AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
STARTEC GLOBAL COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
----------------
<TABLE>
<S> <C> <C>
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
BETHESDA, MD 20817
(301) 365-8959
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
RAM MUKUNDA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
10411 MOTOR CITY DRIVE
BETHESDA, MD 20817
(301) 365-8959
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
Robert B. Murphy, Esq.
Thomas L. Hanley, Esq.
Schnader Harrison Segal & Lewis LLP
1225 Eye Street, NW, Suite 600
Washington, DC 20005
(202) 216-4200
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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 being offered
in connection with the formation of a holding company and there is compliance
with General Instruction G, 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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================
PROPOSED
MAXIMUM
OFFERING PROPOSED AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER NOTE(1) OFFERING PRICE FEE(2)
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
12% Series A Senior Notes due 2008 160,000 $1,000 $160,000,000 $46,586
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f) under the Securities Act of 1933, as amended.
(2) Calculated pursuant to Rule 457(f) based on a book value, as of June 30,
1998, of approximately $157,917,000 of the outstanding 12% Senior Notes
due 2008 of Startec Global Communications Corporation, to be cancelled in
the exchange transaction hereunder.
----------------
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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 14, 1998
PROSPECTUS
[GRAPHIC OMITTED]
OFFER TO EXCHANGE 12% SERIES A SENIOR NOTES DUE 2008
FOR ANY AND ALL 12% SENIOR NOTES DUE 2008
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON , 1998, UNLESS EXTENDED
---------------
Startec Global Communications Corporation ("Startec Global" or the
"Company") is offering, upon the terms and conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to exchange up to $160,000,000 aggregate
principal amount of its 12% Series A Senior Notes due 2008 (the "Exchange
Notes") for up to $160,000,000 aggregate principal amount of its 12% Senior
Notes due 2008 (the "Old Notes", and together with the Exchange Notes, the
"Notes"). The Old Notes are one component of Units (the "Units") issued by the
Company on May 21, 1998 (the "Old Notes Offering"), each such Unit consisting
of (i) $1,000 principal amount of its Old Notes and (ii) a warrant (the
"Warrant") to purchase 1.25141 shares (the "Warrant Shares") at $24.20 per
share of its Common Stock, par value $0.01 per share (the "Common Stock"). The
Notes and the Warrants will not be separately transferable until the Separation
Date (as defined) and the Warrants are not exercisable until November 15, 1998.
As of the date of this Prospectus, there was $160,000,000 aggregate principal
amount of Old Notes outstanding. The terms of the Exchange Notes are identical
in all material respects to those of the Old Notes, except that (i) the
Exchange Notes have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), and, therefore, will not bear legends
restricting their transfer and (ii) the holders of the Exchange Notes will not
be entitled to certain rights under the Registration Rights Agreement (as
defined herein), including the terms providing for an increase in the interest
rate on the Old Notes under certain circumstances relating to the timing of the
Exchange Offer, all of which rights will terminate when the Exchange Offer is
consummated. See "The Exchange Offer--Purposes and Effects of the Exchange
Offer."
Based on an interpretation by the Securities and Exchange Commission (the
"Commission") set forth in no-action letters issued to third parties, the
Company believes that the Exchange Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by a holder thereof (other than (i) a broker-dealer who purchases
such Exchange Notes directly from the Company to resell pursuant to Rule 144A
under the Securities Act or any other available exemption under the Securities
Act or (ii) a person that is an affiliate (as defined in Rule 405 under the
Securities Act) of the Company), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the holder
is acquiring the Exchange Notes in the ordinary course of its business and is
not participating, and has no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. Eligible holders
wishing to accept the Exchange Offer must represent to the Company that such
conditions have been met. Each broker-dealer that receives the Exchange Notes
for its own account in exchange for the Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Old Notes where such Old Notes were
acquired by such broker-dealer as a result of market-making activity or other
trading activities. The Company has agreed that, for a period of 180 days after
the Expiration Date (as defined herein), it will make this Prospectus available
to any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
Interest on the Exchange Notes will be payable semi-annually in arrears on
May 15 and November 15 of each year, commencing November 15, 1998. Holders of
the Exchange Notes will receive interest from the date of initial issuance of
the Exchange Notes, plus an amount equal to the accrued interest on the Old
Notes from the later of (i) the most recent date to which interest has been
paid thereon or (ii) the date of issuance of the Old Notes, to the date of
exchange thereof. The Notes will be redeemable at the option of the Company, in
whole or in part, at any time on or after May 15, 2003, at the redemption
prices set forth herein, plus accrued and unpaid interest and Liquidated
Damages (as defined), if any, to the date of redemption. In addition, at any
time prior to May 15, 2001, the Company may redeem from time to time up to
35.0% of the originally issued aggregate principal amount of the Notes at the
redemption price set forth herein, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of redemption with the Net Cash
Proceeds (as defined) of one or more Public Equity Offerings (as defined);
provided, however, that at least 65.0% of the originally issued aggregate
principal amount of the Notes remains outstanding after any such redemption. In
the event of a Change of Control (as defined), each holder of the Notes will
have the right to require the Company to purchase all or any part of such
holder's Notes at a purchase price in cash equal to 101.0% of the aggregate
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of purchase.
The Exchange Notes will be unsecured obligations of the Company, will rank
senior in right of payment to any existing and future obligations of the
Company expressly subordinated in right of payment to the Exchange Notes and
will rank pari passu in right of payment with all other existing and future
unsecured and unsubordinated obligations of the Company. As of June 30, 1998,
after giving pro forma effect to the Reorganization (as defined), the Company
and its consolidated subsidiaries would have had approximately $158.6 million
of Indebtedness (as defined). Following the Reorganization, the Company will be
a holding company that will conduct its business through its subsidiaries, and
therefore all then existing and future Indebtedness and other liabilities and
commitments of the Company's subsidiaries, including trade payables, will be
effectively senior to the Exchange Notes. As of June 30, 1998, after giving pro
forma effect to the Reorganization, the Company's consolidated subsidiaries had
aggregate liabilities of approximately $25.1 million, including approximately
$647,000 of Indebtedness. The Company's subsidiaries will not be guarantors of
the Exchange Notes. The Company used approximately $52.4 million of the
proceeds of the Old Notes Offering to purchase a portfolio of Pledged
Securities (as defined in the Indenture) consisting of U.S. Government
Obligations (as defined in the Indenture), which are pledged as security and
restricted for the first six scheduled interest payments on the Notes.
The Exchange Offer is not conditioned on any minimum aggregate principal
amount of Old Notes being tendered for exchange. The Company will accept for
exchange any and all validly tendered Old Notes not withdrawn prior to 5:00
p.m., New York City time, on , 1998, unless extended by the Company (the
"Expiration Date"). The Company may, in its sole discretion, extend the
Exchange Offer indefinitely, subject to the Company's obligation to pay
Liquidated Damages if the Exchange Offer is not consummated by , 1998.
Tenders of Old Notes may be withdrawn at any time prior to the Expiration Date.
The Exchange Offer is subject to certain customary conditions. See "The
Exchange Offer--Conditions to Exchange Offer." The Company will not receive any
proceeds from the Exchange Offer.
The Exchange Notes are new securities for which there currently is no
market. The Company does not intend to apply for listing of the Exchange Notes
on any securities exchange or for quotation through the Nasdaq National Market
("Nasdaq"). Although the Initial Purchasers (as defined) have informed the
Company that they currently intend to make a market in the Exchange Notes, they
are not obligated to do so and any such market-making may be discontinued at
any time without notice. In addition, such market-making activity may be
limited during the pendency of the Exchange Offer or the effectiveness of a
shelf registration statement in lieu thereof. Accordingly, there can be no
assurance as to the development or liquidity of any market for the Exchange
Notes.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH
THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
---------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH THE EXCHANGE OFFER AND AN INVESTMENT IN THE EXCHANGE NOTES, SEE
"RISK FACTORS" BEGINNING ON PAGE 15.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE 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.
, 1998
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>
EXCHANGE NOTES MAY NOT BE OFFERED OR SOLD IN OR INTO THE UNITED KINGDOM
EXCEPT IN CIRCUMSTANCES THAT DO NOT CONSTITUTE AN OFFER TO THE PUBLIC WITHIN
THE MEANING OF THE PUBLIC OFFERS OF SECURITIES REGULATION 1996. ALL APPLICABLE
PROVISIONS OF THE FINANCIAL SERVICES ACT 1986 MUST BE COMPLIED WITH IN RESPECT
OF ANYTHING DONE IN RELATION TO OLD NOTES IN, FROM OR OTHERWISE INVOLVING THE
UNITED KINGDOM.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical facts
are "forward-looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995), which can be identified by the use
of forward-looking terminology such as "believes," "expects," "intends,"
"foresees," "plans," "may," "will," "should," or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by
discussions of strategy that involve risks and uncertainties. In addition, from
time to time, the Company or its representatives have made or may make forward-
looking statements, orally or in writing. Furthermore, such forward-looking
statements may be included in, but are not limited to, press releases or oral
statements made by or with the approval of an authorized executive officer of
the Company.
Management wishes to caution the reader that the forward-looking
statements contained in this Prospectus involve predictions. No assurance can
be given that anticipated results will be achieved; actual events or results
may differ materially as a result of risks facing the Company. Such risks
include, but are not limited to, those set forth in "Risk Factors" beginning on
page 15 of this Prospectus.
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PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information, including the risk factors
and the financial statements (including the notes thereto) appearing elsewhere
in this Prospectus. References in this Prospectus to "Startec Global" and the
"Company" refer to Startec Global Communications Corporation and its
subsidiaries, and give effect to the Reorganization, except where the context
otherwise requires. See "-- Holding Company Reorganization." References herein
to numbers of residential customers and carrier customers as of any particular
date are, in each instance, calculated on the basis of the 30-day measuring
period ended on the reference date and the 90-day measuring period ended on the
reference date, respectively. For definitions of certain technical and other
terms used in this Prospectus, see "Glossary of Terms."
THE COMPANY
OVERVIEW
Startec Global is a rapidly growing, facilities-based international long
distance telecommunications service provider. The Company markets its services
to select ethnic residential communities throughout the United States and to
leading international long distance carriers. The Company provides its services
through a flexible, high-quality network of owned and leased transmission
facilities, operating and termination agreements and resale arrangements. The
Company currently owns and operates an international gateway switch in New York
City and has ordered another international gateway switch expected to be
deployed in Los Angeles in 1998. The Company also owns an international gateway
switch in Washington, D.C. that is expected to be redeployed as a domestic
switch in Chicago during the fourth quarter of 1998. Including the Los Angeles
switch, the Company expects to install up to 20 switches worldwide through 2000.
Additionally, the Company has interests in several undersea cable facilities and
plans to acquire additional interests in cable facilities linking North America
with Europe, the Pacific Rim, Asia and Latin America, as well as linking the
East Coast and West Coast of the United States. The Company also plans to invest
in or acquire two satellite earth stations during 1998 and 1999. As the Company
executes its expansion strategy and encounters new marketing opportunities,
management may elect to relocate or redeploy certain switches,
points-of-presence and other network equipment to alternate locations from what
is outlined above. For the year ended December 31, 1997 and the six months ended
June 30, 1998, the Company had revenues of $85.9 million and $63.4 million,
respectively.
Startec Global was founded in 1989 to capitalize on the significant
opportunity to provide international long distance services to select ethnic
communities in major U.S. metropolitan markets that generate substantial
long-distance traffic to their countries of origin. Until 1995, the Company
concentrated its marketing efforts in the New York-Washington, D.C. corridor and
focused on the delivery of international calling services to India. At the end
of 1995, the Company expanded its marketing efforts to include the West Coast of
the United States, and began targeting other ethnic groups in the United States,
such as the Middle Eastern, Filipino and Russian communities. International
traffic generated by the Company currently terminates primarily in Asia, the
Pacific Rim, the Middle East, Africa, Eastern and Western Europe and North
America. The number of the Company's residential customers has grown from 10,675
customers as of December 31, 1995 to 93,500 customers as of June 30, 1998.
The Company uses sophisticated database marketing techniques and a variety
of media to reach its targeted residential customers, including focused print
advertising in ethnic newspapers, advertising on ethnic radio and television
stations, direct mail, sponsorship of ethnic events and customer referrals. The
Company's strategy is to provide overall value to its customers and combine
competitive pricing with high levels of service, rather than to compete on the
basis of price alone. The Company provides responsive customer service 24 hours
a day, seven days a week, in each of the
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languages spoken by the Company's targeted residential customers. The Company
believes that its focused marketing programs and its dedication to customer
service enhance its ability to attract and retain customers in a low-cost,
efficient manner. Residential customers access the Company's network by dialing
a carrier identification code prior to dialing the number they are calling.
This service, known as "dial-around" or "casual calling," enables customers to
use the Company's services without changing their existing long distance
carriers. For the year ended December 31, 1997 and the six months ended June
30, 1998, residential customers accounted for approximately 33% and 38%,
respectively, of the Company's net revenues. As part of its overall strategy,
the Company seeks to increase the proportion of its net revenues derived from
residential customers.
In order to achieve economies of scale in its network operations and to
balance its residential international traffic, in late 1995, the Company began
marketing its excess network capacity to international carriers seeking
competitive rates and high-quality transmission capacity. Since initiating its
international wholesale services, the Company has expanded its number of
carrier customers to 55 at June 30, 1998. For the year ended December 31, 1997
and the six months ended June 30, 1998, carrier customers accounted for
approximately 67% and 62%, respectively, of the Company's net revenues.
BUSINESS STRATEGY
The Company's objectives are to (i) become the leading provider of
international long distance services to select ethnic residential communities
in the United States, Canada and Europe with significant international long
distance usage and (ii) leverage its residential long distance business to
become a leading provider of wholesale carrier services on corresponding
international routes. In order to achieve its objectives, the Company's
strategy relies on the following elements:
o Expand the addressable market. The Company currently serves residential
customers in 14 major U.S. metropolitan markets and expects to enter up to
six new metropolitan markets in 1998. The Company has also identified over
40 major markets outside the United States, primarily in Canada, Europe
and Southeast Asia, which the Company believes are attractive for entry
based on the demographic characteristics, traffic patterns, regulatory
environment and availability of appropriate advertising channels. The
Company anticipates entering up to 20 of these markets by the end of 2000.
In addition, the Company seeks to increase its penetration of its existing
and prospective markets by (i) targeting additional ethnic communities and
(ii) marketing additional routes to existing customers who principally use
the Company's services for one route.
o Achieve "first-to-market" entry of select ethnic residential markets. The
Company believes that it enjoys significant competitive advantages by
establishing a customer base and brand name in select ethnic residential
communities ahead of its competitors. The Company intends to capitalize on
its proven marketing strategy to further penetrate select ethnic
residential communities in the United States, Canada and Europe ahead of
its competitors. The Company selects its target markets based on favorable
demographics with respect to long distance telephone usage, including
geographic immigration patterns, population growth and income levels.
Targeting select ethnic communities also enables the Company to aggregate
traffic along certain routes (which reduces its costs) and to focus on
rapidly expanding and deregulating telecommunications markets. The
Company's target residential customer base is comprised of emigrants from
emerging markets in Asia, Eastern Europe, the Middle East, the Pacific
Rim, Latin America and Africa.
o Expand international network facilities. The Company plans to expand its
international network facilities during 1998 and through 2000 by deploying
20 additional switches, securing additional ownership interests in
undersea cable facilities and investing in domestic cable facilties,
investing in or acquiring two satellite earth stations and entering into
operating agreements. By building network facilities and expanding
operating agreements that enable it
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to carry an increasing percentage of its traffic on its own network
("on-net"), the Company believes that it will be able to reduce its
transmission costs and reliance on other carriers and ensure greater
control over quality of service. For the six months ended June 30, 1998,
approximately 65% of the Company's residential traffic originated on-net.
During the next three years, the Company expects to increase significantly
the volume of its traffic that is originated, carried and terminated
on-net.
The Company intends to implement a network hubbing strategy, linking its
existing and prospective customer base in the United States, Canada and
Europe to call destinations in foreign countries through a network of
foreign-based switches and other telecommunications equipment. The Company
also plans to continue to enhance its termination options through
additional operating agreements, transit arrangements and, if appropriate
opportunities arise, strategic acquisitions and alliances. The Company has
also taken steps to improve the quality of its network by upgrading its
network monitoring and customer service centers, and plans to install
enhanced software that will enable it to better monitor call traffic
routing, capacity and quality.
o Maximize network utilization and efficiency through wholesale carrier
business. The Company intends to continue to market its international long
distance services to existing and new carrier customers. Because the
Company's residential minutes of use are generated primarily during
non-business hours or on weekends, the Company has substantial capacity to
offer to international carriers. The significant carrier traffic volume
that the Company generates allows it to capture additional revenues, to
increase economies of scale and to improve network efficiency.
o Build customer loyalty. The Company seeks to build long-term customer
loyalty through tailored in-language marketing efforts focusing on each
target ethnic group's specific needs and cultural backgrounds, responsive
customer service offering in-language services and involvement in its
customers' communities through sponsorship of local events and other
activities. The Company markets its residential services under the
"STARTEC" name to enhance its name recognition and build brand loyalty in
its target communities. The Company maintains a detailed information
database of its customers, which it uses to monitor usage, track customer
satisfaction and analyze a variety of customer behaviors, including
retention and frequency of usage.
o Pursue strategic acquisitions and alliances. In order to accelerate its
business plan and take advantage of the rapidly changing
telecommunications environment, the Company intends to carefully evaluate
and pursue strategic acquisitions, alliances and investments. The Company,
however, has no present commitments, agreements or understandings with
respect to any particular acquisition, alliance or investment.
The Company believes that, with the remaining net proceeds of the Old
Notes Offering, it will have sufficient capital resources to fund its expansion
plans through the end of the first quarter of 2000. The Company's ability to
complete its strategic plan thereafter, however, will require significant
additional capital.
MARKET OPPORTUNITY
According to industry sources, the international telecommunications
industry generated approximately $67 billion in revenues and 81 billion minutes
of use during 1997. Industry sources indicate that the international
telecommunications market is one of the fastest growing and most profitable
segments of the global telecommunications industry. It is estimated that by the
end of 2001 this market will have expanded to $98 billion in revenues and 153
billion minutes of use, representing compound annual growth rates from 1997 of
10% and 17%, respectively. The highly competitive and rapidly changing
international telecommunications market has created a significant opportunity
for carriers that can offer high-quality, low-cost international long distance
service.
3
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Based on industry estimates, in 1997 approximately 70% of international
long distance traffic was generated between North America and Western Europe.
The Company's target market consists of a significant portion of the remaining
30% of the international long distance traffic, or approximately $20 billion in
revenues and 24 billion minutes of use. The Company believes that international
long distance usage in its target markets will grow at rates in excess of the
international telecommunications market as a whole, primarily as a result of
(i) continuing economic development in these markets with a corresponding
investment in telephone and telecommunications infrastructure and (ii)
continuing deregulation of these markets.
RECENT DEVELOPMENTS
HOLDING COMPANY REORGANIZATION
In March 1998, the Company's Board of Directors approved a plan pursuant
to which the Company's assets, liabilities and operations will be reorganized
into a Delaware holding company structure (the "Reorganization"). The
Reorganization was approved by the Company's stockholders at their annual
meeting on July 31, 1998. Accordingly, the Company has incorporated a wholly-
owned subsidiary corporation in Delaware ("Subsidiary Holdings") that is the
owner of all of the outstanding voting capital stock of certain other
newly-formed lower-tier subsidiaries, each of which will be responsible for
distinct aspects of the Company's pre-Reorganization business, including
separate subsidiaries responsible for (i) U.S. operations, (ii) finance and
investments, and (iii) ownership of licenses. When and where appropriate, the
Company anticipates forming additional lower-tier subsidiaries under the laws
of foreign countries in order to optimize tax benefits and other advantages
associated with such jurisdictions. Currently, the United Kingdom and Canada
are the only foreign countries in which the Company has established an
additional lower-tier subsidiary.
The Reorganization will consist of (i) the transfer of substantially all
of the Company's assets to the appropriate lower-tiered subsidiaries and (ii)
the merger (the "Merger") of the Company with and into Subsidiary Holdings.
Certain transfers are subject to federal and state regulatory approvals. On
July 31, 1998, the Company received stockholder approval for the Merger and is
awaiting such regulatory approvals. The Company anticipates completing the
Reorganization in the fourth quarter of 1998, following completion of the
Exchange Offer. Pursuant to the Merger, the present holders of shares of Common
Stock of the Company will receive shares of common stock in Subsidiary Holdings
on a share-for-share basis. Upon completion of the transfers and the Merger, it
is expected that Subsidiary Holdings will remain as the surviving entity and as
the obligor under the Old Notes and the Exchange Notes. It is expected that
Subsidiary Holdings' only assets will be its equity interests in its
subsidiaries.
OLD NOTES OFFERING
On May 21, 1998, the Company issued $160,000,000 aggregate principal
amount of Old Notes pursuant to an Indenture (as defined), as one component of
Units issued by the Company on that date, each such Unit consisting of (i)
$1,000 principal amount of Old Notes and (ii) a Warrant to purchase 1.25141
Warrant Shares. Interest on the Old Notes is payable semiannually in arrears on
May 15 and November 15 of each year, commencing on November 15, 1998.
The Old Notes are redeemable at the option of the Company in whole or in
part at any time on or after May 15, 2003, at specified redemption prices plus
accrued and unpaid interest and Liquidated Damages (as defined in the
Indenture), if any, thereon to the date of redemption. In addition, at any time
prior to May 15, 2001, the Company may, from time to time, redeem up to 35.0%
of the originally issued aggregate principal amount of the Notes at the
specified redemption prices plus accrued interest and Liquidated Damages, if
any, to the date of redemption with the
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Net Cash Proceeds (as defined in the Indenture) of one or more Public Equity
Offerings (as defined in the Indenture); provided that at least 65.0% of the
originally issued aggregate principal amount of the Notes remains outstanding
after such redemption. In the event of a Change of Control (as defined in the
Indenture), each holder of the Old Notes has the right to require the Company
to purchase all or any of such holder's Old Notes at a purchase price in cash
equal to 101.0% of the aggregate principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, to the date of purchase.
The Company used approximately $52.4 million of the proceeds from the Old
Notes Offering to purchase a portfolio of Pledged Securities (as defined in the
Indenture) consisting of U.S. Governmental Obligations (as defined in the
Indenture), which are pledged as security and restricted for use as the first
six scheduled interest payments on the Notes.
The Old Notes are unsecured obligations of the Company, rank senior in
right of payment to any existing and future obligations of the Company
expressly subordinated in right of payment to the Old Notes and will be pari
passu in right of payment with all other existing and future unsecured and
unsubordinated obligations of the Company. The Notes require maintenance of
certain financial and nonfinancial covenants, including limitations on
additional indebtedness, restricted payments (including dividends),
transactions with affiliates, liens and asset sales.
-----------------
The Company's executive offices are located at 10411 Motor City Drive,
Bethesda, Maryland 20817, and its telephone number at that address is (301)
365-8959. The Company changed its name in 1997 from STARTEC, Inc. to Startec
Global Communications Corporation.
5
<PAGE>
THE EXCHANGE OFFER
For additional information concerning the Notes, as well as the
definitions of certain capitalized terms used below, see "Description of
Notes."
The Exchange Offer...... The Company is offering to exchange up to
$160,000,000 aggregate principal amount of Exchange
Notes for up to $160,000,000 aggregate principal
amount of Old Notes that are properly tendered and
accepted. The Company will issue Exchange Notes on or
promptly after the Expiration Date. The terms of the
Exchange Notes are substantially identical in all
respects to the terms of the Old Notes for which they
may be exchanged pursuant to the Exchange Offer,
except that (i) the Exchange Notes are freely
transferable by holders thereof (other than as
provided herein), and are not subject to any covenant
restricting transfer absent registration under the
Securities Act and (ii) the holders of the Exchange
Notes will not be entitled to certain rights under a
registration rights agreement (the "Registration
Rights Agreement") that the Company executed and
delivered to the Initial Purchasers for the benefit
of the holders of the Old Notes. The Registration
Rights Agreement provides such holders certain
exchange and registration rights, and includes terms
providing for an increase in the interest rate on the
Old Notes under certain circumstances relating to the
timing of the Exchange Offer, all of which rights
will terminate when the Exchange Offer is
consummated. See "The Exchange Offer." The Exchange
Offer is not conditioned upon any minimum aggregate
principal amount of Old Notes being tendered for
exchange.
Based on an interpretation by the Commission set
forth in no-action letters issued to third parties,
the Company believes that the Exchange Notes issued
pursuant to the Exchange Offer in exchange for Old
Notes may be offered for resale, resold and otherwise
transferred by a holder thereof (other than (i) a
broker-dealer who purchases such Exchange Notes
directly from the Company to resell pursuant to Rule
144A under the Securities Act or any other available
exemption under the Securities Act or (ii) a person
that is an affiliate (as defined in Rule 405 under
the Securities Act) of the Company), without
compliance with the registration and prospectus
delivery provisions of the Securities Act, provided
that the holder is acquiring the Exchange Notes in
the ordinary course of its business and is not
participating, and has no arrangement or
understanding with any person to participate, in the
distribution of the Exchange Notes. Each
broker-dealer that receives the Exchange Notes for
its own account in exchange for the Old Notes, where
such Old Notes were acquired by such broker-dealer as
a result of market-making activities or other trading
activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such
Exchange Notes. The Company has agreed that, for a
period of 180 days after the Expiration Date, it will
make this Prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan
of Distribution."
6
<PAGE>
Registration Rights..... On May 21, 1998 (the "Closing Date"), the Old Notes
were issued by the Company to Lehman Brothers Inc.,
Goldman, Sachs & Co. and ING Baring (U.S.)
Securities, Inc. (collectively, the "Initial
Purchasers") in transactions exempt from the
registration requirements of the Securities Act
pursuant to a purchase agreement (the "Purchase
Agreement"), dated as of May 18, 1998, by and among
the Company and the Initial Purchasers. The Initial
Purchasers subsequently sold the Old Notes (a) to
qualified institutional buyers in reliance on Rule
144A under the Securities Act and (b) outside the
U.S. to certain persons in reliance on Regulation S
under the Securities Act. Pursuant to the
Registration Rights Agreement, the Company is
obligated to (i) file a registration statement
relating to the Exchange Offer (the "Exchange Offer
Registration Statement") with the Commission with
respect to the Exchange Offer on or prior to 90 days
after the Closing Date, (ii) use its reasonable best
efforts to cause the Exchange Offer Registration
Statement to be declared effective by the Commission
within 150 days after the Closing Date, (iii) file
all necessary amendments to the Exchange Offer
Registration Statement and make other necessary
filings pursuant to state securities laws to permit
consummation of the Exchange Offer and (iv) use its
reasonable best efforts to cause the Exchange Offer
to be consummated on or prior to 30 days after the
date on which the Exchange Offer Registration
Statement is declared effective by the Commission. In
the event that applicable law or Commission policy do
not permit the Company to effect the Exchange Offer,
the Exchange Offer is not consummated by , 1998, or
certain holders of the Old Notes notify the Company
they are not permitted to participate in, or would
not receive freely tradable Exchange Notes pursuant
to, the Exchange Offer, the Company will use its
reasonable best efforts to cause to be declared
effective a registration statement (the "Shelf
Registration Statement") with respect to resale of
the Old Notes on or prior to the 150th day after such
obligation arises and to keep the Shelf Registration
Statement continuously effective until up to two
years after the date on which the Old Notes were
sold. If the Company fails to satisfy these
registration obligations, it will be required to pay
Liquidated Damages (as defined) to the holders of the
Old Notes under certain circumstances. The holders of
the Exchange Notes are not entitled to any exchange
or registration rights with respect to the Exchange
Notes, except as described herein. Holders of Old
Notes do not have any appraisal or dissenters' rights
under the Indenture in connection with the Exchange
Offer. See "The Exchange Offer -- Purposes and
Effects of the Exchange Offer."
Expiration Date......... The Exchange Offer will expire at 5:00 p.m., New York
City time, on , 1998, unless the Exchange Offer is
extended, in which case the term "Expiration Date"
means the date and time to which the Exchange Offer
is so extended.
7
<PAGE>
Conditions to the Exchange
Offer................... The Exchange Offer is subject to certain customary
conditions, one or more of which may be waived by the
Company. See "The Exchange Offer -- Conditions to
Exchange Offer." The Company reserves the right to
terminate or amend the Exchange Offer at any time
prior to the Expiration Date upon the occurrence of
any such conditions.
Procedures for Tendering
Old Notes................ Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with the Old
Notes and any other required documentation to the
exchange agent (the "Exchange Agent") at the address
set forth herein. Old Notes may be physically
delivered, but physical delivery is not required if a
confirmation of a book-entry transfer of such Old
Notes to the Exchange Agent's account at the
Depository Trust Company ("DTC" or the "Depository")
is delivered in a timely fashion. By executing the
Letter of Transmittal, each holder will represent to
the Company, among other things, that (i) the
Exchange Notes acquired pursuant to the Exchange
Offer by the holder and any beneficial owners of Old
Notes are being acquired in the ordinary course of
business of the person receiving such Exchange Notes,
(ii) neither the holder nor such beneficial owner is
engaged in, intends to engage in or has an
arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes and (iii) neither the holder nor such
beneficial owner is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company. Each
broker-dealer that receives Exchange Notes for its
own account in exchange for Old Notes, where such Old
Notes were acquired by such broker or dealer as a
result of market-making activities or other trading
activities (other than Old Notes acquired directly
from the Company), may participate in the Exchange
Offer but may be deemed an "underwriter" under the
Securities Act and, therefore, must acknowledge in
the Letter of Transmittal that it will deliver a
prospectus in connection with any resale of such
Exchange Notes. The Letter of Transmittal states
that, by so acknowledging and by delivering a
prospectus, a broker or dealer will not be deemed to
admit that it is an "underwriter" within the meaning
of the Securities Act. See "The Exchange Offer --
Procedures for Tendering" and "Plan of Distribution."
Interest on the Exchange
Notes................... The Exchange Notes will bear interest at the rate of
12% per annum, payable semiannually in arrears on May
15 and November 15 of each year, commencing on
November 15, 1998. Holders of the Exchange Notes will
receive interest from the date of initial issuance of
the Exchange Notes, plus an amount equal to the
accrued interest on the Old Notes from the later of
(i) the most recent date to which interest has been
paid thereon and (ii) the date of issuance of the Old
Notes, to the date of exchange thereof.
8
<PAGE>
Special Procedures for
Beneficial Owners...... Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered holder promptly
and instruct such registered holder to tender on such
beneficial owner's behalf. If such beneficial owner
wishes to tender on such owner's own behalf, such
owner must, prior to completing and executing the
Letter of Transmittal and delivering his Old Notes,
either make appropriate arrangements to register
ownership of the Old Notes in such owner's name or
obtain a properly completed bond power from the
registered holder. The transfer of registered
ownership may take considerable time and may not be
completed prior to the Expiration Date. See "The
Exchange Offer -- Procedures for Tendering."
Guaranteed Delivery
Procedures ............. Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes, the
Letter of Transmittal or any other documents required
by the Letter of Transmittal to the Exchange Agent
prior to the Expiration Date must tender their Old
Notes according to the guaranteed delivery procedures
set forth in "The Exchange Offer -- Guaranteed
Delivery Procedures."
