
Net (loss) income per common and equiv-
alent share ............................... $ (0.20) $ (0.22) $ (0.50) $ (0.09) $ 0.02
=========== ============= ============= =========== ============
Weighted average common and equivalent
shares outstanding ........................ 4,888,176 5,609,059 5,695,300 5,695,300 5,695,300
=========== ============= ============= =========== ============
Pro forma net (loss) income per common
and equivalent share (unaudited) ......... $ (0.43) $ (0.07) $ 0.03
============= =========== ============
Pro forma weighted average common
and equivalent shares outstanding
(unaudited) .............................. 5,980,073 5,980,073 5,980,073
============= =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
STARTEC, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE THREE MONTHS ENDED
MARCH 31, 1997
<TABLE>
<CAPTION>
VOTING NONVOTING
COMMON STOCK COMMON STOCK
--------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
----------- --------- -------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 ........................... 4,573,700 $45,737 22,526 $22,526
Net loss ............................................. -- -- -- --
---------- -------- ------- --------
Balance, December 31, 1994 ........................... 4,573,700 45,737 22,526 22,526
Net loss ............................................. -- -- -- --
Issuance of common stock .............................. 807,124 8,071 -- --
---------- -------- ------- --------
Balance, December 31, 1995 ........................... 5,380,824 53,808 22,526 22,526
Net loss ............................................. -- -- -- --
---------- -------- ------- --------
Balance, December 31, 1996 ........................... 5,380,824 53,808 22,526 22,526
Net income (unaudited) .............................. -- -- -- --
Unearned compensation pursuant to issuance of stock
options (unaudited) ................................... -- -- -- --
Amortization of unearned compensation (unaudited) ..... -- -- -- --
---------- -------- ------- --------
Balance, March 31, 1997 (unaudited) .................. 5,380,824 $53,808 22,526 $22,526
========== ======== ======= ========
<CAPTION>
ADDITIONAL
PAID-IN UNEARNED ACCUMULATED
CAPITAL COMPENSATION DEFICIT TOTAL
------------ -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 ........................... $ 190,347 $ -- $ (2,082,783) $ (1,824,173)
Net loss ............................................. -- -- (978,837) (978,837)
----------- ----------- ------------- -------------
Balance, December 31, 1994 ........................... 190,347 -- (3,061,620) (2,803,010)
Net loss ............................................. -- -- (1,206,014) (1,206,014)
Issuance of common stock .............................. 741,929 -- -- 750,000
----------- ----------- ------------- -------------
Balance, December 31, 1995 ........................... 932,276 -- (4,267,634) (3,259,024)
Net loss ............................................. -- -- (2,829,831) (2,829,831)
----------- ----------- ------------- -------------
Balance, December 31, 1996 ........................... 932,276 -- (7,097,465) (6,088,855)
Net income (unaudited) .............................. -- -- 136,752 136,752
Unearned compensation pursuant to issuance of stock
options (unaudited) ................................... 131,007 (131,007) -- --
Amortization of unearned compensation (unaudited) ..... -- 11,242 -- 11,242
----------- ----------- ------------- -------------
Balance, March 31, 1997 (unaudited) .................. $1,063,283 $ (119,765) $ (6,960,713) $ (5,940,861)
=========== =========== ============= =============
</TABLE>
F-5
<PAGE>
STARTEC, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1994 1995 1996 1996 1997
--------------- -------------- -------------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .............................. $ (978,837) $ (1,206,014) $ (2,829,831) $ (497,088) $ 136,752
Adjustments to net loss--
Depreciation and amortization .................. 90,069 137,019 332,526 51,804 95,500
Compensation pursuant to stock options ......... -- -- -- -- 11,242
Changes in operating assets and liabilities:
Accounts receivable ........................... (417,055) (1,342,047) (3,113,428) (636,774) (584,716)
Accounts receivable, related party ............ (273,145) (45,895) 240,693 (234,820) (299,856)
Other current assets ........................... (16,678) (83,532) (80,073) (8,302) (15,168)
Accounts payable .............................. 1,421,249 1,135,137 2,515,785 265,083 760,579
Accrued expenses .............................. 98,624 637,084 1,578,584 1,052,089 72,886
------------ ------------ ------------ ------------ ----------
Net cash (used in) provided by operating
activities ................................. (75,773) (768,248) (1,355,744) (8,008) 177,219
------------ ------------ ------------ ------------ ----------
INVESTING ACTIVITIES:
Purchases of property and equipment ............ (44,258) (199,526) (519,519) (461,459) (63,809)
------------ ------------ ------------ ------------ ----------
FINANCING ACTIVITIES:
Net borrowings under receivable credit facility . -- 570,446 1,241,991 185,429 34,054
Repayments under capital lease obligations ...... (102,158) (96,680) (91,457) (43,469) (56,653)
Borrowings under notes payable to related par-
ties 49,999 -- -- -- --
Repayments under notes payable to related par-
ties -- -- (5,000) (5,000) --
Borrowings under notes payable to individuals
and other ....................................... 235,000 50,000 475,000 -- --
Repayments under notes payable to individuals
and other ....................................... -- (35,000) (125,000) -- --
Proceeds from issuance of voting common stock -- 750,000 -- -- --
------------ ------------ ------------ ------------ ----------
Net cash provided by (used in) financing
activities ................................. 182,841 1,238,766 1,495,534 136,960 (22,599)
------------ ------------ ------------ ------------ ----------
Net increase (decrease) in cash and cash
equivalents ................................. 62,810 270,992 (379,729) (332,507) 90,811
Cash and cash equivalents at the begin-
ning of the period 194,396 257,206 528,198 528,198 148,469
------------ ------------ ------------ ------------ ----------
Cash and cash equivalents at the end of
the period ................................. $ 257,206 $ 528,198 $ 148,469 $ 195,691 $ 239,280
============ ============ ============ ============ ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid .................................... $ 62,526 $ 87,046 $ 296,926 $ 58,315 $ 98,532
============ ============ ============ ============ ==========
Income taxes paid ................................. $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Equipment acquired under capital lease ......... $ 53,944 $ 285,230 $ 523,603 $ 308,083 $ 48,207
============ ============ ============ ============ ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
STARTEC, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
1. BUSINESS DESCRIPTION:
ORGANIZATION
Startec, Inc. (the "Company"), is a Maryland corporation founded in 1989 to
provide long-distance telephone services. The Company currently offers
U.S.-originated long-distance service to residential and carrier customers
through foreign termination arrangements. The Company's marketing targets
specific ethnic residential market segments in the United States that are most
likely to seek low-cost international long-distance service to specific and
identifiable country markets. The Company is headquartered in Bethesda,
Maryland.
RISKS AND OTHER IMPORTANT FACTORS
For each of the three years in the period ending December 31, 1996, the
Company's operations have generated a net loss and negative operating cash
flows. As of March 31, 1997, the Company had a deficit in working capital of
approximately $6,941,000, and total liabilities exceeded total assets by
approximately $5,941,000. As more fully described in Note 12, on July 1, 1997,
the Company entered into a credit facility with a bank. The credit facility
provides for maximum borrowings of up to $10 million through December 31, 1997,
and the lesser of $15 million or 85 percent of eligible accounts receivable, as
defined, thereafter until maturity in December 1999. The Company will require
significant additional capital to finance its expansion plans. There can be no
assurance that the Company will be successful in raising additional capital.
The Company is subject to various risks in connection with the operation of
its business. These risks include, but are not limited to, dependence on
operating agreements with foreign partners, significant foreign and U.S.-based
customers and suppliers, availability of transmission facilities, U.S. and
foreign regulations, international economic and political instability,
dependence on effective billing and information systems, customer attrition, and
rapid technological change. Many of the Company's competitors are significantly
larger and have substantially greater financial, technical, and marketing
resources than the Company; employ larger networks and control transmission
lines; offer a broader portfolio of services; have stronger name recognition and
loyalty; and have long-standing relationships with the Company's target
customers. In addition, many of the Company's competitors enjoy economies of
scale that can result in a lower cost structure for transmission and related
costs, which could cause significant pricing pressures within the long-distance
telecommunications industry. If the Company's competitors were to devote
significant additional resources to the provision of international long-distance
services to the Company's target customer base, the Company's business,
financial condition, and results of operations could be materially adversely
affected.
In the United States, the Federal Communications Commission ("FCC") and
relevant state Public Service Commissions have the authority to regulate
interstate and intrastate telephone service rates, respectively, ownership of
transmission facilities, and the terms and conditions under which the Company's
services are provided. Legislation that substantially revised the U.S.
Communications Act of 1934 was signed into law on February 8, 1996. This
legislation has specific guidelines under which the Regional Bell Operating
Companies ("RBOCs") can provide long-distance services, which will permit the
RBOCs to compete with the Company in providing domestic and international
long-distance services. Further, the legislation, among other things, opens
local service markets to competition from any entity (including long-distance
carriers, such as AT&T, cable television companies and utilities).
F-7
<PAGE>
STARTEC, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Because the legislation opens the Company's markets to additional
competition, particularly from the RBOCs, the Company's ability to compete may
be adversely affected. Moreover, certain Federal and other governmental
regulations may be amended or modified, and any such amendment or modification
could have material adverse effects on the Company's business, results of
operations, and financial condition.
2. SIGNIFICANT ACCOUNTING PRINCIPLES:
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The interim financial data as of March 31, 1997 and for the three-month
periods ended March 31, 1996 and 1997 has been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") and include, in the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
interim periods results. The results of operations for the three months ended
March 31, 1997 are not necessarily indicative of the results to be expected for
the full year.
REVENUE RECOGNITION
Revenues for telecommunication services provided to customers are
recognized as services are rendered, net of an allowance for revenue that the
Company estimates will ultimately not be realized. Revenues for return traffic
received according to the terms of the Company's operating agreements with its
foreign partners are recognized as revenue as the return traffic is received and
processed.
The Company has entered into operating agreements with telecommunications
carriers in foreign countries under which international long-distance traffic is
both delivered and received. Under these agreements, the foreign carriers are
contractually obligated to adhere to the policy of the FCC, whereby traffic from
the foreign country is routed to international carriers, such as the Company, in
the same proportion as traffic carried into the country. Mutually exchanged
traffic between the Company and foreign carriers is settled through a formal
settlement policy at agreed upon rates per-minute. The Company records the
amount due to the foreign partner as an expense in the period the traffic is
terminated. When the return traffic is received in the future period, the
Company generally realizes a higher gross margin on the return traffic compared
to the lower margin (or sometimes negative margin) on the outbound traffic.
Revenue recognized from return traffic was approximately $174,000, $1,959,000,
and $1,121,000 or 3 percent, 19 percent, and 3 percent of net revenues in 1994,
1995, and 1996, and $298,000 and $513,000 or 6 and 4 percent of net revenues in
the three-month periods ended March 31, 1996 and 1997, respectively. There can
be no assurance that traffic will be delivered back to the United States or what
impact changes in future settlement rates, allocations among carriers or levels
of traffic will have on net payments made and revenues received and recorded by
the Company.
COST OF SERVICES
Cost of services represents direct charges from vendors that the Company
incurs to deliver service to its customers. These include costs of leasing
capacity and rate-per-minute charges from carriers that originate, transmit, and
terminate traffic on behalf of the Company. See Note 4 for further discussion.
F-8
<PAGE>
STARTEC, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with original maturities
of 90 days or less to be cash equivalents. Cash equivalents consist primarily of
money market accounts that are available on demand. The carrying amount reported
in the accompanying balance sheets approximates fair value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for current assets and current liabilities, other than
the current portion of notes payable to related parties and individuals and
other, approximate their fair value due to their short maturity. The carrying
value of the receivables based credit facility approximates fair value, since it
bears interest at a variable rate which reprices frequently. The carrying value
of restricted cash approximates fair value plus accrued interest. The fair value
of notes payable to individuals and other and notes payable to related parties
cannot be reasonably and practicably estimated due to the unique nature of the
related underlying transactions and terms (Note 7). However, given the terms and
conditions of these instruments, if these financial instruments were with
unrelated parties, interest rates and payment terms could be substantially
different than the currently stated rates and terms. These notes were paid in
full subsequent to March 31, 1997 (Note 12).
LONG-LIVED ASSETS
Long-lived assets and identifiable assets to be held and used are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount should be addressed. Impairment is measured by comparing the
carrying value to the estimated undiscounted future cash flows expected to
result from the use of the assets and their eventual dispositions. The Company
considers expected cash flows and estimated future operating results, trends,
and other available information in assessing whether the carrying value of the
assets is impaired.
The Company's estimates of anticipated gross revenues, the remaining
estimated lives of tangible and intangible assets, or both, could be reduced
significantly in the future due to changes in technology, regulation, available
financing, or competitive pressures (see Note 1). As a result, the carrying
amount of long-lived assets could be reduced materially in the future.
PROPERTY AND EQUIPMENT
Property and equipment are stated at historical cost. Depreciation is
provided for financial reporting purposes using the straight line method over
the following estimated useful lives:
Long-distance communications equipment ...... 7 years
Computer and office equipment ............... 3 to 5 years
Long-distance communications equipment includes assets financed under
capital lease obligations of approximately $763,000, $1,287,000, and $1,335,000
at December 31, 1995 and 1996, and March 31, 1997, respectively. Accumulated
depreciation on these assets as of December 31, 1995 and 1996, and March 31,
1997, was approximately $403,000, $587,000, and $621,000, respectively.
Maintenance and repairs are expensed as incurred. Replacements and
betterments are capitalized. The cost and related accumulated depreciation of
assets sold or retired are removed from the balance sheet, and any resulting
gain or loss is reflected in the statement of operations.
CONCENTRATIONS OF RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk are accounts receivable. Residential accounts
receivable consist of individually small amounts due from geographically
dispersed customers. Carrier accounts receivable represent amounts due from
second-tier
F-9
<PAGE>
STARTEC, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
long-distance carriers. The Company's allowance for doubtful accounts is based
on current market conditions. The Company's four largest carrier customers
represented 35 and 44 percent of gross accounts receivable as of December 31,
1996, and March 31, 1997, respectively. Revenues from several customers
represented more than 10 percent of net revenues for the periods presented (see
Note 10). Including charges in dispute (see Note 4), purchases from the five
largest suppliers represented 67 and 53 percent of cost of services in the year
ended December 31, 1996, and the three-month period ended March 31, 1997,
respectively. Services purchased from several suppliers represented more than 10
percent of cost of services in the periods presented (see Note 10). One of these
suppliers, representing 25 and 14 percent of cost of services in the year ended
December 31, 1996, and the three-month period ended March 31, 1997,
respectively, is based in a foreign country.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires that deferred income taxes reflect the expected tax
consequences on future years of differences between the tax bases of assets and
liabilities and their bases for financial reporting purposes. Valuation
allowances are established when necessary to reduce deferred tax assets to the
estimated amount to be realized.
NET (LOSS) INCOME PER COMMON AND EQUIVALENT SHARE
Net loss per common share for the years ended December 31, 1994, 1995 and
1996, and for the three-month period ended March 31, 1996, is based upon the
weighted-average number of common shares outstanding during the period. The
effect of outstanding options on net loss per common share is not included for
these periods because such options would be antidilutive. Net income per common
share for the three-month period ended March 31, 1997 is based upon the
weighted-average number of common and common equivalent shares outstanding
during the period, using the treasury stock method. Fully diluted net (loss)
income per share is not presented as it would not materially differ from the
amounts stated.
Pursuant to the requirements of the Securities and Exchange Commission
under Staff Accounting Bulletin ("SAB") No. 83 , common stock and stock rights
issued by the Company during the 12 months immediately preceding an anticipated
initial public offering (the "Offering") have been included in the calculation
of the shares used in computing net (loss) income per common share as if such
shares had been outstanding the entire period for periods prior to the Offering.
Pro forma net income (loss) per share gives effect to the anticipated
repayment of $2,500,000 in debt with proceeds from the Offering and has been
computed by dividing pro forma net income (loss), after adjustment for
applicable interest expense, by the pro forma weighted average common shares
outstanding. The pro forma weighted average common shares outstanding has been
adjusted for the estimated number of shares that the Company would need to issue
to repay debt.
In 1997, the Financial Accounting Standards Board released Statement No.
128, "Earnings Per Share." Statement 128 requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all periods
presented. Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the entity.
Diluted earnings per share is computed similarly to fully diluted earnings per
share pursuant to Accounting Principles Bulletin No. 15. Statement 128 is
effective for fiscal periods ending after December 15, 1997, and when adopted,
it will require restatement of prior periods' earnings per share.
F-10
<PAGE>
STARTEC, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
As discussed above, SAB 83 requires an entity involved in an initial public
offering to treat those potentially dilutive common shares as outstanding common
shares in the computation of both basic and diluted net (loss) income per share
for all reported periods. Accordingly, management anticipates that Statement 128
will not have a material impact upon reported net (loss) income per share.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------- ---------------
1995 1996 1997
------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Residential ........................... $ 2,605,958 $ 3,840,707 $ 4,518,416
Carrier .............................. 71,826 2,572,954 2,707,924
----------- ------------ ------------
2,677,784 6,413,661 7,226,340
Allowance for doubtful accounts ...... (457,029) (1,079,478) (1,307,441)
----------- ------------ ------------
$ 2,220,755 $ 5,334,183 $ 5,918,899
=========== ============ ============
</TABLE>
The Company has certain service providers that are also customers. The
Company carries and settles amounts receivable and payable from and to certain
of these parties on a net basis.
Approximately $1,195,000, $3,428,000, and $4,109,000 of retail receivables
as of December 31, 1995 and 1996, and March 31, 1997, respectively, were pledged
as security under the receivable credit facility agreement discussed in Note 6.
4. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------- ------------
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Disputed vendor obligations .................. $ 642,515 $2,056,957 $2,065,254
Accrued payroll and related taxes ............ 348,545 368,266 401,198
Accrued excise taxes and related charges ...... 197,993 182,286 182,439
Accrued interest .............................. 47,960 87,921 116,581
Other .......................................... 42,493 162,660 165,504
----------- ----------- -----------
$1,279,506 $2,858,090 $2,930,976
=========== =========== ===========
</TABLE>
Disputed vendor obligations represent an assertion from one of the
Company's foreign carriers for minutes processed that are in excess of the
Company's records. The Company has accrued approximately $643,000, $1,414,000,
and $8,000 in the years ended December 31, 1995 and 1996, and the three-month
period ended March 31, 1997, respectively, related to disputed minutes for which
the Company has not recognized any corresponding revenue. If the Company
prevails in its dispute, these amounts or portions thereof would be credited to
operations in the period of resolution. Conversely, if the Company does not
prevail in its dispute, these amounts or portions thereof would be paid in cash.
Other accrued expenses includes an obligation which was converted to a
noninterest bearing, convertible note in June 1997. The note is convertible into
24,000 shares of voting common stock at any time after the completion of a
public offering until maturity in December 1999.
5. STOCK AND STOCK RIGHTS:
As of March 31, 1997, the Company had 5,380,824 shares of voting common
stock issued and outstanding and 22,526 shares of nonvoting common stock issued
and outstanding. For 17,175 shares of outstanding nonvoting common stock, the
Company has agreed to exchange one share of its authorized
F-11
<PAGE>
STARTEC, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
voting common stock for each presently outstanding share of nonvoting common
stock. As of July 29, 1997, the Company has agreed to purchase 5,351 shares of
outstanding nonvoting common stock from a former officer and director of the
Company for $45,269.
STOCK OPTION PLAN
The Company has elected to account for stock and stock rights in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25") and its related interpretations. In
October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which established an alternative
method of expense recognition for stock-based compensation awards to employees
based on fair values. The Company has elected not to adopt SFAS No. 123 for
expense recognition purposes.
The Company maintains a stock option plan, reserving 270,000 shares of
voting common stock to be issued to officers and key employees under terms and
conditions to be set by the Company's Board of Directors. Options granted under
this plan may be exercised only upon the occurrence of any of the following
events: (i) a sale of more than 50 percent of the issued and outstanding shares
of stock in one transaction, (ii) a dissolution or liquidation of the Company,
(iii) a merger or consolidation in which the Company is not the surviving
corporation, (iv) a filing by the Company of an effective registration statement
under the Securities Act of 1933, as amended, or (v) the seventh anniversary of
the date of full-time employment.
Pursuant to APB No. 25, compensation expense is recognized for financial
reporting purposes when it becomes probable that the options will be
exercisable. The amount of compensation expense that will be recognized is
determined by the excess of the fair value of the common stock over the exercise
price of the related option at the measurement date.
Pro forma information regarding net income is required by SFAS No. 123 and
has been determined as if the Company had accounted for its employee stock
options under the fair value method prescribed by SFAS No. 123. The fair value
of options granted in the year ended December 31, 1995, and the three-month
period ended March 31, 1997, was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rates of 5.4 percent and 6.17 percent; no
dividend yield; weighted-average expected lives of the options of five years,
and expected volatility of 50 percent. There were no options granted in 1996.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
characteristics that are significantly different from those of traded options.
Because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
The weighted-average fair value of options granted during the year ended
December 31, 1995, and the three-month period ended March 31, 1997, was $0.34
and $1.04, respectively. For purposes of pro forma disclosures, the estimated
fair value of the options is amortized to expense over the estimated service
period. If the Company had used the fair value accounting provisions of SFAS No.
123, the pro forma net loss for 1995 and 1996 would have been $1,208,714 and
$2,832,531, respectively, or $0.22 and $0.50 per share, respectively, and net
income for the three months ended March 31, 1997 would have been $127,352, or
$0.02 per share.
F-12
<PAGE>
STARTEC, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
A summary of the Company's stock option activity and related information,
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------ THREE MONTHS ENDED
1994 1995 1996 MARCH 31, 1997
---------------------- --------------------- --------------------- -------------------------
(UNAUDITED)
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ----------- --------- ----------- --------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period ...... 75,000 $0.30 103,200 $0.30 143,200 $0.38 138,300 $0.38
Granted .................. 32,700 0.30 40,000 0.60 -- -- 269,966 1.44
Exercised .................. -- -- -- -- -- -- --
Forfeited .................. (4,500) 0.30 -- -- (4,900) 0.36 (138,500) 0.38
-------- ------ -------- ------ -------- ------ ---------- ------
Options outstanding at end
of period ............... 103,200 $0.30 143,200 $0.38 138,300 $0.38 269,766 $1.44
======== ====== ======== ====== ======== ====== ========== ======
Options exercisable at end
of period ............... -- -- -- --
======== ======== ======== ==========
</TABLE>
Exercise prices for options outstanding as of March 31, 1997, are as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------------------
WEIGHTED-AVERAGE
REMAINING WEIGHTED-
RANGE OF NUMBER OUTSTANDING CONTRACTUAL LIFE AVERAGE
EXERCISE PRICES AS OF MARCH 31, 1997 IN YEARS EXERCISE PRICE
- ------------------------ ---------------------- ------------------ ---------------
<S> <C> <C> <C>
$0.30 -- 0.30 39,300 9.78 $0.30
0.60 -- 0.60 39,000 9.78 0.60
1.85 -- 1.85 191,466 9.78 1.85
- ----------------------- -------- ----- ------
$0.30 -- 1.85 269,766 9.78 $1.44
======================= ======== ===== ======
</TABLE>
The Company amended its stock option plan as of January 20, 1997 to provide
that options may be exercised on or after the seventh anniversary of the date of
full time employment, in addition to other events discussed above. In
conjunction with this amendment, all options outstanding were cancelled, and
certain options were reissued at their original exercise prices. Pursuant to APB
No. 25, the Company recognizes compensation expense for the excess of the fair
market value of the common stock over the exercise price of the related option
at the date of grant. The Company recognized $11,242 in compensation expense for
the three-month period ended March 31, 1997, and expects to recognize
approximately $119,765 over the remaining term of the options, subject to
accelerated vesting in the event of a public offering or a change in control.
F-13
<PAGE>
STARTEC, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
SHAREHOLDER AND MANAGEMENT AGREEMENTS
In 1995, the Company issued 807,124 shares of voting common stock for
$750,000. In connection with this transaction, the Company executed a
Subscription Agreement ("Shareholder Agreement") and a Management Participation
Agreement ("Management Agreement"). Among other provisions, the Shareholder
Agreement provides the investor certain antidilution provisions and a right of
first refusal as to any shares offered for sale, at the offering price. Further,
with certain exceptions, the Company's primary shareholder may not sell,
transfer, or assign any shares unless they are first offered to the investor;
and under certain circumstances, if the investor declines to purchase the shares
offered, such shares may not be sold to any third party unless such third party
also offers to purchase all of the investor's shares at the same price.
The Management Agreement contains several covenants that provide the
investor protection with respect to dilution, nonroutine changes in the Articles
of Incorporation or Bylaws, and the declaration of dividends.
The provisions of the Shareholder Agreement and the Management Agreement
expire upon the earlier of a public offering under the Securities Act of 1933,
as amended, or the sale or other transfer of 50 percent or more of the shares
owned by the investor.
6. BILLING ARRANGEMENT AND RECEIVABLES BASED CREDIT FACILITY:
The Company has a billing and information management services agreement
with a third party, which provides for its residential customers to be billed
directly by their local exchange carrier. The third party receives collections
from the local exchange carrier and submits these funds to the Company, after
withholding processing fees, applicable taxes, and provisions for credits and
uncollectible accounts.
The Company has an advanced payment agreement with this third party, which
allows the Company to take advances against 70 percent of all records submitted
for billing. Advances are secured by the receivables involved. The credit limit
under the advanced payment agreement was $3,000,000 as of March 31, 1997. The
agreement provides for interest at the prime rate (8.5 percent at March 31,
1997) plus 4 percent.
7. NOTES PAYABLE TO RELATED PARTIES AND NOTES PAYABLE TO INDIVIDUAL AND OTHER:
NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------- ------------
1995 1996 1997
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to parties related to the primary shareholder and
president of the Company, bearing interest at rates ranging from
15 to 25 percent ................................................ $ 158,160 $ 153,160 $ 153,160
Less -- Current portion .......................................... (58,160) (53,160) (103,160)
--------- --------- ----------
$ 100,000 $ 100,000 $ 50,000
========= ========= ==========
</TABLE>
F-14
<PAGE>
STARTEC, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTES PAYABLE TO INDIVIDUALS AND OTHER
Notes payable to individuals and other represents notes which have interest
at rates ranging from 15 to 33.3 percent at December 31, 1995, and from 15 to 25
percent at December 31, 1996, and March 31, 1997, all due within one year.
The aggregate maturities of notes payable to related parties and notes
payable to individuals and other are as follows as of December 31, 1996:
YEAR ENDING RELATED INDIVIDUALS
DECEMBER 31, PARTIES AND OTHER
-------------- ---------- ------------
1997 $ 53,160 $650,000
1998 50,000 --
1999 50,000 --
--------- ---------
$153,160 $650,000
========= =========
8. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases office space and equipment under noncancelable operating
leases. Rent expense was approximately $63,000, $94,000, and $97,000 for the
years ended December 31, 1994, 1995, and 1996, and $26,000 and $29,000 for the
three-month periods ended March 31, 1996 and 1997, respectively. The terms of
the office lease require the Company to pay a proportionate share of real estate
taxes and operating expenses. As discussed in Note 2, the Company also leases
equipment under capital lease obligations. The future minimum commitments under
lease obligations are as follows:
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- --------------------------------------------------- ------------- ----------
1997 ....................................... $ 318,913 $154,219
1998 ....................................... 305,443 165,025
1999 ....................................... 283,376 140,710
2000 ....................................... 59,225 --
2001 ....................................... 12,586 --
---------- ---------
979,543 $459,954
=========
Less -- Amounts representing interest ...... (207,436)
Less -- Current portion ..................... (226,464)
----------
$ 545,643
==========
LEASE WITH RELATED PARTY
The Company has entered into an agreement with an affiliate of a
shareholder to lease capacity in certain undersea fiber optic cable. The
agreement grants a perpetual right to use the cable and requires ten semiannual
payments of $38,330 beginning on June 30, 1996. The Company has recorded $38,330
in accounts payable as of March 31, 1997, related to this agreement. Unpaid
amounts bear interest at the 180-day LIBOR rate, plus one quarter percent.
The Company is required to pay a proportional share of the cost of
operating and maintaining the cable. The Company can cancel this agreement
without further obligation, except for amounts related to past usage, at any
time.
RESTRICTED CASH
The Company was required to provide a bank guarantee of $180,000 in
connection with one of its foreign operating agreements. This guarantee is in
the form of a certificate of deposit and is shown as restricted cash in the
accompanying balance sheets.
F-15
<PAGE>
STARTEC, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
PROFESSIONAL SERVICES AND CONSULTING AGREEMENTS
The Company has arrangements with its legal counsel and investment bankers
to represent the Company in a proposed public offering of the Company's common
stock. These arrangements for professional services and other expenses commit
the Company to costs of up to $300,000 in the event that such an offering is not
successful.
The Company has agreed to issue warrants to acquire 150,000 shares of
common stock to its investment bankers at the close of the Offering. The
warrants will have a five-year term, will vest after one year, and will have an
exercise price of 110 percent of the Offering price. The warrants will include
certain anti-dilution provisions.
The Company has a consulting agreement with an individual who will serve as
an agent for the Company in a foreign country. Under the agreement, the Company
will pay a total of $90,000 over a three-year period, commencing March 1, 1997.
In addition, the Company will pay other office facilities and general expenses
approximating $12,000 per year.
LITIGATION
Certain claims and suits have been filed or are pending against the
Company. In management's opinion, resolution of these matters will not have a
material impact on the Company's financial position or results of operations and
adequate provision for any potential losses has been made in the accompanying
financial statements.
9. RELATED-PARTY TRANSACTIONS:
The Company has an agreement with an affiliate of a shareholder of the
Company that calls for the purchase and sale of long distance services. Revenues
generated from this affiliate amounted to approximately $625,000, $1,035,000,
and $1,501,000, or 12 percent, 10 percent, and 5 percent of total revenues for
the years ended December 31, 1994, 1995, and 1996, and $295,000 and $524,000, or
6 and 4 percent of total revenues for the three-month periods ended December 31,
1996 and 1997, respectively. The Company was in a net account receivable
position with this affiliate of approximately $152,000, $14,000, and $314,000 as
of December 31, 1995 and 1996, and March 31, 1997, respectively. Services
provided by this affiliate and recognized in cost of services amounted to
approximately $134,000 and $663,000 for the years ended December 31, 1995 and
1996, and $42,000 and $213,000 for the three-month periods ended March 31, 1996
and 1997, respectively. There were no services purchased from this affiliate in
1994.
The Company provided long-distance services to an affiliated entity owned
by the primary shareholder and president of the Company. In the opinion of
management, these services were provided on standard commercial terms. The
affiliate provided long-distance services to customers in certain foreign
countries. Payments received by the Company from this affiliate amounted to
approximately $396,000 and $262,000 for the years ended December 31, 1995 and
1996, respectively, and the affiliate was unable to collect approximately
$150,000 and $95,000 from its residential customers in the years ended December
31, 1995 and 1996, respectively. There were no payments received during the
three-month period ended March 31, 1997. Accounts receivable from this
affiliated entity were $167,000 as of December 31, 1995 and $64,000 as of
December 31, 1996, and March 31, 1997, respectively. There was no activity
related to this entity for the year ended December 31, 1994.
The Company has notes payable from parties related to the primary
shareholder and president of the Company (see Note 7) and a lease with an
affiliate of a shareholder of the Company (see Note 8).
F-16
<PAGE>
STARTEC, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
10. SEGMENT DATA AND SIGNIFICANT CUSTOMERS AND SUPPLIERS:
SEGMENT DATA
The Company classifies its operations into one industry segment,
telecommunications services. Substantially all of the Company's revenues for
each period presented were derived from calls terminated outside the United
States.
Net revenues terminated by geographic area were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------ ------------- ------------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Asia/Pacific Rim ............... $4,187,799 $ 6,723,983 $13,823,875 $2,641,940 $ 5,699,604
Middle East/North Africa ...... 136,419 693,948 5,819,807 815,834 3,415,250
Sub-Saharan Africa ............ 18,521 34,400 2,712,395 428,018 720,652
Eastern Europe ............... 25,562 316,470 1,753,491 194,452 1,153,406
Western Europe .................. 617,255 1,647,446 4,478,508 138,649 440,711
North America .................. 110,643 493,811 1,827,565 299,881 601,379
Other ........................... 12,510 597,392 1,798,865 203,258 341,100
----------- ------------ ------------ ----------- ------------
$5,108,709 $10,507,450 $32,214,506 $4,722,032 $12,372,102
=========== ============ ============ =========== ============
</TABLE>
SIGNIFICANT CUSTOMERS
A significant portion of the Company's revenues is derived from a limited
number of customers. During 1996, the Company's five largest carrier customers
accounted for approximately 40% of the Company's net revenues, with one carrier
customer accounting for approximately 23% of net revenues during that year. In
addition, during the three month period ended March 31, 1997, the Company's five
largest carrier customers accounted for approximately 49% of net revenues, with
one carrier customer accounting for approximately 34% during the period. The
Company's agreements and arrangements with its carrier customers generally may
be terminated on short notice without penalty. The following customers provided
10 percent or more of the Company's net revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- ----------------------------
1994 1995 1996 1996 1997
--------- ------------ ----------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Customer A (foreign) ............ $ * $1,958,827 $ * $ * $ *
Customer B (related party) ...... 624,613 * * * *
Customer C ..................... 564,345 * 7,383,218 1,068,595 4,203,923
</TABLE>
- ----------
* Revenue provided was less than 10 percent of total revenues for the period.
F-17
<PAGE>
STARTEC, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
SIGNIFICANT SUPPLIERS
A significant portion of the Company's cost of services is purchased from a
limited number of suppliers. The following suppliers provided 10 percent or more
of the Company's cost of sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ----------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplier A (foreign) ...... $3,733,464 $7,154,552 $7,524,983 $1,268,748 $1,555,258
Supplier B ............... * * 3,896,555 1,046,258 *
Supplier C ............... * * 3,971,654 * 1,489,115
Supplier D ............... * * * * 1,348,109
Supplier E ............... * * * 514,009 *
</TABLE>
- ----------
* Cost of sales provided was less than 10 percent of total cost of sales for
the period.
The cost of services attributable to Supplier A includes charges that are
in dispute, as discussed in Note 4. Supplier A is a government-owned, foreign
carrier that has a monopoly on telephone service in that country.
11. INCOME TAXES:
The Company has net operating loss ("NOLS") carryforwards for Federal
income tax purposes OF approximately $2,564,000 and $2,438,000, as of December
31, 1996 and March 31, 1997, respectively, which may be applied against future
taxable income and expire in years 2005 through 2011. The Company utilized a
portion of these NOLs to partially offset its taxable income for the three
months ended March 31, 1997. The use of the NOLs is subject to statutory and
regulatory limitations regarding changes in ownership. SFAS No. 109 requires
that the tax benefit of NOLs for financial reporting purposes be recorded as an
asset to the extent that management assesses the realization of such deferred
tax assets is "more likely than not." A valuation reserve is established for any
deferred tax assets that are not expected to be realized.
As a result of historical operating losses and the fact that the Company
has a limited operating history, a valuation allowance equal to the deferred tax
asset was recorded for all periods presented, which resulted in no tax benefit
being realized during any period.
The tax effect of significant temporary differences, which comprise the
deferred tax assets and liabilities, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------- MARCH 31,
1995 1996 1997
--------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ...... $ 418,934 $ 1,014,072 $ 964,382
Allowance for doubtful accounts ...... 149,273 336,127 426,351
Contested liabilities .................. 254,115 813,526 816,690
Cash to accrual adjustment ............ 1,043,264 777,917 713,091
Other ................................. -- 18,086 24,414
------------ ------------ ------------
Total deferred tax assets ............ 1,865,586 2,959,728 2,944,928
============ ============ ============
Deferred tax liabilities:
Depreciation ........................... 34,794 66,434 (74,344)
Other ................................. 2,628 -- --
------------ ------------ ------------
Total deferred tax liabilities ...... 37,422 66,434 (74,344)
------------ ------------ ------------
Net deferred tax assets ............... 1,828,164 2,893,294 2,870,584
Valuation allowance ..................... (1,828,164) (2,893,294) (2,870,584)
------------ ------------ ------------
$ -- $ -- $ --
============ ============ ============
</TABLE>
F-18
<PAGE>
STARTEC, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Pursuant to Section 448 of the Internal Revenue Code, the Company is
required to change from the cash to the accrual method of accounting. The effect
of this change will be amortized over four years for tax purposes.
The Company recorded no benefit or provision for income taxes for each of
the three years in the period ended December 31, 1996 or for the three-month
period ended March 31, 1996. A current provision for Federal alternative minimum
tax was recorded for the three-month period ended March 31, 1997. The components
of income tax expense for the three-month period ended March 31, 1997 are as
follows:
THREE MONTHS ENDED
MARCH 31, 1997
-------------------
(UNAUDITED)
Current provision
Federal .................................... $ 70,410
Federal alternative minimum tax ............ 2,842
State ....................................... 15,142
Deferred benefit
Federal .................................... (18,689)
State ....................................... (4,019)
Benefit of net operating loss carryforwards (62,844)
---------
$ 2,842
=========
The provision for income taxes results in an effective rate which differs
from the Federal statutory rate as follows:
THREE MONTHS ENDED
MARCH 31, 1997
-------------------
(UNAUDITED)
Statutory Federal income tax rate ............ 35.0%
Impact of graduated rate ..................... (1.0)
State income taxes, net of Federal tax benefit 4.6
Federal alternative minimum tax ............... 2.0
Benefit of net operating loss carryforwards ... (38.6)
-------
Effective rate ................................. 2.0%
=======
12. SUBSEQUENT EVENTS:
CREDIT FACILITY
On July 1, 1997, the Company entered into a credit facility ("Loan") with a
bank ("Lender"). The Loan provides for maximum borrowings of up to $10 million
through December 31, 1997, and the lesser of $15 million or 85 percent of
eligible accounts receivable, as defined, thereafter until maturity in December
1999. The Company may elect to pay quarterly interest payments at the prime
rate, plus 2 percent, or the adjusted LIBOR, plus 4 percent. The Loan required a
$150,000 commitment fee to be paid at closing, and a quarterly commitment fee of
one quarter percent of the unborrowed portion. The Loan is secured by
substantially all of the Company's assets and the common stock owned by the
majority stockholder and another stockholder. The Loan contains certain
financial and non-financial covenants, as defined, including, but not limited
to, ratios of monthly net revenue to Loan balance, interest coverage, and cash
flow leverage, minimum subscribers, and limitations on capital expenditures,
additional indebtedness, acquisition or transfer of assets, payment of
dividends, new ventures or merg-
F-19
<PAGE>
STARTEC, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
ers, and issuance of additional equity (excluding shares issuable in connection
with the Offering). Beginning on January 1, 1998 (and extending to July 1, 1998
upon the occurrence of defined events), should the Lender determine and assert
based on its reasonable assessment that a material adverse change has occurred,
all amounts outstanding would be due and payable.
The Loan provides that the Lender receive warrants to purchase up to
539,800 shares of the Company's voting common stock representing 10 percent of
the issued and outstanding shares of the Company. Warrants representing 5
percent of the issued and outstanding shares are immediately exercisable. The
exercise price of these warrants is $8.46. Further, beginning in the fourth
calendar quarter of 1997, and continuing until the Company completes an initial
public offering, the Lender will vest in an additional 1 percent for each
calendar quarter. The exercise price of these warrants will be set at a price
which values the Company at 10 times revenue for the immediately preceding
month. Until the Company is a public registrant, the Company is obligated to
repurchase the shares under warrant in certain circumstances at the then fair
value of the Company as determined by an independent appraisal. The Lender has
certain registration rights with respect to the shares under warrant.
Prior to closing the above described credit facility, the Company obtained
a $500,000 credit facility from the Lender at prime plus 2 percent. Amounts
outstanding under this facility were refinanced under the Loan.
Proceeds from the loan were used to pay down the receivables based credit
facility (Note 6), to retire the notes payable to related parties and
individuals and other (Note 7), to purchase long-distance communications
equipment, and for general working capital purposes.
1997 PERFORMANCE PLAN
In August 1997, the Board of Directors approved and recommended that the
stockholders approve the Company's 1997 Performance Incentive Plan (the
"Performance Plan"). The Performance Plan provides for the award of stock
options, stock appreciation rights, restricted stock and other stock-based
awards to eligible employees of the Company, as well as cash-based annual and
long-term incentive awards. The Performance Plan provides for the issuance of
options to acquire up to 750,000 shares of common stock. The Company may grant
options to acquire up to 480,000 shares of common stock without triggering the
antidilution privileges granted under the warrants issued in connection with the
Loan.
NAME CHANGE
The Board of Directors has approved management's recommendation to change
the Company's name to Startec Global Communications Corporation subject to
stockholder approval.
CHANGE IN AUTHORIZED SHARES
The Company plans to increase its authorized shares of common stock to
20,000,000 and to create a preferred class of stock with 100,000 shares of $1.00
par value preferred stock authorized for issuance.
OTHER
In April 1997, the Company issued aggregate notes payable of $150,000,
requiring quarterly payments of interest at a rate of 15 percent until maturity
in April 1998. These notes were repaid with proceeds from the Loan in July 1997.
In May 1997, the Company entered into capital lease agreements totaling
approximately $188,000 in additional long-distance communications equipment.
In July 1997, the Company paid off approximately $2,650,000 of its existing
debt as of March 31, 1997, using proceeds from the Loan.
F-20
<PAGE>
<TABLE>
<S> <C>
============================================================ ============================================================
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON
HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE 1,900,000 SHARES
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH
IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON
IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS STARTEC
THE STAR OF WORLDWIDE COMMUNICATIONS
PAGE COMMON STOCK
-----
Prospectus Summary ........................... 3
Risk Factors ................................. 6
Use of Proceeds .............................. 17
Dividend Policy .............................. 18
Dilution .................................... 18
Capitalization .............................. 19
Selected Financial Data ..................... 20 -------------------------------
Management's Discussion and Analysis of Finan- PROSPECTUS
cial Condition and Results of Operations 21 -------------------------------
Business .................................... 29
Management .................................... 46
Principal Stockholders ........................ 52
Certain Transactions ........................ 53
Description of Capital Stock .................. 54
Shares Eligible for Future Sale ............... 59
Underwriting ................................. 60 FERRIS, BAKER WATTS
Legal Matters ................................. 61 Incorporated
Experts ....................................... 61
Available Information ........................ 61
Glossary of Terms ........................... G-1
Index to Financial Statements ............... F-1 BOENNING & SCATTERGOOD, INC.
UNTIL _____, 1997 (25 DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE
COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS _________________, 1997
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
============================================================ ============================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an estimate (except for the SEC registration
fee, NASD filing fee and Nasdaq National Market listing fee) of the fees and
expenses, all of which will be borne by the Registrant, in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions.
SEC registration fee .............................. $7,284
-----
NASD filing fee .................................... *
-----
Nasdaq National Market listing fee .................. *
-----
Legal fees and expenses ........................... *
Accounting fees and expenses ........................ *
Blue Sky fees and expenses ........................... *
Printing and engraving expenses ..................... *
Transfer Agent and Registrar fees and expenses ...... *
Miscellaneous ....................................... *
Total ............................................. $ *
=======
- ----------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 2-418 of the Corporations and Associations Article of the Annotated
Code of Maryland permits a corporation to indemnify its present and former
officers and directors, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their services in
those or other capacities, unless it is established that (a) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (i) was committed in bad faith or (ii) was the result of active
and deliberate dishonesty; or (b) the director or officer actually received an
improper personal benefit in money, property, or services; or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. Maryland law permits a corporation to
indemnify a present and former officer to the same extent as a director, and to
provide additional indemnification to an officer who is not also a director. In
addition, Section 2-418(f) of the Corporations and Associations Article of the
Annotated Code of Maryland permits a corporation to pay or reimburse, in advance
of the final disposition of a proceeding, reasonable expenses (including
attorney's fees) incurred by a present or former director or officer made a
party to the proceeding by reason of his service in that capacity, provided that
the corporation shall have received (a) a written affirmation by the director or
officer of his good faith belief that he has met the standard of conduct
necessary for indemnification by the corporation; and (b) a written undertaking
by or on his behalf to repay the amount paid or reimbursed by the corporation if
it shall ultimately be determined that the standard of conduct was not met.
The Registrant has provided for indemnification of directors, officers,
employees, and agents in Article VIII of its charter. This provision reads as
follows:
(a) To the maximum extent permitted by the laws of the State of Maryland
in effect from time to time, any person who is or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by
II-1
<PAGE>
reason of the fact that such person (i) is or was a director or officer of
the Corporation or of a predecessor of the Corporation, or (ii) is or was a
director or officer of the Corporation or of a predecessor of the Corporation
and is or was serving at the request of the Corporation as a director,
officer, partner, trustee, employee or agent of another foreign or domestic
corporation, limited liability company, partnership, joint venture, trust,
other enterprise, or employee benefit plan, shall be indemnified by the
Corporation against judgments, penalties, fines, settlements and reasonable
expenses (including, but not limited to attorneys' fees and court costs)
actually incurred by such person in connection with such action, suit or
proceeding, or in connection with any appeal thereof (which reasonable
expenses may be paid or reimbursed in advance of final disposition of any
such suit, action or proceeding).
(b) To the maximum extent permitted by the laws of the State of Maryland
in effect from time to time, any person who is or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the
fact that such person (i) is or was an employee or agent of the Corporation
or of a predecessor of the Corporation, or (ii) is or was an employee or
agent of the Corporation or of a predecessor of the Corporation and is or was
serving at the request of the Corporation as a director, officer, partner,
trustee, employee or agent of another foreign or domestic corporation,
limited liability company, partnership, joint venture, trust, other
enterprise, or other employee benefit plan, may (but need not) be indemnified
by the Corporation against judgments, penalties, fines, settlements and
reasonable expenses (including, but not limited to, attorneys' fees and court
costs) actually incurred by such person in connection with such action, suit
or proceeding, or in connection with any appeal thereof (which reasonable
expenses may be paid or reimbursed in advance of final disposition of any
such suit, action or proceeding).
(c) Neither the amendment nor repeal of this Article, nor the adoption or
amendment of any other provision of the charter or bylaws of the Corporation
inconsistent with this Article, shall apply to or affect in any respect the
applicability of this Article with respect to indemnification for any act or
failure to act which occurred prior to such amendment, repeal or adoption.
(d) The foregoing right of indemnification and advancement of expenses
shall not be deemed exclusive of any other rights of which any officer,
director, employee or agent of the Corporation may be entitled apart from the
provisions of this Article.
Under Maryland law, a corporation is permitted to limit by provision in its
charter the liability of directors and officers, so that no director or officer
of the corporation shall be liable to the corporation or to any stockholder for
money damages except to the extent that (i) the director or officer actually
received an improper benefit in money, property, or services, for the amount of
the benefit or profit in money, property or services actually received, or (ii)
a judgment or other final adjudication adverse to the director or officer is
entered in a proceeding based on a finding in the proceeding that the director's
or officer's action, or failure to act, was the result or active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. The Registrant has limited the liability of its directors and
officers for money damages in Article VII of its charter, as amended. This
provision reads as follows:
No director or officer of the Corporation shall be liable to the
Corporation or to any stockholder for money damages except to the extent that
(i) the director or officer actually received an improper personal benefit in
money, property, or services, for the amount of the benefit or profit in
money, property or services actually received, or (ii) a judgment or other
final adjudication adverse to the director or officer is entered in a
proceeding based on a finding in the proceeding that the director's or
officer's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. Neither the amendment nor repeal of this Article, nor the
adoption or amendment of any provision of the charter or bylaws of the
Corporation inconsistent with this Article, shall apply to or affect in any
respect the applicability of the preceding sentence with respect to any act
or failure to act which occurred prior to such amendment, repeal or adoption.
II-2
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth information as of July 31, 1997, regarding all
sales of unregistered securities of the Registrant during the past three years.
All such shares were issued in reliance upon an exemption or exemptions from
registration under the Securities Act by reason of Section 4(2) of the
Securities Act or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act, as transactions by an issuer not
involving a public offering or transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under Rule 701. In
connection with each of these transactions, the securities were sold to a
limited number of persons, such persons were provided access to all relevant
information regarding the Registrant and/or represented to the Registrant that
they were "sophisticated" investors, and such persons represented to the
Registrant that the shares were purchased for investment purposes only and with
no view toward distribution.
(a) In February 1995, the Registrant completed a private sale of 807,124
shares of Common Stock to a foreign corporation for an aggregate investment
of $750,000. No underwriters were used in connection with either private
transactions.
(b) During the period, the Registrant also granted options pursuant to
its Amended and Restated Stock Option Plan to 32 persons to purchase an
aggregate of up to 269,766 shares of Common Stock at exercise prices ranging
from $.30 to $1.85 per share.
(c) On July 1, 1997, the Registrant issued warrants to purchase up to
539,800 shares of its Common Stock to Signet Bank in connection with the
provision by Signet of a revolving credit facility.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
1.1 Form of Underwriting Agreement.
3.1* Amended and Restated Articles of Incorporation.
3.2* Amended and Restated Bylaws.
4.1* Specimen of Common Stock Certificate.
4.2 Warrant Agreement dated as of July 1, 1997 by and between Startec,
Inc. and Signet Bank.
4.3 Form of Underwriters' Warrant Agreement (including Form of Warrant).
4.4* Voting Agreement dated as of July 31, 1997 by and between Ram
Mukunda and Vijay and Usha Srinivas.
5.1* Opinion of Shulman, Rogers, Gandal, Pordy & Ecker, P.A. with respect
to the Registrant's Common Stock.
10.1 Secured Revolving Line of Credit Facility Agreement dated as of July
1, 1997 by and between Startec, Inc. and Signet Bank.
10.2 Lease by and between Vaswani Place Limited Partnership and Startec,
Inc. dated as of September 1, 1994, as amended.
10.3 Agreement by and between World Communications, Inc. and Startec,
Inc. dated as of April 25, 1990.
10.4* Co-Location and Facilities Management Services Agreement by and
between Extranet Telecommunications, Inc. and Startec, Inc. dated
as of ___, 1997.
10.5 Employment Agreement dated as of July 1, 1997 by and between
Startec, Inc. and Ram Mukunda.
II-3
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
10.6 Employment Agreement dated as of July 1, 1997 by and between
Startec, Inc. and Prabhav V. Maniyar.
10.7 Amended and Restated Stock Option Plan.
10.8 1997 Performance Incentive Plan.
10.9 * Subscription Agreement by and among Blue Carol Enterprises, Limited,
Startec, Inc. and Ram Mukunda dated as of February 8, 1995.
10.10* Agreement for Management Participation by and among Blue Carol
Enterprises, Limited, Startec, Inc. and Ram Mukunda dated as of
February 8, 1995, as amended as of June 16, 1997.
10.11* Service Agreement by and between Companhia Portuguesa Radio Marconi,
S.A. and Startec, Inc. as amended on February 8, 1995.
10.12* Lease Agreement between Companhia Portuguesa Radio Marconi, S.A. and
Startec, Inc. dated as of June 15, 1996.
10.13* Indefeasible Right of Use Agreement between Companhia Portuguesa
Radio Marconi, S.A. and Startec, Inc. dated as of January 1, 1996.
10.14* International Telecommunication Services Agreement between Videsh
Sanchar Nigam Ltd. and Startec, Inc. dated as of November 12, 1992.
10.15* Digital Service Agreement with Communications Transmission Group,
Inc. dated as of October 25, 1994.
10.16* Lease Agreement by and between GPT Finance Corporation and Startec,
Inc. dated as of January 10, 1990.
10.17* Carrier Services Agreement by and between Frontier Communications
Services, Inc. and Startec, Inc. dated as of February 26, 1997.
10.18* Carrier Services Agreement by and between MFS International, Inc.
and Startec, Inc. dated as of July 3, 1996.
10.19* International Carrier Voice Service Agreement by and between MFS
International, Inc. and Startec, Inc. dated as of June 6, 1996.
10.20* Carrier Service Agreement by and between Cherry Communications, Inc.
and Startec, Inc. dated as of June 7, 1995.
11.1 Statement regarding computation of earnings per share.
23.1 Consent of Arthur Andersen LLP.
23.2 * Consent of Shulman, Rogers, Gandal, Pordy & Ecker, P.A. (included in
Exhibit 5.1).
24.1 Power of Attorney (contained on the signature page).
27.1 Financial Data Schedule.
99.1 Consent of Nazir G. Dossani.
99.2 Consent of Richard K. Prins.
- ----------
* To be filed by amendment
II-4
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedules are included in Part II of this
Registration Statement:
Schedule II-Valuation and Qualifying Accounts
All other schedules are omitted because they are inapplicable or because
the information required is included in the financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS
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 Company's Charter or Bylaws, Maryland law, or
otherwise, the Registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denomination and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purposes 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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Montgomery County, State of Maryland,
on the fourth day of August, 1997.
STARTEC GLOBAL COMMUNICATIONS CORPORATION
By: /s/ Ram Mukunda
------------------------------------
Ram Mukunda
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Ram Mukunda and Prabhav V. Maniyar
and each of them, as his true and lawful attorneys-in-fact and agents, 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, or any related
registration statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act, and to file the same, with all 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 in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their,
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------------------------- ---------------------------------------- ----------------
<S> <C> <C>
/s/ Ram Mukunda President, Chief Executive Officer, August 4, 1997
- ------------------------- Treasurer and Director (Principal
Ram Mukunda Executive Officer)
/s/ Prabhav V. Maniyar Senior Vice President, Chief Financial August 4, 1997
- ------------------------- Officer, Secretary and Director
Prabhav V. Maniyar (Principal Financial and Accounting
Officer)
/s/ Vijay Srinivas Director August 4, 1997
- -------------------------
Vijay Srinivas
</TABLE>
II-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Startec, Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements of Startec, Inc. included in this registration
statement and have issued our report thereon dated August 1, 1997. Our audit was
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The Schedule II -- Valuation And Qualifying Accounts is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
August 1, 1997
S-1
<PAGE>
STARTEC, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ------------------------------------------------ ------------ ------------ ------------------- --------------- -----------
ADDITIONS
--------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS -- DEDUCTIONS -- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE(A) DESCRIBE(B) PERIOD
- ------------------------------------------------ ------------ ------------ ------------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Reflected as reductions to the related assets:
Provision for uncollectible accounts (deduc-
tions from trade accounts receivable)
Year ended December 31, 1994 .................. $696 $ -- $120 $ (64) $ 752
Year ended December 31, 1995 .................. 752 150 174 (619) 457
Year ended December 31, 1996 .................. 457 783 464 (625) 1,079
</TABLE>
- ----------
(a) Represents reduction of revenue for accrued credits on residential
business.
(b) Represents amounts written off as uncollectible.
S-2
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBIT NUMBER
- --------- -------------------------------------------------------------------- -------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1* Amended and Restated Articles of Incorporation.
3.2* Amended and Restated Bylaws.
4.1* Specimen of Common Stock Certificate.
4.2 Warrant Agreement dated as of July 1, 1997 by and between Startec,
Inc. and Signet Bank.
4.3 Form of Underwriters' Warrant Agreement (including Form of Warrant).
4.4* Voting Agreement dated as of July 31, 1997 by and between Ram
Mukunda and Vijay and Usha Srinivas.
5.1* Opinion of Shulman, Rogers, Gandal, Pordy & Ecker, P.A. with respect
to the Registrant's Common Stock.
10.1 Secured Revolving Line of Credit Facility Agreement dated as of July
1, 1997 by and between Startec, Inc. and Signet Bank.
10.2 Lease by and between Vaswani Place Limited Partnership and Startec,
Inc. dated as of September 1, 1994, as amended.
10.3 Agreement by and between World Communications, Inc. and Startec,
Inc. dated as of April 25, 1990.
10.4* Co-Location and Facilities Management Services Agreement by and
between Extranet Telecommunications, Inc. and Startec, Inc. dated
as of ___, 1997.
10.5 Employment Agreement dated as of July 1, 1997 by and between
Startec, Inc. and Ram Mukunda.
10.6 Employment Agreement dated as of July 1, 1997 by and between
Startec, Inc. and Prabhav V. Maniyar.
10.7 Amended and Restated Stock Option Plan.
10.8 1997 Performance Incentive Plan.
10.9 * Subscription Agreement by and among Blue Carol Enterprises, Limited,
Startec, Inc. and Ram Mukunda dated as of February 8, 1995.
10.10* Agreement for Management Participation by and among Blue Carol
Enterprises, Limited, Startec, Inc. and Ram Mukunda dated as of
February 8, 1995, as amended as of June 16, 1997.
10.11* Service Agreement by and between Companhia Portuguesa Radio Marconi,
S.A. and Startec, Inc. as amended on February 8, 1995.
10.12* Lease Agreement between Companhia Portuguesa Radio Marconi, S.A. and
Startec, Inc. dated as of June 15, 1996.
10.13* Indefeasible Right of Use Agreement between Companhia Portuguesa
Radio Marconi, S.A. and Startec, Inc. dated as of January 1, 1996.
10.14* International Telecommunication Services Agreement between Videsh
Sanchar Nigam Ltd. and Startec, Inc. dated as of November 12, 1992.
10.15* Digital Service Agreement with Communications Transmission Group,
Inc. dated as of October 25, 1994.
10.16* Lease Agreement by and between GPT Finance Corporation and Startec,
Inc. dated as of January 10, 1990.
<PAGE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBIT NUMBER
- --------- -------------------------------------------------------------------- -------------
<S> <C>
10.17* Carrier Services Agreement by and between Frontier Communications
Services, Inc. and Startec, Inc. dated as of February 26, 1997.
10.18* Carrier Services Agreement by and between MFS International, Inc.
and Startec, Inc. dated as of July 3, 1996.
10.19* International Carrier Voice Service Agreement by and between MFS
International, Inc. and Startec, Inc. dated as of June 6, 1996.
10.20* Carrier Service Agreement by and between Cherry Communications, Inc.
and Startec, Inc. dated as of June 7, 1995.
11.1 Statement regarding computation of earnings per share.
23.1 Consent of Arthur Andersen LLP.
23.2 * Consent of Shulman, Rogers, Gandal, Pordy & Ecker, P.A. (included in
Exhibit 5.1).
24.1 Power of Attorney (contained on the signature page).
27.1 Financial Data Schedule.
99.1 Consent of Nazir G. Dossani.
99.2 Consent of Richard K. Prins.
- ----------
* To be filed by amendment
</TABLE>
1,900,000 Shares
STARTEC GLOBAL COMMUNICATIONS CORPORATION
Common Stock
(Par Value $0.01 Per Share)
UNDERWRITING AGREEMENT
September __, 1997
FERRIS, BAKER WATTS, INCORPORATED
BOENNING & SCATTERGOOD, INC.
As Representatives of the
Several Underwriters Identified
In Schedule I Hereto,
c/o Ferris, Baker Watts, Incorporated
1720 Eye Street, N.W.
Washington, D.C. 20006
Ladies and Gentlemen:
SECTION 1. INTRODUCTION. STARTEC Global Communications Corporation, a
Maryland corporation (the "Company"), proposes, subject to the terms and
conditions stated herein, to issue and sell to the Underwriters named in
Schedule I hereto (the "Underwriters"), for which Ferris, Baker Watts, Inc. and
Boenning & Scattergood, Inc. are acting as Representatives (the
"Representatives"), an aggregate of 1,900,000 shares and, at the election of the
Underwriters, up to 285,000 additional shares of Common Stock, par value $0.01
per share ("Stock"), of the Company. The 1,900,000 shares to be sold by the
Company are herein called the "Firm Shares" and the 285,000 additional shares to
be sold by the Company are herein called the "Optional Shares." The Firm Shares
and the Optional Shares that the Underwriters elect to purchase pursuant to
hereof are herein collectively called the "Shares."
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, each of the Underwriters that:
(a) A registration statement on Form S-1 (File No. 333- ) under
the Securities Act of 1933, as amended (the "Act"), with respect to the Shares,
including a form of prospectus subject to completion, has been prepared by the
Company in conformity with the requirements of the Act and the rules and
regulations of the Securities and Exchange Commission (the "Commission")
thereunder (the "Rules and Regulations"). Such registration statement has been
filed with the Commission under the
<PAGE>
Act and one or more amendments to such registration statement may also have been
so filed. After the execution of this Agreement, the Company shall file with the
Commission a Prospectus (as hereinafter defined) which shall have been provided
to, and approved by, the Representatives prior to the filing thereof. As used in
this Agreement, the term "Registration Statement" means such registration
statement, as amended and revised at the time when such registration statement
becomes effective, including all financial schedules and exhibits thereto and
any information omitted therefrom pursuant to Rule 430A under the Act and
included in the Prospectus (as hereinafter defined). The term "Preliminary
Prospectus" means each prospectus subject to completion contained in such
registration statement or any amendment thereto before the Registration
Statement was or is declared effective, or such prospectus subject to completion
filed pursuant to Rule 424(a) under the Act which omits the information
permitted under Rule 430A. The term "Prospectus" means a prospectus, including
any amendments or supplements thereto, relating to the Registration Statement
that includes all the information contained in the most recently filed
Preliminary Prospectus in addition to such information which may have been
omitted in any Preliminary Prospectus pursuant to Rule 430A under the Act. To
the extent the Company relies on Rule 462(b) under the Act to increase the
maximum aggregate offering price, the Company shall have made in a timely manner
any filing required under Rule 462(b) and such filing shall be in compliance
with such Rule. Copies of the Registration Statement, any amendment thereto and
any Preliminary Prospectus filed with the Commission have been delivered by the
Company to the Representatives on behalf of the Underwriters. The Registration
Statement any and post-effective amendments thereto have been declared effective
by the Commission.
(b) The Commission has not issued any order suspending the
effectiveness of the Registration Statement, any post-effective amendment
thereto or Rule 462(b) Registration Statement, if any, or preventing or
suspending the use of any Preliminary Prospectus, the Prospectus, the
Registration Statement or any amendment of supplement thereto or suspending the
registration of the Shares, nor has the Commission instituted or threatened to
institute any proceedings with respect to such an order. Each Preliminary
Prospectus, at the time of filing thereof, conformed in all material respects to
the requirements of the Act and the Rules and Regulations thereunder, and did
not contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading;
provided, however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with information
furnished in writing to the Company by an Underwriter through the
Representatives expressly for use therein.
(c) The Registration Statement conforms, and the Prospectus (or
the most recent Preliminary Prospectus) and any further amendments or
supplements to the Registration Statement or the Prospectus will conform, in all
material respects to the requirements of the Act and the Rules and Regulations
thereunder. The Registration
2
<PAGE>
Statement and any post-effective amendment thereto, as of the applicable
effective date or dates, and each Preliminary Prospectus and Prospectus, as of
the date each such Preliminary Prospectus or Prospectus is filed and at all
times subsequent thereto up to and including the Closing Date (as defined in
Section 5 hereof) and the Option Closing Date (as defined in Section 5 hereof),
and during such longer period during which the Prospectus may be required to be
delivered in connection with sales to any dealer and during such longer period
until any post-effective amendment thereto shall become effective, do not and
will not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through the Representatives expressly for use therein, and no event
will have occurred which should have been set forth in an amendment or
supplement to the Registration Statement or the Prospectus which has not then
been set forth in such an amendment or supplement.
(d) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of Maryland, its jurisdiction
of incorporation, and has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts any business so
as to require such qualification, except for those jurisdictions in which the
failure to so qualify has not had and will not have a Material Adverse Effect
(as hereinafter defined), and has all power and authority necessary to own or
hold its properties and to conduct the business in which it is engaged. Each
subsidiary of the Company in existence as of the date hereof (each a
"Subsidiary" and together the "Subsidiaries") has been duly incorporated and is
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and each has been duly qualified as a foreign
corporation for the transaction of business and is in good standing under the
laws of each other jurisdiction in which it owns or leases properties, or
conducts any business so as to require such qualification (except for those
jurisdictions in which the failure to so qualify has not had and will not have a
Material Adverse Effect (as hereinafter defined). "Material Adverse Effect"
means, when used in connection with the Company, any development, change or
effect that is materially adverse to the business, properties, assets, net
worth, condition (financial or other), results of operations or, prospects of
the Company and its Subsidiaries, taken as a whole.
(e) The Company has the duly authorized capitalization as set
forth in the Prospectus (or most recent Preliminary Prospectus) and will have
the adjusted capitalization set forth therein at the Closing Date, based on the
assumptions set forth therein. All of the shares of capital stock of the Company
issued and outstanding have been duly and validly authorized and issued, are
fully paid and non-assessable, without personal liability attaching to the
ownership thereof, and none of such shares have been issued or are owned or held
in violation of any preemptive or other rights of
3
<PAGE>
securityholders or other persons to acquire securities of the Company. As of the
Closing Date, the securities of the Company including, without limitation, the
Stock, the Shares, the warrants (the "Underwriters' Warrants") to be issued to
the Representatives pursuant to the Underwriters' Warrant Agreement of even date
herewith (the "Underwriters' Warrant Agreement") conform to all statements
relating thereto contained in the Registration Statement or the Prospectus. With
respect to each Subsidiary of the Company, all of the issued and outstanding
shares of capital stock are fully paid and non-assessable, without personal
liability attaching to the ownership thereof, and none of such shares have been
issued or are owned or held in violation of any preemptive or other rights of
securityholders or other persons to acquire securities of the Company and
(except as otherwise described in the Prospectus (or the most recent Preliminary
Prospectus)) are owned directly by the Company, free and clear of all liens,
encumbrances, equities or claims. Other than as disclosed in the Prospectus (or
the most recent Preliminary Prospectus), there are no holders of the securities
of the Company having rights to registration thereof or pre-emptive rights to
purchase capital stock of the Company. Except as created hereby or described in
the Prospectus or most recently filed Preliminary Prospectus, there are no
commitments, plans or arrangements to issue, and no outstanding options,
warrants or other rights, calling for issuance of, any shares of capital stock
of the Company or any of its Subsidiaries or any security or other instrument
which, by its terms, is convertible into, exercisable for, or exchangeable for
capital stock of the Company or any of its Subsidiaries. Except as described in
the Prospectus or the most recently filed Preliminary Prospectus, there is no
outstanding security or other instrument which, by its terms, is convertible
into, exercisable for, or exchangeable for capital stock of the Company or any
of its Subsidiaries.
(f) The Shares and the Underwriters' Warrants have been duly and
validly authorized. When the Shares are issued and delivered against payment
therefor as provided herein, or when the Underwriters' Warrants are issued and
delivered in accordance with the terms hereof, thereof and of the Underwriters'
Warrant Agreement, such Shares and such Underwriters' Warrants, will be duly and
validly issued and fully paid and non-assessable, will not have been issued in
violation of any preemptive or other rights of securityholders or other persons
to acquire securities of the Company and will conform to all statements relating
thereto in the Registration Statement and the Prospectus. Good and marketable
title to the Shares and the Underwriters' Warrants will pass to the Underwriters
on the Closing Date free and clear of any lien, encumbrance, security interest,
claim or other restriction whatsoever. The shares to be issued upon exercise of
the Underwriters' Warrants (the "Warrant Shares") have been duly authorized and
validly reserved for issuance and, when issued, paid for and delivered in
accordance with the terms of the Underwriters' Warrants and the Underwriters'
Warrant Agreement will be duly and validly issued and fully paid and
non-assessable, will not have been issued in violation of any preemptive or
other rights of securityholders or other persons to acquire securities of the
Company and will conform to all statements relating thereto in the Registration
Statement and the Prospectus (or most recent Preliminary Prospectus).
4
<PAGE>
Good and marketable title, free and clear of any lien, encumbrance, security
interest, claim or other restriction whatsoever, will pass to the holders of
Warrant Shares issued upon exercise of Underwriters' Warrants in accordance with
the terms thereof and of the Underwriters' Warrant Agreement. The Company has
received, subject to notice of issuance, approval to have the Shares listed on
The Nasdaq National Market ("NNM") and the Company knows of no reason or set of
facts which is likely to adversely affect such approval.
(g) The financial statements and the related notes and schedules
thereto included in the Registration Statement and the Prospectus or the most
recent Preliminary Prospectus fairly present the financial condition, results of
operations, stockholders' equity and cash flows, and the other information
purported to be shown therein, of the Company and its Subsidiaries, on a
consolidated basis at the respective dates and for the respective periods
specified therein. Such financial statements and the related notes and schedules
thereto have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved (except as
otherwise noted therein and have been properly derived from the books and
records of the Company and such financial statements as are audited have been
examined by Arthur Andersen LLP, who are independent public accountants within
the meaning of the Act and the Rules and Regulations, as indicated in their
reports filed therewith. The selected financial information and statistical data
set forth under the captions "Prospectus SummaryuSummary Financial Data,"
"Capitalization," "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" in the
Prospectus (or the most recent Preliminary Prospectus) fairly present, on the
basis stated in the Prospectus or such Preliminary Prospectus, the information
included therein and have been properly derived from the financial statements
and other operating records of the Company and its Subsidiaries. No other
financial statements or financial information, except that which is contained in
the Registration Statement, the Prospectus or the most recent Preliminary
Prospectus is required by Form S-1, the Rules and Regulations, or otherwise, to
be included in the Registration Statement, the Prospectus or such Preliminary
Prospectus.
(h) Since the respective dates as of which information is given in
the Prospectus (or the most recent Preliminary Prospectus), and except as
otherwise may be stated therein (i) neither the Company, nor any of its
Subsidiaries has entered into any transaction or incurred any liability or
obligation, contingent or otherwise, which is material to the Company and its
Subsidiaries, taken as a whole, (ii) there has not been any change in the
outstanding capital stock of the Company or any of its Subsidiaries, or any
issuance of options, warrants or rights to purchase the capital stock of the
Company or any of its Subsidiaries, or any material increase in the long-term
debt of the Company or any of its Subsidiaries, or any material adverse change
in the business, condition (financial or otherwise) or results of operations of
the Company or any of its Subsidiaries, (iii) no loss or damage (whether or not
insured) to the properties of the Company or any of its Subsidiaries
5
<PAGE>
has been sustained which has resulted in a Material Adverse Effect, (iv) neither
the Company nor any of its subsidiaries has paid or declared any dividend or
other distribution with respect to its stock, and (v) there has not been any
change, contingent or otherwise, in the direct or indirect control of the
Company or any of its Subsidiaries nor, to the best knowledge of the Company, do
there exist any circumstances which would likely result in such a change.
(i) The Company and each of its Subsidiaries has filed all
foreign, federal, state and local income, franchise and other material tax
returns required to be filed (or have obtained extensions with respect thereto)
and has paid all taxes shown as due thereunder and all assessments received by
it to the extent that payment has become due, and the Company has no knowledge
of any tax deficiency which might be assessed against the Company or any of its
Subsidiaries which, if so assessed, would be reasonably expected to have a
Material Adverse Effect.
(j) The Company and each of its Subsidiaries maintains insurance
of the types and in amounts which the Company reasonably believes to be adequate
for its business in such amounts and with such deductibles as are customary for
companies in the same or similar business, all of which insurance is in full
force and effect.
(k) Other than as set forth in the Prospectus (or most recent
Preliminary Prospectus), there are no legal or governmental proceedings pending
to which the Company or any of its Subsidiaries is a party or to which any
property of the Company or any of its Subsidiaries is the subject which (i)
challenges the validity of the capital stock of the Company or this Agreement or
the Underwriters' Warrant Agreement, or of any action taken or to be taken by
the Company pursuant to or in connection herewith or therewith, (ii) is required
to be disclosed in the Registration Statement or Prospectus (or most recent
Preliminary Prospectus), or (iii) if determined adversely to the Company or any
of its Subsidiaries, could reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect, and to the Company's best
knowledge, no such proceedings are threatened or contemplated by governmental
authorities or threatened by others. Any such proceedings that are set forth in
the Prospectus (or most recent Preliminary Prospectus) are fairly and accurately
summarized therein.
(l) The Company has full legal right, power and authority to enter
into this Agreement and the Underwriters' Warrant Agreement and to consummate
the transactions provided for and perform its obligations as provided herein and
therein. All necessary corporate proceedings of the Company have been duly taken
to authorize the execution, delivery and performance by the Company of this
Agreement and the Underwriters' Warrant Agreement. This Agreement and the
Underwriters' Warrant Agreement have been duly authorized, executed and
delivered by the Company and, assuming each is a binding agreement of yours,
constitutes a legal, valid and binding agreement of the Company enforceable
against the Company in accordance with its terms
6
<PAGE>
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting the enforcement of creditors' rights and the
application of equitable principles relating to the availability of remedies and
except as rights to indemnity or contribution may be limited by federal or state
securities laws and the public policy underlying such laws).
(m) The Company's execution and performance of this Agreement and
the Underwriters' Warrant Agreement, including, without limitation, application
of the net proceeds of the offering, if and when received, as described in the
Prospectus (or most recent Preliminary Prospectus) under the caption "Use of
Proceeds," will not violate any provision of the Articles of Incorporation or
Bylaws or any similar constitutive documents of the Company or any of its
Subsidiaries, or any law, rule or regulation applicable to the Company or any of
its Subsidiaries of any government, court, regulatory body, administrative
agency or other governmental body having jurisdiction over the Company or any of
its Subsidiaries or any of their respective businesses or properties, and will
not result in the breach, or be in contravention, of any loan agreement, lease,
franchise, license, note, bond, other evidence of indebtedness, indenture,
mortgage, deed of trust, voting trust agreement, stockholders' agreement, note
agreement or other agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which their respective property is or may be
subject, or any statute, judgment, decree, order, rule or regulation applicable
to the Company or any of its Subsidiaries of any government, arbitrator, court,
regulatory body or administrative agency or other governmental agency or body,
domestic or foreign, having jurisdiction over the Company or any of its
Subsidiaries or any of their respective businesses, activities or properties,
except those, if any, that are described in the Prospectus (or most recent
Preliminary Prospectus) or those which would not, individually or in the
aggregate, have a Material Adverse Effect.
(n) All executed agreements or copies of executed agreements filed
as exhibits to the Registration Statement to which the Company or any of its
Subsidiaries is a party or by which any of them is or may be bound or to which
any of their respective assets, properties or businesses is or may be subject
have been duly and validly authorized, executed and delivered by the Company or
the relevant Subsidiary or Subsidiaries and, assuming that each is a binding
obligation of the other party or parties thereto, constitutes the legal, valid
and binding agreement of the Company or such Subsidiary or Subsidiaries,
enforceable against it or them in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization or other similar laws relating to enforcement of creditors'
rights generally, and general equitable principles relating to the availability
of remedies, and except as rights to indemnity or contribution may be limited by
federal or state securities laws and the public policy underlying such laws).
The descriptions in the Prospectus and Preliminary Prospectus of contracts and
other documents are accurate and fairly present the information required to be
disclosed with respect thereto by the Act and the Rules and
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Regulations, and there are no contracts or other documents which are required by
the Act or the Rules and Regulations to be described in the Prospectus or filed
as exhibits to the Registration Statement which are not described or filed as
required, and the exhibits which have been filed are complete and correct copies
of the documents of which they purport to be copies.
(o) The Company and each of its Subsidiaries has good and
marketable title in fee simple to all real property and good title to all other
property and assets owned thereby as set forth in the Prospectus (or most recent
Preliminary Prospectus), in each case free and clear of all liens, security
interests, pledges, charges, mortgages and other defects and encumbrances,
except such as are described in the Prospectus (or most recent Preliminary
Prospectus) or such as do not materially affect the value of such property, and
do not interfere with the use made and proposed to be made of such property by
the Company or its Subsidiaries; and any real properties and buildings held
under lease by the Company or any of its Subsidiaries are held under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its Subsidiaries. No real property owned, leased,
licensed or used by the Company or any of its Subsidiaries is situated in an
area which is, or to the best knowledge of the Company, will be subject to
zoning, use, or building code restrictions which would prohibit (and no state of
facts relating to the actions or inaction of another person or entity or his or
its ownership, leasing, licensing, or use of any real or personal property
exists or will exist which would prevent) the continued effective ownership,
leasing, licensing, or use of such real property in the business of the Company
or its Subsidiaries as presently conducted or as the Prospectus (or most recent
Preliminary Prospectus) indicates any of them contemplate conducting such
business in the future, except as disclosed in the Prospectus (or most recent
Preliminary Prospectus).