Acceptance of the Old
Notes and Delivery of
the Exchange Notes ..... Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Company will
accept for exchange any and all Old Notes which are
properly tendered in the Exchange Offer prior to the
Expiration Date. The Exchange Notes issued pursuant
to the Exchange Offer will be delivered as soon as
practicable after acceptance of the Old Notes.
Withdrawal Rights......... Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date. See "The Exchange Offer --
Withdrawal of Tenders."
U.S. Federal Income Tax
Considerations .......... The exchange of the Old Notes for the Exchange Notes
pursuant to the Exchange Offer will not constitute a
material modification of the terms of the Old Notes
or the Exchange Notes and, thus, such exchange will
not constitute an exchange for U.S. federal income
tax purposes. Accordingly, such exchange will have no
U.S. federal income tax consequences to the holders
of the Old Notes or the Exchange Notes, regardless of
whether such holders participate in the Exchange
Offer. See "Certain United States Federal Income Tax
Considerations."
Use of the Proceeds...... There will be no proceeds to the Company from the
exchange of Exchange Notes for Old Notes pursuant to
the Exchange Offer.
Effect on Holders of Old
Notes................... As a result of making this Exchange Offer, and upon
accep-
9
<PAGE>
tance for exchange of all validly tendered Old Notes
pursuant to the terms of this Exchange Offer, the
Company will have fulfilled a covenant contained in
the terms of the Old Notes and the Registration
Rights Agreement and, accordingly, a holder of the
Old Notes will have no further registration or other
rights under the Registration Rights Agreement,
except under certain limited circumstances. Holders
of the Old Notes who do not tender their Old Notes in
the Exchange Offer will continue to hold such Old
Notes and will be entitled to all the rights and
subject to the limitations applicable thereto under
the Indenture. All untendered, and tendered, but
unaccepted, Old Notes will continue to be subject to
the restrictions on transfer provided for in the Old
Notes and the Indenture. To the extent that Old Notes
are tendered and accepted in the Exchange Offer, the
trading market, if any, for the Old Notes not so
tendered could be adversely affected. See "Risk
Factors -- Consequences of Failure to Exchange."
Exchange Agent........... First Union National Bank is serving as Exchange
Agent in connection with the Exchange Offer. The
address and telephone number of the Exchange Agent
are set forth in "The Exchange Offer -- Exchange
Agent."
Fees and Expenses......... All fees and expenses incident to the Company's
completion of the Exchange Offer and the fullfillment
of its obligations under the Registration Rights
Agreement will be borne by the Company.
THE EXCHANGE NOTES
The Exchange Offer applies to $160,000,000 aggregate principal amount of
Old Notes. The terms of the Exchange Notes are identical in all material
respects to the Old Notes, except that the Exchange Notes have been registered
under the Securities Act and, therefore, will not bear legends restricting
their transfer, and the holders of the Exchange Notes will not be entitled to
certain rights under the Registration Rights Agreement, including the terms
providing for an increase in the interest rate on the Old Notes under certain
circumstances relating to the timing of the Exchange Offer, all of which rights
will terminate when the Exchange Offer is consummated. The Exchange Notes will
evidence the same debt as the Old Notes and will be entitled to the benefits of
the Indenture, under which both the Old Notes were, and the Exchange Notes will
be, issued. See "Description of Notes."
Issue.................... $160,000,000 aggregate principal amount of 12% Series
A Senior Notes due 2008.
Maturity Date............ May 15, 2008.
Interest Payment Dates... May 15 and November 15, commencing on November 15,
1998.
Ranking.................. The Exchange Notes will be unsecured (except as
described herein) obligations of the Company, will
rank senior in right of payment to any existing and
future obligations of the Company expressly
subordinated in right of payment to the Exchange
Notes and pari passu in right of payment with all
other existing and future unsecured and
unsubordinated obligations of the Company, including
trade payables. As of June 30, 1998, the
10
<PAGE>
Company had approximately $158.6 million of
Indebtedness. Following the Reorganization (as
defined), since the Company will be a holding company
that will conduct its business through its
subsidiaries, all then existing and future
Indebtedness and other liabilities and commitments of
the Company's subsidiaries, including trade payables,
will be effectively senior to the Exchange Notes. The
Company's subsidiaries will not be guarantors of the
Exchange Notes, except in certain circumstances. The
Indenture limits, but does not prohibit, the
incurrence of certain additional Indebtedness by the
Company and its Restricted Subsidiaries (as defined
in the Indenture), and does not limit the amount of
Indebtedness Incurred (as defined herein) to finance
the cost of Telecommunications Assets (as defined
herein). As of June 30, 1998, after giving pro forma
effect to the Reorganization, the Company's
consolidated subsidiaries would have had aggregate
liabilities of approximately $25.1 million, including
approximately $647,000 of Indebtedness.
Security................. Pursuant to the Indenture, the Company purchased and
pledged to the Trustee, as security for the benefit
of the holders of the Notes, the Pledged Securities
in an amount sufficient upon receipt of scheduled
interest and/or principal payments of such securities
to provide for the payment in full of the first six
scheduled interest payments due on the Notes. The
Company used approximately $52.4 million of the net
proceeds of the Old Notes Offering to acquire the
Pledged Securities. Under the Pledge Agreement,
assuming that the Company makes the first six
scheduled interest payments on the Notes in a timely
manner, any remaining Pledged Securities will be
released to the Company from the Pledge Account and
the Notes will be unsecured. See "Description of
Notes -- Security."
Optional Redemption...... The Exchange Notes generally will not be redeemable
at the option of the Company prior to May 15, 2003.
Thereafter, the Exchange Notes will be redeemable, in
whole or in part, at the option of the Company, at
the redemption prices set forth herein, plus accrued
and unpaid interest and Liquidated Damages, if any,
to the date of redemption. Notwithstanding the
foregoing, prior to May 15, 2001, the Company may
redeem, from time to time, up to 35.0% of the
originally issued aggregate principal amount of
Exchange Notes at a redemption price equal to 112% of
the aggregate principal amount thereof plus accrued
and unpaid interest and Liquidated Damages, if any,
to the date of redemption with the Net Cash Proceeds
of one or more Public Equity Offerings; provided,
however, that at least 65.0% of the originally issued
aggregate principal amount of the Exchange Notes
remains outstanding immediately after such
redemption; and provided further that notice of such
redemption shall be given within 60 days of the
closing of any such Public Equity Offering. See
"Description of Notes -- Optional Redemption."
11
<PAGE>
Absence of Public Trading
Market for the Exchange
Notes ................... There is no public market for the Exchange Notes. The
Company does not intend to apply for listing of the
Exchange Notes on any national securities exchange or
for quotation of the Exchange Notes through Nasdaq,
although the Old Notes are eligible for trading in
the Private Offerings, Resales and Trading through
Automated Linkages ("PORTAL") Market. Although the
Initial Purchasers have informed the Company that
they currently intend to make a market in the
Exchange Notes, they are not obligated to do so and
any such market-making may be discontinued at any
time without notice. In addition, such market-making
activity may be limited during the pendency of the
Exchange Offer or the effectiveness of a Shelf
Registration Statement (as defined herein) in lieu
thereof. Accordingly, there can be no assurance as to
the development or liquidity of any market for the
Exchange Notes.
Change of Control...... In the event of a Change of Control, each holder of
the Exchange Notes will have the right to require the
Company to purchase all or any part of such holder's
Exchange Notes at a purchase price in cash equal to
101.0% of the aggregate principal amount thereof,
plus accrued and unpaid interest and Liquidated
Damages thereon, if any, to the date of purchase.
Because the Company will be a holding company
following completion of the Reorganization, there can
be no assurance that the Company will have sufficient
funds on hand or through its subsidiaries or
otherwise to satisfy its repurchase obligations with
respect to Exchange Notes tendered upon a Change of
Control. See "Description of Notes -- Repurchase of
Notes upon a Change of Control."
Covenants................ The Indenture contains certain covenants that, among
other things, limit the ability of the Company and
its Restricted Subsidiaries to incur additional
Indebtedness, pay dividends or make other
distributions, repurchase Capital Stock (as defined
in the Indenture) or subordinated Indebtedness or
make certain other Restricted Payments, create
certain liens or restrictions on distributions from
subsidiaries enter into certain transactions with
shareholders and affiliates, sell assets, issue or
sell Capital Stock of the Company's Restricted
Subsidiaries or enter into certain mergers and
consolidations. The Indenture does not limit the
amount of Indebtedness that may be incurred to
finance the cost of Telecommunications Assets. See
"Description of Notes -- Covenants."
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes in exchange for the Old Notes pursuant to the Exchange Offer. In
consideration for issuing the Exchange Notes as contemplated herein, the
Company will receive, in exchange, Old Notes in like principal amount. The Old
Notes surrendered in exchange for the Exchange Notes will be retired and
cancelled and cannot be reissued. Accordingly, issuance of the Exchange Notes
will not result in any change in the Indebtedness of the Company. The net
proceeds to the Company from the
12
<PAGE>
Old Notes Offering, after deducting discounts, commissions and expenses paid by
the Company, were approximately $154.4 million. The Company applied
approximately $52.4 million of such net proceeds to purchase the Pledged
Securities. The Company intends to apply approximately $102.0 million to fund
capital expenditures through the end of the first quarter of 2000 to expand and
develop the Company's network, including the purchase and installation of
switches and related network equipment (including software and hardware
upgrades for current equipment), the acquisition of fiber optic cable
facilities, and investments in and the acquisition of satellite earth stations.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH THE EXCHANGE OFFER AND AN INVESTMENT IN THE EXCHANGE NOTES, SEE
"RISK FACTORS" BEGINNING ON PAGE 15 OF THIS PROSPECTUS.
13
<PAGE>
SUMMARY FINANCIAL AND OTHER DATA
The summary financial data presented below for the fiscal years ended
December 31, 1995, 1996 and 1997 has been derived from the financial statements
of the Company, which have been audited by Arthur Andersen LLP, independent
public accountants. The financial data for the six months ended June 30, 1997
and 1998 has been derived from the Company's unaudited financial statements. In
the opinion of the Company's management, these unaudited financial statements
include all adjustments (consisting only of normal, recurring 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 in this Prospectus. See "Selected Financial and Other Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ---------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT RATIOS AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues .................................. $ 10,508 $ 32,215 $ 85,857 $ 28,836 $ 63,353
Cost of services .............................. 9,129 29,881 75,783 25,250 54,485
-------- -------- -------- -------- --------
Gross margin ................................ 1,379 2,334 10,074 3,586 8,868
General and administrative expenses ........... 2,170 3,996 6,288 2,461 6,852
Selling and marketing expenses ................ 184 514 1,238 306 1,761
Depreciation and amortization ................. 137 333 451 214 708
-------- -------- -------- -------- --------
Income (loss) from operations ............... (1,112) (2,509) 2,097 605 (453)
Interest expense .............................. 116 337 762 252 2,577
Interest income ............................... 22 16 313 5 1,302
-------- -------- -------- -------- --------
Income (loss) before income tax provi-
sion ....................................... (1,206) (2,830) 1,648 358 (1,728)
Income tax provision .......................... -- -- 29 7 30
-------- -------- -------- -------- --------
Net income (loss) ........................... $ (1,206) $ (2,830) $ 1,619 $ 351 $ (1,758)
======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(1) ..................................... $ (975) $ (2,176) $ 2,548 $ 819 $ 255
Capital expenditures .......................... 200 520 3,881 184 5,672
Ratio of earnings to fixed charges(2) ......... -- -- 3.12x 2.37x --
OTHER DATA:
Residential customers ......................... 10,675 27,797 71,583 43,700 93,500
Carrier customers ............................. 7 27 34 32 55
Number of employees (full- and part-time
at period end) .............................. 41 54 124 72 266
</TABLE>
- - -----------
(1) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation and amortization. EBITDA should not be considered as a
substitute for operating earnings, net income, cash flow or other
statement of income or cash flow data computed in accordance with
generally accepted accounting principles ("GAAP") or as a measure of a
company's results of operations or liquidity. Although EBITDA is not a
measure of performance or liquidity calculated in accordance with GAAP,
the Company nevertheless believes that investors consider it a useful
measure in assessing a company's ability to incur and service
indebtedness.
(2) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" are defined as income (loss) before income tax provision plus
fixed charges. Fixed charges consist of interest expense, amortization of
deferred debt financing costs and the estimated interest portion of rental
payments on operating leases. Earnings were inadequate to cover fixed
charges for the fiscal years ended December 31, 1995, 1996 and the six
months ended June 30, 1998 by approximately $1.2 million, $2.8 million,
and $1.7 million, respectively.
14
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the risk factors set forth
below, as well as the other information appearing in this Prospectus, before
making an investment in the Exchange Notes.
SUBSTANTIAL INDEBTEDNESS; LIQUIDITY
The Company has substantial indebtedness as a result of the Old Notes
Offering. As of June 30, 1998, the Company had total assets of approximately
$215.3 million, total Indebtedness of approximately $158.6 million (including
approximately $647,000 of Indebtedness, excluding the Old Notes) and
stockholders' equity of approximately $32.3 million. For the fiscal year ended
December 31, 1997, after giving pro forma effect to the Old Notes Offering and
the application of the net proceeds therefrom as if the Old Notes Offering had
been consummated on January 1, 1997, the Company's EBITDA would have been
approximately $2.5 million and its EBITDA would have been insufficient to cover
fixed charges by approximately $17.4 million. The Indenture limits, but does
not prohibit, the incurrence of Indebtedness by the Company and certain of its
subsidiaries and does not limit the amount of Indebtedness that may be incurred
to finance the cost of Telecommunications Assets. In the event of a bankruptcy,
liquidation, dissolution or similar proceeding with respect to the Company, the
holders of any secured indebtedness will be entitled to proceed against the
collateral that secures such secured indebtedness and such collateral will not
be available for satisfaction of any amounts owed under the Notes. The Company
anticipates that it and its subsidiaries will incur substantial additional
Indebtedness in the future. See "-- Future Capital Needs; Uncertainty of
Additional Funding; Discretion in Use of Proceeds of the Old Notes Offering,"
"Selected Financial and Other Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Description of Notes" and the
Company's financial statements and notes thereto presented elsewhere in this
Prospectus.
The level of the Company's indebtedness could have important consequences
to holders of the Notes, including the following: (i) the debt service
requirements of any additional indebtedness could make it more difficult for
the Company to make payments of interest on the Notes; (ii) the ability of the
Company to obtain any necessary financing in the future for working capital,
capital expenditures, debt service requirements or other purposes may be
limited; (iii) a substantial portion of the Company's cash flow from
operations, if any, must be dedicated to the payment of principal and interest
on its indebtedness and other obligations and will not be available for use in
its business; (iv) the Company's level of indebtedness could limit its
flexibility in planning for, or reacting to, changes in its business; (v) the
Company may become more highly leveraged than some of its competitors, which
may place it at a competitive disadvantage; and (vi) the Company's high degree
of indebtedness will make it more vulnerable in the event of a downturn in its
business.
The Company must substantially increase its net cash flow in order to meet
its debt service obligations, and there can be no assurance that the Company
will be able to meet such obligations, including interest payments on the Notes
after May 15, 2001 and principal due at maturity. If the Company is unable to
generate sufficient cash flow or otherwise obtain funds necessary to make
required payments, or if it otherwise fails to comply with the various
covenants under its indebtedness, it would be in default under the terms
thereof, which would permit the holders of such indebtedness to accelerate the
maturity of such indebtedness and could cause defaults under other indebtedness
of the Company. Such defaults could result in a default on the Notes and could
delay or preclude payments of interest or principal thereon.
HOLDING COMPANY STRUCTURE; RELIANCE ON SUBSIDIARIES FOR DISTRIBUTIONS TO REPAY
NOTES
Upon consummation of the Reorganization, Startec Global will be a holding
company, the principal assets of which will be the outstanding capital stock of
its operating subsidiaries. As a holding company, the Company's internal
sources of funds to meet its cash needs, including payment of principal and
interest on the Notes, will be dividends from its subsidiaries, intercompany
loans and other permitted payments from its direct and indirect subsidiaries,
as well as its own credit arrangements, if any. Such operating subsidiaries of
the Company will be legally distinct from the Company and will have no
obligation, contingent or otherwise, to pay amounts due with respect to the
Notes or to make funds
15
<PAGE>
available for such payments and will not guarantee the Notes (except in limited
circumstances). Additionally, the Company is in the process of organizing
operating subsidiaries in jurisdictions outside the United States. The ability
of the Company's operating subsidiaries to pay dividends, repay intercompany
loans or make other distributions to Startec Global may be restricted by, among
other things, the availability of funds, the terms of the indebtedness incurred
by such operating subsidiaries, as well as statutory and other legal
restrictions. The failure to pay any such dividends, repay intercompany loans
or make any such other distributions would restrict Startec Global's ability to
repay the Notes and its ability to utilize cash flow from one subsidiary to
cover shortfalls in working capital at another subsidiary, and could otherwise
have a material adverse effect upon the Company's business, financial condition
and results of operations.
Following the Reorganization, the Company will be a holding company that
will conduct its business through its subsidiaries and, accordingly, claims of
creditors of such subsidiaries will generally have priority on the assets of
such subsidiaries over the claims of the Company and the holders of the
Company's indebtedness (including the Notes). As a result, the Notes will be
effectively subordinated to all then existing and future indebtedness and other
liabilities and commitments of the Company's subsidiaries, including trade
payables. As of June 30, 1998, after giving pro forma effect to the
Reorganization, the Company's consolidated subsidiaries would have had
aggregate liabilities of $25.1 million, including approximately $647,000 of
Indebtedness. Any right of the Company to receive assets of any subsidiary upon
the liquidation or reorganization of such subsidiary (and the consequent rights
of the holders of the Notes to participate in those assets) will be effectively
subordinated to the claims of such subsidiary's creditors, except to the extent
that the Company is itself recognized as a creditor, in which case the claims
of the Company would still be subordinate to any security in the assets of such
subsidiary and any indebtedness of such subsidiary senior to that held by the
Company. In addition, holders of secured indebtedness of the Company would have
a claim on the assets securing such indebtedness that is prior to the holders
of the Notes and would have a claim that is pari passu with the holders of the
Notes to the extent such security did not satisfy such indebtedness. After the
consummation of the Reorganization, the Company will have no significant assets
other than its equity interests in the Company's subsidiaries, which may be
pledged in the future to secure one or more credit facilities.
HISTORY OF LOSSES; NEGATIVE EBITDA; UNCERTAINTY OF FUTURE OPERATING RESULTS
Although the Company has experienced significant revenue growth in recent
years, the Company had an accumulated deficit of approximately $7.2 million as
of June 30, 1998 and its operations have generated a net loss in three of the
last four fiscal years and negative cash used in operating activities in each
of the last four fiscal years. The Company expects to generate negative EBITDA
and significant operating losses and net losses for the foreseeable future as a
result of its significant debt service requirements and the additional costs it
expects to incur in connection with the development and expansion of its
network, the expansion of its marketing programs and its entry into new markets
and the introduction of new telecommunications services. Furthermore, the
Company expects that its operations in new target markets will experience
negative cash flows until an adequate customer base and related revenues have
been established. The Company must substantially increase its net cash flow in
order to meet its debt service obligations, including its obligations under the
Notes. 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 and sustain profitability or positive cash flow from operating
activities in any future period. In the event the Company cannot achieve and
sustain operating profitability or positive cash flow from operations, it may
not be able to meet its debt service obligations or working capital
requirements, which could have a material adverse effect on the Company's
business, financial condition, and results of operations. See "-- Future
Capital Needs; Uncertainty of Additional Funding; Discretion in Use of Proceeds
of the Old Notes Offering" and "Selected Financial and Other Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING; DISCRETION IN USE OF
PROCEEDS OF THE OLD NOTES OFFERING
The implementation of the Company's strategic plan, including the
development and expansion of its network facilities, expansion of its marketing
programs and funding of operating losses and working
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capital needs, will require significant investment. The Company expects that
the net proceeds of the Old Notes Offering, together with cash on hand and cash
flow from operations, will provide the Company with sufficient capital to fund
currently planned capital expenditures and anticipated operating losses until
approximately the end of the first quarter of 2000. Based on its current plans,
however, the Company will require approximately $40 million of additional
capital to complete its network deployment plans through the end of 2000.
Moreover, there can be no assurance that the Company will not need additional
financing sooner than currently anticipated. The need for additional financing
will depend on a variety of factors, including the rate and extent of the
Company's expansion in existing and new markets, the cost of an investment in
additional switching and transmission facilities and ownership rights in fiber
optic cable, the incurrence of costs to support the introduction of additional
or enhanced services, and increased sales and marketing expenses. In addition,
the Company may need additional financing to fund unanticipated working capital
needs or to take advantage of unanticipated business opportunities, including
acquisitions, investments or strategic alliances. The amount of the Company's
actual future capital requirements also will depend upon many factors that are
not within the Company's control, including competitive conditions and
regulatory or other government actions. In the event that the Company's plans
or assumptions change or prove to be inaccurate or the net proceeds of the Old
Notes Offering, together with cash on hand and internally generated funds,
prove to be insufficient to fund the Company's growth and operations as
currently anticipated through the end of the first quarter of 2000, then some
or all of the Company's development and expansion plans could be delayed or
abandoned, or the Company may be required to seek additional financing or to
sell assets. In addition, although the deposit of the Pledged Securities
assures holders of the Notes that they will receive all scheduled cash interest
payments on the Notes through May 15, 2001, the Company may require additional
financing in order to pay interest on the Notes thereafter and to repay the
Notes at maturity. See "Use of Proceeds of the Old Notes Offering" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Company expects that it will seek to raise additional capital from
public and/or private equity and/or debt sources to fund the shortfall in its
cash resources expected to occur at the end of the first quarter of 2000. There
can be no assurance, however, that the Company will be able to obtain
additional financing or, if obtained, that it will be able to do so on a timely
basis or on terms favorable to the Company. If the Company is able to raise
additional funds through the incurrence of debt, it would likely become subject
to additional restrictive financial covenants. In the event that the Company is
unable to obtain such additional capital or is unable to obtain such additional
capital on acceptable terms, the Company may be required to reduce the scope of
its expansion, which could adversely affect the Company's business, financial
condition and results of operations, its ability to compete and its ability to
meet its obligations under the Notes.
Although the Company intends to implement the capital spending plan
described in this Prospectus, it is possible that unanticipated business
opportunities may arise which the Company's management may conclude are more
favorable to the long-term prospects of the Company than those contemplated by
the current capital spending plan. The Company's management has significant
discretion in its decisions with respect to when and how to utilize the
proceeds of the Old Notes Offering.
INTENSE COMPETITION
The international telecommunications industry is intensely competitive and
subject to rapid change precipitated by changes in the regulatory environment
and advances in technology. The Company's success depends upon its ability to
compete with a variety of other telecommunications providers in the United
States and in each of its international markets, including the respective PTT
in many of the countries in which the Company operates or plans to operate in
the future. Other competitors of the Company include large, facilities-based,
multinational carriers such as AT&T, MCI, Sprint and World- Com (which has
announced plans to merge with MCI) and smaller facilities-based wholesale long
distance service providers in the United States and overseas that have emerged
as a result of deregulation, switched-based resellers of international long
distance services, and global alliances among some of the world's largest
telecommunications carriers, such as Global One (Sprint, Deutsche Telekom and
France Telecom). The telecommunications industry is also being impacted by a
large number of mergers and
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acquisitions including recent announcements regarding a proposed joint venture
between the international operations of AT&T and British Telecom, the proposed
acquisition of TCI by AT&T, and the proposed mergers of SBC and Ameritech and
GTE and Bell Atlantic. International telecommunications providers such as the
Company compete for residential customers on the basis of price, customer
service, transmission quality, breadth of service offerings and value-added
services, and compete for carrier customers primarily on the basis of price and
network quality. 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 currently a dial-around
provider, its 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. However, as a
result of revisions to FCC regulations, beginning on July 1, 1998, all
telecommunications companies were required to migrate from their existing five
digit CIC codes to new seven-digit CIC codes. Though the Company experienced no
material impact on its residential business in July 1998 as a result of the
migration, the migration to seven-digit CIC Codes may adversely affect revenues
from the Company's residential customers as a result of actual or perceived
difficulties in making long distance calls using the longer code. The Company's
carrier customers generally also use the services of a number of international
long distance telecommunications providers, and these carrier customers are
especially price sensitive. In addition, many of the Company's competitors
enjoy economies of scale that can result in a lower cost structure for
termination and network costs, which could cause significant pricing pressures
within the international communications industry. Several long distance
carriers in the United States have introduced pricing strategies that provide
for fixed, low rates for both international and domestic calls originating in
the United States. Such a strategy, if widely adopted, could have an adverse
effect on the Company's business, financial condition and results of operations
if increases in telecommunications usage do not result or are insufficient to
offset the effects of such price decreases. In recent years, prices for
international long distance services have decreased substantially, and are
expected to continue to decrease, in most of the markets in which the Company
currently competes or which it may enter in the future. The intensity of such
competition has recently increased, and the Company expects that such
competition will continue to intensify as the number of new entrants increases
as a result of the competitive opportunities created by the Telecommunications
Act of 1996 (the "1996 Telecommunications Act"), implementation by the FCC of
the commitment of the United States to the World Trade Organization ("WTO") and
changes in legislation and regulation in various foreign markets. There can be
no assurance that the Company will be able to compete successfully in the
future.
The telecommunications industry is also experiencing change as a result 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-based systems, such as those proposed by Iridium
LLC and Globalstar, L.P., utilization of the Internet for international voice
and data communications, and digital wireless communication systems such as
Personal Communications Systems ("PCS"). The Company is unable to predict which
of many possible future product and service offerings will be important to
maintain its competitive position or what expenditures will be required to
develop and provide such products and services.
RISKS OF INTERNATIONAL TELECOMMUNICATIONS BUSINESS; ENTRY INTO DEVELOPING
MARKETS
To date, the Company has generated substantially all of its revenues from
international long distance calls originating in the United States. However,
the Company's expansion strategy will require it to commence operations in a
number of foreign countries, which will expose the Company to the risks
inherent in doing business on an international level. These risks include
unexpected changes in regulatory requirements or administrative practices;
value added tax, tariffs, customs, duties and other trade barriers;
difficulties in staffing and managing foreign operations; problems in
collecting accounts receivable; political risks; fluctuations in currency
exchange rates; foreign exchange controls which restrict or prohibit
repatriation of funds; technology export and import restrictions or
prohibitions; delays from customs brokers or government agencies; seasonal
reductions in business activity during the summer months in Europe and certain
other parts of the world; potential adverse tax consequences resulting
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from operating in multiple jurisdictions with different tax laws; and other
factors which could materially adversely impact the Company's current and
planned operations. Moreover, the international telecommunications industry is
changing rapidly due to deregulation, 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 international markets, including markets in which it has limited
or no operating experience. 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, in many international markets, the PTTs control access to
the local networks, enjoy better brand name recognition and customer loyalty
and possess significant operational economies, including a larger backbone
network and operating agreements with other PTTs. Pursuit of international
growth opportunities may require significant investments for extended periods
of time before returns, if any, on such investments are realized. Obtaining
licenses in certain targeted countries may require the Company to commit
significant financial resources, which investments may not yield positive net
returns in such markets for extended periods of time, if ever. Further, there
can be no assurance that the Company will be able to obtain all or any of the
permits and licenses required for it to operate, obtain access on a timely
basis (or at all) to local transmission facilities or sell and deliver
competitive services in these markets. Incumbent U.S. carriers serving
international markets also may have better brand recognition and customer
loyalty, and significant operational advantages over the Company. 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 adversely 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.
Although 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.
SUBSTANTIAL GOVERNMENT REGULATION
As a multinational telecommunications company, the Company is subject to
varying regulation in each jurisdiction in which it provides services, and it
may be affected indirectly by the laws of other jurisdictions insofar as they
affect foreign carriers with which the Company does business. 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 or
state law. Fines or other penalties also may be imposed for such violations.
Because regulatory frameworks in many countries are relatively new, it is
difficult to assess the potential for enforcement action in such countries. Any
regulatory enforcement action by U.S. or foreign authorities could have a
material adverse effect on the Company's business, financial conditions and
results of operations. See "Business -- Government Regulation."
United States Domestic Regulations
In the United States, the Company's provision of services is subject to
the Communications Act of 1934, as amended, and FCC regulations thereunder, as
well as the applicable law and regulations of the various states. Regulatory
requirements have recently changed and will continue to change. Among other
things, such changes may affect the ability of the Company to compete with
other service providers, continue providing the same services, or introduce new
services. The impact on the Company's operations of any changes in applicable
regulatory requirements cannot be predicted.
Federal and State Transactional Approvals. The FCC and certain PSCs
require telecommunications carriers to obtain prior approval for providing
certain telecommunications services, assignment or transfer of control of
licenses, corporate reorganizations, acquisition of operations, and assignment
of assets.
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Such requirements may have the effect of delaying, deterring or preventing a
change in control of the Company. Six of the states in which the Company is
certificated provide for prior approval or notification of the issuance of
securities by the Company. Because of time constraints, the Company may not
have obtained such approval from all of the states prior to consummation of the
Exchange Offer. The Company's intrastate revenues for the first quarter of 1998
for each of these states was less than $5,000. After consultation with
regulatory counsel, the Company believes that such approvals will be granted
and that obtaining such approvals subsequent to the Exchange Offer should not
result in any material adverse consequences to the Company, although there can
be no assurance that such consequences will not result.
Access Charges. Under alternative rate structures being considered by the
FCC, LECs would be permitted to allow volume discounts in the pricing of
interstate access charges that long distance carriers such as the Company pay
to originate and terminate calls. The RBOCs and other LECs also have been
seeking greater pricing flexibility and reduction of intrastate access charges
from the PSCs. Although the outcome of these proceedings is uncertain, if LECs
are permitted to utilize more flexible rate structures, smaller long distance
carriers like the Company could be placed at a significant cost disadvantage
with respect to larger competitors.
Universal Service. The Company and its U.S. competitors are required to
make FCC-mandated contributions to a universal service fund to subsidize
telecommunications services for low-income persons and certain other users. The
level of such contributions for 1998 and future years is unclear, and there can
be no assurance that the Company will be able fully to pass these costs on to
its customers or that doing so will not result in a loss of customers. Although
the Company has filed a request for forebearance/exemption from the universal
service fund with the FCC, there can be no assurance that this request will be
granted.
United States International Regulations
WTO Agreement. Pursuant to an agreement on basic telecommunications
services concluded under the auspices of the World Trade Organization (the "WTO
Agreement"), 69 countries comprising more than 90% of the global market for
telecommunications services have agreed to permit varying degrees of
competition from foreign carriers. The WTO Agreement is expected to be
implemented by most signatory countries in 1998, although there may be
substantial delays. The Company believes that the WTO Agreement will increase
opportunities for the Company and its competitors. The precise scope and timing
of the implementation of the WTO Agreement, however, remain uncertain, and
there can be no assurance that the WTO Agreement will result in beneficial
regulatory liberalization.
On November 26, 1997, the FCC adopted a new order (the "Foreign
Participation Order") to implement U.S. obligations under the WTO Agreement.
The Foreign Participation Order establishes an open entry standard for carriers
from WTO member countries, generally facilitating market entry for such
applicants by eliminating certain existing tests. These tests remain in effect,
however, for carriers from non-WTO member countries. Petitions for
reconsideration of the Foreign Participation Order are pending at the FCC.
Implementation of the Foreign Participation Order could increase competition in
the Company's markets.
United States International Settlements Policy and Foreign Entry and
Affiliate Rules. The FCC's International Settlements Policy ("ISP") governs the
settlement between U.S. carriers and their foreign correspondents of the cost
of terminating their calls in the other's network. U.S. international carriers,
including the Company, are subject to the FCC's international accounting
"benchmark" rates, which are the FCC's ceilings for prices that U.S. carriers
should pay for international settlements. The FCC could find that certain
settlement rate terms of the Company's foreign carrier agreements do not meet
the ISP requirements, absent a waiver. Although the FCC generally has not
issued penalties in this area, it could, among other things, issue a cease and
desist order or impose fines if it finds that these agreements conflict with
the ISP. The Company does not believe that any such fine or order would have a
material adverse effect on the Company.
In the recently-adopted International Settlement Rates Order, the FCC
conditioned facilities-based authorizations for service on a route on which a
carrier has a foreign affiliate upon the foreign affiliate offering all other
U.S. carriers a settlement rate at or below the relevant benchmark. The FCC
also
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conditioned any authorization to provide switched services over either
facilities-based or resold international private lines upon the condition that
at least half of the facilities-based international message telephone service
("IMTS") traffic on the subject route is settled at or below the relevant
benchmark rate. Under the Foreign Participation Order, however, if the subject
route does not comply with the benchmark requirement, a carrier can demonstrate
that the foreign country provides "equivalent" resale opportunities.
Accordingly, the Company is permitted to resell private lines for the provision
of switched services to any country that either has been found to comply with
the benchmarks or to offer equivalent resale opportunities, but must obtain
prior FCC approval in order to provide resold private lines to any country in
which it has an affiliated carrier that has not been found by the FCC to lack
market power. The International Settlement Rates Order has been appealed before
the courts and the FCC. These proceedings are still pending. The Company cannot
predict the outcome of these preceding or their possible impact on the Company.
Alternative Routing Through Transiting, Refiling and ISR. The FCC is
currently considering whether to limit or prohibit certain procedures whereby a
carrier routes, through facilities in a third or intermediate country, traffic
originating from one country and destined for another country. The FCC has
permitted third country calling under certain pricing and settlement rules,
where all countries involved consent to this type of routing arrangement,
referred to as "transiting." Under certain arrangements referred to as
"refiling," however, traffic appears to originate in the intermediate country
and the carrier in the ultimate destination country does not necessarily
recognize or consent to the receipt of traffic from the originating country.
The FCC to date has made no pronouncement as to whether refile arrangements,
which avoid settlements between the actual originating and destination
countries, comport either with U.S. or ITU regulations. A 1995 petition for a
declaratory ruling on these issues remains pending. To the extent that the
Company utilizes transiting or refiling, an FCC determination with respect to
the permissibility of, or conditions on, these international routing
arrangements could have a material adverse effect on the Company's business,
financial condition or results of operations.
United States Regulation of Internet Telephony. The Company knows of no
domestic or foreign laws that prohibit voice communications over the Internet.
In December 1996, the FCC initiated a Notice of Inquiry (the "Internet NOI")
regarding whether to impose regulations or surcharges upon providers of
Internet access and Information Services. In April 1998, the FCC filed a report
with Congress stating that Internet access falls into the category of
information services, and hence should not be subject to common carrier
regulation, including the obligation to pay access charges, but that the record
suggests that some forms of Internet Telephony may be more like
telecommunications services then information services, and hence subject to
common carrier regulation. In addition, federal legislation that would either
regulate or exempt from regulation services provided over the Internet has been
proposed. PSCs may also retain jurisdiction to regulate the provision of
intrastate Internet telephone services. The Company cannot predict the
likelihood that state, federal or foreign governments will impose additional
regulation or charges on Internet Telephony or other Internet-related services,
nor can it predict the impact that future regulation will have on the Company's
operations. There can be no assurances that any such regulation will not
materially adversely affect the Company's business, financial condition or
results of operation.
European Union Regulations
EU member states are required to adopt national legislation to implement
EU directives aimed at liberalizing telecommunications markets in their
countries. Some EU member states have so far failed to implement such
directives properly. This could limit, constrain or otherwise adversely affect
the Company's ability to provide certain services. Even if a national
government enacts appropriate regulations within the time frame established by
the EU, there may be significant resistance to the implementation of such
legislation from incumbent telecommunications operators, regulators, trade
unions and other sources. For example, in France, the telecommunications
workers union has stated its objection to the current move towards
liberalization. In some EU member states, telecommunications operators that do
not operate their own infrastructure are subject to less favorable terms of
interconnection to the local PTT. Furthermore, the ease with which new entrants
may obtain telecommunications licenses varies
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greatly among EU member states. The above factors could have a material adverse
effect on the Company's operations by preventing the Company from expanding its
operations as currently intended, as well as a material adverse effect on the
Company's business, financial conditions and results of operations. The
Company's provision of services in Western Europe may also be affected if any
EU member state imposes greater restrictions on non-EU international service
than on such service within the EU. Moreover, the EU regime on data protection
is fairly strict with respect to the processing of personal data, which may
adversely affect the Company's marketing in Europe.
Other Jurisdictions
The Company intends to expand its operations into other jurisdictions as
such markets are liberalized and the Company is able to offer a full range of
switched public telephone services to its customers. In countries that enact
legislation intended to deregulate the telecommunications sector or that have
made commitments to open their markets to competition in the WTO Agreement,
there may be significant delays in the adoption of implementing regulations and
uncertainties as to the implementation of the liberalization programs which
could delay or make more expensive the Company's entry into such additional
markets. The ability of the Company to enter a particular market and provide
telecommunications services, particularly in developing countries, is dependent
upon the extent to which the regulations in a particular market permit new
entrants. In some countries, regulators may make subjective judgments in
awarding licenses and permits, without any legal recourse for unsuccessful
applicants. In the event the Company is able to gain entry to such a market, no
assurances can be given that the Company will be able to provide a full range
of services in such market, that it will not have to significantly modify its
operations to comply with changes in the regulatory environment in such market,
or that any such changes will not have a material adverse effect on the
Company's business, results of operations or financial condition.
MANAGEMENT OF GROWTH
The Company's recent growth and expansion and its strategy to continue such
growth and expansion 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. The Company's
growth also has increased responsibilities for its management personnel. In
order to manage its growth effectively, the Company must continue to expand its
network and infrastructure, enhance its management, financial and information
systems, attract additional managerial, technical and customer service
personnel, and train and manage its personnel base. 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 industry who may be available to the Company.
Inaccuracies in the Company's forecasts of traffic could result in insufficient
or excessive transmission facilities and disproportionately high fixed expenses.
In addition, as the Company increases its service offerings and expands its
target markets in the U.S. and overseas, there will be additional demands on its
customer service, marketing and administrative resources. Failure of the Company
to successfully manage its expansion could materially adversely affect the
Company's business, financial condition and results of operations.
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.
Decreases in residential customer response rates or increases in the Company's
residential customer attrition rates could have a material adverse impact on
the Company's business, financial condition and results of operations.
Additionally, the FCC mandated that as of July 1, 1998, all telecommunications
companies must migrate from their existing five-digit CIC codes (10+XXX) to
seven-digit CIC codes (10+10+XXX). This mandate has necessitated changes in the
dialing patterns of the Company's residential customers in order to use the
Company's dial-around services. Though the Company experienced no material
impact on its residential business in July 1998 as a result of the migration,
actual or perceived difficulties in making long distance calls using the longer
code could have a material adverse effect on the Company's residential
business.
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RISKS ASSOCIATED WITH EXPANSION AND OPERATION OF THE NETWORK
The success of the Company is largely dependent upon its ability to
operate, expand, manage and maintain its network so that it is able to deliver
high quality, uninterrupted telecommunications services. In particular, the
Company's ability to increase revenues will depend on its ability to expand the
capacity of, and eliminate bottlenecks that have developed from time to time
on, the Company's network. 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, including adverse effects on its
customer relationships. The Company's operations are also dependent on its
ability to successfully integrate new technologies and equipment into the
network. Increases in the Company's traffic, the build-out of its network, and
the integration of new technologies and equipment into the network will place
additional strains on the Company's systems, and there can be no assurance that
the Company will not experience system failures. In addition, while the Company
performs the majority of the maintenance of its owned transmission facilities,
it depends upon services provided by Nortel under a service and support
contract to resolve problems with its New York City-based switch that the
Company is unable to resolve. The Company also depends upon third parties for
maintenance of facilities which it leases and fiber optic cable lines in which
the Company has an IRU or other use arrangement. 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, result in customer attrition and
have a material adverse effect on its business, financial condition or results
of operations.
DEPENDENCE ON KEY CUSTOMERS; BAD DEBT EXPOSURE
Although the composition of the Company's carrier customer base varies
from period to period, during the year ended December 31, 1997, the Company's
five largest carrier customers accounted for approximately 47% of the Company's
net revenues, with WorldCom and Frontier accounting for approximately 23% and
14%, respectively. In addition, for the six months ended June 30, 1998, the
Company's five largest carrier customers accounted for approximately 33% of the
Company's net revenues, with WorldCom accounting for approximately 19% of net
revenues during that period. No other carrier customer accounted for more than
10% of the Company's net revenues during 1997 or the first six months of 1998.
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. The
Company's carrier customers tend to be price sensitive and often move their
business based solely on incremental changes in price. Carriers also may
terminate their relationship with the Company or substantially reduce their use
of the Company's services for a variety of other reasons, including problems
with transmission quality and customer service, changes in the regulatory
environment, increased use of the carriers' own transmission facilities, and
other factors which may be beyond the Company's control. In addition, the
effect of proposed mergers and alliances in the telecommunications industry may
potentially reduce the number of customers that purchase wholesale
international long distance services from the Company. A loss of a significant
amount of carrier business could have a material adverse effect on the
Company's business, financial condition and results of operations.
The concentration of carrier customers also increases the risk of
non-payment or difficulties in collecting the full amounts due from customers.
The Company's four largest carrier customers represented approximately 44% and
31% of gross accounts receivable as of December 31, 1997 and June 30, 1998,
respectively. The Company performs initial and ongoing credit evaluations of
its carrier customers in an effort to reduce the risk of non-payment. There can
be no assurance that the Company will not experience collection difficulties or
that its allowances for non-payment will be adequate in the future. If the
Company experiences difficulties in collecting accounts receivable from its
significant carrier customers, its business, financial condition and results of
operations could be materially adversely affected. In addition, although the
Company reserves for the risk of non-payment with respect to its residential
customers taken as a whole, the Company does not believe that the risk of
non-payment with respect to any single or concentrated group of residential
customers is significant. See "Business -- Customers."
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DEPENDENCE ON AVAILABILITY OF TRANSMISSION FACILITIES
Historically, substantially all of the telephone calls made by the
Company's customers have been carried and terminated through transmission lines
of facilities-based long distance carriers, which provide the Company
transmission capacity through a variety of lease and resale arrangements
("off-net"). For both the year ended December 31, 1997 and the six months ended
June 30, 1998, 95% of the Company's traffic was terminated off-net. The
Company's ability to maintain and expand its business is dependent, in part,
upon the Company's ability 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
terminations. Although the Company believes that its relationships with these
carriers generally are satisfactory, the failure to maintain satisfactory
relationships with one or more of these carriers could have a material adverse
effect upon the Company's business, financial condition and results of
operations. During the fiscal year ended December 31, 1997, WorldCom and
Pacific Gateway Exchange accounted for approximately 13% and 12%, respectively,
of the Company's acquired transmission capacity (on a cost of services basis).
During the six months ended June 30, 1998, Pacific Gateway Exchange accounted
for approximately 11% of the Company's acquired transmission capacity (on a
cost of services basis). No other supplier accounted for 10% or more of the
Company's acquired transmission capacity during 1997 or the first six months of
1998. See "Business -- The Startec Global Network."
The future profitability of the Company will depend in part on its ability
to obtain and utilize 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, however, the
Company intends to reduce its use of variable usage arrangements and, to the
extent feasible and cost-justified, 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. See "-- Substantial
Government Regulation" and "Business -- Government Regulation."
The Company owns IRUs in, and has other access rights to, a number of
undersea fiber optic cable systems, and the acquisition of additional IRUs in,
and other access rights to, undersea fiber optic cable transmission lines is a
key element of the Company's business strategy. Because undersea fiber optic
lines typically take several years to plan and construct, international long
distance service providers generally make investments based on forecasts of
anticipated traffic. Inaccuracies in the Company's forecasts of traffic could
result in insufficient or excessive investments by the Company in undersea
cable and disproportionately high fixed expenses. The Company will be subject
to similar risks with respect to its decisions to invest in and acquire
satellite earth stations. The Company generally does not control the planning
or construction of undersea fiber optic cable transmission lines, and must seek
access to such facilities through partial ownership positions or through lease
and other access arrangements on negotiated terms that may vary with industry
and market conditions. There can be no assurance that 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. See "Business -- The Startec Global 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. The ability
to terminate traffic on a cost-effective basis is an
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essential component of the Company's business plan. Accordingly, the Company is
dependent upon its operating agreements and other termination arrangements. The
Company's strategy is based on its ability to enter into and maintain: (i)
operating agreements with PTTs in countries that have yet to become deregulated
so it will be able to terminate traffic in, and receive return traffic from,
those countries; (ii) operating agreements with PTTs and emerging carriers in
foreign countries whose telecommunications markets have been deregulated so it
will be able to terminate traffic in those countries; and (iii) interconnection
agreements with the PTT in each of the countries in which the Company has
operating facilities so it will be able to terminate traffic in each such
country. Although to date the Company has negotiated and maintained operating
agreements and termination arrangements sufficient for its current business and
traffic levels, there can be no assurance that the Company will be able to
negotiate additional operating agreements or termination arrangements or
maintain such existing or additional agreements or arrangements in the future.
Cancellation of certain operating agreements or other termination arrangements
could have a material adverse effect on the Company's business, financial
condition and results of operations. 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 and control its
costs.
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS; YEAR 2000 TECHNOLOGY RISKS
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 provides to customers, to ensure that it is properly charged by
vendors for services it uses and to achieve operating efficiencies and
otherwise manage its growth. Although the Company believes that its current
management information systems are sufficient to meet its present demands,
these systems have not grown at the same rate as the Company's business and it
is anticipated that additional investments in these systems will be needed.
There can be no assurance, however, that the Company will not encounter
difficulties in the acquisition, implementation, integration and ongoing use of
any additional management information systems resources, including possible
delays, cost-overruns or incompatibility with the Company's current information
systems resources or its business needs. In addition, the LECs currently
provide billing services for long distance providers such as the Company,
although they are not obligated to do so. As a result, any change in billing
practices by the LECs, including termination of billing services for long
distance providers, may disrupt the Company's operations and materially and
adversely affect its business, results of operations and financial condition.
See "Business -- Management Information and Billing Systems."
A significant percentage of the software that runs many computer systems
relies on two-digit date codes to perform computations and decision-making
functions. Commencing on January 1, 2000, these computer programs may fail to
properly interpret these two-digit date codes, misinterpreting "00" as the year
1900 rather than 2000, which could result in processing errors or system
failures. The Company's management is currently in the process of assessing the
nature and extent of the potential impact of the Year 2000 issue on its systems
and applications, including its billing, credit and call tracking systems, and
intends to take steps to prevent failures in its systems and applications
relating to Year 2000. Although many of the Company's operating systems are
relatively new and have been certified to the Company as being Year 2000
compliant, there can be no assurance that the Company's systems will not be
adversely affected by the Year 2000 issue. In addition, computers used by the
Company's vendors providing services to the Company or computers used by the
Company's customers that interface with the Company's computer systems may have
Year 2000 problems, any of which may adversely affect the ability of those
vendors to provide services to the Company, or in the case of the Company's
carrier customers, to make payments to the Company. If any of such systems
fails or experiences processing errors, such failures or errors may disrupt or
corrupt the Company's systems. The Company is in the initial stages of
verifying the Year 2000 compliance efforts of the third parties with which the
Company's computer systems interface. Although management has not yet finalized
its analysis, it does not expect that the costs to properly address the Year
2000 issue will have a material adverse effect on its results of operations or
financial position. Failure of any of the Company's systems or applications or
the failure of, or errors in, the computer systems of its vendors or carrier
customers could materially adversely affect the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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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 or advances in Internet Telephony allowing
the simultaneous transmission of voice, data and video, and the commercial
availability of 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, continue to offer competitive services at
competitive prices or obtain new technologies on a timely basis on satisfactory
terms or at all. Failure to adapt to rapid technological changes could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS ASSOCIATED WITH STRATEGIC ALLIANCES, ACQUISITIONS AND INVESTMENTS
As part of its business strategy, the Company may enter into strategic
alliances with, or acquire 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 particular alliance, acquisition or investment. Any future
strategic alliances, investments or acquisitions would be accompanied by the
risks commonly encountered in such transactions, including those associated
with assimilating the operations and personnel of acquired 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 strategic alliances, investments or acquisitions.
Expansion through joint ventures may involve additional risks for the
Company. The Company may not have a majority or controlling ownership interest
in the joint venture entity, may not control the joint venture's board of
directors or similar governing authority, and may not otherwise control its
operations or assets. There is also a risk that the Company's joint venture
partner or partners may have economic, business or legal interests or goals
that are not consistent with those of the joint venture or the Company, or that
such goals will diverge over time. In addition, there is a risk that a joint
venture partner may be unable to meet its economic or other obligations to the
joint venture, in which case it may become necessary for the Company to fulfill
those obligations.
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, the Company may incur Indebtedness or
use a substantial portion of its available cash to consummate such
transactions. 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.
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 including, in particular, Ram Mukunda, President, Chief
Executive Officer and Treasurer, and Prabhav V. Maniyar, Senior Vice President,
Chief Financial Officer and Secretary, of the Company. Messrs. Mukunda and
Maniyar have employment agreements with the Company. See "Management --
Employment Agreements." The Company maintains "key man" life insurance on Mr.
Mukunda.
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The Company's success also depends on its ability to attract and retain
additional qualified management, technical, marketing 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 industry
who may be available to the Company. 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, especially management
personnel and personnel for foreign offices. 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 or results of operations. See "Management."
CONTROL OF COMPANY BY CURRENT STOCKHOLDERS
As of July 31, 1998, the executive officers and directors of the Company
beneficially owned 4,038,491 shares of Common Stock, representing approximately
45.2% of the outstanding shares Common Stock, including options to purchase an
aggregate of 10,000 shares of Common Stock. Of these amounts, Mr. Mukunda
beneficially owns 3,579,675 shares of Common Stock. The Company's executive
officers and directors as a group, or Mr. Mukunda, acting individually, will be
able to exercise significant influence over such matters as the election of the
directors of the Company and other fundamental corporate transactions such as
mergers, asset sales and the sale of the Company. See "Principal Stockholders"
and "Description of Capital Stock."
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. Further, the Company has
filed for federal registration of the trademark "Startec Global Communications
Corporation." Although no guarantee can be made that this application will be
successful and mature into a federal trademark registration, the established
rights in and registration of STARTEC provides the basis for expanding the
trademark rights to include the supplemental terms "Global Communications
Group."
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFERABILITY
The Exchange Notes are new securities for which there is currently no
market. The Company does not intend to apply for listing of the Exchange Notes
on any national securities exchange or for quotation of the Exchange Notes
through Nasdaq. Future trading prices of the Exchange Notes will depend on many
factors, including, among other things, prevailing interest rates, the
Company's operating results and the market for similar securities. The Initial
Purchasers have advised the Company that they currently intend to make a market
in the Exchange Notes. The Initial Purchasers, however, are not obligated to do
so, and any market making may be discontinued at any time without notice. In
addition, such market-making activities may be limited during the pendency of
the Exchange Offer and during the effectiveness of any Registration Statement.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes have not been registered under the Securities Act and are
subject to substantial restrictions on transfer. Old Notes that are not
tendered in exchange for Exchange Notes or are tendered but not accepted will,
following consummation of the Exchange Offer, continue to be subject to the
existing restrictions upon transfer thereof. The Company does not currently
anticipate that it will register the Old Notes under the Securities Act. To the
extent that Old Notes are tendered and accepted
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in the Exchange Offer, the trading market for untendered and tendered but
unaccepted Old Notes could be adversely affected. In addition, although the Old
Notes have been designated for trading in the Private Offerings, Resale and
Trading through Automatic Linkages ("PORTAL") Market, to the extent that Old
Notes are tendered and accepted in connection with the Exchange Offer, any
trading market for Old Notes that remain outstanding after the Exchange Offer
could be adversely affected.
FAILURE TO COMPLY WITH EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for the Old Notes pursuant to
the Exchange Offer will be made only after timely receipt by the Exchange Agent
of such Old Notes, a properly completed and duly executed Letter of Transmittal
and all other required documents. Therefore, holders of the Old Notes desiring
to tender such Old Notes in exchange for Exchange Notes should allow sufficient
time to ensure timely delivery. The Company is under no duty to give
notification of defects or irregularities with respect to tenders of Old Notes
for exchange. Holders of Old Notes who do not exchange their Old Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Old Notes as set forth in the legend
thereon. See "The Exchange Offer."
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THE EXCHANGE OFFER
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER
Pursuant to the Registration Rights Agreement, the Company is obligated to
file with the Commission, subject to the provisions described below, the
Exchange Offer Registration Statement on an appropriate form permitting the
Exchange Notes to be offered in exchange for the Transfer Restricted Securities
(as defined below) and to permit resales of Exchange Notes held by
broker-dealers as contemplated by the Registration Rights Agreement. The
Registration Rights Agreement provides that, unless the Exchange Offer would
not be permitted by applicable law or Commission policy, the Company will (i)
file the Exchange Offer Registration Statement with the Commission on or prior
to 90 days after the Closing Date, (ii) use its reasonable best efforts to
cause the Exchange Offer Registration Statement to be declared effective by the
Commission within 150 days after the Closing Date, (iii) (A) file all
pre-effective amendments to such Exchange Offer Registration Statement as may
be necessary in order to cause such Exchange Offer Registration Statement to
become effective, (B) file, if applicable, a post-effective amendment to such
Exchange Offer Registration Statement pursuant to Rule 430A under the
Securities Act and (C) cause all necessary filings in connection with the
registration and qualifications of the Exchange Notes to be made under the blue
sky laws of such jurisdictions as are necessary to permit consummation of the
Exchange Offer and (iv) use its reasonable best efforts to cause the Exchange
Offer to be consummated on or prior to 30 days after the date on which the
Exchange Offer Registration Statement is declared effective by the Commission.
For purposes of the foregoing, "Transfer Restricted Securities" means each
Old Note until the earliest to occur of (i) the date on which such Old Note has
been properly tendered for exchange (and accepted by the Company) by a person
other than a broker-dealer for Exchange Notes pursuant to the Exchange Offer,
(ii) following the exchange by a broker-dealer in the Exchange Offer of such
Old Note for one or more Exchange Notes, the date on which such Exchange Notes
are sold to a purchaser who receives from such broker-dealer on or prior to the
date of such sale a copy of this Prospectus, (iii) the date on which such Old
Note has been effectively registered under the Securities Act and disposed of
in accordance with the Shelf Registration Statement or (iv) the date on which
such Note is eligible for distribution to the public pursuant to Rule 144 under
the Securities Act.
Under existing Commission interpretations, the Exchange Notes would, in
general, be freely transferable after the Exchange Offer without further
registration under the Securities Act; provided, however, that, in the case of
broker-dealers participating in the Exchange Offer, a prospectus meeting the
requirements of the Securities Act must be delivered by such broker-dealers in
connection with resales of the Exchange Notes. The Company has agreed, for a
period of 180 days after consummation of the Exchange Offer, to make available
a prospectus meeting the requirements of the Securities Act to any such
broker-dealer for use in connection with any resale of any Exchange Notes
acquired in the Exchange Offer. A broker-dealer that delivers such a prospectus
to purchasers in connection with such resales will be subject to certain of the
civil liability provisions under the Securities Act and will be bound by the
provisions of the Registration Rights Agreement (including certain
indemnification rights and obligations).
Holders of Old Notes that desire to exchange such Old Notes for Exchange
Notes pursuant to the Exchange Offer will be required to make certain
representations, including representations that (i) any Exchange Notes to be
received by it will be acquired in the ordinary course of its business, (ii) it
is not engaged in, nor does it intend to engage in, nor does it have an
arrangement or understanding with any person to participate in the distribution
(within the meaning of the Securities Act) of the Exchange Notes and (iii) it
is not an "affiliate," as defined in Rule 405 of the Securities Act, of the
Company, or if it is an affiliate, it will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent
applicable.
If the holder is not a broker-dealer, it will be required to represent
that it is not engaged in, and does not intend to engage in, the distribution
of the Exchange Notes. If the holder is a broker-dealer that will receive
Exchange Notes for its own account in exchange for Old Notes that were acquired
as a result of market-making activities or other trading activities, it will be
required to acknowledge that it will deliver a prospectus in connection with
any resale of such Exchange Notes.
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The Company has agreed to pay all expenses incident to the Exchange Offer
and will indemnify the Initial Purchasers against certain liabilities,
including liabilities under the Securities Act.
If (i) the Company is not permitted to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or Commission
policy, (ii) any holder of Transfer Restricted Securities that is a "qualified
institutional buyer" (as defined in Rule 144A under the Securities Act)
notifies the Company at least 20 business days prior to the consummation of the
Exchange Offer that (a) applicable law or Commission policy prohibits the
Company from participating in the Exchange Offer, (b) such holder may not
resell the Exchange Notes acquired by it in the Exchange Offer to the public
without delivering a prospectus and this Prospectus is not appropriate or
available for such resales by such holder or (c) such holder is a broker-dealer
and holds Notes acquired directly from the Company or an affiliate of the
Company, (iii) the Exchange Offer is not for any other reason consummated by
, 1998 or (iv) the Exchange Offer has been completed and in the opinion of
counsel for the Initial Purchasers, a registration statement must be filed and
a prospectus must be delivered by the Initial Purchasers in connection with any
offering or sale of Transfer Restricted Securities, the Company will use its
reasonable best efforts to: (A) file a Shelf Registration Statement within 60
days of the earliest to occur of (i) through (iv) above and (B) cause the Shelf
Registration Statement to be declared effective by the Commission on or prior
to the 150th day after such obligation arises. The Company shall use its
reasonable best efforts to keep such Shelf Registration Statement continuously
effective, supplemented and amended to ensure that it is available for resales
of Old Notes by the holders of Transfer Restricted Securities entitled to this
benefit and to ensure that such Shelf Registration Statement conforms and
continues to conform with the requirements of the Registration Rights
Agreement, the Securities Act and the policies, rules and regulations of the
Commission, as announced from time to time, until the second anniversary of the
Closing Date; provided, however, that during such two-year period the holders
may be prevented or restricted by the Company from effecting sales pursuant to
the Shelf Registration Statement as more fully described in the Registration
Rights Agreement. A holder of Old Notes that sells its Old Notes pursuant to
the Shelf Registration Statement generally will be required to be named as a
selling security holder in the related prospectus and to deliver a prospectus
to purchasers, will be subject to certain of the civil liability provisions
under the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are applicable to such
holder (including certain indemnification and contribution obligations).
If (i) the Company fails to file with the Commission any of the
registration statements required by the Registration Rights Agreement on or
before the date specified therein for such filing, (ii) any of such
registration statements is not declared effective by the Commission on or prior
to the date specified for such effectiveness in the Registration Rights
Agreement (the "Effectiveness Target Date"), (iii) the Exchange Offer has not
been consummated within 30 days after the Effectiveness Target Date with
respect to the Exchange Offer Registration Statement or (iv) any Registration
Statement required by the Registration Rights Agreement is filed and declared
effective but thereafter ceases to be effective or fails to be usable for its
intended purpose without being succeeded within five business days by a
post-effective amendment to such registration statement that cures such failure
and that is itself immediately declared effective (each such event referred to
in clauses (i) through (iv) above, a "Registration Default"), additional cash
interest ("Liquidated Damages") shall accrue to each holder of the Old Notes
commencing upon the occurrence of such Registration Default in an amount equal
to .50% per annum of the principal amount of Old Notes held by such holder. The
amount of Liquidated Damages will increase by an additional .50% per annum of
the principal amount of Old Notes with respect to each subsequent 90-day period
(or portion thereof) until all Registration Defaults have been cured, up to a
maximum rate of Liquidated Damages of 1.50% per annum of the principal amount
of Old Notes. All accrued Liquidated Damages will be paid to holders by the
Company in the same manner as interest is paid pursuant to the Indenture.
Following the cure of all Registration Defaults relating to any particular
Transfer Restricted Securities, the accrual of Liquidated Damages with respect
to such Transfer Restricted Securities will cease.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
by reference to, all the provisions of the Registration
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Rights Agreement, a copy of which has been filed with the Commission as an
exhibit to Exchange Offer Registration Statement of which this Prospectus is a
part.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue up to $160,000,000 aggregate
principal amount of Exchange Notes in exchange for up to $160,000,000 aggregate
principal amount of outstanding Old Notes accepted in the Exchange Offer.
Holders may tender some or all of their Old Notes pursuant to the Exchange
Offer. However, Old Notes may be tendered only in integral multiples of $1,000.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
The form and terms of the Exchange Notes will be identical in all material
respect to the form and terms of the Old Notes, except that (i) the Exchange
Notes will have been registered under the Securities Act and therefore will not
bear legends restricting the transfer thereof and (ii) the holders of the
Exchange Notes will not be entitled to certain rights under the Registration
Rights Agreement, including the terms providing for an increase in the interest
rate on the Old Notes under certain circumstances relating to the timing of the
Exchange Offer, all of which rights will terminate when the Exchange Offer is
consummated. The Exchange Notes will evidence the same debt as the Old Notes
and will be entitled to the benefits of the Indenture under which the Old Notes
were, and the Exchange Notes will be, issued, such that all outstanding Notes
will be treated as a single class of debt securities under the Indenture.
As of the date of this Prospectus, $160,000,000 aggregate principal amount
of the Old Notes was outstanding. Holders of Old Notes do not have any
appraisal or dissenters' rights under the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the provisions of the Registration Rights Agreement and the applicable
requirements of the Securities Act, the Exchange Act and the rules and
regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Exchange Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, such unaccepted Old Notes will be returned, without expense, to
the tendering holder thereof as promptly as practicable after the Expiration
Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commission or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS AND AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the
Exchange Agent of any extension by oral (promptly confirmed in writing) or
written notice and will make a public announcement thereof, prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
expiration date of the Exchange Offer. Without limiting the manner in which the
Company may choose to make a public announcement of any delay, extension,
amendment or termination of the Exchange Offer, the Company shall have no
obligation to publish, advertise or otherwise communicate any such public
announcement, other than by making a timely release to an appropriate news
agency.
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The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any
conditions set forth below under "-- Conditions to Exchange Offer" shall not
have been satisfied, to terminate the Exchange Offer by giving oral or written
notice of such delay, extension or termination to the Exchange Agent or (iv) to
amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof to the registered holders. If the
Exchange Offer is amended in a manner determined by the Company to constitute a
material change, the Company will promptly disclose such amendment by means of
a prospectus supplement that will be distributed to the registered holders of
Old Notes, and the Company will extend the Exchange Offer for a period of five
to ten business days, depending upon the significance of the amendment and the
manner of disclosure to such registered holders, if the Exchange Offer would
otherwise expire during such five to ten business day period. The rights
reserved by the Company in this paragraph are in addition to the Company's
rights set forth below under the caption "-- Conditions to Exchange Offer."