(p) No consent, authorization, approval, order, license,
certificate, declaration or permit of or from, or filing with, any governmental
or regulatory authority, agent, board or other body is required for the issue
and sale of the Shares by the Company and the execution, delivery or performance
by the Company of this Agreement or the Underwriters' Warrant Agreement, or the
issuance of the Warrant Shares in accordance with the terms of the Underwriters'
Warrants and the Underwriters' Warrant Agreement, except for the registration
under the Act of the Shares and the registration of the Stock under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), each of which
has been made or obtained, and such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution of the Shares by
the Underwriters, and such approval as may be required from the NNM to have the
Shares listed thereon. No consent of any party to any contract, agreement,
instrument, lease, license, arrangement or understanding to which the Company or
any of its Subsidiaries are a party, or to which any
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of their properties or assets are subject, is required for the execution,
delivery or performance of this Agreement or the Underwriters' Warrant
Agreement.
(q) Neither the Company nor any of its Subsidiaries is in
violation of its Charter or Bylaws or similar constitutive documents; neither
the Company nor any of its Subsidiaries is (or, as a result of the passage of
time or based on its projected plans of operations, will be) in default in the
performance or observance of any obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which it is a party or by which it or any of
its properties may be bound, which default may reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect, or which could in
any way, individually or in the aggregate, impair or delay the consummation of
the transactions contemplated by this Agreement or the offering of the Shares in
the manner contemplated herein and in the Registration Statement and the
Prospectus (or most recent Preliminary Prospectus) and each such indenture,
mortgage, deed of trust, loan agreement lease or other agreement or instrument
is in full force and effect and is a legal, valid and binding obligation of the
Company or is Subsidiary or Subsidiaries, as the case may be and, to the best
knowledge of the Company, of each other party thereto.
(r) The statements set forth in the Prospectus (or most recent
Preliminary Prospectus) under the caption "Description of Capital Stock,"
insofar as they purport to constitute a summary of the terms of the Company's
securities, and under the captions "Shares Eligible For Future Sale,"
"Business," "Management" and "Underwriting" (except, with respect to the
statements under the caption "Underwriting," for information furnished in
writing to the Company by the Underwriters through the Representatives expressly
for use therein), insofar as they purport to describe the provisions of the laws
and the provisions of documents referred to therein, are accurate and fairly
summarize such provisions.
(s) The Company is not and, after giving effect to the offering
and sale of the Shares, will not be an "investment company" or an "affiliated
person" of or a "promoter" or "principal underwriter" of or an entity
"controlled" by an "investment company," as such terms are defined in the
Investment Company Act of 1940 (the "Investment Company Act").
(t) The Company and each of its Subsidiaries owns or is licensed
or otherwise has sufficient right to use the proprietary knowledge, inventions,
patents, trademarks, service marks, trade names, logo marks and copyrights
("Intellectual Property") currently used in the conduct of their respective
businesses, except for those patents, trademarks, service marks, trade names,
logo marks or copyrights with respect to which the failure to own or license
same would not have a Material Adverse Effect. To the best knowledge of the
Company, none of the activities engaged in by the Company or any of its
Subsidiaries infringes upon or otherwise conflicts with Intellectual Property
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rights of others, except for any such conflicts that would not have a Material
Adverse Effect, and no claims have been asserted against the Company or any of
its Subsidiaries by any person with respect to the use of any such rights or
challenging or questioning the validity or effectiveness of any such rights.
(u) No labor disturbance by, or labor dispute with, the employees
of the Company or any of its Subsidiaries exists or is threatened or imminent
which may have a Material Adverse Effect.
(v) Since its inception, the Company has not incurred any
liability arising under or as a result of the application of the provisions of
the Act.
(w) The Company and each of its Subsidiaries (i) is in compliance
with all environmental, safety, health or similar law or regulation relating to
the protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental Laws")
applicable to its business, (ii) has received all permits, licenses or other
approvals required under applicable Environmental Laws to conduct its business,
and (iii) is in compliance with all terms and conditions of any such permit,
license or approval, except where such noncompliance, failure to receive such
license or approval or failure to comply would not have a Material Adverse
Effect.
(x) The Company and each of its Subsidiaries is in compliance with
all federal or state laws, including the rules and regulations promulgated
thereunder, relating to discrimination in the hiring, promotion or pay of
employees, nor any applicable federal or state wages and hours law, and the
provisions of the Employee Retirement Income Security Act of 1974, as amended,
applicable to its business, except where such noncompliance would not have a
Material Adverse Effect.
(y) The Company and each of its Subsidiaries has full corporate
power and authority and has obtained and holds all necessary consents
authorizations approvals, orders, certificates and permits of and from, and have
made all declarations and filings with, all U.S. and foreign, federal state or
provincial, local and other governmental authorities, all self-regulatory
organizations and all courts and other tribunals, to own, lease, license and use
its properties and assets and to conduct its business in the manner described in
the Prospectus (or most recent Preliminary Prospectus), except to the extent
that the failure to obtain or file would not have Material Adverse Effect, and
except as otherwise described in the Prospectus (or most recent Preliminary
Prospectus). Neither the Company nor any of its Subsidiaries has received any
notice of proceedings relating to, and does not have reason to believe that any
governmental body or agency is considering limiting, suspending, modifying or
revoking, any such consent, authorization, approval, order, certificate or
permit which, individually or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a Material Adverse Effect.
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(z) The Company and each of its Subsidiaries has all necessary
applications, statements, reports, information, forms, consents, authorizations,
approvals, orders, certificates and permits ("Licenses") of and from all United
States federal or state authorities, including the Federal Communications
Commission (the "FCC") and State Public Utilities Commissions to own, lease,
license and use its properties and assets and to conduct its business in the
manner described in the Prospectus (or most recent Preliminary Prospectus),
except to the extent that the failure to obtain or file would not have a
Material Adverse Effect, and except as described in the Prospectus (or most
recent Preliminary Prospectus).
(aa) The Licenses are in full force and effect without conditions
that would have a Material Adverse Effect , except for such conditions imposed
generally by the FCC upon such licenses or conditions stated on the face of the
Licenses, (ii) all express conditions in the Licenses have been satisfied where
the failure to satisfy such conditions would have a Material Adverse Effect, and
(iii) neither the Company nor any of its Subsidiaries has received any
notification that any revocation or limitation of the Licenses is threatened or
pending that would have a Material Adverse Effect.
(bb) The Licenses are validly issued. The Company and each of its
Subsidiaries has filed with the FCC all applications, statements, reports,
information, forms, or any other document required under the Communications Act
of 1934, as amended (the "Communications Act") and the rules and regulations
thereunder, except where the failure to so file would not have a Material
Adverse Effect, and such filings or submissions were in compliance with
applicable laws or regulations when filed or submitted and no deficiencies have
been asserted by the FCC with respect to such filings or submissions, except
where the deficiency is of such a nature that failure to cure would not have a
Material Adverse Effect, the information contained in such filings or
submissions was, in all material respects, accurate, complete and up-to-date at
the time the filings or submissions were made.
(cc) With respect to matters relating to the regulation of long
distance telecommunications carriers administered by United States federal or
state authorities, including, and not limited to, the FCC and State Public
Utilities Commissions, the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement and the
Underwriters' Warrant Agreement will not contravene any provisions of applicable
law or any judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any of its Subsidiaries, and no consent,
approval, authorization or order of, or qualification with, any governmental
body or agency is required for the performance by the Company of its obligations
hereunder or thereunder
(dd) There is no proceeding, formal or informal complaint or
investigation before the FCC against the Company or any of its Subsidiaries or
any of the
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Licenses or based on any violation or alleged violation by the Company or any of
its subsidiaries of the Communications Act, except for proceedings affecting the
industry generally to which neither the Company nor any of its Subsidiaries is a
specific party.
(ee) Neither the execution, delivery and performance of this
Agreement by the Company, nor the issuance and sale of the Shares, the
Underwriters' Warrants or the Warrant Shares, as described in the Registration
Statement and Prospectus (or most recent Preliminary Prospectus), will conflict
with, violate or require any authorization, approval, or consent under the
Communications Act or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, or cause any forfeiture or
impairment of, any of the Licenses.
(ff) Neither the Company nor any other person associated with or
acting on behalf of the Company including, without limitation, any director,
officer, agent, or employee of the Company has, directly or indirectly, while
acting on behalf of the Company (i) used any corporate funds for unlawful
contributions, gifts, entertainment, or other unlawful expenses relating to
political activity, (ii) made any unlawful contribution to any candidate for
foreign or domestic office, or to any foreign or domestic government officials
or employees or other person charged with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United States or
any jurisdiction thereof or to foreign or domestic political parties or
campaigns from corporate funds, or failed to disclose fully any contribution in
violation of law, (iii) violated any provision of the Foreign Corrupt Practices
Act of 1977, as amended, or (iv) made any other unlawful payment.
(gg) Neither the Company nor, to the Company's best knowledge, any
employee or agent of the Company has made any payment of funds of the Company or
received or retained any funds which constitutes a violation by the Company of
any law, rule or regulation or of a character required to be disclosed in the
Prospectus (or most recent Preliminary Prospectus).
(hh) With respect to state certificates of public convenience and
necessity of other operating authorizations issued by state and public utility
commissions or similar state governmental agencies (collectively "PUCs" and
individually a "PUC") (such PUC certificates and authorizations are hereinafter
referred to collectively as the "State Authorizations") held by the Company or
any of its Subsidiaries, such State Authorizations are in full force and effect
and are unimpaired by any act or omission of the Company or any of its employees
or agents or the Company's Subsidiaries, in each case except where such
authorization is not required or where the failure to so hold any such State
Authorization would not have a Material Adverse Effect. The State Authorizations
are all of the licenses, authorizations, consents and approvals necessary from
the PUCs in order to allow the Company and each of its Subsidiaries to own their
respective assets and carry on their respective businesses as currently being
conducted,
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except where the failure to so hold any State Authorizations would not have a
Material Adverse Effect. To the Company's best knowledge, there are no
proceedings of any kind, including but not limited to rulemaking proceedings of
general applicability in the industry or industries in which the Company
operates, by or before any PUC, now pending or threatened, which, if adversely
determined, would have a Material Adverse Effect. Neither the execution and
delivery of this Agreement or the Underwriters' Warrant Agreement, nor the
consummation of the transactions contemplated herein, therein and in the
Registration Statement, will conflict with or result in a breach of, or require
any authorization, approval or consent under the Communications Act, or the
rules of the FCC or the communications statutes of any state or the policies or
rules of any PUC. All applications, reports and other filings required by the
FCC or any PUC to be filed as of the date hereof with respect to any FCC license
or the State Authorizations, as the case may be, have been duly and currently
filed as of the date hereof, except where the failure to so file would not have
a Material Adverse Effect.
(ii) The Company and each of its Subsidiaries has filed with the
applicable foreign and domestic regulatory authorities each and every statement,
report, information or form required by any applicable law, regulation or order,
except where the failure to so file would not have a Material Adverse Effect,
and all such filings or submissions were in compliance with applicable laws when
filed, and no deficiencies have been asserted by any regulatory commission,
agency or authority with respect to such filings or submissions, except where
the failure to so file or cure would not have a Material Adverse Effect. The
Company and each of its Subsidiaries has maintained in full force and effect all
licenses and permits necessary or proper for the conduct of its business, except
where the failure to do so would not have a Material Adverse Effect, and neither
the Company nor any of its Subsidiaries has received any notification that any
revocation or limitation thereof is threatened or pending that would have such
an Effect. Except as disclosed in the Registration Statement and the Prospectus
(or most recent Preliminary Prospectus), there is not pending any change under
any law, regulation, license or permit that would have a Material Adverse
Effect. Neither the Company nor any or its Subsidiaries has received any notice
of, or, to the best knowledge of the Company, been threatened with or is under
investigation with respect to, a violation or a possible violation of any
provision of any law, regulation or order, except such violation or violations
as would not have a Material Adverse Effect.
(jj) The books, records and accounts and systems of internal
accounting controls of the Company currently comply with the requirements of
Section 13(b)(2) of the Exchange Act.
(kk) Neither the Company nor any of its officers, directors or
affiliates (within the meaning of the Rules and Regulations) has taken, directly
or indirectly, any action designed to stabilize or manipulate the price of any
security of the Company, or which has constituted or which might in the future
reasonably be expected to, cause or
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<PAGE>
result in, stabilization or manipulation of the price of any security of the
Company, to facilitate the sale or resale of the Shares or otherwise.
(ll) The minute books of the Company and each of its Subsidiaries
are current and contain a correct and complete record of all corporate action
taken by the respective Boards of Directors and stockholders of the Company and
the Subsidiaries and all signatures contained therein are true signatures of the
persons whose signatures they purport to be.
(mm) Except as described in the Prospectus (or most recent
Preliminary Prospectus), to the best knowledge of the Company there is no loss
or threatened loss of any key customer, supplier, or account which loss would
result in a Material Adverse Effect.
(nn) Neither the Company nor any of its Subsidiaries has incurred,
directly or indirectly, any liability for a fee, commission or other
compensation on account of the employment of a broker or finder in connection
with the offering and sale of the Shares contemplated by this Agreement.
(oo) There are no business relationships or related party
transactions of the nature described in Item 404 of Regulation S-K of the Rules
and Regulations involving the Company, any of its Subsidiaries and any person
referred to in Items 401 or 404 of such Regulation S-K, except as required to be
described, and as so described, in the Prospectus (or most recent Preliminary
Prospectus).
SECTION 3. PURCHASE OF SECURITIES BY THE UNDERWRITERS. On the basis of
the representations, warranties, covenants and agreements herein contained, and
subject to the terms and conditions herein set forth (i) the Company agrees to
sell to each of the Underwriters, and each of the Underwriters agrees, severally
and not jointly, to purchase from the Company, at a purchase price per share of
$_______, the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto and (ii) in the event and to the extent that
the Underwriters shall exercise the election to purchase Optional Shares as
provided below, the Company agrees to sell to each of the Underwriters, and each
of the Underwriters agrees, severally and not jointly, to purchase from the
Company, at the purchase price per share set forth in clause (i) of this Section
3, that portion of the number of Optional Shares as to which such election shall
have been exercised (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying the aggregate number of Firm Shares to be sold by a
fraction, the numerator of which is the number of Firm Shares to be purchased by
each of you as set forth opposite your respective names in Schedule I hereto and
the denominator of which is the aggregate number of Option Shares as to which
such election has been exercised.
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The Company hereby grants to the Underwriters the right to
purchase at their election up to 285,000 Optional Shares, at the purchase price
per share set forth in the paragraph above, for the sole purpose of covering
over-allotments, if any, in the sale of the Firm Shares. Each such election to
purchase Optional Shares may be exercised only by written notice from the
Representatives to the Company, given within a period of thirty (30) calendar
days after the date of this Agreement and setting forth the aggregate number of
Optional Shares to be purchased and the date on which such Optional Shares are
to be delivered, as determined by you but in no event earlier than the Closing
Date or, unless you and the Company otherwise agree in writing, no earlier than
two (2) nor later than ten (10) business days after the date of such notice.
SECTION 4. OFFERING OF THE SHARES BY THE UNDERWRITERS. Upon the
authorization by the Representatives of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
SECTION 5. DELIVERY OF AND PAYMENT FOR THE SHARES.
(a) The Firm Shares to be purchased by each Underwriter hereunder,
in definitive form, and in such authorized denominations and registered, in such
names as the Representatives may request upon at least forty-eight (48) hours'
prior notice to the Company shall be delivered by or on behalf of the Company to
the Representatives, for the account of such Underwriter, against payment by or
on behalf of such Underwriter of the purchase price therefor in Federal (same
day) funds. The Company will cause the certificates representing the Firm Shares
to be made available for checking and packaging at least twenty-four (24) hours
prior to the Closing Date (as defined below) with respect thereto at the office
of Ferris, Baker Watts, Incorporated, 1720 Eye Street, N.W., Washington, D.C.
20006 (the "Designated Office"). The time and date of such delivery and payment
shall be, with respect to the Firm Shares, at ______ o'clock a.m., Washington,
DC time, on ______________, 1997 or such other time and date as the
Representatives and the Company may agree. Such time and date for delivery of
the Firm Shares is herein called the "Closing Date."
(b) Delivery any payment of any Optional Shares to be purchased by
each Underwriter pursuant hereto shall be made at the Designated Office at _____
o'clock a.m., Washington, DC time, on the date specified by the Representatives
in the written notice of the Underwriters' election to purchase such Optional
Shares, or such other time and date as the Representatives and the Company may
agree. Such time and date for delivery of Optional Shares, if not the Closing
Date, is herein called the "Option Closing Date."
(c) The documents to be delivered at the Closing Date or any
Option Closing Date, as the case may be, by or on behalf of the parties hereto
pursuant to
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Section 8 hereof, including the cross-receipt for the Shares and any additional
documents requested by the Underwriters will be delivered at the offices of
Venable, Baetjer, Howard & Civiletti, LLP, 1201 New York Avenue, NW, Washington,
DC 20005 (the "Closing Location"), and the Shares will be delivered at the
Designated Office, on the Closing Date or the Option Closing Date, as the case
may be.
(d) A meeting will be held at the Closing Location at 2:00 p.m.,
Washington, D.C. time, on the business day next preceding Closing Date or any
Option Closing Date, as the case may be, or at such other time as is mutually
agreed upon by the parties hereto, at which meeting the final drafts of the
documents to be delivered pursuant to the preceding sentence will be available
for review by the parties hereto.
SECTION 6. COVENANTS OF THE COMPANY. The Company covenants and agrees
with each of the Underwriters as follows:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto, to become effective as promptly as
practicable. If required, the Company will file the Prospectus and any
amendments or supplements thereto with the Commission in the manner and within
the time period required by Rule 424(b). During any time when a prospectus
relating to the Shares is required to be delivered under the Act, the Company
will comply with all requirements imposed upon it by the Act and the Rules and
Regulations to the extent necessary to permit the continuance of sales of or
dealings in the Shares in accordance with the provisions hereof and of the
Prospectus, as then amended or supplemented. With respect to any registration
statement, prospectus, amendment, or supplement to be filed with the Commission
in connection with the Shares, the Company will provide a copy of each such
document to each of the Representatives a reasonable time prior to the date such
document is proposed to be filed with the Commission and will not file any such
document without the consent of the Representatives. Any such registration
statement, prospectus, amendment or supplement, when filed, will comply with the
Act. In the event that the Registration Statement is effective at the time of
execution of this Agreement, but the total number of Shares subject to this
Agreement exceeds the number of Shares covered by the Registration Statement,
the Company will promptly file with the Commission on the date hereof a
registration statement pursuant to Rule 462(b) in accordance with the
requirements of such Rule and will make payment of the filing fee therefor in
accordance with the requirements of Rule 111(b) under the Act.
(b) The Company will advise the Representatives promptly (i) when
the Registration Statement, as amended, has become effective; (ii) if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A; (iii) when any
post-effective amendment to the Registration Statement becomes effective; (iv)
of any request made by the Commission
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for amendments or supplements to the Registration Statement, any Preliminary
Prospectus or Prospectus or for additional information; (v) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or any order
preventing or suspending the use of any Preliminary Prospectus or Prospectus or
any amendment or supplement thereto or the institution or threat of any
investigation or proceeding for that purpose, and will use its best efforts to
prevent the issuance of any such order and, if issued, to obtain the lifting
thereof as soon as possible; and (vi) of the receipt of any comments from the
Commission regarding the Registration Statement, any post-effective amendment
thereto, the Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto. The Company will use its best efforts to prevent the
issuance of any stop order by the Commission, and if at any time the Commission
shall issue any stop order, the Company will use its best efforts to obtain the
withdrawal of such stop order at the earliest possible moment.
(c) The Company will cooperate with the Representative, its
counsel and the Underwriters in qualifying or registering the Shares for sale,
or obtaining an exemption therefrom, under the Blue Sky laws of such
jurisdictions as the Representatives shall designate, and will continue such
qualifications or registrations or exemptions in effect so long as reasonably
requested by the Representatives to effect the distribution of the Shares. The
Company shall not be required to qualify as a foreign corporation or to file a
general consent to service of process in any such jurisdiction where it is not
presently qualified.
(d) The Company consents to the use of the Prospectus (and any
amendment or supplement thereto) by the Underwriters and all dealers to whom the
Shares may be sold, in connection with the offering or sale of the Shares and
for such period of time thereafter as the Prospectus is required by law to be
delivered in connection therewith. If, at any time when a prospectus relating to
the Shares is required to be delivered under the Act, any event occurs as a
result of which the Prospectus, as then amended or supplemented, would include
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein not misleading, or if it becomes
necessary at any time to amend or supplement the Prospectus to comply with the
Act or the Rules and Regulations, the Company promptly will so notify the
Representatives, will prepare and file with the Commission an amendment to the
Registration Statement or an amendment or supplement to the Prospectus which
will correct such statement or omission or effect such compliance, each such
amendment or supplement to be reasonably satisfactory to counsel to the
Underwriters.
(e) As soon as practicable, but in any event not later than
forty-five (45) days after the end of the 12-month period beginning on the day
after the end of the fiscal quarter of the Company during which the effective
date of the Registration Statement occurs (90 days in the event that such
quarter is the Company's last fiscal
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quarter), the Company will make generally available to its security holders, in
the manner specified in Rule 158(b) of the Rules and Regulations, and will
deliver to each of the Representative, an earnings statement which will be in
the detail required by, and will otherwise comply with, the provisions of
Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations, which
statement need not be audited unless required by the Act or the Rules and
Regulations, covering a period of at least twelve (12) consecutive months after
the effective date of the Registration Statement.
(f) During the period of five (5) years commencing with the date
hereof, the Company will deliver to the Representatives:
(i) within ninety (90) days after the end of each fiscal
year, financial statements for the Company, certified by the Company's
independent certified public accountants, including a balance sheet, statement
of operations, statement of stockholders' equity and statement of cash flows,
with supporting schedules, prepared in accordance with generally accepted
accounting principles, as at the end of such fiscal year and for the twelve (12)
months then ended, accompanied by a copy of the certificate or report thereon of
such independent certified public accountants; provided that if, during such
five-year period, the Company has active subsidiaries, the foregoing financial
statements will be on a consolidated basis to the extent that the accounts of
the Company and its subsidiaries are consolidated, and will be accompanied by
similar financial statements for any significant subsidiary which is not so
consolidated;
(ii) as soon as practicable after filing with the Commission,
all such reports, forms or other documents as may be required from time to time,
under the Act, the Rules and Regulations, the Exchange Act and the rules and
regulations thereunder;
(iii) as soon as they are available, copies of all
information (financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the National Association of
Securities Dealers, Inc. ("NASD") or any securities exchange or market;
(v) promptly following release by the Company, every press
release and every material news item or article of interest to the financial
community in respect of the Company or its affairs which was released or
prepared by the Company; and
(vi) as soon as possible following receipt of a request, any
additional information of a public nature concerning the Company or its business
which the Representatives may reasonably request.
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(g) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the Transfer Agent) for its Stock.
(h) The Company will furnish, without charge, to the
Representatives or on the Representatives' order, at such place as the
Representatives may designate, copies of the Preliminary Prospectus, the
Registration Statement and any pre-effective or post-effective amendments
thereto, and any registration statement filed pursuant to Rule 462(b) of which
three (3) copies will be signed and will include all financial statements and
exhibits) and the Prospectus, and all amendments and supplements thereto in each
case as soon as available and in such quantities as the Representatives may
reasonably request. The Company will provide or cause to be provided to the
Representatives and upon request to each Underwriter, a copy of the report on
Form SR filed by the Company as required by Rule 463 under the Act.
(i) Except pursuant to this Agreement, the Company will not,
directly or indirectly, without the prior written consent of the
Representatives, issue, offer, sell, offer to sell, contract to sell, grant any
option to purchase, pledge or otherwise dispose (or announce any issuance,
offer, sale, offer of sale, contract of sale, grant of any option to purchase,
pledge or other disposition) of any shares of Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Stock for a
period of one hundred eighty (180) calendar days after the date hereof, other
than issuances pursuant to the exercise of stock options outstanding on or
granted subsequent to the date hereof, pursuant to a stock option or other
employee benefit plan in existence on the date hereof.
(j) The Company will cause the Shares to be duly approved for
listing on the NNM prior to the Closing Date. The Company shall take all
necessary and appropriate action such that the Shares are authorized for
quotation on the NNM as soon as practicable after the effectiveness of the
Registration Statement and the Shares shall remain so authorized for at least
thirty-six (36) months thereafter.
(k) Neither the Company nor any of its officers or directors, nor
affiliates of any of them (within the meaning of the Rules and Regulations) will
take, directly or indirectly, any action designed to, or which might in the
future reasonably be expected to, cause or result in, or which will constitute,
stabilization or manipulation of the price of any securities of the Company.
(l) The Company will apply the net proceeds of the offering
received in the manner set forth under the caption "Use of Proceeds" in the
Prospectus and will file on a timely basis such reports with the Commission with
respect to the sale of the Shares and the application of the proceeds therefrom
as may be required pursuant to Rule 463 under the Act. The Company will operate
its business in such a manner and, pending application of the net proceeds of
the offering for the purposes and in the manner set forth
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under the caption "Use of Proceeds" in the Prospectus, will invest such net
proceeds in such securities so as not to become an "investment company" as such
term is defined under the Investment Company Act.
(m) The Company will timely file all such reports, forms or other
documents as may be required from time to time, under the Act, the Rules and
Regulations, the Exchange Act and the rules and regulations thereunder, and all
such reports, forms and documents so filed will comply as to form and substance
with the applicable requirements under the Act, the Rules and Regulations, the
Exchange Act and the rules and regulations thereunder which may from time to
time be applicable to the Company. Without limiting the generality of the
foregoing, the Company has filed a registration statement on Form 8-A covering
the Shares pursuant to Section 12(b) of the Exchange Act and will use its best
efforts to cause said registration statement to become effective on the
Effective Date. The Company shall comply with the provisions of all undertakings
contained in the Registration Statement.
(n) Except as described in the Prospectus, the Company will not,
until the earlier to occur of (i) thirty (30) days following the date of this
Agreement or (ii) the Option Closing Date at which the Underwriters shall have
purchased all of the Optional Shares of immediately after which all Optional
Shares shall have been so purchased, incur any liability or obligation, direct
or contingent, or enter into any material transaction, other than in the
ordinary course of business.
(o) For a period of thirty (30) days following the date of this
Agreement the Company will not acquire any of the Company's capital stock,
declare or pay any dividend or make any other distribution upon its capital
stock payable to its holders of record on a date prior to the expiration of such
30-day period.
(p) The Company will comply or cause to be complied with the
conditions to the Underwriters' obligations set forth in Section 8 hereof.
(q) On the Closing Date, the Company will enter into the
Underwriters' Warrant Agreement and, pursuant thereto will sell to the
Representatives the Underwriters' Warrants to purchase in the aggregate, 150,000
shares of Stock at an aggregate price of $____________ .
(r) During the period of thirty (30) calendar days commencing with
the date of this Agreement, the Company shall neither issue any press release or
other communication, directly or indirectly, nor hold any press conference with
respect to the offering of the Shares, the Company, its subsidiaries or its
business, results of operations, condition (financial or otherwise), property,
assets, liabilities or prospects of the Company or any of its subsidiaries,
without the prior written consent of the Representatives, which consent shall
not unreasonably be denied or delayed; provided, however, that if counsel to
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the Company is of the opinion that the issuance of a press release or other
communication or a press conference is required to comply with or avoid a
violation of applicable law, and having been so informed the Representatives
decline to consent thereto, the Company shall be permitted to issue such press
release or other communication or hold such press conference in the manner
advised by its counsel.
(s) Neither the Company nor any of its Subsidiaries will grant any
person or entity registration rights with respect to any of its securities,
except such rights as are subordinate to the registration rights contained in
the Underwriters' Warrant Agreement and are exercisable no earlier than six (6)
months after the securities to be registered upon exercise of such registration
rights contained in the Underwriters' Warrant Agreement have been offered for
sale pursuant to an effective registration statement under the Act and
registered or qualified for sale under the Blue Sky or state securities law,
rules or regulations of the jurisdictions in which such securities are to be
offered for sale.
SECTION 7. EXPENSES.
(a) If the Underwriters purchase the Firm Shares, in accordance
with the terms of this Agreement, the Company will pay the Representatives, out
of the first proceeds of the offering contemplated by this Agreement, a
non-accountable expense allowance of one percent (1%) of the gross proceeds
raised, in order to compensate the Representatives for their expenses in
connection with the transactions contemplated hereby The costs and expenses of
registration, filings and fees of all counsel in completing the applications and
in clearing the offering contemplated by this Agreement through the state
securities commissions or similar regulatory authorities of the various states
or other jurisdictions shall be borne and paid by the Company in addition to the
non-accountable expense allowance referred to in the immediately preceding
sentence.
(b) If the purchase of the Firm Shares as herein contemplated is
not consummated for any reason other than the Underwriters' default under this
Agreement or other than by reason of Section 11(a), the Company shall reimburse
the several Underwriters, in an among not to exceed $100,000 in the aggregate,
for their out-of-pocket expenses (including but not limited to counsel fees and
disbursements) in connection with any investigation made by them, and any
preparation made by them in respect of marketing of the Shares or in
contemplation of the performance by them of their obligations hereunder.
SECTION 8. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations
of each Underwriter to purchase and pay for the Shares set forth opposite the
name of such Underwriter in Schedule I are subject to the continuing accuracy of
the representations and warranties of the Company herein as of the date hereof
as of the Closing Date, and as of each Option Closing Date, if any, as if they
had been made on and as of the Closing
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Date or Option Closing Date, as the case may be; the accuracy on and as of the
Closing Date, and each Option Closing Date, if any, of the statements of
officers of the Company made pursuant to the provisions hereof; the performance
by the Company on and as of the Closing Date, and each Option Closing Date, as
the case may be, of their respective covenants and agreements hereunder; and the
following additional conditions:
(a) The Registration Statement shall have been declared effective,
and the Prospectus (containing the information omitted pursuant to Rule 430(A))
shall have been filed with the Commission not later than the Commission's close
of business on the second business day following the date hereof or such later
time and date to which the Representatives shall have consented. No stop order
suspending the effectiveness of the Registration Statement or any amendment
thereto shall have been issued, and no proceedings for that purpose shall have
been instituted or threatened or, to the best knowledge of the Company or the
Representatives, shall be contemplated by the Commission. The Company shall have
complied with any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise).
(b) The Representatives shall not have advised the Company that
the Registration Statement, or any amendment thereto, contains an untrue
statement of fact which, in the Representatives' opinion, is material, or omits
to state a fact which, in the Representatives' opinion, is material and is
required to be stated therein or is necessary to make the statements therein not
misleading, or that the Prospectus, or any supplement thereto, contains an
untrue statement of fact which, in the Representatives' opinion, is material, or
omits to state a fact which, in the Representatives' opinion, is material and is
required to be stated thein or is necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading
(c) On or prior to the Closing Date, and any Option Closing Date,
as the case may be, the Representatives shall have received from counsel to the
Underwriters, such opinion or opinions with respect to the issuance and sale of
the Firm Shares, the Registration Statement and the Prospectus and such other
related matters as the Representatives reasonably may request and such counsel
shall have received such documents and other information as they request to
enable them to pass upon such matters.
(d) On the Closing Date, the Underwriters shall have received the
opinion, dated the Closing Date, of Shulman, Rogers, Gandal, Pordy & Ecker,
P.A., counsel to the Company (which opinion may rely, with respect to certain
regulatory matters, upon the opinion, dated the Closing Date, of Kelley Drye &
Warren LLP, regulatory counsel to the Company, copies of which shall be provided
to counsel for the Underwriters and shall be attached to the opinion of counsel
of the Company and may be referred to therein), to the effect set forth below:
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(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of Maryland, its
jurisdiction of incorporation, and has been duly qualified as a foreign
corporation for the transaction of business and is in good standing under the
laws of each other jurisdiction in which it owns or leases properties or
conducts any business so as to require such qualification, (except for those
jurisdictions in which the failure to so qualify has not had and will not have a
Material Adverse Effect). Each of the Subsidiaries has been duly incorporated
and is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and each has been duly qualified as a foreign
corporation for the transaction of business and is in good standing under the
laws of each other jurisdiction in which it owns or leases properties, or
conducts any business so as to require such qualification (except for those
jurisdictions in which the failure to so qualify has not had and will not have a
Material Adverse Effect).
(ii) The Company has the duly authorized capitalization as
set forth in the Prospectus. All of the shares of capital stock of the Company
issued and outstanding immediately prior to the Closing Date or an Option
Closing Date, as the case may be, have been duly and validly authorized and
issued, are fully paid and non-assessable, without personal liability attaching
to the ownership thereof, and none of such shares have been issued or are owned
or held in violation of any preemptive or other rights of securityholders or
other persons to acquire securities of the Company. The securities of the
Company including, without limitation, the Shares, the Stock, the Underwriters'
Warrants and the Warrant Shares conform to all statements relating thereto
contained in the Registration Statement or the Prospectus. With respect to each
Subsidiary of the Company, all of the issued and outstanding shares of capital
stock are fully paid and non-assessable, without personal liability attaching to
the ownership thereof, and none of such shares have been issued or are owned or
held in violation of any preemptive or other rights of securityholders or other
persons to acquire securities of the Company and (except as otherwise described
in the Prospectus) are owned directly by the Company, free and clear of all
liens, encumbrances, equities or claims. Other than as disclosed in the
Prospectus, to the best knowledge of such counsel, there are no holders of the
securities of the Company or any of its Subsidiaries having rights to
registration thereof or pre-emptive rights to purchase capital stock of the
Company or any such Subsidiary. Except as created hereby or described in the
Prospectus, to the best knowledge of such counsel, there are no commitments,
plans or arrangements to issue, and no outstanding options, warrants or other
rights, calling for issuance of, any shares of capital stock of the Company or
any of its Subsidiaries or any security or other instrument which, by its terms,
is convertible into, exercisable for, or exchangeable for capital stock of the
Company or any of its Subsidiaries.
(iii) The Shares AND THE UNDERWRITERS' WARRANTS have been
duly and validly authorized and, when the Shares are issued and delivered
against
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payment therefor as provided herein, or when such Underwriters' Warrants are
issued and delivered in accordance with the terms thereof and of the
Underwriters' Warrant Agreement, will be duly and validly issued and fully paid
and non-assessable, will not have been issued in violation of any preemptive or
other rights of securityholders or other persons to acquire securities of the
Company and will conform to all statements relating thereto in the Registration
Statement and the Prospectus. Good and marketable title to the Shares and the
Underwriters' Warrants will pass to the Underwriters on the Closing Date free
and clear of any lien, encumbrance, security interest, claim or other
restriction whatsoever. The Warrant Shares have been duly authorized and validly
reserved for issuance and, when issued, paid for and delivered in accordance
with the terms of the Underwriters' Warrant Agreement and the Underwriters'
Warrants, the Warrant Shares will be duly and validly issued and fully paid and
non-assessable, will not have been issued in violation of any preemptive or
other rights of securityholders or other persons to acquire securities of the
Company and will conform to all statements relating thereto in the Prospectus.
Good and marketable title, free and clear of any lien, encumbrance, security
interest, claim or any other restriction will pass to the holders of Warrant
Shares issued upon exercise of Underwriters' Warrants in accordance with the
terms thereof and of this Agreement and the Underwriters' Warrant Agreement.
(iv) The Shares have been duly approved for listing on the
NNM.
(v) The Registration Statement is effective under the Act.
Any required filing of a registration statement pursuant to Rule 462(b) has been
made in the manner and within the time period required by Rule 462(b). The
Prospectus has been filed with the Commission pursuant to the appropriate
subparagraph of Rule 424(b) under the Act and no stop order suspending the
effectiveness of the Registration Statement or any amendment thereto has been
issued, and no proceedings for that purpose have been instituted or are pending
or, to the best knowledge of such counsel, are threatened or contemplated under
the Act.
(vi) The registration statement originally filed with respect
to the Shares and each amendment thereto, each Preliminary Prospectus and
Prospectus and, if any, each amendment and supplement thereto (except for the
financial statements, schedules and other financial data included therein, as to
which such counsel need not express any opinion), complies as to form in all
material respects with the requirements of the Act and the Rules and
Regulations.
(vii) The descriptions and summaries contained in the
Prospectus of contracts, agreements, instruments leases, licenses and other
documents, are accurate and fairly represent the information required to be
disclosed with respect thereto by the Act and the Rules and Regulations. To the
best knowledge of such counsel, all contracts, agreements, instruments, leases,
licenses or other documents which
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<PAGE>
are required by the Act or the Rules and Regulations to be described in the
Prospectus or to be filed as exhibits to the Registration Statement have been so
described or filed.
(viii) To the best knowledge of such counsel, there is not
pending or threatened against the Company any action, suit or proceeding by any
person or any action, suit, proceeding or investigation before or by any court,
regulatory body, or administrative agency or any other governmental agency or
body, domestic or foreign, of a character required to be disclosed in the
Registration Statement or the Prospectus which is not so disclosed therein.
(ix) The statements set forth under the captions "Risk
Factors," "Use of Proceeds," "Business," "Management," "Shares Eligible for
Future Sale," and "Description of Capital Stock" in the Prospectus, insofar as
such statements constitute summaries of the legal matters, documents or
proceedings referred to therein, fairly and accurately summarize such legal
matters, documents and proceedings.
(x) The Company has full legal right, power, and authority to
enter into this Agreement and the Underwriters' Warrant Agreement and to
consummate the transactions provided for herein and therein. All necessary
corporate proceedings of the Company have been taken to authorize the execution,
delivery and performance, by the Company, of this Agreement and the
Underwriters' Warrant Agreement. This Agreement and the Underwriters' Warrant
Agreement have been duly authorized, executed and delivered by the Company and,
assuming due authorization, execution and delivery by each other party hereto or
thereto, constitute the valid and binding agreements of the Company, enforceable
in accordance with their respective terms, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws now or
hereafter in effect relating to or affecting creditors' rights generally or by
general principles of equity relating to the availability of remedies and except
as rights to indemnity and contribution may be limited by federal or state
securities laws or the public policy underlying such laws.
(xi) No consent of any party to any material contract,
agreement, instrument, lease, license, or other document, or any arrangement or
understanding to which the Company or any of its Subsidiaries is a party, or to
which any of the property, assets or business of the Company or any of its
Subsidiaries is subject, is required for the execution, delivery and performance
of this Agreement and the Underwriters Warrant Agreement. None of the Company's
execution and delivery of this Agreement and the Underwriters Warrant Agreement,
performance of its obligations hereunder and thereunder, consummation of the
transactions contemplated herein or therein, and application of the net proceeds
of the offering in the manner set forth under the caption "Use of Proceeds" in
the Prospectus will conflict with or results in any breach or violation of any
of the terms or provisions of, or constitute a default under, or entitle any
other party to terminate or call a default under, or result in the creation or
imposition of
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any lien, charge or encumbrance upon, any property or asset of the Company or
any of its Subsidiaries pursuant to the terms of (i) the Charter or Bylaws of
the Company or any of its Subsidiaries; (ii) the terms of any indenture,
mortgage, deed of trust, voting trust agreement, stockholders agreement, note
agreement or other agreement or instrument known to such counsel after
reasonable investigation to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries is or may be bound or
to which any of their respective properties, assets or businesses may be
subject; (iii) any statute, rule or regulation of any regulatory body or
administrative agency or other governmental agency or body, domestic or foreign,
having jurisdiction over the Company or any of its Subsidiaries or any of their
respective businesses, activities or properties; or (iv) any order or decree of
any government, arbitrator, court, regulatory body or administrative agency or
other governmental agency or body, domestic or foreign, having such
jurisdiction.
(xii) All legally required proceedings in connection with the
authorization, issue and sale of the Shares, the Underwriters' Warrants and the
Warrant Shares by the Company in accordance with the provisions of this
Agreement and the Underwriters' Warrant Agreement have been taken and no
consent, approval, authorization, order, license, certificate declaration or
permit from or of any court, regulatory body or administrative agency or other
governmental agency or body, domestic or foreign has been or is required for the
Company's performance of this Agreement and the Underwriters Warrant Agreement
or the consummation of the transactions contemplated hereby and thereby, except
such as may be required under federal or state securities laws in connection
with the purchase and distribution by the Underwriters of the Shares.
(xiii) To such counsel's best knowledge, the conduct of the
business of the Company and each of its Subsidiaries is not in violation of any
federal, state or local statute, administrative regulation or other law, which
violation could have a Material Adverse Effect. The Company and each of its
Subsidiaries possesses all licenses, permits, approvals and other governmental
authorizations required for the conduct of its business, as described in the
Prospectus; all such licenses, permits and other governmental authorizations are
in full force and effect and the Company and each of its Subsidiaries is in all
material respects in compliance therewith. To such counsel's best knowledge,
there is no reason why the Company would not receive, or would be unlikely to
receive such licenses, permits, approvals and other governmental authorization
as would be required for the conduct of the Company's business as contemplated
by the Prospectus.
(xiv) Neither the Company nor any of its Subsidiaries is in
violation or breach of its respective Charter or Bylaws or similar constitutive
documents. To such counsel's best, except as disclosed in the Prospectus, none
of the Company, any of its Subsidiaries, or any other party is now in violation
or breach of, or in default with
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respect to complying with, any material provision of any indenture, mortgage,
deed of trust, debenture, note or other evidence of indebtedness, contract,
agreement, instrument, lease or license, or arrangement or understanding which
is material to the Company, and each such indenture, mortgage, deed of trust,
debenture, note or other evidence of indebtedness, contract, agreement,
instrument, lease or license is in full and force and is the legal, valid and
binding obligation of the Company or its Subsidiary or Subsidiaries, except to
the extent that the enforceability of the rights and remedies of the Company or
any of its Subsidiaries under any such lease or other agreement may be limited
by bankruptcy, insolvency, or similar laws generally affecting the rights of
creditors and by equitable principles limiting the right to specific performance
or other equitable relief.
(xv) To such counsel's best knowledge, the Company and each
of its Subsidiaries has good and marketable title except in fee simple, to all
the real property owned thereby as set forth in the Prospectus, subject to no
lien, mortgage, pledge, charge or encumbrance of any kind or nature whatsoever
except those, if any, referred to in the Prospectus (or reflected in the
financial statements included therein) or which, in the aggregate, are not
material to the Company and its business and do not materially affect the value
of such property; and the real properties held or used by the Company and each
of its Subsidiaries under material leases or other material agreements as set
forth in the Prospectus are held under valid, subsisting and enforceable leases
or other agreements with respect to which neither the Company nor any of its
Subsidiaries is in default, except to the extent that the enforceability of the
rights and remedies of the Company or any of its Subsidiaries under any such
lease or other agreement may be limited by bankruptcy, insolvency, or similar
laws generally affecting the rights of creditors and by equitable principles
limiting the right to specific performance or other equitable relief.
(xvi) The Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company," or an
"affiliated person" of or a "promoter" or "principal underwriter" of or an
entity "controlled" by an "investment company," as such terms are defined in the
Investment Company Act.
(xvii) Neither the Company nor any other person associated
with or acting on behalf of the Company including, without limitation, any
director, officer, agent, or employee of the Company has, directly or
indirectly, while acting on behalf of the Company, (i) used any corporate funds
for unlawful contributions, gifts, entertainment, or other unlawful expenses
relating to political activity; (ii) made any unlawful contribution to any
candidate for foreign or domestic office, or to any foreign or domestic
government officials or employees or other person charged with similar public or
quasi-public duties, other than payments required or permitted by the laws of
the United States or any jurisdiction thereof or to foreign or domestic
political parties or campaigns from corporate funds, or failed to disclose fully
any contribution in violation
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of law; (iii) violated any provision of the Foreign Corrupt Practices Act of
1977, as amended; or (iv) made any other unlawful payment.
(xviii) To the best knowledge of such counsel, since the
effective date of the Registration Statement or the later effective date of any
amendment thereto, no event has occurred which should have been set forth in an
amendment or supplement to the Registration Statement or Prospectus which has
not been so set forth. (xix) Schedule 1 hereto accurately and completely lists
all of the licenses, permits, and authorizations issued by the FCC
(collectively, the "Licenses") necessary for the Company to carry on its
business as described in the Registration Statement and Prospectus. Schedule 2
hereto accurately and completely lists all pending applications filed by the
Company with the FCC.
(xx) To the best knowledge of such counsel, the Licenses are
validly issued. "Validly issued" as used herein means that the Licenses have
been issued through the means of regular FCC procedures applied in conformity
with the Communications Act and prior FCC practice and there is no legal basis
under the Communications Act to conclude that the Company cannot hold one or
more of the Licenses as a matter of law. To the best of knowledge of such
counsel (i) the Licenses are in full force and effect without conditions that
would have a Material Adverse Effect , except for such conditions imposed
generally by the FCC upon such licenses or conditions stated on the face of the
Licenses, (ii) all express conditions in the Licenses have been satisfied where
the failure to satisfy such conditions would have a Material Adverse Effect, and
(iii) the Company has not received any notification that any revocation or
limitation of the Licenses is threatened or pending that would have a Material
Adverse Effect.
(xxi) Except as specified in Schedule 3 hereto, the Company
has filed with the FCC all applications, statements, reports, information,
forms, or any other document required under the Communications Act, except where
the failure to so file would not have a Material Adverse Effect, and, to the
best knowledge of such counsel, such filings or submissions were in compliance
with applicable laws or regulations when filed or submitted and no deficiencies
have been asserted by the FCC with respect to such filings or submissions except
where the deficiency is of such a nature that failure to cure any such
deficiency would not have a Material Adverse Effect, and the information
contained in such filings or submissions was, in all material respects,
accurate, complete and up-to-date at the time the filings or submissions were
made.
(xxii) The Company has filed with the applicable foreign and
domestic regulatory authorities each and every statement, report, information or
form required by any applicable law, regulation or order, except where the
failure to so file would not have a Material Adverse Effect, and all such
filings or submissions were in
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compliance with applicable laws when filed, and no deficiencies have been
asserted by any regulatory commission, agency or authority with respect to such
filings or submissions, except where the failure to so file or cure any such
deficiency would not have a Material Adverse Effect. The Company has maintained
in full force and effect all licenses and permits necessary or proper for the
conduct of its business, except where the failure to do so would not have a
Material Adverse Effect, and the Company has not received any notification that
any revocation or limitation thereof is threatened or pending that would have
such an effect. Except as disclosed in the Registration Statement and the
Prospectus, there is not pending any change under any law, regulation, license
or permit that would have a Material Adverse Effect. The Company has not
received any notice of, or, to the best knowledge of such counsel, been
threatened with or is under investigation with respect to, a violation or a
possible violation of any provision of any law, regulation or order, except such
violation or violations as would not have a Material Adverse Effect.
(xxiii) With respect to state certificates of public
convenience and necessity or other operating authorizations issued by state and
public utility commissions or similar state governmental agencies (collectively
"PUCs" and individually a "PUC") (such PUC certificates and authorizations are
hereinafter referred to collectively as the "State Authorizations") held by the
Company, such State Authorizations are in full force and effect and are
unimpaired by any act or omission of the Company or any of its employees or
agents, in each case except where such authorization is not required or where
the failure to so hold any such State Authorization would not have a Material
Adverse Effect.. The State Authorizations are all of the licenses,
authorizations, consents and approvals necessary from the PUCs in order to allow
the Company to own its assets and carry on its business as currently being
conducted, except where the failure to so hold any State Authorizations would
not have a Material Adverse Effect. To the best knowledge of such counsel, there
are no proceedings of any kind, including but not limited to rulemaking
proceedings of general applicability in the industry or industries in which the
Company operates, by or before any PUC, now pending or threatened, which, if
adversely determined, would have a Material Adverse Effect. Neither the
execution and delivery of this Agreement and the Underwriters' Warrant Agreement
or the consummation of the transactions contemplated herein and therein and in
the Registration Statement will conflict with or result in a breach of, or
require any authorization, approval or consent under the Communications Act of
1934, as amended (the "Communications Act"), or the rules of the Federal
Communications Commission (the "FCC") or the communications statutes of any
state or the policies or rules of any PUC.
(xxiv) To the best knowledge of such counsel, there is no
proceeding, formal or informal complaint or investigation before the FCC or any
PUC against the Company or any of the Licenses identified in Schedule 1 or based
on any violation or alleged violation by the Company of the Communications Act
or any state law, except for proceedings affecting the industry generally to
which the Company is not a specific party.
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In addition, such counsel shall state that in the course of the
preparation of the Registration Statement and the Prospectus, such counsel has
participated in conferences with officers and representatives of the Company and
its Subsidiaries, with the Company's independent public accountants, and with
the Representatives, at which conferences such counsel made inquiries of such
officers, representatives and accountants and discussed the contents of the
Registration Statement and the Prospectus and on the basis of the foregoing,
nothing has come to such counsel's attention that would lead such counsel to
believe that either the Registration Statement or any amendment thereto, as of
the date the Registration Statement or such amendment is or was declared
effective, and as of the Closing Date or any Option Closing Date, as the case
may be, or the Prospectus as of the date thereof and as of the Closing Date or
any Option Closing Date, as the case may be, contained or contains any untrue
statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading (it
being understood that such counsel need not express any belief with respect to
the financial statements, and the notes and schedules related thereto and other
financial information or statistical data included in the Registration
Statement, any amendment thereto, or the Prospectus).
In rendering any such opinions, such counsel may rely, (i) as to
matters of fact, to the extent such counsel deems proper, on certificates of
responsible officers of the Company provided that copies of any such
certificates shall be delivered to counsel for the Underwriters; and (ii) to the
extent such counsel deems proper, upon written statements or certificates of
public officials, provided that copies of any such statements or certificates
shall be delivered to counsel for the Underwriters.
References to the Registration Statement and the Prospectus in
this paragraph (d) shall include any amendment or supplement thereto at the date
of such opinion.
(e) On or prior to the Closing Date or any Option Closing Date, as
the case may be, counsel to the Underwriters shall have been furnished such
documents, certificates and opinions as they may reasonably require in order to
evidence the accuracy, completeness or satisfaction of any of the
representations or warranties of the Company or conditions herein contained.
(f) At the time that this Agreement is executed by the Company the
Underwriters shall have received from Arthur Andersen LLP a letter as of the
date of this Agreement in form and substance satisfactory to the Representatives
(the "Original Letter"), and on the Closing Date and any Option Closing Date the
Underwriters shall have received from such firm a letter dated the Closing Date
or such Option Closing Date, stating that, as of a specified date not earlier
than five (5) calendar days prior to the
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Closing Date or Option Closing Date, as the case may be, nothing has come to the
attention of such firm to suggest that the statements made in the Original
Letter are not true and correct.
(g) On the Closing Date and any Option Closing Date, the
Underwriters shall have received a certificate, dated the Closing Date or such
Option Closing Date, as the case may be, of the principal executive officer and
the principal financial or accounting officer of the Company to the effect that
each such person has carefully examined the Registration Statement and the
Prospectus and any amendments or supplements thereto and this Agreement, and
that:
(i) the representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or the
Option Closing Date, as the case may be, and the Company has complied with all
agreements and covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior to the Closing
Date or such Option Closing Date;
(ii) No Stop Order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose have
been instituted or are pending or, to the best knowledge of each such person,
are contemplated or threatened under the Act and any and all filings required by
Rule 424, Rule 430A and Rule 462(b) have been timely made;
(iii) The Registration Statement and Prospectus and, if any,
each amendment and each supplement thereto, contain all statements and
information required by the Act or the Rules and Regulations to be included
therein, and neither the Registration Statement or the Prospectus nor any
amendment or supplement thereto includes any untrue statement of a material fact
or omits 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; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus or any
amendment or supplement thereto, up to and including the Closing Date or the
Option Closing Date, as the case may be, neither the Company nor any of its
Subsidiaries has incurred, other than in the ordinary course of its business or
as described in the Prospectus or in an amended or supplemented Prospectus, any
material liabilities or obligations, direct or contingent; the Company has not
purchased any of its outstanding capital stock or paid or declared any dividends
or other distributions on its capital stock; neither the Company nor any of its
Subsidiaries has entered into any transactions not in the ordinary course of
business; and there has not been any change in the capital stock or long-term
debt or any increase in the short-term borrowings (other than any increase in
short-term borrowings in the ordinary course of business) of the Company or any
material adverse change to the
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business, properties, assets, net worth, condition (financial or other), results
of operations or prospects of the Company; the Company has not sustained any
material loss or damage to its property or assets, whether or not insured; there
is no litigation which is pending or threatened against the Company which is
required under the Act or the Rules and Regulations to be set forth in an
amended or supplemented Prospectus which has not been set forth; and there has
not occurred any event required to be set forth in an amended or supplemented
Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus
in this paragraph (g) are to such documents as amended and supplemented at the
date of this certificate.
(h) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus up to and
including the Closing Date or any Option Closing Date, as the case may be, there
has not been (i) any change or decrease specified in the letter or letters
referred to in paragraph (f) of this Section 8 or (ii) any change, or any
development involving a prospective change, in the business or properties of the
Company which change or decrease in the case of clause (i) or change or
development in the case of clause (ii) makes it impractical or inadvisable in
the Representatives' judgment to proceed with the public offering or the
delivery of the Shares as contemplated by the Prospectus.
(i) No order suspending the sale of the Shares in any
jurisdiction designated by you pursuant to Section 6(c) hereof has been issued
on or prior to the Closing Date or any Option Closing Date, as the case may be,
and no proceedings for that purpose have been instituted or, to the best
knowledge of such persons or that of the Company, have been or are contemplated.
(j) The Representatives shall have received from each person
who is a director or officer of the Company, each stockholder, and each other
person, if any, who has the right to acquire more than 5% or more of the
outstanding shares of Stock, assuming exercise of currently exercisable stock
options on a fully diluted basis, an agreement to the effect that such person
will not, directly or indirectly, without the prior written consent of the
Representatives, on behalf of the Underwriters, offer, sell, offer to sell,
contract to sell, grant any option to purchase, pledge or otherwise dispose (or
announce any offer, sale, offer of sale, contract of sale, grant of an option to
purchase, pledge or other disposition) of any shares of Common Stock or any
securities convertible into, or exchangeable or exercisable for, shares of
Common Stock for a period of 180 days after the date of this Agreement.
(k) The Shares shall have been duly authorized for listing on
the NNM.
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(l) The NASD, upon review of the terms of the public offering
of the Shares contemplated hereby, shall have indicated that it has no objection
to the underwriting arrangements pertaining to the sale of the Shares and the
Underwriters' participation in the sale of the Shares as so contemplated.
(m) The Company shall have furnished the Underwriters with
such further opinions, letters, certificates or documents as the Representatives
or counsel for the Underwriters may reasonably request.
All opinions, certificates, letters and documents to be furnished by
the Company will comply with the provisions hereof only if they are reasonably
satisfactory in all material respects to the Underwriters and to counsel for the
Underwriters. The Company shall furnish the Underwriters with manually signed or
conformed copies of such opinions, certificates, letters and documents in such
quantities as you reasonably request. The certificates delivered under this
Section 8 shall constitute representations, warranties and agreements of the
Company as to all matters set forth therein as fully and effectively as if such
matters had been set forth in Section 2 of this Agreement.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at either the Closing Date or any Option Closing Date is
not so satisfied, this Agreement, at the Representatives' election, will
terminate upon notification to the Company without liability on the part of any
Underwriter (including the Representatives) or the Company, except for the
expenses to be paid by the Company pursuant to Section 7 hereof and except to
the extent provided in Section 9 hereof.
SECTION 9. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, and its officers, directors, partners, employees, agents and
counsel, and each person, if any, who controls such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any
and all losses, claims, damages, liabilities or expenses whatsoever (which shall
include, for all purposes of this Section 9, but not be limited too, attorneys
fees and any and all fees and expenses whatsoever incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or any
claim whatsoever and any and all amounts paid in settlement), joint or several
(and actions in respect thereof), to which such Underwriter, officer, director,
partner, employee, agent counsel or controlling person may become subject, under
the Act or other federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities, expenses or
actions arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or the
Prospectus or any Preliminary Prospectus, or any amendment or supplement
thereto, or any blue sky application or other document executed by the Company
specifically for the purposes of qualifying, or based upon
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written information furnished by the Company in any state or other jurisdiction
in order to qualify, any or all of the Shares under the securities or blue sky
laws thereof (any such application, document or information being hereinafter
called a "Blue Sky Application"), or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements not misleading and will reimburse,
as incurred, such Underwriter, partner, employee, agent, counsel or controlling
person in connection with investigating, defending or appearing as a third party
witness in connection with any such loss, claim, damage, liability, expense or
action; provided, however, that the Company will not be liable in any such case
to the extent that any such loss, claim, damage, liability, expense or action
arises out of or is based upon any untrue statement or alleged untrue statement
or omission or alleged omission made in any of such documents in reliance upon
and in conformity with information furnished in writing to the Company on behalf
of such Underwriter through the Representatives expressly for use therein, and
provided, further, that such indemnity with respect to any Preliminary
Prospectus shall not inure to the benefit of any Underwriter (or to the benefit
of any person controlling such Underwriter) from whom the person asserting any
such loss, claim, damage, liability or action purchased Shares which are the
subject thereof to the extent that any such loss, claim, damage, liability or
action (i) results from the fact that such Underwriter failed to send or give a
copy of the Prospectus (as amended or supplemented) to such person at or prior
to the confirmation of the sale of such Shares to such person in any case where
such delivery is required by the Act and (ii) arises out of or is based upon an
untrue statement or omission of a material fact contained in such Preliminary
Prospectus that was corrected in the Prospectus (as amended and supplemented),
unless such failure resulted from non-compliance by the Company with Section
6(h) hereof. The indemnity agreement in this paragraph (a) shall be in addition
to any liability which the Company may otherwise have.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act against any and all losses, claims, damages, liabilities or
expenses whatsoever (which shall include, for all purposes of this Section 9,
but not be limited too, attorneys fees and any and all fees and expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever and any and all
amounts paid in settlement), (and actions in respect thereof) to which the
Company or any such director, officer, or controlling person may become subject,
under the Act or other federal or state statutory law or regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities, expenses
or actions arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or the
Prospectus or any Preliminary Prospectus, or any amendment or supplement thereto
or in any Blue Sky Application, or arise out of or are
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based upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with information furnished in writing by that
Underwriter through the Representatives to the Company expressly for use
therein. The Company acknowledges that the statements with respect to the public
offering of the Shares set forth under the caption "Underwriting" and the
stabilization legend the Prospectus have been furnished by the Underwriters to
the Company expressly for use therein and constitute the only information
furnished in writing by or on behalf of the Underwriters for inclusion in the
Prospectus. The indemnity agreement contained in this paragraph (b) shall be in
addition to any liability which the Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof it to be made against one or more
indemnifying parties under this Section 8, notify such indemnifying party or
parties of the commencement thereof; but the failure so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under paragraph (a) or (b) of this Section
8 to the extent that the indemnifying party was not adversely affected by such
omission. In case any such action is brought against an indemnified party and it
notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties against which a claim is to be made will be
entitled to participate therein and, to the extent that it or they may wish, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, provided, however, that if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party has reasonably concluded that there may be legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to assume such legal
defenses and otherwise to participate in the defense of such action on behalf of
such indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 8 for any legal
or other expenses (other than the reasonable costs of investigation)
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party has employed such counsel in connection
with the assumption of such different or additional legal defenses in accordance
with the proviso to the immediately preceding sentence, (ii) the indemnifying
party has not employed counsel reasonably satisfactory to the indemnified party
to represent the indemnified party within a reasonable time after notice of
commencement of the action, or (iii) the indemnifying party has authorized in
writing the employment of counsel for the indemnified party at the expense of
the indemnifying party.
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(d) If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) above in respect of any losses, claims, damages,
liabilities or expenses (or actions in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) (i) in such proportion as is
appropriate to reflect the relative benefits received by each of the
contributing parties, on the one hand, and the party to be indemnified, on the
other hand, from the offering of the Shares or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each of the contributing parties, on the
one hand, and the party to be indemnified, on the other hand in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. In any case
where the Company is a contributing party and the Underwriters are the
indemnified party, the relative benefits received by the Company on the one
hand, and the Underwriters, on the other hand, shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Shares (before
deducting expenses) bear to the total underwriting discounts received by the
Underwriters hereunder, in each case as set forth in the table on the cover page
of the Prospectus. 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 Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, liabilities or
expenses (or actions in respect thereof) referred to above in this paragraph (d)
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this paragraph (d), the
Underwriters shall not be required to contribute any amount in excess of the
underwriting discount applicable to the Shares purchased by the Underwriters
hereunder. The Underwriters' obligations to contribute pursuant to this
paragraph (d) are several in proportion to their respective underwriting
obligations, and not joint. No person guilty of fraudulent misrepresentations
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this paragraph (d), (i) each person, if any,
who controls an Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act shall have the same rights to contribution as
such Underwriter and (ii) each director of the Company, each officer of the
Company who has signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act shall have the same rights to contribution as the Company.
Any party entitled to contribution will, promptly after receipt of notice of
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commencement of any action, suit or proceeding against such party in respect to
which claim for contribution may be made against another party or parties under
this paragraph (d), notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any other
obligation (x) it or they may have hereunder or otherwise than under this
paragraph (d) or (y) to the extent that such party or parties were not adversely
affected by such omission. The contribution agreement set forth above shall be
in addition to any liabilities which any indemnifying party may otherwise have.
SECTION 10. REPRESENTATIONS, ETC. TO SURVIVE DELIVERY. The respective
representations, warranties, agreements, covenants, indemnities and statements
of, and on behalf of, the Company and its officers and the Underwriters,
respectively, set forth in or made pursuant to this Agreement will remain in
full force and effect, regardless of any investigation made by or on behalf of
the Underwriters, and will survive delivery of and payment for the Shares. Any
successors to the Underwriters shall be entitled to the indemnity, contribution
and reimbursement agreements contained in this Agreement.
SECTION 11. EFFECTIVE DATE AND TERMINATION.
(a) This Agreement shall become effective at _____ a.m.,
Washington, D.C. time, on the first business day following the date hereof, or
at such earlier time after the Registration Statement becomes effective as the
Representatives, in their sole discretion, shall release the Shares for the sale
to the public, unless prior to such time the Representatives shall have received
written notice from the Company that it elects that this Agreement shall not
become effective, or the Representatives shall have given written notice to the
Company that the Representatives on behalf of the Underwriters elect that this
Agreement shall not become effective; provided, however, that the provisions of
this Section 11 and of Section 7 and Section 9 hereof shall at all times be
effective. For purposes of this Section 11(a), the Shares to be purchased
hereunder shall be deemed to have been so released upon the earlier of
notification by the Representatives to securities dealers releasing such Shares
for offering or the release by the Representatives for publication of the first
newspaper advertisement which is subsequently published relating to the Shares.
(b) This Agreement (except for the provisions of Sections 7 and 9
hereof) may be terminated by the Representatives by notice to the Company in the
event that the Company has failed to comply in any respect with any of the
provisions of this Agreement required on its part to be performed at or prior to
the Closing Date or any Option Closing Date, as the case may be, or if any of
the representations or warranties of the Company are not accurate in any respect
or if the covenants, agreements or conditions of, or applicable to, the Company
herein contained have not been complied with in any
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respect or satisfied within the time specified on the Closing Date or any Option
Closing Date, as the case may be, or if prior to the Closing Date or any such
Option Closing Date:
(i) the Company shall have sustained a loss by strike, fire,
flood, accident or other calamity of such a character as to interfere materially
with the conduct of the business and operations of the Company regardless of
whether or not such loss was insured;
(ii) trading in the Stock shall have been suspended by the
Commission or the NNM or trading in securities generally on the New York Stock
Exchange or the NNM shall have been suspended or a material limitation on such
trading shall have been imposed or minimum or maximum prices shall have been
established on either such exchange or market;
(iii) a banking moratorium shall have been declared by New
York or United States authorities;
(iv) there shall have been an outbreak or escalation of
hostilities between the United States and any foreign power or an outbreak or
escalation of any other insurrection or armed conflict involving the United
States;
(v) there shall have been commenced any action, suit or
proceeding at law or in equity against the Company, or by any federal, state or
other commission, board or agency, wherein any unfavorable decision would
materially adversely affect the business, properties or financial condition of
the Company;
(vi) there shall have occurred any material adverse market
conditions, of which the Representatives shall be the sole judge;
(viii) Company's independent public accountants shall have
imposed qualifications in certifying to, or its attorneys in opining upon,
material items including, without limitation, information in the footnotes to
the financial statements or matters incident to the issuance and sale of the
Shares, corporate proceedings or other subjects; or
(vi) there shall have been a material adverse change in (i)
general economic, political or financial conditions or (ii) the present or
prospective business or condition (financial or other) of the Company that, in
each case, in the Representative's judgment makes it impracticable or
inadvisable to make or consummate the public offering, sale or delivery of the
Company's Shares on the terms and in the manner contemplated in the Prospectus
and the Registration Statement.
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(c) Termination of this Agreement under this Section 11 or Section
12 after the Firm Shares have been purchased by the Underwriters hereunder shall
be applicable only to the Optional Shares. Termination of this Agreement shall
be without liability of any party to any other party other than as provided in
Sections 7 and 9 hereof.
SECTION 12. SUBSTITUTION OF UNDERWRITERS. If one or more of the
Underwriters shall fail or refuse (otherwise than for a reason sufficient to
justify the termination of this Agreement under the provisions of Section 8 or
11 hereof) to purchase and pay for (a) in the case of the Closing Date, the
number of Firm Shares agreed to be purchased by such Underwriter or Underwriters
upon tender to the Representatives such Firm Shares in accordance with the terms
hereof or (b) in the case of any Option Closing Date, the number of Optional
Shares agreed to be purchased by such Underwriter or Underwriters upon tender to
the Representatives of such Optional Shares in accordance with the terms hereof,
and the number of such Shares shall not exceed 10% of the Firm Shares or
Optional Shares required to be purchased on the Closing Date or such Option
Closing Date, as the case may be, then, each of the non-defaulting Underwriters
shall purchase and pay for (in addition to the number of such Shares which it
has severally agreed to purchase hereunder) that proportion of the number of
Shares which the defaulting Underwriter or Underwriters shall have so failed or
refused to purchase on such Closing Date or Option Closing Date, as the case may
be, which is the percentage set forth next to each such Underwriter's name on
Schedule I. In such case, the Representatives, on behalf of the Underwriters,
shall have the right to postpone the Closing Date or the Option Closing Date, as
the case may be, to a date not exceeding seven (7) full business days after the
date originally fixed as such Closing Date or the Option Closing Date, as the
case may be, pursuant to the terms hereof in order that any necessary changes in
the Registration Statement, the Prospectus or any other documents or
arrangements may be made.
If one or more of the Underwriters shall fail or refuse (otherwise than
for a reason sufficient to justify the termination of this Agreement under the
provisions of Section 8 or 11 hereof) to purchase and pay for (a) in the case of
the Closing Date, the number of Firm Shares agreed to be purchased by such
Underwriter or Underwriters upon tender to you of such Firm Shares in accordance
with the terms hereof or (b) in the case of the Option Closing Date, the number
of Optional Shares agreed to be purchased by such Underwriter or Underwriters
upon tender to you of such Optional Shares in accordance with the terms hereof,
and the number of such Shares shall exceed 10% of the Firm Shares or Optional
Shares required to be purchased by all the Underwriters on the Closing Date or
the Option Closing Date, as the case may be, then (unless within forty-eight
(48) hours after such default arrangements to your satisfaction shall have been
made for the purchase of the defaulted Shares by an Underwriter or Underwriters)
and subject to the provisions of Section 11(b) hereof, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or on
the part of the Company except as otherwise provided in Sections 7 and 9 hereof.
As used in this Agreement, the term "Underwriter" includes
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any person substituted for an Underwriter under this paragraph. Nothing in this
Section 12, and no action taken hereunder, shall relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
SECTION 13. NOTICES. All communications hereunder shall be in writing
and if sent to the Representatives shall be mailed or delivered or sent by
facsimile transmission and confirmed by letter to Ferris, Baker Watts,
Incorporated at 1720 Eye Street, N.W., Washington, D.C. 20006, Attention:
Richard K. Prins (facsimile number: (703) 761-9610) or, if sent to the Company,
shall be mailed or delivered or sent by facsimile transmission and confirmed by
letter to the Company at 10411 Motor City Drive, Bethesda, Maryland 20817,
attention: Ram Mukunda (facsimile number: (301) 365-8969).
SECTION 14. SUCCESSORS. This Agreement shall inure to the benefit of
and be binding upon the Company and each Underwriter and the Company's and each
Underwriter's respective successors and legal representatives, and nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any other person any legal or equitable right, remedy or claim under or in
respect of this Agreement, or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of such persons and for the benefit of no other
person, except that the representatives, warranties, indemnities and
contribution agreements of the Company contained in this Agreement shall also be
for the benefit of the partners, employees agents of each Underwriter and any
person or persons, if any, who control any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, and except that the
Underwriters' indemnity and contribution agreements shall also be for the
benefit of the directors of the Company, the officers of the Company who have
signed the Registration Statement and any person or persons, if any, who control
the Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act. No purchaser of Shares from the Underwriters will be deemed a
successor because of such purchase.
SECTION 15. APPLICABLE LAW; JURISDICTION. This Agreement shall be
governed by and construed in accordance with the laws of the State of Maryland,
without giving effect to the choice of law or conflict of law principles
thereof. Each party hereto consents to the jurisdiction of each court in which
any action is commenced seeking indemnity or contribution pursuant to Section 9
above and agrees to accept, either directly or through an agent, service of
process of each such court.
SECTION 16. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, and all of
which together shall be deemed to be one and the same instrument.
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If the foregoing is in accordance with your understanding, please sign
and return to us three (3) counterparts hereof, and upon the acceptance hereof
by you, on behalf of each of the Underwriters, this letter and such acceptance
hereof shall constitute a binding agreement among each of the Underwriters and
the Company. It is understood that your acceptance of this letter on behalf of
each of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters, the form of which shall be submitted to the
Company for examination, upon request, but without warranty on your part as to
the authority of the signers thereof.
Very truly yours,
STARTEC GLOBAL COMMUNICATIONS, INC.
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
Accepted as of the date hereof
FERRIS, BAKER WATTS, INCORPORATED
1720 EYE STREET, N.W.
WASHINGTON, D.C. 20006
BY: FERRIS, BAKER WATTS, INCORPORATED
ON BEHALF OF EACH OF THE UNDERWRITERS
BY:
--------------------------------
NAME:
TITLE:
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<PAGE>
SCHEDULE I
NUMBER OF SHARES TO BE
PURCHASED BY EACH UNDERWRITER
Number of Firm
--------------
Shares to be Purchased
---------------------
Name of Underwriter Percentage from the Company
------------------- ---------- ----------------
Ferris, Baker Watts, Incorporated................
Boenning & Scattergood...........................
42
WARRANT AGREEMENT
dated as of July 1, 1997
By and Between
STARTEC, INC.
(As Issuer of Warrants)
and
SIGNET BANK
(As Purchaser of Warrants)
Warrants to Purchase 538,083 Shares of
Class A Voting Common Stock of Company
(Representing 10% of the Issued and Outstanding Shares of
Capital Stock (on a Fully Diluted Basis, but Subject to Vesting)
<PAGE>
TABLE OF CONTENTS
ARTICLE 1: GRANT OF WARRANTS
1.1. Grant of Warrants
1.2. Warrant Entitlement
1.3. Warrants as Additional Compensation
ARTICLE 2: PURCHASER'S REPRESENTATIONS AND AGREEMENTS
ARTICLE 3: COMPANY'S REPRESENTATIONS AND WARRANTIES
3.1. Legal Existence and Power
3.2. Authorization; Non-Contravention
3.3. Execution, Delivery and Binding Effect
3.4. Litigation
3.5. Compliance with Laws and Other Requirements
3.6. Broker and Finder Fees
3.7. Offering of Securities
3.8. Warrant Shares as a Percent of Capital Stock
3.9. Reservation and Issuance of Warrant Shares
ARTICLE 4: THE WARRANTS AND WARRANT SHARES
4.1. Warrant Certificates
4.2. Exercise of Warrants
4.3. Transfers of Warrants and Warrant Shares
4.4. Registration and Related Rights
4.5. Rights Upon Occurrence of Dispositions and Non-Surviving Combinations
4.6. Repurchase Offer
4.7. Cumulative Rights
4.8. Exercise of Rights Conditioned Upon Closing of Transaction
Involved
4.9. Payment of Taxes
4.10.Reservation and Issuance of Warrant Shares
4.11.Listing of Shares
4.12.Lists of Holders
4.13.Compliance with Approval Requirements
ARTICLE 5: ANTI-DILUTION PROVISIONS
5.1. Adjustments to Warrant Shares Purchasable and
Exercise Price
5.2. Notice of Adjustment
5.3. Preservation of Purchase Rights upon Certain
Transactions
ARTICLE 6: COMPANY'S COVENANTS
6.1. Information
6.2. Books and Records; Right of Inspection
6.3. Litigation; Defaults
6.4. No Amendments to Organic Documents
6.5. Reincorporation and Qualification
6.6. Existence and Good Standing
6.7. Conduct of Business
6.8. Broker and Finder Fees and Commissions
ARTICLE 7: DEFINITIONS
7.1. Definitions
7.2. General Construction
ARTICLE 8: MISCELLANEOUS
8.1. Compliance with FCC and State PUC Requirements
8.2. Compliance with Purchaser's Regulatory Requirements
8.3. Binding Effect and Governing Law
8.4. Survival
8.5. No Waiver; Delay
8.6. Modification
8.7. Headings
8.8. Notices
8.9. Time of Day
8.10.Prior Agreements Superseded
8.11.Severability
8.12.Counterparts
8.13.Waiver of Liability
8.14.Forum Selection; Consent to Jurisdiction
8.15.Waiver of Jury Trial
EXHIBIT A -- Articles of Incorporation
EXHIBIT B -- Authorizing Resolutions
EXHIBIT C -- Form of Warrant Certificate
EXHIBIT D -- Restrictive Legends
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<PAGE>
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (as defined in Article 7 along with all the other
defined terms, this "Agreement") is made and effective as of July 1, 1997 by and
between STARTEC, INC. (as more fully defined in Article 7, the "Company"), and
SIGNET BANK (as more fully defined in Article 7, the "Purchaser" or the
"Lender").
R E C I T A L S
WHEREAS, Company has requested Lender (and Lender has agreed) to enter into
the Credit Agreement and various related Loan Documents (as defined in the
Credit Agreement) pursuant to which Lender will provide Company with credit
facilities initially aggregating up to $15 million (subject to availability);
and
WHEREAS, to induce Lender to enter into the Credit Agreement and other Loan
Documents and as additional consideration for the credit to be provided
thereunder, Company has agreed to issue and deliver to Purchaser the Warrants
(evidenced by Warrant Certificates) to purchase up to an aggregate of 538,083
shares (subject to adjustment and Vesting) of Class A Voting Common Stock of
Company (which, as of the effective date hereof, represent 10% of the issued and
outstanding shares of Capital Stock and voting rights of Company, on a fully
diluted basis);
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration (receipt and sufficiency of which are hereby
acknowledged), and intending to be legally bound hereby, Company and Purchaser
hereby agree as follows:
ARTICLE 1: GRANT OF WARRANTS
1.1. Grant of Warrants. Company hereby grants to Purchaser warrants (the
"Warrants") to purchase up to an aggregate of 538,083 shares of Class A Voting
Common Stock (as such number may be adjusted from time to time as provided
herein). Each Warrant is exercisable as and when it Vests (as described in
Section 4.2).
1.2. Warrant Entitlement. Each Warrant (as and when it Vests) entitles
Purchaser or any subsequent registered Holder of such Warrant to purchase
(during the Exercise Period) one fully paid, nonassessable Warrant Share at a
price per share equal to the Exercise Price (as described in Section 4.2).
1.3. Warrants as Additional Compensation. The Warrants (and the grant
thereof hereunder) are additional compensation for the cost, expense and risk
incurred by Lender (and/or its Affiliates) associated with the underwriting and
establishment of the loan credit facilities to be provided for in the Credit
Agreement, but neither the grant nor the exercise of any Warrants in any way
affects or relieves Company (or any Affiliate thereof) of any of its obligations
to fully and timely perform and to fully and timely repay the entire
indebtedness due under the Credit Agreement and related Loan Documents.
3
<PAGE>
ARTICLE 2: PURCHASER'S REPRESENTATIONS AND AGREEMENTS
Purchaser represents and warrants that it is acquiring the Warrants (a)
solely for the purpose of investment and not with a view to any distribution of
the Warrants or any Warrant Shares within the meaning of the Securities Act, and
(b) with no present intention of selling or otherwise transferring the Warrants,
the Warrant Certificates or the Warrant Shares except as provided herein.
Purchaser further represents and warrants as follows: (1) it has such knowledge
and experience in financial and business matters as to be capable of evaluating
the merits and risks of its prospective investment in the Warrants, and (2) it
has the ability to bear the economic risks of its prospective investment, and
(3) it is able (without materially impairing its financial condition) to hold
the Warrants and Warrant Shares for an indefinite period of time and to suffer a
complete loss on its investment in such Warrants and Warrant Shares. Purchaser
agrees that it will not offer, sell, pledge, hypothecate or otherwise transfer
any Warrants, Warrant Certificates or Warrant Shares except in compliance with
this Agreement, any restrictive legends listed on such documents and the
Securities Act (and the regulations of the Commission thereunder), as well as in
compliance with any applicable laws, regulations and orders of and/or
administered by any State PUC (to the extent failure to so comply could
reasonably be expected to have or cause a material adverse effect on the
operations of Company or could otherwise reasonably be expected to result in the
imposition of a penalty in excess of $25,000) or the FCC.
ARTICLE 3: COMPANY'S REPRESENTATIONS AND WARRANTIES
Company represents and warrants that:
3.1. Legal Existence and Power. Company (a) is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Maryland, and (b) has all requisite power to execute, deliver and perform this
Agreement, and (c) has all requisite power to issue and deliver the Warrants, to
execute, deliver and perform the Warrant Certificates (evidencing the Warrants),
and to issue and deliver the Warrant Shares (if and when any Warrants are
exercised). The Articles of Incorporation of Company (as amended from time to
time prior to the effective date hereof) are attached as Exhibit A.
3.2. Authorization: Non-Contravention. Company has duly authorized each of
the following by all requisite actions thereof: (a) the execution, delivery and
performance of this Agreement, and (b) the issuance and delivery of the
Warrants, and (c) the execution, delivery and performance of the Warrant
Certificates, and (d) the issuance and delivery of the Warrant Shares Upon any
exercise of the Warrants. None of the actions or activities by Company the
authorization of which is described in the first sentence of this Section (when
performed by Company)
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<PAGE>
will violate, breach or cause a default under (or will require any consent that
has not been obtained under) any applicable law or regulation (including,
without limitation, the laws, regulations and orders of and/or administered by
the FCC or any State PUC), the Organic Documents of Company, any voting or other
equity-related agreements, any other material agreements or instruments, any
order, injunction or decree of any court or governmental authority, or any
permit, authorization or license that (with respect to each of the foregoing
items, as applicable) Company is a party to, Company is bound by or Company
operates pursuant to. The resolutions of Company's Board of Directors
authorizing the actions described in the first sentence of this Section are
attached as Exhibit B and are in full force and effect as of the effective date
hereof.
3.3. Execution, Delivery and Binding Effect. This Agreement and the Warrant
Certificates have been duly executed and delivered by Company. This Agreement,
the Warrant Certificates and the Warrants constitute valid and binding
obligations of Company enforceable against Company in accordance with their
terms except as (a) the enforceability hereof or thereof may be limited by
applicable bankruptcy, insolvency or similar laws affecting creditors' rights
generally and (b) the availability of equitable remedies may be limited by
equitable principles of general applicability.
3.4. Litigation. There is no action, suit, administrative proceeding,
arbitration, investigation or other legal proceeding pending against, or (to the
knowledge of Company, after due inquiry) threatened against, affecting or likely
to be asserted against, Company before any court, arbitrator or governmental
body (a) that, if adversely resolved, could reasonably be expected to have or
cause a materially adverse affect on the business, financial condition,
operations, properties or prospects of Company, or (b) that in any manner
challenges (or questions the validity of) this Agreement, the Warrants, the
Warrant Certificates or the Warrant Shares.
3.5. Compliance with Laws and Other Requirements. Company is in compliance
in all material respects with all applicable material laws and regulations
(including, without limitation, the laws, regulations and orders of and/or
administered by the FCC or any State PUC). Company is not in violation or breach
of or in default under its Organic Documents, or any voting or other
equity-related agreements, or (to the knowledge of Company, after due inquiry)
any material agreement or instrument, any order, injunction or decree of any
court or governmental authority, or any permit, authorization or license to
which Company is a party, by which Company is bound or pursuant to which Company
operates, other than (in each instance) those the violation, breach or default
of which cannot reasonably be expected to have or cause a
5
<PAGE>
materially adverse affect on (a) the business, financial condition, operations,
properties or prospects of Company, or (b) the ability of Company to perform its
obligations under this Agreement, its Organic Documents, the Warrants, the
Warrant Certificates or the Warrant Shares.
3.6. Broker and Finder Fees. Company has not dealt with any broker, finder,
investment bank or other advisor in connection with the issuance and sale of the
Warrants or Warrant Shares, and no broker, finder, investment banking or
advisory fee or commission has been or will be payable (or asserted to be
payable) by Company with respect the issuance and sale of the Warrants or the
Warrant Shares.
3.7. Offering of Securities. Company has not taken and will not take any
action that would cause the offer, issuance or sale of the Warrants or the
Warrant Shares to violate the Securities Act (including, without limitation,
Section 5 thereof) or any securities or "Blue Sky" law of any applicable
jurisdiction.
3.8. Warrant Shares as a Percent of Capital Stock. The Warrant Shares (as
of the effective date hereof, but subject to Vesting) represent 10% of the
issued and outstanding shares of Capital Stock and voting rights on a fully
diluted basis.
3.9. Reservation and Issuance of Warrant Shares. Company has reserved among
its currently authorized but unissued shares of Common Stock the full number of
Warrant Shares deliverable upon exercise of all of the Warrants. The Warrant
Shares (when and if issued upon exercise of the Warrants in accordance with the
terms hereof) will be duly authorized, validly issued, fully paid and
nonassessable.
ARTICLE 4: THE WARRANTS AND WARRANT SHARES
4.1. Warrant Certificates.
a. Form of Certificate: Registration Among Company's Records. The
Warrants shall be evidenced by one or more Warrant Certificates, each of which
will be substantially in the form of Exhibit C with the applicable legend
specified on Exhibit D (but shall incorporate such changes therein as may be
required from time to time to reflect any adjustments made pursuant to Article
5. Each Warrant Certificate shall be uniquely numbered, shall identify the
record Holder thereof, and shall be registered on the books and records of
Company in substantially the same manner as other equity interests of Company.
b. Exchange and Transfer of Certificates. A Warrant Certificate (and the
Warrants evidenced thereby) may be exchanged or (subject to compliance with the
applicable requirements
6
<PAGE>
hereof) may be transferred from time to time at the option of the Holder
thereof. Upon surrender of any such Warrant Certificate to Company, then Company
shall issue and deliver to (or in accordance with the written instructions of)
such Holder one or more new Warrant Certificates evidencing in the aggregate the
same number of Warrants.
c. Missing and Mutilated Certificates. If any Warrant Certificate is lost,
stolen, mutilated or destroyed, then Company (upon request of the registered
Holder thereof) shall issue and deliver to (or in accordance with the written
instructions of) such Holder one or more replacement Warrant Certificates
evidencing in the aggregate the same number of Warrants. Company's obligation
under this Clause is conditioned upon its receipt of reasonably satisfactory
evidence of such loss, theft, mutilation or destruction.
d. Authorization of Certificate Signer. Any Warrant Certificate may be
signed on behalf of Company (and delivered to the Holder entitled thereto) by
any person who, on the actual date of execution of such Warrant Certificate, is
a proper officer of Company to sign such Warrant Certificate even though (l) on
the date of execution of this Agreement such person was not such an officer,
and/or (2) on the date of delivery of such Warrant Certificate such person has
ceased to serve as such officer of Company.
4.2. Exercise of Warrants.
a. Exercise Period. The Warrants are exercisable (once they Vest) at any
time and from time to time after the effective date hereof and prior to 11:59
p.m. (Eastern Time) on July 1, 2002 ("Exercise Period"), at which time any
unexercised Warrants shall expire.
b. Exercise Price. The Exercise Price for a Warrant Share will be
determined (as of the date of Vesting for such Warrant) by dividing (1) the
applicable "Revenue Factor" as of the applicable "Establishment Date" by (2) the
number of shares of Capital Stock issued and outstanding on a fully diluted
basis (including outstanding rights, options and warrants to purchase and other
securities convertible or exchangeable into Capital Stock) as of such
Establishment Date (as such amount may be adjusted from time to time thereafter
as provided herein, the "Exercise Price"). For purposes of establishing the
Exercise Price, (i) the applicable "Revenue Factor" will be an amount 10 times
Company's monthly revenue for the month ending as of the applicable
Establishment Date, and (ii) the applicable "Establishment Date" will be the
last Business Day of the month in which a particular Warrant becomes Vested
(except that, with respect to the Warrants that Vest immediately as of the
effective
7
<PAGE>
date hereof, the applicable Establishment Date will be the last Business Day of
April, 1997). With respect to the Warrants that Vest as of the effective date
hereof, the Exercise Price is $8.46 per share (subject to adjustment).
Notwithstanding the foregoing, if the price per share received by Company in any
Public Offering is less than the Exercise Price then in effect with respect to
any Warrant, then the Exercise Price for each such Warrant will be automatically
adjusted to be the per share price received by Company in connection with such
Public Offering.
c. Vesting. Vesting occurs with respect to any Warrant when such Warrant
becomes immediately exercisable. As of the effective date hereof, Warrants to
purchase up to an aggregate of 269,042 shares (subject to adjustment) of Class A
Voting Common Stock of Company will Vest (which, as of the effective date
hereof, upon exercise, will represent 5% of the issued and outstanding shares of
Capital Stock and voting Rights of Company, on a fully diluted basis). If
Company consummates an Initial Public Offering before 11:59:59 pm Eastern Time
("ET") on December 31, 1997, then no additional Warrants will Vest. As of and
after December 31, 1997, Warrants will Vest in accordance with the following
schedule:
If an Initial Public The Total Percentage Vested
Offering Does Not Occur as of Such Date and Time Will
Before 11:59:59 pm ET Be As Follows (exclusive of
on the Following Date Then anti-dilution protection)
December 31, 1997 6%
March 31, 1998 7%
June 30, 1998 8%
September 30, 1998 9%
December 31, 1998 10%
d. Method of Exercise: Cashless Exercise. A Holder of any Warrant
Certificate (evidencing any Warrants that have Vested) may exercise any such
Warrants from time to time during the Exercise Period to purchase Warrant Shares
upon (1) the surrender of such Warrant Certificate evidencing such Warrants, and
(2) the payment of the Exercise Price in cash, by certified or cashier's check
payable to the order of Company or by wire transfer to Company. As an
alternative to paying such Exercise Price (or any portion thereof), a Holder may
instead elect to effect a cashless exercise pursuant to which such Holder will
receive in exchange for such tendered Warrants an amount of Warrant Shares
determined by multiplying (a) the number of Warrant Shares into which such
Holder would otherwise be entitled as a result of such exercise by (b) a
fraction (i) the numerator of which is the difference between the then Current
Market Price per Warrant Share and the Exercise Price then in effect and (b) the
denominator of which is the then Current Market Price per Warrant Share. Such
surrender and payment must occur at an office of Company or at such other
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<PAGE>
address as Company may specify in writing to the then registered Holder of such
Warrant Certificate.
e. Issuance of Warrant Shares Upon Exercise. Upon surrender of any Warrant
Certificate and payment of the applicable Exercise Price (as described above in
this Section), then Company shall issue, sell and deliver to or upon the
instructions of the Holder of such Warrant Certificate and/or its designee one
or more certificates evidencing in the aggregate the number of Warrant Shares
represented by such Warrant Certificate that are then being purchased (each of
which Warrant Shares shall be fully paid and nonassessable). Any persons so
designated to be named therein shall be deemed to have become a Holder of record
of such Warrant Shares as of the date of exercise of such Warrants. If less than
all of the Warrants evidenced by a Warrant Certificate are exercised at any time
prior to the last day of the Exercise Period, then Company shall issue to such
Holder (or its designee) one or more new Warrant Certificates evidencing the
remaining number of Warrants evidenced by such Warrant Certificate that are not
then exercised by Holder.
4.3. Transfers of Warrants and Warrant Shares. Except as otherwise
expressly provided herein, upon compliance with any applicable requirements
under the Securities Act and the laws, regulations and orders of and/or
administered by each State PUC (to the extent failure to so comply could
reasonably be expected to have or cause a material adverse effect on the
operations of Company or could otherwise reasonably be expected to result in the
imposition of a penalty in excess of $25,000) or the FCC, then the Warrants, the
corresponding Warrant Certificates and the Warrant Shares may be transferred by
Purchaser (or any other Holder thereof from time to time in whole or in part
upon giving written notice to Company (but without the necessity of any prior
written consent of Company). Notwithstanding the foregoing, prior to receiving
notice of any such transfer (either from such Holder or from such transferee),
Company shall be otherwise entitled to treat such known Holder thereof as the
Holder of record hereunder for purposes of giving and receiving notices and for
purposes of exercising rights hereunder.
4.4. Registration and Related Rights.
a. Incidental Registration in a Public Offering. Each Holder of
Warrant Shares and each Holder of Warrants shall have the right to require
Company to include all or (at such Holder's election) any portion of such
Warrant Shares and the Warrant Shares purchasable upon exercise of any such
Warrants that have then Vested in any Public Offering of Company's securities.
Company shall give written notice to each Holder of Warrants and each
Holder of Warrant Shares (at each such Holder's last
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<PAGE>
known address as it appears on Company's books and records) promptly after the
occurrence of any of the following events: (i) Company deciding to proceed with
any registration of securities that would constitute a Public Offering if
declared effective, or (ii) the initial filing of a registration statement with
the Commission pertaining to any Public Offering, or (iii) any amendment,
supplement or modification to any registration statement for a Public Offering
by Company (other than amendments, supplements and modifications that occur
automatically through incorporation by reference as a result of subsequently
prepared publicly available materials), or (iv) any withdrawal of any
registration statement for a Public Offering by Company, or (v) any delay of any
such Public Offering by Company (which, with respect to any Public Offering,
Company may elect to do in its discretion for a period not to exceed 90 calendar
days). Once any such registration statement is declared effective by the
Commission, then Company may not amend or modify it in any manner that affects
any rights, liabilities or benefits of Holders without providing each Holder of
Warrants and each Holder of Warrant Shares with written notice thereof at least
5 Business Days prior to filing any such amendment or modification with the
Commission.
In connection with any such Public Offering, Company shall enter into
an underwriting agreement with one or more underwriters that shall provide,
among other things, that the underwriters shall offer to purchase at the closing
of such Public Offering all of the Warrant Shares and all of the Warrants that
have then Vested (or such lesser portion thereof as any Holder may request) at
the price paid by the underwriters for the Capital Stock (or if a security
convertible into or exchangeable for, or rights to purchase, Capital Stock, then
the conversion, exchange or purchase price for the Capital Stock provided for by
such security less the conversion, exchange or exercise premium on the date of
such offering) sold by Company and/or any selling shareholders (less, with
respect to Warrants, the Exercise Price then in effect). Notwithstanding the
forgoing, if the underwriters shall advise Company in writing that, in their
experience and professional opinion arrived at in good faith, inclusion of such
number of Warrant Shares (together with the shares of Capital Stock requested
for registration by any other selling equityholders) will adversely affect the
price or distribution of the securities to be offered in such Public Offering
solely for the account of Company, then (1) Company shall promptly furnish each
such Holder with a copy of such written advice by the underwriters, and (2) such
Holders shall then have the right to include only such number of Warrant Shares
and Warrants that such advice by the underwriters indicates may be distributed
without adversely affecting the distribution of the securities solely for
Company's account. As among Holders of Warrant Shares and/or Warrants, such
availability for inclusion
10
<PAGE>
in the registration for such Public Offering shall be allocated pro rata based
upon the total number of Warrant Shares owned or purchasable by such Holder. As
between such Holders and any other holders of Capital Stock requesting to be
included in such Public Offering, 60% of any required reduction in the number
shares includible in the registration for such Public Offering shall be
allocated pro rata among such other holders of Capital Stock and 40% of any
required reduction in the number shares includible in the registration for such
Public Offering shall be allocated pro rata among Holders.
In connection with an Initial Public Offering, provided that all other
holders of at least 2% of the issued and outstanding equity interests of Company
are subject to identical (or more restrictive) restrictions with respect to
their equity interests, then each Holder of Warrants and each Holder of Warrant
Shares shall agree to refrain from selling or otherwise transferring (other than
to a Purchaser-Affiliated Transferee) any Warrant Shares not included in such
Initial Public Offering for a period of time (not to exceed 180 calendar days
after the effective date of the registration statement for such Initial Public
Offering) as may be appropriate under the circumstances and reasonably requested
by Company and the underwriters for such offering.
b. Demand Registration Following an Initial Public Offering or Surviving
Public Combination. In addition to any other registration rights to which any
Holder is entitled, at any time and from time to time after closing of an
Initial Public Offering or a Surviving Public Combination, Company (upon each
request of Holders of at least 50% of the Warrant Shares and Warrants then
Vested) shall prepare, shall file with the Commission and shall use its best
efforts to cause to become effective as promptly as reasonably possible a
registration statement covering such number of Warrant Shares owned or then
purchasable as is requested by such Holders. Notwithstanding the forgoing,
Company shall not be required to so prepare and file upon the demand of such
Holders either (a) more than two (2) such registration statements that are
declared effective by the Commission and maintained in effect by Company for at
least 90 consecutive calendar days and are not on a Form S-3 (or any successor
form), or (b) any such registration statement within the first 90 calendar days
after the closing of an Initial Public Offering, or (c) any such registration
statement within the first 180 calendar days after the closing of a Public
Offering that was effective for at least 90 consecutive calendar days and in
which 50% or more of the Warrant Shares and Warrants then Vested were included.
In connection with any such demand registration, such Holders may
engage one or more underwriters to purchase the Warrant Shares, and if so
requested by such Holders, then Company will use commercially reasonable efforts
to assist and cooperate
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with such Holders in identifying and engaging such underwriters. Moreover,
Company shall also use commercially reasonable efforts to assist and cooperate
with such underwriters once engaged by such Holders. The registration statement
shall also provide that sales of the Warrant Shares may be made by dealers, on
an exchange if listed, directly to purchasers or in any other manner. No such
registration statement filed pursuant to this demand registration provision
(without the consent of Holders of at least 50% of the total Warrant Shares and
Warrants that have then Vested) may relate to any securities other than the
Warrant Shares, and no other securities may be sold incidentally to any such
underwritten public offering of Warrant Shares so registered.
In connection with any such demand registration, Company shall keep
effective and maintain the registration, qualification, approval or listing
covering the Warrant Shares for a period of at least 90 consecutive calendar
days. Company from time to time shall amend or supplement the prospectus and
registration statement used in connection with any such registration to the
extent necessary to comply with applicable law (including, without limitation,
to reflect additional information relating to the plan of distribution), and
shall immediately advise each Holder if any such prospectus or registration
statement does not so comply and/or if any stop order or similar order is issued
or threatened or any request for amendment or supplement is received from any
regulatory agency. Company shall make every reasonable effort to prevent the
issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment. Company shall comply with all
other applicable laws in connection with any offering of Warrant Shares and will
promptly make available an earnings statement in accordance with Section 11(a)
of the Securities Act and the regulations promulgated thereunder.
c. Other Registration Rights. If Company has otherwise granted or
hereafter grants to any Person any other or additional registration rights with
respect to any securities of Company (or similar registration rights with any
more favorable or less restrictive terms), then Company will promptly notify
each Holder of Warrants and each Holder of Warrant Shares, and such registration
rights (or the more favorable or less restrictive terms thereof) will be deemed
automatically to be incorporated into this Agreement as additional registration
rights that each Holder is entitled to exercise.
d. Sales Through Underwriters and Dealers. Company shall effect the
registration or qualification of the Warrant Shares registered pursuant to this
Section governing registration rights and such notification to or approval of
any governmental authority under any federal or state law, or listing with any
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securities exchange on which the Common Stock is listed, as may be necessary to
permit the sale of Warrant Shares through underwriters, and, in the case of a
demand registration hereunder, also through dealers, on an exchange, directly to
purchasers or in any other manner.
e. Expenses of Registration. Any registration, qualification,
notification, approval or listing made or withdrawn pursuant to this Section
shall be at the sole expense of Company (excepting underwriter's or broker's
discounts and commissions). Notwithstanding the foregoing, in connection with
any such transaction, Company shall be obligated to pay the costs and expenses
of only one finn serving as legal counsel representing such Holders. In
connection with any demand registration by Holders, if such Holders withdraw the
registration prior to consummation (other than for reasons, in whole or in part,
based upon actions or inactions of Company or other third parties, operating
performance of Company, disclosure of material events by Company, or issues
raised by the Commission, the PCC or any State PUC), then such Holders (at their
election) either (1) will not be entitled to reimbursement from Company for
their expenses associated with such withdrawn registration or (2) will lose the
right to such demand registration (but not the right to any other demand
registrations to which such Holders may be entitled hereunder).
f. Certain Additional Agreements in Connection with Registrations. In
connection with any Public Offering, Company (1) shall enter into, execute and
deliver all agreements and other instruments and documents (including, without
limitation, opinions of counsel, comfort letters and underwriting agreements)
that are customary and appropriate with such public offerings, and (2) shall
cooperate with any underwriters to facilitate sales of the Warrant Shares to the
same extent as if such Warrant Shares were being offered directly by Company,
and (3) shall furnish each Holder such numbers of copies of registration
statements and prospectuses (and amendments and supplements thereto) as such
Holder may reasonably request, and (4) shall take all such other actions as are
necessary or advisable to facilitate the registration and sale of such Warrant
Shares. In connection with any Public Offering as to which any Holder is
requesting registration of Warrant Shares, each such Holder (i) shall provide
Company with such information regarding itself, himself or herself as may be
reasonably required by Company, and (ii) shall reasonably cooperate with Company
in the preparation of the registration statement, and (iii) shall enter into,
execute and deliver all agreements and other instruments and documents that are
customary and appropriate for selling equityholders to execute in connection
with a secondary public offering.
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g. Indemnification by Company. In connection with any offering of
Warrant Shares pursuant to the provisions of this Section, Company hereby
indemnifies and holds harmless each Holder of Warrants and each Holder of
Warrant Shares (and the directors, officers and controlling Persons of each such
Holder), each other Person (if any) who acts on behalf of or at the request of
any such Holder, each underwriter, and each other Person who participates in the
offering of Warrant Shares (collectively, for purposes of this Clause, the
"Indemnified Parties") against any losses, claims, damages or liabilities, joint
or several, to which such Indemnified Party may become subject under the
Securities Act or any other statute or at common law, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof arise out of or
are based upon either of the following:
(i) any untrue statement or alleged untrue statement of any
material fact contained (on the effective date thereof) in any registration
statement (or any amendment thereto) under which such Warrant Shares were
registered under the Securities Act, or the omission or alleged omission
therefrom of a 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, or
(ii) any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or prospectus (or any
amendment or supplement thereto) or the omission or alleged omission therefrom
of a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Company shall also reimburse each such Indemnified Party for any legal or any
other expenses reasonably incurred in connection with investigating or defending
any such loss, claim, damage, liability or action. Notwithstanding the forgoing,
Company shall not be liable to an Indemnified Party in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon any untrue or alleged untrue statement or omission or alleged omission made
in such registration statement, preliminary prospectus, prospectus, or amendment
or supplement in reliance upon and in conformity with written information
furnished to Company through an instrument duly executed by such Indemnified
Party specifically stating that it is expressly for use therein. Such indemnity
shall remain in full force and effect and shall survive the transfer of such
Warrants or Warrant Shares by any such Holder.
h. Indemnification by Holders. Each Holder whose Warrant Shares are
sold under any registration statement pursuant to this Section (by inclusion of
such Warrant Shares thereunder)
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shall indemnify and hold harmless Company (the officers, direction and
controlling Persons thereof), each other Holder of Warrants and each other
Holder of Warrant Shares (and the directors, officers and controlling Persons of
each such Holder), each other Person (if any) who acts on behalf of or at the
request of Company or such other Holder, each underwriter, and each other Person
who participates in the offering of Warrant Shares (collectively, for purposes
of this Clause, the "Indemnified Parties") against any losses, claims, damages
or liabilities, joint or several, to which such Indemnified Party may become
subject under the Securities Act or any other statute or at common law, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon either of the following:
(i) any untrue statement or alleged untrue statement of any
material fact contained (on the effective date thereof in any registration
statement (or any amendment thereto) under which such Warrant Shares were
registered under the Securities Act at the request of such Holder, or the
omission or alleged omission therefrom of a 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, or
(ii) any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or prospectus (or any
amendment or supplement thereto) or the omission or alleged omission therefrom
of a material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
but only to the extent (with respect to either of the forgoing Clauses) that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in such registration statement, preliminary prospectus,
prospectus, amendment or supplement in reliance upon and in conformity with
written information furnished to Company through an instrument duly executed by
such Holder specifically stating that it is expressly for use therein. Each such
Holder shall also reimburse each such Indemnified Party for any legal or any
other expenses reasonably incurred in connection with investigating or defending
any such loss, claim, damage, liability or action. Notwithstanding the forgoing,
no such Holder shall be liable to any Indemnified Party in any such instance to
the extent (a) such loss, claim, damage or liability relates to any untrue
statement or omission, or any alleged untrue statement or omission, made in a
preliminary prospectus but eliminated or remedied in a final prospectus, and (b)
a copy of the final prospectus was not delivered to the Person asserting the
claim at or prior to the time required by the Securities Act in an instance for
which delivery thereof
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would have constituted a defense to the claim asserted by such Person.
i. Certain Notices and Other Rights Relating to Indemnification. A
party from whom indemnity may be sought pursuant to the provisions of this
Section shall not be liable for such indemnity with respect to any claim as to
which indemnity is sought unless the party seeking such indemnity shall have
notified such indemnifying party in writing of the nature of such claim promptly
after such indemnified party becomes aware of the assertion thereof.
Notwithstanding the forgoing, the failure to so notify such indemnifying party
shall not relieve such party from any liability which it may have to such
indemnified party otherwise than on account of the provisions of this Section or
if the failure to give such notice promptly shall not have been prejudicial to
such indemnifying party. No indemnifying party shall be liable for any
compromise or settlement of any such action effected without its consent. No
indemnifying party (in the defense of any such claim or suit), without the
consent of each indemnified party, shall consent to any compromise or settlement
that does not include as an unconditional term thereof the giving by the
claimant to such indemnified party of a complete release from all liability in
respect of such claim or suit.
j. Contribution. In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section for any
reason is held to be unenforceable although applicable in accordance with its
terms, Company and the Holders, as amongst themselves, shall contribute to the
losses, claims, damages, liabilities and expenses described herein in such
proportions so that the portion thereof for which any Holder shall be
responsible shall be limited to the portion determined by a court or the parties
to any settlement to be directly attributable to an untrue statement of a
material fact or an omission to state a material fact in a registration
statement, preliminary prospectus, prospectus or amendment or supplement thereto
in specific reliance upon and in conformity with written information furnished
to Company through an instrument duly executed by such Holder specifically
stating that it is expressly for use therein, and Company shall be responsible
for the balance. Notwithstanding the foregoing, the liability of each Holder
shall be limited to the initial offering price of the Warrant Shares sold by it
thereunder. Company and the Holders agree that it would not be just and
equitable if there respective obligations to contribute were to be determined by
pro rata allocation, by reference to the proceeds realized by them or in any
manner which does not take into account the equitable considerations set forth
in this Clause.
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4.5 Rights Upon Occurrence of Dispositions and Non-surviving Combinations.
a. Offer to Purchase. In connection with any Disposition or any
Non-surviving Combination, Company or the acquiror in any Disposition or
Non-Surviving Combination shall also offer to purchase on the terms set forth
below all of the Warrant Shares and all of the Warrants then Vested. If a
Disposition is of less than all of the Capital Stock then outstanding, then the
number of Warrants and Warrant Shares subject to purchase under this Section
shall be reduced proportionately (to the nearest whole number), and such reduced
number will be available pro rata among all Holders desiring to tender Warrant
Shares or Warrants in connection with such transaction.
b. Notice of Proposed Transaction. Company shall give written notice
to each Holder of Warrants and each Holder of Warrant Shares (at each such
Holder's last known address as it appears on Company's books and records)
promptly after an agreement in principle is reached with respect to any
Disposition or any Non-Surviving Combination (but, in any event, at least 30
calendar days prior to the closing of any such transaction).
c. Purchase Price. As a condition to consummation of any Disposition
or any Non-surviving Combination, either Company or such acquiror shall purchase
(either before or concurrently with the consummation of such transaction) all
Warrants and Warrant Shares tendered by a Holder thereof at a cash price per
Warrant and Warrant Share equal to the greater of the following:
(i) the Target Valuation per Warrant Share, or
(ii) the result of the following formula:
(A) the product of (1) the aggregate consideration received by
all sellers and transferors in connection with such transaction or
series of related transactions (including the consideration to be
received by the holders of Warrants and Warrant Shares pursuant to
this provision) and (2) a fraction the numerator of which is the
number of Warrants and Warrant Shares tendered for purchase in
connection with such transaction or series of related transactions and
the denominator of which is the sum of the number of shares of Common
Stock outstanding immediately prior to such transaction or series of
related transactions plus the number of Warrants and Warrant Shares
tendered for purchase (which result is the amount of consideration
available for all Warrants and Warrant Shares tendered in connection
with such transaction), divided by
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(B) the number of Warrants and Warrant Shares tendered for
purchase in connection with such transaction (which result is the
amount of consideration available for each Warrant and Warrant Share
tendered in connection with such transaction), minus
(C) the Exercise Price then in effect (but only with respect to
Warrants and not Warrant Shares).
d. Payment of Purchase Price. Company (either before or concurrently
with the consummation of such transactions) shall distribute to the respective
Holders of Warrants and Warrant Shares (or to such other Person as such Holder
may direct Company in writing) the applicable purchase price for each tendered
Warrant Share and Warrant in cash, by certified or cashier's check, by wire
transfer or by any other means acceptable to such Holder. In addition, Company
shall also deliver to each such Holder (as and to the extent applicable) a
return or reissuance of Warrants and Warrant Shares not purchased in connection
with any such transaction.
e. Determination of "Aggregate Consideration". Unless the entire
consideration in such transaction consists of cash or unless otherwise agreed by
Holders of Warrants and Warrant Shares, then the fair value of the "aggregate
consideration" to be received by all sellers and transferors in connection with
a Disposition or Non-Surviving Combination shall be determined by an Independent
Appraiser selected by Holders of a majority of the Warrants and Warrant Shares
and approved by Company (which approval may not be unreasonably withheld or
delayed). Such Independent Appraiser shall use one or more valuation methods
that the Independent Appraiser (in its best professional judgment) determines to
be most appropriate under the circumstances; provided,that (i) such valuation
methods shall take into account any related agreements that result in personal
gain to any director, officer or equityholder of Company, and (ii) such
valuation methods shall not give effect to (1) any discount for any lack of
liquidity of the Capital Stock, or (2) the minority status of any holder of
Capital Stock, or (3) the fact that Company may have no class of equity
securities registered under the Securities Act. Such Independent Appraiser, as
promptly as is reasonably possible, will prepare and deliver to Company and to
each Holder of a Warrant or Warrant Share a written valuation report
indicating(a) the methods of valuation considered or used, and (b) the value of
the "aggregate consideration" paid by the acquiror in connection with the
particular Disposition or Non-Surviving Combination or otherwise received by the
sellers and transferors in connection therewith, and (c) the nature and scope of
the examination or investigation upon which the determination of value was made.
Unless the
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valuation report is revised by the Independent Appraiser within 5 Business Days
after delivery thereof or unless Company and Holders otherwise mutually agree,
then the valuation report shall be deemed final at the end of such
5-Business-Day period. Company shall pay the fees and expenses associated with
the Independent Appraiser.
4.6. Repurchase Offer.
a. Offer to Repurchase. Within 30 calendar days following the
occurrence of any Repurchase Condition, Company shall make a written offer
(each, a "Repurchase Offer") to repurchase at the Repurchase Price up to all of
the Warrant Shares and Warrants then Vested. Each such Repurchase Offer (among
other things) shall indicate the date of occurrence of the relevant Repurchase
Condition and shall provide a calculation of the Target Valuation per Warrant
Share (together with a copy of documentation supporting such calculation). Each
such Repurchase Offer shall be delivered by Company to each such Holder entitled
thereto by first-class mail to the last known address of such Holder on the
books and records of Company.
b. "Repurchase Condition". A "Repurchase Condition" will be deemed to
occur (1) on March 1, 2002, which is approximately 120 calendar days prior to
the Maturity Date under the Credit Agreement (unless an Initial Public Offering,
Surviving Public Combination, Non-Surviving Combination or complete Disposition
shall have been consummated after the effective date.hereof and prior thereto),
and (2) upon the occurrence of any Event of Default under and as defined in the
Credit Agreement.
c. "Repurchase Price". The "Repurchase Price" for each Warrant and
Warrant Share in connection with any such Repurchase Offer (unless Company and
Holders otherwise mutually agree) will be the fair market value of a share of
Common Stock as of the date of occurrence of such Repurchase Condition as
determined by an Independent Appraiser, less in either instance with respect to
Warrants (but not Warrant Shares) the Exercise Price then in effect. Such
Independent Appraiser will be selected by Holders of a majority of the Warrants
and Warrant Shares and approved by Company (which approval may not be
unreasonably withheld or delayed). Such Independent Appraiser shall use one or
more valuation methods that the Independent Appraiser (in its best professional
judgment) determines to be most appropriate under the circumstances; provided,
that such valuation methods shall not give effect to (1) any discount for any
lack of liquidity of the Capital Stock, or (2) the minority status of any holder
of Common Stock, or (3) to the fact that Company may have no class of equity
securities registered under the Securities Act. Such Independent Appraiser, as
promptly as is reasonably possible,
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will prepare and deliver to Company and to each Holder of a Warrant or Warrant
Share a written valuation report indicating (a) the methods of valuation
considered or used, and (b) the value of a share of Common Stock, and (c) the
nature and scope of the examination or investigation upon which the
determination of value was made. Unless the valuation report is revised by the
Independent Appraiser within 5 Business Days after delivery thereof or unless
Company and Holders otherwise mutually agree, then the valuation report shall be
deemed final at the end of such 5-Business-Day period. Company shall pay the
fees and expenses associated with the Independent Appraiser.
d. Acceptance of Repurchase Offer; Payment of Purchase Price. At any
time within 60 calendar days after a Holder receives the final written valuation
report of the Independent Appraiser, each such Holder may tender for repurchase
by Company all or any portion of such Holder's Warrant Shares and Warrants that
have vested. Within 30 calendar days of receiving any such tender of Warrant
Shares or Warrants, Company shall distribute to each such Holder (or to such
other Person as such Holder may direct Company in writing) the applicable
Repurchase Price for each such tendered Warrant Share and Warrant in cash, by
certified or cashier's check, by wire transfer or by any other means acceptable
to such Holder. In addition, Company shall also deliver to each such Holder (as
and to the extent applicable) a return or re-issuance of Warrants and Warrant
Shares not tendered for repurchased.
4.7. Cumulative Rights. The rights of Holders upon the occurrence of events
set forth in this Article 4 are cumulative. If more than one such event occurs
simultaneously (or the time period for exercising any such rights overlaps),
then each Holder can elect which rights (if any) to exercise and any prior
inclusion or surrender of Warrants or Warrant Shares with respect to a
transaction that has not yet closed may be rescinded by such Holder during such
overlapping period in order to exercise rights arising under any concurrently
occurring event.
4.8 Exercise of Rights conditioned Upon Closing of Transaction Involved.
The rights of Holders to have Warrants or Warrant Shares included and sold in
any Public Offering or purchased in any Disposition or Non-Surviving Combination
pursuant to this Article 4 are conditioned upon the consummation of the proposed
transaction. Neither Company nor any equityholder involved in any such proposed
transaction shall have any obligation to Holders to consummate any such proposed
transaction once an agreement in principle or decision to proceed with respect
thereto is reached, except as expressly provided in this Article 4.
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4.9. Payment of Taxes. Company will pay all expenses, taxes and charges
attributable to the issuance, transfer or repurchase of the Warrants, the
Warrant Certificates and the Warrant Shares.
4.10. Reservation and Issuance of Warrant Shares. Company at all times
shall reserve (and keep free from preemptive rights) among its authorized but
unissued shares of Capital Stock the full number of Warrant Shares deliverable
upon exercise of all of the Warrants. Company covenants that all Warrant Shares
(when and if issued upon exercise of the Warrants in accordance with the terms
hereof) will be duly authorized, validly issued, fully paid and nonassessable
(and will be free from all taxes, liens, charges and security interests with
respect to the issuance thereof). Before taking any action that could cause an
adjustment pursuant to Article 5, Company will take any corporate action that
(in the opinion of its counsel) may be necessary or appropriate in order that
company may validly and legally issue fully paid and nonassessable Warrant
Shares at the Exercise Price as so adjusted.
4.11. Listing of Shares. If Company lists any shares of Common Stock on any
national securities exchange, then Company (at its expense) will use its best
efforts to cause the Warrant Shares to be approved for listing, subject to
notice of issuance, and will provide prompt notice to each such exchange of the
issuance thereof from time to time.
4.12. Lists of Holders. Company (from time to time upon the request of any
Holder) will provide such Holder with a list of the registered Holders and their
respective addresses.
4.13. Compliance with Approval Requirements. If any Warrants or Warrant
Shares require registration or approval of the FCC, any State PUC or any other
governmental authority (or the taking of any other action under the laws of the
United States of America or any political subdivision thereof) before such
securities may be validly issued, then Company will use commercially reasonable
efforts to secure and maintain such registration or approval or to take such
other action as and when necessary.
ARTICLE 5: ANTI-DILUTION PROVISIONS
5.1. Adjustments to Warrant Shares Purchasable and Exercise Price.
a. General Intent Regarding Anti-Dilution. It is the intent of Company
and Purchaser that the Warrant Shares purchasable upon exercise of the Warrants
(subject to Vesting)
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will represent at least 10% of the issued and outstanding shares of Capital
Stock and voting rights from time to time on a fully diluted basis (exclusive,
however, of up to 750,000 shares of Excludible Shares). It is also the intent of
Company and Purchaser that the aggregate purchase price to acquire the
percentage interest represented by the Warrant Shares (on a fully diluted basis)
not exceed the aggregate Exercise Price for all Warrant Shares as of the
effective date hereof.
b. Equity Dividends, Restructuring and Reclassification. If Company at
any time (1) declares or pays a dividend on its outstanding Common Stock in
shares of Common Stock or other securities of Company, or (2) subdivides its
outstanding shares of Common Stock, or (3) combines its outstanding shares of
Common Stock into a smaller number of shares, or (4) issues by reclassification
of the Common Stock other securities of Company (including any such
reclassification in connection with a merger, consolidation or other business
combination in which Company is the surviving entity), then the number and kind
of Warrant Shares purchasable upon exercise of each Warrant shall be adjusted so
that each Holder of a Warrant upon exercise of such Warrant shall be entitled to
receive the aggregate number and kind of Warrant Shares or other securities of
Company that such Holder would have owned or would have been entitled to receive
after the occurrence of any such Event of Dilution had such Warrant been
exercised immediately prior to the occurrence of such event (or, if earlier, any
record date with respect thereto). Any adjustment required by this Clause (a)
shall become effective on the date of such Event of Dilution retroactive to the
record date with respect thereto (if any), and (b) shall be made successively
whenever any such event occurs.
c. Rights to Purchase Below Current Market Price. If Company issues to
all holders of its outstanding Common Stock rights, options or warrants to
subscribe for or purchase Common Stock (or securities convertible or
exchangeable into Common Stock) at a price per share (or having a conversion or
exchange price per share) less than the then Current Market Price per share of
Common Stock (as defined below) or without consideration, then the current
Exercise Price to be in effect after such issuance shall be reduced to a price
determined as follows:
multiply (1) the Exercise Price in effect immediately prior to such
issuance by (2) a fraction (i) the numerator of which is the number of
shares of Common Stock outstanding on the date of such issuance plus the
number of shares of Common Stock which the aggregate offering price of the
total number of shares of Common Stock so to be offered (or the aggregate
initial conversion or exchange price of the convertible or exchangeable
securities so to be offered)
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would purchase at the Current Market Price and (ii) the denominator of
which is the number of shares of Common Stock outstanding on the date of
such issuance plus the number of additional shares of Common Stock to be
offered for subscription or purchase (or into which the convertible or
exchangeable securities so to be offered are initially convertible).
The provisions of this Clause, however, will not apply to any issuance of
Warrants or to any issuance of Warrant Shares upon exercise of any Warrants. If
such subscription price may be paid in a consideration any of which is in a form
other than cash, then the value of such consideration (unless Company and
Holders otherwise mutually agree) shall be as determined by an Independent
Appraiser, and the Board of Directors of Company shall cause the related shares
to be fully paid. Any adjustment required by this clause (a) shall become
effective on the date of issuance retroactive to the record date for determining
equityholders entitled to receive such issuance, and (b) shall be made
successively whenever any such event occurs.
d. Distributions of Indebtedness, Assets or Securities. If Company
distributes to all holders of Common Stock (including any such distribution in
connection with a merger or consolidation in which Company is the continuing
entity) evidences of indebtedness of Company, assets or securities other than
Common Stock (excluding dividends or distributions otherwise appropriately
covered under other Clauses of this Section 5.1), then the current Exercise
Price to be in effect after such distribution shall be reduced to a price
determined as follows:
multiply (1) the Exercise Price in effect immediately prior to such record
date by (2) a fraction (i) the numerator of which is the current Market
Price per share of Common Stock on such record date minus the fair value
(as determined by an Independent Appraiser, unless otherwise mutually
agreed by Company and Holders) of the portion of the assets, evidences of
indebtedness or other securities so to be distributed applicable to one
share of Common Stock and (ii) the denominator of which is the current
Market Price per share of Common Stock.
Any adjustment required by this Clause (a) shall become effective on the date of
issuance retroactive to the record date for determining equityholders entitled
to receive such distribution, and (b) shall be made successively whenever any
such event occurs.
e. Other Issuances Below Current Market Price. If Company issues or
sells any shares of Common Stock (or rights,
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options, warrants or convertible or exchangeable securities containing a right
to subscribe for or purchase shares of Common Stock) (excluding (i) issuances or
sales with respect to transactions otherwise appropriately covered under other
Clauses of this Section 5.1 and (ii) any Warrant Shares), at a price per share
(determined for rights, options, warrants or convertible or exchangeable
securities, by dividing (A) the total amount received or receivable by Company
in consideration of such issuance or sale plus the total consideration payable
to Company upon exercise, conversion or exchange thereof by (B) the total number
of shares of Common Stock covered by such rights, options, warrants or
convertible or exchangeable securities) less than the then Current Market Price
per share of Common Stock in effect immediately prior to such sale or issuance,
then the number of Warrant Shares thereafter purchasable upon the exercise of
each Warrant shall be determined as follows:
multiply (1) the number of Warrant Shares theretofore purchasable upon the
exercise of each Warrant by (2) a fraction (i) the numerator of which shall
be the total number of shares of Common Stock outstanding immediately after
such issuance or sale and (ii) the denominator of which shall be an amount
equal to the sum of (A) the total number of shares of Common Stock
outstanding immediately prior to such issuance or sale plus (B) the number
of shares of Common Stock that the aggregate consideration received (as
determined below) for such issuance or sale would purchase at the then
Current Market Price per share of Common Stock in effect immediately prior
to such sale and issuance.
For purposes of such adjustments, the shares of Common Stock that the holder of
any such rights, options, warrants or convertible or exchangeable securities is
entitled to subscribe for or purchase shall be deemed to be issued and
outstanding as of the date of such issuance or sale, and the "consideration
received" by Company shall be deemed to be (a) the consideration received by
Company for such rights, options, warrants or convertible or exchangeable
securities plus (b) the consideration or premiums stated in such rights,
options, warrants or convertible or exchangeable securities to be paid for the
shares of Common Stock purchasable thereby. If Company (i) issues or sells
shares for consideration that includes any property other than cash or (ii)
issues or sells shares together with other securities as a part of a unit at a
price per unit, then the "price per share" and the "consideration received" by
Company for purposes of this Clause (unless Company and Holders otherwise
mutually agree) will be determined by an Independent Appraiser. Any adjustment
required by this Clause (a) shall become effective retroactive to the date of
issuance or sale of any such rights, options, warrants or
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convertible or exchangeable securities, and (b) shall be made successively
whenever any such event occurs.
f. Dilution of Voting Rights. If Company otherwise issues or sells any
shares of Capital Stock (or rights, options, warrants or convertible or
exchangeable securities containing the right to subscribe for or purchase shares
of Common Stock) (excluding issuances or sales with respect to an Initial Public
Offering or with respect to transactions otherwise appropriately covered under
other Clauses of this Section 5.1) that have or may have any voting rights
associated therewith, then the number of Warrant Shares thereafter purchasable
upon the exercise of each Warrant shall be determined as follows:
multiply (1) the number of Warrant Shares theretofore purchasable upon the
exercise of each Warrant by (2) a fraction (i) the numerator of which shall
be the total amount of voting rights associated with Capital Stock
outstanding immediately after such issuance or sale and (ii) the
denominator of which shall be the total amount of voting rights associated
with Capital Stock outstanding immediately prior to such issuance or sale.
For purposes of such adjustments, the shares of Capital Stock that the holder of
any such rights, options, warrants or convertible or exchangeable securities
shall be entitled to subscribe for or purchase shall be deemed to be issued and
outstanding as of the date of such issuance or sale. To the extent that any
Holder prior to such date has exercised Warrants to acquire Warrant Shares, then
such Holder shall be entitled to acquire (at the lesser of the price paid such
acquiror of Capital Stock or the Current Market Price therefor) an amount of
additional shares of Capital Stock with voting rights that would entitle such
Holder to have the same aggregate percentage of voting rights as such Holder had
immediately prior to such transaction. Any adjustment required by this Clause
(a) shall become effective retroactive to the date of issuance or sale of any
such rights, options, warrants or convertible or exchangeable securities, and
(b) shall be made successively whenever any such event occurs.
g. Exchange of Class B Common Stock for Class A Common Stock.
Notwithstanding the forgoing Clauses of this Section, if Company at any time
consummates a transaction by which the 22,526 shares of non-voting Class B
Common Stock issued and outstanding as of the effective date of this Agreement
are exchanged for 22,526 (or less) shares of Common Stock, then such event shall
constitute an Event of Dilution. Upon the occurrence of such Event of Dilution,
the number of Vested and un-Vested Warrants and Warrant Shares shall be
appropriately increased, but the Exercise Price shall not be adjusted.
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h. Catchall Anti-Dilution Protection. If Company otherwise engages in
any transaction an effect of which is to dilute the economic value or voting
rights of any Holder's Warrants or Warrant Shares in a manner contrary to the
general intent expressed under Clause "a" of this Section, then Company and such
Holder will negotiate in good faith to implement an equitable adjustment to such
Holder's interest in Company in order to account for the effects of such
transaction. Any adjustment required by this Clause shall be made successively
whenever any such event occurs.
i. "Current Market Price". For the purposes of any computation under
this Section 5.1, the "Current Market Price" per share of Common Stock or any
other security at the date herein specified shall be as follows: (i) if Company
does not then have such securities registered under the Exchange Act, then the
Current Market Price per share of such security will be the greater of the
Exercise Price per Warrant Share then in effect and the Target Valuation per
Warrant Share, or alternatively (ii) if Company does then have such securities
registered under the Exchange Act, then the Current Market Price per share of
such security will be the greater of the Exercise Price per Warrant Share then
in effect and the average of the daily market prices of such security for 20
consecutive Business Days during the period commencing 30 Business Days before
such date (or, if Company has had a class of such securities registered under
the Exchange Act for less than 30 consecutive Business Days before such date,
then the average of the daily market prices for all of the Business Days before
such date for which daily market prices are available). The market price for
each such Business Day shall be as follows: (A) for a security listed or
admitted to trading on any securities exchange, then the closing price (regular
way) on such day (or if no sale takes place on such day, then the average of the
closing bid and asked prices on such day), and (B) for a security not then
listed or admitted to trading on any securities exchange, then the last reported
sale price on such day (or if no sale takes place on such day, then the average
of the closing bid and asked prices on such day, as reported by a reputable
quotation source designated by Company), and (C) for a security not then listed
or admitted to trading on any securities exchange and as to which no such
reported sale price or bid and asked prices are available, then the average of
the reported high bid and low asked prices on such day, as reported by a
reputable quotation service, or a newspaper of general circulation in Manhattan
Borough (New York, NY) customarily published on each business day, designated by
Company (or if there is no bid and asked prices on such day, then the average of
the high bid and low asked prices, as so reported, on the most recent day (not
more than 30 calendar days prior to the date in question) for which prices have
been so reported), and (D) if there are no bid and asked prices reported during
the 30 calendar days prior to
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the date in question, then the Current Market Price per share of the security
shall be determined as if Company did not have a class of such securities
registered under the Exchange Act.
j. Rights Applicable to Shares Other than Common Stock. If at any time
(as a result of an adjustment made pursuant to this Section 5.1) a Holder
becomes entitled to receive any shares of Company other than shares of Common
Stock, then thereafter the number of such other shares so receivable upon
exercise of any Warrant shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Warrant Shares contained in this Section 5.1, and the provisions
of Article 4 with respect to the Warrant Shares shall apply on like terms to
such other shares.
k. Expiration of Rights Previously Subject to Adjustment. Upon the
expiration of any rights, options or warrants that resulted in adjustments
pursuant to this Section 5.1 that were not exercised, then the Exercise Price
and the number of Warrant Shares purchasable shall be readjusted and thereafter
shall be such as it would have been had it been originally adjusted (or had the
original adjustment not been required, as applicable) as if (A) the only shares
of Common Stock purchasable upon exercise of such rights, options or warrants
were the shares of Common Stock (if any) actually issued or sold upon the
exercise of such rights, options or warrants and (B) such shares of Common Stock
so issued or sold (if any) were issuable for the consideration actually received
by Company for the issuance, sale or grant of all such rights, options or
warrants whether or not exercised; provided that no such readjustment may have
the effect of increasing the Exercise Price or decreasing the number of Warrant
Shares purchasable upon the exercise of a Warrant by an amount in excess of the
amount of the adjustment initially made in respect to the issuance, sale or
grant of such rights, options or warrants.
l. Election to Adjust Warrants Rather than Exercise Price. Any Holder
may elect on or after the date of any adjustment to the Exercise Price to adjust
the number of Warrants (and Warrant Shares purchasable) instead of the Exercise
Price. Upon any such election, the number of Warrants (and Warrant Shares
purchasable) will be determined by multiplying the number of Warrants and
Warrant Shares purchasable by a fraction the numerator of which is the Exercise
Price in effect as a result of such adjustment and the denominator of which is
the Exercise Price in effect immediately prior to such adjustment.
5.2. Notice of Adjustment. Upon any adjustment required under this Article
5, Company (at its expense) shall mail (within 10 Business Days after such
adjustment) by first class mail, postage prepaid, to each Holder of Warrants and
each Holder of
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Warrant Shares a notice of such adjustment. Such notice shall include the
following (each in reasonable detail): (i) the number of Warrant Shares
purchasable upon the exercise of each Warrant and the Exercise Price of such
Warrant after such adjustment, and (ii) a brief statement of the facts requiring
such adjustment, and (iii) the computation by which such adjustment was made.
5.3. Preservation of Purchase Rights upon Certain Transactions. In
connection with any merger, consolidation or combination of Company with or into
another Person (whether or not Company is the surviving entity), or any sale,
transfer or lease to another Person of all or substantially all the property of
Company, then Company (or such successor or purchasing Person) shall execute an
agreement in favor of each Holder of Warrants giving such Holder the right
thereafter upon payment of the Exercise Price in effect immediately prior to
such action to purchase upon exercise of each Warrant the kind and amount of
securities, cash and property that such Holder would have owned or would have
been entitled to receive after the happening of such merger, consolidation,
combination, sale, transfer or lease had such Warrant been exercised immediately
prior to such action. If any such successor or purchasing Person is not a
corporation, then such Person shall also provide appropriate tax indemnification
with respect to such shares and other securities and property so that, upon
exercise of the Warrants, each Holder thereof will have the same benefits such
Holder otherwise would have had if such successor or purchasing Person were a
corporation. Such agreement shall provide for adjustments that shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Article 5. The provisions of this Section shall similarly apply to successive
mergers, consolidations, combinations, sales, transfers or leases.
ARTICLE 6: COMPANY'S COVENANTS
6.1. Information.
a. So long as Company does not have a class of equity securities
registered under the Exchange Act, Company will prepare (or cause the
preparation of) the following financial reports: (i) on a quarterly basis
(including the fourth fiscal quarter of each year), unaudited financial
statements including (without limitation) a balance sheet and a statement of
income, together with all appropriate notes and schedules thereto (collectively,
the "Quarterly Reports"), and (ii) on an annual basis, audited financial
statements including (without limitation) a balance sheet, a statement of
income, a cash flow statement, a statement of income and equityholders'
accounts, and a statement of changes in financial position, together with all
appropriate notes and schedules (collectively, the "Annual Reports"). In
addition, each financial statement shall be
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accompanied by a description of material transactions that have occurred in the
appropriate period covered by such financial statement. All financial statements
will be prepared in accordance with generally accepted accounting principles
consistently applied. At any time while Company has a class of equity securities
registered under the Exchange Act, then the terms "Quarterly Report" and "Annual
Report" will refer to the quarterly reports and annual reports required to be
prepared in accordance with the Exchange Act.
b. Company (i) will cause a copy of each Quarterly Report to be mailed
to each Holder within 45 calendar days after the last day of each fiscal
quarter, and (ii) will cause a copy of each Annual Report (together with a copy
of any management letters prepared by the accountants) to be mailed to each
Holder within 90 calendar days after the close of each fiscal year. Such reports
will be mailed to such Holder's last known address appearing on Company's books
and records.
c. Whether or not Company has a class of equity securities registered
under the Exchange Act, Company will provide each Holder with a copy of all
information (including, without limitation, financial information) and other
communications that are sent by or on behalf of Company (i) to any class of
Company's equityholders, or (ii) to the Commission. Company shall provide such
information and communications to Holders concurrently with providing it to such
third parties.
d. Company will also provide each Holder written notice of (and
describing in reasonable detail) the occurrence of any of the following events:
1. Company offers or issues to any Person any shares of Capital Stock
or securities convertible into or exchangeable for Capital Stock or any
right to subscribe for or purchase any thereof; or
2. A dissolution, liquidation or winding up of Company (other than in
connection with a consolidation, merger, sale, transfer or lease of all or
substantially all of its property, assets and business as an entirety); or
3. Company declares or makes (directly or indirectly) any payment or
distribution (in cash or otherwise) with respect to, or incurs any
liability for the purchase, acquisition, redemption or retirement of, any
Capital Stock or as a dividend, return of capital or other payment or
distribution of any kind to any equityholder.
Each such notice shall be mailed by Company to each Holder (at such Holder's
last known address on the books and records of
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Company) at least 20 Business Days prior to the applicable record date of such
transaction.
6.2. Books and Records: Right of Inspection. Company and each of its
Subsidiaries will keep and maintain satisfactory and adequate books and records
of account in accordance with generally accepted accounting principles. At any
time and from time to time during normal business hours (upon reasonable prior
written notice) Company will permit any Holder (or any agent or representative
thereof, but at such Holder's cost and expense) (i) to visit, (ii) to examine
and make copies of and abstracts from the books and records of Company and its
Subsidiaries, and (iii) to discuss the affairs, finances, and accounts of
Company and its Subsidiaries with any of their respective officers, directors
and independent accountants.
6.3. Litigation: Defaults. Company will notify Holders in writing
immediately upon (i) the institution of any litigation, legal or administrative
proceeding, or labor controversy that could materially adversely affect the
business, financial condition, operations, properties or prospects of Company,
or (ii) the happening of any event or the assertion or threat of any claim that
could materially adversely affect the business, financial condition, operations,
properties or prospects of Company, or (iii) the occurrence of any material
default in respect of any material indebtedness of Company or its Subsidiaries.
6.4. No Amendments to Organic Documents. Without the prior written consent
of Holders representing a majority of Warrant Shares and Warrants then Vested
(which consent may not be unreasonably withheld), Company will not permit any
amendments to its Organic Documents that could adversely affect the rights and
interest of Holders.
6.5. Reincorporation and Qualification. Company will not at any time
reincorporate in any jurisdiction or qualify to do business as a foreign
corporation in any jurisdiction unless (in each such instance) Company shall
have received a favorable opinion of counsel to the effect that such
reincorporation or qualification shall impose no direct or contingent liability
on Holders under the laws of such jurisdiction. A copy of each such opinion
shall be provided to each Holder.
6.6. Existence and Good Standing. Company and each of its Subsidiaries will
preserve and maintain its existence as a organization under the laws of its
jurisdiction of incorporation, its good standing in all jurisdictions where it
conducts business, and the validity of all its authorizations and licenses
required in the conduct of its businesses.
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6.7. Conduct of Business. Without the prior written consent of Holders
representing a majority of Warrant Shares and Warrants then Vested (which
consent may not be unreasonably withheld), Company (i) will continue to engage
in business of the same general type as now conducted by it, and (ii) will
maintain and cause each Subsidiary to maintain, insurance with such financially
sound and reputable insurance companies or associations in such amounts,
covering such risks and providing such deductabilities from coverage as are
usually carried by companies engaged in the same or a similar business and
similarly situated, and (iii) will comply, and cause each Subsidiary to comply,
in all material respects with all applicable material laws, regulations, and
orders, and (iv) will not sell, lease, transfer or otherwise dispose of any
material part or amount of its assets (real or personal) other than in
transactions in the normal and ordinary course of business with unrelated
parties for value received (or as otherwise contemplated by this Agreement).
6.8. Broker and Finder Fees and Commissions. Company agrees that any and
all broker, finder, investment banking, advisory or similar fees and commissions
with respect the issuance and sale of the Warrants or the Warrant Shares or any
other transaction contemplated hereby or thereby will be paid by Company, and
Company will hold Purchaser (and each Holder of Warrants or Warrant Shares)
harmless from any claim, demand or liability for any such fees or commissions
incurred (or alleged to have been incurred) in connection with any such
transaction.
ARTICLE 7: DEFINITIONS
7.1. Definitions. As used herein, the following terms have the following
respective meanings:
7. 1.1. "Affiliate" of any Person means any other Person directly or
indirectly controlling, controlled by or under direct or indirect common control
with such Person. A Person shall be deemed to "control" another Person if such
first Person possesses directly or indirectly the power to direct (or to cause
the direction of or to materially influence) the management and policies of the
second Person, whether through the ownership of voting securities, by contract
or otherwise.
7. 1.2. "Agreement" means this Warrant Agreement, as amended, modified
and supplemented from time to time.
7.1.3. "Business Day" means any day except a Saturday, Sunday or other
day on which commercial banks in Richmond, Virginia are authorized by law to
close.
7.1.4. "Capital Stock" means the Common Stock, and all other classes
of common stock (whether voting or non-voting), and
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all other forms of capital stock or securities of Company (preferred or
otherwise) that have any voting rights.
7.1.5. "Commission" means the Securities and Exchange Commission or
any entity or agency that succeeds to any or all of its functions under the
Securities Act or the Exchange Act.
7.1.6. "Common Stock" means the Class A voting common stock of Company
(which has a par value of $0.01 per share), other than up to 750,000 shares of
Excludible Shares.
7.1.7. "Company" means STARTEC, Inc., a Maryland corporation, and its
successors and permitted assigns.
7.1.8. "Credit Agreement" means the Credit Facility Agreement dated as
of July 1, 1997 by and between Company and Lender, as the same may be amended,
modified or otherwise supplemented from time to time (including, without
limitation, any renewals, refinancings or extensions thereof or increases in the
credit extended thereunder).
7.1.9. "Current Market Price" has the meaning set forth in Section
5.1.
7.1.10. "Disposition" means the sale, transfer or other disposition of
Capital Stock (or securities convertible into, or exchangeable for, Capital
Stock or rights to acquire Capital Stock or such securities) to one or more
Persons through any transaction or series of related transactions (other than as
a result of a Public Offering) if, after such sale, transfer or disposition,
either (a) the Primary Shareholder no longer beneficially own in the aggregate
more than 50% of the Capital Stock and voting rights on a fully-diluted basis
(without giving effect to any Warrant Shares purchased or purchasable) then
outstanding or (b) the Initial Shareholders no longer beneficially own in the
aggregate more than 75% of the Capital Stock and voting rights on a
fully-diluted basis (without giving effect to any Warrant Shares purchased or
purchasable) then outstanding. For purposes of this definition, any transfer of
Capital Stock (or securities convertible into, or exchangeable for, Capital
Stock or rights to acquire Capital Stock or such securities) by a shareholder to
any member of his or her immediately family or to any trust for which he or she
is the trustee shall not constitute a "Disposition" provided that such
shareholder retains control over the voting rights associated with such Capital
Stock.
7.1.11. "Event of Dilution" means any of the events described in
Section 5.1 as to which anti-dilution rights are granted pursuant to Article 5.
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7.1.12. "Exchange Act" means the Securities and Exchange Act of 1934,
as amended, or any similar Federal statute, as implemented by the Commission or
any court of competent jurisdiction.
7.1.13. "Excludible Shares" means the pool of up to 750,000 shares of
Class A voting common stock of Company, with a par value of $0.01 per share,
that Company may issue from time to time as incentive compensation for its
employees and directors, provided such issuances are reasonable in amount and
otherwise in accordance with normal and customary business practices within
Company's industry. Such issuances may be pursuant to option plans that either
have been established as of the effective date hereof or that are established
after the effective date hereof.
7.1.14. "Exercise Period" has the meaning set forth in Section 4.2.
7.1.15. "Exercise Price" has the meaning set forth in Section 4.2.
7.1.16. "FCC" means the Federal Communications Commission or any other
entity or agency that succeeds to its responsibilities and powers.
7.1.17. "Holder" means any owner or holder of any Warrant (and
corresponding Warrant Certificate) or any Warrant Share, and (with respect to
each) any successor, trustee, estate, heir, executor, administrator, or personal
representative thereof.
7.1.18. "Independent Appraiser" means a Person who (a) is with a
nationally recognized investment banking or appraisal firm, and (b) is qualified
in the valuation of businesses, transactions and securities of the general type
being analyzed, and (c) does not have a material direct or material indirect
financial interest in Company or any Holder.
7.1.19. "Initial Public Offering" means the first time (after the
effective date of this Agreement) that Company issues or otherwise offers for
sale any Capital Stock (or securities convertible into, or exchangeable for,
Capital Stock or rights to acquire Capital Stock or such securities) pursuant to
a registration statement filed with the Commission under the Securities Act.
7.1.20. "Initial Shareholders" means, collectively, the holders of
Capital Stock of Company as of the effective date of this Agreement.
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7.1.21. "Lender" means SIGNET BANK, a Virginia-chartered, federally
insured commercial bank, and its successors, assigns and transferees.
7.1.22. "Non-Surviving Combination" means either (a) any merger,
consolidation or other business combination by Company with one or more Persons
in which the other Person effectively is the survivor or (b) any sale or
transfer of all or substantially all of the assets (or the economic benefits
thereof of Company to one or more other Persons through any transaction or
series of related transactions.
7.1.23. "Organic Document" means, relative to any entity, its
certificate and articles of incorporation, organization or formation, its
by-laws or operating agreements, and all equityholder agreements, voting
agreements and similar arrangements applicable to any of its authorized shares
of capital stock, its partnership interests or its equity interests, and any
other arrangements relating to the control or management of any such entity
(whether existing as a corporation, a partnership, an LLC or otherwise).
7.1.24. "Person" means an individual, an association, a partnership, a
corporation, a trust or an unincorporated organization or any other entity or
organization.
7.1.25. "Primary Shareholder" means Ram Mukunda.
7.1.26. "Public Offering" means any issuance or other sale by Company
of any Capital Stock (or securities convertible into, or exchangeable for,
Capital Stock or rights to acquire Capital Stock or such securities) pursuant to
a registration statement filed with the Commission under the Securities Act.
7.1.27. "Purchaser" means Lender, and its successors, assigns and
transferees with respect to the Warrants, corresponding Warrant Certificates
and/or Warrant Shares.
7.1.28. "Purchaser-Affiliated Transferee" means any Affiliate of
Purchaser and/or any current or former director, officer, employee or
successor-in-interest of Purchaser's Media Communications Group.
7.1.29. "Registration Rights" means the rights of the Holders of the
Warrant Certificates to have the Warrant Shares registered for sale under an
effective registration statement under the Securities Act.
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7.1.30. "Repurchase Condition" has the meaning set forth in Section
4.6.
7.1.31. "Repurchase Offer" has the meaning set forth in Section 4.6.
7.1.32. "Repurchase Price" has the meaning set forth in Section 4.6.
7.1.33. "Securities Act" means the Securities Act of 1933, as amended,
or any similar Federal statute, as implemented by the Commission or any court of
competent jurisdiction.
7.1.34. "State Communications Acts" means the laws of any state in
which Company does business that govern the provision of communications services
offered or performed by Company within such state and are applicable to Company,
as amended from time to time, and as implemented by the rules, regulations, and
orders of the applicable State PUC or any court of competent jurisdiction.
7.1.35. "State PUC" means the public utility commission or other
regulatory agency of any state in which Company does business that is vested
with jurisdiction over Company and over State Communications Acts or the
provision of communication services within such state.
7.1.36. "Subsidiary" of any Person means (a) any other Person as to
which the first Person directly or indirectly owns or controls 50% or more of
the equity, voting rights or enterprise value thereof or (b) any other Person
the accounts of which would be consolidated with those of the first Person in
its consolidated or combined financial statements according to generally
accepted accounting principles.
7.1.37. "Surviving Public Combination" means any merger, consolidation
or other business combination by Company with one or more Persons in which
Company is the survivor (or a purchase of assets by Company from one or more
other Persons) if Company is thereafter required to file reports with respect to
any of its Capital Stock with the Commission pursuant to the Exchange Act.
7.1.38. "Target Valuation per Warrant Share" means, as of any relevant
date, an amount equal to the quotient of (a) the product of (1) 15 multiplied by
(2) the monthly gross revenues of Company for the calendar month immediately
preceding the relevant valuation date divided by (b) the aggregate number of
shares of Common Stock then outstanding.
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7.1.39. "Vest" or "Vesting" has the meaning set forth in Section 4.2.
7.1.40. "Warrant Certificate" means a certificate (substantially in
the form of Exhibit C evidencing one or more Warrants.
7.1.41. "Warrant" means the irrevocable and unconditional right
(subject to the terms hereof) to acquire a fully paid and nonassessable Warrant
Share at a purchase price per share equal to the Exercise Price (and any other
right or warrant issued upon any exchange or transfer of any such Warrant or any
adjustment relating thereto).
7.1.42. "Warrant Share" means a share of Common Stock issuable upon
exercise of a Warrant (until such share is registered by Company and sold by the
Holder thereof to a third party in a public transaction).
7.2. General Construction. Unless otherwise expressly stated or the context
clearly indicates a different intention, all references to sections,
subsections, paragraphs, clauses, schedules and exhibits contained in this
Agreement are to be interpreted as references to sections, subsections,
paragraphs, clauses, schedules and exhibits of and to this Agreement. In
addition, the words "herein", "hereof", "hereunder, "hereto" and other words of
similar import refer to this Agreement as a whole), and not to any particular
section, subsection, paragraph or clause contained in this Agreement. Wherever
from the context it appears appropriate, each term stated either in the singular
or plural shall include the singular and the plural, and pronouns stated in the
masculine, feminine or neuter gender shall include the masculine, the feminine
and the neuter.
ARTICLE 8: MISCELLANEOUS
8.1. Compliance with FCC and State PUC Requirements. Company and Purchaser
each hereby acknowledge its intent that this Agreement, the Warrants, the
Warrant Certificates and the Warrant Shares (as well as the exercise of rights
hereunder) each comply with all of the laws, regulations and orders of and/or
administered by the FCC or any State PUC relating to Purchaser's ownership,
exercise and/or other realization of rights in connection herewith. If at any
time the terms and conditions of any such ownership, exercise or other ability
to realize upon rights violates, is in conflict with or requires any consent
under any such legal requirements, then Company and Purchaser (or any subsequent
Holder) will cooperate and negotiate in good faith to amend the underlying
documents (or the relevant rights therein) and/or to file and prosecute (or to
cause others to file and prosecute) applications for any such consent in order
to
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enable Company and Purchaser (or such subsequent Holder) to be in compliance
with such legal requirements.
8.2. Compliance with Purchaser's Regulatory Requirements. Company and
Purchaser each hereby acknowledge its intent that this Agreement, the Warrants,
the Warrant Certificates and the Warrant Shares (as well as the exercise of
rights hereunder) each comply with all of the statutory and regulatory
requirements applicable to Purchaser (or any subsequent Holder) relating to its
ownership, exercise and/or other realization of rights in connection herewith.
If at any time the terms and conditions of any such ownership, exercise or other
ability to realize upon rights violates or is in conflict with any such
regulatory requirements applicable to Purchaser (or such subsequent Holder),
then Company and Purchaser (or such subsequent Holder) will cooperate and
negotiate in good faith to amend the underlying documents (or the relevant
rights therein) in order to enable Purchaser (or such subsequent Holder) to be
in compliance with such statutory and regulatory requirements.
8.3. Binding Effect and Governing Law. This Agreement (and the Warrants,
the Warrant Certificates and other documents in connection herewith) are binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns (to the extent authorized). This Agreement (and the
Warrants, the Warrant Certificates and other documents in connection herewith)
are governed as to their validity, interpretation, construction and effect by
the laws of the Commonwealth of Virginia (without giving effect to the conflicts
of law rules of Virginia) or, to the extent that the particular issue in
controversy involves Company's legal power or authorization in connection
herewith or matters of corporate law, then resolution of such issue shall be
governed by the corporate laws of the State of Maryland.
8.4. Survival. All agreements, representations, warranties and covenants of
Company contained herein or in any documentation required hereunder will survive
the execution and delivery of this Agreement and will continue in full force and
effect so long as this Agreement otherwise remains effective.
8.5. No Waiver: Delay. To be effective, any waiver by Purchaser must be
expressed in a writing executed by Purchaser. If Purchaser waives any power,
right or remedy arising hereunder or under any applicable law, then such waiver
will not be deemed to be a waiver upon the later occurrence or recurrence of any
events giving rise to the earlier waiver. No failure or delay by Purchaser to
insist upon the strict performance of any term, condition, covenant or agreement
hereunder, or to exercise any right, power or remedy hereunder, will constitute
a waiver of compliance with any such term, condition, covenant or agreement, or
preclude Purchaser from exercising any such right, power, or
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remedy at any later time or times. The remedies provided herein are cumulative
and not exclusive of each other and the remedies provided by law.
8.6. Modification. Except as otherwise expressly provided in this
Agreement, no modification or amendment hereof will be effective unless made in
a writing signed by appropriate officers of the parties hereto.
8.7. Headings. The various headings in this Agreement are inserted for
convenience only and shall not affect the meaning or interpretation of this
Agreement or any provision hereof.
8.8. Notices. Unless otherwise provided in this Agreement, any notice,
request, consent, waiver or other communication required or permitted under or
in connection with this Agreement will be deemed satisfactorily given if it is
in writing and is delivered either personally to the addressee thereof, or by
prepaid registered or certified U.S. mail (return receipt requested), or by a
nationally recognized commercial courier service with next-day delivery charges
prepaid, or by telegraph, or by facsimile (voice confirmed), or by any other
reasonable means of personal delivery to the party entitled thereto at its
respective address set forth below:
If to Company [Party Entitled to Notice]
or its Affiliates: c/o STARTEC, Inc.
10411 Motor City Drive
Bethesda, MD 20817
Attention: President
Facsimile: (301) 365-8787
With a copy to the following listed counsel or such other counsel as
may be designated by Company from time to time (and which notice shall
not constitute notice to Company and failure to give such notice shall
not affect the effectiveness of notice to Company):
Shulman, Rogers, Gandal, Pordy & Ecker, P.A.
11921 Rockville Pike, Suite 500
Rockville, MD 20853
Attention: Karl L. Ecker, Esquire
Facsimile: (301) 230-2891
If to Purchaser: Signet Bank
7799 Leesburg Pike, Suite 500
Falls Church, VA 22043
Attention: Vincent P. Griffin, Vice President
Facsimile: (703) 506-9712
38
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With a copy to the following listed counsel or such other counsel as
may be designated by Purchaser from time to time (and which notice
shall not constitute notice to Purchaser and failure to give such
notice shall not affect the effectiveness of notice to Purchaser):
Samuel G. Rubenstein, Esquire
Bryan Cave LLP
700 13th Street, N.W., Suite 700
Washington, D.C. 20005
Facsimile: (202) 508-6200
Any party to this Agreement may change its address or facsimile number for
notice purposes by giving notice thereof to the other in accordance with this
Section, provided that such change shall not be effective until 2 calendar days
after notice of such change. All such notices and other communications will be
deemed given and effective (a) if by mail, then upon actual receipt or 5
calendar days after mailing as provided above (whichever is earlier), or (b) if
by facsimile, then upon successful transmittal to such party's designated
number, or (c) if by telegraph, then upon actual receipt or 2 Business Days
after delivery to the telegraph company (whichever is earlier), or (d) if by
nationally recognized commercial courier service, then upon actual receipt or 2
Business Days after delivery to the courier service (whichever is earlier), or
(e) if otherwise delivered, then upon actual receipt.
8.9. Time of Day. All time of day restrictions imposed herein shall be
calculated using Eastern Time.
8.10. Prior Agreements Superseded. This Agreement completely and fully
supersedes all oral agreements and all other and prior written agreements by and
between Company and Purchaser concerning the terms and conditions of this
Agreement.
8.11. Severability. If fulfillment of any provision of or any transaction
related to this Agreement or the Credit Agreement, the time performance of such
provision or transaction is due shall involve transcending the limit of validity
prescribed by law, then ipso facto, the obligation to be fulfilled shall be
reduced to the limit of such validity. If any clause or provision of this
Agreement operates or would prospectively operate to invalidate this Agreement
in whole or in part, then such clause or provision only shall be void, as though
not contained herein, and the remainder of this Agreement shall remain operative
and in full force and effect.
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8.12. Counterparts. This Agreement may be executed in any number of
counterparts with the same effect as if all the signatures on such counterparts
appeared on one document. Each such counterpart will be deemed to be an original
but all counterparts together will constitute one and the same instrument.
8.13. Waiver of Liability. Company (a) agrees that Purchaser (and its
directors, officers, employees and agents) shall have no liability to Company
(whether sounding in tort, contract or otherwise) for losses or costs suffered
or incurred by Company in connection with or in any way related to the
transactions contemplated or the relationship established by this Agreement, or
any act, omission or event occurring in connection herewith, except for
foreseeable actual losses resulting directly and exclusively from Purchaser's
own willful misconduct or fraud and (b) waives, releases and agrees not to sue
upon any claim against Purchaser (or its directors, officers, employees or
agents) whether sounding in tort, contract or otherwise, except for claims for
foreseeable actual losses resulting directly and exclusively from Purchaser's
own willful misconduct or fraud. Notwithstanding the foregoing, Purchaser (and
its directors, officers, employees and agents) shall have no liability with
respect to (and Company hereby waives, releases and agrees not to sue upon any
claim for) any special, indirect, consequential, punitive or non-foreseeable
damages suffered by Company in connection with or in any way related to the
transactions contemplated or the relationship established by this Agreement, or
any act, omission or event occurring in connection herewith.