If the Company extends the period of time during which the Exchange Offer
is open, or if it is delayed in accepting for exchange of, or in issuing and
exchanging the Exchange Notes for, any Old Notes, or is unable to accept for
exchange of, or issue Exchange Notes for, any Old Notes pursuant to the
Exchange Offer for any reason, then, without prejudice to the Company's rights
under the Exchange Offer, the Exchange Agent may, on behalf of the Company,
retain all Old Notes tendered, and such Old Notes may not be withdrawn except
as otherwise provided below in "-- Withdrawal of Tenders." The adoption by the
Company of the right to delay acceptance for exchange of, or the issuance and
the exchange of the Exchange Notes, for any Old Notes is subject to applicable
law, including Rule 14e-1(c) under the Exchange Act, which requires that the
Company pay the consideration offered or return the Old Notes deposited by or
on behalf of the holders thereof promptly after the termination or withdrawal
of the Exchange Offer.
PROCEDURES FOR TENDERING
Only a registered holder of Old Notes may tender such Old Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or facsimile thereof, have the signature
thereon guaranteed if required by the Letter of Transmittal and mail or
otherwise deliver such Letter of Transmittal or such facsimile to the Exchange
Agent at the address set forth below under "-- Exchange Agent" for receipt
prior to the Expiration Date. In addition, either (i) certificates for such Old
Notes must be received by the Exchange Agent along with the Letter of
Transmittal, or (ii) a timely confirmation of a book-entry transfer of such Old
Notes, if such procedure is available, into the Exchange Agent's account at DTC
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date, or (iii) the
holders must comply with the guaranteed delivery procedures described below
under "-- Guaranteed Delivery Procedures."
Any financial institution that is a participant in the Depository's
Book-Entry Transfer facility system may make book-entry delivery of the Old
Notes by causing the Depository to transfer such Old Notes into the Exchange
Agent's account in accordance with the Depository's procedure for such
transfer. Although delivery of Old Notes may be effected through book-entry
transfer into the Exchange Agent's account at the Depository, the Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
any other required documents, must, in any case, be transmitted to and received
and confirmed by the Exchange Agent at its addresses set forth under "--
Exchange Agent" below prior to 5:00 p.m., New York City time, on the Expiration
Date.
DELIVERY OF DOCUMENTS TO THE DEPOSITORY IN ACCORDANCE WITH ITS PROCEDURES DOES
NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute a binding agreement between such holder and the Company in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOM-
32
<PAGE>
MENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY
INSURED. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED,
PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner of the Old Notes whose Old Notes are registered in
the name of a broker, dealer, commercial bank, trust company or other nominee
and who wishes to tender should contact the registered holder promptly and
instruct such registered holder to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such owner's own behalf, such owner
must, prior to completing and executing the Letter of Transmittal and
delivering such owner's Old Notes either make appropriate arrangements to
register ownership of the Old Notes in such owner's name (to the extent
permitted by the Indenture) or obtain a properly completed assignment from the
registered holder. The transfer of registered ownership may take considerable
time.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes (which term includes any participants in DTC
whose name appears on a security position listing as the owner of the Old
Notes) or if delivery of the Old Notes is to be made to a person other than the
registered holder, such Exchange Notes must be endorsed or accompanied by a
properly completed bond power, in either case signed by such registered holder
as such registered holder's name appears on such Old Notes with the signature
on the Old Notes or the bond power guaranteed by an Eligible Institution (as
defined below).
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "-- Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution unless the Old Notes tendered pursuant thereto are
tendered (i) by a registered holder who has not completed the box entitled
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantee must be made by a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States, or another "Eligible Guarantor Institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (any of the foregoing
an "Eligible Institution").
If the Letter of Transmittal or any Old Notes or assignments are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Exchange Agent and the Depository have confirmed that any financial
institution that is a participant in the Depository's system may utilize the
Depository's Automated Tender Offer Program to tender Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old
Notes not properly tendered or any Old Notes, the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Although the Company intends
to request the Exchange Agent to notify holders of defects or irregularities
with respect to
33
<PAGE>
tenders of Old Notes, neither the Company, the Exchange Agent nor any other
person shall incur any liability for failure to give such notification. Tenders
of Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived.
While the Company has no present plan to acquire any Old Notes which are
not tendered in the Exchange Offer or to file a registration statement to
permit resales of any Old Notes which are not tendered pursuant to the Exchange
Offer, the Company reserves the right in its sole discretion to purchase or
make offers for any Old Notes that remain outstanding subsequent to the
Expiration Date or, as set forth below under "-- Conditions to Exchange Offer,"
to terminate the Exchange Offer and, to the extent permitted by applicable law,
purchase Old Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchase or offers could differ from the terms
of the Exchange Offer.
By tendering, each holder will represent to the Company that, among other
things, (i) the Exchange Notes to be acquired by the holder of the Old Notes in
connection with the Exchange Offer are being acquired by the holder in the
ordinary course of business of the holder, (ii) the holder has no arrangement
or understanding with any person to participate in the distribution of Exchange
Notes, (iii) the holder acknowledges and agrees that any person who is a
broker-dealer registered under the Exchange Act or is participating in the
Exchange Offer for the purpose of distributing the Exchange Notes must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with a secondary resale transaction of the Exchange Notes
acquired by such person and cannot rely on the position of the staff of the
Commission set forth in certain no-action letters, (iv) the holder understands
that a secondary resale transaction described in clause (iii) above and any
resales of Exchange Notes obtained by such holder in exchange for Old Notes
acquired by such holder directly from the Company should be covered by an
effective registration statement containing the selling security holder
information required by Item 507 or Item 508, as applicable, of Regulation S-K
of the Commission, and (v) the holder is not an "affiliate," as defined in Rule
405 of the Securities Act, of the Company. If the holder is a broker-dealer
that will receive Exchange Notes for its own account in exchange for Old Notes
that were acquired as a result of market-making activities or other trading
activities, the holder is required to acknowledge in the Letter of Transmittal
that it will deliver a prospectus in connection with any resale of such
Exchange Notes; however, by so acknowledging and by delivering a prospectus,
the holder will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. See "Plan of Distribution."
RETURN OF OLD NOTES
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned
without expense to the tendering holder thereof (or, in the case of Old Notes
tendered by book-entry transfer into the Exchange Agent's account at the
Depository pursuant to the book-entry transfer procedures described below, such
Old Notes will be credited to an account maintained with the Depository) as
promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with
respect to the Old Notes at the Depository for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depository's system may make
book-entry delivery of Old Notes by causing the Depository to transfer such Old
Notes into the Exchange Agent's account at the Depository in accordance with
the Depository's procedures for transfer. However, although delivery of Old
Notes may be effected through book-entry transfer at the Depository, the Letter
of Transmittal or facsimile thereof, with any required signature guarantees and
any other required documents, must, in any case, be transmitted to and received
by the Exchange Agent at the address set forth below under "-- Exchange Agent"
on or prior to the Expiration Date or pursuant to the guaranteed delivery
procedures described below.
34
<PAGE>
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes (or complete
the procedures for book-entry transfer), the Letters of Transmittal or any
other required documents to the Exchange Agent prior to the Expiration Date,
may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder, the certificate number(s) of such Old Notes (if
available) and the principal amount of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that, within five New York Stock
Exchange trading days after the Expiration Date, the Letter of Transmittal (or
a facsimile thereof) together with the certificate(s) representing the Old
Notes in proper form (or transfer for a confirmation of a book-entry transfer
into the Exchange Agent's account at the Depository of Old Notes delivered
electronically), and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly executed Letter of Transmittal (or facsimile thereof),
as well as the certificate(s) representing all tendered Old Notes in proper
form for transfer (or a confirmation of a book-entry transfer into the Exchange
Agent's account at the Depository of Old Notes delivered electronically), and
all other documents required by the Letter of Transmittal are received by the
Exchange Agent within five New York Stock Exchange trading days after the
Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will
be sent to the holders who wish to tender their Old Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to the Expiration Date. To withdraw a tender of Old Notes in
the Exchange Offer, a written or facsimile transmission notice of withdrawal
must be received by the Exchange Agent at its address set forth herein prior to
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor"),
(ii) identify the Old Notes to be withdrawn (including the certificate number
or numbers (if applicable) and principal amount of such Old Notes), and (iii)
be signed by the holder in the same manner as the original signature on the
Letter of Transmittal by which such Old Notes were tendered (including any
required signature guarantees). All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company in its sole discretion, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for purposes of the Exchange Offer and no Exchange Notes
will be issued with respect thereto unless the Old Notes so withdrawn are
validly retendered. Properly withdrawn Old Notes may be retendered by following
one of the procedures described above under "-- Procedures for Tendering" at
any time prior to the Expiration Date.
CONDITIONS TO EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company shall
not be required to accept for exchange, or exchange the Exchange Notes for, any
Old Notes not theretofore accepted for exchange, and may terminate or amend the
Exchange Offer as provided herein before the acceptance of such Old Notes, if
any of the following conditions exist:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer which,
in the reasonable judgment of the Company, might impair the ability of the
Company to proceed with the Exchange Offer or have a material adverse effect on
the contemplated benefits of the Exchange Offer to the Company or there shall
have occurred any material adverse development in any existing action or
proceeding with respect to the Company or any of its Subsidiaries; or
35
<PAGE>
(b) there shall have been any material change, or development involving a
prospective change, in the business or financial affairs of the Company or any
of its Subsidiaries which, in the reasonable judgment of the Company, could
reasonably be expected to materially impair the ability of the Company to
proceed with the Exchange Offer or materially impair the contemplated benefits
of the Exchange Offer to the Company; or
(c) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation which, in the judgment of the Company, could reasonably be
expected to materially impair the ability of the Company to proceed with the
Exchange Offer or materially impair the contemplated benefits of the Exchange
Offer to the Company; or
(d) any governmental approval which the Company shall, in its reasonable
discretion, deem necessary for the consummation of the Exchange Offer as
contemplated hereby shall have not been obtained.
If the Company determines in its reasonable discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Old
Notes and return all tendered Old Notes to the tendering holders, (ii) extend
the Exchange Offer and retain all Old Notes tendered prior to the expiration of
the Exchange Offer, subject, however, to the rights of holders to withdraw such
Old Notes (see "-- Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn. If such waiver constitutes a material
change to the Exchange Offer, the Company will promptly disclose such waiver by
means of a prospectus supplement that will be distributed to the registered
holders of the Old Notes, and the Company will extend the Exchange Offer for a
period of five to ten business days, depending upon the significance of the
waiver and the manner of disclosure to the registered holders, if the Exchange
Offer would otherwise expire during such five to ten business day period.
Holders may have certain rights and remedies against the Company under the
Registration Rights Agreement should the Company fail to consummate the
Exchange Offer, notwithstanding a failure of the conditions stated above. See
"Description of Notes." Such conditions are not intended to modify those rights
or remedies in any respect.
The foregoing conditions are for the sole benefit of the Company and may
be asserted by the Company regardless of the circumstances giving rise to such
condition or may be waived by the Company in whole or in part at any time and
from time to time in the Company's reasonable discretion. The failure by the
Company at any time to exercise the foregoing rights shall not be deemed a
waiver of any such right and each such right shall be deemed an ongoing right
which may be asserted at any time and from time to time.
TERMINATION OF REGISTRATION RIGHTS
All rights under the Registration Rights Agreement (including registration
rights) of holders of the Old Notes eligible to participate in this Exchange
Offer will terminate upon consummation of the Exchange Offer except with
respect to the Company's continuing obligations (i) to indemnify the holders
(including any broker-dealers) and certain parties related to the holders
against certain liabilities (including liabilities under the Securities Act),
(ii) to provide, upon the request of any holder of any transfer-restricted Old
Notes, certain information in order to permit resales of such Old Notes
pursuant to Rule 144A, (iii) to use its best efforts to keep the Exchange Offer
Registration Statement effective and to amend and supplement this Prospectus in
order to permit this Prospectus to be lawfully delivered by all persons subject
to the prospectus delivery requirements of the Securities Act for such period
of time as is necessary to comply with applicable law in connection with any
resale of the Exchange Notes; provided, however, that such period shall not
exceed 180 days after the Exchange Offer has been consummated. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
EXCHANGE AGENT
First Union National Bank has been appointed as Exchange Agent for the
Exchange Offer. All questions and requests for assistance as well as
correspondence in connection with the Exchange Offer and the Letter of
Transmittal should be addressed to the Exchange Agent, as follows:
36
<PAGE>
FIRST UNION NATIONAL BANK
Michael Klotz
First Union Customer Information Center
Corporate Trust Operations -- NC1153
1525 West W.T. Harris Blvd. 3C3
Charlotte, N.C. 28288-1153
Telephone: 704-590-7408
Fax: 704-590-7628
Requests for additional copies of this Prospectus, the Letter of
Transmittal or the Notice of Guaranteed Delivery should be directed to the
Exchange Agent.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telecopy, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager or other soliciting agent
in connection with the Exchange Offer and will not make any payments to
brokers, dealers or others soliciting acceptance of the Exchange Offer. The
Company, however, will pay the Exchange Agent reasonable and customary fees for
its services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer
will be paid by the Company and are estimated in the aggregate to be
approximately $375,000. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the
exchange of Old Notes pursuant to the Exchange Offer. If, however, a transfer
tax is imposed for any reason other than the exchange of Old Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder of Old Notes.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the Old
Notes as reflected in the Company's accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized. The expenses of the Exchange Offer will be amortized over the term
of the Notes.
37
<PAGE>
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the Exchange Notes offered in
the Exchange Offer. In consideration for issuing the Exchange Notes as
contemplated in this Prospectus, the Company will receive, in exchange, Old
Notes in like principal amount at maturity, the form and terms of the Exchange
Notes are the same as the form and terms of the Old Notes except that (i) the
exchange will have been registered under the Securities Act, and, therefore,
the Exchange Notes will not bear legends restricting the transfer thereof and
(ii) holders of the Exchange Notes will not be entitled to certain rights of
holders of the Old Notes under the Registration Rights Agreement, which rights
will terminate upon the consummation of the Exchange Offer. The Old Notes
surrendered in exchange for Old Notes will be retired and cancelled and cannot
be reissued. Accordingly, issuance of the Exchange Notes will not result in any
increase in the indebtedness of the Company.
The net proceeds of the Old Notes Offering were approximately $154.4
million after deducting discounts, commissions and expenses payable by the
Company. The Company used or intends to use the net proceeds from the Old Notes
Offering as follows: (i) approximately $52.4 million was used to acquire the
Pledged Securities, which provides funds for the first six interest payments on
the Notes; and (ii) approximately $102.0 million will be used to fund capital
expenditures through the end of the first quarter of 2000 to expand and develop
the Company's network, including the purchase and installation of switches and
related network equipment (including software and hardware upgrades for current
equipment), the acquisition of fiber optic cable facilities, investments in and
the acquisition of satellite earth stations.
During 1998, the Company plans to install a new international gateway
switch in Los Angeles and redeploy its Washington, D.C. switch to Chicago,
where it will serve as a domestic switch. In addition, the Company plans to
acquire (i) six additional switches during 1998 to be deployed during 1998 and
early 1999 in Chile, France, Germany, Japan, the Netherlands and the United
Kingdom; (ii) nine additional switches during 1999 to be deployed during 1999
and early 2000 in Australia, Belgium, Canada (two), Hong Kong, Italy, Mexico,
Switzerland and Uganda; and (iii) four additional switches in 2000 to be
deployed during 2000 and early 2001 in Argentina, Brazil, India and Singapore.
The Company also intends to invest in domestic land-based fiber optic cable
facilities linking the East Coast and West Coast of the United States, and
undersea fiber optic transmission facilities linking North America with Europe,
the Pacific Rim, Asia and Latin America. Moreover, the Company plans to invest
in or acquire two satellite earth stations during 1998 and 1999. As the Company
executes its expansion strategy and encounters new marketing opportunities,
management may elect to relocate or redeploy certain switches,
points-of-presence and other network equipment to alternate locations from what
is outlined above. The Company's business strategy contemplates aggregate
expenditures (including capital expenditures, working capital and other general
corporate purposes) of approximately $165.8 million through December 31, 2000.
Of such amount, the Company intends to use approximately $152.8 million
(including $5.8 million which has already been allocated to purchase the Los
Angeles switch) to fund capital expenditures to expand and develop the
Company's network. Consequently, after taking into account the net proceeds to
the Company of the Old Notes Offering, together with the Company's cash on hand
and anticipated cash from operations, the Company expects that it will need
approximately $40.0 million of additional financing to complete its capital
spending plan through the end of 2000. Although the Company believes that it
should be able to obtain this required financing from traditional lending
sources, such as bank lenders, asset-backed financiers or equipment vendors,
there can be no assurance that the Company will be successful in arranging such
financing on terms it considers acceptable or at all. In the event that the
Company is unable to obtain additional financing, it will be required to limit
or curtail its expansion plans. See "Risk Factors - Future Capital Needs;
Uncertainty of Additional Funding; Discretion in Use of Proceeds of the Old
Notes Offering."
The Company regularly reviews opportunities to further its business
strategy through strategic alliances with, investment in, or acquisitions of
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 particular strategic alliance, acquisition
or investment. The Company's ability to consummate strategic alliances and
acquisitions, and to make investments that may be
38
<PAGE>
of strategic significance to the Company, may require the Company to obtain
additional debt and/or equity financing. There can be no assurance that the
Company will be successful in arranging such financing on terms it considers
acceptable or at all.
SELECTED FINANCIAL AND OTHER DATA
The following table presents selected financial and other data of the
Company as of and for the fiscal years ended December 31, 1993, 1994, 1995,
1996 and 1997 and for the six months ended June 30, 1997 and as of and for the
six months ended June 30, 1998. The historical financial data as of and for the
fiscal years ended December 31, 1994, 1995, 1996 and 1997 has been derived from
the financial statements of the Company which have been audited by Arthur
Andersen LLP, independent public accountants. The financial data as of and for
the fiscal year ended December 31, 1993, for the six months ended June 30, 1998
has been derived from the Company's unaudited financial statements. In the
opinion of the Company's management, these unaudited financial statements
include all adjustments (consisting only of normal, recurring 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 in this Prospectus. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
----------- --------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT RATIOS AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues .................................. $ 3,288 $5,108 $ 10,508 $ 32,215 $ 85,857
Cost of services .............................. 3,090 4,701 9,129 29,881 75,783
-------- ------ -------- -------- --------
Gross margin ................................ 198 407 1,379 2,334 10,074
General and administrative expenses ........... 1,491 1,159 2,170 3,996 6,288
Selling and marketing expenses ................ 232 91 184 514 1,238
Depreciation and amortization ................. 85 90 137 333 451
-------- ------ -------- -------- --------
Income (loss) from operations ............... (1,610) (933) (1,112) (2,509) 2,097
Interest expense .............................. 71 70 116 337 762
Interest income ............................... 13 24 22 16 313
-------- ------ -------- -------- --------
Income (loss) before income tax provision..... (1,668) (979) (1,206) (2,830) 1,648
Income tax provision .......................... -- -- -- -- 29
-------- ------ -------- -------- --------
Net income (loss) ........................... $ (1,668) $ (979) $ (1,206) $ (2,830) $ 1,619
======== ====== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(1) ..................................... $ (1,525) $ (843) $ (975) $ (2,176) $ 2,548
Capital expenditures .......................... 45 44 200 520 3,881
Ratio of earnings to fixed charges(2) ......... -- -- -- -- 3.12x
OTHER DATA:
Residential customers ......................... 4,549 6,329 10,675 27,797 71,583
Carrier customers ............................. -- -- 7 27 34
Number of employees (full- and part-time at
period end) ................................. 29 31 41 54 124
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1997 1998
------------ ------------
(IN THOUSANDS, EXCEPT
RATIOS AND OTHER
DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues .................................. $ 28,836 $ 63,353
Cost of services .............................. 25,250 54,485
-------- --------
Gross margin ................................ 3,586 8,868
General and administrative expenses ........... 2,461 6,852
Selling and marketing expenses ................ 306 1,761
Depreciation and amortization ................. 214 708
-------- --------
Income (loss) from operations ............... 605 (453)
Interest expense .............................. 252 2,577
Interest income ............................... 5 1,302
-------- --------
Income (loss) before income tax provision..... 358 (1,728)
Income tax provision .......................... 7 30
-------- --------
Net income (loss) ........................... $ 351 $ (1,758)
======== ========
OTHER FINANCIAL DATA:
EBITDA(1) ..................................... $ 819 $ 255
Capital expenditures .......................... 184 5,672
Ratio of earnings to fixed charges(2) ......... 2.37x --
OTHER DATA:
Residential customers ......................... 43,700 93,500
Carrier customers ............................. 32 55
Number of employees (full- and part-time at
period end) ................................. 72 266
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------- AS OF JUNE 30,
1993 1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- ---------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ........................ $ 194 $ 257 $ 528 $ 148 $26,114 $120,121
Total assets ..................................... 1,176 1,954 4,044 7,327 51,530 215,275
Long-term obligations (including capital leases),
net of current maturities ...................... 248 6 361 646 461 158,183
Stockholders' equity (deficit) ................... (1,824) (2,803) (3,259) (6,089) 31,590 32,271
</TABLE>
- - ----------
(1) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation and amortization. EBITDA should not be considered as a
substitute for operating earnings, net income, cash flow or other
statement of income or cash flow data computed in accordance with GAAP or
as a measure of a company's results of operations or liquidity. Although
EBITDA is not a measure of performance or liquidity calculated in
accordance with GAAP, the Company nevertheless believes that investors
consider it a useful measure in assessing a company's ability to incur and
service indebtedness.
(2) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" are defined as income (loss) before income tax provision plus
fixed charges. Fixed charges consist of interest expense, amortization of
deferred debt financing costs and the estimated interest portion of rental
payments on operating leases. Earnings were inadequate to cover fixed
charges for the fiscal years ended December 31, 1993, 1994, 1995, 1996 and
the six months ended June 30, 1998 by approximately $1.7 million, $1.0
million, $1.2 million, $2.8 million, and $1.7 million, respectively.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto presented elsewhere in this
Prospectus. Certain information contained below and elsewhere in this
Prospectus, including information regarding the Company's plans and strategy
for its business, are forward-looking statements. See "Note Regarding
Forward-Looking Statements."
OVERVIEW
Startec Global is a rapidly growing, facilities based international long
distance telecommunications service provider. The Company markets its services
to select ethnic residential communities throughout the United States and to
leading international long distance carriers. The Company's annual revenues
have increased more than eight-fold over the last three years from
approximately $10.5 million for the year ended December 31, 1995 to
approximately $85.9 million for the year ended December 31, 1997. The number of
the Company's residential customers increased from 10,675 customers as of
December 31, 1995 to 93,500 customers as of June 30, 1998.
The Company was founded in 1989 to capitalize on the significant
opportunity to provide international long distance services to select ethnic
communities in major U.S. metropolitan markets that generate substantial
long-distance traffic to their countries of origin. Until 1995, the Company
concentrated its marketing efforts in the New York-Washington, D.C. corridor
and focused on the delivery of international calling services to India. At the
end of 1995, the Company expanded its marketing efforts to include the West
Coast of the United States, and began targeting other ethnic groups in the
United States, such as the Middle Eastern, Filipino and Russian communities.
The Company currently originates traffic that terminates in Asia, the Pacific
Rim, the Middle East, Africa, Eastern and Western Europe and North America.
In order to achieve economies of scale in its network operations and
balance its residential international traffic, the Company, in late 1995, began
marketing its excess network capacity to international carriers seeking
competitive rates and high quality capacity. Since initiating its international
wholesale services, the Company has expanded its number of carrier customers to
55 at June 30, 1998.
A key component of the Company's strategy is to build its own global
network, which will allow it to originate, transmit and terminate a substantial
portion of its calls utilizing network capacity the Company manages. The
facilities currently owned by the Company only provide a cost advantage with
respect to traffic origination costs. The Company anticipates that this network
expansion will allow it to achieve a per-minute cost advantage. As the Company
transitions from leasing to owning or managing its facilities, the Company's
management believes economies in the per-minute cost of a call will be
realized, while fixed costs will increase. The Company realizes a per-minute
cost savings when it is able to originate calls on-net. For the year ended
December 31, 1997 and the six months ended June 30, 1998, approximately 60% and
65%, respectively, of the Company's residential revenues were originated on-net.
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 are recognized as those 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 PTTs, as described
below, are recognized as revenue as the return traffic is received and
processed. There can be no assurance that traffic will be returned 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.
40
<PAGE>
Substantially all of the Company's revenues for the past three fiscal
years and for the six months ended June 30, 1997 and 1998 have been derived
from calls terminated outside the United States. The percentages of net
revenues attributable to traffic terminating on a region-by-region basis are
set forth in the table below.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Asia/The Pacific Rim ............. 66.4% 43.0% 49.0% 41.9% 46.8%
Middle East/North Africa ......... 6.6 25.7 24.7 28.1 20.1
Sub-Saharan Africa ............... 0.3 3.5 7.4 8.2 6.8
Eastern Europe ................... 3.0 8.2 9.3 9.9 10.5
Western Europe ................... 15.7 5.5 2.2 3.1 2.1
North America .................... 4.7 11.5 4.0 5.4 4.5
Other ............................ 3.3 2.6 3.4 3.4 9.2
----- ----- ----- ----- -----
Total ......................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
The Company's cost of services consists of origination, transmission and
termination expenses. Origination costs include the amounts paid to LECs, and,
in areas where the Company does not have its own network facilities, to other
telecommunication network providers for originating calls ultimately carried to
the Company's switches. Transmission expenses are fixed month-to-month payments
associated with capacity on domestic and international leased lines, satellites
and undersea fiber optic cables. Leasing this capacity subjects the Company to
price changes that are beyond the Company's control and to transmission costs
that are higher than transmission costs on the Company's owned network. As the
Company builds its own transmission capacity, the risks associated with price
fluctuations and the relative costs of transmission are expected to decrease;
however, fixed costs will increase. When billing disputes between the Company
and other telecommunication network providers arise, the Company accrues the
full amount in dispute within cost of services and, upon resolution, only the
amount actually agreed upon is treated by the Company as a "credit" to cost of
services. The Company's experience to date has been that the resolution of such
disputes occurs primarily in the fourth quarter of each year, and, therefore,
the related adjustments to cost of services may have a disproportionate impact
on its fourth quarter results of operations. Accordingly, adjustments to the
Company's cost of services arising from the resolution of billing disputes with
other telecommunication network providers may have a positive impact on gross
margins in any particular year.
Termination expenses consist of variable per minute charges paid to
foreign PTTs and alternative carriers to terminate the Company's international
long-distance traffic. Among its 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 to
the United States is routed through U.S.-based international carriers such as
the Company in the same proportion as traffic carried into the foreign country
from the United States ("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
Company receives return traffic in a future period, the Company generally
realizes a higher gross margin on the return traffic as compared to the lower
margin on the outbound traffic. Revenue recognized from return traffic was
approximately $2.0 million, $1.1 million, $1.4 million and $706,000, or 19%,
3%, 2% and 1% of net revenues in 1995, 1996, 1997 and for the six months ended
June 30, 1998, respectively. There can be no assurance that traffic will be
delivered back to the United States or that changes in future settlement rates,
allocations among carriers or levels of traffic will not adversely affect net
payments made and revenues received by the Company.
In addition to operating agreements, the Company utilizes alternative
termination arrangements offered by third party vendors. The Company seeks to
maintain vendor diversity for countries where
41
<PAGE>
traffic volume is high. These vendor arrangements provide service on a variable
cost basis subject to volume. These prices are subject to changes, generally
upon seven days' notice.
As the international telecommunications marketplace has been deregulated,
per-minute prices 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 price reductions, although there can be no assurance that
this will continue. The Company expects selling, general and administrative
costs to increase as it develops its infrastructure to manage higher business
volume.
The Company expects to incur negative EBITDA and significant operating
losses and net losses for the next several years as it incurs additional costs
associated with the development and expansion of its network, the expansion of
its marketing programs, its entry into new markets and the introduction of new
telecommunications services, and, in the case of net losses, as a result of the
interest expense associated with its financing activities.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net revenues:
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues ................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services ............................ 86.9 92.8 88.3 87.6 86.0
----- ----- ----- ----- -----
Gross margin ............................... 13.1 7.2 11.7 12.4 14.0
General and administrative expenses ......... 20.7 12.4 7.3 8.5 10.8
Selling and marketing expenses .............. 1.8 1.6 1.4 1.1 2.8
Depreciation and amortization ............... 1.3 1.0 0.5 0.7 1.1
----- ----- ----- ----- -----
Income (loss) from operations .............. (10.7) ( 7.8) 2.5 2.1 ( 0.7)
Interest expense ............................ ( 1.1) ( 1.1) ( 0.9) ( 0.9) ( 4.1)
Interest income ............................. 0.2 0.1 0.3 -- 2.1
----- ----- ----- ----- -----
Income (loss) before income tax provi-
sion ..................................... (11.6) ( 8.8) 1.9 1.2 ( 2.7)
Income tax provision ........................ -- -- -- -- ( 0.1)
----- ----- ----- ----- -----
Net income (loss) .......................... (11.6)% ( 8.8)% 1.9% 1.2% ( 2.8)%
===== ===== ===== ===== =====
</TABLE>
SIX MONTH PERIOD ENDED JUNE 30, 1998 COMPARED TO SIX MONTH PERIOD ENDED JUNE
30, 1997
Net Revenues. Net revenues for the six months ended June 30, 1998
increased approximately $34.6 million or 120.1 percent, to approximately $63.4
million from $28.8 million for the six months ended June 30, 1997. Residential
revenue increased in comparative periods by approximately $13.7 million or
130.5 percent, to approximately $24.2 million for the six months ended June 30,
1998 from approximately $10.5 million in the six months ended June 30, 1997.
The increase in residential revenue is due to an increase in the number of
residential customers to over 93,500 as of June 1998 from approximately 43,700
as of June 1997. Carrier revenue for the six months period ended of June 30,
1998 increased approximately $20.9 million or 114.2 percent, to approximately
$39.2 million from approximately $18.3 million for the six months ended June
30, 1997. The increase in carrier revenues is due to the execution of the
Company's strategy to optimize its capacity on its facilities, which has
resulted in sales to new carrier customers and increased sales to existing
carrier customers.
Gross Margin. Gross margin increased by approximately $5.3 million to $8.9
million for the six month period ended June 30, 1998 from $3.6 million for the
six month period ended June 30, 1997. Gross margin improved as a percentage of
net revenues for the six-month period ended June 30, 1998 to
42
<PAGE>
14.0 percent from 12.4 percent for the six-month period ended June 30, 1997.
Gross margin for the six-month period ended June 30, 1998 improved due to an
increase in the traffic originated on the Company's own network and improved
termination costs.
General and Administrative. General and administrative expenses for the
six month period ended June 30, 1998 increased 176 percent to approximately
$6.9 million from $2.5 million for the six month period ended June 30, 1997. As
a percentage of net revenues, general and administrative expenses increased to
10.8 percent from 8.5 percent for the respective periods. The increase in
dollar amounts was primarily due to an increase in personnel to 266 at June 30,
1998 from 73 at June 30, 1997, and to a lesser extent, an increase in billing
processing fees.
Selling and Marketing. Selling and marketing expenses for the six month
period ended June 30, 1998 increased 488.2 percent to approximately $1.8
million from approximately $306,000 for the six month period ended June 30,
1997. As a percentage of net revenues, selling and marketing expenses increased
to 2.8 percent from 1.1 percent for the respective periods. The increase in
dollar amounts is primarily due to Company's efforts to market to new, and
increased efforts to market to existing, customer groups.