8.14. Forum Selection: Consent to Jurisdiction. Any litigation in
connection with or in any way related to this Agreement, or any course of
conduct, course of dealing, statements (whether verbal or written), actions or
inactions of Purchaser or Company will be brought and maintained exclusively in
the courts of the Commonwealth of Virginia or in the United States District
Court for the Eastern District of Virginia; provided, however, that any suit
seeking enforcement against Company may also be brought (at Purchaser's option)
in the courts of any other jurisdiction where the collateral security of Company
committed to Lender pursuant to the Credit Agreement or other property of
Company may be found or where Purchaser may otherwise obtain personal
jurisdiction over Company. Company hereby expressly and irrevocably submits to
the jurisdiction of the courts of the Commonwealth of Virginia and of the United
States District Court for the Eastern District of Virginia for the purpose of
any such litigation as set forth above and irrevocably agrees to be bound by any
final and non-appealable judgment rendered thereby in connection with such
litigation. Company further irrevocably consents to the service of process by
registered or certified mail, postage prepaid, or by personal
40
<PAGE>
service within or outside the Commonwealth of Virginia. Company hereby expressly
and irrevocably waives, to the fullest extent permitted by law, any objection
which it may have or hereafter may have to the laying of venue of any such
litigation brought in any such court referred to above and any claim that any
such litigation has been brought in an inconvenient forum. To the extent that
Company has or hereafter may acquire any immunity from jurisdiction of any court
or from any legal process (whether through service or notice, attachment prior
to judgment, attachment in aid of execution or otherwise) with respect to itself
or its property, then Company hereby irrevocably waives such immunity in respect
of its obligations under this Agreement.
8.15. Waiver of Jury Trial. Purchaser and Company each hereby knowingly,
voluntarily and intentionally waives any rights it may have to a trial by jury
in respect of any litigation (whether as claim, counter-claim, affirmative
defense or otherwise) in connection with or in any way related to this
Agreement, or any course of conduct, course of dealing, statements (whether
verbal or written), actions or inactions of Purchaser or Company. Company
acknowledges and agrees (a) that it has received full and sufficient
consideration for this provision, and (b) that it has been advised by legal
counsel in connection herewith, and (c) that this provision is a material
inducement for Purchaser entering into this Agreement.
[BALANCE OF PAGE INTENTIONALLY BLANK]
41
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed,
as an instrument under seal (whether or not any such seals are physically
attached hereto) as of the date and year first above written.
ATTEST: STARTEC, INC. (Company)
By: /s/ Prabhav V. Maniyar By: /s/ Ram Mukunda
----------------------------- ---------------------------
Name: Prabhav V. Maniyar Name:Ram Mukunda
Title: Secretary Title: President
[CORPORATE SEAL] Address: 10411 Motor City
Drive
Bethesda, MD 20817
Facsimile: (301) 365-8787
WITNESS: SIGNET BANK (Purchaser)
/s/ By: /s/ Vincent P. Griffin
--------------------------
Vincent P. Griffin, President
Address: 7799 Leesburg Pike
Suite 500
Falls Church, VA 22043
Facsimile: (703) 506-9712
42
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EXHIBIT A Articles of Incorporation
43
<PAGE>
EXHIBIT B -- Authorizing Resolutions
44
<PAGE>
EXHIBIT C -- Form of Warrant Certificate
45
<PAGE>
EXHIBIT D -- Restrictive Legends
FORM OF RESTRICTIVE LEGENDS FOR WARRANT CERTIFICATES
"The Warrants evidenced by this certificate have not been registered under the
Securities Act of 1933 or the securities laws of any state. Such Warrants may
not be sold, transferred, pledged or hypothecated in the absence of an effective
registration statement for such Warrants under the Securities Act of 1933 and
applicable state securities laws or an opinion of counsel satisfactory to
STARTEC, Inc. prior to the proposed transaction that such registration is not
required. "
FORM OF RESTRICTIVE LEGEND FOR WARRANT SHARES
"The shares evidenced by this certificate have been issued upon the exercise of
warrants issued pursuant to a Warrant Agreement dated as of June , 1997 (the
"Warrant Agreement") and have not been registered under the Securities Act of
1933 or the securities laws of any state. Such shares may not be sold,
transferred, pledged or hypothecated in the absence of an effective registration
statement for such shares under the Securities Act of 1933 and applicable state
securities laws or an opinion of counsel satisfactory to STARTEC, Inc. prior to
the proposed transaction that such registration is not required.
46
STARTEC GLOBAL COMMUNICATIONS CORPORATION
UNDERWRITERS' WARRANT AGREEMENT
UNDERWRITERS' WARRANT AGREEMENT dated as of ___________, 1996 by and
between STARTEC GLOBAL COMMUNICATIONS CORPORATION, a Maryland Corporation (the
"Company"), and FERRIS, BAKER WATTS INCORPORATED ("FERRIS") and BOENNING &
SCATTERGOOD, INC. ("BOENNING") (Ferris and Boenning sometimes being referred to
collectively herein as the "Underwriters").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue warrants to the Underwriters
(the Warrants") to purchase up to 150,000 shares of common stock, par value
$0.01 per share, of the Company (the "Stock"), of which 110,000 Warrants are to
be issued to Ferris and the remaining 40,000 Warrants are to be issued to
Boenning; and
WHEREAS, the Underwriters have agreed, pursuant to an underwriting
agreement (the "Underwriting Agreement") dated _________, 1997, to which the
Underwriters and the Company are parties, to act as the co-lead underwriters in
connection with the Company's public offering of up to 1,900,000 shares of its
Stock at a public offering price of $_____ per share (the "Public Offering");
and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Underwriters in the amounts set forth in the
first recital above written, in consideration for, and as part of their
compensation in connection with acting as underwriters pursuant to the
Underwriting Agreement;
NOW, THEREFORE, in consideration of the foregoing promises, which are
incorporated into the terms hereof, of the payment by Ferris and Boenning to the
Company of $110.00 and $40.00, respectively for the Warrants purchased to be
purchased thereby hereunder, the agreements herein set forth and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. GRANT. The holders of the Warrants issued hereunder are hereby
granted the right to purchase, at any time from _______________, 1998 (the first
anniversary of the effective date of the Company's Registration Statement
relating to the Public Offering (the "Effective Date")) until 5:00 p.m.,
Washington, DC time, on _________, 2003 (the sixth anniversary of the Effective
Date), up to an aggregate of 150,000 shares of the Stock of the Company, at an
initial exercise price (subject to
<PAGE>
adjustment as provided in Section 8 hereof) of $____ per Share (110% of the
initial public offering price per share in the Public Offering), subject to the
terms and conditions of this Agreement. The shares issuable upon exercise of the
Warrants are referred to herein as the "Warrant Shares".
2. WARRANT CERTIFICATES. The warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A, attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. EXERCISE OF WARRANTS. The Warrants are exercisable during the
term set forth in Section 1 hereof at the Exercise Price (defined below) per
Share set forth in Section 6 hereof, payable by certified or cashier's check or
money order payable in lawful money of the United States, subject to adjustment
as provided in Article 8 hereof; provided, however, that if the fair market
value of one Stock is greater than the Exercise Price (at the date of
calculation as set forth below), in lieu of exercising this Warrant for cash,
the Holder may elect to receive shares equal to the value (as determined below)
of this Warrant (or the portion thereof being canceled) by surrender of the
Warrant Certificate at the principal office of the Company together with the
properly endorsed Notice of Exercise in the form attached as Exhibit A, in which
event the Company shall issue to the Holder a number of Warrant Shares computed
using the following formula:
Where: X = the number of Warrant Shares to be issued to the Holder;
Y = the number of shares of Common Stock purchasable pursuant to
the Warrant Certificate surrendered, or, if only a portion of
the Warrant represented by such Warrant Certificate is being
exercised, the portion of the Warrant being canceled (at the
date of such calculation);
A = the fair market value of one share of the Company's Stock
(at the date of such calculation); and
B = Exercise Price (as adjusted to the date of such calculation).
For purposes of the above calculation, fair market value of one share of Stock
shall be determined by the Company's Board of Directors in good faith; provided,
however, that where there exists a public market for the Stock at the time of
such exercise, the fair market value per share shall be equal to the average of
the closing bid and asked prices of the Stock quoted in the Over-The-Counter
Market Summary or the last reported sale price of the Stock or the closing price
quoted on the Nasdaq National Market or on any exchange on which the Stock is
listed, whichever is applicable, as published in The Wall
2
<PAGE>
Street Journal for the five (5) trading days prior to the date of determination
of fair market value. Notwithstanding the foregoing, in the event the Warrant is
exercised in connection with a pubic offering by the Company (including, without
limitation, the Public Offering), the fair market value per share shall be equal
to the per share offering price to the public of the Stock in such public
offering.. Upon surrender of a Warrant Certificate with the annexed Form of
Election to Purchase duly executed, together with payment of the Exercise Price
(as hereinafter defined) for the Warrant Shares (and such other amounts, if any,
arising pursuant to Section 4 hereof) at the Company's principal office, the
registered holder of a Warrant Certificate (each, a "Holder" and, collectively,
the "Holders") shall be entitled to receive a certificate or certificates for
the Warrant Shares so purchased. (References herein to a "Holder" or "Holders of
Warrant Shares shall mean the registered holder or holders thereof). The
purchase rights represented by each Warrant Certificate are exercisable, at the
option of the Holder thereof, in whole or in part, (but not as to fractional
Warrant Shares). The Warrants may be exercised to purchase all or part of the
Warrant Shares represented thereby. In the case of the purchase of less than all
the Warrant Shares purchasable on the exercise of the Warrants represented by a
Warrant Certificate, the Company shall cancel the Warrant Certificate
represented thereby upon the surrender thereof and shall execute and deliver a
new Warrant Certificate of like tenor for the balance of the Warrant Shares
purchasable thereunder.
4. ISSUANCE OF CERTIFICATES. Upon the exercise of the Warrants
and payment of the Exercise Price therefor, the issuance of certificates for the
Warrant Shares underlying such Warrants shall be made forthwith (and, in any
event, within three (3) business days thereafter) without further charge to the
Holder thereof, and such certificates shall (subject to the provisions of
Sections 5 and 7 hereof) be issued in the name of, or in such names as may be
directed by, the Holder effecting such exercise; provided, however, that the
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance and delivery of any such certificates in a
name other than that of such Holder, and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid. The Warrant Certificates and the certificates representing
the Warrant Shares shall be executed on behalf of the Company by the persons and
in the manner prescribed by the Bylaws of the Company and by applicable law.
Warrant Certificates shall be dated the date of execution by the Company upon
initial issuance, division, exchange, substitution or transfer.
5. RESTRICTIONS ON TRANSFER OF WARRANTS. The Holder of a Warrant
Certificate (and its Permitted Transferee, as defined below), by its acceptance
thereof, covenants and agrees that the Warrants are being acquired as an
investment and not with a view to the distribution thereof; that the Warrants
may be sold, transferred, assigned,
3
<PAGE>
hypothecated or otherwise disposed of, in whole or in part, to any person (a
"Permitted Transferee"), provided such transfer, assignment, hypothecation or
other deposition is made in accordance with the provisions of the Securities Act
of 1933, as amended (the "1933 Act"); and provided, further, that until
__________, 1998 (one year after the Effective Date) only officers of the
Underwriters, or any selling group member or its officers or partners, shall be
Permitted Transferees.
6. EXERCISE PRICE
a. INITIAL AND ADJUSTED EXERCISE PRICE. Except as otherwise
provided in Section 8 hereof, the initial exercise price of each Warrant to
purchase Warrant Shares shall be $____ per Share. The adjusted exercise price
shall be the price which shall result from time to time from any and all
adjustments of the initial exercise price in accordance with the provisions of
Section 8 hereof.
b. EXERCISE PRICE. The term "Exercise Price" herein shall
mean the initial exercise price or the adjusted exercise price, depending upon
the context.
7. REGISTRATION RIGHTS.
a. WARRANT LEGEND. The Warrant Certificates shall bear the
following legends:
THE SECURITIES ISSUABLE UPON EXERCISE OF THE WARRANT
REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO (I) AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933
ACT"), (II) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH
ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE
DISPOSITION OF SECURITIES), OR (III) AN OPINION OF
COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY
TO COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
OFFERED FOR SALE OR SOLD EXCEPT PURSUANT TO (I) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT, OR
(II) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE
REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH 1933 ACT IS
AVAILABLE.
4
<PAGE>
THE TRANSFER OR EXCHANGE OF THE WARRANT REPRESENTED BY
THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE
WARRANT AGREEMENT REFERRED TO HEREIN.
b. DEMAND REGISTRATION. On any one (1) occasion commencing at any
time one (1) year after the Effective Date and expiring six (6) years after the
Effective Date, the Holders of the Warrants and the Warrant Shares representing
at least a Majority (as hereinafter defined) of such securities shall have the
right, exercisable by written notice to the Company, to have the Company prepare
and file with the Securities and Exchange Commission (the "Commission") a
registration statement on Form S-1, SB-2 (or other appropriate form, including,
without limitation, a post-effective amendment to the Company's Registration
Statement) and such other documents, including a prospectus, as may be necessary
in the opinion of both counsel for the Company and counsel for the Holders, in
order to comply with the provisions of the 1933 Act, so as to permit a public
offering and sale, for a period of not less than twelve (12) months, of the
Warrants and the Warrant Shares by such Holders, and any other Holders of the
Warrants and/or Warrant Shares who shall notify the Company within thirty (30)
business days after receipt of the notice described in the succeeding sentence.
The Company covenants and agrees to give written notice of any registration
request under this Section 7(b) by any Holder(s) of Warrants or Warrants Shares
to all other Holders of the Warrants and the Warrant Shares within ten (10)
calendar days from the date of the receipt of any such registration request. For
purposes of this Agreement, the term "Majority" in reference to the Holders of
the Warrants and/or Warrant Shares, shall mean the Holders of Warrant Shares and
Warrants representing, in the aggregate, in excess of fifty percent (50%) of the
then outstanding Warrant Shares and Warrant into which then-outstanding Warrants
are then exercisable excluding all Warrant Shares and Warrants that (i) are held
by the Company, an affiliate, officer, director, employee or agent thereof or
any of their respective affiliates, members of their family, persons acting as
nominees or in conjunction therewith, or (ii) have been resold to the public
pursuant to a registration statement filed with the Commission under the 1933
Act. The Holders of Warrants may demand registration without exercising the
Warrants, and shall never be required to exercise same. For the purposes of
subsection (i) above, the Underwriters and their respective officers, directors,
employees and agents shall not be deemed to be affiliates, officers, directors,
employees or agents of the Company.
c. PIGGYBACK REGISTRATION. If, at any time within eight (8) years
after the Effective Date, the Company should file a registration statement with
the Commission under the 1933 Act (other than in connection with a merger or
pursuant to Form S-8) it will give written notice by registered mail, at least
forty-five (45) calendar days prior to the filing of each such registration
statement, to each of the Underwriters (if then a Holder) and to all other
Holders of the Warrants and/or the Warrant Shares of its
5
<PAGE>
intention to do so. If the Underwriters or other Holders of the Warrants and/or
the Warrant Shares notify the Company within thirty (30) calendar days after
receipt of any such notice of its or their desire to include any Warrants or
Warrant Shares in such proposed registration statement, the Company shall afford
such Underwriters and Holders of the Warrants and/or Warrant Shares the
opportunity to have any such Warrants or Warrant Shares registered under such
registration statement. Notwithstanding the provisions of this Section 7(c), the
Company shall have the right at any time after it shall have given written
notice pursuant to this Section 7(c) (irrespective of whether a written request
for inclusion of any such securities shall have been made) to elect not to file
any such proposed registration statement, or to withdraw the same after the
filing but prior to the effective date thereof.
If the underwriter of an offering to which the above piggyback rights
apply objects to such rights, such objection shall preclude such inclusion.
However, in such event, the Company will, within six (6) months of completion of
such subsequent underwriting, file at its sole expense, a registration statement
relating to such excluded Warrants and/or Warrant Shares, which shall be in
addition to any registration statement required to be filed pursuant to Section
7(b), unless such Holders had refused an opportunity provided with the consent
of the underwriter, to be included in the registration statement on the
condition that they agree not to offer the securities for sale (without the
prior written consent of the underwriter) for a period not exceeding (60)
calendar days from the effective date of such registration statement.
If the underwriter in such underwritten offering shall advise the Company
that it declines to include a portion or all of the Warrants or Warrant Shares
requested by the Underwriters and the Holders to be included in the registration
statement, then (i) registration of all of the Warrant Shares shall be excluded
from such registration statement on the condition that all securities to be
registered by other selling security holders, if any, are also excluded and (ii)
registration of a portion of such Warrants and Warrant Shares allocated among
the Underwriters and the Holders and any other selling securityholders in
proportion to the respective numbers of securities to be registered by the
Underwriters and each such Holder and other selling securityholder (provided
that, for purposes of such allocation, Warrants shall be treated as representing
the number of Warrant Shares then represented thereby). In such event the
Company shall give the Underwriters and the Holders prompt notice of the number
of Warrants and Warrant Shares excluded.
d. COVENANTS OF THE COMPANY IN RESPECT OF REGISTRATION.
In connection with any registrations under Sections 7(b) and 7(c) hereof, the
Company covenants and agrees as follows:
(1) The Company shall use its best efforts to file a registration
statement within sixty (60) calendar days of receipt of any
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<PAGE>
demand therefor; provided, however, that the Company shall not
be required to produce audited or unaudited financial
statements for any period prior to the date such financial
statements are required to be filed in a report on Form 10-K
or Form 10-Q (or Form 10-KSB or Form 10-QSB), as the case may
be. The Company shall use its best efforts to have any
registration statement declared effective at the earliest
possible time, and shall furnish each Holder desiring to sell
Shares such number of prospectuses as shall reasonably be
requested.
(2) The Company shall pay all costs (excluding any underwriting
discounts or commissions), fees and expenses in connection
with any registration statement filed pursuant to Sections
7(b) or 7(c) hereof including, without limitation, the actual
and reasonable costs and expenses of one firm serving as legal
counsel to the Holders, the Company's legal and accounting
fees, printing expenses, and any blue sky fees and expenses.
If the Company shall fail to comply with the provisions of
Section 7(d)(1), the Company shall, in addition to any other
equitable or other relief available to the Holder(s), be
liable for any or all incidental, special and consequential
damages and damages due to loss of profit sustained by the
Holder(s) requesting registration of their Warrant Shares.
(3) The Company will take all necessary and reasonable steps which
may be required to qualify or register the Warrants and
Warrant Shares included in a registration statement for
offering and sale under the securities or blue sky laws of
such states as reasonably are requested by the Holder(s),
provided that the Company shall not be obligated to execute or
file any general consent to service of process or to qualify
as a foreign corporation to do business under the laws of any
such jurisdiction.
(4) The Company shall indemnify the Holder(s) of the Warrants and
Warrant Shares to be sold pursuant to any registration
statement, each, director, officer, partner, employee and
agent of each such Holder and each person, if any, who
controls such Holder within the meaning of Section 15 of the
1933 Act or Section 20(a) of the Securities Exchange Act of
1934, as amended (the
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<PAGE>
"Exchange Act"), against all losses, claims, damages, expenses
or liability (including, without limitation, all expenses
reasonably incurred in investigating, preparing or defending
against any claim whatsoever) to which any of them may become
subject under the 1933 Act, the Exchange Act or otherwise,
arising from such registration statement, but only to the same
extent and with the same effect as the provisions pursuant to
which the Company has agreed to indemnify the Underwriters
contained in Section 9 of the Underwriting Agreement.
(5) The Holder(s) of the Warrants and/or Warrant Shares to be sold
pursuant to a registration statement, and their successors and
assigns, shall severally, and not jointly, indemnify the
Company, its officers and directors and each persons, if any,
who controls the Company within the meaning of Section 15 of
the 1933 Act or Section 20(a) of the Exchange Act, against all
losses, claims, damages, expenses or liability (including all
expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which they may
become subject under the 1933 Act, the Exchange Act or
otherwise, arising from information furnished by or on behalf
of such Holders, or their successors or assigns, for specific
inclusion in such registration statement to the same extent
and with the same effect as the provisions contained in
Section 9 of the Underwriting Agreement pursuant to which the
Underwriters have agreed to indemnify the Company.
(6) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Warrants prior to
the initial filing of any registration statement or the
effectiveness thereof.
(7) If the manner of distribution proposed by the holders of the
Warrants and the Warrant Shares is an underwriting, the
Company shall furnish to each Holder participating in the
offering and to each underwriter of such offering, a signed
counterpart, addressed to such Holder or underwriter of (i) an
opinion of counsel to the Company, dated the effective date of
such registration statement (and, if such registration
includes an underwritten public offering, an
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<PAGE>
opinion dated the date of the closing under the underwriting
agreement), and (ii) a "cold comfort" letter dated the
effective date of such registration statement (and, if such
registration includes an underwritten public offering, a
letter dated the date of the closing under the underwriting
agreement) signed by the independent public accountants who
have issued a report (or reports) on the Company's financial
statements included in such registration statements, in each
case covering substantially the same matters with respect to
such registration statement (and the prospectus included
therein) and, in the case of such accountants' letter, with
respect to events subsequent to the date of such financial
statements, as are customarily covered in opinions of issuer's
counsel and in accountants' letter, with respect to events
subsequent to the date of such financial statements, as are
customarily covered in opinions of issuer's counsel in
accountants' letters delivered to underwriters in underwritten
public offerings of securities.
(8) The Company shall as soon as practicable after the effective
date of the registration statement, and in any event within
the first full four fiscal quarters following the effective
date, make "generally available to its security holders"
(within the meaning of Rule 158 under the 1933 Act) an
earnings statement (which need not be audited) complying with
Section 11(a) of the 1933 Act.
(9) The Company shall deliver promptly to one designated
representative for each Holder participating in the offering
requesting the correspondence described below and any managing
underwriter, copies of all correspondence between the
Commission and the Company, its counsel or auditors with
respect to the registration statement and permit each Holder
and underwriter to do such investigation, upon reasonable
advance notice, with respect to information contained in or
omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules
of the National Association of Securities Dealers, Inc. (the
"NASD"). Such investigation shall include access to books,
records and properties and opportunities to discuss the
business of the Company with its officers and independent
auditors, all
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<PAGE>
to such reasonable extent and at such reasonable times and as
often as any such Holder shall reasonably request.
(10) In connection with an offering for which the Holders have
demand rights, the Company shall enter into an underwriting
agreement with the managing underwriter selected for such
underwriting by Holders holding a Majority of the Warrants and
Warrant Shares requested to be included in such underwriting.
In connection with an offering for which the Holders have
piggyback rights, the Company shall have the sole right to
select the managing underwriter. Such underwriting agreement
shall be satisfactory in form and substance to the Company, a
Majority of such Holders and such managing underwriter, and
shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily
contained in agreements of that type used by the managing
underwriter. The Holders shall be parties to any underwriting
agreement relating to an underwritten sale of their Warrants
and/or Warrant Shares and may, at their option, require that
any or all the representations, warranties and covenants of
the Company to or for the benefit of such underwriter shall
also be made to and for the benefit of such Holders. Such
Holders shall not be required to make any representations or
warranties to or agreements with the Company or the
underwriter except as they may relate to such Holders, their
ownership of Warrants or Warrant Shares subject to
registration, and their intended methods of distribution.
8. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES.
a. ADJUSTMENT OF EXERCISE PRICE. Except as hereinafter
provided, in the event the Company shall, at any time or from time to time after
the date hereof, issue any shares of Stock as a stock dividend to the holders of
Stock, or subdivide or combine the outstanding shares of Stock into a greater or
lesser number of shares (any such issuance, subdivision or combination being
herein called a "Change of Shares"), then, and thereafter upon each Change of
Shares, the Exercise Price for the Warrants (whether or not the same shall be
issued and outstanding) in effect immediately prior to such Change of Shares
shall be changed to a price (including any applicable fraction of a cent to the
nearest cent) determined by dividing (i) the sum of (a) the total number of
shares of Stock outstanding immediately prior to such Change of Shares,
multiplied by the Exercise Price in effect immediately prior to such Change of
Shares, and (b) the
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<PAGE>
consideration, if any, received by the Company upon such issuance, subdivision
or combination by (ii) the total number of shares of Stock outstanding
immediately after such Change of Shares; provided, however, that in no event
shall the Exercise Price be adjusted pursuant to this computation to an amount
in excess of the Exercise Price in effect immediately prior to such computation,
except in the case of a combination of outstanding shares of Stock.
For the purposes of any adjustment to be made in accordance with this
Section 8(a) the following provisions shall be applicable:
(1) Shares or equivalents of Stock issuable by way of
dividend or other distribution on any stock of the
Company shall be deemed to have been issued immediately
after the opening of business on the day following the
record date for the determination of stockholders
entitled to receive such dividend or other distribution
and shall be deemed to have been issued without
consideration.
(2) The reclassification of securities of the Company other
than shares of Stock into securities including shares of
Stock shall be deemed to involve the issuance of such
shares of Stock for a consideration other than cash
immediately prior to the close of business on the date
fixed for the determination of security holders entitled
to receive such shares, and the value of the
consideration allocable to such shares of Stock shall be
determined in good faith by the Board of Directors of
the Company on the basis of a record of values of
similar property or services.
(3) The number of shares of Stock at any one time
outstanding shall be deemed to include the aggregate
maximum number of shares issuable (subject to
readjustment upon the actual issuance thereof) upon the
exercise of options, rights or warrants and upon the
conversion or exchange of convertible or exchangeable
securities.
b. ADJUSTMENT OF NUMBER OF WARRANTS. Upon each adjustment
of the Exercise Price pursuant to Section 8.a. above, the number of shares of
Stock purchasable upon the exercise of each Warrant shall be the number derived
by multiplying the number of shares of Stock purchasable immediately prior to
such adjustment by the Exercise Price in effect prior to such adjustment and
dividing the product so obtained by the applicable adjusted Exercise Price.
11
<PAGE>
c. ACTION UPON RECLASSIFICATION, MERGER, ETC. The Company
will not merge, reorganize or take any other action which would terminate the
Warrants without first making adequate provision for the Warrants as provided
for herein. In case of any reclassification or change of the outstanding shares
of Stock (other than a change in par value to no par value, or from nor par
value to par value, or as a result of a subdivision or combination), or in case
of any consolidation of the Company with, or merger of the Company with, or
merger of the Company into, another corporation (other than a consolidation or
merger in which the Company is the continuing corporation and which does not
result in any reclassification or change of the outstanding Stock except a
change as a result of a subdivision or combination of such shares or a change in
par value, as aforesaid), or in the case of a sale or conveyance to another
corporation or other entity of the property of the Company as an entirety, the
Holder of each Warrant then outstanding or to be outstanding shall have the
right thereafter (until the expiration of such Warrant) to purchase, upon
exercise of such Warrant, the kind and number of shares of stock and other
securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance as if the Holder were the owner of the
shares of Stock underlying such Warrants immediately prior to any such events at
a price equal to the product of (x) the number of shares issuable upon exercise
of the Warrants and (y) the Exercise Prices in effect immediately prior to the
record date for such reclassification, change, consolidation, merger, sale or
conveyance, as if such Holder has exercised the Warrants. In the event of a
consolidation, merger, sale or conveyance of property, the corporation formed by
such consolidation or merger, or acquiring such property, shall execute and
deliver to the Holders a supplemental warrant agreement to such effect. Such
supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustment to those provided in Section 8. The provisions of
this Section 8.c. shall similarly apply to successive reclassifications,
changes, consolidations, mergers, sales or conveyances.
d. EFFECT OF ADJUSTMENTS ON WARRANT CERTIFICATES. Irrespec-
tive of any adjustments or changes in the Exercise Price or the number of shares
of Stock purchasable upon exercise of the Warrants, the Warrant Certificates
theretofore and thereafter issued shall, unless the Company shall exercise its
option to issue new Warrant Certificates, continue to express the Exercise Price
per share and the number of shares purchasable thereunder as the Exercise Price
per share and the number of shares purchasable thereunder were expressed in the
Warrant Certificates when the same were originally issued.
e. NOTIFICATION TO HOLDERS. After each adjustment of the
Exercise Price pursuant to this Section 8, the Company will promptly prepare a
certificate signed by the Chairman or President, and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company
setting forth: (i) the Exercise Price as so adjusted; (ii) the number of shares
of Stock purchasable upon exercise of each Warrant, after such adjustment; and
(iii) a brief statement of the facts accounting for such
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<PAGE>
adjustment. The Company will promptly cause a copy of such certificate to be
sent by first class mail to each Holder at his last address as it shall appear
on the registry books of the Company. No failure to mail such notice nor any
defect therein or in the mailing thereof shall affect the validity thereof
except as to the Holder to whom the Company failed to mail such notice, or
except as to the Holder whose notice was defective. The affidavit of the
Secretary or an Assistant Secretary of the Company that such notice has been
mailed shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
f. EVENTS NOT TRIGGERING ADJUSTMENT. No adjustment of the
Exercise Price shall be made upon the issuance or sale of: (i) the Warrants or
the Warrant Shares; (ii) the shares of Stock pursuant to the Public Offering; or
(iii) the shares of Stock issuable upon the exercise of the options or warrants
outstanding or shares reserved for issuance pursuant to stock option plans in
effect on the date hereof as described in the prospectus relating to the Public
Offering. In addition, no adjustment of the Exercise Price shall be made if the
amount of said adjustments shall be less than five cents ($.05) per Warrant
Share, provided, however, that in such case any adjustment that would otherwise
be required then to be made shall be carried forward and shall be made at the
time of and together with the next subsequent adjustment which, together with
any adjustment so carried forward, shall amount to at least five cents ($.05)
per Warrant Share.
g. SECURITIES INCLUDED IN THE DEFINITION OF "STOCK". For the
purpose of this Agreement, the term "Stock" shall mean (i) the class of stock
designated as Common Stock in the Charter of the Company as it may be amended as
of the date hereof, or (ii) any other class of stock resulting from successive
changes or reclassification of such Stock consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value. In
the event that the Company shall, after the date hereof issue securities with
greater or superior voting rights than those of the shares of Stock outstanding
as of the date hereof, each Holder, at its option, may receive upon exercise of
any Warrant either shares of Stock or a like number of such securities with
greater or superior voting rights.
h. NONCASH DIVIDENDS AND OTHER DISTRIBUTIONS. In the event
that the Company shall at any time prior to the exercise or expiration of all
the Warrants declare a dividend (other than a dividend consisting solely of
shares of Stock) or otherwise distribute to its stockholders any assets,
property, rights, evidences of indebtedness, securities (other than shares of
Stock), whether issued by the Company or by another, or any other thing of
value, the Holders of the unexercised Warrants shall thereafter be entitled, in
addition to the shares of Stock or other securities and property receivable upon
the exercise thereof, to receive, upon the exercise of such Warrants, the same
property, assets, rights, evidences of indebtedness, securities or any other
thing of value that they would have been entitled to receive at the time of such
dividend or distribution as if the Warrants had been exercised immediately prior
to such dividend or
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<PAGE>
distribution. At the time of any such dividend or distribution, the Company
shall make appropriate reserves to ensure the timely performance of the
provisions of this Section 8h.
i. SUBSCRIPTION RIGHTS FOR SHARES OF STOCK AND OTHER
SECURITIES. In the event that the Company or an affiliate of the Company shall
at any time after the date hereof and prior to the exercise or expiration of all
the Warrants issue any rights to subscribe for shares of Stock or any other
securities of the Company or of such affiliate to all the stockholders of the
Company, the Holders of the unexercised Warrants shall be entitled to receive,
in addition to the Warrant Shares receivable upon the exercise of the Warrants,
such rights at the time such rights are distributed to the other stockholders of
the Company.
9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES. Each Warrant
Certificate is exchangeable, without expense, upon the surrender thereof by the
Holder at the principal executive office of the Company, for a new Warrant
Certificate of like tenor and date representing in the aggregate the right to
purchase the same number of Warrant Shares in such denominations as shall be
designated by the Holder thereof at the time of such surrender. Upon receipt by
the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of any Warrant Certificate, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it,
and reimbursement to the Company of all reasonable expenses incidental thereto,
and upon surrender and cancellation of the Warrants, if mutilated, the Company
will make and deliver a new Warrant Certificate of like tenor, in lieu thereof.
10. ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be
required to issue certificates representing fractions of Warrant Shares upon the
exercise of the Warrants, nor shall it be required to issue scrip or pay cash in
lieu of fractional interests; provided, however, that if a Holder exercises all
Warrants held of record by such Holder the fractional interests shall be
eliminated by rounding any fraction up to the nearest whole number of Shares.
11. RESERVATION AND LISTING OF SECURITIES. The Company shall at
all times reserve and keep available out of its authorized shares of Stock,
solely for the purpose of issuance upon the exercise of the Warrants, such
number of shares of Stock as shall be issuable as Warrant Shares upon the
exercise on conversion thereof. The Company covenants and agrees that, upon
exercise of the Warrants and payment of the Exercise Price therefor, all the
Warrant Shares issuable upon such exercise shall be duly and validly issued,
fully paid, nonassessable and not subject to the preemptive rights of any
stockholder. As long as the Warrants shall be outstanding, the Company shall use
its best efforts to cause the Stock to be listed and quoted (subject to official
notice of issuance) on all securities exchanges on which the Stock issued to the
public in connection herewith may then be listed or quoted.
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<PAGE>
12. LIMITATIONS ON RIGHTS OF, AND CERTAIN NOTICES TO WARRANT
HOLDERS. Nothing contained in this Agreement shall be construed as conferring
upon the Holders of Warrants, prior to the exercise thereof, the right to
receive cash dividends to vote or to consent or to receive notice as a
stockholder in respect of any meetings of stockholders for the election of
directors or any other matter, or as having any rights whatsoever as a
stockholder of the Company. If, however, at any time prior to the expiration of
the Warrants or their earlier exercise, any of the following events shall occur:
(1) the Company shall take a record of the holders of
its shares of Stock for the purpose of entitling them to
receive a dividend or distribution payable otherwise
than in cash, or a cash dividend or distribution payable
otherwise than out of current or retained earnings, as
indicated by the accounting treatment of such dividend
or distribution on the books of the Company; or
(2) the Company shall offer to all the holders of its Stock
any additional shares of capital stock of the Company or
securities convertible into or exchangeable for shares
of Stock or such other capital stock of the Company, or
any option, right or warrant to subscribe therefor; or
(3) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or
merger) or a sale of all or substantially all of its
property, assets and business as an entirety shall be
proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least thirty (30) calendar days prior to the date fixed as a
record date or the date of closing the transfer books for the determination of
the stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend, or the issuance of any convertible or exchangeable securities, or
subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding up or sale.
13. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
duly made when (i) personally delivered, (ii) three (3) business days after
having been
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<PAGE>
properly addressed, enclosed in a properly sealed envelope or wrapper and sent
postage-paid by first class mail, (iii) transmitted by facsimile transmission,
if acknowledged by such facsimile equipment as received, or (iv) one (1)
business day after being sent, at the expense of the sender, by Federal Express,
Airborne, U.S. Express Mail or similar overnight carrier (i) if to the Holder of
the Warrants, to the address of such Holder as shown on the books of the Company
or (ii) if to the Company, at its principal office or to such other address as
the Company may designate by notice to the Holders.
14. SUPPLEMENTS AND AMENDMENTS. The Company and the Underwriters
may, from time to time, supplement or amend this Agreement without the approval
of any Holders of Warrants (other than the Underwriters) in order to cure any
ambiguity, to correct or supplement any provision contained herein which may be
defective or inconsistent with any provisions herein, or to make any other
provisions in regard to matters or questions arising hereunder which the Company
and the Underwriters may deem necessary or desirable and which the Company and
the Underwriters deem shall not adversely affect the interests of the Holders of
Warrants.
15. SUCCESSORS. All the covenants and provisions of this Agree-
ment shall be binding upon and inure to the benefit of the Company, the
Underwriters, the Holders and their respective successors and assigns hereunder.
16. TERMINATION. This Agreement shall terminate at the close of
business on __________, 2006 (the eighth anniversary of the Effective Date).
Notwithstanding the foregoing, the registration provisions and indemnification
provisions of Section 7 shall survive such termination until the close of
business on the later of the expiration of any applicable statue of limitations
or ________, 2008.
17. GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement and
each Warrant Certificate issued hereunder shall be deemed to be a contract made
under the laws of the State of Maryland and for all purposes shall be construed
in accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws. The Company, each of the
Underwriters and each and any Holders each hereby agrees that any action,
proceeding or claim against it arising out of, or relating in any way to, this
Agreement, the Warrants or the Warrant Certificates shall be brought and
enforced in the courts of the State of Maryland or of the United States of
America for the District of Maryland, and irrevocably submits to such
jurisdiction, which jurisdiction shall be exclusive. The Company, each of the
Underwriters and each and any Holders each hereby irrevocably waives any
objection to such exclusive jurisdiction or inconvenient forum. Any such process
or summons to be served upon any of the Company, the Underwriters and the
Holders (at the option of the party bringing such action, proceeding or claim)
may be served by transmitting a copy thereof, by registered or certified mail,
return receipt requested, postage prepaid, addressed to it at the address set
forth in Section 13 hereof. Such mailing shall be
16
<PAGE>
deemed personal service and shall be legal and binding upon the party so served
in any action, proceeding or claim.
18. ENTIRE AGREEMENT; Modification. This Agreement (including the
Underwriting Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof. Subject to Section 14, this Agreement may not be modified
except upon the express agreement of the Company and a Majority of the of the
Warrants and the Warrant Shares.
19. SEVERABILITY. If any provision of this Agreement shall be
held to be invalid or unenforceable, such invalidity or unenforceability shall
not affect any other provision of this Agreement.
20. CAPTIONS. The caption headings of the Sections of this Agree-
ment are for convenience of reference only and are not intended, nor should they
be construed as, a part of this Agreement and shall be given no substantive
effect.
21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give to any person or corporation, other than the Company and the
Underwriters and any other Holder(s) of the Warrants or Warrant Shares, any
legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and the
Underwriters and any other Holder(s) of the Warrants or Warrant Shares.
22. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of such counterparts shall for all purposes be deemed to be
an original, and all such counterparts together shall together constitute but
one and the same instrument.
23. BINDING EFFECT. This Agreement shall be binding upon and inure
to the benefit of the Company, each of the Underwriters and their successors and
assigns and the Holders from time to time of the Warrant(s) or any of them.
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
STARTEC GLOBAL COMMUNICATIONS
CORPORATION
By:----------------------------------------
Print Name:--------------------------------
Title:-------------------------------------
FERRIS, BAKER WATTS, INCORPORATED
By-----------------------------------------
Print Name:--------------------------------
Title:-------------------------------------
BOENNING & SCATTERGOOD, INC.
By:----------------------------------------
Print Name:--------------------------------
Title:-------------------------------------
18
<PAGE>
EXHIBIT A
STARTEC GLOBAL COMMUNICATIONS CORPORATION
WARRANT CERTIFICATE
THE SECURITIES ISSUABLE UPON EXERCISE OF THE WARRANT REPRESENTED BY THIS
CERTIFICATE MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (I) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933
ACT"), (II) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (III) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL
FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE OR
SOLD EXCEPT PURSUANT TO (I) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933
ACT, OR (II) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY
SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER
SUCH 1933 ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANT REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE COMMENCING ________, 1998 THROUGH 5:00 P.M., WASHINGTON, DC TIME
________, 2003
NO. WC- ___ --------- WARRANTS
This Warrant Certificate certifies that ______________
_______________ or registered assigns, is the registered holder of _________
warrants (the "Warrants") to purchase initially, at any time from _______, 1998,
until 5:00 p.m., Washington, DC time on _______, 2003 (the "Expiration Date"),
up to _____________ fully paid and non-assessable shares (the "Shares"), of the
Common Stock, par value $0.01 per share (the "Stock"), of STARTEC Global
Communications Corporation, a Maryland corporation
19
<PAGE>
(the "Company") at the exercise price of $____ per Share (the "Exercise Price"),
upon the surrender of this Warrant Certificate and payment of the Exercise Price
at an office or agency of the Company, but subject to the conditions set forth
herein and in the warrant agreement dated as of ____________________, 1997 (the
"Warrant Agreement") by and between the Company and Ferris, Baker Watts,
Incorporated and Boenning & Scattergood, Inc. Payment of the Exercise Price
shall be made as provided in Section 3 of the Warrant Agreement.
No Warrant may be exercised after 5:00 P.M, Washington, DC time, on
the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange as provided herein,
without any charge except for any tax or other governmental charge imposed in
connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
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<PAGE>
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
IN WITNESS WHEREOF, the undersigned has executed this certificate this __th
day of _______, 1997.
STARTEC GLOBAL COMMUNICATIONS CORPORATION
By:----------------------------------------
Print Name:--------------------------------
Title:-------------------------------------
[SEAL]
ATTEST:
By:----------------------------
21
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
Warrant Certificate.)
FOR VALUE RECEIVED ___________________________________ hereby sells, assigns and
transfers unto __________________________________ (Please print name and address
of transferee) this Warrant Certificate, together with all right, title and
interest therein, and does hereby irrevocably constitute and appoint
____________________________________ Attorney, to transfer the within Warrant
Certificate on the books of STARTEC Global Communications Corporation, with full
power of substitution.
Dated: Signature:
- ---------------------------- ----------------------------------------
(Signature must conform in all respects
to the name of holder as specified on
the face of the Warrant Certificate.)
----------------------------------------
(Insert Social Security or Other
Indemnifying Number of Holder)
22
<PAGE>
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
_______ Shares
and herewith tenders in payment for such securities the amount of $____________,
in accordance with the terms of this Warrant Certificate and of the Warrant
Agreement. The undersigned requests that a certificate for such securities be
registered in the name of _______________________________________, whose address
is ____________________________________________________________________________,
and that such Certificate be delivered to _____________________________________,
whose address is _______________________________________________________________
____________________________________________.
Dated: Signature:
- ------------------------- ----------------------------------------
(Signature must conform in all respects
to the name of holder as specified on
the face of the Warrant Certificate.)
----------------------------------------
(Insert Social Security or Other
Indemnifying Number of Holder)
23
CREDIT FACILITY AGREEMENT
BY AND BETWEEN
S T A R T E C, I N C.
AND
SIGNET BANK
Executed as of July 1, 1997
<PAGE>
TABLE OF CONTENTS
ARTICLE 1: THE CREDIT FACILITIES . . . . . . . . . . . . . . .
1.1. Line of Credit Facility . . . . . . . . . . . . . . .
1.1.1. Establishment of Credit Facility . . . . . . . . . .
1.1.2. Facility Maturity . . . . . . . . . . . . . . . . . .
1.1.3. Use of Proceeds . . . . . . . . . . . . . . . . . . .
1.1.4. Line of Credit Note . . . . . . . . . . . . . . . . .
1.1.5. Interest . . . . . . . . . . . . . . . . . . . . . .
1.1.5.1. Establishment of Portions . . . . . . . . .
1.1.5.2. Interest Rate Determination . . . . . . . .
1.1.5.3. Selection of Rate Index . . . . . . . . . .
1.1.5.4. Applicable Rate Margins . . . . . . . . . .
1.1.5.5. Calculation of Interest . . . . . . . . . .
1.1.5.6. Special LIBO Rate Provisions . . . . . . . .
1.1.6. Repayment and Prepayment . . . . . . . . . . . . . .
1.1.6.1. Periodic Interest Payments . . . . . . . . .
1.1.6.2. Principal Payments -- Commitment
Reduction . . . . . . . . . . . . . . . . . .
1.1.6.3. Principal Payments -- Periodic Sweep of Excess
Cash Flow
1.1.6.4. At Maturity or Termination . . . . . . . . .
1.1.6.5. Prepayments . . . . . . . . . . . . . . . .
1.1.6.6. Principal Repayment -- Automatic . . . . . .
1.1.6.7. Default Interest Payment . . . . . . . . . .
1.1.6.8. Application of Payments . . . . . . . . . .
1.1.6.9. Availability For Reborrowing . . . . . . . .
1.2. Term Loan Facility . . . . . . . . . . . . . . . . . .
1.3. Determination of Commitment Amounts . . . . . . . . .
1.3.1. Initial Commitment . . . . . . . . . . . . . .
1.3.2. Determination of Borrowing Base . . . . . . .
1.3.3. Voluntary Reduction of Commitment . . . . . . .
1.4. Advances . . . . . . . . . . . . . . . . . . . . . .
1.4.1. Requesting Advances . . . . . . . . . . . . .
1.4.2. Funding Advances . . . . . . . . . . . . . . .
1.4.3. Automatic Line of Credit Advances . . . . . .
1.4.4. Obligation to Advance . . . . . . . . . . . . .
1.4.5. Indemnification for Revocation or Failure
to Satisfy Conditions . . . . . . . . . . . . .
1.5. Payments in General . . . . . . . . . . . . . . . . .
1.5.1. Manner and Place . . . . . . . . . . . . . . .
1.5.2. Special Payment Timing Issues . . . . . . . . .
1.5.3. Application of Payments . . . . . . . . . . .
1.5.4. Debiting Accounts . . . . . . . . . . . . . .
1.5.5. Default Interest . . . . . . . . . . . . . . .
1.5.6. Usury Savings Provision . . . . . . . . . . .
1.6. Release of Security . . . . . . . . . . . . . . . . .
1.7. Fees and Other Compensation . . . . . . . . . . . . .
1.7.1. Commitment Fee . . . . . . . . . . . . . . . .
1.7.2. Periodic Facility Fee . . . . . . . . . . . .
1.7.3. Issuance of Warrants . . . . . . . . . . . . .
1.7.4. Other Fees . . . . . . . . . . . . . . . . . .
1.8. Issuance of Letters of Credit. . . . . . . . . . . .
ARTICLE 2: CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . .
2.1. Closing Conditions . . . . . . . . . . . . . . . . .
2.1.1. Compliance . . . . . . . . . . . . . . . .
2.1.1.1. Fees and Expenses . . . . . . .
2.1.1.2. Representations . . . . . . . .
2.1.1.3. No Default . . . . . . . . . .
2.1.2. Documents . . . . . . . . . . . . . . . . .
2.1.2.1 Credit Agreement . . . . . . .
2.1.2.2 Promissory Note . . . . . . . .
2.1.2.3. Scurity Agreement and Related
Documents . . . . . . . . . . .
2.1.2.4. Intellectual Property Security
Agreements . . . . . . . . . . .
2.1.2.5. Estoppels and Consent Agreements
2.1.2.6. Owners' Pledge and Security
Agreement . . . . . . . . . . .
2.1.2 7. Warrants . . . . . . . . . . .
2.1.2.8. Insurance . . . . . . . . . . .
2.1.2.9. Solvency Certificates . . . . .
2.1.2.10. Compliance Certificates . . . .
2.1.2.11. Opinions of Counsel . . . . . .
2.1.2.12 Payoff Instructions for Prior
Indebtedness . . . . . . . . . .
2.1.2.13. Authorization Documents --
Borrower . . . . . . . . . . .
2.1.2.14. Authorization Documents -- Other
Than Borrower . . . . . . . . .
2.1.2.15. Officer's Certificates . . . .
2.1.2.16. Other Documents . . . . . . . .
2.2. Line of Credit Advances . . . . . . . . . . . . . . .
2.2.1. Advance Request . . . . . . . . . . . . . .
2.2.2. Cash Flow Leverage . . . . . . . . . . . .
2.2.3. Other Documents . . . . . . . . . . . . . .
2.2.4. Compliance . . . . . . . . . . . . . . . .
2.2.4.1. Fees and Expenses . . . . . . .
2.2.4.2. Representations . . . . . . . .
2.2.4.3. No Default . . . . . . . . . .
ARTICLE 3: REPRESENTATIONS AND WARRANTIES . . . . . . . . . . .
3.1. Organization and Good Standing . . . . . . . . . . .
3.2. Power and Authority . . . . . . . . . . . . . . . . .
3.3. Validity and Legal Effect . . . . . . . . . . . . . .
3.4. No Violation of Laws or Agreements . . . . . . . . .
3.5. Title to Assets; Existing Encumbrances;
Intellectual and Real Property . . . . . . . . . . .
3.6. Capital Structure and Equity Ownership . . . . . . .
3.7. Subsidiaries, Affiliates and Investments . . . . . . .
3.8. Material Contracts . . . . . . . . . . . . . . . . .
3.9. Licenses and Authorizations . . . . . . . . . . . . .
3.10. Taxes and Assessments . . . . . . . . . . . . . . . .
3.11. Litigation and Legal Proceedings . . . . . . . . . . .
3.12. Accuracy of Financial Information . . . . . . . . . .
3.13. Accuracy of Other Information . . . . . . . . . . . .
3.14. Compliance with Laws Generally . . . . . . . . . . .
3.15. ERISA Compliance . . . . . . . . . . . . . . . . . .
3.16. Environmental Compliance . . . . . . . . . . . . . .
3.17. Margin Rule Compliance . . . . . . . . . . . . . . .
3.18. Fees and Commissions . . . . . . . . . . . . . . . .
3.19. Solvency . . . . . . . . . . . . . . . . . . . . . .
3.20. FCC and State PUC-Related Representations . . . . . .
3.20.1. No Unresolved Application, Complaint
or Proceeding . . . . . . . . . . . . . . .
3.20.2. Status and Renewal of Licenses . . . . . .
ARTICLE 4: AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . .
4.1. Financial Covenants and Ratios . . . . . . . . . . .
4.1.1. Monthly Net Revenue to Senior Funded Debt .
4.1.2. Minimum Subscribers. . . . . . . . . . . .
4.1.3. Interest Coverage Ratio . . . . . . . . . .
4.1.4. Cash Flow Leverage Ratio . . . . . . . . . .
4.2. Periodic Financial Statements . . . . . . . . . . . .
4.2.1. Monthly Reporting . . . . . . . . . . . . .
4.2.2. Quarterly Financial Statements . . . . . . .
4.2.3. Annual Financial Statements . . . . . . . .
4.3. Other Financial and Specialized Reports . . . . . . .
4.4 Fiscal Year . . . . . . . . . . . . . . . . . . . . .
4.5. Books and Records; Maintenance of Properties . . . .
4.6. Existence and Good Standing . . . . . . . . . . . . .
4.7. Deposit Accounts . . . . . . . . . . . . . . . . . .
4.8. Insurance; Disaster Contingency . . . . . . . . . . .
4.8.1. General Insurance Provisions . . . . . . .
4.8.2. Disaster Recovery and Contingency Program .
4.9. Loan Purpose . . . . . . . . . . . . . . . . . . . .
4.10. Taxes . . . . . . . . . . . . . . . . . . . . . . . .
4.11. Management Changes . . . . . . . . . . . . . . . . .
4.12. Litigation and Administrative Proceedings . . . . . .
4.13. Monitoring Compliance with Loan Documents; Occurrence
of Defaults and Material Adverse Effects . . . . . .
4.14. Compliance with Laws . . . . . . . . . . . . . . . .
4.14.1. General . . . . . . . . . . . . . . . . . .
4.14.2. ERISA . . . . . . . . . . . . . . . . . . .
4.14.3. Environmental . . . . . . . . . . . . . . .
4.14.4. Communications . . . . . . . . . . . . . .
4.15. Further Actions . . . . . . . . . . . . . . . . . . .
4.15.1. Additional Collateral . . . . . . . . . . .
4.15.2. Further Assurances . . . . . . . . . . . .
4.15.3. Estoppel Certificate . . . . . . . . . . .
4.15.4. Waivers and Consents . . . . . . . . . . .
4.15.5. Additional Material Contracts, Licenses
Land Authorizations . . . . . . . . . . . .
4.15.6. Access and Audits . . . . . . . . . . . . .
4.16. Costs and Expenses . . . . . . . . . . . . . . . . .
4.17. Other Information . . . . . . . . . . . . . . . . . .
4.18. Payment by Account Debtors . . . . . . . . . . . . . .
4.19. FCC and State PUC-Related Affirmative Covenants . . .
4.19.1. Service Interruption 30
4.19.2. FCC and State PUC Correspondence, Orders and
Filings . . . . . . . . . . . . . . . . . . .
4.20. Post-Closing Items . . . . . . . . . . . . . . . . .
4.20.1. Restructuring of Borrower and Release of
Equity Pledge . . . . . . . . . . . . . . .
4.20.2. Foreign Qualifications . . . . . . . . . .
4.20.3. State PUC Authorizations and Approvals . .
4.20.4. Primary Estoppels and Consents . . . . . .
4.20.5. Secondary Estoppels and Consents . . . . .
4.20.6. Payoff Letters and Termination Statements. .
ARTICLE 5: NEGATIVE COVENANTS . . . . . . . . . . . . . . . . .
5.1. Capital Expenditures . . . . . . . . . . . . . . . .
5.2. Additional Indebtedness . . . . . . . . . . . . . . .
5.3. Guaranties . . . . . . . . . . . . . . . . . . . . . .
5.4. Loans . . . . . . . . . . . . . . . . . . . . . . . .
5.5. Liens and Encumbrances; Negative Pledge . . . . . . .
5.6. Transfer of Assets . . . . . . . . . . . . . . . . .
5.7. Acquisitions and Investments . . . . . . . . . . . .
5.8. New Ventures; Mergers . . . . . . . . . . . . . . . .
5.9. Transactions with Affiliates . . . . . . . . . . . .
5.10. Distributions or Dividends . . . . . . . . . . . . .
5.11. Payment of Subordinated Indebtedness . . . . . . . .
5.12. Payment of Management Fees . . . . . . . . . . . . .
5.13. Issuance of Additional Equity . . . . . . . . . . . .
5.14. Removal of Assets . . . . . . . . . . . . . . . . . .
5.15. Modifications to Organic Documents . . . . . . . . .
5.16. Modifications to Material Relationships . . . . . . .
5.17. Margin Stock Restrictions; Other Federal Statutes . .
ARTICLE 6: ADDITIONAL COLLATERAL AND RIGHT OF SET OFF . . . . .
6.1. Additional Collateral . . . . . . . . . . . . . . . .
6.2. Right of Set-Off . . . . . . . . . . . . . . . . . .
6.3. Additional Rights . . . . . . . . . . . . . . . . . .
ARTICLE 7: DEFAULT AND REMEDIES . . . . . . . . . . . . . . . .
7.1. Events of Default . . . . . . . . . . . . . . . . . .
7.1.1. Payment Obligations . . . . . . . . . . . .
7.1.2. Representations and Warranties . . . . . .
7.1.3. Financial Covenants . . . . . . . . . . . .
7.1.4. Other Covenants in Loan Documents . . . . .
7.1.5. Default Under Other Agreements with Lender .
7.1.6. Default Under Material Agreements with Other
Parties. . . . . . . . . . . . . . . . . . .
7.1.7. Security Interest . . . . . . . . . . . . .
7.1.8. Change of Control . . . . . . . . . . . . .
7.1.9. Government Action . . . . . . . . . . . . .
7.1.10. Insolvency . . . . . . . . . . . . . . . .
7.1.11. Additional Liabilities . . . . . . . . . .
7.1.12. Business Interruption . . . . . . . . . . .
7.1.13. FCC and Other Regulatory-Action Defaults .
7.1.14. Material Adverse Change . . . . . . . . . .
7.2. Remedies . . . . . . . . . . . . . . . . . . . . . .
7.2.1. General; Acceleration . . . . . . . . . . .
7.2.2. Other . . . . . . . . . . . . . . . . . . .
7.2.3. Special FCC and State PUC-Related Remedies
ARTICLE 8: DEFINITIONS . . . . . . . . . . . . . . . . . . . .
8.1. Definitions . . . . . . . . . . . . . . . . . . . . .
8.2. Rules of Interpretation and Construction . . . . . .
8.2.1. Plural; Gender . . . . . . . . . . . . . .
8.2.2. Financial and Accounting Terms . . . . . .
8.2.3. Independence of Covenants and Defaults . .
ARTICLE 9: Miscellaneous . . . . . . . . . . . . . . . . . . .
9.1. Indemnification, Reliance and Assumption of Risk
Provisions . . . . . . . . . . . . . . . . . . . . .
9.2. Assignments and Participations . . . . . . . . . . .
9.3. No Waiver; Delay . . . . . . . . . . . . . . . . . .
9.4. Modification and Amendment . . . . . . . . . . . . .
9.5. Disclosure of Information to Third Parties . . . . .
9.6. Binding Effect and Governing Law . . . . . . . . . .
9.7. Notices . . . . . . . . . . . . . . . . . . . . . . .
9.8. Headings . . . . . . . . . . . . . . . . . . . . . . .
9.9. Time of Day . . . . . . . . . . . . . . . . . . . . .
9.10. Relationship with Prior Agreements . . . . . . . . .
9.11. Severability . . . . . . . . . . . . . . . . . . . .
9.12. Termination and Survival . . . . . . . . . . . . . .
9.13. Reinstatement . . . . . . . . . . . . . . . . . . . .
9.14. Counterparts . . . . . . . . . . . . . . . . . . . .
9.15. Conflict Provision . . . . . . . . . . . . . . . . .
9.16 Waiver of Suretyship Defenses . . . . . . . . . . . .
9.17. Waiver of Liability . . . . . . . . . . . . . . . . .
9.18. Forum Selection; Consent to Jurisdiction . . . . . .
9.19. Waiver of Jury Trial . . . . . . . . . . . . . . . .
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SCHEDULES AND EXHIBITS:
Schedules:
Schedule 1.1.3 Indebtedness Satisfied with Proceeds
Schedule 1.4.2 Funding Instructions
Schedule 3.1 Good Standing / Foreign Qualification
Jurisdictions
Schedule 3.2 Missing Consents
Schedule 3.4 Existing Violations
Schedule 3.5 Existing Encumbrances
Schedule 3.5A Intellectual Property
Schedule 3.5B Real Property Interests
Schedule 3.5C Operating Names / Trade Names
Schedule 3.6 Capital Structure / Equity Ownership
Schedule 3.7 Subsidiaries, Affiliates & Investments
Schedule 3.8 Material Contracts
Schedule 3.9 Licenses and Authorizations
Schedule 3.10 Taxes and Assessments
Schedule 3.11 Material Litigation
Schedule 3.18 Fees and Commissions
Schedule 3.20 Pending FCC Matters
Schedule 4.7 Existing Deposit Accounts
Schedule 5.2 Permitted Additional Indebtedness
Schedule 5.5 Permitted Additional Liens
Exhibits:
Exhibit 1.4.1 Form of Advance Request
Exhibit 4.2 Form of Periodic Compliance Certificate
Exhibit 4.2.1(a) Form of Monthly Financial Statements
Exhibit 4.2.1(b) Form of Monthly Borrowing Base Certificate
Exhibit 4.2.3 Form of Debt Compliance Letter
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CREDIT FACILITY AGREEMENT
THE CREDIT FACILITY AGREEMENT (as defined in Article 8 hereof, along
with all other defined terms, this "Agreement") is made and effective as of July
1, 1997, by and between STARTEC, INC. (as more fully defined in Article 8
hereof, "Borrower") and SIGNET BANK (as more fully defined in Article 8 hereof,
"Lender").
R E C I T A L S
WHEREAS, Borrower desires and has applied to Lender for a credit
facility consisting of a line of credit arrangement pursuant to which up to $15
million (subject to adjustment pursuant to Section 1.3 hereof) can be borrowed
from time to time on a senior secured basis; and
WHEREAS, Lender is willing to accommodate the request for credit upon
and subject to the terms, conditions and provisions of the Loan Documents;
NOW, THEREFORE, in consideration of the covenants and agreements
contained in the Loan Documents, and other good and valuable consideration,
receipt and sufficiency of which are hereby acknowledged, and intending to be
legally bound hereby, Borrower and Lender hereby agree as follows:
ARTICLE 1: THE CREDIT FACILlTIES
1.1. Line of Credit Facility.
1.1.1. Establishment of Credit Facility. Subject to the terms and
conditions of and in reliance upon the representations and warranties contained
in the Loan Documents, Lender will lend funds to Borrower on a senior secured
basis from time to time prior to the Line of Credit Maturity Date (as determined
in accordance with Section 1.1.2 hereof) in an aggregate amount at any time
outstanding not to exceed the Available Credit Portion (as determined in
accordance with Section 1.3 hereof).
1.1.2. Facility Maturity. The Line of Credit Facility will mature
on December 31, 1999 (as may be extended from time to time in Lender's sole and
absolute discretion, "Line of Credit Maturity Date").
1.1.3. Use of Proceeds. The funds advanced under this Line of
Credit Facility may be used exclusively as follows:
a. For general working capital and other allowable and
legitimate corporate expenditures (including, without
limitation, for costs associated with (i) marketing to and
retaining of new customers, and (ii) the growth of accounts
receivable, and (iii) the expansion of domestic switch
capacity, overseas gateways, and fiber lines, and (iv) the
support of monthly accounts payable for line charges); and
b. To satisfy the subordinated indebtedness owed by Borrower to
the various Persons listed on Schedule 1.1.3 hereto; and
c. To renew, continue, restructure and refinance the $500,000
(plus accrued interest) of indebtedness owed by Borrower to
Lender under the Business Loan Agreement dated as of June
11, 1997, and
d. The balance of the Available Credit Portion (if any) to pay
(i) for closing costs and fees associated with consummating
and documenting the transactions contemplated by this
Agreement, and (ii) for such other purposes as specifically
authorized hereunder or in writing by Lender (in its sole
and
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<PAGE>
absolute discretion).
1.1.4. Line of Credit Note. The indebtedness under the Line of
Credit Facility and the corresponding obligation of Borrower to repay Lender
with interest in accordance with the terms hereof will be evidenced by an
Amended and Restated Line of Credit Note (as amended, restated, replaced,
supplemented, extended or renewed hereafter, "Line of Credit Note") payable to
the order of Lender. The Line of Credit Note will be due and payable in full on
the Line of Credit Maturity Date. The stated principal amount of the Line of
Credit Note will be the Line of Credit Commitment established as of the Closing
Date pursuant to Section 1.3 hereof; provided, however, that the maximum
liability under such Line of Credit Note will be limited at all times to the
actual amount of indebtedness (including principal, interest, fees and expenses)
then outstanding under the Line of Credit Facility. Lender is authorized to note
or endorse the date and amount of each Advance and payment under the Line of
Credit Facility on a schedule annexed to and constituting a part of the Line of
Credit Note. Such notations or endorsements, if made, will constitute prima
facie evidence of the information noted or endorsed on such schedule, but the
absence of any such notation or endorsement will not limit or otherwise affect
the obligations and liabilities of Borrower thereunder or hereunder.
1.1.5. Interest. Interest under the Line of Credit Facility (and
with respect to any other amounts advanced to or on behalf of Borrower under the
Loan Documents) will be determined and imposed in accordance with the following
provisions (and, as applicable, Section 1.5.5 hereof and Section 1.5.6 hereof):
1.1.5.1. Establishment of Portions. For
purposes of determining interest, Borrower may designate and subdivide the
aggregate outstanding balance under the Line of Credit Facility (including any
other amounts advanced to or on behalf of Borrower under the Loan Documents)
into a maximum of three (3) Portions. No Portion may be less than $100,000
(unless it is designated as $0.00 or the aggregate outstanding balance under the
Line of Credit Facility is less than $100,000 or such Portion is accruing
interest based upon the Prime Rate), and all Portions collectively must total
the aggregate outstanding balance under the Line of Credit Facility. If there is
less than $200,000 outstanding under the Line of Credit Facility, then only one
Portion will be permitted.
1.1.5.2. Interest Rate Determination. The aggregate
outstanding principal balance under each Portion will bear interest (computed
daily until paid, whether prior to
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<PAGE>
or after the Line of Credit Maturity Date) at the applicable Rate Index (as
determined in accordance with Section 1.1.5.3 hereof) plus the applicable Rate
Margin (as determined in accordance with Section 1.1.5.4 hereof). If the Prime
Rate is the applicable Rate Index for a Portion, then the interest rate on such
Portion will change when and as the Prime Rate or Rate Margin changes; and if an
Adjusted LIBO Rate is the applicable Rate Index for a Portion, then the interest
rate on such Portion will be established on the first day of each Interest
Period for such Portion and will not change during such Interest Period, except
as otherwise permitted under Section 1.1.5.6 hereof. Notwithstanding the
foregoing, the applicable interest rate for the entire outstanding balance under
the Line of Credit Facility from the Closing Date until the first date on which
the Rate Index may be changed under Section 1.1.5.3 hereof will be 9.8086%
(i.e., the Adjusted LIBO Rate applicable for a 3-month period as of the Closing
Date plus Rate Margin of 4% per annum).
1.1.5.3. Selection of Rate Index. The applicable Rate
Index for each Portion will be either the Prime Rate or an Adjusted LIBO Rate.
The applicable Rate Index for each Portion may be changed (at the election of
Borrower) as of the first calendar day after the end of the applicable Interest
Period for such Portion. At least three (3) Business Days but not more than ten
(10) Business Days before any day on which the Rate Index may be changed,
Borrower (through an Authorized Officer) must notify Lender in writing of (a)
the dollar amount of each Portion (if more than one exists) and (b) the selected
Rate Index for each Portion during the subsequent rate period (including, if
applicable, the selected length of the Interest Period for balances accruing
interest at the Adjusted LIBO Rate). If Lender does not timely receive such
written notification as to any Portion, then the Prime Rate will be the
applicable Rate Index for the entire outstanding balance of such unspecified
Portion during the subsequent Interest Period. Notwithstanding the foregoing,
with respect to the proceeds of each Advance under the Line of Credit Facility,
unless Borrower otherwise requests the Adjusted LIBO Rate at the time of such
Advance (and an otherwise unallocated Portion then exists), then the Prime Rate
will be the applicable Rate Index from the corresponding Settlement Date for
such Advance until the next date on which the Rate Index may be changed
hereunder.
1.1.5.4. Applicable Rate Margins. The Rate Margin
applicable to the Line of Credit Facility will be 4.0% for each Portion accruing
interest at the Adjusted LIBO Rate and 2.0% for each Portion accruing interest
at the Prime Rate.
1.1.5.5. Calculation of Interest. Interest under the Line
of Credit Facility will be calculated,
6
<PAGE>
accrued, imposed and payable on the basis of a 360-day year for the actual
number of days elapsed. Interest will begin to accrue on the outstanding
principal amount of the Line of Credit Facility (and on any other amounts
advanced to or on behalf of Borrower under the Loan Documents) on and as of the
date such funds are advanced.
1.1.5.6. Special LIBO Rate Provisions. The following
provisions will apply with respect to the Adjusted LIBO Rate, notwithstanding
any other provision hereof:
a. Change in Adjusted LIBO Rate. The Adjusted
LIBO Rate may be automatically adjusted by Lender from time to time on a
prospective basis to account for any additional or increased cost of maintaining
any necessary reserves for Eurodollar deposits (including, without limitation,
any increase in the Reserve Percentage) or increased costs due to changes in the
applicable law occurring subsequent to the commencement of the then-applicable
Adjusted LIBO Rate Interest Period. Lender will give Borrower notice of any such
determination and adjustment within a reasonable period of time thereafter, and
(upon written request) Lender will furnish a statement setting forth the basis
for adjusting such Adjusted LIBO Rate and the method for determining the amount
of such adjustment. A determination by Lender hereunder will be conclusive
absent manifest error. If Lender provides any such notice of adjustment under
this Subsection, then Borrower may elect to change the then-applicable Rate
Index (using the same Rate Margin category) to the Prime Rate for any Portion
then subject to an Adjusted LIBO Rate. Such election to change the Rate Index
may be made by providing Lender written notice thereof at any time within the
first 10 Business Days after receipt of the notice of adjustment from Lender
(notwithstanding the restriction hereunder limiting such Rate Index changes to
certain dates, but subject to the requirement to pay actual costs incurred by
Lender as described in Section 1.1.6.5.e hereof). Upon Lender's receipt of such
a written election, the identified Portion will thereupon begin to accrue
interest at the Prime Rate plus the Rate Margin (as applicable for the same
Leverage Ratio level as was previously applicable for the Adjusted LIBO Rate)
for the remainder of the then-current Interest Period for such Portion.
b. Unavailability of Eurodollar Funds. An
Adjusted LIBO Rate will not be available for the Line of Credit Facility if
Lender at any time determines or reasonably believes that (1) Eurodollar
deposits equal to the amount of principal under the Line of Credit Facility for
the applicable Interest Period are unavailable, or (2) an Adjusted LIBO Rate
will not adequately and fairly reflect the cost of
7
<PAGE>
maintaining balances under the Line of Credit Facility, or (3) by reason of
circumstances affecting Eurodollar markets, adequate and reasonable means do not
then exist for ascertaining an Adjusted LIBO Rate. Lender will give Borrower
notice of any such event within a reasonable time thereafter, and (upon written
request) Lender will furnish a statement setting forth the basis for such
determination or reasonable belief. A determination or belief by Lender
hereunder will be conclusive absent manifest error.
c. Illegality. An Adjusted LIBO Rate will
also not be available for the Line of Credit Facility if Lender at any time
determines or reasonably believes that it is unlawful or impossible to fund or
maintain sufficient Eurodollar liabilities for the Line of Credit Facility under
an Adjusted LIBO Rate. Lender will give Borrower notice of any such event within
a reasonable time thereafter, and (upon written request) Lender will furnish a
statement setting forth the basis for such determination or reasonable belief. A
determination or belief by Lender hereunder will be conclusive absent manifest
error.
d. Alternative Rate. During the occurrence of
an event contemplated by either Clause "b" of this Subsection or Clause "c" of
this Subsection, Lender's obligation hereunder to fund or maintain balances
under an Adjusted LIBO Rate will be suspended, and during such period, the
outstanding balance under the Line of Credit Facility will bear interest at the
Prime Rate plus the appropriate Rate Margin (determined in accordance with
Section 1.1.5.4 hereof).
1.1.6. Repayment and Prepayment. Borrower hereby promises to pay
Lender the aggregate indebtedness under the Line of Credit Facility (and other
Loan Documents) in accordance with the following provisions:
1.1.6.1. Periodic Interest Payments. Interest accrued
under the Line of Credit Facility will be due and payable quarterly in arrears
on the first calendar day following the end of each such quarter and also on the
first calendar day following the end of each Interest Period for any Portion
accruing interest at an Adjusted LIBO Rate, commencing on the first such date
after the Closing Date.
1.1.6.2. Principal Payments -- Commitment Reduction.
Intentionally Blank.
1.1.6.3. Principal Payments -- Periodic Sweep of Excess
Cash Flow. Intentionally Blank
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1.1.6.4. At Maturity or Termination. The entire aggregate
outstanding indebtedness under the Line of Credit Facility (including principal,
interest, fees and expenses) is due and payable in its entirety in immediately
available funds on the Line of Credit Maturity Date. Notwithstanding the
foregoing, the entire aggregate outstanding indebtedness under the Line of
Credit Facility (including all principal, interest, fees and expenses) will be
due and payable in its entirety in immediately available funds upon any earlier
termination of either the Line of Credit Commitment, the Line of Credit Facility
or this Agreement.
1.1.6.5. Prepayments.
a. Voluntary Prepayments. The outstanding
principal balance under the Line of Credit Facility may be prepaid in whole or
in part at any time without premium or penalty, except as provided in Clause "e"
of this Subsection.
b. Mandatory Prepayments -- Excessive
Balance. If the aggregate outstanding indebtedness under the Line of Credit
Facility at any time exceeds the Available Credit Portion (as determined in
accordance with Section 1.3 hereof), then such excess amount outstanding must be
prepaid immediately (without necessity of notice or demand by Lender). If any
funds are advanced or costs are incurred by Lender on behalf of Borrower (as
protective advances or otherwise) pursuant to any Loan Documents, other than
Advances pursuant to Section 1.4 hereof, then such advances or costs must also
be repaid to Lender immediately (without necessity of notice or demand).
c. Mandatory Prepayments -- Asset Sales. If
Borrower sells, transfers or otherwise disposes of any assets (other than
inventory or other assets sold in the ordinary course of business with the
proceeds thereof promptly reinvested in similar assets at similar locations)
exceeding an aggregate fair market value of $150,000 in any twelve (12)
consecutive calendar months, then (unless Lender otherwise consents, which
consent may not be unreasonably withheld while no Default is occurring) a
prepayment must be immediately made on the outstanding indebtedness under the
Line of Credit Facility. The amount of any such mandatory prepayment will be the
higher of the cash proceeds or the cash equivalent of the fair market value of
any such asset dispositions net of (1) reasonable commissions and expenses
actually incurred to unrelated third parties in connection with such
transactions and (2) taxes actually due as a direct result of such transactions
(as such taxes are estimated and certified to Lender by an acceptable certified
public
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accountant or the chief financial officer).
d. In General. Any prepayment under the Line
of Credit Facility must include all accrued but unpaid interest under the Line
of Credit Facility allocable to the amount prepaid through the date of such
prepayment.
e. Adjusted LIBO Rate Prepayments. In
connection with any prepayment of all or any portion of the outstanding balance
under the Line of Credit Facility upon which an Adjusted LIBO Rate is then
applicable on any day other than the last day of an Interest Period -- whether
such prepayment is voluntary, mandatory, by demand, acceleration or otherwise --
Borrower must pay Lender all costs, losses and expenses (including funding
costs) that may arise or be incurred as a result of or in connection with such
prepayment, as such costs, losses and expenses may be calculated by Lender. Upon
written request, Lender will furnish a statement setting forth the basis for
such calculation. A determination or calculation by Lender hereunder will be
conclusive absent manifest error.
1.1.6.6. Principal Repayment -- Automatic. Notwithstanding
the foregoing, if Cash Management Agreements have been executed and are at the
time effective, then principal amounts outstanding from time to time under the
Line of Credit Facility will also be repaid from time to time in accordance with
such Cash Management Agreements.
1.1.6.7. Default Interest Payment. Any payment hereunder
or under the Line of Credit Note during the existence of a Default or an Event
of Default hereunder must include the payment of any default interest due
pursuant to Section 1.5.5 hereof.
1.1.6.8. Application of Payments. Payments hereunder
(including prepayments) will be applied in accordance with Section 1.5.3 hereof.
Notwithstanding the foregoing, payments and prepayments allocable to principal
under the Line of Credit Facility will be applied to repay Portions accruing
interest at the Prime Rate first and then to repay Portions accruing interest at
the Adjusted LIBO Rate (applying first to Portions having the Interest Period
with the longest remaining time to maturity).
1.1.6.9. Availability For Reborrowing. Principal amounts
repaid or prepaid under the Line of Credit Facility prior to the Line of Credit
Maturity Date will be available for reborrowing pursuant to and in accordance
with the terms hereof up to the Available Credit Portion.
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1.2. Term Loan Facility. Intentionally Blank.
1.3. Determination of Commitment Amounts.
1.3.1. Initial Commitment. Upon the execution of this Agreement
and satisfaction of the conditions precedent set forth in Section 2.1 hereof,
the Line of Credit Commitment established hereunder will be $10.0 million ("Line
of Credit Commitment").
1.3.2. Determination of Borrowing Base. From the Closing Date
through December 31, 1997, the Current Line of Credit Commitment will be $10
million. After December 31, 1997, the Current Line of Credit Commitment
hereunder will be the lesser of (a) $15.0 million or (b) 85% of Eligible
Accounts.
Notwithstanding the foregoing, the maximum amount of credit available at any
time under the Line of Credit Facility may not exceed the amount resulting from
the following formula:
a. The Current Line of Credit Commitment,
b. Minus the then-aggregate amount of all prepayments relating
to asset sales required to have been paid to Lender since
the Closing Date under Section 1.1.6.5.c hereof, and
c. Minus the aggregate amount of all voluntary commitment
reductions requested under Section 1.3.3 hereof, and
d. Minus the aggregate outstanding amount (at face value) of
all letters of credit issued by Lender (or any Affiliate
thereof) on behalf or for the account of Borrower under
Section 1.8 hereof or otherwise.
(Collectively, the amount resulting from the equation under categories "a"
through "d" above is sometimes referred to herein as the "Available Credit
Portion".) On the effective date of any such reduction in the amount of
available credit, a prepayment must be made to the extent required under Section
1.1.6.5.b hereof.
1.3.3. Voluntary Reduction of Commitment. Upon giving Lender
prior written notice of at least ten (10) Business Days, Borrower at any time
and from time to time may reduce the Current Line of Credit Commitment in
multiples of $100,000. On the effective date of any such reduction, a prepayment
must be made to the extent required under Section 1.1.6.5.b hereof. Any
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such reduction in the Line of Credit Commitment will be permanent, and such
Commitment cannot thereafter be increased without the written consent of Lender.
1.4. Advances.
1.4.1. Requesting Advances. To request an Advance (except with
respect to the initial Advances on the Closing Date or as otherwise provided in
Section 1.4.3 hereof), Borrower (through an Authorized Officer) must give Lender
written notice (or verbal notice by telephone with immediate written
confirmation to follow) at least two (2) Business Days but not more than ten
(10) Business Days prior to the requested Settlement Date for such Advance (such
notice, an "Advance Request"). Each Advance Request, together with certain
certifications, must be substantially in the form of Exhibit 1.4.1 hereto or
such other form as Lender from time to time may reasonably request. Each Advance
under the Line of Credit Facility pursuant to an Advance Request must be in an
amount of at least $10,000 or in a multiple of $10,000 in excess thereof and not
greater than the un-borrowed balance of the Available Credit Portion (as
determined under Section 1.3 hereof). Unless Lender otherwise consents, Borrower
may only request up to ten (10) Advances per month.
1.4.2. Funding Advances. Subject to the satisfaction of and
compliance with the terms and conditions hereof (including, as applicable, the
conditions precedent specified in Section 2.2 hereof), Lender will make each
requested Advance available by crediting such amount to the Account with Lender
(or by such other means as Lender may consider reasonable). At the written
request and expense of Borrower, Lender will wire transfer all or any portion of
an Advance in accordance with such written instructions therefor. By executing
this Agreement, Borrower hereby requests Lender to make and fund the initial
Advances in accordance with the funding instructions attached as Schedule 1.4.2
hereto.
1.4.3. Automatic Line of Credit Advances. If Cash Management
Agreements have been executed and are effective, then the request and
disbursement of Advances under the Line of Credit Facility may also be processed
automatically in accordance with such Cash Management Agreements.
1.4.4. Obligation to Advance. Lender will not be obligated to
make any Advance under the following circumstances (other than with respect to
an Advance by Lender automatically occurring pursuant to Section 1 8 hereof upon
a draw under a letter of credit): (a) if the principal amount of such Advance
plus the aggregate amount outstanding under the Line of Credit
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Facility would exceed the Available Credit Portion, or (b) during the existence
of a Default or an Event of Default hereunder, or (c) if such Advance would
cause a Default or Event of Default hereunder, or (d) after the Line of Credit
Maturity Date.
1.4.5. Indemnification for Revocation or Failure to Satisfy
Conditions. Borrower will indemnify Lender against any loss, cost or expense
incurred by Lender as a result of any revocation of any requested Advance or any
failure to fulfill the applicable conditions precedent to such Advance on or
before the requested Settlement Date specified in an Advance Request. Such
indemnification will include, without limitation, any loss, cost or expense
incurred by reason of the liquidation or reemployment of funds required by
Lender to fund the Advance when such Advance, as a result of such failure, is
not made on the requested Settlement Date. Lender's calculation of such losses,
costs and expenses will be conclusive absent manifest error.
1.5. Payments in General.
1.5.1. Manner and Place. All payments of principal, interest,
fees and other amounts due under the Loan Documents must be received by Lender
in immediately available funds in U.S. dollars (and without any deduction,
offset, netting or counterclaim) on or before Twelve O'Clock (12:00) noon
Eastern Time ("ET") on the due date therefor at the principal office of Lender
set forth in Notice Section hereof or at such other place as Lender may
designate from time to time.
1.5.2. Special Payment Timing Issues. Whenever any payment to be
made under any Loan Document is due on a day that is not a Business Day, such
payment may be made on the next succeeding Business Day, and such extension of
time will be included in the computation of interest under such Loan Document.
Any funds received by Lender after 12:00 noon ET on any day will be deemed to be
received on the next succeeding Business Day.
1.5.3. Application of Payments. All payments and other funds
received by Lender hereunder will be applied by Lender in the following order:
(a) first to the payment of any fees and charges due under the Loan Documents,
and (b) then to any obligations for the payment of expenses due under the Loan
Documents, and (c) then to the payment of interest due and owing hereunder, and
(d) then to the principal indebtedness due under the Line of Credit Facility,
and (e) then to any other interest accrued hereunder, and (f) then to any other
indebtedness of Borrower or other Obligor to Lender.
1.5.4. Debiting Accounts. Borrower hereby authorizes Lender to
charge any account of Borrower maintained at
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Lender or at any Affiliate of Lender (including, without limitation, the
Account) for all or any part of any payment of principal, interest, fees and/or
expenses due under the Loan Documents or otherwise due to Lender (including, if
applicable, as due under and in accordance with the Cash Management Agreements).
1.5.5. Default Interest. During the existence of an Event of
Default hereunder, Borrower hereby agrees (to the maximum extent not prohibited
by applicable law) to pay to Lender (upon Lender's request) interest on any
indebtedness outstanding hereunder at the rate of Three Percent (3%) per annum
in excess of the rate then otherwise applicable to such indebtedness.
Notwithstanding the foregoing, if the relevant Default is under Section 7.1.10
hereof, then such rate increase (to the maximum extent not prohibited by
applicable law) will occur automatically without any request by Lender.
1.5.6. Usury Savings Provision. Notwithstanding any provision of
any Loan Document to the contrary, Borrower is not and will not be required to
pay interest at a rate or any fee in an amount prohibited by applicable law. If
interest or any fee payable to Lender on any date would be in a prohibited
amount, then such interest or fee will be automatically reduced to the maximum
amount that is not prohibited, and any interest or fee for subsequent periods
(to the extent not prohibited) will be increased accordingly until Lender
receives payment of the full amount of each such reduction. To the extent that
any prohibited amount is actually received by Lender, then such amount will be
automatically deemed to constitute a repayment of principal indebtedness
hereunder.
1.6. Release of Security. Upon (a) repayment to Lender in full
(unconditionally and indefeasibly) of the entire indebtedness hereunder and of
all other amounts then due or owing to Lender under the Loan Documents, and (b)
the termination of the Loan Documents (and all Facilities thereunder), and (c)
return and cancellation of any effective letters of credit issued by Lender (or
any Affiliate thereof) for the account of Borrower, then Lender (at the written
request and expense of Borrower) (i) will release the Obligors and the property
serving as Collateral hereunder from all the Loan Documents, and (ii) will
execute such UCC termination statements and mortgage and deed of trust releases
and such other documentation (all in form and substance reasonably acceptable to
Lender and without representation, warranty, recourse or indemnification of any
kind) as may be reasonably requested and provided to Lender to effect such
release and termination. Notwithstanding the foregoing, at Lender's sole and
absolute option, such release may be reasonably delayed, qualified and
conditioned, including, without
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limitation, until the expiration of any period during which a trustee, receiver
or other party could avoid, set aside, rescind or seek repayment or return of
any funds or property received by Lender from any ObLigor hereunder.
1.7. Fees and Other Compensation.
1.7.1. Commitment Fee. On the Closing Date, Lender must receive
in immediately available funds a Credit Commitment Fee in the amount of
$150,000.
1.7.2. Periodic Facility Fee. Borrower will also pay Lender in
immediately available funds a Periodic Facility Fee at the rate of ONE QUARTER
OF ONE PERCENT (0.25%) per annum on the average daily unborrowed portion of the
Current Line of Credit Commitment. Such fee will be calculated by Lender and
will be due and payable in immediately available funds quarterly in arrears on
the first calendar day of each fiscal quarter. To the extent any such
calculations of the unborrowed portion includes the face amount of one or more
letters of credit issued by Lender for the account of Borrower, then the amount
of any issuance fee actually imposed and collected by Lender in connection with
any such letter of credit will be deducted by Lender in calculating subsequent
installments of the Periodic Facility Fee applicable to such amount of the
unborrowed portion until Borrower has received a full credit for the amount of
such issuance fees.
1.7.3. Issuance of Warrants. As additional compensation for the
cost, expense and risk incurred by Lender (or its Affiliates) associated with
the underwriting and establishment of the Facilities (but in no way affecting or
relieving Borrower of any of its obligations to fully and timely perform and to
repay the entire indebtedness due under the Loan Documents), Borrower will issue
and grant to Lender (or its designated Affiliate) warrants exercisable into
shares of voting common stock of Borrower sufficient to represent 10% of its
issued and outstanding shares of voting common stock, on a fully diluted basis
("Warrants"). All of the Warrants exercisable into 5% of the issued and
outstanding shares of voting common stock will vest and will be fully earned by
Lender (or its Affiliate) as of the Closing Date. Thereafter, Warrants will vest
in accordance with the terms of a separate Warrant Agreement executed by and
between Borrower and Lender. Subject to being adjusted in accordance with the
terms of the Warrant Agreement, the Warrants earned as of the Closing Date will
be exercisable at price that values Borrower at a multiple of 10 times monthly
revenue for April 1997 and the Warrants earned after the Closing Date will be
exercisable at a price that values Borrower at a multiple of 10 times monthly
revenue for the month immediately
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preceding each such vesting. The Warrants, and all of Lender's rights in
connection therewith, are freely assignable and transferable at any time by
Lender (or its Affiliate and assignees) to any other Person, provided that
Lender complies with any applicable terms thereof and restrictions therein (and
obtains any necessary approvals in connection therewith) required by any
applicable State PUC (to the extent non-compliance therewith by Lender could
have or cause a Material Adverse Effect or could otherwise reasonably be
expected to result in the imposition of a penalty in excess of $25,000), the
FCC, the SEC or the Warrant Agreement itself.
1.7.4. Other Fees. Other fees and charges may be imposed by
Lender hereunder for services rendered under and in accordance with other
agreements with Lender, including, without limitation, any deposit account
agreements, any agreement to issue wire transfers or letters of credit, and any
Cash Management Agreements.
1.8. Issuance of Letters of Credit. If Lender (or any Affiliate of Lender)
issues one or more letters of credit on behalf of or for the account of
Borrower, then the obligations of Borrower (or its Affiliate) to such letter of
credit issuer relating thereto will be deemed Obligations under this Agreement
secured by the Collateral herefor pursuant to the terms of the Loan Documents.
So long as any such letter of credit is effective and outstanding, the face
amount thereof will be deducted from the Current Line of Credit Commitment in
determining the Available Credit Portion (under Section 1 3 hereof) at any time
and will be included within the definition of Funded Debt. Such amounts,
however, will be considered "unborrowed" for preposes of calculating the
Facility Fee under Section 1.7.2 hereof. If the beneficiary under any such
letter of credit makes a draw thereunder, then the amount thereof (as of the
date of such draw) will be treated as an Advance to Borrower under the Line of
Credit Facility
ARTICLE 2: CONDITIONS PRECEDENT
2.1. Closing Conditions. The obligation of Lender to execute and perform
the Loan Documents, and to establish the Line of Credit Facility, and to fund
the Advances listed on Schedule 1.4.2 hereto are subject to the following
conditions precedent (unless and except to the extent expressly waived by Lender
in its sole and absolute discretion):
2.1.1. Compliance.
2.1.1.1. Fees and Expenses. Borrower must have paid (or
made acceptable arrangements with Lender to
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pay) all fees, costs, expenses and taxes due and payable hereunder, including,
without limitation, any fees due and payable pursuant to Section 1.7 hereof and
the reasonable fees, costs and expenses of Lender's attorneys with respect to
the preparation, negotiation and execution of the Loan Documents.
2.1.1.2. Representations. Each, and all, representations
and warranties contained in this Agreement (including those in Article 3 hereof)
and in each other Loan Document, certificate or other writing delivered to
Lender pursuant hereto or thereto on or prior to the Closing Date must be true,
correct and complete in all material respects on and as of the Closing Date,
except for such deviations disclosed in writing and acceptable to Lender.
2.1.1.3. No Default. There must not be any Default or
Event of Default hereunder or any default under any other Loan Document on the
Closing Date, and there must not be any such Default or Event of Default
occurring as a result of executing or advancing funds under the Loan Documents,
except for such defaults disclosed in writing and acceptable to Lender.
2.1.2. Documents. Lender must have received the following
documents, agreements and certificates (together with all exhibits and schedules
thereto), each duly executed, in form, substance and amount satisfactory to
Lender and, when applicable, recorded or filed in the appropriate public office:
2.1.2.1. Credit Agreement. This Agreement.
2.1.2.2. Promissory Note. The Line of Credit Note (i.e.,
as amended and restated) as described in Section 1.1.4 hereof.
2.1.2.3. Security Agreement and Related Documents. An
amended and restated security agreement by Borrower in favor of Lender granting
(and/or reconfirming in favor of) Lender a security interest in all of grantor's
tangible and intangible personal property assets and fixtures (whether now owned
or hereafter acquired) and the proceeds and products thereof, as collateral
security for the indebtedness and obligations hereunder, together with all
necessary financing statements and termination statements (each as filed),
waivers and consents, and evidence of any other recordations required by
applicable law or by Lender to perfect such first lien security interests.
2.1.2.4. Intellectual Property Security Agreements. One or
more separate intellectual property security
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agreements by Borrower in favor of Lender covering all of grantor's copyrights,
patents, trade names, trademarks, service names, service marks and other
intellectual property (including any and all applications and licenses
therefor), all as now owned or hereafter acquired and the proceeds and goodwill
thereof, together with all appropriate financing statements and termination
statements (each as filed), waivers and consents, and any other documents or
recordations required by applicable law or by Lender to perfect such interests.
2.1.2.5. Estoppels and Consent Agreements. One or more
estoppels and consent agreements in favor of Lender by each party to a real
property lease, Capital Lease on any switch used by Borrower or any other
Material Contract with Borrower consenting to Borrower's encumbrance of the real
property lease, Capital Lease or Material Contract (as applicable) and granting
to Lender certain other rights pursuant thereto.
2.1.2.6. Owners' Pledge and Security Agreement. An equity
pledge and security agreement executed by each holder of any voting equity
interest of Borrower (other than up to a 15% interest owned by Blue Carol
Enterprises Ltd. and other than holders of less than 3.5% of shares of any such
class of voting securities) in favor of Lender pledging a first priority
interest in (among other things) all of such pledgor's outstanding equity
interests and rights of such issuer (whether existing as common or preferred
stock, or limited or general partnership interests, or LLC membership interests,
or any warrants, options or convertible rights therefor) as collateral security
for the indebtedness and obligations hereunder, together with the certificates
therefor (if any), powers executed in blank, and all necessary financing
statements and evidence of registration.
2.1.2.7. Warrants. One or more separate warrant agreements
by Borrower issuing and granting to Lender (or its designated Affiliate) the
Warrants, together with all underlying warrant certificates and evidence of
necessary and appropriate actions by Borrower to authorize and issue such
warrants and related warrant shares.
2.1.2.8. Insurance. Current proof of insurance with an
indication of loss payee and additional insured endorsements in favor of Lender
with respect to all of the insurance coverages required under Section 4.8
hereof. Such proof of insurance must be indicated pursuant to one or more
certificates on (a) an ACORD 27 form (3/93) for property-related insurance
coverages and (b) a modified version of an ACORD 25-S form (3/93) permitting
Lender reliance and requiring cancellation
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notification for general liability and all other types of insurance coverages.
2.1.2.9. Solvency Certificates. A certificate from the
chief financial officer of Borrower to Lender dated as of the Closing Date and
certifying (in form and substance acceptable to Lender) as to the solvency of
Borrower.
2.1.2.10. Compliance Certificates. A certificate from an
Authorized Officer of Borrower to Lender dated as of the Closing Date and
certifying as to compliance with the matters described under Section 2.1.1
hereof (with specific reconciled calculations demonstrating compliance with the
financial covenants under Section 4.1 hereof as of the Closing Date).
2.1.2.11. Opinions of Counsel. One or more written
opinions from legal counsel to Borrower addressed to Lender and its counsel and
dated as of the Closing Date opining as to such matters as Lender may request.
2.1.2.12. Payoff Instructions for Prior Indebtedness. A
letter from Borrower to Lender, consistent with the requirements of Section
1.1.3 hereof, Section 1.4 hereof and Section 2.1.1 hereof, instructing Lender
how to disburse the proceeds of the initial Advance.
2.1.2.13. Authorization Documents -- Borrower. A
certificate of an Authorized Officer of Borrower delivering true, accurate and
complete versions of (a) its Articles of Incorporation and all amendments
thereto, and (b) its Bylaws and all amendments thereto, and (c) the resolutions
authorizing its execution, delivery and full performance of the Loan Documents
and all other documents, certificates and actions required hereunder or in
connection herewith, and (d) an incumbency certificate setting forth its
officers (together with the corresponding signatures), and (e) a long-form good
standing and qualification certificate (issued within 15 calendar days of the
Closing Date) with respect to each jurisdiction listed on Schedule 3.1 hereto,
and (f) a copy of each License (or renewal thereof) issued to it by the Federal
Communications Commission and any State PUC).
2.1.2.14. Authorization Documents -- Other Than Borrower.
A certificate of an Authorized Officer of each Obligor (other than Borrower)
that is not a natural person delivering true, accurate and complete versions of
(a) the resolutions authorizing its execution, delivery and full performance of
the Loan Documents to which it is a party and all other documents, certificates
and actions required of it
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hereunder or in connection herewith, and (b) an incumbency certificate setting
forth its officers (together with the corresponding signatures).
2.1.2.15. Officer's Certificates. One or more certificates
of an Authorized Officer of Borrower delivering true, accurate and complete
copies of the following documents and agreements (together with all amendments,
exhibits and schedules thereto):
a. Lien Searches -- Searches (conducted within 15 calendar days of
the Closing Date) satisfactory to Lender with respect to
consensual liens, tax liens, judgments and bankruptcy, listing
respectively (a) all effective UCC financing statements that name
Borrower (including any predecessor thereto and any operating or
tradenames thereof) as "debtor" that are filed in the States of
Maryland, New York or California or the District of Columbia or
any other U.S. jurisdiction in which such debtor currently
operates or has had assets at any time within the immediately
preceding 12 calendar months (together with copies of such
financing statements), and (b) all tax liens against any Obligor
(or the assets thereof), and (c) all outstanding judgments
against any Obligor (or the assets thereof), and (d) whether any
Obligor has filed bankruptcy within the preceding 5 years.
b. Financial Statements -- A set of (a) the monthly financial
statements of Borrower for calendar months ending April 30 and
May 31, 1997 (as otherwise consistent with the requirements of
Section 4.2 hereof), and (b) the quarterly financial statements
of Borrower for fiscal quarter ending March 31, 1997 (as
otherwise consistent with the requirements of Section 4.2
hereof), and (c) the audited financial statements of Borrower
(with consolidating schedules thereto, if any) for fiscal year
ending December 31, 1996 (as otherwise consistent with the
requirements of Section 4.2 hereof).
c. Equityholder Agreements -- Each shareholder agreement, member
agreement, partner agreement, voting agreement, buy-sell
agreement, option, warrant, put, call, right of first refusal,
and
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any other agreement or; instrument with conversion rights into
equity of Borrower either (a) between Borrower and any holder or
prospective holder of any equity interest of Borrower (including
interests convertible into such equity) or (b) otherwise between
any two or more such holders of equity interests.
d. Employment and Non-Compete Agreements -- Each employment
agreement, consulting agreement and non-compete agreement between
Borrower and any director, officer, employee or former owner of
Borrower.
e. Inter-Affiliate Agreements -- Each written agreement between
Borrower and any Affiliate of Borrower.
f. Disaster Recovery and Contingency Program -- A description of the
currently effective disaster recovery and contingency program of
Borrower, as required to be delivered under Section 4.8 hereof.
g. Leases as Lessee -- Each lease between Borrower and any owner or
landlord of real or personal property used in connection with
Borrower's business for which it has an annual rent obligation in
excess of $36,000.
h. Leases as Lessor -- Each lease between Borrower and any lessee of
real or personal property owned or leased by Borrower, but only
to the extent the lessee thereunder has an annual rent obligation
in excess of $12,000.
2.1.2.16. Other Documents. Lender must have received any
additional agreements, documents and certificates as Lender or its counsel may
reasonably request.
2.2. Line of Credit Advances. The obligation of Lender to fund any request
for an Advance under the Line of Credit Facility is subject to the following
conditions precedent (unless and except to the extent expressly waived by Lender
in its sole and absolute discretion):
2.2.1. Advance Request. Lender must have received an Advance
Request under and in accordance with Section 1.4.1 hereof.
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2.2.2. Cash Flow Leverage. As of the Settlement Date for such
Advance (and in addition to any other requirements and covenants hereunder),
Borrower must be in compliance with the Leverage Ratio requirement under Section
4.1 hereof using an amount for Funded Debt that is as of such Settlement Date
and inclusive of the proposed Advance.
2.2.3. Other Documents. Lender must have received any additional
documents, certificates and opinions as Lender or its counsel may reasonably
request, including without limitation, UCC-1 financing statements, fixture
filings and leasehold mortgages regarding new locations for other assets of
Borrower.
2.2.4. Compliance.
2.2.4.1. Fees and Expenses. Borrower must have paid (or
made acceptable arrangements with Lender to pay) all fees, costs, expenses and
taxes due and payable hereunder, including, without limitation, all reasonable
costs and expenses incurred in connection with or as a result of reviewing and
funding such Advance Request.
2.2.4.2. Representations. Each, and all, representations
and warranties contained in the Loan Documents (including those in Article 3
hereof) and in each other certificate or other writing delivered to Lender
pursuant hereto or thereto on or prior to the Settlement Date must be true,
correct and complete in all material respects on and as of the Settlement Date,
except for such deviations disclosed in writing and acceptable to Lender (which
disclosure will not constitute Lender's waiver or acceptance thereof).
2.2.4.3. No Default. There must not be any Default or
Event of Default hereunder or any default under any other Loan Document on the
Settlement Date, and there must not be any such Default or Event of Default
occurring as a result of funding such Advance, except for such defaults
disclosed in writing and acceptable to Lender (which disclosure will not
constitute Lender's waiver or acceptance thereof).
ARTICLE 3: REPRESENTATIONS AND WARRANTIES
Borrower, as of the Closing Date and the Settlement Date for each
Advance hereunder, hereby represents and warrants as follows:
3.1. Organization and Good Standing. Borrower (a) is duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization, and (b) has all
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requisite corporate power and authority to own its properties and to conduct its
business as now conducted and as currently proposed to be conducted, and (c) is
duly qualified to conduct business as a foreign organization and is currently in
good standing in each state and jurisdiction in which it conducts business,
except where failure to be duly qualified and in good standing could not have a
Material Adverse Effect. Each state and jurisdiction in which Borrower is
organized or is (or should be) qualified to conduct business under applicable
law is listed on Schedule 3.1 hereto.
3.2. Power and Authority. Borrower has all requisite power and authority
under applicable law and under its Organic Documents, Authorizations and
Licenses to execute, deliver and perform the obligations under the Loan
Documents to which it is a party. Except as disclosed on Schedule 3.2 hereto,
all actions, waivers and consents (corporate, regulatory and otherwise)
necessary or appropriate for Borrower to execute, deliver and perform the Loan
Documents to which it is a party have been taken and/or received.
3.3. Validity and Legal Effect. This Agreement constitutes, and the other
Loan Documents to which Borrower is a party constitute (or will constitute when
executed and delivered), the legal, valid and binding obligations of Borrower
enforceable against it in accordance with the terms thereof.
3.4. No Violation of Laws or Agreements. Except as disclosed on Schedule
3.4, the execution, delivery and performance of the Loan Documents (a) will not
violate or contravene any material provision of any material law, rule,
regulation, administrative order or judicial decree (federal, state or local),
and (b) will not violate or contravene any provision of the Organic Documents of
Borrower, and (c) will not result in any material breach or violation of (or
constitute a material default under) any material agreement or instrument by
which Borrower or any of its property may be bound, and (d) will not result in
or require the creation of any Lien (other than pursuant to the Loan Documents)
upon or with respect to any properties of Borrower, whether such properties are
now owned or hereafter acquired.
3.5. Title to Assets: Existing Encumbrances: Intellectual and Real
Property. Borrower has good and marketable title to all of its owned real and
personal property assets and the right to possess and use all of its leased or
licensed real and personal property assets. All such property interests are free
and clear of any Liens, except for Permitted Liens (as defined in Section 5.5
hereof) and Liens described on Schedule 3.5 hereto. Schedule 3.5A hereto lists
each trademark, service
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mark, copyright, patent, database, customized application software and systems
integration software, trade secret and other intellectual property owned,
licensed, leased, controlled or applied for by Borrower, together with relevant
identifying information with respect to such intellectual property describing
(among other things) the date of creation, the method of protection against
adverse claims and the registration number. Schedule 3.5B hereto lists each real
property interest owned, leased or otherwise used by Borrower, together with
relevant identifying information describing (among other things) the location
and use of each such real property interest, whether such interest is owned or
leased (and, if leased, the lessor and record owner thereof), and the estimated
appraised value thereof. Each such property and asset is in good order and
repair (ordinary wear and tear excepted) and is fully covered by the insurance
required under Section 4.8 hereof. Each such property and asset owned by
Borrower is titled in the current legal name of Borrower. Schedule 3.5C hereto
identifies each legal, operating and trade name that Borrower has used (or
permitted the filing of a UCC financing statement under) at any time during the
twelve (12) consecutive calendar years immediately preceding the Closing Date.
3.6. Capital Structure and Equity Ownership. Schedule 3.6 hereto accurately
and completely discloses (a) the number of shares and classes of equity
ownership rights and interests of Borrower that are authorized and/or
outstanding (whether existing as common or preferred stock or warrants, options
or other instruments convertible into such equity), and (b) the ownership
thereof. Schedule 3.6 also accurately and completely discloses (i) the number of
shares and classes of equity ownership rights and interests of any organization
that owns or controls at least 50% of any class of equity interests of Borrower
authorized and/or outstanding (whether existing as common or preferred stock,
general or limited partnership interests, or LLC membership interests, or
warrants, options or other instruments convertible into such equity), and (ii)
the ownership thereof. All such shares and interests are validly existing, fully
paid and non-assessable.
3.7. Subsidiaries. Affiliates and Investments. Schedule 3.7 hereto
accurately and completely discloses (a) each Subsidiary and Affiliate of
Borrower (other than its officers and directors) and (b) each investment in or
loan to any other Person by Borrower.
3.8. Material Contracts. Schedule 3.8 hereto (a) accurately and completely
discloses each Material Contract (as defined below) of Borrower, and (b) also
indicates the following information with respect to each such contract: (1) the
contract
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parties thereunder, and (2) the contract term and any options or renewals
thereto, and (3) the monthly payment required thereunder, and (4) any
restrictions on assignments, and (5) the existence of any breaches or defaults
thereunder. Borrower has not committed any unwaived breach or default under any
material contract (whether or not listed on Schedule 3.8 hereto), and after due
inquiry and investigation, Borrower does not have any knowledge or reason to
believe that any other party to any such material contract (whether or not
listed on Schedule 3.8 hereto) has or might have committed any unwaived breach
or default thereof. For purposes of this Section 3.8 hereof, a "Material
Contract" of Borrower includes the following types of agreements to which
Borrower is a party: (1) any contract either with annual compensation,
consideration or payments in excess of $100,000 or with aggregate compensation,
consideration or payments in excess of $200,000, and (2) any lease of real
estate or office space from which Borrower conducts its primary business
operations, and (3) any lease of real estate or space at which Borrower has
located any switch operations, and (4) any contract, agreement or lease under
the terms of which Borrower obtains the right to use or operate a switch, and
(5) any operating agreement with a foreign country, and (6) any leased line
agreement, and (7) any other agreement or contract the loss or breach of which
could reasonably be expected to have or cause a Material Adverse Effect.
3.9. Licenses and Authorizations. Except as disclosed on Schedule 3.9,
Borrower possesses all Licenses and other Authorizations necessary or required
in the conduct of its businesses and/or the operation of its properties. Each
material Authorization is valid, binding and enforceable on, against and by
Borrower. Each material Authorization is subsisting without any defaults
thereunder or enforceable adverse limitations thereon, and no Authorization is
subject to any proceedings or claims opposing the issuance, continuance,
renewal, development or use thereof or contesting the validity or seeking the
revocation thereof. Schedule 3.9 hereto accurately and completely lists each
material Authorization of Borrower (including, whether or not otherwise
"material", each License and other Authorization issued by the FCC and each
State PUC, and further including all pending applications and renewals
therefor), together with relevant identifying information describing such
Authorizations. With respect to each FCC License and each State PUC License
listed on Schedule 3.9 hereto, the description includes, if applicable, the call
sign, frequency, class, location, file number, issuance date (original or most
recent renewal), and expiration date. For purposes of this Section 3.9 hereof,
all Licenses and ether Authorizations issued by the FCC or any State PUC will be
deemed to be "material".
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3.10. Taxes and Assessments. Except as disclosed on Schedule 3.10 hereto,
Borrower has timely filed all required tax returns and reports (federal, state
and local) or has properly and timely filed for extensions of the time for the
filing thereof. Borrower does not have knowledge of any deficiency, penalty or
additional assessment due or appropriate in connection with any such taxes. All
taxes (federal, state and local) imposed upon Borrower or any of its properties,
operations or income have been paid and discharged prior to the date when any
interest or penalty would accrue for the nonpayment thereof, except for those
taxes being contested in good faith by appropriate proceedings diligently
prosecuted and with adequate reserves reflected on the financial statements in
accordance with GAAP (all as also disclosed on Schedule 3.10 hereto).
3.11. Litigation and Legal Proceedings. Except as disclosed on Schedule
3.11 hereto, there is no litigation, claim, investigation, administrative
proceeding, labor controversy or similar action that is pending or (to the best
of Borrower's knowledge and information after due inquiry) threatened against
Borrower or its properties that, if adversely resolved, could reasonably be
expected to have or cause a Material Adverse Effect
3.12. Accuracy of Financial Information. All financial statements
previously furnished to Lender concerning the financial condition and operations
of Borrower (a) have been prepared in accordance with GAAP consistently applied,
and (b) fairly present the financial condition of the organization covered
thereby as of the dates and for the periods covered thereby (but, with respect
to interim periodic financial statements, subject to normal and customary year
end audit adjustments), and (c) disclose all material liabilities (contingent
and otherwise) of Borrower. In addition, all written information previously
furnished to Lender concerning the financial condition and operations of
Borrower are true, accurate and complete in all material respects.
3.13. Accuracy of Other Information. All written information contained in
any application, schedule, report, certificate, or any other document furnished
to Lender by Borrower or any other Person (on behalf of Borrower) in connection
with the Loan Documents is in all material respects true, accurate and complete,
and no such Person (including Borrower) has omitted to state therein (or failed
to include in any such document) any material fact or any fact necessary to make
such information not misleading. All written projections furnished to Lender by
Borrower or any other Person on behalf of Borrower have been prepared with a
reasonable basis and in good faith, making use of such information as was
available at the date such projection was made.
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3.14. Compliance with Laws Generally. Borrower is in compliance in all
material respects with all material laws, rules, regulations, administrative
orders (including the policies and procedures of the FCC and each State PUC) and
judicial decrees (federal, state, local and otherwise) applicable to it, its
operations and its properties.
3.15. ERISA Compliance. Borrower is in compliance in all material respects
with all applicable provisions of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and all rules, regulations and orders implementing
ERISA.
3.15.1. Neither Borrower nor any ERISA Affiliate thereof
maintains or contributes to (or has maintained or contributed to) any
multiemployer plan (as defined in Section 4001 of ERISA) under which Borrower or
any ERISA Affiliate thereof could reasonably be expected to have any withdrawal
liability.
3.15.2. Neither Borrower nor any ERISA Affiliate thereof
sponsors or maintains any defined benefit pension plan under which there is an
accumulated funding deficiency within the meaning of Section 412 of the Code,
whether or not waived.
3.15.3. The liability for accrued benefits under each defined
benefit pension plan that will be sponsored or maintained by Borrower or any
ERISA Affiliate thereof (determined on the basis of the actuarial assumptions
utilized by the PBGC) does not exceed the aggregate fair market value of the
assets under each such defined benefit pension plan.
3.15.4. The aggregate liability of Borrower and each ERISA
Affiliate thereof arising out of or relating to a failure of any employee
benefit plan within the meaning of Section 3(2) of ERISA to comply with
provisions of ERISA or the Code will not have a Material Adverse Effect.
3.15.5. There does not exist any unfunded liability (determined
on the basis of actuarial assumptions utilized by the actuary for the plan in
preparing the most recent annual report) of Borrower or any ERISA Affiliate
thereof under any plan, program or arrangement providing post-retirement, life
or health benefits.
3.15.6. No Reportable Event and no Prohibited Transaction (as
defined in ERISA) has occurred or is occurring with respect to any plan with
which Borrower is associated.
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3.16. Environmental Compliance.
3.16.1. Borrower has received all permits and filed all
notifications necessary under and is otherwise in compliance in all material
respects with all federal, state and local laws, rules, ordinances and
regulations governing the control, removal, storage, transportation, spill,
release or discharge of hazardous or toxic wastes, substances and petroleum
products, including, without limitation, as provided in the provisions of (a)
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended by the Superfund Amendment and Reauthorization Act of 1986, and
(b) the Solid Waste Disposal Act, and (c) the Clean Water Act, and (d) the Clean
Air Act, and (e) the Hazardous Materials Transportation Act, and (f) the
Resource Conservation and Recovery Act of 1976, and (g) the Federal Water
Pollution Control Act Amendments of 1972, and (h) the rules, regulations and
ordinances of the Environmental Protection Agency, and any departments of health
services, regional water quality control boards, state water resources control
boards, and/or cities in which any of Borrower's assets are located (all of the
foregoing enumerated and nonenumerated statutes, regulations, rules and
ordinances, all as amended from time to time, collectively, the "Environmental
Control Statutes").
3.16.2. Borrower has not given any written or oral notice to the
Environmental Protection Agency ("EPA") or any state or local agency with regard
to any actual or imminently threatened removal, storage, transportation, spill,
release or discharge of hazardous or toxic wastes, substances or petroleum
products either (a) on properties owned or leased by Borrower or (b) otherwise
in connection with the conduct of its business and operations.
3.16.3. Borrower has not received notice that it is potentially
responsible for costs of clean-up of any actual or imminently threatened spill,
release or discharge of hazardous or toxic wastes or substances or petroleum
products pursuant to any Environmental Control Statute.
3.17. Margin Rule Compliance. Borrower does not own or have any present
intention of acquiring any "Margin Stock" within the meaning of the following
Margin Regulations of the FRB: Regulation G at 12 C.F.R. Pt. 207, and Regulation
T at 12 C.F.R. Pt. 220, and Regulation U at 12 C.F.R. Pt. 221, and Regulation X
at 12 C.F.R. Pt. 224. The credit extended under this Agreement does not
constitute "Purpose Credit" within the meaning of the FRB's Margin Regulations.
3.18. Fees and Commissions. Except as disclosed on Schedule 3.18 hereto or
as required by Section 1.7 hereof,
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Borrower does not owe any fees or commissions of any kind in connection with
this Agreement or the transactions contemplated hereby, and Borrower does not
know of any claim (or any basis for any claim) for any fees or commissions in
connection with this Agreement or the transactions contemplated hereby.
3.19. Solvency.
3.19.1. Through June 1998. Upon the execution of this Agreement
and the funding of each Advance hereunder through the earlier of June 30, 1998
or consummation of an initial Public Offering, Borrower is and will be solvent
such that it will be able to realize upon its assets, will be able to obtain
Advances hereunder and will have sufficient cash flow from operations to enable
it to pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal and ordinary course of business.
Borrower does not intend to (or believe that it will) incur debts or liabilities
beyond its ability to pay such debts and liabilities as they become due and
mature. Borrower has not incurred any obligations under the Loan Documents and
has not made any conveyance pursuant hereto or in connection herewith with the
actual intent to hinder, delay or defraud present or future creditors of it or
any of its Affiliates.
3.19.2. After June 1998. Immediately prior to and upon the
funding of each Advance hereunder after the earlier of June 30, 1998 or
consummation of an initial Public Offering, Borrower was, is and will be solvent
such that:
a. The fair saleable value of its assets (including, without
limitation, the fair saleable value of its goodwill and
other intangible property) is greater than the total amount
of its liabilities, including without limitation, all
contingent liabilities; and
b. The present fair saleable value of its assets (including,
without limitation, the fair saleable value of its goodwill
and other intangible property) is not less than the amount
that will be required to pay the probable liability on its
debts as they become absolute and matured; and
c. It will be able to realize upon its assets and will have
sufficient cash flow from operations to enable it to pay its
debts and other liabilities, contingent obligations and
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other commitments as they mature in the normal and ordinary
course of business; and
d. The sum of its debts is not greater than all of its property
at a fair valuation.
Borrower does not intend to (or believe that it will) incur debts or liabilities
beyond its ability to pay such debts and liabilities as they become due and
mature. Borrower is not engaged in a business or transaction, or about to engage
in a business or transaction, for which its property would constitute
unreasonably small capital or assets after giving due consideration to the
prevailing practice and industry in which it is engaged. Borrower has not
incurred any obligations under the Loan Documents and has not made any
conveyance pursuant hereto or in connection herewith with the actual intent to
hinder, delay or defraud present or future creditors of it or any of its
Affiliates. For purposes of this Subsection, in computing the amount of
contingent liabilities at any time, it is intended that such liabilities will be
computed at the amount which, in light of all the facts and circumstances
existing at such time, represents the amount that can reasonably be expected to
become an actual mature liability.
3.20. FCC and State PUC-Related Representations. Without limiting the
generality of the foregoing representations and warranties, Borrower further
represents and warrants as follows:
3.20.1. No Unresolved Application, Complaint or Proceeding.
Except as described on Schedule 3.20 hereto, there is no outstanding or
unresolved (a) application by Borrower for any FCC or State PUC Authorization
(including any renewal of any License), or (b) material complaint to the FCC or
any State PUC regarding Borrower or any of its Licenses or Tariffs, or (c)
litigation, investigation or other inquiry by or before the FCC or any State PUC
involving Borrower or any of its Licenses or Tariffs, or (d) FCC or State PUC
enforcement proceeding against Borrower or any of its Licenses or Tariffs,
including without limitation, any notice of violation, any notice of apparent
liability for forfeiture, or any forfeiture.
3.20.2. Status and Renewal of Licenses. The Licenses identified
on Schedule 3.9 hereto constitute all of the Licenses required by the Federal
Communications Act or any State Act for the operation of Borrower's business as
it is currently being operated. Each such License is validly outstanding and
effective and has been renewed (as applicable) by the FCC or any State PUC
without condition for a full term in accordance with the Federal Communications
Act or any State Act. There are no
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modifications, amendments or revocations (pending or, to the best of the
knowledge of Borrower after due inquiry, threatened) that could adversely affect
the operations or financial condition of Borrower. After due inquiry, Borrower
does not know of any reason why the FCC or any State PUC (as applicable) would
not routinely grant, for a full term and without condition, the application by
Borrower for the renewal of each such License over which the FCC or such State
PUC has jurisdiction, when and as such application shall become due to be filed
with the FCC or such State PUC.
ARTICLE 4: AFFIRMATIVE COVENANTS
Borrower hereby covenants and agrees that, so long as any indebtedness
remains outstanding hereunder, Borrower will comply with the following
affirmative covenants:
4.1. Financial Covenants and Ratios. As of the end of each fiscal quarter
or calendar month (as applicable), Borrower will satisfy each of the following
financial ratios and characteristics, each of which will be determined using
GAAP consistently applied, except as otherwise expressly provided:
4.1.1. Monthly Net Revenue to Senior Funded Debt. A ratio of
Monthly Net Revenue to Senior Funded Debt (measured monthly) of not less than
the following:
a. 40%, from the Closing Date through August 30, 1997; and
b. 50%, from August 31, 1997 through October 31, 1997; and
c. 75%, from November 1, 1997 through November
30, 1997; and
d. 90%, from December 1, 1997 through March 30, 1998.
4.1.2. Minimum Subscribers. A minimum number of Subscribers
(measured monthly) of not less than the following:
a. 30,300, from the Closing Date through July 30, 1997; and
b. 31,450, from July 31, 1997 through August 30, 1997; and
c. 37,000, from August 31, 1997 through
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September 29, 1997; and
d. 43,570, from September 30, 1997 through October 30, 1997;
and
e. 54,450, from October 31, 1997 through November 29, 1997; and
f. 68,100, from November 30, 1997 through December 30, 1997;
and
g. 85,100, from December 31, 1997 through January 30, 1998; and
h. 106,400, from January 31, 1998 through March 30, 1998.
4.1.3. Interest Coverage Ratio. As of and after March 31, 1998, a
ratio of OCF to Interest Expense (measured quarterly) of not less than
2.5-to-1.0.
4.1.4. Cash Flow Leverage Ratio. A ratio of Funded Debt to OCF
(measured quarterly) of not more than the following:
a. 3.75-to-1.0, on March 31, 1998; and
b. 2.0-to-1.0, after March 31, 1998.
4.2. Periodic Financial Statements.
4.2.1. Monthly Reporting.
a. Financial Statements. Within forty-five (45) calendar days
after the end of each calendar month (including, without
limitation, the last calendar month of each year), Borrower
must prepare and deliver to Lender a complete set of
unaudited internal monthly financial statements
substantially similar in form and content with the form of
monthly financial statements attached as Exhibit 4.2.1(a)
hereto. Such financial statements must include, without
limitation, a balance sheet and an income statement (with
appropriate notes and schedules). Such financial statements
must be prepared in accordance with GAAP consistently
applied (except as approved by Lender in its sole and
absolute discretion). Together with the monthly
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financial statements, Lender must also receive a certificate
executed by Ram Mukunda or Prabhav Maniyar or such other
senior executive officer of Borrower as is acceptable to
Lender (a) stating that the financial statements fairly
present the financial condition of Borrower as of the date
thereof and for the periods covered thereby, and (b)
providing a reconciled calculation demonstrating compliance
with each financial covenant and ratio that is measured on a
monthly basis under Section 4.1 hereof (using the form
attached as Exhibit 4.2 hereto), and (c) calculating, as of
the end of such monthly period, the then-current amounts for
the Current Line of Credit Commitment and the Available
Credit Portion (using the form attached as Exhibit 4.2
hereto), and (d) providing an aging of accounts receivable,
and (e) certifying that as of the date of such certificate
there is not any existing Default or Event of Default.
b. Calculation of Borrowing Base. Within thirty (30) calendar
days after the end of each calendar month (including,
without limitation, the last calendar month of each year),
Borrower also must prepare and deliver to Lender a borrowing
base certificate substantially similar in form and content
with the form of borrowing base certificate attached as
Exhibit 4.2.1(b) hereto.
4.2.2. Quarterly Financial Statements. Within forty-five (45)
calendar days after the end of each fiscal quarter (including, without
limitation, the fourth fiscal quarter of each year), Borrower must prepare and
deliver to Lender unaudited quarterly financial statements, in form and
substance as required by and acceptable to Lender. Such financial statements
must include, without limitation, a balance sheet and an income statement (with
appropriate notes and schedules). Such financial statements must be prepared in
accordance with GAAP consistently applied (except as approved by Lender in its
sole and absolute discretion). Together with the quarterly financial statements,
Lender must also receive a certificate executed by Ram Mukunda or Prabhav
Maniyar or such other senior executive officer of Borrower as is acceptable to
Lender (a) stating that the financial statements fairly present the financial
condition of Borrower as of the date thereof and for the periods covered
thereby, and (b) providing a reconciled calculation demonstrating
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compliance with each applicable financial covenant and ratio under Section 4.1
hereof (using the form attached as Exhibit 4.2 hereto), and (c) calculating, as
of the end of such fiscal period, the then-current amounts for the Current Line
of Credit Commitment and the Available Credit Portion (using the form attached
as Exhibit 4.2 hereto), and (d) certifying that as of the date of such
certificate there is not any existing Default or Event of Default.
4.2.3. Annual Financial Statements. Within ninety (90) calendar
days after the close of each fiscal year, Borrower must prepare and deliver to
Lender a complete set of audited annual financial statements (with accompanying
notes and consolidating schedules). Such financial statements (a) must include
the types of financial statements and information required on a quarterly basis
under this Section 4.2 hereof as well as a cash flow statement and a
reconciliation of consolidated net worth, and (b) must be prepared in accordance
with GAAP consistently applied, and (c) must be certified without qualification
by an independent certified public accounting firm satisfactory to Lender.
Together with the annual financial statements, Lender must also receive (i) all
related management letters prepared by such accountants, and (ii) a debt
compliance letter (substantially similar in form and substance to the form
attached as Exhibit 4.2.3 and otherwise acceptable to Lender), and (iii) a
certificate signed by such accountants, stating that the financial statements
fairly present the financial condition of Borrower as of the date thereof and
for the periods covered thereby.
4.3. Other Financial and Specialized Reports.
4.3.1. Financial Forecasts. Within 15 Business Days after
receiving, preparing, materially revising or otherwise assembling any periodic
budgets or financial forecasts, Borrower must deliver a complete copy thereof to
Lender.
4.3.2. SEC Filings and Press Releases. Within 15 Business Days
after the date that Borrower or any organization that owns or controls at least
50% of any class of equity interests of Borrower makes any filing with the
Securities Exchange Commission (whether on Form 8-K, Form 10-K, Form 10-Q, or
otherwise) or issues any press release, Borrower must deliver a complete copy
thereof to Lender.
4.4. Fiscal Year. Borrower will maintain a fiscal year that has a December
31st year end.
4.5. Books and Records: Maintenance of Properties. Borrower will keep and
maintain satisfactory and adequate books
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and records of account in accordance with GAAP. Borrower will also keep,
maintain and preserve all of its property and assets in good order and repair
(ordinary wear and tear excepted).
4.6. Existence and Good Standing. Borrower will preserve and maintain (a)
its existence as a corporation under the laws of its jurisdiction of
organization, and (b) its good standing in all jurisdictions where it conducts
business, and (c) the validity of all its Authorizations and Licenses required
or otherwise appropriate in the conduct of its businesses.
4.7. Deposit Accounts. Borrower will maintain all of its operating and
deposit accounts with Lender or an Affiliate of Lender, except as otherwise
provided in this Section or as consented to in writing by Lender.
Notwithstanding the foregoing, Borrower may maintain commercial deposit accounts
at institutions other than Lender (or its Affiliates) provided that (1) each
such institution is a federally insured depository institution rated as "well
capitalized" by its primary federal regulator, and (2) the aggregate collective
amount of collected balances in all such accounts does not at any time exceed
$25,000 for any ten (10) consecutive calendar days, and (3) within twenty (20)
calendar days after opening or acquiring any such account, Borrower provides
Lender with written notice of the institution's name and location and the
account name and number with respect to each such account. The institution's
name and location and the account name and number for each such account
currently in existence, as well as an approximate current balance (i.e., a
current balance at any time within the preceding thirty (30) calendar days), are
listed on Schedule 4.7 hereto.
4.8. Insurance; Disaster Contingency.
4.8.1 General Insurance Provisions. Borrower will keep all of its
property and assets fully covered by insurance with reputable and financially
sound insurance companies (reasonably acceptable to Lender). Borrower must also
maintain such protection against such hazards and liability (including, without
limitation, casualty, liability, fire, flood, business interruption, earthquake,
workmen's compensation, and other material risks to its property and business),
in such amounts and with such deductibles as is customary in the relevant
industry and appropriate under the relevant circumstances (and, in each
instance, as is reasonably acceptable to Lender). If Borrower fails or refuses
to obtain or maintain any such insurance coverage, then Lender (at its election)
may (but is not obligated to) obtain and maintain such insurance coverage on
behalf of Borrower, and the premiums and other costs thereof (a) will be
included in the indebtedness hereunder secured by the Collateral and (b) will be
due and payable by Borrower to Lender
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immediately upon demand. Each such policy must name Lender as loss payee and as
additional insured. Each such policy must also require the insurer to furnish
Lender with written notice at least 25 calendar days prior to any termination of
coverage and must provide Lender with the right (but not the obligation) to cure
any non-payment of premium. Upon Lender's request, Borrower will furnish Lender
with proof of such insurance (in form and substance acceptable to Lender) and
will cause Lender to be reflected thereon as additional insured and the loss
payee thereof. Notwithstanding the foregoing, Borrower may receive and keep all
proceeds and payments of less than $50,000 in respect of property insurance if
and to the extent that (a) no Default exists at the time of receiving such
proceeds or payment and (b) such proceeds or payment is promptly reinvested by
Borrower to repair or replace the affected property.
4.8.2. Disaster Recovery and Contingency Program. Borrower will
maintain (and at least annually review the sufficiency of) a disaster recovery
and contingency plan that addresses Borrower's plans for continuing operations
upon the occurrence of a natural disaster or other event that destroys or
prevents the use of or access to Borrower's primary computer systems,
information databases, software applications, business records and operations
facility and/or Borrower's switch sites. Such contingency plan will also
specifically address exposure within Borrower's computer systems, information
databases and software applications to processing the year 2000. Such
contingency plan at all times must be in form and substance reasonably
acceptable to Lender. Upon request, Borrower will provide Lender with a current
copy of such plan.
4.9. Loan Purpose. Borrower will use the proceeds of each Advance under the
Facility exclusively as set forth in Section 1.1.3 hereof.
4.10. Taxes. Borrower will pay and discharge all taxes, assessments or
other governmental charges or levies imposed on it or any of its property or
assets prior to the date upon which any penalty for non-payment or late payment
is incurred, unless (a) the same are then being contested in good faith by
appropriate proceedings diligently prosecuted, and (b) adequate reserves
therefor acceptable to Lender have been established, and (c) Lender has been
notified thereof in writing, and (d) the consequences of such non-payment (in
Lender's reasonable judgment) will not have a Material Adverse Effect.
4.11. Management Changes. Borrower will notify Lender in writing within
thirty (30) calendar days after any change (including, without limitation, any
dismissal or change in title or status) in the senior management personnel of
Borrower.
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4.12. Litigation and Administrative Proceedings. Borrower will notify
Lender in writing immediately upon the institution or commencement of any
litigation, legal or administrative proceeding, or labor controversy that could
reasonably be expected to have or cause a Material Adverse Effect.
4.13. Monitoring Compliance with Loan Documents: Occurrence of Defaults and
Material Adverse Effects. Borrower at all times will maintain (and comply with)
commercially reasonable procedures and systems designed to monitor compliance
and detect instances of noncompliance with the Loan Documents. Borrower will
notify Lender in writing immediately upon (a) the occurrence of any Default or
Event of Default hereunder, or (b) the occurrence of any default under any other
Loan Document, or (c) the happening of any event or the assertion or threat of
any claim that could reasonably be expected to have or cause a Material Adverse
Effect.
4.14. Compliance with Laws.
4.14.1. General. Borrower will comply in all material respects
(a) with all material laws, rules, regulations and orders (federal, state, local
and otherwise) applicable to its business, and (b) with the provisions and
requirements of all Authorizations. Borrower will notify Lender immediately in
detail of any actual or alleged material failure to comply with or violation of
any such laws, rules, regulations or orders, or under the terms of any of such
Authorizations, or of the occurrence or existence of any facts or circumstances
that with the passage of time, the giving of notice or otherwise could create
such a failure to comply or violation or could reasonably be expected to
occasion the termination of any of such Authorization.
4.14.2. ERISA. Borrower will comply in all respects with the
provisions of ERISA to the extent applicable to any Plan maintained by it or for
the benefit of any of its employees, except to the extent that the failure to be
in such compliance could not reasonably be expected to have or cause a Material
Adverse Effect. Borrower will not (a) incur any material accumulated funding
deficiency (within the meaning of ERISA and the regulations thereunder), or any
material liability to the PBGC established by ERISA or (b) permit any reportable
event (as defined in ERISA) or other event to occur which may indicate that its
Plans are not sound or which may be the basis for PBGC to assert a material
liability against it or which may result in the imposition of a Lien on its
properties or assets. Borrower will notify Lender in writing promptly after any
assertion or threat of any of the following: (i) the occurrence
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of any reportable event, (ii) the existence of any reportable threat, or (iii)
the occurrence of any other event which may indicate that a Plan is not sound or
may be the basis for PBGC to assert a material liability against it or impose a
Lien on any of its properties or assets.
4.14.3. Environmental. Borrower will comply in all respects with
the Environmental Control Statutes, except to the extent that the failure to be
in such compliance could not reasonably be expected to have or cause a Material
Adverse Effect. Borrower (a) will notify Lender when the EPA, any state or local
agency or any other Person provides oral or written notification to it with
regard to an actual or imminently threatened removal, spill, release or
discharge of hazardous or toxic wastes, substances or petroleum products, and
(b) will notify Lender in detail immediately upon the receipt by it of an
assertion of liability under the Environmental Control Statutes, or any actual
or alleged failure to comply with or perform, breach, violation or default under
any such laws or regulations.
4.14.4. Communications. Borrower will comply in all material
respects with (a) the provisions of the Federal Communications Act and each
State Act and the rules, regulations, policies, procedures and orders of the FCC
and each State PUC and (b) the terms, conditions and restrictions of each
material License, Tariff and other Authorization.
4.15. Further Actions.
4.15.1. Additional Collateral. Borrower will execute, deliver and
record (or, as appropriate, cause the execution, delivery and recordation) at
any time upon Lender's request and in form and substance reasonably satisfactory
to Lender, any of the following instruments in favor of Lender as additional
Collateral hereunder: (a) mortgages, deeds of trust and/or assignments on or of
any real or personal property owned, leased or licensed by it, and (b)
certificates of title encumbrances against any of its titled vehicles, and (c)
any other like assignments or agreements specifically covering any of its
properties or assets (including, without limitation, assignments of any patents,
trademarks, copyrights, databases, trade secrets and other forms of intellectual
property), and (d) any financing or continuation statements requested by Lender.
4.15.2. Further Assurances. From time to time, Borrower will
execute and deliver (or will cause to be executed and delivered) such
supplements, amendments, modifications to and/or replacements of the Loan
Documents and such further instruments as may be reasonably required to
effectuate the intention of the parties to (or to otherwise facilitate
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the performance of) the Loan Documents.
4.15.3. Estoppel Certificate. Upon Lender's request, Borrower
will execute, acknowledge and deliver (or, as appropriate, cause the execution,
acknowledgement and delivery) to such Person as Lender may request a statement
in writing certifying as follows (to the best of its knowledge, after due
inquiry): (a) that the Loan Documents (as amended, if applicable) are unmodified
and in full force and effect, and (b) that the payments under the Loan Documents
required to be paid by Borrower have been paid, and (c) the then unpaid
principal balance of Facilities hereunder, and (d) whether or not any Default is
then occurring under any of the Loan Documents and, if so, specifying each such
Default of which the signer may have knowledge. Unless Borrower otherwise
consents (which consent will not be unreasonably withheld, delayed or
conditioned), Lender must give Borrower at least ten (10) Business Days to
complete and deliver any such certificate. Borrower understands and agrees that
any such certificate delivered pursuant to this Section may be relied upon by
Lender and, if different, by the recipient thereof.
4.15.4. Waivers and Consents. At any time upon Lender's request,
Borrower will use commercially reasonable efforts to obtain and deliver (in form
and substance reasonably satisfactory to Lender) a waiver or consent to the
assignment to Lender of any contract, lease, Authorization or other agreement to
which it is a party.
4.15.5. Additional Material Contracts Licenses and
Authorizations. Borrower (a) will notify Lender in writing within 90 calendar
days after executing or becoming bound by any contract, agreement, License or
other Authorization that should have been listed on Schedule 3.5A hereto,
Schedule 3.8 hereto or Schedule 3.9 hereto if it had existed as of the Closing
Date, and (b) will concurrently update Schedule 3.5A hereto, Schedule 3.8 hereto
or Schedule 3,9 hereto (as appropriate).
4.15.6. Access and Audits. Lender (from time to time at its
discretion) may conduct audits of the Collateral and of the performance and
operations of Borrower. Borrower (upon Lender's request from time to time) will
use commercially reasonable efforts to provide Lender (and its representatives
and agents) with reasonable access to Borrower's management personnel, books and
records, property and operations (including, without limitation, its financial
records), whether such property, books and records are in the possession of
Borrower or are in the possession of a third party (including, without
limitation, the possession of Borrower's affiliates, accountants and legal
counsel). In connection with any such audit, Lender may also make notes and
copies of (and extracts from) relevant records.
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4.16. Costs and Expenses. Borrower will pay or reimburse Lender for all
fees and out-of-pocket costs and expenses (including, without limitation, all
reasonable attorneys' fees and disbursements and the reasonable fees and
disbursements of in-house counsel and documentation personnel) that Lender may
pay or incur in connection with (a) the preparation, negotiation and review of
the Loan Documents, any waivers, consents and amendments in connection herewith
or therewith and all other documentation related hereto or thereto, and (b) the
funding of the indebtedness or any Advance hereunder, and (c) the initial and
continuing perfection or protection of Lender's interest in any of the
Collateral, and (d) the collection or enforcement of any of the Loan Documents,
and (e) the periodic examination of the Collateral and the books and records of
Borrower, and (f) Lender's release of its interests in the Collateral in
accordance with the terms of the Loan Documents. Borrower will pay any and all
recordation taxes or other fees due upon the filing of the financing statements
or documents of similar effect required to be filed under the Loan Documents,
and will provide Lender with a copy of any receipt or other evidence reflecting
such payments. All obligations provided for in this Section shall survive the
termination of this Agreement and/or the repayment of indebtedness hereunder.
4.17. Other Information. Borrower will provide Lender with any other
documents and information (financial or otherwise) reasonably requested by
Lender or its counsel from time to time.
4.18. Payment by Account Debtors.
a. Borrower (1) will ensure that all rights to payment in respect
of services rendered by Borrower (in connection with direct-dialed or
operator-assisted telephone calls or otherwise) are billed to the user of such
services either by Borrower or by a LEC; and (2) will perform all processing and
take all other actions (either itself or through one or more Billing Agents) as
are legal and necessary to directly bill each ultimate customer or to transmit
such records and other billing information to each LEC in a format compatible
with each LEC's internal billing systems; and (3) will take such actions (either
itself or through one or more Billing Agents) as are necessary to cause each LEC
to purchase, in accordance with its usual and customary practices generally and
consistent with its past practice, from Borrower all records and other billing
information related to all services rendered by Borrower to any Person that such
LEC is authorized to bill; and (4) will directly remit or will cause each
Billing Agent to remit or will cause each LEC to whom billing information has
been submitted on behalf
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of Borrower to remit all payments in respect of such billing information
directly to BIC or, if BIC is not acting as a Billing Agent, to Lender or its
designee via direct wire transfer in accordance with the provisions of Section
1.6 of the Security Agreement.
b. In addition, but not in limitation of clause "a", Borrower
will not sell, transfer, assign, dispose of, or otherwise permit any other
Person to acquire any interest in any records or billing information evidencing
Borrower's right to receive payment for services rendered in connection with
direct-dialed or operator-assisted telephone calls directly billable by Borrower
or billable by any LEC to any Person, except that Borrower may sell such records
and billing information to one or more LECs provided that payment therefor
(after deduction of reasonable and customary processing and bill rendering fees
due to the purchasing LEC) is remitted to BIC or Lender or its designee as
provided in clause "a" of this Subsection.
c. Borrower shall cause BIC (1) promptly upon receipt of each
payment by any LEC or other Person, to notify Borrower and Lender of the amount
of such payment allocable to billing information submitted to such LEC or other
Person on behalf of Borrower and (2) to transfer that amount (less such
reasonable fees, charges, charge backs, credits and adjustments as are withheld
in accordance with the BIC Billing Agreement) via direct wire transfer to Lender
or its designee in accordance with the provisions of Section 1.6 of the Security
Agreement.
d. Except with prior written consent of Lender (which consent
shall not be unreasonably withheld while no Default is occurring), Borrower will
not enter into any agreement (other than the BIC Billing Agreement) with any
Person (other than BIC) whereby such Person agrees to act as a Billing Agent.
The BIC Billing Agreement is a Material Contract.
e. Notwithstanding the foregoing (or the provisions of Section
1.6 of the Security Agreement) so long as no Default of the types described in
Sections 7.1.1 through 7.1.13 hereof exists, then any funds received by Lender
pursuant to this Section or Section 1.6 of the Security Agreement that are
considered by Lender to be "collected funds" may be withdrawn by Borrower at any
time (to satisfy indebtedness under the Loan Documents or for other allowable
and legitimate corporate expenditures).
4.19. FCC and State PUC-Related Affirmative Covenants. Without limiting the
generality of the foregoing affirmative covenants, Borrower further covenants
and agrees as follows:
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4.19.1. Service Interruption. Borrower will notify Lender in
writing within 36 hours after any period during which the transmission at any
switch site is interrupted or curtailed for an aggregate of 24 hours or more
(whether or not consecutive) during any period of 48 consecutive hours. Borrower
will make every effort to restore such transmission as soon as possible to the
level that was obtained prior to such interruption or curtailment.
4.19.2. FCC and State PUC Correspondence. Orders and Filings.
Within 5 Business Days after mailing or receipt (as applicable), Borrower will
provide Lender with a copy of each significant or material correspondence,
application or filing with, to or from the FCC or any State PUC. Within 5
Business Days after the release of any order of the FCC or any State PUC (a)
designating or proposing to designate an application by Borrower to the FCC or a
State PUC for an evidentiary hearing, or designating or proposing to designate
for an evidentiary hearing the possible non-renewal, revocation or modification
of any License or Authorization issued to it by the FCC or a State PUC, or (b)
imposing or proposing to impose a fine, penalty or other forfeiture upon
Borrower, or (c) initiating any other enforcement action against Borrower, or as
soon as Borrower ascertains that any such order will be forthcoming from the FCC
or a State PUC, then Borrower must notify Lender of the same and, if any such
order has been issued by the FCC or a State PUC, must provide a copy of such
order to Lender.
4.20. Post-Closing Items.
4.20.1. Restructuring of Borrower and Release of Equity Pledge.
Borrower will use commercially reasonable efforts to promptly restructure its
ownership (in a manner reasonably acceptable to Lender, written confirmation of
which Lender will not unreasonably withhold) so that Borrower becomes a
wholly-owned operating Subsidiary of a holding company that owns no assets other
than the equity of Borrower (the "Corporate Restructuring"). Concurrently with
the consummation of any such Corporate Restructuring, (a) such holding company
will execute in favor of Lender an unconditional guaranty of payment (in form
and substance acceptable to Lender) with respect to the indebtedness under the
Loan Documents, and (b) such holding company will execute in favor of Lender an
equity pledge (in form and substance acceptable to Lender) pledging all of its
ownership of equity interests of Borrower as Collateral, and (c) Lender will
release from each then-existing equity pledge each other Person who has pledged
equity of Borrower as Collateral, and (d) the Warrant Agreement will be amended
and restated (in a manner acceptable to Lender) so that it grants Lender
substantially
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similar rights and interests with respect to the ownership of such holding
company, and (e) the various other Loan Documents will be amended (as reasonably
requested by Lender) to appropriately reflect the restructuring of the ownership
of Borrower, and (f) Borrower will obtain for the benefit of Borrower and Lender
a legal opinion as to the effectiveness and validity of such Corporate
Restructuring and issuance of shares in connection therewith. If prior to any
such Corporate Restructuring Borrower issues shares of its stock pursuant to an
effective registration statement filed with the SEC under the Securities Act (a
"Public Offering"), then concurrently with the closing of the first such Public
Offering, (a) Lender will release from each then-existing equity pledge each
Person who has pledged equity of Borrower as Collateral, and (b) each member of
senior management of Borrower (and any relative thereof) who owns equity
interests of Borrower will execute in favor of Lender an option and escrow (in
form and substance acceptable to Lender) by which Lender (at any time while an
Event of Default exists) may purchase from such Persons (at the lesser of the
par value per share or a total of $100) equity of Borrower that collectively in
the aggregate (a) represents at least 50% of the issued and outstanding voting
rights of Borrower (On a fully diluted basis) and (b) has a fair market value of
at least 200% of the Current Line of Credit Commitment (as such commitment
amount may be adjusted from time to time). In connection with any such Public
Offering, any legal opinions issued regarding the validity and effectiveness of
such transaction, the issuance of shares in connection therewith or the status
of regulatory Authorizations shall also be issued for the benefit of Lender.
4.20.2. Foreign Qualifications. On or before July 15, 1997 and
before any Advance hereunder other than the Advances identified on Schedule
1.4.2, Borrower must file to qualify to conduct business as a foreign
corporation (and must deliver evidence thereof to Lender) with respect to the
following jurisdictions: (a) District of Columbia, and (b) New York, and (c) New
Jersey.
4.20.3. State PUC Authorizations and Approvals. Borrower will
diligently prosecute and pursue the obtaining of all consents and approvals from
the following State PUCs whose consents and approvals are necessary or
appropriate for Borrower to obtain and to perform its obligations under the Loan
Documents (and must deliver evidence thereof to Lender): (a) Tennessee and (b)
Washington.
4.20.4. Primary Estoppels and Consents. On or before July 10,
1997 and before any Advance hereunder other than the Advances identified on
Schedule 1.4.2, Borrower must obtain estoppel and consent agreements (in form
and substance reasonably
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acceptable to Lender) from each of the following Persons with whom Borrower has
entered into a Material Contract or other significant relationship: (a) BIC, and
(b) Vaswani Place Limited Partnership, and (c) Telecommunications Finance Group.
4.20.5. Secondary Estoppels and Consents. On or before July 30,
1997, Borrower must obtain estoppel and consent agreements (in form and
substance reasonably acceptable to Lender) from each of the following Persons
with whom Borrower has entered into a Material Contract or other significant
relationship: (a) Communications Transmission Group ("IXC") and (b) Companhia
Portuguesa Radio Marconi, S.A. ("Marconi").
4.20.6. Payoff Letters and Termination Statements. On or before
July 15, 1997 and before any Advance hereunder other than the Advances
identified on Schedule 1.4.2, Borrower must payoff all existing indebtedness
owed to (and must provide evidence thereof to Lender) from General Electric
Capital Corporation ("GECC") and AT&T Commercial Finance Corporation ("AT&T").
On or before July 30, 1997, Borrower must obtain and file termination statements
and such other release documents as are appropriate (in form and substance
reasonably acceptable to Lender) from GECC and AT&T.
ARTICLE 5: NEGATIVE COVENANTS
Borrower hereby covenants and agrees that, so long as any indebtedness
remains outstanding hereunder, Borrower will comply with the following negative
covenants (unless Lender otherwise consents in writing, which consent will not
be unreasonably withheld while no Default is occurring):
5.1. Capital Expenditures. Borrower will not incur Capital Expenditures in
any fiscal year in excess of $4,000,000. Notwithstanding the foregoing, to the
extent that the permitted Capital Expenditures (referenced above) exceed the
actual Capital Expenditures for any fiscal year, then the excess may be carried
over and used during the immediately succeeding fiscal year as additional
permitted amounts of Capital Expenditures in such subsequent fiscal year applied
after first exhausting the otherwise permitted amount of scheduled Capital
Expenditures), provided that in no event may the aggregate amount of Capital
Expenditures in any fiscal year exceed $6,000,000. Notwithstanding the
foregoing, Borrower may not make any such Capital Expenditure to acquire all or
any substantial portion of the assets or equity of another business enterprise.
5.2. Additional Indebtedness. Borrower will not borrow any monies or
create, incur or assume any additional
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indebtedness, obligations or liabilities (including, without limitation,
monetary obligations under non-compete and consulting arrangements) except as
follows (collectively, the "Permitted Indebtedness"):
a. Borrowings from Lender hereunder; and
b. Trade indebtedness, if and to the extent (i) such indebtedness
is incurred in the normal and ordinary course of business for value received and
(ii) such indebtedness (to the extent it exceeds $10,000 to any single vendor)
is paid on a current basis or is less than 120 calendar days past due; and
c. Indebtedness and obligations incurred to purchase fixed or
capital assets, consistent with the restrictions in Section 5.1 hereof and
Section 5.5 hereof, provided, however, that (1) the aggregate amount of such
asset acquisition indebtedness outstanding at any time (together with the
aggregate amount of Capital Lease indebtedness outstanding under Subsection
5.2.d hereof) may not exceed $2,500,000, and (2) such indebtedness must be
immediately included in the calculation of Funded Debt, and (3) such fixed or
capital assets being purchased may not constitute (a) customized application
software or systems integration software, or (b) equity interests in or
substantially all of the assets of another enterprise other than Permitted
Investments, or (c) any other asset the loss of which could reasonably be
expected to have or cause a Material Adverse Effect; and
d. Indebtedness and obligations incurred under Capital Leases,
consistent with the restrictions in Section 5.1 hereof and Section 5.5 hereof,
provided, however, that (1) the aggregate amount of such Capital Lease
indebtedness outstanding at any time (together with the aggregate amount of
asset acquisition indebtedness outstanding under Subsection 5.2.c hereof) may
not exceed $2,500,000, and (2) such indebtedness must be immediately included in
the calculation of Funded Debt, and (3) such fixed or capital assets being
leased may not constitute (a) customized application software or systems
integration software, or (b) any asset the loss of which could reasonably be
expected to have or cause a Material Adverse Effect; and
e. Subordinated Indebtedness if and to the extent permitted under
Section 5.11 hereof; and
f. Such indebtedness listed on Schedule 5.2 hereto with the prior
written consent of Lender (which consent will not be unreasonably withheld by
Lender while no Default is occurring). Unless Lender otherwise expressly
consents in writing (or unless otherwise specified on Schedule 5.2 hereto),
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all indebtedness listed on Schedule 5.2 hereto must be included in the
calculation of Funded Debt.
5.3. Guaranties. Borrower will not guarantee, assume or otherwise agree to
become liable in any way, either directly or indirectly, for any additional
indebtedness or liability of any other Person, except as follows (collectively,
the "Permitted Guaranties"): (a) in favor of Lender, or (b) to endorse checks,
drafts and negotiable instruments for collection in the ordinary course of
business, or (c) to the extent that Lender otherwise consents in writing.
5.4. Loans. Borrower will not make any loans or advances to any other
Person, except as follows (collectively, the "Permitted Loans"): loans to
employees that do not exceed $2,500 to any individual employee and do not at any
time in the aggregate outstanding exceed $10,000 among all such loans to all
such employees.
5.5. Liens and Encumbrances: Negative Pledge. Borrower will not create,
permit or suffer the creation or existence of any Liens on any of its property
or assets (real or personal, tangible or intangible), except as follows
(collectively, the "Permitted Liens"):
a. Liens in favor of Lender as security for the Obligations under
the Loan Documents; and
b. Liens arising in favor of sellers or lessors for indebtedness
and obligations incurred to purchase or lease fixed or capital assets as
permitted under Subsection 5.2.c hereof or Subsection 5.2.d hereof, provided,
that (1) such Liens secure only the indebtedness and obligations created
thereunder (but not any related monetary obligations under non-compete and
consulting arrangements) and are limited to the assets purchased or leased
pursuant thereto, and (2) such fixed or capital assets do not constitute (a)
customized application software or systems integration software, or (b) equity
interests in or substantially all of the assets of another enterprise, or (c)
any other asset the loss of which could reasonably be expected to have or cause
a Material Adverse Effect; and
c. Liens for taxes, assessments or other governmental charges
(federal, state or local) that are not yet delinquent or that are then being
currently contested in good faith by appropriate proceedings diligently
prosecuted, provided, however, that (1) the existence of such Liens and
challenge of such charges must have been fully disclosed to Lender, and (2)
adequate reserves therefor in accordance with GAAP must have been established,
and (3) such Liens (in Lender's reasonable opinion)
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could not reasonably be expected to have or cause a Material Adverse Effect; and
d. Deposits in the ordinary course of business to secure
obligations under workmen's compensation, unemployment insurance or social
security laws or similar legislation; and
e. Deposits to secure performance or payment bonds, bids,
tenders, contracts, leases, franchises or public and statutory obligations
required in the ordinary course of business; and
f. Deposits to secure surety, appeal or custom bonds required in
the ordinary course of business; and
g. Liens of carriers, warehousemen, mechanics, materialmen and
landlords incurred in the ordinary course of business for sums not past due or
for sums being currently contested in good faith by appropriate proceedings
diligently prosecuted, provided, however, that (1) the existence of such Liens
and challenge of such sums allegedly due must have been fully disclosed to
Lender, and (2) adequate reserves therefor in accordance with GAAP must have
been established, and (3) such Liens (in Lender's reasonable opinion) could not
reasonably be expected to have or cause a Material Adverse Effect; and
h. Easements, rights-of-way, restrictions and other similar
encumbrances on real property of Borrower that, independently and in the
aggregate, do not (1) materially interfere with the occupation, use or enjoyment
by Borrower of the property or assets encumbered thereby in the normal course of
business or (2) materially impair the value of the property subject thereto; and
i. Liens listed on Schedule 5.5 hereof with the consent of Lender
(which consent will not be unreasonably withheld by Lender while no Default is
occurring).
Borrower will not similarly covenant to or in favor of any other Person that it
will not create, permit or suffer the creation or existence of any Liens on any
of its property or assets. In addition, Borrower will not purchase or otherwise
acquire any additional assets (including, without limitation, any leasehold
interest therefor) unless Lender's interest in such property either (a) is
already covered and perfected pursuant to an existing and effective UCC-1
financing statement, fixture filing, mortgage and/or leasehold mortgage (as
appropriate) in favor of Lender or (b) otherwise becomes properly perfected
within 5 calendar days after any such acquisition by Borrower's filing (at its
expense) all necessary UCC-1 financing statements, fixture
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filings, mortgages and/or leasehold mortgages (as appropriate, and in form and
substance reasonably acceptable to Lender). Moreover, Borrower will not
establish or maintain any "securities account" with any "securities
intermediary" (as such terms are defined in Article 8 of the UCC) except as
permitted under Section 5.7 hereof.
5.6. Transfer of Assets. Borrower will not sell, lease, transfer or
otherwise dispose of all or substantially all of its assets. In addition,
Borrower will not sell, lease, transfer or otherwise dispose of any of its
assets other than (a) pursuant to a transaction with an unrelated third party in
the normal and ordinary course of business for value received and otherwise in
accordance with the terms hereof, (including, without limitation, Section
1.1.6.5 c hereof) or (b) pursuant to a transaction not satisfying the standard
under Clause "(a)" if the aggregate collective fair market value of the asset
being transferred together with all other such transfers during the immediately
preceding 12 calendar months does not exceed $50,000 (collectively, the
"Permitted Transfers").
5.7. Acquisitions and Investments. Borrower will not purchase or otherwise
acquire (including, without limitation, by way of share exchange) any part or
amount of the equity ownership or assets of, or make any investments in, any
other corporation, partnership, limited liability company or other venture or
enterprise. Notwithstanding the foregoing, Borrower may acquire or invest in the
following (collectively, the "Permitted Investments"):
a. Government and agency securities backed by the full faith and
credit of the U.S. federal government; and
b. Commercial paper of a U.S. domestic issuer rated A-1+ or A-1
by Standard & Poor's Ratings Group or P-1 by Moody's Investor Services, Inc. and
maturing not more than 90 calendar days from the date of acquisition thereof;
and
c. Certificates of deposit (maturing within 12 calendar months
after the date of issuance), time deposits, other deposits and bankers'
acceptances issued by or established with U.S. federally insured commercial
banks rated as "well capitalized" by their primary federal regulators, and
having unimpaired capital and unimpaired surplus (collectively) of at least $250
million, and whose commercial paper (or commercial paper that is supported by
such bank's letter of credit or commitment to lend) is rated as A-1+ or A-1 by
Standard & Poor's Ratings Group or P-1 by Moody's Investor Services, Inc.; and
d. Assets acquired pursuant to transactions
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permitted under Section 5.1 hereof or Section 5.2 hereof; and
e. Other investments that collectively in the aggregate of any
time do not exceed $50,000.
Notwithstanding the foregoing, unless and to the extent such investments are
certificated and separately collaterally assigned to Lender, then the amounts of
investments permitted under Clauses "a", "b" and "c" of this Section may not at
any time exceed $50,000. In addition, Borrower will not establish or maintain
any "securities account" with any "securities intermediary" (as such terms are
defined in Article 8 of the UCC), unless a control agreement acceptable in form
and substance to Lender is first executed by such "securities intermediary"
securing Lender's first priority interest and rights in and to all "financial
assets" and "security entitlements" associated with such "securities account".
5.8. New Ventures: Mergers. Borrower will not (a) enter into any new
business activities or ventures not directly related to its current business, or
(b) merge or consolidate with or into any other corporation, partnership,
limited liability company or other organization, or (c) create or acquire (or
cause or permit the creation or acquisition of) any Subsidiary or Affiliate
(except the hiring of officers and directors). Notwithstanding the foregoing,
Borrower may create or acquire (or cause or permit the creation or acquisition
of) one or more wholly-owned Subsidiaries provided that (1) each such Subsidiary
(at Lender's sole discretion) becomes a "Borrower," "Guarantor" and/or "Obligor"
under the Loan Documents, and (2) a first priority security interest and pledge
of 100% of the assets and equity of each such Subsidiary is perfected in favor
of Lender as additional Collateral under the Loan Documents (except as otherwise
permitted under Section 5.5).