Depreciation and Amortization. Depreciation and amortization expenses for
the six month period ended June 30, 1998 increased to approximately $708,000
from $214,000 for the six month period ended June 30, 1997, primarily due to
increases in capital expenditures pursuant to the Company's strategy of
expanding its network infrastructure.
Interest. Interest expense for the six month period ended June 30, 1998
increased to approximately $2.6 million from $252,000 for the six month period
ended June 30, 1997, as a result of the Old Notes Offering. The Company also
recorded interest income of approximately $1.3 million for the six-month period
ended June 30, 1998 as a result of the investing the offering proceeds.
Net Loss. Net loss was approximately $1.8 million for the six month period
ended June 30, 1998 as compared to a net income of approximately $351,000 in
for the six month period ended June 30, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net revenues for the year ended December 31, 1997 increased approximately
$53.7 million or 166.8%, to approximately $85.9 million from $32.2 million for
the year ended December 31, 1996. Residential revenue increased in comparative
periods by approximately $16.6 million or 138.3%, to approximately $28.6
million for the year ended December 31, 1997 from approximately $12.0 million
in 1996. The increase in residential revenue was due to an increase in
residential customers to over 71,500 at December 31, 1997 from approximately
27,800 at December 31, 1996. Carrier revenue for the year ended December 31,
1997 increased approximately $37.1 million or 183.7%, to approximately $57.3
million from approximately $20.2 million for the year ended December 31, 1996.
The increase in carrier revenues was due to the execution of the Company's
strategy to optimize capacity on its facilities, which resulted in sales to
additional carrier customers and increased sales to existing carrier customers.
Gross margin increased approximately $7.7 million to approximately $10.0
million for the year ended December 31, 1997 from approximately $2.3 million
for the year ended December 31, 1996. Gross margin improved as a percentage of
net revenues for the year ended December 31, 1997 to 11.7% from 7.2% for the
year ended December 31, 1996. The gross margin on residential revenue increased
to approximately 14.9% for the year ended December 31, 1997 from approximately
10.1% for the year ended December 31, 1996, due to an increase in the
percentage of residential traffic originated on-net and improved termination
costs. In the year ended December 31, 1997, 59.8% of residential traffic
originated on-net as compared to 44.9% for the year ended December 31, 1996.
The reported gross margin for the years ended December 31, 1997 and
December 31, 1996 included the effect of accrued disputed charges of
approximately $67,000 and $1.4 million, respectively, which represented less
than 1% and 5% of reported net revenues, respectively.
43
<PAGE>
General and administrative expenses for the year ended December 31, 1997
increased approximately $2.3 million or 57.5% to approximately $6.3 million
from $4.0 million for the year ended December 31, 1996. As a percentage of net
revenues, general and administrative expenses declined to 7.3% from 12.4% for
the respective periods. The increase in dollar amounts was primarily due to an
increase in personnel to 124 at December 31, 1997 from 54 at December 31, 1996,
and to a lesser extent, an increase in billing processing fees as a result of
the increased residential customer base.
Selling and marketing expenses for the year ended December 31, 1997
increased approximately $686,000 or 133.5% to approximately $1.2 million from
approximately $514,000 for the year ended December 31, 1996. As a percentage of
net revenues, selling and marketing expenses declined to 1.4% from 1.6% in the
respective periods. The increase in dollar amounts was primarily due to the
Company's efforts to market to new customer groups.
Depreciation and amortization expenses for the year ended December 31,
1997 increased to approximately $451,000 from approximately $333,000 for the
year ended December 31, 1996, primarily due to increases in capital
expenditures pursuant to the Company's strategy of expanding its network
infrastructure.
Interest expense for the year ended December 31, 1997 increased to
approximately $762,000 from $337,000 for the year ended December 31, 1996, as a
result of additional debt incurred by the Company to fund expansion and working
capital needs.
Net income was approximately $1.6 million in 1997 as compared to a net
loss of approximately $2.8 million in 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net revenues for the year ended December 31, 1996 increased approximately
$21.7 million or 206.7%, to approximately $32.2 million from $10.5 million for
the year ended December 31, 1995. Residential revenue increased in comparative
periods by approximately $6.6 million or 122.2%, to approximately $12.0 million
in 1996 from $5.4 million in 1995. The increase in residential revenue was 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 27,797
customers as of December 31, 1996 from 10,675 customers as of December 31,
1995. Carrier revenue increased approximately $15.1 million or 296.1% to $20.2
million in 1996 from $5.1 million in 1995. This growth was a 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 approximately $1.1 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 increased approximately $900,000 to $2.3 million for the year
ended December 31, 1996 from $1.4 million for the year ended December 31, 1995.
Gross margin declined as a percentage of net revenues to approximately 7.2% for
the year ended December 31, 1996 from 13.1% for the year ended December 31,
1995. The gross margin on residential revenue decreased to approximately 10.1%
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 approximately 44.9% in
1996, as compared to 62.7% 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 approximately negative 0.02% in 1996 from negative 36.9%
in 1995.
General and administrative expenses for the year ended December 31, 1996
increased approximately $1.8 million, or 81.8%, to $4.0 million from $2.2
million for the year ended December 31, 1995. As a percentage of net revenues,
general and administrative expenses declined to approximately 12.4% from 20.7%
for the respective periods. The increase in dollar amounts was primarily due to
increased third party billing and collection fees of approximately $349,000 to
support higher calling volume; increased personnel expenses to $1.5 million in
1996 from $1.1 million in 1995 as a result of new hires; and bad debt losses of
approximately $529,000 attributable to the bankruptcy of one former customer.
44
<PAGE>
Selling and marketing expenses for the year ended December 31, 1996
increased to approximately $514,000 from approximately $184,000 for the year
ended December 31, 1995. As a percentage of net revenues, selling and marketing
expenses declined to 1.6% from 1.8% in the respective periods. The increase in
dollar amounts was attributable to the Company's efforts to enter additional
ethnic markets and new geographic areas.
Depreciation and amortization expenses grew to approximately $333,000 in
1996 from $137,000 in 1995, primarily due to increased capital expenditures.
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.
The Company experienced a net loss of approximately $2.8 million in 1996
compared to a net loss of $1.2 million in 1995.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial data
for each of the quarters in the years ended December 31, 1996 and 1997, and for
the first two quarters of 1998. This quarterly information has been derived
from and should be read in conjunction with the Company's financial statements
and the notes thereto, and, in management's opinion, reflects all adjustments
(consisting only of normal recurring adjustments except as discussed in Notes
(1), (2) and (3) below) 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
-----------------------------------------------------------------------------------------------
1996 1997 1998
-------------------------------------------- ---------------------------------------- ---------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
--------- ----------- ---------- ----------- --------- --------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues(1) ............. $4,722 $ 8,485 $ 7,652 $ 11,356 $12,372 $16,464 $25,757 $31,264 $29,891
Cost of services(2) ......... 4,467 7,922 6,763 10,729 10,765 14,485 22,668 27,865 25,655
------ ------- ------- -------- ------- ------- ------- ------- -------
Gross margins (2)(3)(1)..... 255 563 889 627 1,607 1,979 3,089 3,399 4,236
General and administrative
expenses(2) ................ 595 778 1,370 1,253 1,151 1,310 1,820 2,007 2,691
Selling and marketing ex-
penses ..................... 52 101 166 195 104 202 391 541 648
Depreciation and amortiza-
tion ....................... 52 93 93 95 96 118 140 97 184
------ ------- ------- -------- ------- ------- ------- ------- -------
Income (loss) from oper-
ations ................... (444) (409) (740) (916) 256 349 738 754 713
Interest expense ............ 58 60 80 139 117 135 326 184 153
Interest income ............. 5 4 5 2 1 4 9 299 359
------ ------- ------- -------- ------- ------- ------- ------- -------
Income (loss) before in-
come tax provision ....... (497) (465) (815) (1,053) 140 218 421 869 919
Income tax provision ........ -- -- -- -- 3 4 8 14 20
------ ------- ------- -------- ------- ------- ------- ------- -------
Net income (loss) .......... $ (497) $ (465) $ (815) $ (1,053) $ 137 $ 214 $ 413 $ 855 $ 899
====== ======= ======= ======== ======= ======= ======= ======= =======
<CAPTION>
QUARTERS
ENDED
------------
1998
------------
JUNE 30
------------
<S> <C>
Net revenues(1) ............. $ 33,462
Cost of services(2) ......... 28,830
--------
Gross margins (2)(3)(1)..... 4,632
General and administrative
expenses(2) ................ 4,161
Selling and marketing ex-
penses ..................... 1,113
Depreciation and amortiza-
tion ....................... 524
--------
Income (loss) from oper-
ations ................... (1,166)
Interest expense ............ 2,424
Interest income ............. 943
--------
Income (loss) before in-
come tax provision ....... (2,647)
Income tax provision ........ 10
--------
Net income (loss) .......... $ (2,657)
========
</TABLE>
- - ----------
(1) During the second quarter of 1998, upon receipt of favorable collection
data, the Company reduced its allowance for doubtful accounts by
approximately $337,000.
(2) Vendor disputes and other disputed charges resolved in the fourth quarter
of 1997 resulted in net credits as estimated by management of
approximately $300,000 recognized as lower cost of services and general
and administrative expenses.
(3) During the first quarter of 1997, the Company's gross margin improved by
approximately $1.0 million over the fourth quarter of 1996. The
improvement was due to (i) approximately $500,000 in costs accrued in the
fourth quarter of 1996 for disputed vendor obligations as compared to
approximately $8,000 in costs accrued during the first quarter of 1997;
(ii) approximately $400,000 of 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 residential traffic
originated on-net.
45
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from cash used in operating
activities, purchases of network equipment and payments on outstanding
indebtedness. Prior to the completion of its Initial Public Offering (as
defined below), the Company financed its activities through capital lease
financings, notes payable from individuals, a credit and billing arrangement
with a third party company (since terminated) and a secured revolving line of
credit with Signet Bank ("Signet Facility"). The Signet Facility provides for
maximum borrowings of up to the lesser of $15 million or 85% 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%, or the adjusted LIBOR, plus 4%. The Signet Facility required a
$150,000 commitment fee to be paid at closing, and a quarterly commitment fee
of 0.25% of the unborrowed portion. The Signet Facility is secured by
substantially all of the Company's assets. The Signet Facility was amended in
connection with the Old Notes Offering and the Reorganization. As of the date
hereof, as a result of the Indebtedness incurred in connection with the Old
Notes Offering, the Company is not in compliance with certain financial
covenants contained in the Amended Credit Facility and is therefore unable to
borrow any amounts thereunder.
The Company completed its initial public offering of 3,277,500 shares of
its common stock ("Common Stock") in October 1997 ("Initial Public Offering"),
the net proceeds of which (after underwriting discounts, commissions and other
professional fees) approximated $35.0 million. The Company used a portion of
the net proceeds to acquire cable facilities and switching, compression and
related telecommunications equipment. Proceeds were also used for marketing
programs, to pay down amounts due under the Signet Facility, for working
capital and general corporate purposes. As a result, the Company's cash and
cash equivalents increased to approximately $26.1 million at December 31, 1997
from approximately $148,000 at December 31, 1996. Net cash used in operating
activities was approximately $1.7 million for the year ended December 31, 1997,
as compared to net cash used in operating activities of approximately $1.4
million for the year ended December 31, 1996. The increase in cash used in
operating activities was the result of the significant growth in net revenues
offset in part by an increase in accounts payable for the period.
Net cash used in investing activities was approximately $3.9 million and
$520,000 for the year ended December 31, 1997 and 1996, respectively. Net cash
used in investing activities for the year ended December 31, 1997 primarily
related to capital expenditures made to expand the Company's network
infrastructure.
Net cash provided by financing activities was approximately $31.6 million
and $1.5 million for the year ended December 31, 1997 and 1996, respectively.
Cash provided by financing activities for the year ended December 31, 1997
primarily resulted from net proceeds from the Initial Public Offering, as
previously discussed, offset by the repayment of amounts under the
receivables-based credit facility, capital lease obligations, and various notes
payable. Any borrowings under the Signet Facility were repaid by December 31,
1997.
On May 21, 1998, the Company consummated the Old Notes Offering, which
yielded net proceeds of approximately $155 million, of which approximately
$52.4 million was used to purchase the Pledged Securities, which are pledged as
security and restricted for use as the first six interest payments due on the
Notes. The Company intends to apply approximately $102.0 million to fund
capital expenditures through the end of the first quarter of 2000 to expand and
develop the Company's network, including the purchase and installation of
switches and related network equipment (including software and hardware
upgrades for current equipment), the acquisition of fiber optic cable
facilities, and investments in and the acquisition of satellite earth stations.
The Notes are unsecured and require semi-annual interest payments beginning
November 15, 1998. The Notes and Warrants have certain registration rights
discussed elsewhere herein.
As a result of the Old Notes Offering, the Company's cash and cash
equivalents increased to approximately $120.1 million at June 30, 1998 from
approximately $2.1 million at June 30, 1997. Net cash used by operating
activities was approximately $2.3 million for the six months ended June 30,
1998, as compared to net cash provided by operating activities of $514,000 for
the three months ended June 30, 1997. The decrease
46
<PAGE>
in cash from operations for the six months ended June 30, 1998 was primarily
the result of the net loss and an increase in accounts receivable, which was
partially offset by an increase in accounts payable and accrued expenses.
Net cash used in investing activities was approximately $5.7 million and
$184,000 for the six-month periods ended June 30, 1998 and 1997, respectively.
Net cash used in investing activities for the six months ended June 30, 1998
was primarily related to capital expenditures made in connection with its
network expansion.
Net cash provided by financing activities was approximately $102 million
and $1.6 million for the six months ended June 30, 1998 and 1997, respectively.
Cash provided by financing activities for the six months ended June 30, 1998
primarily resulted from the Old Notes Offering.
After the Exchange Offer, the Company's principal cash requirements will
be for capital expenditures related to the Company's network development plan,
and for interest payments on the Notes. The Notes bear an annual rate of
interest of 12%, payable semi-annually in arrears. A portion of the net
proceeds of the Old Notes Offering were used to purchase the Pledged
Securities, which assures holders of the Notes that they will receive all
scheduled cash interest payments on the Notes through May 15, 2001. The Company
may be required to obtain additional financing in order to pay interest on the
Notes after May 15, 2001 and to repay the Notes at their maturity.
The Company's business strategy contemplates aggregate capital
expenditures (including capital expenditures, working capital and other general
corporate purposes) of approximately $165.8 million through December 31, 2000.
Of such amount, the Company intends to use approximately $152.8 million to fund
capital expenditures to expand and develop the Company's network (including
$5.8 million which has already been allocated to purchase the Los Angeles
switch).
During 1998, the Company plans to install a new international gateway
switch in Los Angeles and to redeploy its Washington, D.C. switch to Chicago,
where it will serve as a domestic switch. In addition, the Company plans to
acquire (i) six additional switches during 1998 to be deployed during 1998 and
early 1999 in Chile, France, Germany, Japan, the Netherlands and the United
Kingdom; (ii) nine additional switches during 1999 to be deployed during 1999
and early 2000 in Australia, Belgium, Canada (two), Hong Kong, Italy, Mexico,
Switzerland and Uganda; and (iii) four additional switches in 2000 to be
deployed during 2000 and early 2001 in Argentina, Brazil, India and Singapore.
The Company also intends to invest in domestic land-based fiber optic cable
facilities linking the East Coast and West Coast of the United States, and
undersea fiber optic transmission facilities linking North America with Europe,
the Pacific Rim, Asia and Latin America. Moreover, the Company plans to invest
in or acquire two satellite earth stations during 1998 and 1999. As the Company
executes its expansion strategy and encounters new marketing opportunities,
management may elect to relocate or redeploy certain switches,
points-of-presence and other network equipment to alternate locations from what
is outlined above
After taking into account the net proceeds to the Company of the Old Notes
Offering and the purchase of the Pledged Securities, together with the
Company's cash on hand and anticipated cash from operations, the Company
expects that it will need approximately $40.0 million of additional financing
to complete its capital spending plan through the end of 2000. Although the
Company believes that it should be able to obtain this required financing from
traditional lending sources, such as bank lenders, asset-based financiers or
equipment vendors, there can be no assurance that the Company will be
successful in arranging such financing on terms its considers acceptable or at
all. In the event that the Company is unable to obtain additional financing, it
will be required to limit or curtail its expansion plans.
The Company regularly reviews opportunities to further its business
strategy through strategic alliances with, investment in, or acquisitions of
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 particular strategic alliance,
acquisition or investment. The Company's ability to consummate strategic
alliances and acquisitions, and to make investments that may be of strategic
significance to the Company, may require the Company to obtain additional debt
and/or equity financing. There can be no assurance that the Company will be
successful in arranging such financing on terms it considers acceptable or at
all.
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The implementation of the Company's strategic plan, including the
development and expansion of its network facilities, expansion of its marketing
programs, and funding of operating losses and working capital needs, will
require significant investment. The Company expects that the net proceeds of
the Old Notes Offering, together with cash on hand and cash flow from
operations, will provide the Company with sufficient capital to fund currently
planned capital expenditures and anticipated operating losses through the end
of the first quarter of 2000. There can be no assurance, however, that the
Company will not need additional financing sooner than currently anticipated.
The need for additional financing depends on a variety of factors, including
the rate and extent of the Company's expansion in existing and new markets, the
cost of an investment in additional switching and transmission facilities and
ownership rights in fiber optic cable, the incurrence of costs to support the
introduction of additional or enhanced services, and increased sales and
marketing expenses. In addition, the Company may need additional financing to
fund unanticipated working capital needs or to take advantage of unanticipated
business opportunities, including acquisitions, investments or strategic
alliances. The amount of the Company's actual future capital requirements also
will depend upon many factors that are not within the Company's control,
including competitive conditions and regulatory or other government actions. In
the event that the Company's plans or assumptions change or prove to be
inaccurate or the remaining net proceeds of the Old Notes Offering, together
with cash on hand and internally generated funds, prove to be insufficient to
fund the Company's growth and operations, then some or all of the Company's
development and expansion plans could be delayed or abandoned, or the Company
may be required to seek additional financing or to sell assets, to the extent
permitted by the Indenture.
The Company may seek to raise such additional capital from public or
private equity or debt sources. There can be no assurance that the Company will
be able to obtain additional financing or, if obtained, that it will be able to
do so on a timely basis or on terms favorable to the Company. If the Company is
able to raise additional funds through the incurrence of debt, it would likely
become subject to additional restrictive financial covenants. In the event that
the Company is unable to obtain such additional capital or is unable to obtain
such additional capital on acceptable terms, the Company may be required to
reduce the scope of its expansion, which could adversely affect the Company's
business, financial condition and results of operations, its ability to compete
and its ability to meet its obligations under the Notes.
Although the Company intends to implement the capital spending plan
described above, it is possible that unanticipated business opportunities may
arise which the Company's management may conclude are more favorable to the
long-term prospects of the Company than those contemplated by the current
capital spending plan. Management will have significant discretion in its
decisions with respect to when and how to utilize the remaining net proceeds of
the Old Notes Offering.
The Company has accrued approximately $2.1 million as of June 30, 1998 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 disputes, these amounts or portions
thereof would be credited to operations in the period of resolution.
Conversely, if the Company does not prevail in its disputes, these amounts or
portions thereof may be paid in cash.
The Company's management is currently in the process of assessing the
nature and extent of the potential impact of the Year 2000 issue on its systems
and applications, including its billing, credit and call tracking systems, and
intends to take steps to prevent failures in its systems and applications
relating to Year 2000. Although many of the Company's operating systems are
relatively new and have been certified to the Company as being Year 2000
compliant, there can be no assurance that the Company's systems will not be
adversely affected by the Year 2000 issue. In addition, computers used by the
Company's vendors providing services to the Company or computers used by the
Company's customers that interface with the Company's computer systems may have
Year 2000 problems, any of which may adversely affect the ability of those
vendors to provide services to the Company, or in the case of the Company's
carrier customers, to make payments to the Company. If any of such systems
fails or experiences processing errors, such failures or errors may disrupt or
corrupt the Company's systems. The Company is in the initial stages of
verifying the Year 2000 compliance efforts of the third parties with which the
Company's computer systems interface. Although management has not yet finalized
its analysis, it does not expect that the costs to properly address the Year
2000 issue will have a material adverse
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effect on its results of operations or financial position. Failure of any of
the Company's systems or applications or the failure, or errors in, the
computer systems of its vendors or carrier customers could materially adversely
affect the Company's business, financial condition and results of operations.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information."
SFAS No. 130 requires "comprehensive income" and the components of "other
comprehensive income," to be reported in the financial statements and/or notes
thereto. Because the Company does not have any components of "other
comprehensive income," reported net income is the same as "total comprehensive
income" for all periods presented.
SFAS No. 131 requires an entity to disclose financial and descriptive
information about its reportable operating segments. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. SFAS No. 131 is not required for interim financial
reporting purposes during 1998. The Company is in the process of assessing the
additional disclosures, if any, required by SFAS No. 131. However, adoption
will not impact the Company's results of operations or financial position since
it relates only to disclosures.
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.
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THE INTERNATIONAL TELECOMMUNICATIONS INDUSTRY
The international telecommunications industry consists of transmissions of
voice and data that originate in one country and terminate in another. The
industry is undergoing a period of fundamental change, which has resulted in
significant growth in the usage of international telecommunications services.
From the standpoint of U.S.-based long distance carriers, the international
market can be divided into two major segments: the U.S.-originated market,
which consists of all international calls that 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 industry sources and the
Company's market research, the international telecommunications services market
generated approximately $67 billion in revenues and 81 billion minutes of use
during 1997. The international telecommunications market is currently
recognized as one of the fastest growing and most profitable segments of the
global telecommunications industry. According to industry estimates,
international long distance minutes are projected to grow at approximately 17%
per year through the year 2001. Based on publicly-available information, from
1990 to 1996, the U.S.-originated international telecommunications market grew
at a compound annual growth rate of approximately 11% (from $7.6 billion to
$14.1 billion) and is expected to grow at approximately 14% per year through
2001.
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:
o 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
initiatives and technological advancements, is expected to lead to
increased demand for international telecommunications services in those
markets.
o Liberalization of telecommunications markets. The continuing
liberalization and privatization of telecommunications markets has
provided, and continues to provide, opportunities for new carriers who
desire to penetrate those markets, thereby increasing competition.
o 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.
o 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.
o 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.
o Bandwidth needs. The demand for bandwidth-intensive data transmission
services, including Internet-based demand, has increased rapidly and is
expected to continue to increase in the future.
Liberalization has encouraged competition, which in turn has prompted
carriers to offer a wider selection of products and services at lower prices.
In recent years, prices for international long distance services have decreased
substantially and are expected to continue to decrease in many of the markets
in which the Company currently competes. Several long distance carriers in the
United States have introduced pricing strategies that provide for fixed, low
rates for both domestic and international calls originating in the United
States. The Company believes that revenue losses resulting from competition-
induced price decreases have been more than offset by cost decreases, as well
as an increase in telecommunications usage. For example, based on FCC data for
the period 1990 through 1996, per minute settlement payments by U.S.-based
carriers to foreign PTTs fell 38.6%, from $0.70 per minute to $0.43 per minute.
Over this same period, however, per minute international billed revenues fell
only 30.2%, from $1.06 in 1990 to $0.74 in 1996. The Company believes that as
settlement rates and costs for leased capacity continue to decline,
international long distance will continue to provide high revenues and gross
margin per minute. See "Risk Factors -- Intense Competition."
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Regulatory and Competitive Environment
In the United States, one of the first liberalized markets in the world,
competition began in the late 1960's with MCI's authorization to provide
long-distance service. The 1984 court-ordered dissolution of AT&T's monopoly
over local and long distance telecommunications fostered the emergence of new
U.S.-based long distance companies. Today, there are over 600 U.S.-based long
distance companies, most of which are small- or medium-sized companies, serving
residential and business customers and other carriers. Liberalization has
occurred and is occurring elsewhere around the world, including in most EU
nations, several Latin American nations and certain Asian nations.
On February 15, 1997, the United States and 68 other countries signed the
WTO Agreement and agreed to open their telecommunications markets to
competition and foreign ownership starting January 1, 1998. These 69 countries
represent approximately 90% of worldwide telecommunications traffic. The
Company believes that the WTO Agreement will provide it with significant
opportunities to compete in markets where the Company could not previously
access, and to provide end-to-end, facilities-based services to and from these
countries.
Set forth below is a timetable summarizing the commitments made by parties
to the WTO Agreement to implement its provisions. Special conditions and/or
restrictions apply to those countries marked with an asterisk (*).
<TABLE>
<CAPTION>
1998-1999 2000 AND THEREAFTER
-------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
EUROPE Austria Netherlands Bulgaria Romania
Belgium Norway Czech Republic Slovak Republic
Denmark Portugal Greece Turkey
Finland Spain Poland
France Sweden
Germany Switzerland
Italy United Kingdom
Luxembourg
AMERICAS Brazil* El Salvador Antigua Jamaica
Canada Guatemala Argentina Peru
Chile Iceland Bolivia Trinidad
Dominican Mexico Grenada Venezuela
Republic
ASIA/PACIFIC Australia Malaysia Brunei Thailand
RIM Hong Kong* New Zealand Pakistan*
Japan Phillipines Singapore
Korea
AFRICA/MIDDLE Ivory Coast* Israel Senegal
EAST Mauritius
</TABLE>
The FCC recently released an order that significantly changes U.S.
regulation of international services in order to implement the United States'
"open market" commitments under the WTO Agreement. Among other measures, the
FCC's order (i) eliminated the FCC's Effective Competitive Opportunities
("ECO") test for applicants affiliated with carriers in WTO member countries,
while imposing new conditions on participation by dominant foreign carriers,
(ii) allowed non-dominant U.S.-based carriers to enter into exclusive
arrangements with non-dominant foreign carriers and scaled back the prohibition
on exclusive arrangements with dominant carriers and (iii) adopted rules that
will facilitate approval of flexible alternative settlement payment
arrangements.
The Company believes that the recent FCC order will have the following
effects on U.S.-based carriers: (i) fewer impediments to investments in
U.S.-based carriers by foreign entities; (ii) increased opportunities to enter
into innovative traffic arrangements with foreign carriers located in WTO mem-
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ber countries; (iii) new opportunities to engage in international simple resale
("ISR") to additional foreign countries; and (iv) modified settlement rates
offered by foreign affiliates of U.S.-based carriers to U.S.-based carriers to
comply with the FCC's settlement rate benchmarks.
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 United
States, 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.
The following chart illustrates an international long distance call
originating in the United States under a traditional operating agreement.
"International telephone call diagram"
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, satellite-based
facilities and switches, to those that are purely resellers of another
carrier's transmission facilities. The largest U.S.-based 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 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.
Accounting Rate Mechanism. Under the Accounting Rate Mechanism, which has
been the traditional model for handling traffic between international carriers,
traffic is exchanged under bilateral carrier agreements, or operating
agreements, between carriers in two countries. Operating agreements generally
are three to five years in length and provide for the termination of traffic
in, and return of traffic to, the carriers' respective countries at a
negotiated accounting rate, known as the Total Accounting Rate ("TAR"). In
addition, operating agreements provide for network coordination and accounting
and settlement procedures between the carriers. Both carriers are responsible
for costs and expenses related to operating their respective halves of the
end-to-end international connection.
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Settlement costs, which typically equal one-half of the TAR, are the fees
owed to another international carrier for transporting traffic on its
facilities. Settlement costs are reciprocal between each party to an operating
agreement at a negotiated rate (which must be the same for all U.S.-based
carriers, unless the FCC approves an exception). Additionally, the TAR is the
same for all carriers transporting traffic into a particular country, but
varies from country to country. The term "settlement costs" arises because
carriers essentially pay each other on a net basis determined by the difference
between inbound and outbound traffic between them.
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 fiber optic cables 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 IRUs 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 IRUs, however, require a carrier to make an initial
capital commitment based on anticipated usage.
In addition to using traditional operating agreements, an international
long distance provider may use transit arrangements, resale arrangements and
alternative transit/termination arrangements.
Transit Arrangements. Transit arrangements involve a long distance
provider in an intermediate country carrying the long distance traffic
originating in a second country to the destination third 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.
Resale Arrangements. Resale arrangements typically involve the wholesale
purchase and sale of transmission and termination services between two long
distance providers on a variable, per minute basis. The resale of capacity 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 that rely, at least in part, on transmission capacity
acquired on a wholesale 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 that 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 international long distance resale market is continually
changing as new long distance resellers emerge and existing providers respond
to changing costs and competitive pressures.
Alternative Transit/Termination Arrangements. As the international long
distance market has become increasingly competitive, long distance providers
have 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 transmission and switching facilities in foreign
countries, which enables a provider to terminate its traffic on its own
facilities. 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 United States and other applicable regulatory authorities only on some
routes, ISR services are increasing and are expected to expand significantly as
liberalization continues in the international telecommunications market. As
with transit arrangements, refiling involves the use of an intermediate country
to carry the long-distance traffic originating in a second country to the
destination third country. However, the key difference between transit and
refile arrangements is that under a transit arrangement the operator in the
destination country has a direct relationship with the originating operator and
is aware of the transit arrangement, while with refiling, the operator in the
destination country typically is not aware that the received traffic originated
in another country with another carrier. Refiling of traffic
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takes advantage of disparities in settlement rates between different countries
by allowing 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. In addition,
new market access agreements, such as the WTO Agreement, have made it possible
for many international long distance providers to establish their own switching
facilities in certain foreign countries, allowing them to directly terminate
traffic, including traffic which they have originated.
Internet Telephony
The Internet is an interconnected global computer network of tens of
thousands of packet-switched networks using Internet protocols. Technology
trends over the past decade have removed the distinction between voice and data
segments. Traditionally, voice conversations have been routed on analog lines.
Today, voice conversations are routinely converted into digital signals and
sent together with other data over high-speed lines. In order to satisfy the
high demand for low-cost communication, software and hardware developers began
to develop technologies capable of allowing the Internet to be utilized for
voice communications. Several companies now offer services that provide
real-time voice conversations over the Internet ("Internet Telephony"). Current
Internet Telephony does not provide comparable sound quality to traditional
long distance service. The sound quality of Internet Telephony, however, has
improved over the past few years.
The FCC and most foreign regulators have not yet attempted to regulate the
companies that provide the software and hardware for Internet Telephony, the
access providers that transmit their data, or the service providers, as common
carriers or telecommunications services providers. Therefore, the existing
systems of access charges and international accounting rates, to which
traditional long distance carriers are subject, are not imposed on providers of
Internet Telephony services. As a result, such providers may offer calls at a
significant discount to standard international calls.