5.9. Transactions with Affiliates. Borrower will not enter into any
transaction or agreement with any Subsidiary, Affiliate or other related
enterprise except as follows: (a) reasonable and customary compensation
arrangements in the ordinary course of business with its officers and directors,
and (b) guaranties (if any) to the extent permitted by Section 5.3 hereof, and
(c) employee loans (if any) to the extent permitted under Section 5.4 hereof,
and (d) reasonable and customary asset transfers among Borrowers (if any) to the
extent permitted under Section 5.6 hereof, and (e) reasonable dividends and
distributions (if any) to the extent permitted by Section 5.10 hereof, and (f)
reasonable and customary management fees (if any) to the extent permitted under
Section 5.12 hereof.
5.10. Distributions or Dividends. Borrower will not
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declare or make (directly or indirectly) any payment or distribution with
respect to, or incur any liability for the purchase, acquisition, redemption or
retirement of, any of its equity interests (including warrants therefor) or as a
dividend, return of capital or other payment or distribution of any kind to any
holder of any such equity interest. Notwithstanding the foregoing, Borrower will
make all payments and distributions to Lender required under or in connection
with the Warrant Agreement, the Warrants and/or any related warrant shares.
5.11. Payment of Subordinated Indebtedness. Borrower will not incur or make
any payments on Subordinated Indebtedness except as permitted by this Section or
by a separate subordination agreement executed between such other creditor and
Lender. Notwithstanding the foregoing, if any Subordinated Indebtedness is
subsequently authorized by Lender and if any Default occurs under the Loan
Documents, then Borrower will not make any further payments in connection with
its Subordinated Indebtedness unless and until such Default has been waived or
cured to Lender's satisfaction.
5.12. Payment of Management Fees. Borrower will not pay any funds or
otherwise incur or accrue any liabilities for any management or related services
except (a) reasonable and customary compensation to bona fide full-time resident
employees of Borrower, and (b) reasonable and customary compensation to
consultant management employees, and (c) as otherwise permitted by this Section.
5.13. Issuance of Additional Equity. Borrower will not permit the issuance
(or reissuance) of any equity interests (common stock, preferred stock,
partnership interests, member interests or otherwise) or any options, warrants,
convertible securities or other rights to purchase such beneficial or equity
interest. Notwithstanding the foregoing, Borrower may issue additional equity
interests provided that: (a) Borrower has provided written notice thereof to
Lender at least 10 Business Days prior to such issuance (which notice must at
least describe the type and amount of equity interests being purchased, the
consideration to be received by Borrower in exchange for such issuance, and the
identity of the purchaser), and (b) such equity interests are pledged to Lender
(with a first lien priority) as additional Collateral hereunder at the time of
issuance thereof using documentation that is in form and substance reasonably
acceptable to Lender, and (c) no Default or Event of Default then exists under
the Loan Documents or would otherwise result from the issuance of such equity
interest (including, without limitation, a Default under the change in control
restrictions set forth in Section 7.1.8 hereof). Further notwithstanding the
foregoing, (a) the negative covenant under this Section
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restricting additional issuances of equity of Borrower will be automatically
deleted herefrom and will be of no further force or effect immediately prior to
(but conditioned upon) consummation of a Public Offering by Borrower (as defined
in and in accordance with Section 4.20 hereof), and (b) prior to a Corporate
Restructuring, Borrower may issue shares of common stock upon the exercise of
warrants or options outstanding as of the Closing Date (without such equity
being pledged as Collateral if the owner thereof has not otherwise executed an
equity pledge in favor of Lender), and (c) as of and after a Corporate
Restructuring, Borrower only may issue additional equity to its corporate parent
that owns 100% of its equity.
5.14. Removal of Assets. Borrower will not remove or permit the removal of
any asset or group of assets (with a collective fair market value exceeding
$10,000) to a jurisdiction or a county in which no financing statement on Form
UCC-1 has been filed naming Lender as secured party" with respect to such
assets. Notwithstanding the foregoing, Borrower may remove the following types
of assets under the following conditions: (a) temporary removal of equipment for
repair or replacement provided that Lender has received prior written notice
thereof indicating the type of equipment, its approximate fair market value, the
destination location and an estimate of the length of time that such equipment
will be removed from the relevant jurisdiction, and (b) booths, displays,
marketing materials and related accompanying equipment of Borrower being used
temporarily in connection with marketing Borrower's business at trade shows or
otherwise (provided that the aggregate fair market value thereof does not exceed
$50,000), and (c) portable computer and related accompanying equipment being
used by the officers, employees and independent representatives of Borrower in
connection with accomplishing Borrower's business activities at home offices or
otherwise (provided that the aggregate fair market value thereof does not exceed
$50,000). Moreover, Borrower will not move the location of its chief executive
office (or change its official mailing address) without providing Lender with
prior written notice thereof.
5.15. Modifications to Organic Documents. Borrower will not (a) amend or
otherwise modify any of its Organic Documents, or (b) change its official name,
its operating names or the names under which it executes contracts and conducts
business.
5.16. Modifications to Material Relationships. Borrower will not (and will
not permit any other party to) cancel, terminate, amend, modify or otherwise
alter (a) any Subordinated Indebtedness, or (b) any agreement regarding the
provision of management services to Borrower, or (c) any Material Contract
listed (or contract that should be listed) on Schedule 3.8 hereto.
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5.17. Margin Stock Restrictions; Other Federal Statutes. Borrower will not
use any of the proceeds hereunder, directly or indirectly, to purchase or carry,
or to reduce or retire any indebtedness that was originally incurred to purchase
or carry, any Margin Stock or for any other purpose that might constitute the
transactions contemplated hereby as a "Purpose Credit" within the meaning of the
FRB's Margin Regulations. In addition, Borrower will not engage as its principal
business in the extension of credit for purchasing or carrying Margin Stock.
Borrower will not cause or permit any Loan Document to violate any other
regulation of the FRB or the SEC or any provision of the Securities Act of 1933,
the Securities Exchange Act of 1934, the Investment Company Act of 1940 or the
Small Business Investment Act of 1958, each as amended, or any rules or
regulations promulgated under any of such statutes.
ARTICLE 6: ADDITIONAL COLLATERAL AND RIGHT OF SET OFF
6.1. Additional Collateral. As additional collateral for the payment of any
and all indebtedness and obligations of Borrower to Lender (whether matured or
unmatured, and whether now existing or hereafter incurred or created hereunder
or otherwise), Borrower hereby grants Lender a security interest in and a lien
upon all funds, balances and other property of any kind of Borrower, or in which
Borrower has any interest (limited to the interest of Borrower therein), now or
hereafter in the possession, custody or control of Lender or any Affiliate of
Lender.
6.2. Right of Set-Off. Lender is hereby authorized at any time and from
time to time during the existence of an Event of Default hereunder (unless
expressly prohibited by applicable law) to set-off and apply any and all
deposits (general or special, time or demand, provisional or final) and other
indebtedness at any time held or owing by Lender (or any of its Affiliates) to
or for the credit or the account of Borrower against any and all of the
indebtedness and monetary obligations of Borrower now or hereafter existing
under the Loan Documents or any other evidence of indebtedness originated,
acquired or otherwise held by Lender, irrespective of whether Lender shall have
made any demand under the Loan Documents or other indebtedness and although such
obligations may be unmatured. Notwithstanding the foregoing, Lender may not
exercise such right of set-off if the only Event of Default existing at the time
is under Section 7.1.14 hereof. Lender agrees to notify Borrower within a
commercially reasonable time after any such set-off and application made by
Lender; provided, however, that the failure
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to give such notice shall not in any way affect the validity of such set-off and
application.
6.3. Additional Rights. The rights of Lender under this Article 6 are in
addition to the other rights and remedies (including, without limitation, other
rights of set-off) that Lender may have by contract, at law, or otherwise.
ARTICLE 7: DEFAULT AND REMEDIES
7.1. Events of Default. Each of the following events separately constitutes
an independent Event of Default hereunder (each of which may be waived by Lender
in its sole and absolute discretion):
7.1.1. Payment Obligations. If any payment of principal, interest
or other sum payable to Lender under any Loan Document (including any Note) is
not received by Lender on the date such payment is due and payable and such
failure to receive payment continues for a period of five (5) Business Days
after the due date therefor.
7.1.2. Representations and Warranties. If any representations,
warranty or other statement made in any Loan Document, or in any written report,
schedule, exhibit, certificate, agreement, or other document given by or on
behalf of Borrower or any other Obligor (or otherwise furnished in connection
herewith) when made was misleading or incorrect in any material respect.
7.1.3. Financial Covenants. If Borrower defaults in or fails to
observe at any time any of the covenants set forth in Section 4.1 hereof.
7.1.4. Other Covenants in Loan Documents. If Borrower or any
other Obligor defaults in the full and timely performance when due of any other
covenant or agreement contained in any Loan Document (or in any other document
or agreement now or hereafter executed or delivered in connection herewith), and
such default remains uncured for a period of ten (10) Business Days after the
earlier of the date that Lender notifies Borrower thereof or the date that
Borrower otherwise acquires knowledge or should have acquired knowledge thereof.
Notwithstanding the foregoing, if such covenant Default is not reasonably
subject to cure within such 10 Business Day period, then such Default will not
be an Event of Default hereunder if and so long as (1) Lender was notified of
the occurrence of such Default in writing within such 10 Business Day period,
and (2) Borrower or such other Obligor commenced cure within such 10 Business
Day period, and
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(3) Borrower or such other Obligor continues to diligently pursue cure
thereafter, and (4) such default is ultimately cured to Lender's satisfaction
(or waived by Lender) within a reasonable period of time after such 10 Business
Day period (but in any event within 90 calendar days after the occurrence of
such Default).
7.1.5. Default Under Other Agreements with Lender. If any event
of default (as described or defined therein, which term shall include any notice
and cure periods provided therein) occurs or exists under the provisions of any
other credit agreement, security agreement, mortgage, deed of trust, indenture,
debenture, cash management or account agreement, contract, lease or other
agreement between Borrower, any Affiliate of Borrower or any other Obligor and
Lender (or any Affiliate of Lender), unless such default is waived by Lender or
cured to Lender's satisfaction.
7.1.6. Default Under Material Agreements with Other Parties. If
Borrower fails or refuses to make any one or more required payments (whether
principal, interest or otherwise) aggregating in excess of $25,000 with respect
to any Funded Debt (or with respect to any guaranty or reimbursement obligation
of any such indebtedness) prior to the expiration of any applicable grace period
with respect to such payment, or if any such indebtedness for borrowed money in
excess of $25,000 is accelerated prior to its express maturity as a result of
any default thereunder, or if any event of default (as described or defined
therein, which term shall include any notice and cure periods provided therein)
occurs or exists under the provisions of any Material Contract listed on
Schedule 3.8 hereto (or a contract that should be listed on Schedule 3.8 hereto
under the terms hereof). Notwithstanding the foregoing, the occurrence of such
an event of default thereunder will not constitute an Event of Default hereunder
if and so long as either:
(a) (l) lender was notified of the occurrence of such default in
writing within 10 Business Days after the occurrence
thereof, and (2) the other Person to such agreement has not
formally declared an event of default thereunder, has not
accelerated any related indebtedness in connection
therewith, and is not then otherwise pursuing any remedies
thereunder, and (3) Borrower continues to diligently pursue
resolving such dispute with such Person, and (4) such event
of default is ultimately cured (without incurring any
material liability) to Lender's satisfaction within a
reasonable period of time after such
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10 Business Day period (but in any event within 90 calendar
days after the occurrence of such default), or
(b) Within 30 calendar days after the occurrence of such event
of default, the services or products provided under such
Material Contract are replaced by Borrower with
substantially comparable services or products under a new
contract with another Person (without incurring any material
liability) that is in form and substance acceptable to
Lender.
7.1.7. Security Interest. If the security interest or lien in any
of the Collateral (with a fair market value exceeding collectively $15,000),
other than Collateral consisting of equity ownership interest in Borrower or in
subsidiaries or other securities of Borrower (for which there is no permissible
threshold for non-compliance), at any time does not constitute a legal, valid
and enforceable security interest or lien in favor of Lender.
7.1.8. Change of Control.
a. Prior to the occurrence of a Corporate Restructuring:
(i) If Ram Mukunda ceases to own and control at least 65% of
each class of voting securities of Borrower prior to the occurrence of a Public
Offering of Borrower's common stock or ceases to own and control at least 40%
(and, in any event, the largest single block) of each class of voting securities
of Borrower after the occurrence of a public Offering of Borrower's common
stock.
(ii) If Ram Mukunda or Prabhav Maniyar or Anthony Das ceases
to hold a senior management position with active involvement in the management
and operations of Borrower, unless (1) such event is by reason of his or her
death or disability and (2) replacement management arrangements satisfactory to
Lender (in its sole and absolute discretion) are made within 60 calendar days
after such death or within 120 calendar days after the commencement of such
period of disability.
b. As of and after the occurrence of a Corporate Restructuring:
(i) If the corporate holding company of
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Borrower ceases to own and control 100% of each class of equity securities of
Borrower.
(ii) If Ram Mukunda or Prabhav Maniyar or Anthony Das ceases
to hold a senior Management position with active involvement in the management
and operations of Borrower, unless (1) such event is by reason of his or her
death or disability and (2) replacement management arrangements satisfactory to
Lender (in its sole and absolute discretion) are made within 60 calendar days
after such death or within 120 calendar days after the commencement of such
period of disability.
7.1.9. Government Action.
a. If custody or control of any substantial part of the
property of Borrower is assumed by any governmental agency or any court of
competent jurisdiction at the instance of any governmental agency.
b. If any governmental regulatory authority or judicial
body makes any other final nonappealable determination that (in Lender's
reasonable judgment) could reasonably be expected to have or cause a Material
Adverse Effect.
7.1.10. Insolvency. If Borrower or any other Obligor that pledges
Collateral or that is directly or indirectly liable to Lender for all or any
part of the indebtedness under the Loan Documents (a) becomes insolvent,
bankrupt or generally fails to pay its, his or her debts as such debts become
due; or (b) is adjudicated insolvent or bankrupt in any proceeding; or (c)
admits in writing an inability to pay its, his or her debts; or (d) comes under
the authority of a custodian, receiver or trustee (or one is appointed for
substantially all of its, his or her property); or (e) makes an assignment for
the benefit of creditors; or (f) has commenced against it, him or her any
proceedings under any law related to bankruptcy, insolvency, liquidation,
dissolution or the reorganization, readjustment or release of debtors that is
either not contested or if contested is not dismissed or stayed within ninety
(90) calendar days after the commencement thereof; or (g) commences or
institutes any proceedings under any law related to bankruptcy, insolvency,
liquidation, dissolution or the reorganization, readjustment or release of
debtors; or (h) calls a meeting of creditors with a view to arranging a
composition or adjustment of debt; or (i) by any act or failure to act that
indicates consent to, approval of or acquiescence in any of the foregoing.
7.1.11. Additional Liabilities. If any
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judgment, writ, warrant, attachment or execution or similar process that calls
for payment or presents liability in excess of $100,000 is rendered, issued or
levied against Borrower or any of its properties or assets and such liability is
not paid, waived, stayed, vacated, discharged, settled, satisfied or fully
bonded within thirty (30) calendar days after it is rendered, issued or levied.
7.1.12. Business Interruption. If the operations of any switch or
switch facility owned, controlled or used by Borrower is interrupted or
curtailed at any time for a period in excess of 24 hours (whether or not
consecutive) during any period of 7 consecutive calendar days.
7.1.13. FCC and Other Regulatory-Action Defaults. In addition to
the events described in Section 7.1.9 hereof, (a) if any Official Body
(including the FCC) designates for an evidentiary hearing any applications of
Borrower (or any Affiliate thereof) requesting any Authorization from such
Official Body, any Tariff of Borrower, or any complaint, petition or motion of
any third party affecting any of Borrower's requested or then-existing Licenses
or other Authorizations, and Lender reasonably believes that the result thereof
could be the termination, revocation, suspension, non-renewal or material (and
adverse) modification of any material License, Tariff or other Authorization
held by Borrower, or (b) if any Official Body (including the FCC) terminates,
revokes or substantially and adversely modifies any material License, Tariff or
other Authorization of Borrower (or any Affiliate thereof), or (c) if any
Official Body (including the FCC) commences an action or proceeding seeking the
termination, suspension, revocation, non-renewal or substantial and adverse
modification of any material License, Tariff or other Authorization, or (d) if
any material License, Tariff or other Authorization expires by its terms and is
not renewed in a timely manner, or any material agreement which is necessary to
the operation of any switch expires or is revoked or terminated and is not
replaced by a comparable substitute or a substitute reasonably acceptable to
Lender. For purposes of this Section 7.1.13, a "material" License or other
Authorization is (1) any License or Authorization issued by the FCC or any State
PUC, and (2) any other License or Authorization (alone or in conjunction with
other Licenses and Authorizations then subject to any of the circumstances
described in this Section) the loss of which (in Lender's reasonable judgment)
could reasonably be expected to have or cause a Material Adverse Effect.
7.1.14. Material Adverse Change. If Lender determines in good
faith that a Material Adverse Change has occurred with respect to Borrower from
the condition set forth in
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the financial statements furnished to Lender for the fiscal year ended
immediately prior to the Closing Date, or from the condition of Borrower most
recently disclosed to Lender in any annual financial statements furnished to
Lender pursuant to Section 4.2.3 hereof. If (with respect either to any fiscal
year or to any interim period in connection with a Public Offering) Borrower's
auditors deliver to Lender a set of final draft audited financial statements or
(if applicable) a set of final interim financial statements for a Public
Offering, then Lender will notify Borrower (within 10 Business Days thereof if
possible using commercially reasonable efforts) whether Lender believes in good
faith that such financial statements (if finalized without modification) will
evidence, for purposes of this Section 7.1.14, a Material Adverse Change in the
financial condition from the condition of Borrower disclosed to Lender in the
audited annual financial statements for the preceding fiscal year (but such
notice from Lender will not otherwise indicate whether such financial statements
demonstrate compliance with the Loan Documents, including without limitation,
the financial covenants under Section 4.1. Moreover, to the extent that after
the Closing Date the financial condition or performance of Borrower as of the
Closing Date deteriorates during the balance of fiscal year 1997 but in
accordance with the projections and business plan provided to Lender prior to
the Closing Date, then such deterioration in and of itself will not constitute
an Event of Default for purposes of this Section 7.1.14. Notwithstanding the
foregoing, this Section 7.1.14 will not be effective until January 1, 1998, and
if Borrower consummates an initial Public Offering prior to November 30, 1997,
then this Section 7.1.14 will not be effective until July 1, 1998.
7.2. Remedies.
7.2.1. General; Acceleration. At any time during the existence of
any Event of Default, at the election of Lender but with notice thereof to
Borrower (unless an Event of Default described in Section 7.1.10 hereof has
occurred, in which case acceleration will occur automatically with respect to
the entire indebtedness and without any notice), then Lender may accelerate the
Line of Credit Maturity Date and may declare all or any portion of the
indebtedness of Borrower to Lender (hereunder or otherwise, but including the
unpaid balance of principal, interest and fees hereunder) to be immediately due
and payable. At any time during the existence of any Event of Default, Lender
will also have the immediate right to enforce and realize upon any collateral
security granted hereunder or in connection herewith in any manner or order that
Lender deems expedient without regard to any equitable principles of marshalling
or otherwise.
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7.2.2. Other. In addition to any rights granted hereunder or in
any other Loan Document, Lender will have all other legal and equitable rights
and remedies granted by or available under any applicable law (including the
rights of a secured party under the Uniform Commercial Code), and all rights and
remedies will be cumulative in nature.
7.2.3. Special FCC and State PUC-Related Remedies.
a. Borrower and Lender hereby acknowledge their intent
that, during the existence of an Event of Default, to the fullest extent
permitted by applicable law and governmental policy (including, without
limitation, the rules, regulations and policies of the FCC and any State PUC),
Lender will have all rights necessary or desirable to obtain, use and/or sell
the assets and operations of Borrower and the other Collateral, and to exercise
all remedies available to Lender under the Loan Documents, the Uniform
Commercial Code or other applicable law. The parties further acknowledge and
agree that, in the event of changes in applicable law or governmental policy
occurring subsequent to the date hereof that affect in any manner Lender's
rights of access to, or use or sale of, Borrower's assets or other Collateral
(including, without limitation, Licenses and other Authorizations issued by the
FCC and any State PUC) or the procedures necessary to enable Lender to obtain
such rights of access, use or sale during an Event of Default, Lender and
Borrower will amend the Loan Documents, in such manner as Lender reasonably
requests, in order to provide Lender with such rights to the greatest extent
possible consistent with then-applicable law and governmental policy.
b. Borrower hereby agrees (during the existence of a
Default) to take any actions that Lender may reasonably request in order to
enable Lender to receive the full rights and benefits granted to Lender by the
Loan Documents. Without limiting the generality of the foregoing, at any time
during the existence of an Event of Default, at the cost and expense of
Borrower, Borrower will use commercially reasonable efforts to assist and
cooperate in obtaining all approvals (including, without limitation, all FCC
approvals) which are then required by applicable law or contract for or in
connection with any action or transaction contemplated by the Loan Documents or
the Uniform Commercial Code. Borrower further agrees, upon Lender's request and
at the expense of Borrower, at any time during the existence of an Event of
Default, to prepare, sign, file and diligently prosecute (and to use its best
efforts to cause the preparation, execution, filing and diligent prosecution by
others) with the FCC or any State PUC the assignor's or transferor's portion of
any applications for the FCC's or any
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State PUC's consent to the assignment of Licenses or transfer of control thereof
necessary or appropriate under the FCC's or any State PUC's rules for approval
of any sale or transfer of any Collateral pursuant to the exercise of Lender's
remedies under the Loan Documents. Borrower further agrees that, during the
existence of a Default, Borrower will assist and cooperate with Lender (and will
use its best efforts to cause others to assist and cooperate with Lender) to
ensure that Borrower continues (a) to operate in the normal course of business,
and (b) to fulfill all of its legal, regulatory and contractual obligations and
(c) to otherwise be properly and professionally managed. At Lender's request and
the expense of Borrower, at any time during the existence of an Event of
Default, such assistance and cooperation may include (without limitation) the
employment of (and, to the maximum extent not prohibited by the rules,
regulations and orders of the FCC or any State PUC, delegation of appropriate
management authority to) one or more qualified and independent consultants and
professional managers acceptable to Lender to assist in the interim operations
of Borrower; all of which Borrower hereby agrees not to challenge. Borrower
further consents to (and agrees that it will not challenge), at any time during
the existence of an Event of Default, the transfer of control or assignment of
Licenses, Tariffs, Authorizations and other assets to a receiver, trustee,
transferee, or similar official or to any purchaser of the Collateral pursuant
to any public or private sale, judicial sale, foreclosure or exercise of other
remedies available to Lender as permitted by applicable law.
c. Notwithstanding anything to the contrary contained in
any Loan Document, neither Lender nor Borrower will take any action pursuant to
the Loan Documents that would constitute or result in any assignment of an FCC
or State PUC License, Tariff or Authorization or any transfer of control of
Borrower if such assignment of License, Tariff or Authorization or transfer of
control would require under then existing law (including the written rules and
regulations promulgated by the FCC) the prior approval of the FCC or a State
PUC, unless such approval has been obtained (as applicable) from such State PUC
(to the extent failure to obtain such approval by Lender could reasonably be
expected to have or cause a Material Adverse Effect or could otherwise
reasonably be expected to result in the imposition of a penalty in excess of
$25,000) or from the FCC. Without limiting the generality of the foregoing,
Lender specifically agrees that (a) voting rights with respect to the pledged
shares of stock of Borrower will remain with the holders of such voting rights
during the existence of an Event of Default unless and until any required prior
approvals to the transfer of such voting rights shall have been obtained (as
applicable) from any State PUC (to the extent failure to obtain
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such approval by Lender could have or cause a Material Adverse Effect or could
otherwise reasonably be expected to result in the imposition of a penalty in
excess of $25,000) or from the FCC, and (b) during the existence of any Event of
Default and foreclosure upon the Collateral by Lender, there will be either a
private or public sale of the Collateral that complies with applicable rules and
policies of any State PUC (to the extent failure to comply with such rules and
policies could have or cause a Material Adverse Effect or could otherwise
reasonably be expected to result in the imposition of a penalty in excess of
$25,000) and the FCC, and (c) prior to the exercise of voting rights by the
purchaser at any such sale, any consent of any State PUC or the FCC required
pursuant to any State Act (to the extent failure to obtain such consent could
have or cause a Material Adverse Effect or could otherwise reasonably be
expected to result in the imposition of a penalty in excess of $25,000) or the
Federal Communications Act (respectively) will be obtained.
ARTICLE 8: DEFINITIONS
8.1. Definitions. When used in this Agreement, the following terms shall
have the respective meanings set forth below:
8.1.1. "Account" means, at any relevant time, the designated or
principal deposit account of Borrower at Lender for purposes of effecting
transactions hereunder (and, if applicable, under the Cash Management
Agreements).
8.1.2. "Adjusted LIBO Rate" means the rate per annum (rounded
upwards, if necessary, to the next l/100th of 1%) determined by Lender pursuant
to the following formula:
Adjusted LIBO Rate = LIBO Rate
----------------------
1 - Reserve Percentage
For purposes of this calculation, "LIBO Rate" means the London Interbank Offered
Rate per annum (determined by Lender) on the first day of any Interest Period
for which the Adjusted LIBO Rate is applicable as published by Bloomberg or Dow
Jones-Telerate and displayed on page 3750 as the BBA LIBOR (or, if neither
Bloomberg nor Dow Jones-Telerate is then available, then as published by Reuters
Monitor Money Rates Service and displayed on the LIBO page as the "Libo Rate")
(or, in any such instance, as published by such other service or displayed on
such other page as may replace such service or page for the purpose of
displaying rates or prices comparable to the designated rate) for the offering
of dollar deposits by leading banks in the London interbank market for a period
of approximately 3 months and an amount
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approximately equal to the amount outstanding hereunder to which such LIBO Rate
will be applicable. If more than one such rate is displayed on such page or its
replacement, then the LIBO Rate will be the arithmetic mean of such displayed
rates. If the first day of the applicable Interest Period is not a Business Day,
then the applicable LIBO Rate will be the rate in effect on the immediately
preceding Business Day. For purposes of this calculation, "Reserve Percentage"
means that percentage (expressed as a decimal) prescribed by the FRB (or any
other governmental or administrative agency to which Lender is subject) for
determining the reserve requirements (including, without limitation, any basic,
supplemental, marginal or emergency reserves) for (a) Lender's negotiable,
non-personal time deposits in U.S. Dollars with maturities of comparable
duration, or (b) deposits of U.S. DoLlars in a non-U.S. or an international
banking office of Lender used to fund loans.
8.1.3. "Advance" means any advance of funds under any Facility.
8.1.4. "Advance Request" has the meaning set forth in Section
1.4.1 hereof.
8.1.5. "Affiliate" of any Person or entity means (a) any Person
directly or indirectly owning, controlling or holding 5% or more of the
outstanding beneficial interest in such person or entity, or (b) any Person as
to which such other Person or entity directly or indirectly owns, controls or
holds 5% or more of the outstanding beneficial interest, or (c) any Person
directly or indirectly controlling, controlled by, or under common control with
such other person or entity, or (d) any officer, director, partner or member of
such Person, but such term with respect to Borrower does not include Lender.
8.1.6. "Agreement" means this Credit Facility Agreement and all
the exhibits and schedules hereto, all as may be amended and otherwise modified
from time to time hereafter.
8.1.7. "Authorized Officer" means any officer, employee or
representative of such organization who is expressly designated as such or is
otherwise authorized to borrow funds hereunder or, as appropriate, to sign loan
documents and/or deliver certificates on behalf of such organization pursuant to
the provisions of such organization's most recent resolution on file with
Lender.
8.1.8. "Authorization" means any License or other governmental
permit, certificate and/or approval issued by or any Tariff filed with an
Official Body.
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8.1.9. "Available Credit Portion" means that portion of the
Current Line of Credit Commitment that is generally available in the ordinary
course for borrowing at any time under the Line of Credit Facility, as such
amount is determined in accordance with Section 1.3 hereof.
8.1.10. "BIC" means Billing Concepts, Inc.
8.1.11. "BIC Billing Agreement" means the Billing and Information
Management Service Agreement between BIC and Borrower (as the same may be
amended, supplemented, modified or replaced from time to time and including any
similar agreement entered into between BIC and Borrower during the term of this
Agreement) pursuant to which BIC will, upon submission to it of billing
information for Borrower rated calls and in exchange for certain processing and
other fees therein specified, process such billing information and act as
Borrower's agent to collect accounts receivable due to Borrower from one or more
LECs.
8.1.12. "Billing Agent" means any Person (whether or not acting
pursuant to an agreement) who, directly or indirectly, submits billing
information with respect to Borrower rated calls to any LEC or any other Person.
8.1.13. "Billing Concepts" means Billing Concepts, Inc. (formerly
known as U.S. Billings, Inc.), or any successor or permitted assignee thereof.
8.1.14. "Borrower" means, individually and collectively, the
following:
a. STARTEC, Inc., a Maryland corporation, having its
principal and chief executive office at the
address specified in Section 9.7 hereof, or any
successor or authorized assignee thereof, and
b. Any other entity subsequently added hereto as a
Borrower hereunder, or any successor or authorized
assignee thereof.
8.1.15. "Business Day" means any day that is not a Saturday, a
Sunday or a day on which banks under the laws of the Commonwealth of Virginia
(or, with respect to certain LIBO Rate matters, banks in London, England) are
authorized or required to be closed.
8.1.16. "Capital Expenditures" means
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expenditures (a) for any fixed assets or improvements, replacements,
substitutions or additions thereto that have a useful life of more than one (1)
year, including direct or indirect acquisition of such assets or (b) for any
Capital Leases.
8.1.17. "Capital Leases" means capital leases and subleases as
defined in the Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 13 dated November 1976 (as amended and updated from
time to time).
8.1.18. "Cash Management Agreements" means the cash management
agreements (as amended from time to time) executed and delivered hereunder,
including, as appropriate, without limitation, (a) a target balance management
agreement, and (b) a target balance management loan rider, and (c) a master
repurchase agreement, and (d) an information reporting agreement, and (e) a cash
concentration service agreement, and (f) a wholesale lockbox agreement.
8.1.19. "Closing Date" means the date on which all conditions
precedent to the effectiveness of this Agreement under Section 2.1 hereof have
been satisfied or waived by Lender.
8.1.20. "Code" means the Internal Revenue Code of 1986, as
amended.
8.1.21. "Collateral" means the collateral security committed to
Lender under the Collateral Security Documents executed by Borrower or any other
Obligor in favor of Lender pursuant to this Agreement from time to time and/or
pursuant to all similar or related documents and agreements from time to time,
all as amended from time to time.
8.1.22. "Collateral Security Documents" means, individually and
collectively, (a) the Security Agreements and the financing statements filed
pursuant thereto, and (b) the Pledge and Security Agreements, and (c) any
additional documents guaranteeing indebtedness, assuring performance of
obligations, subordinating indebtedness, or granting security or Collateral to
Lender hereunder, all as amended from time to time.
8.1.23. "Commitment" means any commitment for credit pursuant to
a Facility established hereunder.
8.1.24. "Corporate Restructuring" has the meaning set forth in
Section 4.20.1 hereof.
8.1.25. "Current Line of Credit Commitment" means the absolute
maximum amount of credit that is available for
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borrowing at any time under the Line of Credit Facility, as such amount is
determined in accordance with Section 1.3 hereof.
8.1.26. "Default" means any event or circumstance that with the
giving of notice or the passage of time would constitute an Event of Default.
8.1.27. "Dollar" or "$" means U.S. dollars.
8.1.28. "EBITDA" means, at the time of any determination, the sum
of the following items for Borrower during the relevant four consecutive fiscal
quarter period:
a. Net income from continuing operations during such
period -- i.e., excluding extraordinary gains and
income items and the cumulative effect of
accounting changes -- determined in accordance
with GAAP, and
b. Plus Interest Expense during such period, but
subtract interest income accrued during such
period, and
c. Plus federal and state income taxes paid and
accrued in accordance with GAAP during such
period, and
d. Plus depreciation permitted under GAAP during such
period, and
e. Plus amortization expense permitted under GAAP
during such period.
For purposes of this calculation, interest shall include interest accrued under
Capital Leases, determined in accordance with GAAP.
8.1.29. "Eligible Accounts" means, at any date, all billed accounts
receivable then properly due to Borrower from all directly-billed customers and
all LECs, other than the following: (a) accounts more than 90 calendar days past
the date on which the customer was originally directly billed by Borrower for
such calls or past the date on which the related billing information for
Borrower rated calls is transmitted to such LEC, and (b) accounts the liability
for which has been disputed by the customer or the LEC or for which the customer
or the LEC has claimed set off rights or other defenses, and (c) accounts owing
from any customer or LEC that shall take or be the subject of any
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action or proceeding of the type described in Section 7.1.10 hereof, and (d)
accounts as to which Borrower does not have all necessary Authorizations in
order to be entitled to bill and collect such amounts, and (e) accounts, the
full and timely collection of which Lender, in its good faith judgment, believes
to be doubtful.
8.1.30. "Environmental Control Statutes" has the meaning set
forth in Section 3.16 hereof.
8.1.31. "EPA" means the United States Environmental Protection
Agency or any other entity that succeeds to its responsibilities and powers.
8.1.32. "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended, and as implemented and interpreted.
8.1.33. "ERISA Affiliate" means any company, whether or not
incorporated, which is considered a single employer with Borrower under Titles
I, II and IV of ERISA.
8.1.34. "Event of Default" means each of the events described in
Section 7.1 hereof.
8.1.35. "Facility" means any credit facility established under
Article 1 hereof.
8.1.36. "FCC" means the Federal Communications Commission or any
other entity or agency that succeeds to its responsibilities and powers.
8.1.37. "Federal Communications Act" means the Communications Act
of 1934, as amended, and as implemented by the FCC and interpreted by the FCC or
any court of competent jurisdiction.
8.1.38. "FRB" means the Board of Governors of the Federal Reserve
System or any other entity or agency that succeeds to its responsibilities and
powers.
8.1.39. "Funded Debt" means, at the time of any determination,
the aggregate principal amount of indebtedness of Borrower for the following:
a. Borrowed money (including the indebtedness under
the Loan Documents, but not including trade
indebtedness permitted under Section 5.2.b
hereof), and
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b. Installment purchases of real or personal
property, and
c. Capital Leases, and
d. Deferred purchase price in connection with
acquisitions, and
e. Reimbursement obligations under letters of credit,
and,
f. Any indebtedness or contractual payment obligation
that is not paid within 120 calendar days of the
due date therefor, and
g. Guaranties of indebtedness and obligations that
would constitute Funded Debt hereunder if the
primary obligor thereof were Borrower, and
h. Indebtedness otherwise required to be included as
part of "Funded Debt" under Section 5.2 hereof.
Notwithstanding the foregoing, the term "Funded Debt" includes the Subordinated
Indebtedness.
8.1.40. "GAAP" means generally accepted accounting principles
applied on a consistent basis set forth in the Opinions of the Accounting
Principles Board of the American Institute of Certified Public Accountants
and/or in statements of the Financial Accounting Standards Board and/or in such
other statements by such other entity as Lender may reasonably approve, which
are applicable in the circumstances as of the date in question, and the
requirement that such principles be applied on a consistent basis shall mean
that the accounting principles observed in a current period are comparable in
all material respects to those applied in a preceding period.
8.1.41. "Hazardous Materials" includes (a) any "hazardous waste"
as defined by the Resource Conservation and Recovery Act of 1976 (42 U.S.C.
Section 6901 et seq.), as amended from time to time, and regulations promulgated
thereunder; or (b) any "hazardous substance" as defined by the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C.
Section 9601 et seq.), as amended from time to time, and regulations promulgated
thereunder; or (c) any other substance the use or presence of which on, in,
under or above any real
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property ever owned, controlled or used by Borrower is similarly regulated or
prohibited by any federal, state or local law, rule, ordinance, regulation or
decree of any court or governmental authority as a hazardous material.
8.1.42. "Interest Coverage Ratio" means, at any time such ratio
is being computed, the ratio of "OCF" (for the immediately preceding four fiscal
quarters) to "Interest Expense" (for the immediately preceding four fiscal
quarters).
8.1.43. "Interest Expense" means, at the time of any
determination, the amount of interest and other finance charges of Borrower
required to be charged as an expense under GAAP during the relevant four
consecutive fiscal quarter period (including, without limitation, the fees under
Section 1.7 hereof and any other such charges with respect to any Funded Debt).
For purposes of this calculation, interest includes interest accrued under
Capital Leases.
8.1.44. "Interest Period" means (a) with respect to the Prime
Rate, a period of one (1) Business Day, and (b) with respect to the Adjusted
LIBO Rate, a period of 3 months duration commencing initially on the date of the
relevant Advance and ending 3 months thereafter and (after such initial Interest
Period) commencing on the day immediately following the last day of the
preceding Interest Period and ending on the corresponding day 3 months
thereafter.
8.1.45. "LEC" means a local exchange carrier.
8.1.46. "Lender" means Signet Bank, or any successor thereof, or
any assignee, participant or other transferee of Lender hereunder.
8.1.47. "Leverage Ratio" means, at any time such ratio is being
computed, the ratio of "Funded Debt" to "OCF (i.e., Operating Cash Flow)" (for
the immediately preceding four fiscal quarters).
8.1.48. "LIBO Rate" has the meaning set forth in the definition
of "Adjusted LIBO Rate".
8.1.49. "License" means any authorization, construction or other
permit, consent, franchise, ordinance, registration, certificate, license, call
sign, frequency designation, agreement or other right filed with, granted by,
issued by or entered into with any Official Body.
8.1.50. "Lien" means any security interest, mortgage, pledge,
hypothecation, assignment, deposit arrangement,
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encumbrance, lien (statutory or otherwise), reversionary or reclamation
interest, charge against or interest in property to secure payment of a debt or
performance of an obligation or other priority or preferential arrangement of
any kind or nature whatsoever.
8.1.51. "Line of Credit Commitment" means the Commitment
established pursuant to Section 1.1 hereof and Section 1.3 hereof.
8.1.52. "Line of Credit Facility" means the line of credit
Facility as described in Article 1 hereof.
8.1.53. "Line of Credit Maturity Date" has the meaning set forth
in Section 1.1.2 hereof, as may be extended from time to time in Lender's sole
and absolute discretion.
8.1.54. "Line of Credit Note" means that certain Note payable to
the order of Lender prepared in accordance with Section 1.1.4 hereof, as may be
amended, modified, restated, replaced, supplemented, extended or renewed from
time to time hereafter.
8.1.55. "LLC" means a limited liability company.
8.1.56. "Loan" means any loan or Advance of funds under any
Facility as well as any other credit extended by Lender to Borrower under this
Agreement.
8.1.57. "Loan Documents" means this Agreement, any Notes, the
Collateral Security Documents and any other documents, agreements and
certificates entered into or delivered in connection herewith or therewith or
pursuant hereto or thereto, all as may be amended, modified and supplemented
from time to time.
8.1.58. "Local Authorities" means, individually and collectively,
the state and local governmental authorities that govern the activities of
Borrower.
8.1.59. "Margin Regulation" has the meaning set forth in Section
3.17 hereof.
8.1.60. "Margin Stock" has the meaning set forth in Section 3.17
hereof.
8.1.61. "Material Adverse Change" means any change that has or
causes or could reasonably be expected to have or cause a Material Adverse
Effect.
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8.1.62. "Material Adverse Effect" means, relative to any
occurrence of whatever nature (including, without limitation, any adverse
determination in any litigation, arbitration, or governmental investigation or
proceeding), a material adverse change to, or, as the case may be, a materially
adverse effect on:
a. The business, assets, revenues, financial
condition, operations, Collateral or prospects of
Borrower or other Obligor; or
b. The ability of Borrower to perform any of its
payment obligations when due or to perform any
other material obligations under any Loan
Document; or
c. Any right, remedy or benefit of Lender under any
Loan Document.
8.1.63. "Material Contract" has the meaning set forth in Section
3.8 hereof.
8.1.64. "Monthly Net Revenue" means, as of the time of any such
determination, the net revenue for the particular month calculated in accordance
with GAAP.
8.1.65. "Notes" means, individually and collectively, each
promissory note delivered to Lender pursuant to any Loan Document and evidencing
any indebtedness to Lender under the Loan Documents (each as may be amended,
modified, supplemented, restated, extended, renewed or replaced from time to
time).
8.1.66. "Obligations" means all of the indebtedness and
obligations (monetary or otherwise) of Borrower and any other Obligor arising
under or in connection with any Loan Document as well as all indebtedness and
obligations (monetary or otherwise) of any Affiliate of Borrower or other
Obligor arising under or in connection with any agreement between any such
Affiliate and Lender (or any Affiliate of Lender).
8.1.67. "Obligor" means Borrower or any other Person (other than
Lender) obligated under any Loan Document.
8.1.68. "OCF" (or "Operating Cash Flow") means, at the time of
any determination, the sum of the following items for Borrower during the
relevant four consecutive fiscal quarter period:
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a. EBITDA during such period, and
b. Plus reasonable non-recurring acquisition expenses
acceptable to or approved by Lender during such
period, and
c. With respect to liabilities under Deferred
Compensation Plans and Agreements: add accrued
liabilities reflected on the financial statements
in accordance with GAAP during such period, and
subtract payments made on such liabilities during
such period, and otherwise adjust (as appropriate)
to reflect changes required under GAAP during such
period in the amounts of such accrued liabilities
with respect to accruals made during a previous
reporting period, and
d. With respect to other non-cash items: add the
total amount of other non-cash expenses recognized
during such period (to the extent not already
accounted for in one of the above categories), but
subtract the total amount of other non-cash
revenue recognized during such period (to the
extent not already accounted for in one of the
above categories).
For purposes of this calculation, interest shall include interest accrued under
Capital Leases, determined in accordance with GAAP.
8.1.69. "Official Body" means any federal, state, local, or other
government or political subdivision (and any agency, authority, bureau, central
bank, commission, department or instrumentality of either, including the FCC and
each State PUC) and any court, tribunal, grand jury or arbitrator, in each case
whether foreign or domestic.
8.1.70. "Organic Document" means, relative to any entity, its
certificate and articles of incorporation or organization, its by-laws or
operating agreements, and all equityholder agreements, voting agreements and
similar arrangements applicable to any of its authorized shares of capital
stock, its partnership interests or its member interests,
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and any other arrangements relating to the control or management of any such
entity (whether existing as a corporation, a partnership, an LLC or otherwise).
8.1.71. "PBGC" means the Pension Benefits Guaranty Corporation or
any other entity that succeeds to its responsibilities and powers under ERISA.
8.1.72. "Permitted Guaranties" has the meaning set forth in
Section 5.3 hereof.
8.1.73. "Permitted Indebtedness" has the meaning set forth in
Section 5.2 hereof.
8.1.74. "Permitted Investments" has the meaning set forth in
Section 5.7 hereof.
8.1.75. "Permitted Liens" has the meaning set forth in Section
5.5 hereof.
8.1.76. "Permitted Loans" has the meaning set forth in Section
5.4 hereof.
8.1.77. "Permitted Transfers" has the meaning set forth in
Section 5.6 hereof.
8.1.78. "Person" means any natural person, corporation, LLC,
partnership, firm, association, trust, government, governmental agency or any
other entity, whether acting in an individual, fiduciary or other capacity.
8.1.79. "Plan" means any pension benefit or welfare benefit plan
as defined in Sections 3(1), (2) or (3) of ERISA covering employees of Borrower
or any ERISA Affiliate of Borrower.
8.1.80. "Pledge and Security Agreements" means, individually and
collectively, each pledge and security agreement relating to a pledge of an
equity interest in an enterprise (all as may be amended, modified and
supplemented from time to time) required to be executed and delivered in favor
of Lender pursuant to the Loan Documents.
8.1.81. "Portion" means a designated portion of the indebtedness
hereunder as to which a specified Rate Index (and a corresponding Rate Margin)
has been selected or deemed to be applicable.
8.1.82. "Prime Rate" means the rate of interest per annum
publicly announced by Lender from time to time as its
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prime rate of interest on direct, short-term borrowings to its large business
customers with high credit standings; such term, however, does not necessarily
mean Lender's best or lowest rate available.
8.1.83. "Public Offering" has the meaning set forth in Section
4.20.1 hereof.
8.1.84. "Rate Index" has the meaning set forth in Section 1.1.5
hereof.
8.1.85. "Rate Margin" has the meaning set forth in Section 1.1.5
hereof.
8.1.86. "Reserve Percentage" has the meaning set forth in the
definition of "Adjusted LIBO Rate".
8.1.87. "SEC" means the Securities and Exchange Commission or any
other entity that succeeds to its responsibilities and powers.
8.1.88. "Securities Acts" means, collectively, the Securities Act
of 1933 and the Securities Exchange Act of 1934, each as amended, and as
implemented by the SEC and interpreted by the SEC or any court of competent
jurisdiction.
8.1.89. "Security Agreements" means, collectively, each security
agreement (as may be amended, modified and supplemented from time to time)
required to be executed and delivered in favor of Lender pursuant to Article 2
hereof, and any other security agreement required or delivered in connection
with the Loan Documents, including, without limitation, any intellectual
property assignments or security agreements required to be delivered pursuant to
Article 2 hereof.
8.1.90. "Senior Funded Debt" means, at the time of any
determination, the aggregate principal amount of indebtedness of Borrower
outstanding under the Loan Documents.
8.1.91. "Settlement Date" means, with respect to any Advance
hereunder, the date on which funds are advanced by Lender.
8.1.92. "Signet Bank" means Signet Bank, a Virginia-chartered,
federally insured commercial bank, or any successor thereof, having an office at
the address specified in Section 9.7 hereof, and which is Lender hereunder at
the time of execution hereof.
8.1.93. "State Act" means the law of any state
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in which Borrower does business that governs the provision of telecommunications
services within such state that are applicable to Borrower, as amended from time
to time, and as implemented by the applicable State PUC or any court of
competent jurisdiction.
8.1.94. "State PUC" means the public utilities commission of any
state or any other regulatory agency of any state in which Borrower does
business that is vested with jurisdiction over Borrower and over the provision
of telecommunication services within such state.
8.1.95. "Subordinated Indebtedness" means all indebtedness and
monetary obligations of Borrower (other than indebtedness in favor of Lender or
indebtedness and obligations expressly excluded therefrom by Lender), including,
without limitation, all indebtedness treated or defined as "Subordinated
Indebtedness" under any separate Subordination Agreement by and among Borrower,
Lender and another Person. Notwithstanding the foregoing, the term "Subordinated
Indebtedness" (unless Lender otherwise requires) does not include indebtedness
permitted under Section 5.2(a or b) hereof or (to the extent consistent with
Section 5.5.b hereof) under Section 5.2(c or d) hereof.
8.1.96. "Subscriber" means any Person who is a customer of
Borrower's residential telecommunications services (including, without
limitation, long distance services).
8.1.97. "Subsidiary" of any Person or entity means any Person as
to which such other Person or entity (a) directly or indirectly owns, controls
or holds 25% or more of the outstanding beneficial interest or (b) is otherwise
required in accordance with GAAP to be considered as part of a consolidated
organization.
8.1.98. "Tariff" means any tariff, rate schedule or similar
document that is either (a) required by law or applicable regulation to be filed
with the FCC or a State PUC or (b) permitted by law or applicable regulation so
to be filed and actually filed by Borrower.
8.1.99. "UCC" means the Uniform Commercial Code as in effect in
the applicable jurisdiction.
8.1.100. "Warrants" has the meaning set forth in Section 1.7
hereof.
8.2. Rules of Interpretation and Construction.
8.2.1. Plural: Gender. Whenever used herein, (a) a singular
number includes the plural, and the plural includes
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the singular, and (b) the use of the masculine, feminine or neuter gender
includes all genders.
8.2.2. Financial and Accounting Terms. Except as otherwise
specifically provided herein, financial and accounting terms used in the
foregoing definitions or elsewhere in the Loan Documents shall be defined and
determined in accordance with GAAP.
8.2.3. Independence of Covenants and Defaults. All covenants and
defaults contained in the Loan Documents shall be given independent effect. If a
particular action or condition is not permitted by any covenant in the Loan
Documents, then the fact that such action or condition would be permitted by an
exception to (or would otherwise be within the limitations of) another covenant
in the Loan Documents shall not avoid the occurrence or existence of a Default
if such action is taken or if such condition exists.
ARTICLE 9: MISCELLANEOUS
9.1. Indemnification. Reliance and Assumption of Risk Provisions. Without
limiting any other indemnification in any Loan Document, Borrower hereby agrees
to defend Lender (and its directors, officers, employees, agents, counsels and
Affiliates) from, and hold each of them harmless against, any and all losses,
liabilities, claims, damages, interests, judgments, costs, or expenses
(including without limitation, fees and disbursements of counsel) incurred by
any of them arising out of or in any way connected with any Loan Document,
except for losses resulting directly and exclusively from such Person's own
gross negligence, willful misconduct or fraud. In addition, Borrower will
reimburse and indemnify Lender for all costs, expenses and losses resulting from
the following: (1) any failure or refusal by Borrower or by any Affiliate of
Borrower to provide any requested assistance or cooperation in connection with
any attempt by Lender to liquidate any Collateral in the event of any Event of
Default and/or any attempt by Lender to otherwise exercise its rights hereunder,
and (2) any misrepresentation, gross negligence, fraud or willful misconduct by
Borrower (or any of its employees or officers), or any other person or entity
pledging Collateral hereunder. Moreover, with respect to any Advance Request or
other communication between Borrower and Lender hereunder and all other matters
and transactions in connection therewith, Borrower hereby irrevocably authorizes
Lender to accept, rely upon, act upon and comply with any verbal or written
instructions, requests, confirmations and orders of any Authorized Officer of
Borrower. Borrower acknowledges that the transmissions of any such instruction,
request, confirmation,
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order or other communication involves the possibility of errors, omissions,
mistakes and discrepancies, and Borrower agrees to adopt such internal measures
and operational procedures to protect its interest. By reason thereof, Borrower
hereby assumes all risk of loss and responsibility for -- and hereby releases
and discharges Lender from any and all risk of loss and responsibility for, and
agrees to indemnify, reimburse on demand and hold Lender harmless from -- any
and all claims, actions, damages, losses, liability and expenses by reason of or
in any way related to (a) Lender's accepting, relying and acting upon, complying
with or observing any such instructions, requests, confirmations or orders from
or on behalf of any such Authorized Officer, and (b) any such errors, omissions,
mistakes and discrepancies by (or otherwise resulting from or attributable to
the actions or inactions of) any Authorized Officer or Borrower; provided,
however, Borrower does not assume hereby the risk of any foreseeable actual loss
resulting directly and exclusively from Lender's own fraud or willful
misconduct. Borrower's obligations provided for in this Section will survive any
termination of this Agreement, and the repayment of the outstanding balances
hereunder.
9.2. Assignments and Participations. No Loan Document may be assigned (in
whole or in part) by Borrower without the prior written consent of Lender.
Notwithstanding any other provision of any Loan Document, without receiving any
consent of Borrower, Lender at any time and from time to time may syndicate,
participate or otherwise transfer or assign its rights and obligations under the
Loan Documents (or the indebtedness evidenced thereby) as follows: (a) up to 49%
of its rights and obligations under any of the Loan Documents (or any of the
indebtedness evidenced thereby) to any Person, and (b) all (or any proportionate
part of) its rights and obligations under any of the Loan Documents (or any of
the indebtedness evidenced thereby) to any Affiliate of Lender or any
successor-in-interest to Lender's Media Communications Group, and (c) all (or
any proportionate part of) its rights and obligations under any of the Loan
Documents (or any of the indebtedness evidenced thereby) to any Person during
the existence of any Event of Default under the Loan Documents. In addition,
Borrower will not unreasonably withhold its consent to any request by Lender to
syndicate, participate or otherwise transfer or assign all or any portion of its
interest in excess of 49%. Lender will make reasonable efforts to notify
Borrower of any such participation, transfer or assignment within twenty (20)
Business Days thereafter; however, a failure to so notify will in no way impair
any rights of Lender or any participant, transferee or assignee. Upon execution
and delivery of an appropriate instrument between any such participant,
transferee or assignee and Lender, then (at Lender's request) such participant,
transferee or assignee will become a
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Lender party to this Agreement and will have all the rights and obligations of a
Lender as set forth in such instrument. At Lender's request, Borrower will
execute (or re-execute) and deliver (or otherwise obtain) any documents
necessary to reflect or implement any such participation, transfer or assignment
(including, without limitation, replacement promissory notes and any requested
letters authorizing such participant, transferee or assignee to rely on existing
certificates and opinions) and will otherwise fully cooperate in any such
syndication process.
9.3. No Waiver: Delay. To be effective, any waiver by Lender must be
expressed in a writing executed by Lender. Once a Default occurs under the Loan
Documents, then such Default will continue to exist until it either is cured (to
the extent specifically permitted) in accordance with the Loan Documents or is
otherwise expressly waived by Lender (in its sole and absolute discretion) in
writing; and once an Event of Default occurs under the Loan Documents, then such
Event of Default will continue to exist until it is expressly waived by Lender
(in its sole and absolute discretion) in writing. If Lender waives any power,
right or remedy arising hereunder or under any applicable law, then such waiver
will not be deemed to be a waiver (a) upon the later occurrence or recurrence of
any events giving rise to the earlier waiver or (b) as to any other Obligor. No
failure or delay by Lender to insist upon the strict performance of any term,
condition, covenant or agreement of any of the Loan Documents, or to exercise
any right, power or remedy hereunder, will constitute a waiver of compliance
with any such term, condition, covenant or agreement, or preclude Lender from
exercising any such right, power, or remedy at any later time or times. By
accepting payment after the due date of any amount payable under this Agreement
or any other Loan Document, Lender will not be deemed to waive the right either
to require prompt payment when due of all other amounts payable under this
Agreement or any other Loan Document or to declare an Event of Default for
failure to effect such prompt payment of any such other amount. The remedies
provided herein are cumulative and not exclusive of each other, the remedies
provided by law, and the remedies provided by the other Loan Documents.
9.4. Modification and Amendment. Except as otherwise expressly provided in
this Agreement, no modification or amendment hereof will be effective unless
made in a writing signed by appropriate officers of the parties hereto.
9.5.Disclosure of Information to Third Parties. Lender will employ
reasonable procedures to treat as confidential all written, non-public
information delivered to Lender pursuant to this Agreement concerning the
performance, operations, assets, structure and business plans of Borrower that
is conspicuously
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designated by Borrower as confidential information. While other or different
confidentiality procedures may be employed by Lender, the actual procedures
employed by Lender for this purpose will be conclusively deemed to be reasonable
if they are at least as protective of such information as the procedures
generally employed by Lender to safeguard the confidentiality of Lender's own
information that Lender generally considers to be confidential. Notwithstanding
the foregoing, Lender may disclose any information concerning Borrower in
Lender's possession from time to time (a) to permitted participants,
transferees, assignees and investors (including prospective participants,
transferees, assignees and investors), but subject to a reasonable
confidentiality agreement regarding any nonpublic confidential information
thereby disclosed, and (b) in response to credit inquiries consistent with
general banking practices, and (c) to any federal or state regulator of Lender,
and (d) to Lender's Affiliates, employees, legal counsel, appraisers,
accountants, agents and investors, and (e) to any Person pursuant to compulsory
judicial process, and (f) to any judicial or arbitration forum in connection
with enforcing the Loan Documents or defending any action based upon the Loan
Documents or the relationship between Lender and Borrower, and (g) to any other
Person with respect to the public or non-confidential portions of any such
information. Lender may also include operational and performance information and
data relating to Borrower in compilations, reports and data bases assembled by
Lender (or its Affiliates) and used to conduct, support, assist in and validate
portfolio, industry and credit analysis; provided, however, that Lender may not
thereby disclose to other Persons any information relating to Borrower in a
manner that is attributable to Borrower unless (1) such disclosure is permitted
under the standards outlined above in this Section or (2) Borrower otherwise
separately consent thereto (which consent may not be unreasonably withheld).
9.6.Binding Effect and Governing Law. This Agreement and the other Loan
Documents have been delivered by Borrower and the other Obligors and have been
received by Lender in the Commonwealth of Virginia. This Agreement and all
documents executed hereunder are binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns. This Agreement and
all documents executed hereunder are governed as to their validity,
interpretation, construction and effect by the laws of the Commonwealth of
Virginia (without giving effect to the conflicts of law rules of Virginia).
9.7. Notices. Any notice, request, consent, waiver or other communication
required or permitted under or in connection with the Loan Documents will be
deemed satisfactorily given if it is in writing and is delivered either
personally to the addressee
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thereof, or by prepaid registered or certified U.S. mail (return receipt
requested), or by a nationally recognized commercial courier service with
next-day delivery charges prepaid, or by telegraph, or by facsimile (voice
confirmed), or by any other reasonable means of personal delivery to the party
entitled thereto at its respective address set forth below:
If to Borrower [Party Entitled to Notice]
or its Affiliates: c/o STARTEC, Inc.
10411 Motor City Drive
Bethesda, MD 20817
Attention: Chief Financial Officer
Facsimile: (301) 365-8787
With a copy to the following Listed counsel or
such other counsel as may be designated by
Borrower from time to time (and which notice shall
not constitute notice to Borrower and failure to
give such notice shall not affect the
effectiveness of notice to Borrower):
Shulman, Rogers, Gandal,
Pordy & Ecker, P.A.
11921 Rockville Pike
Suite 300
Rockville, MD 20853
Attention: Karl L. Ecker, Esquire
Facsimile: (301) 230-2891
If to Lender: Signet Bank
7799 Leesburg Pike, Suite 500
Falls Church, VA 22043
Attention: Vincent P. Griffen,
Vice President
Facsimile: (703) 506-9712
With a copy to the following listed counsel or
such other counsel as may be designated by Lender
from time to time (and which notice shall not
constitute notice to Lender and failure to give
such notice shaLl not affect the effectiveness of
notice to Lender):
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Samuel G. Rubenstein, Esquire
Bryan Cave LLP
700 13th Street, N.W., Suite 700
Washington, D.C. 20005
Facsimile: (202) 508-6200
Any party to a Loan Document may change its address or facsimile number for
notice purposes by giving notice thereof to the other parties to such Loan
Document in accordance with this Section, provided that such change shall not be
effective until 2 calendar days after notice of such change. All such notices
and other communications will be deemed given and effective (a) if by mail, then
upon actual receipt or 5 calendar days after mailing as provided above
(whichever is earLier), or (b) if by facsimile, then upon successful transmittal
to such party's designated number, or (c) if by telegraph, then upon actual
receipt or 2 Business Days after delivery to the telegraph company (whichever is
earlier), _ (d) if by nationally recognized commercial courier service, then
upon actual receipt or 2 Business Days after delivery to the courier service
(whichever is earlier), or (e) if otherwise delivered, then upon actual receipt.
For any and all purposes related to giving and receiving notices and
communications between Borrower and Lender under any Loan Document, Borrower
hereby irrevocably appoints its President and Chief Financial Officer as its
agents to whom Lender may give and from whom Lender may receive all such notices
and communications.
9.8. Headings. The various headings in this Agreement are inserted for
convenience only and shall not affect the meaning or interpretation of this
Agreement or any provision hereof.
9.9. Time of Day. All time of day restrictions imposed herein shall be
calculated using Eastern Time.
9.10. Relationship with Prior Agreements. This Agreement completely and
fully supersedes all oral agreements and all other and prior written agreements
by and between Borrower and Lender concerning the terms and conditions of this
credit arrangement. This Agreement renews, restructures and continues the
Business Loan Agreement between Borrower and Lender dated as of June 11, 1997
without any novation, discharge, release or satisfaction of the underlying
obligations or indebtedness (or any guaranty or collateral security therefor),
all of which obligations, indebtedness and security remain outstanding under the
Credit Agreement and the amended and restated Note.
9.11. Severability. If fulfillment of any provision of or any transaction
related to any Loan Document at the time performance is due involves
transcending the limit of validity prescribed by applicable law, then ipso
facto, the obligation to be fulfilled shall be reduced to the limit of such
validity. If
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any clause or provision of this Agreement operates or would prospectively
operate to invalidate this Agreement or any other Loan Document in whole or in
part, then such clause or provision only shall be void (as though not contained
herein or therein), and the remainder of this Agreement or such other Loan
Document shall remain operative and in full force and effect; provided, however,
if any such clause or provision pertains to the repayment of any indebtedness
hereunder, then the occurrence of any such invalidity shall constitute an
immediate Event of Default hereunder.
9.12. Termination and Survival. All agreements, representations, warranties
and covenants of Borrower contained herein or in any documentation required
hereunder will survive the execution and delivery of this Agreement and the
other Loan Documents and the funding of the Advances hereunder and will continue
in full force and effect until terminated in accordance with this Section.
Except as otherwise provided in Section 4.16 hereof, Section 9.16 hereof,
Section 9.13 hereof and the other indemnifications and waivers under the Loan
Documents, this Agreement will terminate upon satisfaction of each of the
following events: (i) payment to Lender in full (unconditionally and
indefeasibly) of the entire indebtedness and monetary obligations due hereunder
and under the other Loan Documents, and (ii) the termination of the Facilities
hereunder, and (iii) return and cancellation of any effective letters of credit
issued by Lender for the account of Borrower.
9.13. Reinstatement. To the maximum extent not prohibited by applicable
law, this Agreement and the other Loan Documents (and the indebtedness hereunder
and Collateral therefor) will be reinstated and the indebtedness correspondingly
increased (as though such payment(s) had not been made) if at any time any
amount received by Lender in respect of any Loan Document is rescinded or must
otherwise be restored, refunded or returned by Lender to Borrower or any other
Person (a) upon or as a result of the insolvency, bankruptcy, dissolution,
liquidation or reorganization of Borrower or any other Person, or (b) upon or as
a result of the appointment of any receiver, intervenor, conservator, trustee or
similar official for Borrower or any other Person or for any substantial part of
the assets of Borrower or any other Person, or (c) for any other reason.
9.14. Counterparts. This Agreement may be executed in any number of
counterparts with the same effect as if all the signatures on such counterparts
appeared on one document. Each such counterpart will be deemed to be an original
but all counterparts together will constitute one and the same instrument.
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9.15. Conflict Provision. In the event of an irreconcilable conflict
between the terms and conditions of this Agreement and the terms and conditions
of any other Loan Document (other than a Note or any warrant issued to Lender),
the terms and conditions of this Agreement shall govern.
9.16. Waiver of Suretyship Defenses. Borrower hereby waives any and all
defenses and rights of discharge based upon suretyship or impairment of
collateral (including, without limitation, lack of attachment or perfection with
respect thereto) that it may now have or may hereafter acquire with respect to
Lender or any of its obligations hereunder, under any Loan Document or under any
other agreement that it may have or may hereafter enter into with Lender.
9.17. Waiver of Liability. Borrower (a) agrees that Lender (and its
directors, officers, employees and agents) shall have no liability to Borrower
(whether sounding in tort, contract or otherwise) for losses or costs suffered
or incurred by Borrower in connection with or in any way related to the
transactions contemplated or the relationship established by any Loan Document,
or any act, omission or event occurring in connection herewith or therewith,
except for foreseeable actual losses resulting directly and exclusively from
Lender's own gross negligence, willful misconduct or fraud and (b) waives,
releases and agrees not to sue upon any claim against Lender (or its directors,
officers, employees or agents) whether sounding in tort, contract or otherwise,
except for claims for foreseeable actual losses resulting directly and exclusive
from Lender's own gross negligence, willful misconduct or fraud. Notwithstanding
the foregoing, under no circumstances will Lender (or its directors, officers,
employees or agents) be liable to Borrower for any loss, cost or damage suffered
or incurred as a result of any action or inaction by Lender (or its directors,
officers, employees or agents) during the existence of a Default or an Event of
Default, except for foreseeable actual losses resulting directly and exclusively
from Lender's own fraud or criminal activity. Moreover, whether or not such
damages are related to a claim that is subject to the waiver effected above and
whether or not such waiver is effective, Lender (and its directors, owners,
employees and agents) shall have no liability with respect to (and Borrower
hereby waives, releases and agrees not to sue upon any claim for) any special,
indirect, consequential, punitive or non-foreseeable damages suffered by
Borrower in connection with or in any way related to the transactions
contemplated or the relationship established by any Loan Document, or any act,
omission or event occurring in connection herewith or therewith.
9.18. Forum Selection: Consent to Jurisdiction. Any litigation in
connection with or in any way related to any Loan
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Document, or any course of conduct, course of dealing, statements (whether
verbal or written), actions or inactions of Lender or Borrower will be brought
and maintained exclusively in the courts of the Commonwealth of Virginia or in
the United States District Court for the Eastern District of Virginia; provided,
however, that any suit seeking enforcement against Borrower, any Collateral or
any other property may also be brought (at Lender's option) in the courts of any
other jurisdiction where such Collateral or other property may be found or where
Lender may otherwise obtain personal jurisdiction over Borrower. Borrower hereby
expressly and irrevocably submits to the jurisdiction of the courts of the
Commonwealth of Virginia and of the United States District Court for the Eastern
District of Virginia for the purpose of any such litigation as set forth above
and irrevocably agrees to be bound by any final and non-applicable judgment
rendered thereby in connection with such litigation. Borrower further
irrevocably consents to the service of process by registered or certified mail,
postage prepaid, or by personal service within or outside the Commonwealth of
Virginia. Borrower hereby expressly and irrevocably waives, to the fullest
extent permitted by law, any objection which it may have or hereafter may have
to the laying of venue of any such litigation brought in any such court referred
to above and any claim that any such litigation has been brought in an
inconvenient forum. To the extent that Borrower has or hereafter may acquire any
immunity from jurisdiction of any court or from any legal process (whether
through service or notice, attachment prior to judgment, attachment in aid of
execution or otherwise) with respect to itself or its property, then Borrower
hereby irrevocably waives such immunity in respect of its obligations under this
Agreement.
9.19. Waiver of Jury Trial. Lender and Borrower each hereby knowingly,
voluntarily and intentionally waives any rights it may have to a trial by Jury
in respect of any litigation (whether as claim, counter-claim, affirmative
defense or otherwise) in connection with or in any way related to any of the
Loan Documents, or any course of conduct, course of dealing, statements (whether
verbal or written), actions or inactions of Lender or Borrower. Borrower
acknowledges and agrees (a) that it has received full and sufficient
consideration for this provision (and each other provision of each other Loan
Document to which it is a party), and (b) that it has been advised by legal
counsel in connection herewith, and (c) that this provision is a material
inducement for Lender entering into the Loan Documents and funding Advances
thereunder.
[BALANCE OF PAGE INTENTIONALLY BLANK]
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IN WITNESS WHEREOF, the undersigned, by there duly authorized officers, have
executed this Credit Facility Agreement, as an instrument under seal (whether or
not any such seals are physically attached hereto), as of the day and year first
above written.
ATTEST: STARTEC, INC.
By: By:
----------------------------- -------------------------------
Pravhav Maniya Ram Mukunda
Chief Financial Officer President
[CORPORATE SEAL]
WITNESS: SIGNET BANK
By: By:
----------------------------- -------------------------------
Vincent P. Griffin,
Vice President
84
THE VASWANIPLACE CORPORATION
LEASE with STARTEC, INC.
<PAGE>
TABLE OF CONTENTS
1. DEMISED PREMISES . . . . . . . . . . . . . . . . . . . . .
2. TERM . . . . . . . . . . . . . . . . . . . . . . . . . . .
3. USE . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4. MINIMUM RENT . . . . . . . . . . . . . . . . . . . . . . .
5. TAXES AND OPERATING EXPENSES: ADDITIONAL RENT . . . . . . .
6. RENTAL ESCALATION . . . . . . . . . . . . . . . . . . . . .
7. SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . . .
8. COMPLETION OF PREMISES . . . . . . . . . . . . . . . . . .
9. RULES AND REGULATIONS . . . . . . . . . . . . . . . . . . .
10. SERVICES . . . . . . . . . . . . . . . . . . . . . . . . .
11. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . .
12. PUBLIC LIABILITY INSURANCE . . . . . . . . . . . . . . . .
13. FIRE OR OTHER CASUALTY . . . . . . . . . . . . . . . . . .
14. EMINENT DOMAIN . . . . . . . . . . . . . . . . . . . . . .
15. ALTERATIONS . . . . . . . . . . . . . . . . . . . . . . . .
16. MAINTENANCE . . . . . . . . . . . . . . . . . . . . . . . .
17. COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . .
18. MECHANIC'S LIENS . . . . . . . . . . . . . . . . . . . . .
19. SIGNS: ADVERTISEMENT . . . . . . . . . . . . . . . . . . .
20. WEIGHTS: SAFES . . . . . . . . . . . . . . . . . . . . . .
21. ENTRY FOR REPAIRS AND INSPECTIONS . . . . . . . . . . . . .
22. PARKING AND COMMON AREAS . . . . . . . . . . . . . . . . .
23. LIEN FOR RENT . . . . . . . . . . . . . . . . . . . . . . .
24. OTHER COVENANTS OF TENANT . . . . . . . . . . . . . . . . .
A. Use . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Care of Premises . . . . . . . . . . . . . . . . . . . .
C. Trash and Odors . . . . . . . . . . . . . . . . . . . .
D. Assignment or Sublease . . . . . . . . . . . . . . . . .
25. OTHER MUTUAL COVENANTS . . . . . . . . . . . . . . . . . . .
A. Waiver of Subrogation . . . . . . . . . . . . . . . . .
B. LiabilitY for Damage . . . . . . . . . . . . . . . . . .
C. Notices . . . . . . . . . . . . . . . . . . . . . . . .
D. Waiver . . . . . . . . . . . . . . . . . . . . . . . . .
E. Memorandum of Lease . . . . . . . . . . . . . . . . . .
F. Time of Essence . . . . . . . . . . . . . . . . . . . .
G. Late Charges . . . . . . . . . . . . . . . . . . . . . .
26. DEFAULTS: REMEDIES . . . . . . . . . . . . . . . . . . . .
27. SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . .
28. LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT . . . . . . . . .
29. ESTOPPEL STATEMENT . . . . . . . . . . . . . . . . . . . .
30. HOLDING OVER . . . . . . . . . . . . . . . . . . . . . . .
31. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . .
32. PRIOR AGREEMENTS: AMENDMENTS . . . . . . . . . . . . . . .
33. CAPTIONS . . . . . . . . . . . . . . . . . . . . . . . . .
34. BENEFIT AND BURDEN . . . . . . . . . . . . . . . . . . . .
35. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . .
36. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . .
37. NO PARTNERSHIP . . . . . . . . . . . . . . . . . . . . . .
38. OPTIONS TO EXTEND TERM . . . . . . . . . . . . . . . . . .
39. ELECTRONIC SECURITY . . . . . . . . . . . . . . . . . . . .
40. OTHER RIGHTS OF LANDLORD . . . . . . . . . . . . . . . . .
41. RIGHT OF FIRST REFUSAL . . . . . . . . . . . . . . . . . .
EXHIBIT A Demised Premises Floor Plan
EXHIBIT B Tenant Improvements
EXHIBIT C Rules & Regulations
EXHIBIT D Tenant's Corporate Resolution
EXHIBIT E Cleaning Schedule
2
<PAGE>
LEASE
THIS LEASE made and entered into as of this 1 day of September, 1994 by and
between The Vaswani Place Corporation, owner of the real property and the
Building situated thereon located at 10411 Motor City Drive, Bethesda, Maryland,
20817, called "LANDLORD" and Startec, Inc., hereinafter called "TENANT".
WITNESSETH THAT, for in consideration of the rents and mutual covenants and
agreements hereinafter stipulated and intending to be legally bound, the parties
do hereby mutually agree as follows:
1. DEMISED PREMISES:
Landlord does hereby lease and demise to Tenant, and Tenant does
hereby hire and take from Landlord, upon and subject to the terms and conditions
of this Lease, a portion of the Building known as The Vaswani Place, 10411 Motor
City Drive, Bethesda, Maryland, 20817 (the "Building") in Montgomery Mall Auto
Park, Montgomery County, Maryland, consisting of approximately 5,396 rentable
square feet on the third (3rd) floor as shown on the floor plan(s) attached
hereto as "Exhibit "A" which shall be supplied in advance by Tenant and attached
to the Lease and forming a part hereof (hereinafter referred to as the "Demised
Premises").
2. TERM:
A. The term of this Lease shall commence on November 1, 1994, and shall end
on the last day of the calendar month in which occurs the day preceding the 5th
anniversary of the Term Commencement Date (the "Term"). The "Term Commencement
Date" shall mean the earlier of (a) 5 business days after the Tenant's receipt
of notice from Landlord that the Demised Premises are ready for occupancy, or
(b) the date Tenant or anyone claiming under or through Tenant first occupies
the Demised Premises or any portion thereof excluding Tenant's installation of
cabling or minor maintenance work. Said commencement date to be not later
3
<PAGE>
than sixty (60) days after full lease execution.
B. Subject to Section 2C below, the Demised Premises shall be deemed ready
for occupancy when the work in the Demised Premises in accordance with Exhibit
"B" attached hereto and made a part thereof, (the "Tenant Improvements") shall
be substantially completed as certified by an architect or engineer retained by
Landlord, notwithstanding that minor or insubstantial details of construction,
mechanical adjustments or decorations remain to be performed, the non-completion
of which does not materially interfere with Tenant's use and occupancy of the
Demised Premises
C. If the completion of the Tenant Improvements shall be delayed caused by
Tenant, or changes, alterations or additions required or made by Tenant in the
plans and/or specifications of the Tenant Improvements as set forth in Exhibit
"B" or otherwise, then the Demised Premises shall be deemed ready for occupancy
by Tenant when the Tenant improvements, less any additional work, changes,
alterations, or additions requested by the Tenant are, or would have been,
substantially completed.
3. USE
Tenant will use and occupy the Demised Premises solely for general
office purposes. Tenant agrees not to use the Demised Premises for any purpose
which interferes with the use and enjoyment of the Building by other Tenants
occupying space therein or which would increase the premiums for insurance
coverage payable by Landlord in respect of the Building. Landlord represents
that Tenant's use as sa forth above does not violate the certificate of
occupancy for the Building.
4. MINIMUM RENT
A. Tenant shall pay as minimum annual rent for the Demised Premises
the sum of eighty nine thousand, thirty-four and 00/100ths Dollars ($89,034.00),
which amount shall be the product of $16.50 multiplied by the total number of
square feet in the Demised Premises. Such sum shall be payable during the Term,
in advance, in equal monthly installments of seven thousand, four hundred
nineteen and 50/100ths Dollars ($7,419.50). Subject to the Provisions of Section
25 (G) of this lease, each such monthly installment shall be paid on the first
day of each month of the Term hereof commencing with the first month of the
Term.
B. If the Term begins on a day other than the first day of the month,
minimum rent from the Term Commencement Date to the first day of the full
calendar month following shall be prorated at the rate of one-thirtieth (1/30)
of the fixed monthly rental for each day and shall be payable on the execution
of this Lease. Any overage for the 1st months rent, which is due and payable at
lease execution shall be applied to the 2nd months rent at a rate of one day of
rent credit for each one day of
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overage payment.
C. All rent and other sums due to Landlord hereunder (collectively,
the "Rent") shall be payable at the office address of Landlord first above
given, or to such other party or at such other address as Landlord may
designate, from time to time, by written notice to Tenant, without demand and
without deduction, set-off or counterclaim.
5. TAXES AND OPERATING EXPENSES: ADDITIONAL RENT
A. As used in this Section 5, the following terms shall
have the following meanings:
(1) "Taxes" shall mean all real estate taxes, impositions and
assessments, general or special, ordinary or extraordinary, foreseen or
unforeseen, imposed upon the Property or with respect to the ownership thereof.
If, due to a future change in the method of taxation, any franchise, income,
profit or other tax, however, designated, shall be levied or imposed in
substitution, in whole or in part, for (or in lieu of) any tax which would
otherwise be included within the definition of Taxes, such other tax shall be
deemed to be included within "Taxes" as defined herein.
(2) "Base Year" for real estate taxes and operating expenses shall be
1994. Landlord represents that the Building has been fully assessed for the Base
Year.
(3) "Tenant's Proportionate Share" shall be five and six tenths
percent (5.6%), which Landlord and Tenant agree is the percentage which the
square footage of the Demised Premises bears to the square footage of the
Building.
(4) "Operating Expenses" shall mean all expenses, costs and
disbursements of every kind and nature which Landlord shall pay or become
obligated to pay in respect of the operation, maintenance, repair and management
of the Property and shall include, without limitation (a) wages and salaries
(and taxes imposed upon employers with respect to such wages and salaries) and
fringe benefits paid to persons employed by Landlord or Landlord's managing
agent, if any, for rendering service in the normal operation, maintenance and
repair of the Building and Property, (b) contract costs of independent
contractors hired for the operation, maintenance and repair of the Building and
Property; (c) costs of electricity, steam, water, sewer, fuel and other
utilities chargeable to the operation and maintenance of the Building and
Property; (d) costs of insurance for the Building and Property, including fire
and extended coverage, elevator, boiler, sprinkler leakage, water damage, public
liability and property damage, plate glass, and rent protection, but excluding
any charge for increased premiums due to acts or omissions of other occupants of
the Building because of extra risk which are reimbursed to Landlord by such
other occupants;
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(e) costs of supplies, tools, materials necessary for the normal operation,
maintenance and repair of the Building, Property and equipment; (f) interest,
depreciation or amortization and rents paid or incurred by Landlord for
machinery, equipment or other capital improvements used or useful only in the
maintenance or operation of the Building; and (g) any and all sums for
landscaping, ground maintenance, sanitation control, cleaning, lighting, snow
removal, parking area and driveway resurfacing, when reasonably required, fire
protection, policing, security and other expenses, reasonably required for the
upkeep, maintenance and operation of the Property by virtue of the ownership
thereof, including, without limitation, reasonable management fees payable to
any managing agent employed or engaged by Landlord.
B. In addition to the minimum annual rent, commencing on the first day
of the first calendar month following receipt of Landlord's statement therefore,
Tenant shall pay in monthly installments or in a lump sum if in arrears, as
additional rent hereunder, Tenant's Proportionate Share of the amount by which
all Taxes (as defined in article 5A(1) above) imposed upon The Property for and
with respect to each year and any renewals or extensions thereof, exceeds the
Taxes assessed or imposed upon the Property for the Base Year. Said Expenses
shall be passed through to Tenant in Year Two of the Lease Term, and each
anniversary of the lease term thereafter.
C. (i) Tenant hereby agrees to pay as additional rent, Tenant's
Proportionate Share of the amount by which Operating Expenses Grossed up as if
the Building was ninety-five percent (95%) occupied incurred by Landlord in the
Base Year Increase for and with respect to each calendar year of the Term after
the Base Year, and any renewals or extensions thereof. Operating Expenses will
be appropriately prorated for the portion of any calendar year. Said expenses
shall be passed through to Tenant in Year Two of the lease term, and each
anniversary of the lease term thereafter.
(ii) If the Expiration Date of this Lease does not coincide with
the last day of the real estate tax fiscal year, the portion of the increase in
Real Estate Taxes payable by Tenant hereunder for the real estate fiscal year in
which the Expiration Date occurs shall be appropriately adjusted and pro-rated
between Landlord and Tenant based upon the respective number of days in such
real estate tax fiscal year prior to and after the Expiration Date.
(iii) As an example of estimated increases in Operating Expenses
based on a Calendar Year (which is equal to the building's fiscal year) assume
total building expense increases are $100,000 between January 1 and December 31
and the Tenant's proportionate share is twenty percent (20%) Tenant would be
responsible for an increase in operating rent of $20,000 in 12) or $l,666.67 in
additional rent. thly installments ($20,000\12) or $1,666.67 in additional rent.
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(D) If Tenant's usage of Building electricity substantially exceeds by
reasonable comparison, on a square foot basis, other building tenants'
electricity usage, then Landlord, at Tenant's expense, shall have the option to
separately meter Tenant's space for electrical usage and charge Tenant for the
additional amount of electricity used.
6. RENTAL ESCALATION
In addition to the adjustment to the monthly rent for increases in Real
Estate Taxes and Operating Expenses, Tenant's Base Year Rental will be increased
in the beginning of year two of the lease term, and each anniversary thereafter
at three percent (3%) per annum.
7. SECURITY DEPOSIT
As additional security for the full and prompt performance by Tenant of the
terms and covenants of this Lease, Tenant has deposited with Landlord the sum of
seven thousand four hundred nineteen and 50/100ths Dollars ($7,419.50)
representing one month's rent as Security Deposit, which shall not constitute
rent for any month unless so applied by Landlord on account of Tenant's default.
Tenant shall, upon demand, restore any portion of the Security Deposit which may
be applied by Landlord to cure any default by Tenant hereunder. To the extent
that Landlord has not applied the Security Deposit on account of a default, the
Security Deposit shall be returned to Tenant promptly after termination of this
Lease. In the event Tenant fails to take possession of the Demised Premises on
the Term Commencement Date or vacates or abandons the Demised Premises during
the Term, the Security Deposit shall not be deemed to be liquidated damages, and
such application of the Security Deposit shall not preclude Landlord from
recovering from Tenant all additional damages incurred by Landlord. If Tenant
fails at any time to perform its obligations, Landlord may at its option apply
said deposit, or so much thereof as is required, to cure Tenant's default, but
if prior to the termination of this lease Landlord depletes said deposit in
whole or in part, Tenant shall immediately restore the amount so used by
Landlord. Following termination of this lease and satisfaction of all Tenant
obligations hereunder, Landlord shall return to Tenant any unused portion of the
Security Deposit plus any interest due.
8. COMPLETION OF PREMISES
Promptly after the execution of this lease by the parties hereto, the
Landlord shall cause the leased premises to be completed in accordance with the
work described on said Exhibit "B" up to $13.50 per square foot. In the event
that the cost of the total work exceeds $13.50 per square foot and substantial
completion of the premises has occurred, Tenant hereby agrees to promptly pay
and reimburse Landlord for the full cost of such work to the extent it is over
$13.50 per square foot upon the substantial completion thereof. Landlord shall
have the right to
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provide Tenant with Turnkey construction of the Premises in lieu of the
allowance provided above, subject to a mutually acceptable space plan and
schedule of finishes. Following substantial completion of said work, Landlord
shall deliver the premises to Tenant who shall accept the same and promptly
furnish the premises for its business purposes and use. Landlord has the right
to reasonably approve all tenant improvements as required by Tenant. All such
costs including but not limited to design services, construction drawings to be
provided by Landlord, general contractor's profit and overhead and construction
management are included in the tenant improvement allowance. In order to ensure
timely completion of construction of improvements, Landlord and Tenant shall
agree to an estimated timetable (said estimated timetable shall be submitted to
Tenant within five (5) business days of receipt of the final approved space
plan) whereby each party shall make best efforts to meet certain dates in the
design and construction process. Tenant shall be permitted to enter and have
prior access to the Premises along with its agent, contractors, architects,
etc., for the purpose of installing telephone, computer equipment and cabling
during the last fifteen (15) days of construction (provided such work by Tenant
or Tenant's agent, contractors, architects, etc. does not unreasonably interfere
with Landlord's construction work) without liability for rent during such
period, but subject to all other terms, covenants and conditions of the lease.
Tenant's allowance shall not include the cost of the preliminary spare plan,
which shall be paid by the landlord. Tenant shall have the right to submit to
Landlord two (2) construction bids from licensed general contractors for
consideration to perform tenant's buildout. The demised premises as well as
Common areas on the third floor shall be in broom clean condition, consistent
with other floors in the building, prior to tenant occupancy of the demised
premises.
9. RULES AND REGULATIONS
The "Rules and Regulations" in regard to the Building and the Tenants
occupying offices therein, attached hereto as Exhibit "C" and made a part
hereof, and such reasonable alterations, additions or modifications thereof as
may from time to time be made by Landlord, shall be deemed a part of this Lease,
with the same effect as though written herein, and Tenant covenants that the
Rules and regulations shall be faithfully observed by Tenant, Tenant's employees
and all persons visiting the Demised Premises or claiming under Tenant, the
right being hereby expressly reserved by Landlord to add to, alter or rescind,
from time to time, such Rules and Regulations, which changes shall take effect
immediately after notice thereof in writing shall have been served on Tenant by
delivering the same to Tenant by certified mail return receipt requested.
Landlord shall not be responsible for any violation or disregard of any of the
Rules and regulations or any rules and regulations hereafter adopted, by any
other Tenant, occupant or person in the Building of which the Demised Premises
are a part; and nothing herein shall impose any obligation on Landlord to
enforce the Rules and
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Regulations or any of them against any other Tenant, occupant or person, but the
same are to be Rules and Regulations to be abided by and complied with by Tenant
hereunder. In the event of a conflict between the rules and regulations as set
forth in Exhibit C and the Terms of this Lease, the terms of this lease shall
prevail.
10. SERVICES
Landlord agrees to maintain the building to the standard of other
similar class "A" buildings in the North Bethesda Office Market. As long as
Tenant is not in default after expiration of all applicable notice and cure
periods and the elapse of all opportunities to cure under any of the provisions
of this lease, Landlord shall provide the following facilities and services to
Tenant without additional charge (except as elsewhere provided herein). Landlord
agrees to provide;
(A) Heat and air conditioning necessary, in Landlord's reasonable
judgment, for comfortable occupancy of the Demised Premises, Monday through
Friday from 8:00 AM to 6:00 PM, and on Saturdays from 8:00 AM to 1:00 PM,
holidays noted below excepted. Heat and air conditioning required by Tenant at
other times shall be supplied upon reasonable notice, and shall be paid for by
Tenant, promptly upon billing,
(B) Passenger elevator service to the Demised Premises during all
working days (Saturday other than 9:00 AM to 1:00 PM, Sunday and the holidays
noted below excepted) from 8:00 AM to 6:00 PM, with one elevator subject to call
at all other times. Tenant and its employees and agents shall have access to the
Demised Premises at all times, subject to compliance with such security measures
as shall be in effect for the Building. The Building will be accessed after
hours by key cards. Landlord will provide Tenant with 11 card keys. Additional
card keys are available at $8.50 each.
(C) The holidays referred to in Section 10A and 10B above are New
Year's Day, Martin Luther King Day, Washington's Birthday, Memorial Day, Fourth
of July, Labor Day, Columbus Day, Veteran's Day, Thanksgiving Day, Christmas
Day, and those days designated by the federal government, and any other national
holiday promulgated by a Presidential Executive Order or Congressional Act.
(D) Janitorial service to Demised Premises customary for first class
office buildings in Montgomery County, Maryland. Any and all additional or
specialized janitorial service desired by Tenant shall be contracted for by
Tenant directly with Landlord's janitorial agent and the cost and payment
thereof shall be and remain the sole responsibility of Tenant. Exhibit E
specifies existing building Cleaning standards and procedures.
(E) All structural repairs to the Building and all
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repairs which may be needed to the mechanical, electrical, air-conditioning,
heating and plumbing systems in the Demised Premises, excluding repairs to any
non-Building standard fixtures or other improvements installed or made by or at
the request of Tenant (other than the Tenant Improvements) and requiring usual
or special maintenance. In the event that any repair is required by reason of
the negligence or abuse of Tenant or its agents, employees, invitees or of any
other person using the Demised Premises with Tenant's consent, express or
implied, Landlord may make such repair and add the cost thereof to the first
installment of rent which will thereafter become due, unless Landlord shall have
actually recovered such cost through insurance proceeds.
(F) Water for drinking, lavatory and toilet purposes drawn through
fixtures installed by Landlord; and
(G) Electric current to the Demised Premises for lighting and normal
office use and for heating and air conditioning. Tenant shall not install or
operate in Demised Premises any computers or other electrically operated
equipment or other machinery, other than modern day office equipment such as
computers, copiers, fax machines, typewriters, word processing machines,
micro-computers, radios, televisions, tape recorders, dictaphones, photocopying
equipment, and adding machines normally employed for general office use, or any
plumbing fixtures, without first obtaining the prior written consent of the
Landlord. Landlord may condition such consent upon the payment by Tenant of
additional rent as compensation for any risks, services, or utilities Landlord
deems necessary.
(H) It is understood that Landlord does not warrant that any of the
services referred to in this Section 10 will be free from interruption from
causes beyond the reasonable control of Landlord. However, in such event, the
Landlord will use his best efforts to effect the restoration of same. Landlord
shall not be liable to Tenant, its employees, agents, invitees or licensees for
any damages or injury to person or property arising from the bursting, leaking
or overflowing of water, sewer, or steam pipes, heating or plumbing fixture, or
electrical wires or fixture unless due to Landlord's, gross negligence. No
interruption of service shall ever be deemed an eviction or disturbance thereof
or render Landlord liable to Tenant for damage by abatement of Rent or otherwise
or relieve Tenant from performance of Tenant's obligations under this Lease.
11. INDEMNIFICATION
Landlord and Tenant mutually agree to indemnify, defend and hold
harmless each other and the manager of the Property and/or Building and their
officers, employees and agents from and against all suits, actions, damages,
liability and expense (including reasonable attorneys' fees) in connection with
loss of life, bodily or personal injury or property damage arising
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directly or indirectly from any cause whatsoever in connection with the
occupancy, conduct, operation, ownership or maintenance of the Demised Premises
or the building from any work or thing whatever done or which was not done in
and on the Demised Premises, or the building arising from any breach or default
on the part of the Landlord or Tenant in the performance of any covenant or
agreement on the part of Landlord or Tenant to be performed, or under the law,
or arising from any act, omission or negligence of Landlord or Tenant, or any of
their agents, contractors, servants, employees, licensees or invitees, and in
case any action or proceeding be brought against the other, each covenants at
Landlord or Tenant's cost and expense to resist or defend such action or
proceeding or to cause it to be resisted or defended by an insurer, the cost of
which shall be offset by any insurance proceeds obtained.
12. PUBLIC LIABILITY INSURANCE
(A) Tenant, at its own cost and expense, shall obtain and maintain in
full force and effect during the Term, and any extensions or renewals,
comprehensive general public liability insurance with a combined single limit
coverage of not less than $1,000,000on account of bodily injuries and/or death
and property damage.
(B) All such policies of insurance shall name Landlord and if required
mortgagee of Landlord as additional insureds. All such policies of insurance
shall be issued by a financially responsible company or companies authorized to
issue such policy or policies, and licensed to do business in the State of
Maryland, and shall contain provisions to the effect that no cancellation
thereof shall be effective without thirty (30) days' prior written notice to
Landlord and any mortgagee. Tenant shall lodge with Landlord duplicate originals
or certificates of such insurance at or prior to the Term Commencement Date,
together with evidence of paid-up premiums, and shall lodge with Landlord
renewals thereof at least thirty (30) days' prior to expiration of any such
policies.
13. FIRE OR OTHER CASUALTY
In case of damage to the Demised Premises or damages to the Building
specifically caused by the Tenant or its agents or invitees by fire or other
casualty, Tenant shall give immediate notice thereof to Landlord. Subject to the
rights of any mortgagee of Landlord's estate, Landlord may, at its option
thereupon undertake the repair and restoration of the Demised Premises or the
Building to substantially the same condition as existed prior to the casualty,
at the expense of the Tenant, subject to the delays which may arise by reason of
adjustment of loss under insurance policies and for delays beyond the reasonable
control of Landlord. In the event the damage shall be such that Landlord
reasonably determines that it cannot be repaired within ninety (90) days from
the date of such damage, Landlord may at its option either (a) by written notice
to Tenant
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given within sixty (60) days after Landlord is notified of the casualty,
terminate this Lease as of a date specified in such notice (which shall not be
more than ninety (90) days after the occurrence as aforesaid) and the Rent
(taking into account any abatement) shall be adjusted to the termination date
and Tenant shall thereupon promptly vacate the Demised Premises, or (b) restore
the Building and/or Demised Premises with reasonable promptness in which event
Rent shall equitably abate.
Notwithstanding the foregoing, Tenant may cancel this Lease by
delivering written notice to Landlord in the event that the Landlord elects to
repair the Demised Premises and such repairs are not substantially complete
within 110 days of the occurrence of the damage.
Landlord shall pursue all claims it has with insurance companies as a
result of any loss by fire or other casualty in such a manner as Landlord deems
appropriate.
14. EMINENT DOMAIN
(A) If the whole of the Property, Building or Demised Premises shall
be taken or condemned for a public or quasi-public use under any statute or by
right of eminent domain or private purchase in lieu thereof by any competent
authority, Tenant shall have no claim against Landlord and shall not have any
claim or right to any portion of the amount that may be awarded as damages or
paid as a result of any such condemnation or purchase; and all rights of the
Tenant to damages therefore are hereby assigned by Tenant to Landlord. The
foregoing shall not, however, deprive Tenant of any separate award for moving
expenses or for any other award which would not reduce the award payable to
Landlord. Upon the date the right to possession shall vest in the condemning
authority, this Lease shall cease and terminate with Rent adjusted to such date
and Tenant shall have no claim against Landlord for value of any unexpired term
of this Lease.
(B) If part of the Demised Premises shall be acquired or condemned as
aforesaid, and such partial acquisition or condemnation shall render the
remaining portion unsuitable for the business of Tenant (in the reasonable
opinion of Landlord), the term of the Lease shall cease and terminate as
provided in Section 14A hereof, provided, however, that diminution of floor area
shall not in and of itself be conclusive as to whether the portion of the
Demised Premises remaining after such acquisition is unsuitable for Tenant's
business. If such partial taking is not extensive enough to render the Demised
Premises unsuitable for the business of Tenant, then this Lease shall continue
in effect except that the minimum rent shall be reduced in the same proportion
that the floor area of the Demised Premises taken bears to the original floor
area demised. Subject to the rights of any mortgagee of Landlord's estate,
Landlord may, at its option, upon receipt of the net award in condemnation, make
all necessary repairs or alterations to the Building so as to render
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the portion of the Building not taken a complete architectural unit, but
Landlord shall in no event be obligated to pay to Tenant any portion of the net
amount received by Landlord as damages for the part of the Demised Premises so
taken. "Net amount received by Landlord" shall mean that portion of the award in
condemnation which is free and clear to Landlord of any sums required to be paid
by Landlord to the holder of any mortgage on the property so condemned for the
value of the diminished fee, as well as all expenses and legal fees incurred by
Landlord in connection with the condemnation proceeding.
(C) If part of the Building, but no part of the Demised Premises, is
taken or condemned as aforesaid, and, in the reasonable opinion of Landlord,
such partial acquisition or condemnation shall render the Demised Premises
unsuitable for the business of Tenant, the term of the Lease shall cease and
terminate as provided in Section 14A hereof, by Landlord sending written notice
to such effect to Tenant, whereupon Tenant shall immediately vacate the Demised
Premises.
15. ALTERATIONS
Other than the Initial Tenant Improvements, Tenant shall make no
alterations, installations, additions or improvements (herein collectively
called "Alterations") in or to the Demised Premises or the Building, structural
or otherwise, without Landlord's prior written consent. Tenant, at its sole cost
and expense, must provide Landlord with a copy of the full floor mechanical and
electrical plans for the floor or floors of the Demised Premises on which the
Alterations are being made, revised by the Building architect and engineers,
showing the Alterations proposed by Tenant for Landlord's approval. If any such
Alterations are made without the prior written consent of Landlord, Landlord may
correct or remove the same, and Tenant shall be liable for any and all expenses
incurred by Landlord in the performance of such work. All Alterations shall be
at Tenant's sole expense, shall comply with all laws, rules, orders and
regulations of governmental authorities having jurisdiction thereof and shall be
made at such time and in such manner as Landlord determines will not
unreasonably interfere with the use of the Building by other Tenants and their
respective premises. All Alterations shall be made only by such contractors or
mechanics as are approved in writing by Landlord. Such approval shall not be
unreasonably withheld or delayed. Approval of contractors or mechanics by
Landlord shall be based upon the contractors or mechanics being properly
licensed, their financial posture, experience and past job performance. Tenant
shall pay prevailing wages to all contractors and mechanics.
All Alterations to the Demised Premises, whether made by Landlord or
Tenant, and whether at Landlord's or Tenant's expense, or the joint expense of
Landlord and Tenant, shall be and remain the property of Landlord, hereinafter
unless otherwise agreed to by Landlord and Tenant.
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Landlord, at the expiration of the Term or any renewal or extension
thereof, may elect to require Tenant to remove all or any part of the
Alterations made by the Tenant, subsequent to the Term Commencement Date, unless
Landlord agrees in writing not to require the removal of an Alteration at the
time Landlord consents to the Alteration. Removal of Tenant's Property and
Alteration shall be at Tenant's cost and expense and Tenant shall, at its cost
and expense, repair any damage to the Demised Premises or the Building caused by
such removal. In the event Landlord does not so elect, and Tenant does not
remove Tenant's Property, it shall become property of Landlord. In the event
Tenant fails to remove Tenant's property or the Alterations requested to be
removed by Landlord on or before the expiration of the Term or any extension or
renewal thereof, then and in such event, the Landlord may remove Tenant's
Property and Alteration from the Demised Premises at Tenant's expense and the
Tenant hereby agrees to reimburse the Landlord for the cost of such removal
together with any and all damages which the Landlord may suffer and sustain by
reason of the failure of Tenant to remove the same.
Tenant further acknowledges that any violation of the foregoing
requirement by Tenant will jeopardize Landlord's bond financing for the Building
project of which the leased premises is a part and could likely cause Landlord
to suffer and incur substantial monetary damage or injury to which Tenant would
be liable.
16. MAINTENANCE
(A) Demised Premises: Tenant shall keep the Demised Premises and the
fixtures and equipment therein in good order and condition, will suffer no waste
or injury thereto, and shall at the expiration or sooner termination of this
Lease, surrender and deliver up the Demised Premises to Landlord in the same
good order and broom clean condition as existed on the Term Commencement Date,
ordinary wear and tear and damage by fire, the elements and other casualty
excepted. If repairs are required due to the negligent acts of the Tenant, its
agents, employees or invitees, the Landlord (upon written notice from Tenant of
the need for same) will make the same forthwith. Tenant shall be required to
give Landlord immediate notice of the need for any repair which, if not promptly
repaired, will constitute an unsafe condition which might cause injury. The
Landlord shall, at reasonable times and on prior reasonable notice to Tenant, be
permitted to enter upon the demised premises to examine the condition thereof
and to make the repairs as are required by the provisions of this paragraph at
Tenant's expense.
(B) Common Areas: Landlord shall maintain and repair the common areas
and facilities of the Building at all times. For the purposes of this Lease, the
Term "Common Areas" shall mean all areas, facilities and improvements provided,
from time to
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time, in the Building or for the mutual convenience and use of tenants or other
occupants of the Building, their respective agents, employees, and invitees and
shall include, if provided, but shall not be limited to, the Lobbies and
hallways, access roads, driveways, retaining walls, sidewalks, walkways,
landscaped areas, and exterior lighting facilities.
(C) Landlord shall, as between Landlord and Tenant, at all times
during the Term of the Lease, have the sole and exclusive control, management,
and direction of the Common Areas, and may, at any time and from time to time
during the Term exclude and restrain any person from the use and occupancy
thereof, excepting however, Tenant and other tenants of the Landlord and bona
fide invitees who make use of said areas in accordance with the rules and
regulations established by Landlord from time to time with respect thereto. The
rights of the Tenant in and to the Common Areas shall at all times be subject to
the rights of others to use same in common with Tenant, and it shall be the duty
of Tenant to keep all areas free and clear of any obstructions created or
permitted by Tenant or resulting from Tenant 's operation. Landlord may at any
time and from time to time close all or any of the Common Areas to make repairs
or alterations with advance notice to Tenant, or to the extent as maybe
necessary it the opinion of Landlord, to prevent the dedication thereof or the
accrual of any rights to any person or to the public therein, to close
temporarily any or all portions of the said areas to discourage non-customer
parking, and to do and to perform such other acts in and to said areas as, in
the exercise of good business judgment, Landlord shall determine to be advisable
with a view to the improvement of the convenience and use thereof by tenants,
their employees, agents, and invitees.
17. COMPLIANCE WITH LAWS
Tenant agrees, on behalf of itself, its employees and agents, that it
shall comply at all times with any and all Federal, state and local laws,
statutes, regulations, ordinances and other requirements of any of the
constituted public authorities relating to its use and occupancy of the Demised
Premise. Tenant shall be responsible for obtaining and maintaining proper
occupancy permits.
18. MECHANIC'S LIENS
Tenant shall not create or permit to be created or to remain, and
shall discharge and have removed or obtain security in the form of legally
recordable bonds for any lien, encumbrance or charge levied on account of any
mechanic's laborer's or materialmen's lien upon the Demised Premises or the
Property. If
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any mechanic's laborer's or materialmen's lien shall at any time be filed
against the Demised Premises or the Property for work claimed to have been done
for or materials claimed to have been furnished to Tenant (except for work
contracted for by Landlord), Tenant, within ten business (10) days after notice
of the filing thereof, at its sole cost and expense will cause it to be
discharged of record by payment, deposit, bond, order of a court of competent
jurisdiction or otherwise. If Tenant shall fail to discharge any such lien,
Landlord may, at it's option, discharge the same and treat the cost thereof as
additional rent payable with the monthly rent next becoming due. Tenant will
indemnify, defend and hold harmless Landlord from and against any and all
expenses, liens, claims or damages to person or property which may or might
arise by reason of Tenant making any Alterations, additions or improvements to
the Demised Premises or the Property.
19. SIGNS: ADVERTISEMENTS
Without the prior written consent of Landlord which consent shall not
be unreasonably withheld and except for mutually agreed to designs and locations
of sign(s) which are planned to be standard building directory signage and suite
entry signage, No sign, advertisement or notice shall be inscribed, painted,
affixed or displayed on any part of the outside or the inside of the Building or
the Demised Premises, including, without limitation, the doors of offices, and
if any such sign, advertisement or notice is exhibited, Landlord shall have the
right to remove the same and Tenant shall be liable for any and all expenses
incurred by Landlord by said removal. Any such permitted sign, advertisement
and/or notice, shall be at the sole expense and cost of the Tenant. Landlord
shall have the right to prohibit any advertisement of Tenant which in its
opinion tends to impair the reputation of the Building or its desirability as a
high-quality office Building and, upon written notice from Landlord, Tenant
shall immediately refrain from and discontinue any such advertisement.
Landlord will provide Building standard signage to identify Tenant on
one entrance door to demised premises and on a Building directory in the
Building lobby.
20. WEIGHTS: SAFES
Landlord shall have the right to reasonably prescribe the weight and
position of safes and other heavy equipment or fixtures to be located upon the
Demised Premises. Any and all damage or injury to the Demised Premises or the
Building caused by moving the property of Tenant into, or out of the Demised
Premises, or due to the same being located on the Demised Premises, shall be
repaired by and at the sole cost of Tenant. No
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furniture, equipment or other bulky matter of any description will be received
into the Building or carried in the (cent)levators except in the manner and
during the times approved in advance by Landlord in the exercise of reasonable
discretion. All moving of furniture, equipment and other bulky material within
public areas of the Property shall be under the direct reasonable control and
supervision of Landlord who shall not be responsible for any damage to or charge
for moving the same. Tenant agrees promptly to remove from the sidewalks
adjacent to the Building any of the Tenant's furniture, equipment or other
material there delivered or positioned.
21. ENTRY FOR REPAIRS AND INSPECTIONS
Tenant will permit Landlord, or its agent, employees or contractors,
with reasonable notice to Tenant when possible, to enter the Demised premises,
without charge therefore to Landlord or without diminution of the Rent payable
by Tenant, to examine, inspect and protect the Demised Premises, and to make
such repairs as in the judgment of Landlord may be deemed necessary to maintain
or protect the Demised Premises or the Building, or to exhibit the same to
prospective Tenants during the last one hundred twenty (120) days of the Term.
Landlord shall use reasonable efforts to minimize interference to Tenant's
business when making repairs, but Landlord shall not be required to perform the
repairs at a time other than during normal working hours.
In the event of an emergency, Landlord may enter the Demised Premises
without notice and make whatever repairs are necessary to protect the Demised
Premises or Building.
22. PARKING AND COMMON AREAS
Landlord will provide Eleven (11) parking spaces to Tenant (Four (4)
of the Eleven (11) spaces are to be reserved in the covered parking area for the
Term of the Lease), at a location determined from time to time by Landlord, at
no cost to Tenant. Landlord shall be entitled to reasonably relocate or reduce,
on a temporary basis, the parking spaces at any time in order to construct
alterations or additions to the Building. Additional parking needs will be
considered upon request.
23. LIEN FOR RENT
In consideration of the mutual benefits arising hereunder, Tenant
hereby grants to Landlord a lien on all property of Tenant except for prior
liens which already exist now or hereafter placed in or on the Demised Premises
(except such
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part of any property as may be exchanged, replaced or sold from time to time in
the ordinary course of business operation or trade) and such property shall be
and remain subject to such lien of Landlord for payment of all Rent and other
sums agreed to be paid by Tenant herein. Said lien shall be in addition to and
cumulative with any other rights or remedies of Landlord under this Lease by law
or at equity.
24. OTHER COVENANTS OF TENANT
A. Use - Under no circumstances shall Tenant permit the leased
premises to be used or occupied by (i) any state or Federal branch, agency or
entity, the source of whose lease payments or other payments for the lease or
occupancy of such space are derived from moneys raised by taxation; (ii) any
individual or entity for the purpose of engaging in non-commercial activity or
whose activities would contravene public policy.
Tenant understands that any violation of the restrictions hereinbefore
set forth shall adversely affect the exemption from Federal taxation of interest
paid on the bond issue used to finance the project of which the leased premises
is a part, which would result in a serious monetary loss and damages to Landlord
for which Tenant would be liable.
B. Care of Premises - Tenant shall not permit the demised premises to
be overloaded, damaged or defaced; not place a load upon the premises exceeding
65 pounds of live load per square foot of floor area; and not move any safe,
vault or other heavy equipment in, about or out of the premises, except in such
manner, and at such time as Landlord shall in each instance authorize. Tenant's
business machines and mechanical equipment which cause vibration or noise that
may be transmitted to the Building structure or to any other space in the
Building shall be so installed, maintained and used by Tenant as to eliminate
such vibration or noise; no nuisance will be permitted on or about the demised
premises which shall be contrary to any law, ordinance, regulation or
requirement of any public authority having jurisdiction; the Tenant will keep
the demised premises reasonably clean; the Tenant will not litter or place any
obstruction in any portion of the common facilities; the Tenant will not do, nor
suffer to be done, nor keep or suffer to be kept, anything in or upon the
demised premises or the Building which may prevent the obtaining of any
insurance (including fire, extended coverage and public liability insurance) on
the demised premises or the Building or on any property therein, or which may
make void any such insurance, or which may create any extra premiums for, or
increase the rate of any such insurance. If any actions of Tenant do create any
increase in premiums or additions
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premiums, then the Tenant shall pay the increased cost of the same to the
Landlord upon demand.
C. Trash and Odors - Tenant shall keep all trash, rubbish, garbage and
other refuse in proper containers within the interior of the leased premises
until called for to be removed by Landlord's janitorial service, and not cause
or permit objectionable odors to emanate or be dispelled from said Demised
Premises.
D. Assignment or Sublease - Tenant shall not voluntarily,
involuntarily or by operation of law assign or encumber this lease, in whole or
in part, or sublet the whole or any part of the demised premises, or permit any
other persons to occupy same without the prior express written consent of the
Landlord which consent shall not be unreasonably withheld, references elsewhere
in this lease to assignees, subtenants or other persons notwithstanding. Any
assignment or subletting, even with the consent of Landlord, shall not relieve
Tenant from liability for payment of rent or other sums herein provided or from
the obligation to keep and be bound by the terms, conditions and covenants of
this lease. The acceptance of rent from any other person shall not be deemed to
be a waiver of any of the provisions of this lease or to be a consent to the
assignment of this lease or subletting of the demised premises. The referenced
assignment or sublease provision shall remain in effect should the Tenant renew
the Lease. Tenant shall have the right without Landlord's consent to sublet at
no profit, to any venture owned 50% or more by Tenant.
If Tenant is a corporation other than a corporation whose stock is
listed on a national stock exchange, then any transfer of this lease from Tenant
by merger, consolidation or liquidation, shall constitute an assignment for the
purpose of this lease. An assignment for the benefit of creditors or by
operation of law shall not be effective to transfer any rights to the assignee
without the prior express written consent of the Landlord having been obtained.
Notwithstanding any provision above to the contrary, before Tenant may
assign this lease or sublet said premises, Tenant must first offer to relinquish
its lease of said premises, and to surrender same, to the Landlord; and Tenant
agrees that if Landlord accepts said offer within ten (10) days of receipt
thereof, this lease shall terminate and become null and void upon a date
designated by Landlord, not less than thirty (30) nor more than sixty(60) days
after the date of Landlord's acceptance. Upon such acceptance and termination,
all account and interests of the parties shall be settled to the date of
termination. Any profits net of reasonable subleasing expenses shall be split
50/50 with
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the Landlord.
E. Corporate Authority - Tenant represents and warrants that the
person executing this Lease is authorized by Startec, Inc. to execute and bind
the corporation to this Lease.
25. OTHER MUTUAL COVENANTS
In addition to the foregoing covenants and conditions with which the
parties hereto have agreed to comply, the Landlord and Tenant do hereby further
mutually agree that:
A. Waiver of Subrogation - Landlord and Tenant hereby waive all right
of recovery in causes of action which either party has or may have or which may
rise hereafter against the other, whether caused by negligence or otherwise, for
any damage to the premises or contents therein or to the Building or any part
thereof caused by any of the perils which are covered under policies of fire and
extended coverage, Building and contents and business interruption insurance or
for which either party may be reimbursed as a result of insurance coverage
affecting any loss suffered by it; and further provided that the foregoing
waivers do not invalidate any policy of insurance of the parties hereto, now or
hereafter issued, it being stipulated by the parties hereto that the waivers
shall not apply in any case in which the application thereof would result in the
invalidation of any such policy of insurance.
B. Liability for Damage - Except for Landlord's negligence, Landlord,
shall not be liable for any damage to any property of the Tenant or anyone
claiming through the Tenant done or occasioned by or from the electrical system,
the heating or air conditioning system, the sprinkler system or the plumbing and
sewer systems (including damage caused by the freezing or bursting of pipes),
in, upon or about the premises or the Building of which the premises is a part,
nor for damages occasioned by water, snow or ice being upon or coming through
the roof, walls, windows, doors or otherwise, nor for any damage arising from
acts of negligence of Co-Tenants or other occupants of the Building of which the
premises may be a part, or the acts of any owners or occupants of adjoining or
contiguous property.
C. Notices - Whenever any notice is required or permitted hereunder,
the same shall be given in writing, sent by registered or certified United
States mail, postage prepaid, return receipt requested, and shall be addressed
to the address as either party may hereafter and from time to time designate in
writing to the other. If either party's address shall be changed during the term
hereof and written notice of such change is given to the other party as
hereinbefore prescribed, any notice and the contents thereof, if properly mailed
as stated to the last known
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address of the party whose address has been changed, shall be valid and binding
upon said party for all intents and purposes. All notices hereunder, if given as
herein directed, shall be deemed to be effective upon the date such notice is
postmarked. Tenant shall be required to notify Landlord of ownership changes.
D. Waiver - The waiver of any covenants or conditions or of the
performance of and compliance with same, or the acquiesced breach thereof, shall
not constitute a waiver of any subsequent non-performance and non-compliance or
of any subsequent breach of such covenants or conditions, nor will such waiver
justify or authorize the non-observance of any other covenant or condition
hereof.
E. Memorandum of Lease - In the event, either simultaneously with the
execution of this lease or at any time thereafter during the term hereof,
Landlord shall request that a Memorandum of this lease ("Memorandum of Lease")
be executed and recorded in the public records of Montgomery County, Tenant
hereby agrees to cooperate with Landlord and to execute said Memorandum of Lease
for such purposes. When prepared, such document shall set forth the names and
addresses of both Landlord and Tenant, a description of said leased premises and
said Building, the duration of the term of lease (including the exact
commencement and ending dates of each term) and a reference to any special
clause contained in this lease which might be of particular significance for
recording purposes. Such Memorandum of Lease shall not set forth the amount of
any rents or other sums or charges provided for under this lease. The parties
further agree that this lease instrument shall not at any time be recorded or
made public.
F. Time of Essence - Time is of the essence with respect to the
compliance with and performance of each of the covenants and agreements under
this lease.
G. Late Charges- In the event that payment of any rent or other sum of
money due under this lease shall become overdue for ten (10) calendar days
beyond the date on which said sums of money are due and payable, a late charge
of 1.5% of payment per month or portion thereof, accruing from the date the
payment was originally due. On the sums so overdue, shall become immediately due
and payable by Tenant to Landlord as and for liquidated damage for Tenant's
failure to make prompt payment of said sums, and the full amount of late charges
shall be payable by Tenant on demand. In the event of the non-payment for any
reason of any such late charges or any part thereof, Landlord, in addition to
all other rights and remedies which it may have, shall have all the rights and
remedies provided for herein and by
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law as in the case of non-payment of rent. No failure by Landlord to insist upon
the strict performance by Tenant of Tenant's obligations hereunder to pay late
charges shall constitute a waiver by Landlord of its right to enforce the
provisions of this subparagraph G and shall not be construed in any way to
extend the notice periods for default as provided for in this lease. By way of
example only, the amount of a late charge due and payable on a monthly rental
payment of $1,500.00 which was paid after ten (10) days beyond the due date for
such rental payment would be computed as follows: $1,500.00 x .015 = $22.50
(late payment).
26. DEFAULTS; REMEDIES
In the event Tenant shall at any time a default in the payment of Rent
herein reserved, or of any other sum required to be paid by Tenant under this
lease when due and such failure or refusal shall continue for ten (10) days
following receipt of written notice from Landlord of such failure or refusal, or
in the performance of or compliance with any of the terms, covenants, conditions
or provisions of this lease and shall not cure such failure or refusal within
thirty (30) days after written notice thereof from Landlord to Tenant, or if
Tenant shall be adjudicated a bankrupt or shall make an assignment for the
benefit of creditors or shall file a bill in equity or otherwise initiate
proceedings for the appointment of a receiver of Tenant's assets, or shall file
any proceedings in bankruptcy or for reorganization or an arrangement under any
federal or state law, or if any proceedings in bankruptcy or for the appointment
of a receiver shall be instituted by any creditor of Tenant under any state or
federal law, or if Tenant is levied upon or sold by sheriff's or marshall's or
constable's sale or other legal process, or if Tenant attempts to remove its
property from the Demised Premises other than in the ordinary course of
business, the occurrence of any such event to constitute an event of default and
a breach under this Lease, and after having provided Tenant with ten days
written notice, then and in addition to any other rights or remedies Landlord
may have under this Lease and at law and in equity, Landlord shall have the
following rights:
A. To accelerate the whole or any part of the Rent for the entire
unexpired balance of the Term as well as all other charges, payments, costs and
expenses herein agreed to be paid by Tenant. Any Rent or other charges,
payments, costs and expenses if so accelerated shall be deemed due and payable
as if they were on that date payable in advance; and/or
B. To enter the Demised Premises without further demand or notice and
proceed to the sale of the goods, chattels and personal property there found, to
levy the Rent and/or charges herein payable as Rent, and Tenant shall pay all
costs
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and officers' commissions, including watchmen's wages and sums chargeable to
Landlord, and in such case all costs, officers' commissions and other charges
shall immediately attach and become part of the claim of Landlord for Rent, and
any tender of Rent without said costs, commissions and charges made, after the
issuance of a warrant of distress, shall not be sufficient to satisfy the claim
of Landlord; and/or
C. To re-enter the Demised Premises and remove all persons and all or
any property therefrom, either by summary dispossess proceedings or by any
suitable action or proceeding at law, or by force or otherwise, without being
liable to indictment, prosecution or damages therefore, and repossess and enjoy
the Demised Premises, together with all additions, alterations and improvements.
Upon recovering possession of the Demised Premises by reason of or based upon or
arising out of a default on the part of Tenant, Landlord may, at Landlord's
option, either terminate this Lease or make such alterations and repairs as may
be necessary in order to relet the Demised Premises and rent the Demised
Premises or any part or parts thereof, either in Landlord's name or otherwise,
for a term or terms which may at Landlord's discretion seem best; upon each such
reletting all rents received by Landlord from such reletting shall be applied;
first, to the payment of any indebtedness other than Rent due hereunder from
Tenant to Landlord; second, to the payment of any reasonable costs and expenses
of such reletting, including reasonable brokerage fees and reasonable attorney's
fees and all reasonable costs of such alterations and repairs; third, to the
payment of Rent due and unpaid hereunder; and the residue, if any, shall be held
by Landlord and applied in payment of future rent as it may become due and
payable hereunder. If such rentals received from such reletting during any month
shall be less than that to be paid during that month to Landlord, such
deficiency shall be calculated and paid monthly. No such re-entry or taking
possession of the Demised Premises or the making of alterations and/or
improvements thereto or the reletting thereof shall be construed as an election
on the part of Landlord to terminate this Lease unless written notice of such
intention be given to Tenant.
D. To terminate this Lease and the Term hereby created without any
right on the part of Tenant to waive the forfeiture by payment of any sum due or
by other performance of any condition, term or covenant broken, whereupon
Landlord shall be entitled to recover, in addition to any and all sums and
damages for violation of Tenant's default in an amount equal to the amount of
the Rent reserved for the balance of the Term, as well as all other charges,
payments, costs and expenses therein agreed to be paid by Tenant, all of which
amount shall be immediately due and payable from Tenant to Landlord.
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No right or remedy herein conferred upon or reserved to Landlord is
intended to be exclusive of any other right or remedy herein or by law provided
but each shall be cumulative and in addition to every other right or remedy
given herein or now or hereafter existing at law or in equity.
No waiver by Landlord of any breach by Tenant of any of Tenant's
obligations, agreements or covenants herein shall be a waiver of any subsequent
breach or of any obligation, agreement or covenant, nor shall any forbearance by
Landlord to seek a remedy for any breach by Tenant be a waiver by Landlord of
any rights and remedies with respect to such or any subsequent breach. Landlord
represents that if tenant is making reasonable efforts to cure defaults in good
faith and stated deadlines expire, Landlord will grant reasonable leniency in
meeting deadlines, not to exceed thirty (30) days.
E. In consideration of the benefits accruing under this Lease, Tenant
hereby covenants and agrees that in the event of any actual or alleged failure,
breach, or default hereunder by Landlord:
(a) the sole and exclusive remedy shall be against the
interest of the Landlord in the Building;
(b) neither the Landlord nor any shareholder of Landlord shall be
personally liable with respect to any claim arising out of or related
to this Lease;
(c) no shareholder of the Landlord shall be sued or
named as a party in any suit or action;
(d) no service of process shall be made against any
shareholder of Landlord;
(e) any judgment granted against any shareholder of
Landlord may be vacated and set aside at any time as if
such judgment had never been granted;
(f) both Landlord and any shareholder may invoke and
enforce these covenants and agreements.
27. SUBORDINATION
This Lease shall be subject and subordinate to any mortgage and/or any
deed of trust which may now or hereafter be secured upon the Property of
Building, and to all renewals, modifications, consolidations, replacements and
extensions thereof. This clause shall be self-operative and no further
instrument of subordination shall be required by any mortgagee, but in
confirmation of such subordination, Tenant shall execute,
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within five (5) days after request, any certificate that Landlord may reasonably
require acknowledging such subordination. Tenant hereby constitutes and appoints
Landlord as Tenant's attorney-in-fact to execute any such certificate within
said five (5) day period. Notwithstanding the foregoing, the party holding the
instrument to which this Lease shall be subordinate shall have the right to
recognize and preserve this Lease in the event of any foreclosure sale or
possessory action, and in such case this Lease shall continue in full force and
effect at the option of the party holding the superior lien and Tenant shall
attorn to such party and shall execute, acknowledge and deliver any instrument,
demanded by Landlord or such other party, that has for its purpose and effect
the confirmation of such attornment. Such superior lien holder or any purchaser
at a foreclosure or other judicial sale may, at or prior to the time of any such
sale or within sixty (60) days thereafter, notify Tenant to vacate and surrender
the Demised Premises within ninety (90) days of the date of such sale and in the
event such notice is given, this Lease shall terminate and expire one hundred
twenty (120) days after such sale.
This section is subject to any of the rights of the Tenant pursuant to
any non-disturbance agreement delivered and subject to section 25D.
28. LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT
If Tenant shall after the expiration of all applicable notice and cure
periods be in default in the performance of any of its obligations under this
Lease, Landlord may but shall not be obligated, in addition to any other rights
it may have in law or equity, cure on behalf of Tenant any default hereunder by
Tenant, and Tenant shall reimburse Landlord for any sums paid or costs incurred
by Landlord in curing such default, including but not limited to reasonable
attorney's fees incurred, and also including interest at the rate of Prime Plus
(as published in the Wall Street Journal) three percent (3%) per annum on all
sums advanced by Landlord as aforesaid, which sums and costs together with
interest thereon shall be deemed additional rent payable on demand.
29. ESTOPPEL STATEMENT
Tenant shall from time to time, within ten (10) business days after
request by Landlord, execute, acknowledge and deliver to Landlord a statement
certifying that this Lease is unmodified and in full force and effect (or that
the same is in full force and effect as modified, listing any instruments of
modification), the dates to which Rent and other charges have been paid, and
whether or not, Landlord is in default hereunder or whether Tenant has any
claims or demands against Landlord (and, if so, the default, claim, and/or
demand shall be
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specified) and such estoppel statement may be delivered by Landlord to any
prospective purchaser or ground lessor mortgagee of the Property of Building and
may be relied upon by such prospective purchaser, ground lessor or mortgagee.
30. HOLDING OVER
Should Tenant continue to occupy the Demised Premises after the
expiration of the Term and without Landlord's prior written consent, or any
renewal thereof, or after a forfeiture incurred, such tenancy shall (without
limitation on any of Landlord's right or remedies therefor) be a tenancy at
will,at a minimum daily rent equal to one-thirtieth of 150% of the rent payable
for the previous month of the Term, plus all additional rent payable hereunder.
31. MISCELLANEOUS
A. Landlord and Tenant each represent and warrant to the other that,
except for Barnes, Morris, Pardoe & Foster, Inc., and Karnpa & Brown Company
neither of them has employed any broker in carrying on the negotiations relative
to this Lease. Landlord and Tenant shall each indemnify and hold harmless the
other from and against any claim or claims for brokerage or other commission
arising from or out of breach of the foregoing representation and warranty.
Landlord recognizes that the Aforementioned Broker is entitled to the payment of
a commission for services rendered in the negotiation and obtaining of this
Lease, and Landlord has agreed to pay such commissions pursuant to a separate
agreement.
B. The word "Tenant" as used in this Lease shall be construed to mean
Tenants in all cases where there is more than one Tenant, and the necessary
grammatical changes required to make the provisions hereof apply to
corporations, partnerships, or individuals, men or women, shall in all cases be
assumed as though in each case fully expressed. Each provision hereof shall
extend to and shall, as the case may require, bind and inure to the benefit of
Tenant ant its heirs, legal representative, successors and assigns, provided
that without in any way limiting the right afforded to Tenant pursuant to
Section 24(D) of this lease. This Lease shall not inure to the benefit of any
assignee, heir, legal representative, transferee or successor of Tenant except
upon the express written consent or election of Landlord.
C. The term "Landlord" as used in this Lease shall mean the fee owner
of the entire Property or, if different, the party holding and exercising the
right, as against all other (except space Tenants of Building) to possession of
the entire Property. In the event of voluntary or involuntary transfer of such
ownership or right to a successor in interest of Landlord,
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Landlord shall be freed and relieved of all liability and obligation hereunder
(and, as to any unapplied portion of Tenant's security deposit, Landlord shall
be relieved of all liability therefor upon transfer of such portion to its
successor in interest) and Tenant shall look solely to such successor in
interest for the performance of the covenants and obligations of the Landlord
hereunder which shall thereafter accrue.
32. PRIOR AGREEMENTS
Neither party hereto has made any representation or promises except as
contained herein. No agreement hereinafter made shall be effective to change,
modify, discharge or effect an abandonment of this Lease, in whole or in part,
unless committed to a written agreement signed by both the Landlord and the
Tenant.
33. CAPTIONS
The captions of the Sections in this Lease are inserted and included
solely for convenience and shall not be considered or given any effect in
construing the provisions hereof.
34. BENEFIT AND BURDEN
The provisions of this Lease shall be binding upon and shall inure to
the benefit of the parties hereto and each of their permitted successors and
assigns.
35. SEVERABILITY
If any term, covenant, or condition of this Lease or the application
thereof to any person or circumstance shall, to any extent, be invalid or
unenforceable, the remainder of this Lease or the application of such term,
covenant or condition to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby and each
term, covenant and condition of this Lease shall be valid and enforced to the
fullest extent permitted by law.
36. GOVERNING LAW
This Lease shall be governed by the laws of the State of Maryland.
37. NO PARTNERSHIP
Nothing in this Lease shalt be deemed or construed to create a
partnership or joint venture of or between Landlord and Tenant or to create any
other relationship between the parties hereto other than that of Landlord and
Tenant.
38. OPTIONS TO EXTEND TERM
Provided that Tenant is still in occupancy, and has not
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been in default of the Lease, Tenant shall have the option to renew this lease
for one (1) additional five (5) year term ("Renewal Term") at the end of the
fifth (5th) Lease Year with eight (8) months prior written notice at one hundred
percent (100%) of fair market value.
39. ELECTRONIC SECURITY
Landlord warrants that the Building contains an electronic security
system of which the Tenant will be granted access and that the Building will
maintain this or an equivalent or better security system throughout the term of
the lease and any renewal periods.
40. OTHER RIGHTS OF LANDLORD
(A) to decorate, remodel, alter or otherwise prepare the Demised
Premises for reoccupancy during the last ninety (90) days of the Term, if during
or prior to that time Tenant vacates the Demised Premises; and
(B) To show the Demised Premises to prospective tenants or brokers
during the last one hundred and eighty (180) days of the Term; to show the
Demised Premises to prospective purchasers at all reasonable dues provided that
prior notice is given to Tenant in each case and that Tenant's use and occupancy
of the Demised Premises shalt not be materially inconvenienced by any action of
Landlord; and to place and maintain FOR RENT signage on the Demised Premises
during the last one hundred eighty (180) days of the Lease Term.
41. RIGHT OF FIRST REFUSAL
Subject to the terms and conditions herein set forth, Tenant shalt
have a right of first refusal to expand into those premises (the "Expansion
Premises") adjacent to Tenant's current Premises at the escalated rent Tenant is
paying for its original lease. Landlord and Tenant shall attempt to negotiate in
good faith the other items contained in an amendment and subject to the terms
below.
Provided Tenant is not in default of its lease obligations, Landlord
shall, by written notice (the "Offer Notice"), offer to lease the Expansion
Premises to Tenant. In order to effectively exercise the foregoing right of
first refusal, Tenant must notify Landlord in writing, within ten (10) days of
Tenant's receipt of the Offer Notice, of Tenant's unequivocal acceptance of
Landlord's offer. In the event that Tenant (i) rejects Landlord's offer, or (ii)
fails to respond in writing to the Offer Notice within such ten (10) day period,
then the above-described right of first refusal shall be null and void
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and of no further force or effect, and Landlord shall at all times thereafter be
free to offer and lease the space to any party whatsoever, or to hold the space
vacant, at Landlord's sole discretion; Landlord shall not be required to offer
the Expansion Premises to Tenant more than once during the Term of Tenant's
lease. Upon Tenant's effective exercise of the foregoing right of first refusal,
Landlord shall prepare and Landlord and Tenant shall execute an amendment to
Tenant's lease reflecting the addition of the Expansion Premises to the Premises
theretofore held by Tenant under the lease.
IN WITNESS WHEREOF, the parties hereto have duly executed this Lease the
day and year first above written.
Witness: LANDLORD:
Vaswani Place Limited
Partnership
By: By:
----------------------------- -----------------------------
[SEAL]
Witness: TENANT:
Startec, Inc.
By: By:
----------------------------- -----------------------------
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February 23, 1996
Mr. Suhail Nathane, Esq.
Startec, Inc.
10411 Motor City Drive
Bethesda, Maryland 20817
Dear Mr. Nathane:
In accordance with our discussion, the Vaswani Place will lease to Startec,
Inc. an adjoining (Ex. A) space. The new space consists of approximately 575
rentable square feet on the third (3rd) floor adjoining your current office.
The term of your new space shall commence 1 March 1996 and run concurrent
with the existing lease. All terms and conditions of your existing lease will
apply. You have agreed to accept the new space without improvements. there shall
be a five (5) month rent abatement with payment starting 1 August 1996.
In addition and separate from above, one additional parking space will be
made available at the outside parking perimeter next to your current space.
IN AGREEMENT WITH:
Landlord: Tenant:
Vaswani Place Limited Partnership Startec, Inc.
By: By:
----------------------------- -----------------------------
Suhail Nathani, Esq.
General Counsel
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AGREEMENT
This Agreement, dated as of April 25, 1990, is made and entered into by and
between World Communications, Inc., a New York corporation ("WorldCom"), and
Startec, Inc., a Maryland corporation ("Customer").
Recitals
A. WorldCom is in the business of providing domestic and international
telecommunications services.
B. Customer desires that WorldCom provide certain private line
communications circuits ("Circuits") and floor space in WorldCom's offices in
Washington, D.C. for Customer's Stromberg Carlson DC0-CS carrier switch
described more fully in Exhibit A to this Agreement (the "Equipment"). Customer
also desires to route certain telecommunications originating outside the United
States which have destinations within the United States ("Return Traffic")
through WorldCom's telecommunications switching equipment in New York, New York.
C. WorldCom desires to provide these Circuits and floor space for the
Equipment, and to have Return Traffic routed through its telecommunications
switching equipment in New York, on the terms set forth in this Agreement.
Terms
For good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows.
1. Circuits.
(a) Provision of Initial Circuits. At Customer's request, Worldcom
shall provide for Customer up to six (6) international voice-grade analog half
Circuits from Washington, D.C. to New Delhi and/or Bombay, India (the "Initial
Circuits"). The initial term for each Initial Circuit shall be for a period of
two (2) years beginning on the date that WorldCom notifies Customer in writing
that such Initial Circuit is ready for service (the "Initial Circuit Start
Date"). Following the
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expiration of the initial term for an Initial Circuit, WorldCom shall continue
to provide such Initial Circuit for additional one-year terms, unless either
party notifies the other party in writing, at least forty-five (45) days before
the beginning of the applicable renewal term, of its desire to terminate
WorldCom's provision of such Initial Circuit. The initial and renewal terms for
an Initial Circuit are referred to herein collectively as the "Initial Circuit
Term."
(b) Deposit. Upon execution of this Agreement, Customer shall deposit
the sum of nine thousand dollars ($9,000) with WorldCom as security for payment
by Customer of all charges under this Agreement (including, without limitation,
charges relating to the Circuits, Equipment and Return Traffic). WorldCom shall
return the deposit to Customer on the first day of the thirteenth full calendar
month following the Initial Circuit Start Date of the first Initial Circuit
placed in service, provided Customer is not then in default under this
Agreement; otherwise, the deposit shall be returned to Customer upon termination
of this Agreement. The deposit shall accrue interest at the rate of six and
one-half percent (6.5%) per annum. Accrued interest shall be payable upon return
of the deposit.
(c) Charges For Initial Circuits. Customer shall pay to WorldCom for
each Initial Circuit a monthly charge of three thousand dollars ($3,000) for
each month during the Initial Circuit Term for such Initial Circuit; provided,
however, that one-half of these monthly charges with respect to the first four
(4) Initial Circuits placed in service may be deferred by Customer until the
first day of the seventh full calendar month following the Initial Circuit Start
Date for the first Initial Circuit placed in service, at which time Customer
shall commence payment of all such deferred charges in twelve (12) consecutive
equal monthly installments plus interest on such deferred charges at the rate of
ten percent (10%) per annum from the date such deferred charges would have been
due but for Customer's right to defer them. With respect to each Initial
Circuit, the monthly charges for the first and last months of the applicable
Initial Circuit Term shall be prorated based on the number of days during the
first or last month, as applicable, which fall within the Initial Circuit Term
for such Initial Circuit. The first monthly charge for an Initial Circuit shall
be payable on the applicable Initial Circuit Start Date and thereafter the
monthly charges for such Initial Circuit shall be payable in advance on the
first day of each calendar month.
(d) Conversion to Digital Circuits. At Customer's request, WorldCom
shall convert the Initial Circuits from analog Circuits to their digital
equivalent. Upon conversion, the monthly charges for the Initial Circuits shall
be adjusted to
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reflect WorldCom's then current monthly charges for the digital equivalent of
the analog Initial Circuits reduced by a discount comparable to the discount
provided to Customer on the analog Initial Circuits. In all other respects
payment of the monthly charges for the Initial Circuits shall be as set forth in
paragraph (c) above (except that there shall be no additional deferral of
charges as a result of the conversion from analog Circuits to their digital
equivalents).
(e) Termination of Initial Circuits. Customer may terminate WorldCom's
provision of an Initial Circuit at any time during the first two (2) years
following the Initial Circuit Start Date for such Initial Circuit upon
forty-five (45) days' advance written notice to WorldCom, provided that Customer
pays to WorldCom on or before the effective date of termination a termination
charge equal to forty-five (45) days' of monthly charges for such Initial
Circuit at the then effective rate, which termination charge shall be in
addition to the forty-five (45) days' of monthly charges payable under Section
2(c) for the period between the date of Customer's notice of termination and the
effective date of termination. Customer shall not incur a termination charge
solely as a result of converting an Initial Circuit from an analog Circuit to
its digital equivalent.
(f) Additional Circuits. At Customer's request, WorldCom shall provide
additional Circuits (analog or digital) to Customer ("Additional Circuits"). A
description of each Additional Circuit, together with the targeted start date,
the term and the applicable installation, monthly and termination charges, shall
be set forth on a Schedule to be signed by WorldCom and Customer in
substantially the form attached as Exhibit B to this Agreement.
(g) Adjustments to Monthly Charges. WorldCom reserves the right to
increase the monthly charges for any Initial Circuit or Additional Circuit
effective at any time beginning after the expiration of the initial term during
which WorldCom has agreed to provide such Initial Circuit or Additional Circuit,
as applicable, upon at least forty-five (45) days' advance written notice to
Customer. Notwithstanding anything to the contrary in this Agreement, if
Customer objects to any such price increase, Customer shall have the right to
terminate WorldCom's provision of the Initial Circuit or Additional Circuit, as
applicable, by so notifying WorldCom in writing on or before the date the price
increase is to become effective.
(h) Third Party Charges. Except as set forth below, Customer shall be
responsible for paying all charges of PTTs and other third parties relating to
the installation or use of Initial Circuits and/or Additional Circuits,
including, without
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limitation, charges for local access lines, interexchange circuits and
equipment. In the event that WorldCom pays any such charges on behalf of
Customer, Customer shall reimburse WorldCom within thirty (30) days after the
date of any WorldCom invoice for such charges. WorldCom agrees to provide local
access from 1220 L Street, N.W., Washington, D.C. to its technical operating
center at 1828 L Street, N.W., Washington, D.C. free of charge.
2. Equipment.
(a) Provision of Floor Space. WorldCom shall provide floor space for
the Equipment at its technical operating center at 1828 L Street, N.W.,
Washington, D.C. (the "Site") for an initial term of five (5) years beginning on
the date WorldCom notifies Customer in writing that it has completed the
necessary Site preparation work (the "Equipment Start Date"). The parties have
set a target date for the completion of Site preparation work of May 15, 1990.
Following the expiration of the initial term, WorldCom shall continue to provide
floor space for the Equipment for additional one-year terms, unless either party
notifies the other party in writing, at least forty-five (45) days before the
beginning of the applicable renewal term, of its desire to terminate WorldCom's
provision of floor space for the Equipment. The initial and renewal terms for
the provision of floor space at the Site for the Equipment are referred to
herein collectively as the "Equipment Term."
(b) WorldCom Responsibilities. In connection with its provision of
floor space at the Site for the Equipment, WorldCom shall do the following at
its own expense:
(i) WorldCom shall prepare the Site for installation of the
Equipment in accordance with a floor plan layout to be mutually agreed
to with Customer. WorldCom shall use reasonable efforts to complete
Site preparation work by May 15, 1990, but shall not be liable to
Customer for failure to meet this target date.
(ii) WorldCom shall furnish power, air conditioning and fire
protection for the Equipment to the same standards as it applies to
its own equipment at the Site.
(iii) WorldCom shall furnish cleaning and security (i.e.
controlling access to WorldCom facilities and the Equipment) services
at the Site.
(iv) WorldCom shall provide up to two (2) hours of maintenance on
the Equipment per month, such
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maintenance to be limited, however, to reporting to Customer any
irregularity in the Equipment observed by WorldCom. WorldCom shall
have the right, but not the obligation, to inspect the Equipment to
detect irregularities and shall not be liable to Startec under any
circumstance for failure to observe any irregularity. At its sole
discretion, WorldCom may take any reasonable measures if either
WorldCom property or personnel is endangered or threatened by the
Equipment.
(v) WorldCom shall permit designated employees of Customer to
have access to the Equipment twenty-four (24) hours per day every day
of the year for the purpose of operating the Equipment.
(vi) WorldCom shall permit authorized maintenance contractors and
Customer personnel access to the Equipment during normal business
hours for the purpose of installing, maintaining and repairing the
Equipment, provided these visits, except in cases of an emergency, are
scheduled in advance with WorldCom.
(vii) In the event any employee, agent, contractor, subcontractor
or other representative of Startec fails to adhere to a standard of
conduct that WorldCom imposes on its own personnel at the Site,
WorldCom may so notify Customer and Customer shall cause such person
to be replaced.
(c) Customer Responsibilities. In connection with WorldCom's provision of
floor space at the Site for the Equipment, Customer shall do the following at
its own expense:
(i) Customer shall arrange for the shipping and delivery to the
Site, rigging into place, unpacking, installing, testing, cutting over
and subsequent operation of the Equipment.
(ii) Customer shall arrange for all preventive and corrective
maintenance of the Equipment.
(iii) Customer shall provide WorldCom with a listing of
authorized maintenance contractors and Customer personnel who will be
visiting the Site to install the Equipment and perform maintenance
services. Customer shall update this list as required. Except as may
be required due to an emergency, Customer shall schedule all visits in
advance with WorldCom.
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(iv) Customer shall install only Equipment which will, at a
minimum, meet the type-approval standards set by Underwriters
Laboratories and will not create objectionable conducted or radiated
radio frequency interference or safety hazards of any kind. By
executing this Agreement, WorldCom indicates its approval of
installation of the Equipment listed in Exhibit A.
(v) Customer shall notify WorldCom in writing in advance of any
exchange, removal or delivery of new or additional Equipment to the
Site. Such notification must include detailed space, power and air
conditioning requirements of the Equipment to be installed. Customer
must obtain WorldCom's prior written approval for installation of new
or additional Equipment. In the event new or additional Equipment is
to be installed, the monthly charges set forth in paragraph (d) below
may be adjusted by WorldCom to reflect any additional space, power or
air conditioning requirements. WorldCom shall not unreasonably
withhold approval of the installation of new or additional Equipment
at the Site.
(vi) Customer shall provide or arrange for the removal of all
Equipment, and reimburse WorldCom for reasonable costs of restoring
the Site to the condition it was in immediately prior to the
installation of the Equipment, reasonable wear and tear excepted, at
the expiration or termination of the Equipment Term. The monthly
charges set forth in paragraph (d) below shall continue until all
Equipment is removed from the Site.
(vii) Customer shall ensure that its officers, employees, agents,
contractors, subcontractors licensees and other representatives
(collectively, "Representatives") install, test, maintain and operate
the Equipment in a manner which will not adversely affect WorldCom's
ability to provide its other customers with the services and
assistance they are usually accorded.
(viii) With respect to all work performed by any of its
Representatives, Customer shall ensure that these Representatives
comply with all applicable laws and regulations of the Federal
government and of the jurisdictions in which such work is being
performed (including, without limitation, Workmen's Compensation,
Social Security Act and unemployment insurance).
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(ix) Customer shall ensure that its Representatives comply with
all WorldCom security and safety regulations when on the Site.
(x) Customer shall obtain and maintain any and all permits,
licenses and regulatory approvals required for the installation,
maintenance, repair and operation of the Equipment at the Site.
(d) Monthly Charges. Customer shall pay to WorldCom a monthly charge of one
thousand two hundred fifty dollars ($1,250) for each month during the Equipment
Term; provided, however, that these monthly charges may be deferred by Customer
until the first day of the seventh full calendar month following the Equipment
Start Date, at which time Customer shall commence payment of all such deferred
charges in twelve (12) consecutive equal monthly installments plus interest on
such deferred charges at the rate of ten percent (10%) per annum from the date
such deferred charges would have been due but for Customer's right to defer
them. The monthly charges for the first and last months of the Equipment Term
shall be prorated based on the number of days during the first or last month, as
applicable, which fall within the Equipment Term. The first monthly charge shall
be payable on the Equipment Start Date and thereafter monthly charges shall be
payable in advance on the first day of each calendar month.
(e) WorldCom Lease. Customer acknowledges that its use of the Site is
subject to the terms and conditions of the 1828 L Street Office Lease Agreement,
dated as of May 15, 1984, as amended (the "Lease"), between ITT World
Communications, Inc. and 1828 L Street Associates, Inc. (the "Landlord"), as
assigned to WorldCom by Assignment of Lease dated April 24, 1989. Customer shall
abide by, and shall ensure that its Representatives abide by, the terms and
conditions of the Lease relating to the use and occupancy of the Site. Customer
shall not take, and shall ensure that its Representatives do not take, any
action that would result in a default by WorldCom under the Lease. WorldCom's
obligations under this Section 2 are subject to WorldCom obtaining any necessary
consents from the Landlord to the arrangements contemplated herein. In addition,
the Lease is scheduled to expire April 30, 1994. If for any reason WorldCom does
not obtain an extension of the Lease, or the Lease otherwise terminates during
the Equipment Term, WorldCom shall have the right to terminate its obligations
under this Section 2, effective as of the date the Lease expires or terminates
and without liability to Customer, by giving written notice of termination to
Customer. If practicable, WorldCom shall give Customer at least thirty (30)
days' advance written notice of termination.
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3. Return Traffic.
At all times during the term of this Agreement in which WorldCom's
charges are competitive with its Major Competitors (as defined below), Customer
shall route all Return Traffic which Customer handles or for which it is
entitled to receive compensation to WorldCom's telecommunications switching
equipment in New York, New York. WorldCom shall then route the Return Traffic to
its ultimate destination within the United States. Customer shall pay WorldCom
for routing the Return Traffic to the ultimate destination within the United
States at WorldCom's then current rates. WorldCom shall invoice Customer for
these charges on a monthly basis. Payment shall be due within thirty (30) days
of the date of any WorldCom invoice. As used in this Agreement, the term "Major
Competitors" refers to MCI, U.S. Sprint, AT&T and other U.S. communications
common carriers.
4. Right of First Refusal.
Customer grants to WorldCom a right of first refusal for a period of
two (2) years from the date of this Agreement to provide to Customer any and all
international private line traffic and Return Traffic (including domestic
delivery of Return Traffic) (collectively, "Telecommunications Services") which
Customer proposes to have a third party provide to Customer. Customer shall
notify WorldCom in writing of the name and address of the third party and the
terms on which the third party is willing to provide the Telecommunications
Services requested by Customer. WorldCom shall have thirty (30) days from
receipt of this notice in which to notify Customer in writing of its election to
provide the same or substantially equivalent Telecommunications Services on
terms not less favorable than those set forth in Customer's notice. If WorldCom
fails to make this election, the right of first refusal granted to WorldCom
shall lapse with respect to the proposed transaction (but not as to any other
transactions), and Customer shall be free to enter into the proposed transaction
with the third party on terms not more favorable to the third party than the
terms set forth in Customer's notice. If Customer and the third party do not
execute a final written agreement covering the proposed transaction within
ninety (90) days after the expiration of the period within which WorldCom must
make its election, Customer may not enter into the proposed transaction without
again offering WorldCom, in the manner set forth above, the right to provide the
proposed Telecommunications Services.
5. Term.
The term of this Agreement shall commence on the date first above
written and, unless sooner terminated pursuant to
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Section 10, shall expire on the latest to occur of (a) the date on which
WorldCom no longer provides any Circuits for Customer, (b) the date on which
WorldCom no longer provides floor space for the Equipment and all Equipment is
removed from the Site, or (c) two (2) years after the date of this Agreement.
6. Warranties and Liability Limitations.
WORLDCOM WARRANTS THAT IT WILL PERFORM ITS OBLIGATIONS UNDER THIS
AGREEMENT IN A PROFESSIONAL AND WORKMANLIKE MANNER. THE FOREGOING WARRANTY IS IN
LIEU OF ALL OTHER WARRANTIES EXPRESS OR IMPLIED RELATING TO THE CIRCUITS, THE
SITE, THE HANDLING OF RETURN TRAFFIC OR ANY OTHER PRODUCTS OR SERVICES TO BE
PROVIDED BY WORLDCOM UNDER THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, THE
WARRANTY OF MERCHANTABILITY AND THE WARRANTY OF FITNESS FOR A PARTICULAR
PURPOSE. ANY LIABILITY OF WORLDCOM ARISING OUT OF THIS AGREEMENT SHALL NOT
EXCEED THE TOTAL AMOUNT PAID BY CUSTOMER UNDER THIS AGREEMENT DURING THE SIX (6)
MONTH PERIOD IMMEDIATELY PRIOR TO THE ACT OR EVENT GIVING RISE TO THE LIABILITY.
IN NO EVENT SHALL WORLDCOM BE LIABLE TO CUSTOMER OR ANY THIRD PARTY FOR SPECIAL,
INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION
WITH THIS AGREEMENT, WHETHER IN CONTRACT OR TORT, EVEN IF WORLDCOM HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
7. Indemnification, Insurance and Risk of Loss.
(a) Indemnification. Customer shall protect, indemnify and save
WorldCom harmless from and against all costs and expenses (including, without
limitation, interest and reasonable attorneys' fees), liabilities, losses,
damages, injunctions, suits, actions, fines, penalties, claims and demands of
every kind and nature whatsoever (collectively, "Liabilities"), by or on behalf
of any person, party, governmental authority or other entity (including, without
limitation, all persons claiming by, through or under Customer), in any way
arising out of (i) the use of the Site by Customer or any of its
Representatives, (ii) any failure by Customer or any of its Representatives to
perform or observe any of the agreements, terms, covenants or conditions of this
Agreement to be performed or observed by Customer, or (iii) the use, operation
or handling of any Circuits, Equipment or Return Traffic unless the Liabilities
arise solely out of the willful act or gross negligence of WorldCom. If any
claim is made, or any action or proceeding is brought against WorldCom, by
reason of any of the matters described above, Customer, upon request, shall, at
Customer's sole cost and expense, resist and defend such claim, action or
proceeding, or cause the same to be resisted and defended, by counsel designated
by Customer and approved by WorldCom in its reasonable judgment. Customer or its
counsel
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shall keep WorldCom fully apprised at all times of the status of such defense
and shall not settle same without the written consent of WorldCom.
(b) Insurance. Customer shall name WorldCom as an additional insured
on its public liability insurance policy affecting the Site effective as of the
date Customer moves any Equipment to the Site. Customer shall maintain such
public liability insurance policy with respect to the Site in amounts of at
least $3,000,000 for injury or death for each occurrence, and property damage of
at least $1,000,000, and keep such policy in effect until all Equipment is
removed from the Site. The insurance policy (i) shall include a waiver of the
insurer's right of subrogation against WorldCom, and (ii) shall contain the
agreement of the insurer that the policy will not be cancelled without at least
thirty (30) days' prior written notice to WorldCom and that the acts or
omissions of one insured will not invalidate the policy as to the other
insureds. At WorldCom's request, Customer shall deliver certificates evidencing
such insurance to WorldCom. In addition, the Equipment shall be added as a rider
to WorldCom's casualty insurance. Customer shall pay to WorldCom two hundred
fifty dollars ($250) per month from the Equipment Start Date until the Equipment
is removed from the Site to have the Equipment so added as a rider to WorldCom's
policy. The monthly charges for the first and last months shall be prorated. The
first monthly charge shall be payable on the Equipment Start Date and thereafter
monthly charges shall be payable in advance on the first day of each calendar
month.
(c) Risk of Loss. Customer shall bear all risk of loss, damage or
destruction with respect to the Equipment except to the extent such loss, damage
or destruction is caused solely by the willful act or gross negligence of
WorldCom.
8. Dispute Resolution.
All disputes between WorldCom and Customer relating to this Agreement
which cannot be resolved through direct negotiations between the parties shall
be settled by arbitration in Washington, D.C. pursuant to any rules then in
effect of the American Arbitration Association. Any award rendered shall be
final and conclusive upon both parties and a judgment thereon may be enforced in
any court having jurisdiction. All costs and expenses, including reasonable
attorneys' fees, which each party incurs in settling a dispute by arbitration
shall be borne by whoever is determined to be liable in respect of such dispute.
Except where clearly prevented by the subject matter of the dispute, each party
shall continue performing its respective obligations under this Agreement while
the dispute is being resolved.
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9. Authorized Representatives.
Except for duly appointed officers, the following are the only
representatives authorized to sign contractual documents and orders pertaining
to this Agreement. Either party hereto may add or substitute others for those
named below by written notice.
STARTEC, INC.: Hari Pani
President
6509 Green Tree Road
Bethesda, MD 20817
WORLD COMMUNICATIONS, INC.: George Frylinck
V.P. Marketing & Sales
67 Broad Street
New York, NY 10004
10. Termination.
Either party may terminate this Agreement by giving written notice of
termination to the other party within sixty (60) days after the occurrence of
any of the following events:
(a) the other party fails to perform or observe any material term,
condition or agreement to be performed or observed by it hereunder (including,
without limitation, the payment of amounts owed under this Agreement) and fails
to cure the same within ten (10) days after notice thereof, provided that the
other party shall be permitted to cure any particular type of default only
twice;
(b) the other party ceases doing business as a going concern, makes an
assignment for the benefit of creditors, admits in writing its inability to pay
its debts as they become due, files a voluntary petition in bankruptcy, is
adjudicated a bankrupt or an insolvent, files a petition seeking for itself any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar arrangement under any present or future statute, law or regulation or
files an answer admitting the material allegations of a petition filed against
it in any such proceeding, consents to or acquiesces in the appointment of a
trustee, receiver, or liquidator of it or of all or any substantial part of its
assets or properties, or if it or its shareholders shall take any action looking
to its dissolution or liquidation; or
(c) within sixty (60) days after the appointment without the other
party's consent or acquiescence of any trustee, receiver or liquidator of it or
of all or any substantial part of its assets and properties, such appointment
shall not be vacated.
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(d) immediately upon termination of this Agreement, Customer shall pay
to WorldCom any amounts owed to WorldCom through the termination date and remove
any Equipment then at the Site in accordance with Section 2(c)(vi), and WorldCom
shall cease providing the Circuits and handling any Return Traffic.
11. General Provisions.
(a) Independent Contractors. The parties to this Agreement are
independent contractors. Neither party is an agent or representative of the
other party. Neither party shall have any right, power or authority to enter
into any agreement for or on behalf of, or incur any obligation or liability of,
or to otherwise bind, the other party. This Agreement shall not be interpreted
or construed to create an association, joint venture or partnership between the
parties or to impose any partnership obligation or liability upon either party.
Notwithstanding anything to the contrary in this paragraph, Customer shall be
responsible for paying all charges of PTTs and other third parties in accordance
with Section l(g) irrespective of whether Customer or WorldCom arranges for the
services giving rise to such charges.
(b) Notices. Any notice, approval, request, authorization, direction
or other communication under this Agreement shall be given in writing and shall
be deemed to have been delivered and given for all purposes (i) on the delivery
date if delivered personally to the party to whom the same is directed, (ii) on
the date received if sent by facsimile or express courier, or (iii) two (2)
business days after the mailing date, whether or not actually received, if sent
by registered or certified mail, return receipt requested, postage and charges
prepaid, addressed as follows:
If to Customer: Startec, Inc.