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BUSINESS
OVERVIEW
Startec Global is a rapidly growing, facilities-based international long
distance telecommunications service provider. The Company markets its services
to select ethnic residential communities throughout the United States and to
leading international long distance carriers. The Company provides its services
through a flexible, high-quality network of owned and leased transmission
facilities, operating and termination agreements and resale arrangements. The
Company currently owns and operates an international gateway switch in New York
City and has ordered another international gateway switch expected to be
deployed in Los Angeles in 1998. The Company also owns an international gateway
switch in Washington, D.C. that is expected to be redeployed as a domestic
switch in Chicago during the third quarter of 1998. Including the Los Angeles
switch, the Company expects to install up to 20 switches worldwide through
2000. Additionally, the Company has interests in several undersea cable
facilities and plans to acquire additional interests in cable facilities
linking North America with Europe, the Pacific Rim, Asia and Latin America, as
well as linking the East Coast and West Coast of the United States. The Company
also plans to invest in or acquire two satellite earth stations during 1998 and
1999. From time to time, however, the Company is presented with marketing
opportunities which may result in the relocation, redeployment, or alternative
deployment of the Company's switches, points-of-presence, and other
telecommunications equipment. For the year ended December 31, 1997 and the six
months ended June 30, 1998, the Company had revenues of $85.9 million and $63.4
million, respectively.
Startec Global was founded in 1989 to capitalize on the significant
opportunity to provide international long distance services to select ethnic
communities in major U.S. metropolitan markets that generate substantial
long-distance traffic to their countries of origin. Until 1995, the Company
concentrated its marketing efforts in the New York-Washington, D.C. corridor
and focused on the delivery of international calling services to India. At the
end of 1995, the Company expanded its marketing efforts to include the West
Coast of the United States, and began targeting other ethnic groups in the
United States, such as the Middle Eastern, Filipino and Russian communities.
International traffic generated by the Company currently terminates primarily
in Asia, the Pacific Rim, the Middle East, Africa, Eastern and Western Europe
and North America. The number of the Company's residential customers has grown
from 10,675 customers as of December 31, 1995 to 93,500 customers as of June
30, 1998.
The Company uses sophisticated database marketing techniques and a variety
of media to reach its targeted residential customers, including focused print
advertising in ethnic newspapers, advertising on ethnic radio and television
stations, direct mail, sponsorship of ethnic events and customer referrals. The
Company's strategy is to provide overall value to its customers and combine
competitive pricing with high levels of service, rather than to compete on the
basis of price alone. The Company provides responsive customer service 24 hours
a day, seven days a week, in each of the languages spoken by the Company's
targeted residential customers. The Company believes that its focused marketing
programs and its dedication to customer service enhance its ability to attract
and retain customers in a low-cost, efficient manner. Residential customers
access the Company's network by dialing a carrier identification code prior to
dialing the number they are calling. This service, known as "dial-around" or
"casual calling," enables customers to use the Company's services without
changing their existing long distance carriers. For the year ended December 31,
1997 and the six months ended June 30, 1998, residential customers accounted
for approximately 33% and 38%, respectively, of the Company's net revenues. As
part of its strategy, the Company seeks to increase the proportion of its net
revenues derived from residential customers.
In order to achieve economies of scale in its network operations and to
balance its residential international traffic, in late 1995, the Company began
marketing its excess network capacity to international carriers seeking
competitive rates and high-quality transmission capacity. Since initiating its
international wholesale services, the Company has expanded its number of
carrier customers to 55 at June 30, 1998. For the year ended December 31, 1997
and the six months ended June 30, 1998, carrier customers accounted for
approximately 67% and 62%, respectively, of the Company's net revenues.
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BUSINESS STRATEGY
The Company's objectives are to (i) become the leading provider of
international long distance services to select ethnic residential communities
in the United States, Canada and Europe with significant international long
distance usage and (ii) leverage its residential long distance business to
become a leading provider of wholesale carrier services on corresponding
international routes. In order to achieve its objectives, the Company's
strategy relies on the following elements:
o Expand the addressable market. The Company currently serves residential
customers in 14 major U.S. metropolitan markets and expects to enter up to
six new metropolitan markets in 1998. The Company has also identified over
40 major markets outside the United States, primarily in Canada, Europe
and Southeast Asia, which the Company believes are attractive for entry
based on the demographic characteristics, traffic patterns, regulatory
environment and availability of appropriate advertising channels. The
Company anticipates entering up to 20 of these markets by the end of 2000.
In addition, the Company seeks to increase its penetration of its existing
and prospective markets by (i) targeting additional ethnic communities and
(ii) marketing additional routes to existing customers who principally use
the Company's services for one route.
o Achieve "first-to-market" entry of select ethnic residential markets. The
Company believes that it enjoys significant competitive advantages by
establishing a customer base and brand name in select ethnic residential
communities ahead of its competitors. The Company intends to capitalize on
its proven marketing strategy to further penetrate select ethnic
residential communities in the United States, Canada and Europe ahead of
its competitors. The Company selects its target markets based on favorable
demographics with respect to long distance telephone usage, including
geographic immigration patterns, population growth and income levels.
Targeting select ethnic communities also enables the Company to aggregate
traffic along certain routes (which reduces its costs) and to focus on
rapidly expanding and deregulating telecommunications markets. The
Company's target residential customer base is comprised of emigrants from
emerging markets in Asia, Eastern Europe, the Middle East, the Pacific
Rim, Latin America and Africa.
o Expand international network facilities. The Company plans to expand its
international network facilities during 1998 and through 2000 by deploying
20 additional switches, securing additional ownership interests in
undersea cable facilities and investing in domestic cable facilties,
investing in or acquiring two satellite earth stations and entering into
operating agreements. By building network facilities and expanding
operating agreements that enable it to carry an increasing percentage of
its traffic on its own network, the Company believes that it will be able
to reduce its transmission costs and reliance on other carriers and ensure
greater control over quality of service. For the six months ended June 30,
1998, approximately 65% of the Company's residential traffic originated
on-net. During the next three years, the Company expects to increase
significantly the volume of its traffic that is originated, carried and
terminated on-net.
The Company intends to implement a network hubbing strategy, linking its
existing and prospective customer base in the United States, Canada and
Europe to call destinations in foreign countries through a network of
foreign-based switches and other telecommunications equipment. The Company
also plans to continue to enhance its termination options through
additional operating agreements, transit arrangements and, if appropriate
opportunities arise, strategic acquisitions and alliances. The Company has
also taken steps to improve the quality of its network by upgrading its
network monitoring and customer service centers, and plans to install
enhanced software that will enable it to better monitor call traffic
routing, capacity and quality.
o Maximize network utilization and efficiency through wholesale carrier
business. The Company intends to continue to market its international long
distance services to existing and new carrier customers. Because the
Company's residential minutes of use are generated primarily during
non-business hours or on weekends, the Company has substantial capacity to
offer to international carriers. The significant carrier traffic volume
that the Company generates allows it to capture additional revenues, to
increase economies of scale and to improve network efficiency.
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o Build customer loyalty. The Company seeks to build long-term customer
loyalty through tailored in-language marketing efforts focusing on each
target ethnic group's specific needs and cultural backgrounds, responsive
customer service offering in-language services and involvement in its
customers' communities through sponsorship of local events and other
activities. The Company markets its residential services under the
"STARTEC" name to enhance its name recognition and build brand loyalty in
its target communities. The Company maintains a detailed information
database of its customers, which it uses to monitor usage, track customer
satisfaction and analyze a variety of customer behaviors, including
retention and frequency of usage.
o Pursue strategic acquisitions and alliances. In order to accelerate its
business plan and take advantage of the rapidly changing
telecommunications environment, the Company intends to carefully evaluate
and pursue strategic acquisitions, alliances and investments. The Company,
however, has no present commitments, agreements or understandings with
respect to any particular acquisition, alliance or investment.
The Company believes that, with the remaining net proceeds of the Old
Notes Offering, it will have sufficient capital resources to fund its expansion
plans through the end of the first quarter of 2000. The Company's ability to
complete its strategic plan thereafter, however, will require significant
additional capital.
MARKET OPPORTUNITY
According to industry sources, the international telecommunications
industry generated approximately $67 billion in revenues and 81 billion minutes
of use during 1997. Industry sources indicate that the international
telecommunications market is one of the fastest growing and most profitable
segments of the global telecommunications industry. It is estimated that by the
end of 2001, this market will have expanded to $98 billion in revenues and 153
billion minutes of use, representing compound annual growth rates from 1997 of
10% and 17%, respectively. The highly competitive and rapidly changing
international telecommunications market has created a significant opportunity
for carriers that can offer high-quality, low-cost international long distance
service.
Based on industry estimates, in 1997 approximately 70% of international
long distance traffic was generated between North America and Western Europe.
The Company's target market consists of a significant portion of the remaining
30% of the international long distance traffic, or approximately $20 billion in
revenues and 24 billion minutes of use. The Company believes that international
long distance usage in its target markets will grow at rates in excess of the
international telecommunications market as a whole, primarily as a result of
(i) continuing economic development in these markets with a corresponding
investment in telephone and telecommunications infrastructure and (ii)
continuing deregulation of these markets.
CUSTOMERS
The Company markets its international long distance services primarily to
two customer groups: residential ethnic communities with significant
international long distance usage and international long distance carriers. The
Company's residential customers generally are members of ethnic groups that
tend to be concentrated in major U.S. metropolitan areas, including Asian,
Middle Eastern, Sub-Saharan African and European communities. The number of
such customers has grown significantly over the past three years, from 10,675
as of December 31, 1995 to 93,500 as of June 30, 1998. Net revenues from
residential customers accounted for approximately 51%, 37% and 33% of the
Company's net revenues in the years ended December 31, 1995, 1996 and 1997,
respectively, and 38% of net revenues for the six months ended June 30, 1998.
As part of its strategy, the Company seeks to increase the proportion of its
net revenues derived from residential customers.
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[GRAPHIC OMITTED]
The Company also offers wholesale telecommunications services to other
international long distance carriers, which allows the Company to balance its
residential customer base and efficiently use its network capacity. These
carrier customers include first- and second-tier long distance carriers seeking
competitive rates and high-quality transmission capacity. The number of the
Company's carrier customers has grown significantly since the Company first
began marketing its services to this segment in late 1995. As of June 30, 1998,
the Company had 55 carrier customers. Revenues from carrier customers accounted
for 49%, 63% and 67% of the Company's net revenues in the years ended December
31, 1995, 1996 and 1997, respectively and 62% of net revenues for the six
months ended June 30, 1998. During the six months ended June 30, 1998, the
Company's five largest carrier customers accounted for 33% of net revenues,
with one of these carriers, WorldCom, accounting for 19% of net revenues during
that period. During the year ended December 31, 1997, the Company's five
largest carrier customers accounted for 47% of net revenues, with WorldCom and
Frontier accounting for 23% and 14% of net revenues, respectively. No other
customer accounted for 10% or more of the Company's net revenues during 1997 or
the first six months of 1998. In a number of cases, the Company provides
services to carriers that are also suppliers to the Company.
SERVICES AND MARKETING
Residential Customers
The Company generally provides international and interstate residential
long distance customers with dial-around long distance service. Residential
customers access Startec Global's network by dialing its CIC code before
dialing the number they are calling, enabling them to use the Company's
services at any time without changing their existing long distance carrier.
The Company invests substantial resources in identifying and evaluating
potential markets for its services. In particular, the Company seeks to
identify ethnic groups with demographic profiles that suggest significant
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
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of media, including focused print advertising in ethnic newspapers, advertising
on ethnic radio and television stations, direct mail and sponsorship of ethnic
events and customer referrals. The Company also sponsors and attends community
events.
Potential customers call a toll free number that appears in Company
advertising 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 Startec Global's services. Once the customer begins to
use the services, the Company routinely monitors usage and periodically
communicates with the customer to gauge service satisfaction. Startec Global
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's customer service center, which services
the Company's residential customer base, is staffed by trained, multilingual
customer service representatives, and operates 24 hours a day, seven days a
week. The Company currently employs 149 customer service representatives.
Although the Company is sensitive to the role that the price of long
distance service plays in consumer decision-making, it generally does not
attempt to be the low-price leader. Instead, the Company focuses on providing
overall value to its customers, combining competitive pricing with high levels
of service, customer representatives fluent in the customers' native languages,
focused marketing campaigns directed at their ethnic groups, and involvement in
their communities through sponsorship of local events and other activities. The
Company believes that this strategy increases usage of Startec Global's
services and enhances customer loyalty and retention.
In addition to its current long distance services, the Company continually
evaluates potential new service offerings in order to increase traffic and
enhance customer loyalty and retention. New services the Company expects to
introduce include Home Country Direct Services, which will provide customers
with access to Startec Global's network from any country and will allow them to
place either collect or credit/debit card calls, and prepaid domestic and
international calling cards, which may be used from any touchtone 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 Global has been actively marketing its services to carrier customers
since late 1995 and believes that it has established a high degree of
credibility and valuable relationships with the leading carriers. The Company
has a dedicated marketing team serving the carrier market, including 17 carrier
service representatives. In addition, the Company participates in international
carrier membership organizations, trade shows, seminars and other events that
provide its carrier marketing staff with additional opportunities to establish
and maintain relationships with other carriers that are potential customers.
The Company's strategy is to focus its marketing efforts on first- and
second-tier carriers. The Company generally avoids providing services to
lower-tiered carriers because of potential difficulties in collecting accounts
receivable. Because carrier customers generally are extremely price sensitive,
the Company closely tracks the prices of competitors serving the carrier market
and monitors its own network costs to ensure optimal pricing for its carrier
customers.
THE STARTEC GLOBAL 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, all of which allow the Company to
terminate traffic in the over 200 countries that have telecommunication
capabilities. The Company has been expanding its network to match increases in
its long distance traffic volume. The network employs advanced switching
technologies and is supported by monitoring facilities and the Company's
technical support personnel.
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"Expected Startec International Telephone call diagram"
Switching and Transmission Facilities
The Company currently has a Nortel DMS-250/300 international gateway
switch in New York City and a Siemens international gateway switch in
Washington, D.C. The Company substantially completed the migration of its
traffic from its Washington, D.C. switch to the New York switch by March 31,
1998. The Company plans to redeploy the Washington, D.C. switch to Chicago as a
domestic switch by the end of 1998.
The Company also intends to expand its switching capabilities in the
United States by installing a Nortel DMS-250/300 SE international gateway
switch in Los Angeles. This switch has been ordered and is expected to be
installed during 1998. The Company's international expansion strategy is also
predicated on the installation of multiple switches throughout the world. The
Company plans to acquire (i) six additional switches during 1998 to be deployed
during 1998 and early 1999 in Chile, France, Germany, Japan, the Netherlands
and the United Kingdom; (ii) nine additional switches during 1999 to be
deployed during 1999 and early 2000 in Australia, Belgium, Canada (two), Hong
Kong, Italy, Mexico, Switzerland and Uganda; and (iii) four additional switches
in 2000 to be deployed during 2000 and early 2001 in Argentina, Brazil, India
and Singapore. From time to time, however, the Company is presented with
marketing opportunities which may result in the relocation, redeployment, or
alternative deployment of the Company's switches, points-of-presence, and other
telecommunications equipment.
The Company generally installs switches in regions where it believes it
can achieve one or more of the following goals: (i) originate calls from its
own customer base, (ii) transit calls originated elsewhere on its network to
the call's final destination on a more cost-efficient basis, or (iii) terminate
calls originated and carried on its own network. The Company intends to use the
switches to be installed in Canada and Europe over the next two years primarily
to carry calls originated in those countries by the Company's customers. The
switches that the Company plans to install in Latin America and Japan will be
used both as "hubbing" or transit switches and to terminate calls originated in
other countries. The switches to be installed in Asia (other than Japan) and
the Pacific Rim, such as in Hong Kong and Australia, will be used primarily to
terminate traffic (in the case of Hong Kong), or for hubbing or transit
purposes (in the case of Australia).
Startec Global currently owns IRUs in the Canus-1, Cantat-3, Columbus II
and Gemini digital fiber optic undersea cables, and is a signatory owner on the
Columbus III cable project. It accesses additional cables and satellite
facilities through arrangements with other carriers. During 1998 and 1999, the
Company intends to invest in domestic land-based fiber optic cable facilities
linking the East Coast and West Coast of the United States and in undersea
fiber optic transmission facilities linking North America with Europe, the
Pacific Rim, Asia and Latin America. The Company believes that it may achieve
substantial savings by acquiring additional interests in fiber optic cable,
which would reduce its dependence on leased cable access. Having an ownership
interest rather than a lease interest in such cable enables the
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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.
In addition to increasing its interests in fiber optic cable facilities, the
Company intends to invest in or acquire two satellite earth stations in 1998
and 1999, which will provide it with additional routing flexibility, and the
ability to connect with carriers on lower-volume routes and carriers in
countries where international cable capacity has not yet become available.
Although the Company believes that, with the remaining net proceeds of the
Old Notes Offering, it will have sufficient capital resources to fund its
expansion plans through the end of the first quarter of 2000, the Company's
ability to complete its strategic plan thereafter will require substantial
additional capital. See "Risk Factors -- Future Capital Needs; Uncertainty of
Additional Funding; Discretion in Use of Proceeds of the Old Notes Offering;
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
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 40 carriers. 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. As traffic across its owned facilities
increases, management believes the Company will realize operating efficiencies
and improve its margins.
The Company intends to incorporate additional state-of-the-art facilities
in its network architecture, including Internet protocol telephony. The Company
is evaluating a number of existing products for implementation into its
network. By incorporating this technology, the Company expects to realize lower
overall transmission costs.
Operating Agreements and Other Termination Arrangements
Startec Global 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's strategy is based on its ability to enter into and maintain:
(i) operating agreements with PTTs in countries that have yet to become
liberalized so that the Company would then be permitted to terminate traffic
in, and receive return traffic from, that country; (ii) operating agreements
with PTTs and emerging carriers in foreign countries whose telecommunications
markets have liberalized so it can terminate traffic in such countries; (iii)
resale agreements and transit and refile arrangements to terminate its traffic
in countries with which it does not have operating agreements so as to provide
the Company multiple options for routing traffic; and (iv) interconnection
agreements with the PTT in each of the countries where the Company plans to
have operating facilities so that it can terminate traffic in that country. As
of July 31, 1998, Startec Global had operating agreements with 17 PTTs and
seven second network operators. These operating agreements allow the Company to
terminate traffic at lower rates than by resale in markets where it cannot
establish an on-net connection due to the current regulatory environment. The
Company believes that it would not be able to serve its customers at
competitive prices without such operating or interconnection agreements. In
addition, these operating agreements provide a source of profitable return
traffic for the Company. Termination of such operating agreements by certain of
the Company's foreign carriers or PTTs could have a material adverse effect on
the Company's business.
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The following table provides a summary of the Company's current operating
agreements:
<TABLE>
<CAPTION>
COUNTRY CARRIER CARRIER STATUS
- - --------------------------------------- --------------------- ---------------
<S> <C> <C>
Australia ............................. Telstra PTT
Bangladesh ............................ BTTB PTT
Cyprus ................................ CYta PTT
Democratic Republic of Congo .......... AFRITEL SNO
Denmark ............................... Tele Danmark PTT
Dominican Republic .................... Tricom SNO
India ................................. VSNL PTT
Israel ................................ Incom Group SNO
Israel ................................ Bezek PTT
Italy ................................. Telecom Italia PTT
Malaysia .............................. Mutiara Telecom SNO
Malta ................................. Maltacom PTT
Monaco ................................ Monaco Telecom PTT
Netherlands ........................... PTT Netherlands PTT
New Zealand ........................... Telecom New Zealand PTT
Philippines ........................... SMARTCom SNO
Portugal .............................. Marconi Portugal PTT
Russia ................................ Rustelnet SNO
Sao Tome .............................. Companhia Sao Tome PTT
South Korea ........................... One-Tel SNO
Sweden ................................ Telia PTT
Switzerland ........................... Swisscom PTT
Syria ................................. STE PTT
Uganda ................................ UPTC PTT
</TABLE>
Network Operations and Technical Support
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 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, and has developed and uses proprietary
software that enables 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. While the Company
performs the majority of the maintenance of its network, it also has service
and support agreements with Nortel and Siemens covering its New York City and
Washington, D.C. switches. The Company expects to have similar arrangements
with Nortel for its Los Angeles switch. The Company depends upon third parties
with respect to the maintenance of facilities which the Company leases and
fiber optic cable lines in which it has an IRU or other use arrangements.
The Company utilizes 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 the utilization of 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 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 uses 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 call data to corporate
headquarters for use in customer service and traffic analysis. The Company
maintains these independent and redundant billing systems in order to 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 the customer's LEC. The Company utilizes a third party
billing company which has arrangements with the LECs 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 its own billing and collection agreements directly with certain
LECs, which management expects will provide the Company with opportunities to
reduce the costs currently associated with billing and collection practices.
Carrier customers are billed directly by the Company.
COMPETITION
The international telecommunications industry is intensely competitive and
subject to rapid change precipitated by changes in the regulatory environment
and advances in technology. The Company's success depends upon its ability to
compete with a variety of other telecommunications providers in the United
States and in each of its international markets, including the respective PTT
in each country in which the Company operates or plans to operate in the
future. Other competitors of the Company include large, facilities-based
multinational carriers such as AT&T, MCI, Sprint and WorldCom (which plans to
merge with MCI), smaller facilities-based wholesale long distance service
providers in the United States and overseas that have emerged as a result of
deregulation, switched-based resellers of international long distance services
and global alliances among some of the world's largest telecommunications
carriers, such as Global One (Sprint, Deutsche Telekom and France Telecom). The
telecommunications industry is also being impacted by a large number of mergers
and acquisitions including recent announcements regarding a proposed joint
venture between the international operations of AT&T and British Telecom, the
proposed acquisition of TCI by AT&T, and the proposed mergers of SBC and
Amertech and GTE and Bell Atlantic. International telecommunications providers
such as the Company 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. In general,
because the Company is currently a dial-around provider, its 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, and are especially price sensitive. In addition, many of the
Company's competitors enjoy economies of scale that can result in a lower cost
structure for termination and network costs, which could cause significant
pricing pressures within the international communications
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industry. Several long distance carriers in the United States have introduced
pricing strategies that provide for fixed, low rates for both international and
domestic calls originating in the United States. Such a strategy, if widely
adopted, could have an adverse effect on the Company's business, financial
condition and results of operations if increases in telecommunications usage do
not result or are insufficient to offset the effects of such price decreases.
In recent years, competition has intensified causing prices for international
long distance services to decrease substantially. Prices are expected to
continue to decrease in most of the markets in which the Company currently
competes. The Company believes, however, that these reductions in prices have
been and will continue to be more than offset by reduction in the cost to the
Company of providing such services. The Company expects that competition will
continue to intensify as the number of new entrants increases as a result of
the new opportunities created by the 1996 Telecommunications Act,
implementation by the FCC of the United States' commitment to the WTO and
changes in legislation and regulation in various foreign target markets. There
can be no assurance that the Company will be able to compete successfully in
the future.
The telecommunications industry is also experiencing change as a result 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-based systems, such as those proposed by Iridium
LLC and Globalstar, L.P., utilization of the Internet for international voice
and data communications and digital wireless communication systems such as PCS.
The Company is unable to predict which of many possible future product and
service offerings will be important to maintain its competitive position or
what expenditures will be required to develop and provide such products and
services.
GOVERNMENT REGULATION
Overview
As a multinational telecommunications company, the Company is subject to
varying degrees of regulation in each of the jurisdictions in which it provides
services, both in the United States and abroad. Applicable laws and
regulations, and the interpretation of such laws and regulations, differ
significantly in these jurisdictions. In addition, the Company may be affected
indirectly by the laws of other jurisdictions insofar as they affect foreign
carriers with which the Company does business. 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. Because regulatory frameworks in many
countries are relatively new, the potential for enforcement action in these
countries is difficult to assess. Any regulatory enforcement action by United
States or foreign authorities could have a material adverse effect on the
Company's business, financial conditions and results of operations. See "Risk
Factors - Substantial Government Regulation." The regulatory framework in
certain jurisdictions in which the Company provides its services is briefly
described below.
United States Domestic Regulations
In the United States, the Company's provision of services is subject to
the Communications Act of 1934, as amended, and the FCC regulations thereunder
with respect to interstate and international operations, as well as the
applicable law and regulations of the various states with respect to intrastate
operations.
Federal and State Transactional Approvals. The FCC and certain PSCs
require telecommunications carriers to obtain prior approval for assignment or
transfer of control of licenses, corporate reorganizations, acquisitions of
operations, assignments of assets, carrier stock offerings, and assumption of
significant debt obligations. State requirements vary. Such federal and state
requirements may have the effect of delaying, deterring or preventing a change
in control of the Company. Six of the states in which the Company is
certificated provide for prior approval or notification of the issuance of
securities by the Company. Because of time constraints, the Company may not
have obtained such approval from all of these states prior to consummation of
the Offering. The Company's intrastate revenues for the second quarter of 1998
for each of the these states was less than $5,000 for each such state.
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Federal and State Licenses and Tariffs. The Company is classified as a
non-dominant carrier for domestic services and is not required to obtain
specific prior FCC approval to initiate or expand domestic interstate services.
The Company currently is 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 has adopted a new policy requiring that non-dominant interstate
carriers, such as the Company, eliminate FCC tariffs for domestic interstate
long distance service. Should pending court appeals concerning this new policy
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 agreements with its customers regarding its existing
tariffs or face potential 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 absence of tariffs would require the
Company to limit potential liability by contractual means. On August 20, 1997,
the FCC partially reconsidered its order by allowing dial-around carriers such
as the Company to maintain tariffs on file with the FCC.
The Company also currently has the certifications required to provide
service in 42 states, and has filed or is in the process of filing requests for
certification in two 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 the Company will succeed.
To the extent that any incidental intrastate service is provided in any state
where the Company has not yet obtained any required certification, the
applicable state commission may impose penalties for any such unauthorized
provision of service. The Company monitors regulatory developments in all 50
states to ensure regulatory compliance.
Interexchange Competition Under The 1996 Telecommunications Act ("1996
Act"). Under the 1996 Act, RBOCs are permitted to provide out-of-region long
distance (or inter-LATA) services upon receipt of standard state and/or federal
regulator approvals for long distance service. The GTE Operating Companies
("GTOCs") also are permitted to enter the long distance market without regard
to limitations by region. An RBOC may provide in-region long distance services,
however, only after satisfying a 14-point "checklist" for nondiscriminatory
competitive access to its local network. The grant of long distance authority
could permit RBOCs and GTOCs to compete with the Company in the provision of
domestic and international long distance services. To date, the FCC has denied
several applications for in-region long distance authority filed by RBOCs.
These denials remain in effect pending further appeals to the U.S. Court of
Appeals for the D.C. Circuit. In addition, the U.S. Court of Appeals for the
5th Circuit is hearing an appeal of a Texas Federal District Court Order
finding unconstitutional certain provisions of the 1996 Act concerning the
14-point checklist. The District Court Order has been stayed pending the 5th
Circuit Appeal. If the District Court's decision ultimately is permitted to
stand by the 5th Circuit or the FCC denials are reversed by the DC Circuit, it
may result in RBOCs providing interexchange service in their operating regions
sooner than previously expected.
Two RBOCs have recently entered into agreements with long distance service
providers that would allow the RBOCs to provide, indirectly, in-region long
distance services. Both of the proposals have been challenged, on the basis,
among other things, that these RBOCs cannot enter into such partnerships or
agreements until they have satisfied the 14-point checklist. Both of these
challenges are now pending before the FCC. If the partnerships or agreements
are allowed to stand, it may result in RBOCs being allowed to provide
interexchange service in their operating regions sooner than previously
expected. The Company cannot predict the outcome of these proceedings or their
possible impact on the Company.
The 1996 Act also addresses a wide range of other telecommunications
issues that could impact the Company's operations, including, for example,
access charges and universal service. As required by the legislation, the FCC
and the PSCs have initiated a number of proceedings to adopt regulations to
implement the 1996 Act. Many of these regulations have been, and others likely
will be, judicially challenged. It is not possible to assess what impact the
1996 Act, the rulemakings, or related litigation will have on the Company's
business, financial conditions and results of operations.
Access Charges. To originate and terminate calls, 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 costs of United States
domestic long distance services. Interstate access charges are regulated
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by the FCC. Under alternative rate structures being considered by the FCC, LECs
would be permitted to allow volume discounts in the pricing of access charges.
PSCs regulate intrastate access charges. The RBOCs and other local exchange
carriers also have been seeking greater pricing flexibility and reduction of
intrastate access charges. While the outcome of these proceedings is uncertain,
if LECs are permitted to utilize more flexible rate structures for access
charges, smaller long distance carriers such as the Company, could be placed at
a significant cost disadvantage with respect to larger competitors.
International and Foreign Regulations
WTO Agreement. Pursuant to the WTO Agreement, 69 countries, comprising
more than 90% of the global market for telecommunications services have agreed
to permit varying degrees of competition from foreign carriers.
As a result of the WTO Agreement, telecommunications markets in countries
representing more than 90% of the global telecommunications markets are
expected to be significantly liberalized. As explained further below,
implementation of the WTO Agreement in the United States already has resulted
in a lessening of regulatory burdens on the Company and the facilitation of the
Company's international expansion. Implementation of the WTO Agreement in
foreign countries is expected to create additional competitive opportunities in
international and foreign markets for U.S. telecommunications businesses such
as the Company. Although many countries have agreed to make certain changes to
increase competition in their respective markets, there can be no assurance
that countries will honor their commitments in a timely manner or at all. Also,
since the regulatory frameworks are not yet well established in all countries,
specific foreign regulatory requirements that the Company will face in carrying
out its business plan are not yet known.
U.S. International Authorizations. International common carriers, such as
the Company, are required to obtain authority from the FCC under Section 214 of
the Communications Act to provide international telecommunications services
that originate or terminate in the U.S., and 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
satellite facilities for the provision of direct international service to
Italy, Kenya, India, Iran, Saudi Arabia, Pakistan, Sri Lanka, South Korea and
the United Arab Emirates. At the same time, the Company also was 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 and international television services to various overseas
points. On August 27, 1997, the Company was granted global facilities-based
Section 214 authorization under streamlined processing rules adopted in 1996 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 Section 214 authorizations and tariff regulation
processes provide for shorter tariff notice and review periods for certain U.S.
international carriers, including the Company, as well as for other streamlined
regulatory requirements for "non-dominant" carriers found to lack market power
on the routes served. The Company is classified by the FCC as a non-dominant
international and domestic carrier.
U.S. International Settlements Policy. All U.S. international switched
services carriers, including the Company, must comply with the FCC's
international settlements policy ("ISP"). The ISP establishes the parameters by
which U.S. carriers and their foreign correspondents settle international
revenues to recover the cost of terminating each other's traffic over their
respective networks. The ISP is designed to eliminate foreign carriers'
incentives and opportunities to discriminate in their operating agreements
among different U.S.-based carriers. Under the ISP, the amount of payments is
determined by applying a "settlement rate" (generally one-half of the
negotiated accounting rate) to net billed minutes for a particular month. Two
other features of the ISP are uniformity, i.e., that accounting rates must be
uniform for all U.S. carriers interconnecting with a particular country, and
proportionate return, i.e., that each U.S. carrier may accept return traffic
from a foreign country only in the same proportion as its share of total U.S.
traffic delivered to that country. The FCC is currently considering whether to
discon-
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tinue applying the ISP to arrangements between U.S. carriers and: (1) any
foreign carrier from a WTO member country that lacks market power on the
relevant route; and (2) any foreign carrier from a WTO member country with a
liberalized market.
The precise terms of settlement between a U.S. carrier and a foreign
correspondent carrier, as well as the terms and conditions for the provision of
service, are established in an "operating agreement." The Company has operating
agreements with correspondents in 24 countries. U.S. international carriers,
including the Company, are required to file copies of operating agreements with
the FCC within 30 days of execution. The Company has filed 21, and will timely
file the remaining three, of its operating agreements with the FCC. The FCC is
currently considering whether to allow carriers to obtain authority to enter
into flexible settlement arrangements without naming the foreign correspondent
and without filing the terms and conditions of the actual agreement under
certain circumstances.