6509 Green Tree Road
Bethesda, MD 20817
Attn: Mr. Hari Pani
If to WorldCom: World Communications, Inc.
67 Broad Street
New York, NY 10004
Attn: Mr. George Frylinck
Either party may change its address specified above by giving the other party
notice of such change in accordance with this paragraph.
(c) Nonwaiver. The failure of either party to insist upon or enforce
strict performance by the other party of any
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provision of this Agreement or to exercise any right under this Agreement shall
not be construed as a waiver or relinquishment to any extent of such party's
right to assert or rely upon any such provision or right in that or any other
instance; rather, the same shall be and remain in full force and effect.
(d) Survival. All provisions of this Agreement which may reasonably be
interpreted or construed as surviving the completion, expiration, termination or
cancellation of this Agreement, shall survive the completion, expiration,
termination or cancellation of this Agreement.
(e) Entire Agreement. This Agreement sets forth the entire agreement,
and supersedes any and all prior agreements, of the parties with respect to the
transactions set forth herein. Neither party shall be bound by, and each party
specifically objects to, any term, condition or other provision which is
different from or in addition to the provisions of this Agreement (whether or
not it would materially alter this Agreement) and which is proffered by the
other party in any correspondence or other document, unless the party to be
bound thereby specifically agrees to such provision in writing.
(f) Amendment. No change, amendment or modification of any provision
of this Agreement shall be valid unless set forth in a written instrument signed
by the party to be bound thereby.
(g) Payments. All payments under this Agreement shall be made in U.S.
dollars. Any payments not received by the due date shall bear interest at the
annual rate of eighteen percent (18%) or the maximum rate permitted by law,
whichever is less, from the due date until paid in full.
(h) Taxes. Customer shall assume responsibility for, and hold WorldCom
harmless from, all taxes, duties and similar liabilities related to the
Equipment and the Circuits under any present or future tax laws, except for
taxes based on WorldCom's net income.
(i) Implementation. Each party shall take such action (including, but
not limited to, the execution, acknowledgment and delivery of documents) as may
reasonably be requested by any other party for the implementation or continuing
performance of this Agreement.
(j) Successors and Assigns. Neither party shall assign (voluntarily,
by operation of law or otherwise) this Agreement or any right, interest or
benefit under this Agreement without the prior written consent of the other
party, except that
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WorldCom may assign or transfer this Agreement, in whole or in part, to any of
its affiliates or to any successor or to that part of its business to which this
Agreement relates. Subject to the foregoing, this Agreement shall be fully
binding upon, inure to the benefit of and be enforceable by the parties hereto
and their respective successors and assigns.
(k) Severability. In the event that any provision of this Agreement
conflicts with the law under which this Agreement is to be construed or if any
such provision is held invalid by a court with jurisdiction over the parties to
this Agreement, such provision shall be deemed to be restated to reflect as
nearly as possible the original intentions of the parties in accordance with
applicable law, and the remainder of this Agreement shall remain in full force
and effect.
(l) Applicable Law. This Agreement shall be interpreted, construed and
enforced in all respects in accordance with the laws of the District of
Columbia.
(m) Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original and all of which together shall constitute
one and the same document.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
CUSTOMER: STARTEC, INC.
By: /s/
Title: _____________________
WORLDCOM: WORLD COMMUNICATIONS, INC.
By: /s/
Title: _____________________
14
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of July 1, 1997, between STARTEC, INC., a Maryland
corporation ("Employer"), and Ram Mukunda (the "Executive").
R E C I T A L S
WHEREAS, the Employer and the Executive are desirous of entering into an
Employment Agreement setting forth the terms and conditions of Employee's
employment with Employer for a three (3) year period with two (2) annual
extensions.
ACCORDINGLY, in consideration of the mutual covenants and agreements
contained in this Agreement, the parties agree as follows:
1. EMPLOYMENT AND DUTIES. Employer hereby employs Executive and Executive
hereby accepts employment as President, Chief Executive Officer and Treasurer of
Employer and, if Employer so elects, as an executive officer or director of any
of the direct or indirect subsidiaries of Employer (the "Subsidiaries").
Executive agrees to serve without additional remuneration in such capacities for
the Subsidiaries of Employer, with responsibilities and authority commensurate
with the nature of Executive's responsibility and authority with Employer as the
Board of Directors of Employer (the "Board of Directors") may from time to time
request, subject to appropriate authorization by the Subsidiaries involved and
any limitations under applicable law. Executive shall perform such duties and
have such powers and authority as the Board of Directors shall determine,
commensurate with Executive's position as an executive officer of Employer. The
Executive also agrees to serve as a member and Chairman of the Board of
Directors until his successor shall be duly elected and qualified. The
Executive's failure to discharge an order or perform a function because the
Executive reasonably and in good faith believes such would violate a law or
regulation or be dishonest shall not be deemed a breach by him of his
obligations or duties hereunder.
2. SERVICES AND EXCLUSIVITY OF SERVICES.
2.1 So long as this Agreement shall continue in effect, Executive
shall devote his full business time and energy
<PAGE>
to the business, affairs and interests of Employer and its Subsidiaries and
matters related thereto and shall faithfully and diligently endeavor to promote
such business, affairs and interests.
2.2 Executive may serve as a director or in any other capacity of any
business enterprise, including an enterprise whose activities may involve or
relate to the business of the Employer and its Subsidiaries, provided that such
service is expressly approved by the Board of Directors of the Employer.
Executive may make and manage personal business investments of his choice
(provided such investments are in businesses which do not directly compete with
Employer and its Subsidiaries or such investments satisfy the standards set
forth in the proviso to Section 6.1.1. and, in either case, do not require any
services on the part of Executive in the affairs of the companies in which such
investments are made) and may serve in any capacity with any civic, educational
or charitable organization, or any governmental entity or trade association,
without seeking or obtaining approval by the Board of Directors of Employer,
provided such activities and service do not materially interfere or conflict
with the performance of his duties hereunder.
3. COMPENSATION, EXPENSES AND OTHER BENEFITS.
3.1 BASE SALARY. During the Term (as defined in Section 4.1), the
Executive shall receive for the services to be rendered hereunder a base salary
at an annual rate of $250,000 per annum (the "Base Salary"). The Base Salary
shall be paid in substantially equal installments consistent with the Employer's
normal payroll schedule, but in no event less frequently than bi-weekly, subject
to applicable withholding and other taxes. The Executive's Base Salary shall be
reviewed at least annually and may be increased but may not be decreased. If
Base Salary is so increased, the amount of such increase shall thereafter be
included in Base Salary.
3.2 BONUS. In addition to the Base Salary, the Executive shall also be
eligible to receive an annual bonus (the "Bonus") of up to 40% of the Base
Salary. The amount of the Bonus shall be determined by the Board of Directors of
Employer and shall be based on the financial and operating performance of
Employer. The Board of Directors may, in its sole and absolute discretion, award
additional bonuses to Executive on any other basis as it deems appropriate from
time to time.
3.3 STOCK OPTIONS. Executive shall be entitled to receive grants of
stock options or other awards, which options or awards will be subject to the
terms and conditions of Employer's
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1997 Performance Incentive Plan (the "Plan"), when, as and if adopted, in
amounts determined by the Board of Directors (or a committee thereof) in its
sole and absolute discretion.
3.4 EXPENSES. Employer shall promptly reimburse Executive for all
reasonable expenses incurred by him in connection with the performance of his
services under this Agreement upon presentation of appropriate documentation in
accordance with Employer's and its Subsidiaries' customary procedures and
policies applicable to its and their senior executives.
3.5 DISABILITY INSURANCE. Employer shall obtain a disability policy
covering the Executive in the event he becomes disabled, in a monthly amount
equal to at least 60% of Executive's then-current monthly Base Salary.
3.6 OTHER BENEFITS. Executive shall be eligible to participate in any
accident, health, medical, disability, pension, savings and any other employee
benefit plans (other than any stock option or similar plans) that may from time
to time be provided by the Employer to its executive personnel.
3.7 VACATION. Executive shall be entitled to reasonable vacations
during each year of the Term (as defined in Section 4.1 hereof), the timing and
duration thereof to be determined by mutual agreement between Executive and the
Employer.
4. TERM AND TERMINATION.
4.1 TERM. The term of Employee's employment hereunder (the "Term")
shall begin on the date of this Agreement (the "Effective Date"), shall continue
through the third anniversary of the Effective Date (the "Initial Term") and
shall automatically extend each year until the fifth anniversary of the
Effective Date, unless notice of termination is given by either party hereto at
least ninety (90) days prior to the end of the Initial Term or the first annual
extension.
4.2 TERMINATION.
4.2.1 Employer may, at its election, subject to the provisions of
Section 4.3 hereof, terminate Executive's employment hereunder as follows:
(i) for "Cause" upon notice of such termination to Executive;
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(ii) upon the death of Executive; or
(iii) upon 10 days' notice to Executive if Executive becomes
"Disabled".
4.2.2 As used in this Agreement, the following terms shall have
the meanings ascribed to them below:
(i) "Cause" shall mean (A) Executive's final conviction of a
felony involving a crime of moral turpitude, (B) acts of Executive which, in the
reasonable judgment of the Board, constitute willful fraud on the part of
Executive in connection with his duties under this Agreement, including but not
limited to misappropriation or embezzlement in the performance of duties as an
employee of the Company, or willfully engaging in conduct materially injurious
to the Company and in violation of the covenants contained in this Agreement, or
(C) gross misconduct, including but not limited to the willful failure of
Executive either to (1) continue to obey lawful written instruction of the Board
after thirty (30) days notice in writing of Executive's failure to do so and the
Board's intention to terminate Executive if such failure is not corrected, or
(2) correct any conduct of Executive which constitutes a material breach of this
Agreement after thirty (30) days notice in writing of Executive's failure to do
so and the Board's intention to terminate Executive if such failure is not
corrected.
(ii) "Disabled" or "Disability" shall mean a written
determination by a physician mutually agreeable to the Company and Executive
(or, in the event of Executive's total physical or mental disability,
Executive's legal representative) that Executive is physically or mentally
unable to perform his duties of Chief Executive Officer under this Agreement and
that such disability can reasonably be expected to continue for a period of six
(6) consecutive months or for shorter periods aggregating one hundred and eighty
(180) days in any twelve-(12)-month period.
(iii) "Termination Without Cause" shall mean any termination
of employment of Executive (A) by the Employer for reasons other than (a) as set
forth in Section 4.2.1(i) through (iii) and (b) by the Executive for Good
Reason, or (B) by the Executive following the willful and material breach by
Employer of its obligations under Section 1 of this Agreement, which breach is
not cured within 30 days of notice of such breach to the Board of Directors.
(iv) "Good Reason" shall mean the occurrence, without
Executive's express written consent, of any of the
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following circumstances following a Change in Control unless such circumstances
are fully corrected prior to the date of termination specified in the
termination notice given in respect thereof (A) the failure of Executive to be
retained as an employee in a senior executive position; (B) a reduction by the
Employer in Executive's salary payable pursuant to Section 3.1 hereof; or (C) a
relocation of Executive's office to a location more than twenty (20) miles from
the current executive office of the Employer and (i) a failure to make Executive
whole for all losses and costs reasonably incurred in connection with the
relocation including, but not limited to, moving expenses, forfeited bonds, fees
or escrows to clubs or other organizations and losses from the sale of
Executive's personal residence and (ii) the failure of Executive to obtain an
agreement in form and substance reasonably satisfactory to Executive from any
successor to provide employment to Executive in the capacity of a senior
executive, at his then current Base Salary, for a period of at least two years
from the date of the Change in Control.
(v) "Change in Control" shall be deemed to have occurred if:
(A) any "person", as such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the
Employer, any trustee or other fiduciary holding securities under any employee
benefit plan of the Employer or any company owned, directly or indirectly, by
the shareholders of the Employer in substantially the same proportions as their
ownership of the Employer's voting common stock, $.01 par value per share (the
"Common Stock"), becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of Employer
representing 30% or more of the combined voting power of all classes of the
Employer's then outstanding voting securities; (B) during any period of two
consecutive calendar years individuals who at the beginning of such period
constitute the Board of Directors, cease for any reason to constitute at least a
majority thereof, unless the election or nomination for the election by the
Employer's shareholders of each new director was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the two-year period or whose election or nomination for
election was previously so approved; (C) the shareholders of the Employer
approve a merger or consolidation of the Employer with any other corporation or
legal entity, other than a merger or consolidation that would result in the
voting securities of the Employer outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 50% of the combined
voting power of the voting securities of the Employer or such surviving entity
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outstanding immediately after such merger or consolidation; provided, however,
that a merger or consolidation effected to implement a recapitalization of the
Employer (or similar transaction) in which no person acquires more than 30% of
the combined voting power of the Employer's then outstanding securities shall
not constitute a Change in Control of the Employer; or (D) the shareholders of
the Employer approve a plan of complete liquidation of the Employer or an
agreement for the sale or disposition by the Employer of all or substantially
all of the Employer's assets.
4.3 RIGHTS UPON TERMINATION.
4.3.1 Upon any termination of this Agreement for Cause, Employer
shall not have any other or further obligations to the Executive under this
Agreement (except (i) as may be provided in accordance with the terms of
retirement and other benefit plans pursuant to Section 3, (ii) as to that
portion of any unpaid Base Salary and other benefits accrued and earned under
this Agreement through the date of such termination, (iii) as to benefits, if
any, provided by any insurance policies in accordance with their terms, and (iv)
for reasonable business expenses incurred prior to the date of termination,
subject to the provisions of Section 3.4. hereof).
4.3.2 Upon termination of this Agreement because of the death or
Disability of Executive, Employer shall pay to Executive or Executive's estate,
any unpaid Base Salary and Bonus accrued through the date of termination
specified in the termination notice, plus an additional amount equal to the
Severance Payment (as defined in Section 4.3.3), and shall reimburse Executive
(or his estate) for reasonable business expenses incurred prior to the date of
termination, subject to the provisions of Section 3.4. hereof. Employer shall
pay such amounts within 10 days following such termination, provided, that, at
Employer's option, the Severance Payment (as defined in Section 4.3.3) may be
made in equal monthly installments over the 12-month period subsequent to the
date of termination specified in the termination notice.
4.3.3 Upon a Termination Without Cause, the Executive shall be
entitled to receive (i) severance compensation equal to what would have been his
Base Salary under Section 3.1, payable at such times as his Base Salary would
have been paid if his employment hereunder had not been terminated, for the
longer of twelve (12) months or the remainder of what would have been the Term,
as well as a pro rata portion of the Bonus applicable to the calendar year in
which such termination occurs, payable when and as such Bonus is determined
under Section 3.2, (ii) Base
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Salary and other benefits, payable within sixty (60) days after the date of such
termination, accrued by him hereunder up to and including the date of such
termination, and (iii) the benefits set forth in Sections 3.5 and 3.6 for the
longer of twelve (12) months or the remainder of what would have been the Term
(and subsequent to which Executive will be entitled to any COBRA benefits). In
addition, Employer shall reimburse Executive for reasonable business expenses
incurred prior to the date of termination, subject to the provisions of Section
3.4. hereof.
4.3.4 Upon termination of this Agreement by Executive for Good
Reason, Employer shall pay to Executive any unpaid Base Salary and Bonus accrued
through the date of termination specified in the termination notice, plus an
additional payment equal to the unpaid Base Salary for the balance of the Term
and shall reimburse Executive for reasonable business expenses incurred prior to
the date of termination, subject to the provisions of Section 3.4 hereof.
4.3.5 Upon any termination provided for in this Agreement, any
outstanding options or other awards granted to Executive by the Employer shall
be treated in the manner set forth in the 1997 Performance Incentive Plan or
similar or subsequent incentive plan, and any applicable stock option agreements
associated with such options or awards.
4.3.6 Except as provided herein, Employer shall have no further
liability to Executive under this Agreement in respect of any termination of
this Agreement.
5. CONFIDENTIALITY. Executive agrees that he will not make use of, divulge
or otherwise disclose, directly or indirectly, any trade secret or other
confidential information concerning the business, operations, practices, or
financial condition of Employer or any of its Subsidiaries ("Confidential
Information"), which he may have learned as a result of his employment by the
Employer during the Term or as a shareholder, officer or director of Employer or
any of its Subsidiaries, except to the extent such use or disclosure is (a)
necessary to the performance of this Agreement and in furtherance of the best
interests of Employer and its Subsidiaries, (b) required by applicable law, (c)
authorized by Employer or its Subsidiaries, or (d) is of information which is in
the public domain through no unlawful act of the Executive or which the
Executive lawfully acquires subsequent to termination of his employment with the
Employer from any person not subject to a confidentiality obligation to the
Employer or its Subsidiaries. The Executive acknowledges and recognizes that the
Confidential Information is essential to the unique nature of the Employer's
business and for that reason, all
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such materials and information shall at all times remain the exclusive property
of the Employer. Upon the termination of this Agreement, all such Confidential
Information furnished and supplied to the Executive during the Term shall be
returned by the Executive to the Employer. Executive, in the event of such
termination, will not at any time impart to anyone or use any such Confidential
Information. The provisions of Sections 5 and 6 shall survive the expiration,
suspension or termination, for any reason, of this Agreement. Executive
acknowledges that the Executive's obligations under Sections 5 and 6 shall
survive regardless of whether the Executive's employment by the Employer is
terminated, voluntarily or involuntarily by the Employer or the Executive, with
Cause or without Cause.
6. RESTRICTIVE COVENANTS.
6.1 NON-COMPETITION.
6.1.1 The Executive agrees that he shall not, until the first
anniversary of the date this Agreement is terminated, without the prior written
consent of the Employer, directly or indirectly (whether as a sole proprietor,
partner, venturer, shareholder, director, officer, employee, or in any other
capacity as principal or agent or through any person, corporation, partnership,
entity or employee acting as nominee or agent) conduct or engage in or be
interested in or associated with any person, firm, association, syndicate,
partnership, company, corporation, or other entity which conducts or engages in
the international telecommunications business in any geographic areas in which
Employer or any Subsidiary is then so engaged in business or proposes to engage
in business in accordance with its then-current strategic plan, nor shall
Executive interfere with, disrupt or attempt to disrupt the relationship,
contractual or otherwise, between Employer or any of its Subsidiaries, on the
one hand, and any customer, supplier, lessor, lessee or employee of the Employer
or any of its Subsidiaries, on the other hand; provided, however, that this
Section 6.1.1. shall not prohibit the Executive from owning beneficially or of
record more than 5% of the outstanding equity securities of any entity whose
equity securities are registered under the Securities Act of 1933, as amended,
or are listed for trading on any United States or foreign stock exchange.
6.1.2 It is the desire and intent of the parties that the
provisions of this Section 6 shall be enforced to the full extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular portion of this Section 6
shall be adjudicated to be invalid or unenforceable, this Section 6 shall be
deemed amended to delete therefrom the portion thus adjudicated to be invalid or
unenforceable, such deletion to apply only with respect to the operation of this
paragraph in the particular jurisdiction in which such adjudication is made.
7. INJUNCTIVE RELIEF. If there is a breach or threatened breach of the
provisions of Sections 5 or 6 of this Agreement, the Employer shall be entitled
to an injunction restraining the Executive from such breach. Nothing herein
shall be construed as prohibiting the Employer from pursuing any other remedies
for such breach or threatened breach.
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8. INSURANCE. The Employer may, at its election and for its benefit, insure
the Employee against accidental loss or death, and the Executive shall submit to
such physical examination and supply such information as may be reasonably
required in connection therewith.
9. MISCELLANEOUS. This Agreement: (a) constitutes the entire agreement of
the parties with respect to its subject matter and supersedes all previous
agreements or understandings, whether oral or written; (b) may not be amended or
modified except by a written instrument signed by all the parties; (c) is
binding upon and will inure to the benefit of the parties and their respective
successors, transferees, personal representatives, heirs, beneficiaries and
permitted assigns; (d) may not be assigned or the obligations of any party
delegated except with the prior written consent of all the parties; (e) may be
executed in duplicate originals; and (f) shall be governed by and interpreted in
accordance with the laws of the State of Maryland, without regard to its
conflict of laws rules.
10. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be delivered by hand delivery by
independent courier service or by registered or certified mail, return receipt
requested, postage prepaid, in either case addressed as follows:
If to the Executive: Mr. Ram Mukunda
8909 Tuckerman Lane
Potomac, Maryland 20854
If to the Employer: STARTEC, INC.
10411 Motor City Drive
Bethesda, Maryland 20817
Attention: Secretary
or to such other address as either party hereto may from time to time give
notice of to the other in the aforesaid manner. Any notice delivered in the
manner set forth in this Section 10 shall be deemed given as of the date of
delivery.
11. INDEMNIFICATION; D&O INSURANCE. Employer shall indemnify Executive, in
his capacity as an executive officer or director of Employer or any of its
Subsidiaries, to the full extent permissible under the laws of the State of
Maryland, or of the state of incorporation of the relevant Subsidiary as the
case may be. Employer shall purchase and maintain directors and officers
insurance coverage in such amounts and on such terms as are customary for
companies within the Employer's industry.
12. WAIVER. The failure of any party to exercise any right or remedy under
this Agreement shall not constitute a waiver of
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such right or remedy, and the waiver of any violation or breach of this
Agreement by a party shall not constitute a waiver of any prior or subsequent
violation or breach. No waiver under this Agreement shall be valid unless in
writing and executed by the waiving party.
13. SEVERABILITY. If any provision of this Agreement is determined by a
court or other governmental authority to be invalid, illegal or unenforceable,
such invalidity, illegality or unenforceability shall not affect the validity,
legality or enforceability of any other provision of this Agreement. Further,
the provision that is determined to be invalid, illegal or unenforceable shall
be reformed and construed to the extent permitted by law so that it will be
valid, legal and enforceable to the maximum extent possible.
14. HEADINGS. The headings used in this Agreement are included for the
convenience of the parties for reference purposes only and are not to be used in
construing or interpreting this Agreement.
15. NO THIRD PARTY BENEFICIARIES. This Agreement shall not be deemed to
confer in favor of any third parties any rights whatsoever as a third-party
beneficiary.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
EMPLOYER:
STARTEC, INC.
By:
----------------------------------------------
Title:
-------------------------------------------
EXECUTIVE:
-----------------------------------
Ram Mukunda
10
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of July 1, 1997, between STARTEC, INC., a Maryland
corporation ("Employer"), and Prabhav Maniyar (the "Executive").
R E C I T A L S
WHEREAS, the Employer and the Executive are desirous of entering into an
Employment Agreement setting forth the terms and conditions of Employee's
employment with Employer for a three (3) year period with two (2) annual
extensions.
ACCORDINGLY, in consideration of the mutual covenants and agreements
contained in this Agreement, the parties agree as follows:
1. EMPLOYMENT AND DUTIES. Employer hereby employs Executive and Executive
hereby accepts employment as Vice President, Chief Financial Officer and
Secretary of Employer and, if Employer so elects, as an executive officer or
director of any of the direct or indirect subsidiaries of Employer (the
"Subsidiaries"). Executive agrees to serve without additional remuneration in
such capacities for the Subsidiaries of Employer, with responsibilities and
authority commensurate with the nature of Executive's responsibility and
authority with Employer as the Board of Directors of Employer (the "Board of
Directors") may from time to time request, subject to appropriate authorization
by the Subsidiaries involved and any limitations under applicable law. Executive
shall perform such duties and have such powers and authority as the Board of
Directors shall determine, commensurate with Executive's position as an
executive officer of Employer. The Executive also agrees to serve as a member of
the Board of Directors until his successor shall be duly elected and qualified.
The Executive's failure to discharge an order or perform a function because the
Executive reasonably and in good faith believes such would violate a law or
regulation or be dishonest shall not be deemed a breach by him of his
obligations or duties hereunder.
<PAGE>
2. SERVICES AND EXCLUSIVITY OF SERVICES.
2.1 So long as this Agreement shall continue in effect, Executive
shall devote his full business time and energy to the business, affairs and
interests of Employer and its Subsidiaries and matters related thereto and shall
faithfully and diligently endeavor to promote such business, affairs and
interests.
2.2 Executive may serve as a director or in any other capacity of any
business enterprise, including an enterprise whose activities may involve or
relate to the business of the Employer and its Subsidiaries, provided that such
service is expressly approved by the Board of Directors of the Employer.
Executive may make and manage personal business investments of his choice
(provided such investments are in businesses which do not directly compete with
Employer and its Subsidiaries or such investments satisfy the standards set
forth in the proviso to Section 6.1.1. and, in either case, do not require any
services on the part of Executive in the affairs of the companies in which such
investments are made) and may serve in any capacity with any civic, educational
or charitable organization, or any governmental entity or trade association,
without seeking or obtaining approval by the Board of Directors of Employer,
provided such activities and service do not materially interfere or conflict
with the performance of his duties hereunder.
3. COMPENSATION, EXPENSES AND OTHER BENEFITS.
3.1 BASE SALARY. During the Term (as defined in Section 4.1), the
Executive shall receive for the services to be rendered hereunder a base salary
at an annual rate of $175,000 per annum (the "Base Salary"). The Base Salary
shall be paid in substantially equal installments consistent with the Employer's
normal payroll schedule, but in no event less frequently than bi-weekly, subject
to applicable withholding and other taxes. The Executive's Base Salary shall be
reviewed at least annually and may be increased but may not be decreased. If
Base Salary is so increased, the amount of such increase shall thereafter be
included in Base Salary.
3.2 BONUS. In addition to the Base Salary, the Executive shall also be
eligible to receive an annual bonus (the "Bonus") of up to 40% of the Base
Salary. The amount of the Bonus shall be determined by the Board of Directors of
Employer and shall be based on the financial and operating performance of
Employer. The Board of Directors may, in its sole and absolute discretion, award
additional bonuses to Executive on any other basis as it deems appropriate from
time to time.
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3.3 STOCK OPTIONS. Executive shall be entitled to receive grants of
stock options or other awards, which options or awards will be subject to the
terms and conditions of Employer's 1997 Performance Incentive Plan (the "Plan"),
when, as and if adopted, in amounts determined by the Board of Directors (or a
committee thereof) in its sole and absolute discretion.
3.4 EXPENSES. Employer shall promptly reimburse Executive for all
reasonable expenses incurred by him in connection with the performance of his
services under this Agreement upon presentation of appropriate documentation in
accordance with Employer's and its Subsidiaries' customary procedures and
policies applicable to its and their senior executives.
3.5 DISABILITY INSURANCE. Employer shall obtain a disability policy
covering the Executive in the event he becomes disabled, in a monthly amount
equal to at least 60% of Executive's then-current monthly Base Salary.
3.6 OTHER BENEFITS. Executive shall be eligible to participate in any
accident, health, medical, disability, pension, savings and any other employee
benefit plans (other than any stock option or similar plans) that may from time
to time be provided by the Employer to its executive personnel.
3.7 VACATION. Executive shall be entitled to reasonable vacations
during each year of the Term (as defined in Section 4.1 hereof), the timing and
duration thereof to be determined by mutual agreement between Executive and the
Employer.
4. TERM AND TERMINATION.
4.1 TERM. The term of Employee's employment hereunder (the "Term")
shall begin on the date of this Agreement (the "Effective Date"), shall continue
through the third anniversary of the Effective Date (the "Initial Term") and
shall automatically extend each year until the fifth anniversary of the
Effective Date, unless notice of termination is given by either party hereto at
least ninety (90) days prior to the end of the Initial Term or the first annual
extension.
4.2 TERMINATION.
4.2.1 Employer may, at its election, subject to the provisions of
Section 4.3 hereof, terminate Executive's employment hereunder as follows:
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(i) for "Cause" upon notice of such termination to
Executive;
(ii) upon the death of Executive; or
(iii) upon 10 days' notice to Executive if Executive becomes
"Disabled".
4.2.2 As used in this Agreement, the following terms shall have the
meanings ascribed to them below:
(i) "Cause" shall mean (A) Executive's final conviction of a
felony involving a crime of moral turpitude, (B) acts of Executive which, in the
reasonable judgment of the Board, constitute willful fraud on the part of
Executive in connection with his duties under this Agreement, including but not
limited to misappropriation or embezzlement in the performance of duties as an
employee of the Company, or willfully engaging in conduct materially injurious
to the Company and in violation of the covenants contained in this Agreement, or
(C) gross misconduct, including but not limited to the willful failure of
Executive either to (1) continue to obey lawful written instruction of the Board
after thirty (30) days notice in writing of Executive's failure to do so and the
Board's intention to terminate Executive if such failure is not corrected, or
(2) correct any conduct of Executive which constitutes a material breach of this
Agreement after thirty (30) days notice in writing of Executive's failure to do
so and the Board's intention to terminate Executive if such failure is not
corrected.
(ii) "Disabled" or "Disability" shall mean a written
determination by a physician mutually agreeable to the Company and Executive
(or, in the event of Executive's total physical or mental disability,
Executive's legal representative) that Executive is physically or mentally
unable to perform his duties of Chief Executive Officer under this Agreement and
that such disability can reasonably be expected to continue for a period of six
(6) consecutive months or for shorter periods aggregating one hundred and eighty
(180) days in any twelve-(12)-month period.
(iii) "Termination Without Cause" shall mean any termination
of employment of Executive (A) by the Employer for reasons other than (a) as set
forth in Section 4.2.1(i) through (iii) and (b) by the Executive for Good
Reason, or (B) by the Executive following the willful and material breach by
Employer of its obligations under Section 1 of this Agreement, which breach is
not cured within 30 days of notice of such breach to the Board of Directors.
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(iv) "Good Reason" shall mean the occurrence, without
Executive's express written consent, of any of the following circumstances
following a Change in Control unless such circumstances are fully corrected
prior to the date of termination specified in the termination notice given in
respect thereof (A) the failure of Executive to be retained as an employee in a
senior executive position; (B) a reduction by the Employer in Executive's salary
payable pursuant to Section 3.1 hereof; or (C) a relocation of Executive's
office to a location more than twenty (20) miles from the current executive
office of the Employer and (i) a failure to make Executive whole for all losses
and costs reasonably incurred in connection with the relocation including, but
not limited to, moving expenses, forfeited bonds, fees or escrows to clubs or
other organizations and losses from the sale of Executive's personal residence
and (ii) the failure of Executive to obtain an agreement in form and substance
reasonably satisfactory to Executive from any successor to provide employment to
Executive in the capacity of a senior executive, at his then current Base
Salary, for a period of at least two years from the date of the Change in
Control.
(v) "Change in Control" shall be deemed to have occurred if:
(A) any "person", as such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the
Employer, any trustee or other fiduciary holding securities under any employee
benefit plan of the Employer or any company owned, directly or indirectly, by
the shareholders of the Employer in substantially the same proportions as their
ownership of the Employer's voting common stock, $.01 par value per share (the
"Common Stock"), becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of Employer
representing 30% or more of the combined voting power of all classes of the
Employer's then outstanding voting securities; (B) during any period of two
consecutive calendar years individuals who at the beginning of such period
constitute the Board of Directors, cease for any reason to constitute at least a
majority thereof, unless the election or nomination for the election by the
Employer's shareholders of each new director was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the two-year period or whose election or nomination for
election was previously so approved; (C) the shareholders of the Employer
approve a merger or consolidation of the Employer with any other corporation or
legal entity, other than a merger or consolidation that would result in the
voting securities of the Employer outstanding immediately prior thereto
continuing to represent (either by remaining
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outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the combined voting power of the voting securities of
the Employer or such surviving entity outstanding immediately after such merger
or consolidation; provided, however, that a merger or consolidation effected to
implement a recapitalization of the Employer (or similar transaction) in which
no person acquires more than 30% of the combined voting power of the Employer's
then outstanding securities shall not constitute a Change in Control of the
Employer; or (D) the shareholders of the Employer approve a plan of complete
liquidation of the Employer or an agreement for the sale or disposition by the
Employer of all or substantially all of the Employer's assets.
4.3 RIGHTS UPON TERMINATION.
4.3.1 Upon any termination of this Agreement for Cause, Employer
shall not have any other or further obligations to the Executive under this
Agreement (except (i) as may be provided in accordance with the terms of
retirement and other benefit plans pursuant to Section 3, (ii) as to that
portion of any unpaid Base Salary and other benefits accrued and earned under
this Agreement through the date of such termination, (iii) as to benefits, if
any, provided by any insurance policies in accordance with their terms, and (iv)
for reasonable business expenses incurred prior to the date of termination,
subject to the provisions of Section 3.4. hereof).
4.3.2 Upon termination of this Agreement because of the death or
Disability of Executive, Employer shall pay to Executive or Executive's estate,
any unpaid Base Salary and Bonus accrued through the date of termination
specified in the termination notice, plus an additional amount equal to the
Severance Payment (as defined in Section 4.3.3), and shall reimburse Executive
(or his estate) for reasonable business expenses incurred prior to the date of
termination, subject to the provisions of Section 3.4. hereof. Employer shall
pay such amounts within 10 days following such termination, provided, that, at
Employer's option, the Severance Payment (as defined in Section 4.3.3) may be
made in equal monthly installments over the 12-month period subsequent to the
date of termination specified in the termination notice.
4.3.3 Upon a Termination Without Cause, the Executive shall be
entitled to receive (i) severance compensation equal to what would have been his
Base Salary under Section 3.1, payable at such times as his Base Salary would
have been paid if his employment hereunder had not been terminated, for the
longer of twelve (12) months or the remainder of what would have been
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the Term, as well as a pro rata portion of the Bonus applicable to the calendar
year in which such termination occurs, payable when and as such Bonus is
determined under Section 3.2, (ii) Base Salary and other benefits, payable
within sixty (60) days after the date of such termination, accrued by him
hereunder up to and including the date of such termination, and (iii) the
benefits set forth in Sections 3.5 and 3.6 for the longer of twelve (12) months
or the remainder of what would have been the Term (and subsequent to which
Executive will be entitled to any COBRA benefits). In addition, Employer shall
reimburse Executive for reasonable business expenses incurred prior to the date
of termination, subject to the provisions of Section 3.4. hereof.
4.3.4 Upon termination of this Agreement by Executive for Good
Reason, Employer shall pay to Executive any unpaid Base Salary and Bonus accrued
through the date of termination specified in the termination notice, plus an
additional payment equal to the unpaid Base Salary for the balance of the Term
and shall reimburse Executive for reasonable business expenses incurred prior to
the date of termination, subject to the provisions of Section 3.4 hereof.
4.3.5 Upon any termination provided for in this Agreement, any
outstanding options or other awards granted to Executive by the Employer shall
be treated in the manner set forth in the 1997 Performance Incentive Plan or
similar or subsequent incentive plan, and any applicable stock option agreements
associated with such options or awards.
4.3.6 Except as provided herein, Employer shall have no further
liability to Executive under this Agreement in respect of any termination of
this Agreement.
5. CONFIDENTIALITY. Executive agrees that he will not make use of, divulge
or otherwise disclose, directly or indirectly, any trade secret or other
confidential information concerning the business, operations, practices, or
financial condition of Employer or any of its Subsidiaries ("Confidential
Information"), which he may have learned as a result of his employment by the
Employer during the Term or as a shareholder, officer or director of Employer or
any of its Subsidiaries, except to the extent such use or disclosure is (a)
necessary to the performance of this Agreement and in furtherance of the best
interests of Employer and its Subsidiaries, (b) required by applicable law, (c)
authorized by Employer or its Subsidiaries, or (d) is of information which is in
the public domain through no unlawful act of the Executive or which the
Executive lawfully acquires subsequent to termination of his employment with the
Employer from any person not subject to a confidentiality
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obligation to the Employer or its Subsidiaries. The Executive acknowledges and
recognizes that the Confidential Information is essential to the unique nature
of the Employer's business and for that reason, all such materials and
information shall at all times remain the exclusive property of the Employer.
Upon the termination of this Agreement, all such Confidential Information
furnished and supplied to the Executive during the Term shall be returned by the
Executive to the Employer. Executive, in the event of such termination, will not
at any time impart to anyone or use any such Confidential Information. The
provisions of Sections 5 and 6 shall survive the expiration, suspension or
termination, for any reason, of this Agreement. Executive acknowledges that the
Executive's obligations under Sections 5 and 6 shall survive regardless of
whether the Executive's employment by the Employer is terminated, voluntarily or
involuntarily by the Employer or the Executive, with Cause or without Cause.
6. RESTRICTIVE COVENANTS.
6.1 NON-COMPETITION.
6.1.1 The Executive agrees that he shall not, until the first
anniversary of the date this Agreement is terminated, without the prior written
consent of the Employer, directly or indirectly (whether as a sole proprietor,
partner, venturer, shareholder, director, officer, employee, or in any other
capacity as principal or agent or through any person, corporation, partnership,
entity or employee acting as nominee or agent) conduct or engage in or be
interested in or associated with any person, firm, association, syndicate,
partnership, company, corporation, or other entity which conducts or engages in
the international telecommunications business in any geographic areas in which
Employer or any Subsidiary is then so engaged in business or proposes to engage
in business in accordance with its then-current strategic plan, nor shall
Executive interfere with, disrupt or attempt to disrupt the relationship,
contractual or otherwise, between Employer or any of its Subsidiaries, on the
one hand, and any customer, supplier, lessor, lessee or employee of the Employer
or any of its Subsidiaries, on the other hand; provided, however, that this
Section 6.1.1. shall not prohibit the Executive from owning beneficially or of
record more than 5% of the outstanding equity securities of any entity whose
equity securities are registered under the Securities Act of 1933, as amended,
or are listed for trading on any United States or foreign stock exchange.
6.1.2 It is the desire and intent of the parties that the
provisions of this Section 6 shall be enforced to the full extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular portion of this Section 6
shall be adjudicated to be invalid or unenforceable, this Section 6 shall be
deemed amended to delete therefrom the portion thus adjudicated to be invalid or
unenforceable, such deletion to apply only with respect to the operation of this
paragraph in the particular jurisdiction in which such adjudication is made.
7. INJUNCTIVE RELIEF. If there is a breach or threatened breach of the
provisions of Sections 5 or 6 of this Agreement, the Employer shall be entitled
to an injunction restraining the Executive from such breach. Nothing herein
shall be construed as prohibiting the Employer from pursuing any other remedies
for such breach or threatened breach.
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8. INSURANCE. The Employer may, at its election and for its benefit, insure
the Employee against accidental loss or death, and the Executive shall submit to
such physical examination and supply such information as may be reasonably
required in connection therewith.
9. MISCELLANEOUS. This Agreement: (a) constitutes the entire agreement of
the parties with respect to its subject matter and supersedes all previous
agreements or understandings, whether oral or written; (b) may not be amended or
modified except by a written instrument signed by all the parties; (c) is
binding upon and will inure to the benefit of the parties and their respective
successors, transferees, personal representatives, heirs, beneficiaries and
permitted assigns; (d) may not be assigned or the obligations of any party
delegated except with the prior written consent of all the parties; (e) may be
executed in duplicate originals; and (f) shall be governed by and interpreted in
accordance with the laws of the State of Maryland, without regard to its
conflict of laws rules.
10. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be delivered by hand delivery by
independent courier service or by registered or certified mail, return receipt
requested, postage prepaid, in either case addressed as follows:
If to the Executive: Mr. Prabhav Maniyar
c/o STARTEC, INC.
10411 Motor City Drive
Bethesda, Maryland 20817
If to the Employer: STARTEC, INC.
10411 Motor City Drive
Bethesda, Maryland 20817
Attention: Secretary
or to such other address as either party hereto may from time to time give
notice of to the other in the aforesaid manner. Any notice delivered in the
manner set forth in this Section 10 shall be deemed given as of the date of
delivery.
11. INDEMNIFICATION; D&O INSURANCE. Employer shall indemnify Executive, in
his capacity as an executive officer or director of Employer or any of its
Subsidiaries, to the full extent permissible under the laws of the State of
Maryland, or of the state of incorporation of the relevant Subsidiary as the
case may be. Employer shall purchase and maintain directors and officers
insurance coverage in such amounts and on such terms as are customary for
companies within the Employer's industry.
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12. WAIVER. The failure of any party to exercise any right or remedy under
this Agreement shall not constitute a waiver of such right or remedy, and the
waiver of any violation or breach of this Agreement by a party shall not
constitute a waiver of any prior or subsequent violation or breach. No waiver
under this Agreement shall be valid unless in writing and executed by the
waiving party.
13. SEVERABILITY. If any provision of this Agreement is determined by a
court or other governmental authority to be invalid, illegal or unenforceable,
such invalidity, illegality or unenforceability shall not affect the validity,
legality or enforceability of any other provision of this Agreement. Further,
the provision that is determined to be invalid, illegal or unenforceable shall
be reformed and construed to the extent permitted by law so that it will be
valid, legal and enforceable to the maximum extent possible.
14. HEADINGS. The headings used in this Agreement are included for the
convenience of the parties for reference purposes only and are not to be used in
construing or interpreting this Agreement.
15. NO THIRD PARTY BENEFICIARIES. This Agreement shall not be deemed to
confer in favor of any third parties any rights whatsoever as a third-party
beneficiary.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
EMPLOYER:
STARTEC, INC.
By:
----------------------------------------------
Title:
-------------------------------------------
EXECUTIVE:
-----------------------------------
Prabhav Maniyar
10
STARTEC, INC.
AMENDED AND RESTATED STOCK OPTION PLAN
A. Purpose and Scope.
This Amended and Restated Stock Option Plan completely amends and restates
the Stock Option Plan adopted by the Company on April 10, 1993 by STARTEC, Inc.
(herein called the "Company"). The purposes of this Plan are to encourage stock
ownership by management employees of the Company, to provide an incentive for
such employees to expand and improve the profits and prosperity of the Company,
and to assist the Company in attracting and retaining key personnel through the
grant of Options to purchase shares of the Company's common stock.
B. Definitions.
Unless otherwise required by the context:
1. "Board" shall mean the Board of Directors of the Company.
2. "Committee" shall mean the Stock Option Plan Committee, which is
appointed by the Board, and which shall be composed of three members of the
Board.
3. "Company" shall mean STARTEC, Inc.
4. "Option" shall mean a right to purchase Stock, granted pursuant to the
Plan.
5. "Option Price" shall mean the purchase price for Stock under an Option,
as determined in Section P below.
6. "Option Exercise Event" shall have the meaning ascribed to it in Section
G.1(a).
7. "Participant" shall mean a full-time employee of the Company to whom an
Option is granted under the Plan.
8. "Plan" shall mean this STARTEC, Inc. Amended and Restated Stock Option
Plan.
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9. "Stock" shall mean the common stock of the Company, par value $.01.
C. Stock to be Optioned.
Subject to the provisions of Section J of the Plan, the maximum number of
shares of Stock that may be optioned or sold under the Plan is 270,000 shares.
Such shares may be treasury, or authorized, but unissued, shares of Stock.
D. Administration.
The Plan shall be administered by the Committee. Two members of the
Committee shall constitute a quorum for the transaction of business. The
Committee shall be responsible to the Board for the operation of the Plan, and
shall make recommendations to the Board with respect to participation in the
Plan by employees of the Company, and with respect to the extent of that
participation. The interpretation and construction of any provision of the Plan
by the Committee shall be final, unless otherwise determined by the Board. No
member of the Board or the Committee shall be liable for any action or
determination made by him in good faith.
E. Eligibility.
The Board, upon recommendation of the Committee, may grant Options to any
key management employee (including an employee who is a director or an officer)
of the Company. Options may be awarded by the Board at any time and from time to
time to new Participants, or to existing Participants, or to a greater or lesser
number of Participants, and may include or exclude previous Participants, as the
Board, upon recommendation by the Committee, shall determine. Options granted at
different times need not contain similar provisions.
F. Option Price.
The purchase price for Stock under each option shall be determined by the
Board at the time the option is granted, but in no event less than the par value
of the Stock.
G. Terms and Conditions of Options.
1. Time That Option May Be Exercised.
(a) An Option granted hereunder may be exercised only upon the
occurrence of any of the following events (each an
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"Option Exercise Event"): (i) a sale of more than fifty percent (50%) of the
issued and outstanding shares of Stock in one transaction, (ii) a dissolution or
liquidation of the Company, (iii) a merger or consolidation of the Company in
which the Company is not the surviving corporation, (iv) a filing by the Company
of an effective registration statement under the Securities Act of 1933, as
amended, or (v) the seventh anniversary of the date that the Participant is
first hired as a full-time employee by the Company.
(b) All Options granted hereunder that have not been exercised shall
terminate and expire on the earlier of (i) ten (10) years from the date the
Option is granted, or (ii) the date the Participant is no longer employed by the
Company as a full-time employee, and such Participant's employment was not
terminated as a result of any of the following: the death or permanent
disability of the Participant prior to termination, or the Company's termination
of the Participant's full-time employment without cause.
2. Time and Method of Payment. An Option that is exercisable hereunder may
be exercised by delivery to the Company on any business day, at its principal
office, addressed to the attention of the Chairman of the Board, of written
notice of exercise, which notice shall specify the number of shares with respect
to which the Option is being exercised, and shall be accompanied by payment in
full of the Option Price of the shares for which the Option is being exercised,
except as provided below. The minimum number of shares of Stock with respect to
which an Option may be exercised, in whole or in part, at any time shall be the
lesser of 100 shares or the maximum number of shares available for purchase
under the Option at the time of exercise. Payment of the Option Price for the
shares of Stock purchased pursuant to the exercise of an Option shall be made
(i) in cash or in cash equivalents; (ii) through the tender to Company of shares
of Stock, which shares shall be valued, for purposes of determining the extent
to which the Option Price has been paid thereby, at their fair market value
(determined by the Board in such manner as it shall reasonably determine) on the
date of exercise; (iii) by delivering a written direction to Board that the
Option be exercised pursuant to a "cashless" exercise/sale procedure (pursuant
to which funds to pay for exercise of the Option are delivered to the Company by
a broker upon receipt of stock certificates from the Company) or a cashless
exercise/loan procedure (pursuant to which the optionees would obtain a margin
loan from a broker to fund the certificates for the shares of Stock for which
the Option is exercised will be delivered to such broker as the agent for the
individual
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exercising the Option and the broker will deliver to the Company cash (or cash
equivalents acceptable to the Company) equal to the Option Price for the shares
of Stock purchased pursuant to the exercise of the Option plus the amount (if
any) of federal and other taxes that the Company, may, in its judgment, be
required to withhold with respect to the exercise of the Option; or (iv) by a
combination of the methods described in (i), (ii) and (iii). Payment in full of
the Option Price need not accompany the written notice of exercise if the Option
is exercised pursuant to the cashless exercise/sale procedure described above.
An Attempt to exercise any Option granted hereunder other than as set forth
above shall be invalid and of no force and effect. Promptly after the exercise
of an Option, the individual exercising the Option shall be entitled to the
issuance of a Stock certificate or certificates evidencing his ownership of such
shares. An individual holding or exercising an Option shall have none of the
rights of a shareholder until the shares of Stock covered thereby are fully paid
and issued to him, and no adjustment will be made for dividends or other rights
for which the record date is prior to the date such stock certificate is issued.
3. Number of Shares. Each Option shall state the total number of shares of
Stock to which it pertains.
4. Termination of Employment and Death and Disability.
(a) Upon the termination of the employment or other service of a
Participant with the Company, other than by reason of death, permanent
disability, or retirement of such Participant or for cause, any Option granted
pursuant to the Plan shall terminate three months after the date of such
termination of employment or service (subject to the general limitations on
exercises set forth elsewhere in this Section G), and thereafter such
Participant shall have no further right to purchase shares of Stock pursuant to
such Option. Whether a leave of absence or leave on military or government
service shall constitute a termination of employment or service for purposes of
the Plan shall be determined by the Board, which determination shall be final
and conclusive.
(b) If a Participant dies while in the employ or service of the Company,
the executors or administrators or legatees or distributees of such
Participant's estate shall have the right (subject to the general limitations on
exercises set forth elsewhere in this Section G), at any time within one year
after the date of such Participant's death to exercise any Option held by such
Participant at the date of such Participant's death.
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(c) If a Participant terminates employment or service with the Company by
reason of the permanent disability or retirement of such Participant, then such
Participant shall have the right (subject to the general limitations on
exercises set forth elsewhere in this Section G),at any time within one year
after such termination of employment or service and prior to termination of the
Option pursuant hereto, to exercise, in whole or part, any Option held by such
Participant at the date of such termination of employment or service. Whether a
termination of employment or service is to be considered by reason of permanent
disability for purposes of the Plan shall be determined by the Board, which
determination shall be final and conclusive.
(d) If a Participant's employment or service is terminated for cause, his
or her rights to exercise any Option shall immediately terminate without regard
to the exercisability of the Option. Whether a termination of employment or
service is to be considered for cause for purposes of the Plan shall be
determined by the Board, which determination shall be final and conclusive.
H. No Obligations to Exercise Option.
The granting of an Option shall impose no obligation upon the Participant
to exercise such Option.
I. Nonassignability.
Options shall not be transferable other than by will or by the laws of
descent and distribution, and during a Participant's lifetime shall be
exercisable only by such Participant.
J. Effect of Change in Stock Subject to the Plan.
The aggregate number of shares of Stock available for Options under the
Plan, the shares subject to any Option, and the price per share shall all be
proportionately adjusted for any increase or decrease in the number of issued
shares of Stock subsequent to the effective date of the Plan resulting from (1)
a subdivision or consolidation of shares or any other capital adjustment, (2)
the payment of a stock dividend, or (3) other increase or decrease in such
shares effected without receipt of consideration by the Company. If the Company
shall be the surviving corporation in any merger or consolidation, any Option
shall pertain, apply, and relate to the securities to which a holder of the
number of shares of Stock subject to the Option would have been entitled after
the merger or consolidation.
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K. Amendment and Termination.
The Board, by resolution, may terminate, amend, or revise the Plan with
respect to any shares as to which Options have not been granted. Neither the
Board nor the Committee may, without the consent of the holder of an Option,
alter or impair any Option previously granted under the Plan, except as
authorized herein. Unless sooner terminated, the Plan shall remain in effect for
a period of ten years from the date of the Plan's adoption by the Board.
Termination of the Plan shall not affect any Option previously granted.
L. Agreement and Representation of Employees.
As a condition to the exercise of any portion of an Option, the person
exercising such Option shall represent and warrant at the time of such exercise
that any shares of Stock acquired at exercise are being acquired only for
investment and without any present intention to sell or distribute such shares,
if, in the opinion of counsel for the Company, such a representation is required
under the Securities Act of 1933 as amended, or any other applicable law,
regulation, or rule of any governmental agency.
M. Reservation of Shares of Stock.
The Company, during the term of this Plan, will at all times reserve and
keep available and will seek or obtain from any regulatory body having
jurisdiction any requisite authority necessary to issue and to sell, the number
of shares of Stock that shall be sufficient to satisfy the requirements of this
Plan. The inability of the Company to obtain from any regulatory body having
jurisdiction the authority deemed necessary by counsel for the Company for the
lawful issuance and sale of its Stock hereunder shall relieve the Company of any
liability in respect of the failure to issue or sell Stock as to which the
requisite authority has not been obtained.
N. Effective Date of Plan.
The Plan shall be effective from April 10, 1993, the date that the Plan was
originally approved by the Board.
6
STARTEC GLOBAL COMMUNICATIONS CORPORATION
1997 PERFORMANCE INCENTIVE PLAN
SECTION 1 -- PURPOSE; DEFINITIONS.
The name of the Plan is the Startec Global Communications Corporation 1997
Performance Incentive Plan (the "Plan"). The purpose of the Plan is to encourage
and enable the officers, directors, advisers, consultants and key persons of
Startec Global Communications Corporation (the "Company") and its subsidiaries
upon whose judgment, initiative and efforts the Company largely depends for the
successful conduct of its business to acquire a proprietary interest in the
Company.
For purposes of the Plan, the following terms are defined as set forth
below:
a. "Annual Incentive Award" means an Incentive Award made pursuant to
Section 5(a)(v) with a Performance Cycle of one year or less.
b. "Awards" mean grants under this Plan of Incentive Awards, Stock Options,
Stock Appreciation Rights, Restricted Stock or Other Stock-Based Awards.
c. "Board" means the Board of Directors of the Company.
d. "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
e. "Commission" means the Securities and Exchange
Commission or any successor agency.
f. "Committee" means the Compensation Committee of the Board or a
subcommittee thereof, any successor thereto or such other committee or
subcommittee as may be designated by the Board to administer the Plan.
g. "Common Stock" or "Stock" means the Common Stock, par value $.01 per
share, of the Company.
h. "Company" means Startec Global Communications
Corporation, a corporation organized under the laws of the State of Maryland, or
any successor thereto.
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i. "Exercise Period" means the 60-day period from and after a Change in
Control.
j. "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
k. "Fair Market Value" of the Stock on any given date means the fair market
value of the Stock determined in good faith by the Committee; provided, however,
that (i) if the Stock is admitted to quotation on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), the Fair Market Value
on any given date shall be not less than the average of the highest bid and
lowest asked prices of the Stock reported for such date or, if no bid and asked
prices were reported for such date, for the last day preceding such date for
which such prices were reported, or (ii) if the Stock is admitted to trading on
a national securities exchange or the NASDAQ National Market, the Fair Market
Value on any date shall be not less than the closing price reported for the
Stock on such exchange or system for such date or, if no sales were reported for
such date, for the last date preceding the date for such a sale was reported.
l. "Incentive Award" means any Award that is either an Annual Incentive
Award or a Long-Term Incentive Award.
m. "Incentive Stock Option" means any Stock Option that complies with
Section 422 of the Code.
n. "Long-Term Incentive Award" means an Incentive Award made pursuant to
Section 5(a)(v) with a Performance Cycle of more than one year.
o. "Non-Employee Advisor" means any consultant or independent contractor or
principal of a consultant or independent contractor who is not an employee of
the Company or any affiliate but is in a position to make a significant
contribution to the management, growth, or profitability of the business of the
Company or any affiliate, as determined by the Board.
p. "Nonqualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
q. "Other Stock-Based Award" means an Award made pursuant to Section
5(a)(iv).
r. "Performance Cycle" means the period selected by the Committee during
which the performance of the Company or any subsidiary, affiliate or unit
thereof or any individual is measured for the purpose of determining the extent
to which an Award subject to Performance Goals has been earned.
<PAGE>
s. "Performance Goals" mean the objectives for the Company or any
subsidiary or affiliate or any unit thereof or any individual that may be
established by the Committee for a Performance Cycle with respect to any
performance-based Awards contingently awarded under the Plan. The Performance
Goals for Awards that are intended to constitute "performance-based"
compensation within the meaning of Section 162(m) of the Code shall be based on
one or more of the following criteria: earnings per share, total shareholder
return, operating income, net income, cash flow, return on equity, and return on
capital.
t. "Plan" means this 1997 Performance Incentive Plan, as amended from time
to time.
u. "Restricted Period" means the period during which an Award may not be
sold, assigned, transferred, pledged or otherwise encumbered.
v. "Restricted Stock" means an Award of shares of Common Stock pursuant to
Section 5(a)(iii).
w. "Spread Value" means, with respect to a share of Common Stock subject to
an Award, an amount equal to the excess of the Fair Market Value, on the date
such value is determined, over the Award's exercise or grant price, if any.
x. "Stock Appreciation Right" or "SAR" means a right granted pursuant to
Section 5(a)(ii).
y. "Stock Option" means an option granted pursuant to Section 5(a)(i).
z. "Ten Percent Stockholder" means a person owning Stock possessing more
than ten percent (10%) of the total combined voting power of all classes of
Stock as defined in Section 422 of the Code.
In addition, the terms "Business Combination," "Change in Control," "Change
in Control Price," "Incumbent Board," "Outstanding Company Stock," "Outstanding
Company Voting Securities" and "Person" have the meanings set forth in Section
6.
SECTION 2 -- ADMINISTRATION.
The Plan shall be administered by the Committee, which shall have the power
to interpret the Plan and to adopt such rules and guidelines for carrying out
the Plan as it may deem appropriate. The Committee shall have the authority to
adopt such modifications, procedures and subplans and to waive any conditions or
other restrictions as may be necessary or desirable to comply with the laws,
regulations, compensation practices and tax and accounting principles of the
countries in which the Company, a subsidiary or an affiliate may operate to
assure the viability of the benefits of Awards made to individuals employed in
such countries and to meet the objectives of the Plan.
<PAGE>
Subject to the terms of the Plan, the Committee shall have the authority to
determine those employees eligible to receive Awards and the amount, type and
terms of each Award and to establish and administer any Performance Goals
applicable to such Awards.
The Committee may delegate its authority and power under the Plan to one or
more officers of the Company, subject to guidelines prescribed by the Committee
and approved by the Board, with respect to participants who are not subject to
Section 16 of the Exchange Act.
Any determination made by the Committee or pursuant to delegated authority
in accordance with the provisions of the Plan with respect to any Award shall be
made in the sole discretion of the Committee or such delegate, and all decisions
made by the Committee or any appropriately designated officer pursuant to the
provisions of the Plan shall be final and binding on all persons, including the
Company and Plan participants.
SECTION 3 -- ELIGIBILITY.
Participants in the Plan will be such officers and other employees,
advisors, consultants and key persons of the Company, its subsidiaries and
affiliates who are responsible for or contribute to the management, growth and
profitability of the business of the Company, its subsidiaries or its affiliates
as are selected from time to time by the Committee, in its sole discretion.
Independent Directors are also eligible to participate in the Plan.
SECTION 4 -- COMMON STOCK SUBJECT TO PLAN.
The total number of shares of Common Stock reserved and available for
distribution pursuant to the Plan shall be [750,000] shares, all of which may be
issued pursuant to the exercise of Stock Options awarded under the Plan. If any
Award is exercised, cashed out or terminates or expires without a payment being
made to the participant in the form of Common Stock, the shares subject to such
Award, if any, shall again be available for distribution in connection with
Awards under the Plan. Any shares of Common Stock that are used by a participant
as full or partial payment of withholding or other taxes or as payment for the
exercise or conversion price of an Award shall be available for distribution in
connection with Awards under the Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split, split-up or other change in
corporate structure affecting the Common Stock after adoption of the Plan by the
Board, the Board is authorized to make substitutions or adjustments in the
aggregate number and kind of shares reserved for issuance under the Plan, in the
number, kind and price of shares subject to outstanding Awards and in the Award
limits set forth in Section 5; provided, however, that any such substitutions or
adjustments shall be, to the extent deemed appropriate by the Board, consistent
with the treatment of shares of Common Stock not subject to the Plan, and that
the number of shares subject to any Award shall always be a whole number.
<PAGE>
SECTION 5 -- AWARDS.
(a) General. The types of Awards that may be granted under the Plan are set
forth below. Awards may be granted singly, in combination or in tandem with
other Awards.
(i) STOCK OPTIONS. A Stock Option represents the right to purchase a
share of Stock at a predetermined grant price. Stock Options granted under this
Plan may be in the form of Incentive Stock Options or Nonqualified Stock
Options, as specified in the Award agreement. The term of each Stock Option
shall be set forth in the Award agreement, but no Incentive Stock Option shall
be exercisable more than ten years after the grant date. The grant price per
share of Common Stock purchasable under a Stock Option shall not be less than
100% of the Fair Market Value on the date of grant. Subject to the applicable
Award agreement, Stock Options may be exercised, in whole or in part, by giving
written notice of exercise to the Company specifying the number of shares to be
purchased. Such notice shall be accompanied by payment in full of the purchase
price by certified or bank check or such other instrument as the Company may
accept (including a copy of instructions to a broker or bank acceptable to the
Company to deliver promptly to the Company an amount of sale or loan proceeds
sufficient to pay the purchase price). As determined by the Committee, payment
in full or in part may also be made in the form of Common Stock already owned by
the optionee valued at the Fair Market Value on the date the Stock Option is
exercised; provided, however, that such Common Stock shall not have been
acquired within the preceding six months upon the exercise of a Stock Option or
stock unit or similar Award granted under the Plan or any other plan maintained
at any time by the Company or any subsidiary.
(ii) STOCK APPRECIATION RIGHTS. An SAR represents the right to receive
a payment, in cash, shares of Common Stock or both (as determined by the
Committee), equal to the Spread Value on the date the SAR is exercised. The
grant price of an SAR shall be set forth in the applicable Award agreement and
shall not be less than 100% of the Fair Market Value on the date of grant.
Subject to the terms of the applicable Award agreement, an SAR shall be
exercisable, in whole or in part, by giving written notice of exercise to the
Company.
(iii) RESTRICTED STOCK. Shares of Restricted Stock are shares of
Common Stock that are awarded to a participant and that during the Restricted
Period may be forfeitable to the Company upon such conditions as may be set
forth in the applicable Award agreement. Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise encumbered during the Restricted
Period. The Restricted Period shall be no less than one year. Except as provided
in this subsection (iii) and in the applicable Award Agreement, a participant
shall have all the rights of a holder of Common Stock, including the rights to
receive dividends and to vote during the Restricted Period. Dividends with
respect to Restricted Stock that are payable in Common Stock shall be paid in
the form of Restricted Stock.
<PAGE>
(iv) OTHER STOCK-BASED AWARDS. Other Stock-Based Awards are Awards,
other than Stock Options, SARs or Restricted Stock, that are denominated in,
valued in whole or in part by reference to, or otherwise based on or related to,
Common Stock. The purchase, exercise, exchange or conversion of Other
Stock-Based Awards granted under this subsection (iv) shall be on such terms and
conditions and by such methods as shall be specified by the Committee. Where the
value of an Other Stock-Based Award is based on the Spread Value, the grant
price for such an Award will not be less than 100% of the Fair Market Value on
the date of grant.
(v) INCENTIVE AWARDS. Incentive Awards are performance-based Awards
that are expressed in U.S. currency. Incentive Awards shall either be Annual
Incentive Awards or Long-Term Incentive Awards.
(b) Maximum Awards. The total number of shares of Restricted Stock and
other shares of Common Stock subject to or underlying Stock Options, SARs and
Other Stock-Based Awards awarded to any participant during the term of this Plan
shall not exceed 10% of the shares of Common Stock reserved for distribution
pursuant to the Plan. An Annual Incentive Award paid to a participant with
respect to any Performance Cycle shall not exceed $[00,000]. A Long-Term
Incentive Award paid to a participant with respect to any Performance Cycle
shall not exceed $[00,000] times the number of years in the Performance Cycle.
An amount not in excess of 30% of the shares of Common Stock reserved for
distribution pursuant to the Plan may be issued pursuant to Restricted Stock
Awards and Other Stock-Based Awards, except that Other Stock-Based Awards with
values based on Spread Values shall not be included in this limitation.
(c) Incentive Stock Option Restrictions. To the extent required for
"incentive stock option" treatment under Section 422 of the Code, the aggregate
Fair Market Value (determined as of the time of grant) of the shares of Stock
with respect to which Incentive Stock Options granted under the Plan and any
other plan of the Company become exercisable for the first time by an optionee
during any calendar year shall not exceed $100,000. If an Incentive Stock Option
is granted to a Ten Percent Stockholder, the exercise price per share shall not
be less than 110% of the Fair Market Value of a share on the date of grant.
Incentive Stock Options may be granted only to employees of the Company or any
subsidiary that is a "subsidiary corporation" within the meaning of Section
424(f) of the Code. To the extent that any Stock Option exceeds these
restrictions, it shall constitute a Non-Qualified Stock Option.
(d) Performance-Based Awards. Any Awards granted pursuant to the Plan may
be in the form of performance-based Awards through the application of
Performance Goals and Performance Cycles.
<PAGE>
SECTION. 6 -- CHANGE IN CONTROL PROVISIONS.
(a) Impact of Event. Notwithstanding any other provision of the Plan to the
contrary, in the event of a Change in Control:
(i) All Stock Options and Stock Appreciation Rights outstanding as of
the date such Change in Control occurs shall become fully vested and
exercisable.
(ii) The restrictions and other conditions applicable to any
Restricted Stock or Other Stock-Based Awards, including vesting requirements,
shall lapse, and such Awards shall become free of all restrictions and fully
vested.
(iii) The value of all outstanding Stock Options, Stock Appreciation
Rights, Restricted Stock and Other Stock-Based Awards shall, unless otherwise
determined by the Committee at or after grant, be cashed out on the basis of the
Change in "Control Price," as defined in Section 6(c), as of the date such
Change in Control occurs or such other date as the Committee may determine prior
to the Change in Control.
(iv) Any Incentive Awards relating to Performance Cycles prior to the
Performance Cycle in which the Change in Control occurs that have been earned
but not paid shall become immediately payable in cash. In addition, each
participant who has been awarded an Incentive Award shall be deemed to have
earned a pro rata Incentive Award equal to the product of (y) such participant's
maximum award opportunity for such Performance Cycle, and (z) a fraction, the
numerator of which is the number of full or partial months that have elapsed
since the beginning of such Performance Cycle to the date on which the Change in
Control occurs, and the denominator of which is the total number of months in
such Performance Cycle.
(b) Definition of Change in Control. A "Change in Control" means the
happening of any of the following events:
(i) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person")) of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (A) the then outstanding shares of Common
Stock (the "Outstanding Company Common Stock") or (B) the combined voting power
of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that the following acquisitions shall not
constitute a Change in Control: (1) any acquisition directly from the Company,
(2) any acquisition by the Company, (3) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company or (4) any acquisition by any corporation
pursuant to a transaction described in clauses (A), (B) and (C) of paragraph
(iii) of this Section 6(b); or
<PAGE>
(ii) Individuals who, as of the effective date of the Plan, constitute
the Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to such effective date whose election, or nomination for
election by the stockholders of the Company, was approved by a vote of at least
a majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; or
(iii) Approval by the stockholders of the Company of a reorganization,
merger, share exchange or consolidation (a "Business Combination"), unless, in
each case following such Business Combination, (A) all or substantially all of
the individuals and entities who were the beneficial owners, respectively, of
the Outstanding Company Common Stock and Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 80% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination (including,
without limitation, a corporation that as a result of such transaction owns the
Company through one or more subsidiaries) in substantially the same proportions
as their ownership, immediately prior to such Business Combination of the
Outstanding Company Common Stock and Outstanding Company Voting Securities, as
the case may be, (B) no Person (excluding any employee benefit plan (or related
trust) of the Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined voting power of the
then outstanding voting securities of such corporation except to the extent that
such Person owned 20% or more of the Outstanding Company Common Stock or
Outstanding Company Voting Securities prior to the Business Combination and (C)
at least a majority of the members of the board of directors of the corporation
resulting from such Business Combination were members of the Incumbent Board at
the time of the execution of the initial agreement, or of the action of the
Board, providing for such Business Combination; or
(iv) Approval by the stockholders of the Company of (A) a complete
liquidation or dissolution of the Company or (B) the sale or other disposition
of all or substantially all of the assets of the Company, other than to a
corporation with respect to which, following such sale or other disposition, (1)
more than
<PAGE>
80% of, respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately prior to such
sale or other disposition, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (2) less than 20% of,
respectively, the then outstanding shares of common stock of such corporation
and the combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by any Person (excluding any
employee benefit plan (or related trust) of the Company or such corporation),
except to the extent that such Person owned 20% or more of the Outstanding
Company Common Stock or Outstanding Company Voting Securities prior to the sale
or disposition and (3) at least a majority of the members of the board of
directors of such corporation were members of the Incumbent Board at the time of
the execution of the initial agreement, or of the action of the Board, providing
for such sale or other disposition of assets of the Company or were elected,
appointed or nominated by the Board. (c) Change in Control Price. "Change in
Control Price" means the highest price per share paid in any transaction
reported on the national securities exchange or quotation system on which the
Common Stock is admitted for trading or quotation, as the case may be, or paid
or offered in any bona fide transaction related to a potential or actual change
in control of the Company at any time during the preceding 60-day period as
determined by the Committee, except that, in the case of Incentive Stock
Options, such price shall be based only on transactions reported for the date on
which such Incentive Stock Options are cashed out.
(d) Notwithstanding any other provision of this Plan, upon a Change in
Control, unless the Committee shall determine otherwise at grant, an Award
recipient shall have the right, by giving notice to the Company within the
Exercise Period, to elect to surrender all or part of the Stock Option, SAR or
Other Stock-Based Award to the Company and to receive in cash, within 30 days of
such notice, an amount equal to the amount by which the Change in Control Price
on the date of such notice shall exceed the exercise or grant price under such
Award, multiplied by the number of shares of Stock as to which the right granted
under this Section 6 shall have been exercised.
(e) Notwithstanding the foregoing, if any right granted pursuant to this
Section 6 would make a Change in Control transaction ineligible for pooling of
interests accounting under generally accepted accounting principles that but for
this Section 6 would otherwise be eligible for such accounting treatment, the
Committee shall have the ability to substitute the cash payable pursuant to this
Section 6 with Common Stock with a Fair Market Value equal to the cash that
would otherwise be payable hereunder.
<PAGE>
SECTION 7 -- PLAN AMENDMENT AND TERMINATION.
The Board may amend or terminate the Plan at any time, provided that no
such amendment shall be made without stockholder approval if such approval is
required under applicable law, or if such amendment would: (i) decrease the
grant or exercise price of any Stock Option, SAR or Other Stock-Based Award to
less than the Fair Market Value on the date of grant; or (ii) increase the total
number of shares of Common Stock that may be distributed under the Plan.
Except as set forth in any Award agreement, no amendment or termination of
the Plan may materially and adversely affect any outstanding Award under the
Plan without the Award recipient's consent.
SECTION 8 -- PAYMENTS AND PAYMENT DEFERRALS.
Payment of Awards may be in the form of cash, Stock, other Awards or
combinations thereof as the Committee shall determine, and with such
restrictions as it may impose. The Committee, either at the time of grant or by
subsequent amendment, may require or permit deferral of the payment of Awards
under such rules and procedures as it may establish. It also may provide that
deferred settlements include the payment or crediting of interest or other
earnings on the deferred amounts, or the payment or crediting of dividend
equivalents where the deferred amounts are denominated in Common Stock
equivalents.
SECTION 9 -- DIVIDENDS AND DIVIDEND EQUIVALENTS.
The Committee may provide that any Awards under the Plan earn dividends or
dividend equivalents. Such dividends or dividend equivalents may be paid
currently or may be credited to a participant's Plan account. Any crediting of
dividends or dividend equivalents may be subject to such restrictions and
conditions as the Committee may establish, including reinvestment in additional
shares of Common Stock or Common Stock equivalents.
SECTION 10 -- TRANSFERABILITY.
Unless otherwise required by law, Awards shall not be transferable or
assignable other than by will or the laws of descent and distribution.
SECTION 11 -- AWARD AGREEMENTS.
Each Award under the Plan shall be evidenced by a written agreement (which
need not be signed by the recipient unless otherwise specified by the Committee)
that sets forth the terms, conditions and limitations for each Award. Such terms
may include, but are not limited to, the
<PAGE>
term of the Award, vesting and forfeiture provisions, and the provisions
applicable in the event the recipient's employment terminates. The Committee may
amend an Award agreement, provided that no such amendment may materially and
adversely affect an Award without the Award recipient's consent. Award
agreements need not be identical.
SECTION 12 -- UNFUNDED STATUS OF PLAN.
It is presently intended that the Plan constitute an "unfunded" plan for
incentive and deferred compensation. The Committee may authorize the creation of
trusts or other arrangements to meet the obligations created under the Plan to
deliver Common Stock or make payments; provided, however, that, unless the
Committee otherwise determines, the existence of such trusts or other
arrangements is consistent with the "unfunded" status of the Plan.
SECTION 13 -- GENERAL PROVISIONS.
(a) The Committee may require each person acquiring shares of Common Stock
pursuant to an Award to represent to and agree with the Company in writing that
such person is acquiring the shares without a view to the distribution thereof.
The certificates for such shares may include any legend that the Committee deems
appropriate to reflect any restrictions on transfer.
All certificates for shares of Common Stock or other securities delivered
under the Plan shall be subject to such stock transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations
and other requirements of the Commission, any stock exchange or quotation system
upon which the Common Stock is then listed or quoted, as the case may be, and
any applicable Federal, state or foreign securities law, and the Committee may
cause a legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
(b) Nothing contained in this Plan shall prevent the Company, a subsidiary
or an affiliate from adopting other or additional compensation arrangements for
its employees.
(c) The adoption of the Plan shall not confer upon any employee any right
to continued employment nor shall it interfere in any way with the right of the
Company, a subsidiary or an affiliate to terminate the employment of any
employee at any time.
(d) No employee, participant or other person shall have any right to be
granted an Award. The grant of an Award to a director shall not confer any right
on such director to continue as a director of the Company, and the grant of an
Award to a Non-Employee Adviser shall not confer any right on such Non-Employee
Advisor or a business entity of which such Non-Employee Advisor is a principal
to continue as a Non-Employee Advisor.
<PAGE>
(e) No later than the date as of which an amount first becomes includible
in the gross income of the participant for Federal income tax purposes with
respect to any Award under the Plan, the participant shall pay to the Company,
or make arrangements satisfactory to the Company regarding the payment of, any
Federal, state, local or foreign taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined by the
Committee, withholding obligations arising from an Award may be settled with
Common Stock, including Common Stock that is part of, or is received upon
exercise or conversion of, the Award that gives rise to the withholding
requirement. The obligations of the Company under the Plan shall be conditional
on such payment or arrangements, and the Company, its subsidiaries and its
affiliates shall, to the extent permitted by law, have the right to deduct any
such taxes from any payment otherwise due to the participant. The Committee may
establish such procedures as it deems appropriate, including the making of
irrevocable elections, for the settling of withholding obligations with Common
Stock.
(f) On receipt of written notice of exercise, the Committee may elect to
cash out all or a portion of the shares of Common Stock for which a Stock Option
is being exercised by paying the optionee an amount, in cash or Common Stock,
equal to the Spread Value of such shares on the date such notice of exercise is
received.
(g) The Plan and all Awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Maryland.
(h) If any provision of the Plan is held invalid or unenforceable, the
invalidity or unenforceability shall not affect the remaining parts of the Plan,
and the Plan shall be enforced and construed as if such provision had not been
included.
(i) If approved by stockholders, the Plan shall be effective on August 15,
1997. Except as otherwise provided by the Board, no Awards shall be granted
after August 14, 2002, but any Awards granted theretofore may extend beyond that
date.
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------- THREE MONTHS THREE MONTHS
1994 1995 1996 ENDED ENDED
--------------- --------------- --------------- MARCH 31, 1996 MARCH 31, 1997
--------------- ---------------
<S> <C> <C> <C> <C> <C>
Net income (loss) .................. $ (978,837) $ (1,206,014) $ (2,829,831) $ (497,088) $ 136,752
Weighted average common and com-
mon equivalent shares outstanding:
Weighted average common shares
outstanding ..................... 4,596,226 5,317,109 5,403,350 5,403,350 5,403,350
Dilutive effect of options ...... -- -- -- -- 37,220
Effect of cheap stock ............ 291,950 291,950 291,950 291,950 254,730
------------ -------------- -------------- ------------ ----------
Total .............................. 4,888,176 5,609,059 5,695,300 5,695,300 5,695,300
------------ -------------- -------------- ------------ ----------
Net income (loss) per share ...... $ (0.20) $ (0.22) $ (0.50) $ (0.09) $ 0.02
============ ============== ============== ============ ==========
</TABLE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Washington, D.C.
August 1, 1997
CONSENT OF PROSPECTIVE DIRECTOR
STARTEC GLOBAL COMMUNICATIONS CORPORATION
The undersigned hereby consents to being named as a prospective
director in the Registration Statement on Form S-1 filed by Startec Global
Communications Corporation.
August 1, 1997
---------------------------------
Nazir G. Dossani
CONSENT OF PROSPECTIVE DIRECTOR
STARTEC GLOBAL COMMUNICATIONS CORPORATION
The undersigned hereby consents to being named as a prospective
director in the Registration Statement on Form S-1 filed by Startec Global
Communications Corporation.
August 1, 1997
---------------------------------
Richard K. Prins
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 239
<SECURITIES> 0
<RECEIVABLES> 7,604
<ALLOWANCES> (1,307)
<INVENTORY> 0
<CURRENT-ASSETS> 407
<PP&E> 2,277
<DEPRECIATION> (885)
<TOTAL-ASSETS> 8,335
<CURRENT-LIABILITIES> 13,703
<BONDS> 0
0
0
<COMMON> 76
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,335
<SALES> 12,372
<TOTAL-REVENUES> 12,372
<CGS> 10,765
<TOTAL-COSTS> 10,765
<OTHER-EXPENSES> 1,351
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 116
<INCOME-PRETAX> 140
<INCOME-TAX> 3
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 137
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>