Consistent with the ISP, the FCC has prohibited U.S. carriers from
agreeing to accept special concessions from foreign carriers or
administrations. The no special concessions rule currently prohibits only those
exclusive arrangements granted to a U.S. carrier by a foreign correspondent
with market power and that affect traffic flow to or from the U.S. The FCC is
currently considering modifications to the no special concession rule in light
of the proposal to modify the ISP. However, a U.S. carrier may negotiate an
accounting rate that is lower than the accounting rate offered to any other
U.S. carrier on the same route, upon the filing of a notification letter with
the FCC. If the U.S. carrier negotiating the lower rate does not already have
an operating agreement in effect with the foreign carrier, the U.S. carrier
must file a request with the FCC to modify the accounting rate for that
country. U.S. carriers 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. Additionally, in 1996, the FCC established an alternative
settlements policy permitting U.S. companies to be authorized to enter into
non-uniform settlement arrangements with carriers from countries that meet the
effective competitive opportunities ("ECO") test or where the U.S. carrier can
demonstrate that an alternative settlement arrangement would promote
competition. Recently, the FCC has further liberalized this policy, replacing
the ECO test with a rebuttable presumption in favor of alternative arrangements
for 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. On August 7, 1997,
the FCC adopted revisions to reduce the level and increase enforcement of its
international accounting "benchmark" rates, which are the FCC's ceilings for
prices that U.S. carriers should pay for international settlements. Certain
foreign carriers have challenged the FCC decision in court appeals as well as
petitions for reconsideration filed with the FCC. These proceedings are
currently pending. If the FCC mandate of benchmark reductions achieves its
stated goal of establishing competitive international settlement rates, the
Company may benefit from such rate reductions.
U.S. Policies on Alternative Routing Through Transiting, Refiling and ISR.
The FCC is currently considering whether to limit or prohibit certain
procedures whereby a carrier routes, through facilities in a third or
intermediate country, traffic originating from one country and destined for
another country. The FCC has permitted third country calling under certain
pricing and settlement rules, where all countries involved consent to this type
of routing arrangement, referred to as "transiting." Under certain arrangements
referred to as "refiling," however, traffic appears to originate in the
intermediate country and the carrier in the ultimate destination country does
not expressly 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, which avoid settlements between the actual
originating and destination countries, comport either with United States or ITU
regulations. A 1995 petition for a declaratory ruling on these issues remains
pending. It is possible that the FCC may determine that transiting or refiling
violates United States and/or international law.
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The FCC decides on a case-by-case basis whether to grant Section 214
authority to United States carriers to resell international private lines for
the provision of switched services interconnected on one or both ends to the
public network ("International Simple Resale" or "ISR"). To date, the FCC has
Under new rules implementing the WTO Agreement, the FCC will authorize the
provision of ISR between the U.S. and a WTO member country if either the
settlement rates for at least 50% of the settled U.S.-billed traffic between
the United States and that country are at or below the FCC's benchmark
settlement rate for that country or the country satisfies the FCC's equivalency
test. The FCC will authorize ISR between the United States and a non-WTO member
country only if both the settlement rates for at least 50% of the settled
U.S.-billed traffic between the United States and that country are at or below
the relevant benchmark and the country satisfies the FCC's equivalency test. To
date, the FCC has granted U.S. carriers ISR authority to Australia, Austria,
Belgium, Canada, Denmark, France, Germany, Japan, Luxembourg, the Netherlands,
New Zealand, Norway, Sweden, Switzerland and the U.K. The FCC has found that
equivalent resale opportunities do not exist in Hong Kong. Once ISR authority
for a particular country has been granted to one U.S. telecommunications
operator, the Company will also be able to provide ISR to the same country over
resold facilities. The FCC is currently considering permitting carriers to
provide ISR for a limited amount of traffic on routes where it would otherwise
not authorize the provision of ISR.
U.S. Reporting Requirements. The FCC's international service rules require
the Company to file periodically a variety of reports regarding its
international traffic flows and use of international facilities. The Company
has filed each of its annual circuit status and traffic data reports. 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.
United States Foreign Entry and Foreign Affiliate Rules. The FCC's rules
implementing the WTO Agreement generally ease restrictions on entry by foreign
telecommunications operators from WTO member countries into the United States
and streamline FCC regulation of such operators. Foreign entry restrictions and
full FCC regulation remain in effect for foreign telecommunications operators
from non-WTO countries. There are no limits on foreign ownership except that
the Communications Act limits the foreign ownership of an entity holding a
common carrier radio license. The Company does not currently hold any radio
licenses.
The FCC regulates the ability of United States international carriers
affiliated with foreign carriers to serve markets where the foreign affiliate
is dominant. The FCC presumes a foreign-affiliated U.S. carrier to be dominant
on foreign routes where the foreign affiliate is a monopoly or has more than
50% market share in international or local telecommunications. A U.S. carrier
affiliated with a dominant foreign carrier may still be entitled to streamlined
regulation by the FCC if it agrees to be regulated as dominant on routes
between the United States and the country of the foreign affiliate. Moreover,
as a result of the WTO Agreement, the FCC has adopted a rebuttable presumption
in favor of entry into the U.S. market by foreign carrier affiliates from WTO
member countries. The presumption can be rebutted if the foreign country of the
affiliate does not meet FCC settlement rate benchmarks. 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. Previously U.S. carriers were required to report any
investment by a foreign carrier of 10% or greater, and the Company has reported
the 15% investment in the Company by an affiliate of Portugal Telecom, a
foreign carrier from a WTO member country and a signatory to the WTO Agreement.
U.S. Regulation of Internet Telephony. The Company knows of no domestic or
foreign laws that prohibit voice communications over the Internet. In December
1996, the FCC initiated a Notice of Inquiry (the "Internet NOI") regarding
whether to impose regulations or surcharges upon providers of Internet access
and information services. The Internet NOI specifically identifies Internet
Telephony as a subject for FCC consideration. In April 1998, the FCC filed a
report with Congress stating that Internet access falls into the category of
information services, and hence should not be subject to common carrier
regulation, including the obligation to pay access charges, but that the record
suggests that some forms
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of Internet Telephony may be more like telecommunications services then
information services, and hence subject to common carrier regulation. In
addition, several efforts have been made to enact federal legislation that
would either regulate or exempt from regulation services provided over the
Internet. State public utility commissions may also retain jurisdiction to
regulate the provision of intrastate Internet telephone services. If a foreign
government, Congress, the FCC, or a state utility commission begins to regulate
Internet Telephony, there can be no assurances that any such regulation will
not materially adversely affect the Company's business, financial condition or
results of operations. The Company cannot predict the likelihood that state,
federal or foreign governments will impose additional regulation on the
Company's Internet-related services, nor can it predict the impact that future
regulation will have on the Company's operations.
European Union Regulations
The EU's 15 member states (Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain,
Sweden and the U.K.) are free to regulate their respective telecommunications
markets subject to compliance with any EU and WTO rules. EU legislative
initiatives in this area aim at ensuring a harmonized regulatory framework and
an open, competitive telecommunications market throughout the EU.
In March 1996, the EU adopted the "Full Competition Directive" requiring
EU member states to allow the creation of alternative telecommunications
infrastructures by July 1, 1996, and to abolish the PTTs' monopolies in voice
telephony by January 1, 1998. Certain EU countries may delay the abolition of
the voice telephony monopoly based on exemptions established in the Full
Competition Directive. These countries include Luxembourg (July 1, 1998), Spain
(November 30, 1998), Portugal and Ireland (January 1, 2000) and Greece
(December 31, 2000). As a complement to the Full Competition Directive, the EU
issued two further important Directives in 1997: the "Licensing Directive" and
the "Interconnection Directive".
The Licensing Directive sets out framework rules for the national
authorizations for telecommunications services and networks. In practice,
however, these authorization requirements still vary considerably from country
to country, and certain EU countries have introduced or are likely to introduce
licensing requirements that are disproportionate. This could have a material
adverse effect on the Company's future operations in the EU. The
Interconnection Directive sets out rules to secure the interconnection of
telecommunications networks in the EU. Telecommunications operators that may
invoke rights to interconnect under this regime are primarily those operating a
transmission network. Operators that provide telecommunications services but do
not have their own network facilities do not enjoy full interconnection rights,
but may benefit from "access rights", which are generally more limited and less
clearly defined than interconnection rights. The new interconnection regimes in
several EU member states reflect this discrimination against telecommunications
service providers that do not have their own network. Therefore, for as long as
the Company does not operate as an authorized network operator in the EU, it
may not be in a position to benefit directly from the optimum interconnection
regime in the EU. Similar discriminations currently exist in several EU
countries with respect to prefixes that may be used for "dial-around" or
"casual calling". It is generally easier for large network operators with
nationwide domestic coverage to obtain short prefixes for such calls. New
entrants with limited facilities are generally entitled to longer prefixes.
Despite various EU regulatory initiatives supporting the liberalization of
the telecommunications market, most EU Member States are still in the initial
stages of liberalizing their telecommunications markets and establishing
competitive regulatory structures to replace the monopolistic environment in
which the PTTs previously operated. For example, most EU member states have
only recently established a national regulatory authority. In addition, the
implementation, interpretation and enforcement of these EU directives differs
significantly among the EU Member States. While some EU Member States have
embraced the liberalization process and achieved a high level of openness,
others have delayed the full implementation of the directives and maintain
several levels of restrictions on full competition.
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The Company is also subject to general European law, which, among other
things, prohibits certain anti-competitive agreements and abuses of dominant
market positions through Articles 85 and 86 of the Treaty of Rome. The EU has
introduced strict rules governing the processing of personal data by private
parties, including telecommunications operators. Among other restrictions, the
EU data protection regime does not allow the processing of data revealing
ethnic origin without the explicit consent of the data subject. Moreover,
Member States are allowed to prohibit such processing even if the data subject
has given its explicit consent. Furthermore, EU data protection rules prohibit
the transfer of personal data to third countries that do not ensure an adequate
level of data protection. The United States is likely to be included among
these countries. These restrictions may have a material adverse effect on the
Company's database marketing techniques and its ability to target customers in
the EU.
United Kingdom. In 1991, the UK telecommunications market was
significantly liberalized (in substantially all markets, apart from
international facilities, which were later liberalized in 1996), when the
British government established a "multi-operator" policy. There are now more
than 200 individually licensed telecommunications operators in the United
Kingdom.
The principal piece of telecommunications legislation in the United
Kingdom is the Telecommunications Act 1984. Under the Act, the Secretary of
State for Trade and Industry, acting on the advice of the Department of Trade
and Industry (the "DTI") and the Director General of Telecommunications (the
"DGT"), is responsible for issuing and granting UK telecommunications licenses.
License enforcement is undertaken by the DGT and his staff at the Office of
Telecommunications ("Oftel").
The DTI issued to the Company an International Simple Resale ("ISR")
License for the United Kindgom in October 1997. The ISR License allows the
Company to resell traffic originating in the U.K. Pursuant to regulatory
restructure in the U.K. introduced in December, 1997, the ISR License was
replaced by the International Simple Voice Resale ("ISVR") License. The DTI
issued the ISVR License to the Company in March 1998. Operators do not need an
individual license to provide International Simple Data Resale services and are
only required to comply with the terms of the Telecommunications Services Class
License.
In April 1998, the Company received an International Facilities License
("IFL"), which entitles it to run its own international telecommunications
systems in the UK and supersedes the terms of the ISVR License.
The Company appears on Oftel's list (as of March 24, 1998) of operators
deemed to have rights and obligations to interconnect (to other
telecommunications operators networks) pursuant to "Annex II" of the EU
Interconnection Directive. Currently, the main implication of the Company's
"Annex II" status is that it is entitled to wholesale interconnect rates from
British Telecommunications, plc., the former monopoly provider.
In addition to the obligations imposed on Startec Global (as a licensed
telecommunications operator) by the Telecommunications Act 1984, the Company is
also subject to general UK and European Union law as well as specific EU
telecommunications and competition legislation.
Regulations In Other Jurisdictions
The Company's ability to enter a foreign Country's telecommunications
market depends upon, among other things, the extent to which that country
permits access by United States carriers. As previously noted, pursuant to the
WTO Agreement, the telecommunications markets of countries representing more
than 90% of the global market in telecommunications services have committed in
varying degrees to allow telecommunications suppliers from WTO countries access
to their domestic and international markets. Although most WTO member states
have embraced the liberalization process and should achieve a high level of
openness, some have delayed full implementation of their respective commitments
under the WTO Agreement and maintain several levels of restrictions on full
competition. In addition, a number of countries have committed to open certain
telecommunications markets to competition in future years rather than
immediately.
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The countries that the Company plans to enter in 1998 include Chile and
Japan. Although Chile has not yet formally ratified the WTO Agreement, both
Chile and Japan have committed to allow full competition in domestic and
international long distance services in 1998 and have taken significant steps
to implement their commitments. The countries that the Company plans to enter
in 1999 (including Australia, Canada, Hong Kong and Mexico) and in 2000
(including Argentina, Brazil, India and Singapore), are in the process of
liberalizing, in varying degrees, certain telecommunications services in their
respective jurisdictions based on the WTO Agreement. Although implementation of
the WTO Agreement should create significant competitive opportunities in each
of these countries, there can be no assurance that these countries will honor
their commitments in a timely manner or at all. Moreover, since the regulatory
frameworks are not yet well established in all of these countries, the specific
regulatory requirements that the Company will face in these countries in
carrying out its business plan are not yet known.
EMPLOYEES
As of August 1, 1998, the Company had 181 full-time employees and 122
part-time employees. None of the Company's employees are currently represented
by a collective bargaining agreement. Management believes that the Company's
relationship with its employees is good.
PROPERTIES
The Company's headquarters are located in approximately 37,000 square feet
of space in Bethesda, Maryland. The Company leases this space under an
agreement which expires October 31, 2002. The Company also is a party to a
co-location agreement pursuant to which it has the right to occupy certain
space in Washington, D.C. as a site for its switching facilities. In addition,
the Company has recently entered into a co-location agreement with another
party pursuant to which it has the right to occupy approximately 2,000 square
feet in New York City, New York as a site for its switching facilities and
under which it pays approximately $8,000 per month. The Washington, D.C.
co-location agreement is currently renewable on a month-to-month basis, and the
New York City co-location agreement has a five-year initial term expiring in
2002, 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 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 or results of
operations.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding the Company's
directors, executive officers and key employees as of August 1, 1998.
Directors and Executive Officers
<TABLE>
<CAPTION>
NAME AGE POSITION
- - ---- --- --------
<S> <C> <C>
Ram Mukunda ................. 39 President, Chief Executive Officer, Treasurer and
Director
Prabhav V. Maniyar .......... 39 Senior Vice President, Chief Financial Officer,
Secretary and Director
Nazir G. Dossani ............ 56 Director
Richard K. Prins ............ 41 Director
Vijay Srinivas .............. 45 Director
</TABLE>
Certain Key Employees
<TABLE>
<CAPTION>
NAME AGE POSITION
- - ---- --- --------
<S> <C> <C>
Anthony Das .............. 44 Vice President of Corporate and International
Affairs
Subhash Pai .............. 32 Vice President, Controller and Assistant Secretary
Gustavo Pereira .......... 44 Vice President of Engineering
Dhruva Kumar ............. 28 Vice President of Global Carrier Services
Tracy Behzad ............. 35 Vice President of Human Resources
Ron Vassallo ............. 32 Director, Global Marketing
</TABLE>
RAM MUKUNDA is the founder of Startec Global. Prior to founding STARTEC in
1989, Mr. Mukunda was an Advisor in 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. Prior to joining INTELSAT, he
worked as a fixed-income analyst with Caine, Gressel. 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 Global 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 known 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 an M.A. in Economics from Old Dominion University.
NAZIR G. DOSSANI joined Startec Global as a director in October 1997 at
the completion of the Initial Public 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 Science from
the University of Pennsylvania and an M.B.A. from the Wharton School of the
University of Pennsylvania.
RICHARD K. PRINS joined Startec Global as a director in October 1997 at
the completion of the Initial Public 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 Corporation. Mr. Prins received an M.B.A. from Oral Roberts
University and a B.A. from Colgate University. He currently serves on the Board
of Directors of Path Net, Inc., a domestic telecommunications company, and The
Association for Corporate Growth, National Capital Chapter.
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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.
ANTHONY DAS joined Startec Global in February 1997 and is Vice President
of Corporate and International Affairs. 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.
SUBHASH PAI joined Startec Global in January 1992 and serves as Vice
President, Controller and Assistant Secretary. He is a CA/CPA. Prior to joining
the Company, Mr. Pai held various positions with a multinational shipping
company.
GUSTAVO PEREIRA joined Startec Global 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 and was responsible for
Portugal's international telecommunications network.
DHRUVA KUMAR joined Startec Global in April 1993 and is Vice President of
Global Carrier Services. Prior to managing the Carrier Services group, Mr.
Kumar held a series of progressively more responsible positions within the
Company.
TRACY BEHZAD joined Startec Global in January 1998 and is Vice President
of Human Resources. Ms. Behzad's background includes over 15 years of
progressively responsible positions in human resources management, including
experience in labor relations and in the development of human resources
departments within organizations.
RON VASSALLO joined Startec Global in January 1998 and serves as Director,
Global Marketing. Prior to joining the Company, Mr. Vassallo was Vice President
and a founding partner of MultiServices, Inc., a strategic marketing firm, and
General Manager of World Access, Inc., an international affinity marketing
company.
CLASSIFIED BOARD OF DIRECTORS
Pursuant to its Articles of Incorporation, 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 an
attempt by a 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 annual meetings of stockholders in order to elect a majority of the
members of the Board. Upon completion of the Reorganization, the Company will
continue to have a classified Board of Directors. See "Risk Factors -- Control
of Company by Current Stockholders."
COMMITTEES OF THE BOARD
The Board of Directors has established two standing committees: the Audit
Committee and the Compensation Committee.
The Audit Committee is 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. Messrs. Dossani and Prins currently serve
as the members of the Audit Committee.
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The Compensation Committee is 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 also
administers the Amended and Restated Option Plan and 1997 Performance Incentive
Plan. Messrs. Dossani and Prins currently serve as the members of the
Compensation Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the completion of the Initial Public Offering, the Board of
Directors did not have a Compensation Committee or committee performing a
similar function. Accordingly, the entire Board of Directors, including
directors who are executive officers of the Company, historically had made all
determinations concerning compensation of executive officers. As discussed
above under "-- Committees of the Board," the Board of Directors has
established a Compensation Committee which consists entirely of directors who
are not employees of the Company.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This report is not deemed to be "soliciting material" or deemed to be
"filed" with the Commission or subject to the Commission's proxy rules or to
the liabilities of Section 18 of the Exchange Act, and the report shall not be
deemed to be incorporated by reference into any prior or subsequent filing by
the Company under the Securities Act or the Exchange Act.
General. In connection with its Initial Public Offering, the Company
formed a Compensation Committee of the Board of Directors consisting of Messrs.
Prins and Dossani. The Compensation Committee evaluates and recommends to the
Board the base salary and incentive compensation for the Chief Executive
Officer of the Company, as well as its senior officers. The Compensation
Committee also administers and grants awards under the 1997 Plan. The Committee
consists solely of non-employee directors whose participation in the 1997 Plan
is under the control of the Board. The Committee intends to retain a
professional consultant to research the executive compensation levels of
similar companies and to assist and advise it in the future in the setting of
the Company's own executive compensation levels.
Executive Compensation. The Company's executive compensation program as
implemented by the Compensation Committee is intended to provide a competitive
compensation program that will enable the Company to attract, retain and reward
experienced and highly motivated executive officers who have the skills,
experience and talents required to promote the short- and long-term financial
performance and growth of the Company. The compensation policy is generally
based on the principle that the financial rewards to the executive must be
aligned with the financial interests of the stockholders of the Company.
Officers of the Company are paid salaries in line with their
responsibilities and generally comparable to industry standards. Senior
officers are also eligible to receive discretionary bonuses based upon the
overall growth in revenue and profit and the performance of the Company.
Likewise, stock option or other stock-based awards to officers and other
employees are intended to promote the success of the Company by aligning
employee financial interests with long-term stockholder value. Such awards are
generally based on various subjective factors primarily relating to the
responsibilities of the individual officers or employees, and also their
expected future contributions and prior awards.
The Committee will consider establishing standard salary ranges for all
executive positions below the level of the chief executive officer in the
future with the assistance of experienced compensation consultants. These
salary ranges will be developed in coordination with such consultants and the
Company's human resources staff from surveys using competitive market data from
similarly sized companies in the telecommunications industry, as well as other
industry groups. An executive's salary within these ranges will depend upon the
executive's experience and capabilities, the executive's unique talents and
strengths and the executive's overall contribution to the Company.
Compensation of the Chief Executive Officer. The Compensation Committee
will annually review and approve the compensation of Mr. Mukunda, the Chief
Executive Officer of the Company. The compensation package for the Chief
Executive Officer includes elements of base salary, annual incentive
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compensation and long-term incentive compensation. Mr. Mukunda's total
compensation is designed to be competitive within the industry while creating
rewards for short- and long-term performance in line with the financial
interests of the Company's stockholders.
With regard to Mr. Mukunda's compensation, the Committee considers in
particular the Company's performance as evidenced by changes in the market
price of the Common Stock during the year as compared to changes in the
telecommunications industry and the broader economic environment. Mr. Mukunda
is a significant stockholder in the Company, and to the extent his performance
as Chief Executive Officer translates into an increase in the value of the
Common Stock, all Company stockholders, including him, share the benefits. The
Committee also considers the Chief Executive Officer's leadership in continuing
to improve the strategic position of the Company and its positive financial
performance during 1997 with respect to revenue growth, expense control, net
income, and earnings per share, compared to other telecommunications companies.
Section 162(m). The Commission requires that this report comment upon the
Company's policy with respect to Section 162(m) of the Code, which limits the
deductibility on the Company's tax return of compensation over $1 million to
any of the named executive officers of the Company unless, in general, the
compensation is paid pursuant to a plan which is performance related,
non-discretionary and has been approved by the Company's stockholders. The
Company's policy with respect to Section 162(m) is to make every reasonable
effort to insure that compensation is deductible to the extent permitted, while
simultaneously providing Company executives with appropriate awards for their
performance. None of the Company's executives earned sufficient compensation
income in 1997 nor are any of the Company's executives anticipated to have
sufficient compensation in the near future to be subject to Section 162(m). The
Compensation Committee, however, reserves the right to use its judgment, where
merited by the Committee's need for flexibility to respond to changing business
conditions or by an executive's individual performance, to authorize
compensation which may not, in a specific case, be fully deductible by the
Company.
Conclusion. The Compensation Committee intends to base its executive
compensation practices on stock price and other financial performance criteria,
as well as on its qualitative evaluation of individual performance. In
addition, the Committee will augment these components of the compensation
process with quantitative measures of individual performance. The Committee
believes that its compensation policies promote the goals of attracting,
motivating, rewarding and retaining talented executives who will maximize value
for the Company's stockholders.
THE COMPENSATION COMMITTEE
Nazir G. Dossani
Richard K. Prins
COMPENSATION OF DIRECTORS
Currently, the Company's directors do not receive cash compensation for
their service on the Board of Directors. In the future, however, directors who
are not executive officers or employees of the Company may receive meeting
fees, committee fees and other compensation relating to their service. The
Company's practice is to grant to each member of the Board of Directors who is
not an officer of the Company an award of options to purchase 5,000 shares of
Company Common Stock upon joining the Board and an additional option to
purchase 2,000 shares of Company Common Stock per year of service 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 table sets forth certain summary information concerning
compensation for services in all capacities awarded to, earned by or paid to,
the Company's Chief Executive Officer and the other most highly compensated
officers of the Company, whose aggregate cash and cash equivalent compensation
exceeded $100,000 (the "Named Officers"), with respect to the last three fiscal
years.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------------------------- ---------------------------------------
OTHER RESTRICTED SECURITIES ALL
NAME AND ANNUAL STOCK UNDERLYING OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS($) OPTIONS(#) COMPENSATION
- - ----------------------------- ------ ---------------- ---------- ----------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ram Mukunda ................. 1997 345,833(1) -- 30,800(2) -- -- --
President & Chief 1996 165,872 -- 18,000(2) -- -- --
Executive Officer 1995 150,000 -- -- -- -- --
Prabhav Maniyar(3) .......... 1997 149,585 -- -- -- 157,616 --
Chief Financial Officer & 1996 -- -- -- -- -- --
Secretary 1995 -- -- -- -- -- --
Gustavo Pereira(4) .......... 1997 110,000 -- -- -- 7,500 --
Vice President--Engineering 1996 110,000 -- -- -- -- --
1995 32,000 -- -- -- -- --
</TABLE>
- - ----------
(1) Includes $150,000 accrued salary for prior periods.
(2) This amount includes the value of an automobile allowance.
(3) Mr. Maniyar joined the Company in January 1997.
(4) Mr. Pereira joined the Company in August 1995.
STOCK OPTION GRANTS
The following table sets forth certain information regarding grants of
options to purchase Common Stock made by the Company during the fiscal year
ended December 31, 1997 to each of the Named Officers. No stock appreciation
rights were granted during fiscal 1997.
OPTION GRANTS IN 1997 -- INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL RATES
OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE/ EXPIRATION ---------------------
NAME GRANTED(#) 1997(%)(1) SHARE($)(2) DATE 5% 10%
- - ------------------------- ------------ -------------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ram Mukunda ............. -- -- -- -- -- --
Prabhav Maniyar ......... 107,616 16.10 1.85 1/19/2007 125,206 317,297
50,000 7.48 10.00 8/17/2007 314,447 796,871
Gustavo Pereira ......... 7,500 1.12 10.00 8/17/2007 47,167 119,530
</TABLE>
- - ----------
(1) During 1997, the Company granted options to purchase a total of 668,366
shares of Common Stock.
(2) The exercise price was equal to the fair market value of the shares of
Common Stock underlying the options on the date of grant.
(3) Amounts reflected in these columns represent amounts that may be realized
upon exercise of options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on
the Common Stock over the term of the options. Actual gains, if any, on
the stock option exercises and Common Stock holdings are dependent upon
the timing of such exercise and the future performance of the Common
Stock. There can be no assurance that the rates of appreciation assumed in
this table can be achieved or that the amounts reflected will be received
by the holder of the option.
OPTION EXERCISES AND HOLDINGS
The following table sets forth certain information as of December 31, 1997
regarding the number and year end value of unexercised options to purchase
Common Stock held by each of the Named Officers. No stock appreciation rights
were exercised during fiscal 1997.
76
<PAGE>
FISCAL 1997 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED "IN-THE-MONEY"
OPTIONS AT FISCAL OPTIONS AT
YEAR END(#) FISCAL YEAR-END
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE ($)(1)
- - ---- --------------------------- ---------------------------------
<S> <C> <C>
Ram Mukunda ............. -- --
Prabhav Maniyar ......... 107,616/50,000 2,208,818/618,750
Gustavo Pereira ......... 0/7,500 0/92,813
</TABLE>
- - ----------
(1) Options are "in-the-money" if the fair market value of underlying
securities exceeds the exercise price of the options. The amounts set
forth represent the difference between $22.375 per share, the fair market
value of the Common Stock issuable upon exercise of options at December
31, 1997 and the exercise price of the option, multiplied by the
applicable number of shares underlying the options. On July 31, 1998, the
closing price of the Company Common Stock was $11.00.
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 per year, is entitled to
participate in the Company's 1997 Performance Incentive Plan, is eligible to
receive a bonus of up to 40% of his base salary, as determined by the
Compensation Committee of Board of Directors of the Company based upon the
financial and operating performance of the Company, and is entitled to receive
an automobile allowance of $1,500 per month. In addition, the Mukunda
Employment Agreement provides that if there is a "Change of Control" (as
defined herein), Mr. Mukunda will receive, for the longer of 12 months or 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 Senior 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, is eligible to receive a bonus of up to 40% of his base salary, as
determined by the Compensation Committee of Board of Directors of the Company
based upon the financial and operating performance of the Company, and is
entitled to receive an automobile allowance of $750 per month. In addition, the
Maniyar Employment Agreement provides that if there is a "Change of Control"
(as defined herein), Mr. Maniyar will receive, for the longer of 12 months or
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 Employment Agreement and the Maniyar Employment Agreement each
has an initial term of three years and is 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.
For purposes of the Mukunda Employment Agreement and the Maniyar
Employment Agreement, a "Change of Control" shall be deemed to have occurred 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
77
<PAGE>
Directors, cease for any reason to constitute at least a majority thereof,
unless the election or nomination for the election by the Company's
stockholders of each new director was approved by a vote of at least two-thirds
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 stockholders 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 stockholders 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.
The Board of Directors in consultation with the Compensation Committee
recently approved increases in the Compensation of Messrs. Multunda and
Maniyar, which increases are consistent with compensation levels of other
comparable companies in the telecommunications industry. Effective July 1, 1998
Mr. Multunda's annual base salary was increased to $325,000 and Mr. Maniyar's
annual base was increased to $225,000.
STOCK OPTION PLANS
Amended and Restated 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 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 (the "Amended and Restated Option Plan") to establish a
determinable date for the exercisability of options granted under the Option
Plan and to make other changes and updates. The Amended and Restated 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.
All such options terminate and expire 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. Pursuant
to resolution of the Board of Directors, no further awards may be made under
the Amended and Restated Option Plan. As of July 31, 1998, options to purchase
a total of 7,950 shares of Common Stock were outstanding under the Amended and
Restated Option Plan.
1997 Performance Incentive Plan
On August 18, 1997, the stockholders of the Company approved 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 Performance Plan provides for the award to eligible employees of the
Company and others 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 is administered by the Compensation
Committee of the Board of Directors. The Board of Directors recently adopted
and, at the annual stockholder meeting on July 31, 1998, the Company's
stockholders approved, an amendment and restatement of the Performance Plan
that, among other things, increases the number of shares available for issuance
thereunder to an amount equal to 18.5% of the issued and outstanding shares of
Common Stock (determined at the time of grant on an award under the Performance
Plan). Based upon the presently outstanding 8,964,315
78
<PAGE>
shares of Common Stock, the Performance Plan would authorize awards of up to
1,658,398 shares of Common Stock. 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
person'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 purposes. As of June
30, 1998, options to purchase a total of 488,400 shares of Common Stock were
outstanding under the Performance Plan.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Company's current charter and Bylaws (the "Maryland 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 Maryland 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 Maryland 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 of another corporation, partnership, joint venture, trust, or
other enterprise to such extent and to such effect as is permitted by Maryland
law and as the Board of Directors may determine. The Company maintains
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 Maryland 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; and (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.
Under Maryland law, the Company is permitted to limit by provision in its
charter the liability of its directors and officers, so that no director or
officer shall be liable to the Company 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. In Article VII of its amended Articles of Incorporation, the
Company has included a provision which limits the liability of its directors
and officers for money damages in accordance with the Maryland law. Article VII
does not eliminate or otherwise limit the fiduciary duties or obligations of
the Company's directors and officers, does not limit non-monetary forms of
recourse against such directors and officers, and, in the opinion of the
Securities and Exchange Commission, does not eliminate the liability of a
director or officer under the federal securities laws.
Upon completion of the Reorganization, the Company will be governed by the
laws of the State of Delaware as well as a new charter and bylaws (together,
the "Delaware Charter").
The Delaware Charter incorporates indemnification provisions to the
maximum extent permitted by Delaware law and provides that directors, officers,
employees and other individuals shall be indemnified against liability to the
Company or its stockholders, other than an action by or in the right of the
Company, if the indemnified person acted in good faith and in a manner such
person reasonably believed to be in or
79
<PAGE>
not opposed to the best interests of the Company and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. With respect to this standard, under Delaware law,
termination of any proceeding by conviction or upon a plea of nolo contendre or
its equivalent, shall not, of itself, create a presumption that such person is
prohibited from being indemnified. In the event of any action by or in the
right of the Company, indemnification extends only to expenses incurred in
connection with defense or settlement of such an action. In addition, under
Delaware law, upon court approval, a corporation may indemnify an individual
found liable to the corporation, whereas under Maryland law, a corporation may
not indemnify an individual who has been found liable to the corporation in a
proceeding brought by or in the right of the corporation or on the basis that a
personal benefit was improperly received except, as specified above, for
expenses upon a court order.
Delaware law states that the indemnification provided by statute shall not
be deemed exclusive of any other rights under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise. Under Delaware law,
therefore, the Company is permitted to enter into indemnification agreements
with its directors. Under Delaware law, directors' liability for monetary
damages cannot be limited by the charter for (i) breaches of their duty of
loyalty to the Company and its stockholders; (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) monetary damages relating to willful or negligent violations regarding
the prohibition on the payment of unlawful dividends or unlawful stock
purchases or redemptions; or (iv) transactions from which a director derives
improper personal benefit. The liability of officers may not be limited under
Delaware law, unless the officers are also directors. In contrast, under
Maryland law, the charter of a corporation may include any provision expanding
or limiting the liability of its directors and officers to the corporation and
its stockholders.
80
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of July 31, 1998, regarding
beneficial ownership of the Company's Common Stock, by (i) each person or group
known by the Company to beneficially own more than 5% or more of the Common
Stock; (ii) each director of the Company; (iii) each executive officer of the
Company that is a Named Officer; 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>
NUMBER OF SHARES
BENEFICIALLY PERCENT OF
BENEFICIAL OWNER(1) OWNED(2) CLASS
- - ------------------- ----------------- -----------
<S> <C> <C>
Ram Mukunda ......................................................... 3,579,675 39.9%
Blue Carol Enterprises Ltd(3) ....................................... 807,124 9.0%
Vijay Srinivas(4) ................................................... 311,200 3.5%
Prabhav V. Maniyar .................................................. 118,616 1.3%
Nazir G. Dossani(5) ................................................. 11,000 *
Richard K. Prins(6) ................................................. 18,000 *
All directors and executive officers as a group (5 persons) ......... 4,038,491 45.1%
</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, 1998, 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) The address of Blue Carol Enterprises Ltd. is 930 Ocean Center Harbour
City, Kowloon, Hong Kong. Blue Carol Enterprises Ltd. is an affiliate of
Portugal Telecom International.
(4) Such shares are held by Mr. Srinivas and his wife as joint tenants. Mr.
and Mrs. Srinivas are the brother-in-law and sister of Ram Mukunda, the
Company's President and Chief Executive Officer.
(5) Consists of options to purchase 5,000 shares of Common Stock.
(6) Consists of options to purchase 5,000 shares of Common Stock. Excludes
warrants to purchase 33,000 shares of Common Stock. In addition, Mr. Prins
is a Senior Vice President of Ferris, Baker Watts, Incorporated, one of
the underwriters of the Initial Public Offering, which received warrants
to purchase up to 150,000 shares of the Common Stock in connection with
the closing of Initial Public Offering, of which Mr. Prins received the
33,000 warrants referred to above. Such warrants are not currently
exercisable.
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<PAGE>
COMPARATIVE STOCK PERFORMANCE
The graph below compares the cumulative total stockholder return on the
Common Stock for the period from October 9, 1997 (the date the Common Stock
began trading on the Nasdaq/National Market) through December 31, 1997 with the
cumulative total return on (i) the "NASDAQ-US Index", and (ii) the "NASDAQ
Telecommunications Index." The comparisons assume the investment of $100 on
October 9, 1997 in the Common Stock and in each of the indices and, in each
case, assumes reinvestment of all dividends. The Company has not paid any
dividends on the Common Stock and does not intend to do so in the foreseeable
future. The performance graph is not necessarily indicative of future
performance.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
MONTHLY CUMULATIVE TOTAL VALUES($)*
------------------------------------------------------------------------
1997 THE NASDAQ THE NASDAQ
MONTH-END THE COMPANY STOCK MARKET -- U.S. INDEX TELECOMMUNICATIONS INDEX
--------- ------------- ---------------------------- -------------------------
<S> <C> <C> <C>
10/31/97 ......... 88.81 91.28 95.44
11/28/97 ......... 95.52 91.68 95.79
12/31/97 ......... 133.58 89.95 99.27
</TABLE>
- - ----------
* Assumes $100 invested on October 9, 1997 in Common Stock or an index,
including reinvestment of dividends.
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<PAGE>
CERTAIN TRANSACTIONS
The Company has an agreement with Companhia Santomensed De
Telecommunicacoes ("CST"), an affiliate of Blue Carol Enterprises Ltd. ("Blue
Carol"), which currently holds 9% of the outstanding shares of Common Stock,
for the purchase and sale of long distance services. Revenues generated from
this affiliate amounted to approximately $1,035,000, $1,501,000 and $1,900,000,
or 10%, 5% and 2% of the Company's total revenues for the years ended December
31, 1995, 1996 and 1997, respectively. Services provided to the Company by this
affiliate amounted to approximately $134,000, $663,000 and $680,000 of the
Company's costs of services for the years ended December 31, 1995, 1996 and
1997, respectively. The Company also has a lease agreement with an affiliate of
Blue Carol, Companhia Portuguesa Radio Marconi, S.A. ("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.
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. No services were provided in 1997 or the first two quarter of
1998. Accounts receivable from EAA were $167,000 and $64,000 as of December 31,
1995 and 1996, respectively. The Company believes that the services provided
were on standard commercial terms, which are no less favorable than those
available on an arms-length basis with an unaffiliated third party.
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, which amounts were repaid in July 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%.
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 common
stock, or alternatively, to repurchase such shares of non-voting common 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.
During the second quarter of 1998, the Company made loans to certain of
its employees, including executive officers. These loans were all made on
substantially the same terms, including interest rates. In this regard, the
Company advanced an aggregate of $736,676 to such employees, including $550,000
to the Company's Senior Vice President and Chief Financial Officer, Prabhav V.
Maniyar, in connection with the exercises of certain outstanding options to
purchase Common Stock and the payment of taxes related thereto. The loans bear
interest at a rate of 7.87% per year with interest payable quarterly in
arrears. Principal and any unpaid interest are due and payable on December 31,
1998, and may not be pre-paid. The loan to Mr. Maniyar is secured by a pledge
of all of his assets other than assets that may be subject to any pre-existing
security interests.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company is currently 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. Upon completion of the Reorganization, the Company will
be authorized to issue 40,000,000 shares of Common Stock, par value $.01 per
share, and 1,000,000 shares of preferred stock, par value $1.00 per share.
As of July 31, 1998, there were 8,964,315 shares of Common Stock
outstanding, held of record by 44 stockholders. In addition, as of July 31,
1998, options, warrants and other rights to purchase an aggregate of 1,116,476
shares of Common Stock were outstanding, of which 279,550 were currently
exercisable.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders, including 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 fully paid and nonassessable.
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.
REGISTRATION RIGHTS
Certain holders of outstanding warrants (other than the Warrants) and
shares of Common Stock have the right to request the Company to register their
shares under the Securities Act. First Union, as the successor to Signet Bank,
has the right to request the Company to register 269,900 shares of Common Stock
underlying their warrants on two occasions. In addition, the holders of
warrants to purchase Common Stock that were issued to the representatives of
the underwriters of the Company's initial public offering have the right to
request the Company to register the 150,000 shares of Common Stock underlying
their warrants on one occasion following the vesting of those warrants in
October 1998. First Union, the holders of the representatives' warrants and a
beneficial owner of 3,000 shares of Common Stock also have "piggy-back"
registration rights with respect to certain registered offerings of securities
by the Company that are registered under the Securities Act. Each of these
parties waived their registration rights in connection with the Old Notes
Offering, including the Warrant Registration Statement and the Demand
Registration Statement.
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION, BYLAWS, MARYLAND
LAW AND DELAWARE LAW
Amended and Restated Articles of Incorporation and Bylaws
The Maryland Charter includes 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, 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.
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In this regard, the Maryland Charter provides that the number of directors
shall be five but may not be fewer than three nor more than twenty-five
members. The Maryland 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 Maryland Charter provides 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 Maryland Charter also provides 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;
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 Maryland 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 Maryland Charter also contains 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 Maryland Charter establishes
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 Maryland 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 Maryland 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). 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. In addition, the Maryland 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.
Upon completion of the Reorganization, the Delaware Charter will be the
charter documents of the Company. Although the provisions of the Delaware
Charter are similar in many respects to those of the Maryland Charter, the
Reorganization includes implementation of provisions in the Delaware Charter
that affect the rights of stockholders and management. In addition, certain
other changes altering the rights of stockholders and powers of management
could be implemented in the future by amendment of
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the Company's Certificate of Incorporation following stockholder approval, and
certain changes could be implemented by amendment of the Bylaws without
stockholder approval.
Change in Authorized Stock. The Maryland Charter authorizes a total of
20,100,000 shares of stock, of which 20,000,000 are shares are classified as
common stock, $.01 par value, and 100,000 shares are classified as preferred
stock, $1.00 par value ("Preferred Stock"). Of the authorized shares of
Preferred Stock, 25,000 shares are classified as Series A Junior Participating
Preferred Stock in connection with the adoption by the Board of a Preferred
Stock Purchase Rights Agreement dated as of March 26, 1998 ("Rights Plan"). The
Board of Directors has the authority to classify and issue the remaining shares
of Preferred Stock in one or more series and to fix the price, rights,
preferences, privileges and restriction thereof. The Delaware Charter
authorizes Startec-Delaware to classify and issue an aggregate of 41,000,000
shares of stock, of which 40,000,000 shares shall be common stock, $.01 par
value per share, and 1,000,000 shares shall be preferred stock, $1.00 par value
per share.
Elimination of Stockholders' Power to Call Special Stockholders' Meeting
and to Act by Unanimous Written Consent. The Delaware Charter provides that
stockholders may act only at an annual or special meeting of stockholders and
not by written consent. Although the current Bylaws authorize the stockholders
of the Company to take action by unanimous written consent without a meeting,
this method of obtaining stockholder approval has not been used since the
Company became a public company in 1997. Because of the large number of
stockholders of the Company and its current practice of soliciting proxies and
holding meetings, the Company does not expect to use this procedure in the
future. In addition, the Delaware Bylaws of the Company provide that a special
meeting of the stockholders may only be called by the Board of Directors, the
Chairman of the Board of Directors, or the President. The Maryland Bylaws
authorize a special meeting of the stockholders to be called by the Board of
Directors, the President, or the holders of stock entitled to cast not less
than 25% of the votes at such meeting. Although such a provision is permitted
by Delaware law, the Delaware Bylaws will prohibit stockholders from calling a
special meeting. As a result, after the Reorganization, the stockholders of the
Company will be permitted to act only at a duly called annual or special
meeting of the stockholders.
The provisions prohibiting stockholder action by written consent will give
all stockholders of the Company the opportunity to participate in determining
any proposed stockholder action and will prevent the holders of a majority of
the voting power of the Company from using the written consent procedure to
take stockholder action. Persons attempting hostile takeovers of corporations
have attempted to use written consent procedures to deal directly with
stockholders and avoid negotiations with the boards of directors of such
corporations. The provisions eliminating the right of stockholders to call a
special meeting would mean that a stockholder could not force stockholder
consideration of a proposal over the opposition of the Board of Directors by
calling a special meeting of the stockholders prior to such time as the Board
of Directors believed such consideration to be appropriate. By eliminating the
use of the written consent procedure and the ability of stockholders to call a
special meeting, the Company intends to encourage persons seeking to acquire
control of the Company to initiate an acquisition through arm's-length
negotiations with the Company's management and its Board of Directors.
The provisions restricting stockholder action by written consent and the
elimination of the stockholders' ability to call special meetings may have the
effect of delaying consideration of a stockholder proposal until the next
annual meeting unless a special meeting is called by the Board of Directors.
Because elimination of the procedures for stockholders to act by written
consent or to call special meetings could make more difficult an attempt to
obtain control of the Company, such action could have the effect of
discouraging a third party from making a tender offer or otherwise attempting
to obtain control of the Company. Because tender offers for control usually
involve a purchase price higher than the prevailing market price, the
provisions restricting stockholder action by written consent and the
elimination of the stockholders' ability to call special meetings may have the
effect of preventing or delaying a bid for the Company's shares that could be
beneficial to the Company and its stockholders. Elimination of the written
consent procedure also means that a meeting of the stockholders would be
required in order for the Company's stockholders to replace the Board of
Directors. The restriction on the ability of stockholders to call a special
meeting means that a proposal to replace the Board of Directors could be
delayed until the next annual meeting. These provisions thus will make the
removal of directors more difficult.
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Maryland and Delaware 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 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
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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.
Following the Reorganization, the Company will be subject to the
provisions of the Delaware General Corporation Law, which contains provisions
similar to the Maryland laws summarized above. The following is a summary of
certain similarities and differences between Delaware law and Maryland law. The
discussion is not exhaustive and is qualified in its entirety by reference to
the specific provisions of Delaware law and Maryland law.
Redemption Retirement. Delaware law prohibits the purchase or redemption
of stock when the capital of a corporation is or will be impaired; except that
a corporation may purchase or redeem out of capital any of its own shares which
are entitled upon any distribution of its assets, whether by dividend or in
liquidation, to a preference over another class or series of its stock.
Maryland law, on the other hand, prohibits the purchase or redemption of stock
if the corporation would be unable to pay its indebtedness as the indebtedness
becomes due in the usual course of business, or if the corporations's total
assets are, or would be, less than the sum of the total liabilities plus,
unless the charter provides otherwise, the amount needed to satisfy
preferential rights.
Dividends. Delaware law provides that a corporation can pay dividends out
of capital surplus or out of net profits for the current or immediately
preceding fiscal year. Maryland law, however, restricts the payment of
dividends if the corporation is, or would be unable to, pay its indebtedness as
the indebtedness becomes due in the usual course of business or the
corporation's total assets are, or would be, less than the sum of the total
liabilities plus, unless the charter provides otherwise, the amount needed to
satisfy preferential rights of stockholders whose preferential rights are
superior to those receiving the distribution.
Dissenters' Rights. Under Delaware law and Maryland law, a dissenting
stockholder of a corporation participating in certain transactions such as
certain mergers or consolidations, may, under varying circumstances, receive
cash in the amount of the fair value of such stockholder's shares (as
determined by a court) in lieu of the consideration such stockholder otherwise
would have received in such transaction. Delaware law does not generally
require such dissenters' rights of appraisal with respect to (i) a sale of
assets, (ii) an amendment of the certificate of incorporation (unless otherwise
provided for in the certificate of incorporation), (iii) a merger or
consolidation by a corporation, the shares of which are either listed on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 stockholders, if such
stockholders received shares of the surviving corporation or of another listed
or widely-held corporation, or (iv) stockholders of a corporation surviving a
merger if no vote of the stockholders of the surviving corporation is required
to approve the merger. Maryland law has similar provisions, but under Maryland
law, dissenters' rights of appraisal would apply: (i) with respect to a sale of
all or substantially all of a corporation's assets (except a transfer of assets
by a corporation to one or more persons if all of the equity interests of the
person or persons are owned directly or indirectly by the transferor, in which
event dissenters' rights of appraisal would not apply) or
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(ii) if a corporation amends its charter in a way that would alter express
contractual rights of any outstanding stock and substantially adversely affect
the existing stockholder's rights unless the corporation's charter reserves the
right to do so. Under Maryland law, a stockholder does not generally have
appraisal rights in a merger or consolidation if such stockholder's stock is
listed on a national exchange or if such stockholder's stock is that of the
surviving corporation in the merger and the merger does not change such stock.
Inspection of Stockholder List. The rights of stockholders of a Maryland
corporation and a Delaware corporation to inspect and copy corporation records
differ in certain respects. Under Maryland law, any stockholder may inspect the
bylaws, minutes of the proceedings of stockholders, annual statements of
affairs, and voting trust agreements of the corporation at the corporation's
principal office. Any stockholder may also present a written request for a
statement showing all stock and securities issued by the corporation during a
specified period of not more than 12 months before the date of the request, the
consideration received per share or unit and the value of any consideration
other than money as set forth in a resolution of the board of directors. In
addition, stockholders of record who own and have owned for at least six months
at least five percent of the outstanding stock of any class may inspect and
copy the corporation's books of account and its stock ledger, and request an
account of the corporation's affairs with no statutory restriction upon the
purpose of such inspection. Under Delaware law, on the other hand, any
stockholder may upon written demand under oath stating the stockholder's
purpose, inspect and copy for any proper purpose the corporation's stock
ledger, list of stockholders, and its other books and records. A proper purpose
is one reasonably related to such person's interest as a stockholder.
Accordingly, for stockholders holding less than five percent of the outstanding
stock of any class, the right of inspection of some records may be broader
under Delaware law than under Maryland law. For some stockholders, however, the
Maryland rights of inspection that are available may be less restrictive with
respect to the purpose for which the right may be exercised, and the lack of
access to stockholder records under Delaware law could result in the impairment
of the stockholder's ability to coordinate opposition to management proposals,
including proposals with respect to a change in control of the corporation.
Limitation of Liability. Under Delaware law, directors' liability for
monetary damages cannot be limited by the charter for (i) breaches of their
duty of loyalty to the Company and its stockholders; (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) monetary damages relating to willful or negligent violations
regarding the prohibition on the payment of unlawful dividends or unlawful
stock purchases or redemptions; or (iv) transactions from which a director
derives improper personal benefit. The liability of officers may not be limited
under Delaware law, unless the officers are also directors. Under Maryland law,
the charter of a corporation may include any provision expanding or limiting
the liability of its directors and officers to the corporation and its
stockholders.
Restrictions on Voting of Securities. Maryland law provides for
control-share voting restrictions. If applicable, the Maryland law restriction
provides that the voting rights of the persons who make a "control-share"
acquisition of a corporation's stock (at least 20% of the voting power of the
corporation) are eliminated unless the acquisition is exempt from the
restriction or the holders of two-thirds of the non-control share stock of the
corporation vote in favor of the acquisition. In contrast, Delaware Law does
not provide for a similar control-share voting restriction.
Voting Requirements for Business Combination. Maryland law requires a vote
of two-thirds of all stockholders entitled to vote to approve a business
combination, although, as permitted by Maryland law, the Maryland Charter
provides for the effectiveness and validity of such an action if authorized by
the affirmative vote of a majority of the total number of votes entitled to be
cast thereon. Delaware law and the Delaware Charter require the vote of a
majority of the shares represented at a stockholder meeting for all corporate
actions requiring stockholder approval. In addition, Delaware law requires that
certain transactions between a corporation and an "interested stockholder"
(generally, a stockholder acquiring 15% or more of the voting stock of a
corporation) may not occur for three years following the date such person
became an interested stockholder unless (i) prior to such date the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested
stockholder; (ii) upon consummation of the transaction that resulted in
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the stockholder becoming an interested stockholder, the interested stockholder
owns at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (excluding shares controlled by the interested
stockholder); (iii) the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders by
two-thirds of the outstanding voting stock not held by the interested
stockholder; or (iv) an exemption is available. In contrast, Maryland law
provides that, unless the Board of Directors has approved the acquisition of
voting stock pursuant to which a person becomes an interested stockholder
(generally, a stockholder acquiring 10% or more of the voting stock of a
corporation), a Maryland corporation may not engage in certain business
combinations with any interested stockholder for five years following the most
recent date on which the interested stockholder became an interested
stockholder. Moreover, Maryland law provides that business combinations with an
interested stockholders after such five-year period must be recommended by the
board of directors and approved by (i) at least 80% of the outstanding shares
of the voting stock of the corporation and (ii) at least two-thirds of the
outstanding shares of voting stock (other than voting stock held by an
interested stockholder or an affiliate thereof), unless certain value and other
standards are met or an exemption is available.
STOCKHOLDER RIGHTS PLAN
The Board of Directors has adopted a stockholder rights plan (the "Plan").
In implementing the Plan, the Board of Directors declared a dividend of one
right (collectively, the "Rights") for each outstanding share of Common Stock.
Each Right, when exercisable, would entitle the holder thereof to purchase
1/1,000th of a share of Series A Junior Participating Preferred Stock (the
"Preferred Stock") at a price of $175 per 1/1,000th share.
Subject to certain limited exceptions, the Rights will be exercisable only
if a person or group, other than an Exempt Person, as defined in the Plan,
becomes the beneficial owner of 10% or more of the Common Stock or announces a
tender or exchange offer which would result in its ownership of 10% or more of
the Common Stock. Ten days after a public announcement that a person has become
the beneficial owner of 10% or more of the Common Stock, or ten days following
the commencement of a tender offer or exchange offer which would result in a
person becoming the beneficial owner of 10% or more of the Common Stock (the
earlier of which is called the "Distribution Date"), each holder of a Right,
other than the acquiring person, would be entitled to purchase a certain number
of shares of Common Stock for each Right at one-half of the then-current market
price. If the Company is acquired in a merger, or 50% or more of the Company's
assets are sold in one or more related transactions, each Right would entitle
the holder thereof to purchase common stock of the acquiring company at one
half of the then-market price of such common stock.
At any time after a person or group becomes the beneficial owner of 10% or
more of the Common Stock, the Board of Directors may exchange one share of
Common Stock for each Right, other than Rights held by the acquiring person.
Generally, the Board of Directors may redeem the Rights at any time until 10
days following the public announcement that a person or group of persons has
acquired beneficial ownership of 10% or more of the outstanding Common Stock.
The Rights will expire on March 25, 2008.
Until a Right is exercised, the holder thereof will have no rights as a
stockholder of the Company, including without limitation, the right to vote or
to receive dividends. In addition, other than those provisions relating to the
principal economic terms of the Rights (other than an increase in the purchase
price), any of the provisions of the Plan may be amended by the Board of
Directors prior to the Distribution Date.
Upon the completion of the Reorganization, the Company's rights and
obligations under the Plan will continue.
LISTING
The Common Stock is quoted on the Nasdaq Stock Market under the symbol
"STGC."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company.
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DESCRIPTION OF OTHER INDEBTEDNESS
The Signet Facility provides for maximum borrowings of up to the lesser of
$15 million or 85% of eligible accounts receivable, as defined, until maturity
of the Signet Facility on December 31, 1999. The proceeds of the Signet
Facility may be used for working capital and general corporate purposes. As of
the date hereof, there are no amounts outstanding under the Signet Facility.
Interest. Borrowings under the Signet Facility bear interest, at the
Company's option, at the prime rate, plus 2%, or the adjusted LIBOR, plus 4%.
Security. The Signet Facility is secured by substantially all of the
Company's assets, and, prior to the First Amendment to Credit Facility (the
"Amended Credit Facility") described below, a pledge of all of the Company's
stock owned by Ram Mukunda and Vijay and Usha Srinivas.
Covenants. The Signet Facility contains certain financial and
non-financial covenants, including, but not limited to (i) ratios of monthly
net revenue to loan balance, (ii) interest coverage requirements, (iii) cash
flow leverage requirements, (iv) limitations on capital expenditures,
incurrence of additional indebtedness and the issuance of additional equity
securities, (iv) restrictions on transfers of assets, mergers and acquisitions
and (v) restrictions on the payment of dividends.
Events of Default. The Signet Facility contains events of default
customary for similar facilities. If any event of default occurs and is
continuing beyond any applicable grace period, First Union (defined below) may
accelerate the due date with respect to the entire indebtedness of the Company
under the Signet Facility and may also immediately enforce and realize upon any
collateral security granted to the lender thereunder.
The Company and First Union National Bank ("First Union"), as the
successor to Signet Bank, recently executed the Amended Credit Facility, which
provided for certain changes to the Signet Facility in connection with the Old
Notes Offering and the Reorganization. Pursuant to the Amended Credit Facility,
among other changes, First Union consented to the Old Notes Offering and the
Reorganization and waived compliance with certain affirmative and negative
covenants in connection therewith that may be in conflict with the terms of the
Old Notes Offering. In particular, among other amendments, the Amended Credit
Facility provides that certain key financial covenants shall apply only in the
event that the Company attempts to borrow amounts under the Amended Credit
Facility. As of the date hereof, as a result of the Indebtedness incurred in
connection with the Old Notes Offering, the Company is not in compliance with
these covenants and is therefore unable to borrow any amounts under the Amended
Credit Facility. The Amended Credit Facility also provided for the release of
First Union's security interest in the Company's stock owned by Mr. Mukunda and
Mr. and Mrs. Srinivas previously pledged to secure the Company's obligations
under the Signet Facility.
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DESCRIPTION OF UNITS
Each Unit consists of $1,000 principal amount of Notes and a Warrant to
purchase 1.25141 Warrant Shares. The issue price of a Unit was allocated, as
between the Note and the Warrant, $986.83 to the Note and $13.17 to the
Warrant. The Notes and the Warrants are not be separately transferable until
the earliest to occur of (i) November 15, 1998, (ii) an Exercise Event, (iii)
the date the Exchange Offer Registration Statement or Shelf Registration
Statement is declared effective by the Commission and (iv) such other date as
Lehman Brothers, Inc. shall determine (the "Separation Date").
DESCRIPTION OF NOTES
The Old Notes were, and the Exchange Notes will be, issued pursuant to an
Indenture, dated as of May 21, 1998 (the "Indenture"), between the Company and
First Union National Bank, as trustee thereunder (the "Trustee"). Upon issuance
of the Exchange Notes or the effectiveness of a Shelf Registration Statement,
the Indenture will be subject to and governed by the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). The following summary of certain
provisions of the Notes, the Indenture, the Registration Rights Agreement and
the Pledge Agreement does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Notes, the
Indenture, the Registration Rights Agreement and the Pledge Agreement,
including the definitions of certain terms therein and those terms made a part
thereof by the Trust Indenture Act. Whenever particular sections or defined
terms of the Indenture not otherwise defined herein are referred to, such
sections or defined terms are incorporated herein by reference. Copies of the
Indenture, the Registration Rights Agreement and the Pledge Agreement have been
filed with the Commission as exhibits to the Exchange Offer Registration
Statement of which this Prospectus is a part. For purposes of this "Description
of Notes," the term "the Company" refers to Startec Global and not any of its
Subsidiaries. The definitions of certain other terms used in the following
summary are set forth below under "-- Certain Definitions."
GENERAL
The Old Notes are, and the Exchange Notes will be, senior obligations of
the Company, limited to $160.0 million aggregate principal amount, and will
mature on May 15, 2008. The Notes bear interest at the rate of 12% per annum,
payable semiannually in arrears on May 15 and November 15 of each year,
commencing November 15, 1998 to the Person in whose name the Note (or any
predecessor Note) is registered at the close of business on the preceding May 1
or November 1, as the case may be. Interest will be computed on the basis of a
360-day year of twelve 30-day months.
Principal of, premium, if any, interest and Liquidated Damages, if any, on
the Notes will be payable, and the Notes may be exchanged or transferred, at
the office or agency of the Company (which initially will be the corporate
trust operations office of the Trustee in New York City; or, at the option of
the Company, payment of interest may be made by check mailed to the address of
the holders as such address appears in the Register; provided that all payments
with respect to Global Notes and Certificated Notes (as such terms are defined
below under the caption "Book-Entry, Delivery and Form") the holders of which
have given wire transfer instructions to the Company will be required to be
made by wire transfer of immediately available funds to the accounts specified
by the holders thereof. (Section 307)
The Notes will be issued only in fully registered form, without coupons,
in denominations of $1,000 of principal amount and any integral multiple
thereof. See "Book-Entry, Delivery and Form." No service charge will be made
for any registration of transfer or exchange of Notes, but the Company may
require payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith. (Section 305)
OPTIONAL REDEMPTION
Except as otherwise provided, the Notes are not redeemable at the option
of the Company prior to May 15, 2003. At any time on or after that date, the
Notes may be redeemed at the Company's option, in whole or in part, at any time
or from time to time, upon not less than 30 nor more than 60 days' prior
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notice mailed by first class mail to each holder's last address as it appears
in the Register, at the following Redemption Prices (expressed in percentages
of principal amount thereof), plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the Redemption Date (subject to the right of
holders of record on the relevant Regular Record Date to receive interest due
on an Interest Payment Date that is on or prior to the Redemption Date), if
redeemed during the 12-month period commencing on May 15 of the years set forth
below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- -----------------
<S> <C>
2003 ........................... 106.0%
2004 ........................... 104.0%
2005 ........................... 102.0%
2006 (and thereafter) .......... 100.0%
</TABLE>
Notwithstanding the foregoing, prior to May 15, 2001, the Company may, on
any one or more occasions, redeem up to 35.0% of the originally issued
aggregate principal amount of Notes at a redemption price of 112.0% of the
aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the Redemption Date, with the Net Cash
Proceeds of one or more Public Equity Offerings; provided, that at least 65.0%
of the originally issued principal amount of the Notes remains outstanding
immediately after the occurrence of such redemption; and provided further that
notice of such redemptions shall be given within 60 days of the closing of any
such Public Equity Offering. (Section 1101)
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed or, if the Notes are not listed on a national securities exchange, on a
pro rata basis, by lot or by such other method as the Trustee in its sole
discretion shall deem to be fair and appropriate; provided that no Note of
$1,000 or less in principal amount at maturity shall be redeemed in part. If
any Note is to be redeemed in part only, the notice of redemption relating to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon cancellation of
the original Note.
SECURITY
The Indenture requires the Company to purchase and pledge to the Trustee,
as security for the benefit of the holders of the Notes, the Pledged Securities
in such amount as will be sufficient upon receipt of scheduled interest and/or
principal payments of such securities, in the opinion of a nationally
recognized firm of independent public accountants selected by the Company, to
provide for payment in full of the first six scheduled interest payments due on
the Notes. The Company used approximately $52.4 million of the net proceeds of
the Old Notes Offering to acquire the Pledged Securities. The Pledged
Securities were pledged by the Company to the Trustee for the benefit of the
holders of the Notes pursuant to the Pledge Agreement and are held by the
Trustee in the Pledge Account pending disposition pursuant to the Pledge
Agreement. Pursuant to the Pledge Agreement, immediately prior to one of the
first six scheduled interest payment dates with respect to the Notes, the
Company may either (a) deposit with the Trustee from funds otherwise available
to the Company cash sufficient to pay the interest scheduled to be paid on such
date or (b) direct the Trustee to release from the Pledge Account proceeds
sufficient to pay interest then due. In the event that the Company exercises
the option under clause (a) above, the Company may thereafter direct the
Trustee to release to the Company proceeds or Pledged Securities from the
Pledge Account in like amount. A failure by the Company to pay interest on the
Notes in a timely manner through the first six scheduled interest payment dates
will constitute an immediate Event of Default under the Indenture.
Interest earned on the Pledged Securities is added to the Pledge Account.
In the event that the funds or Pledged Securities held in the Pledge Account
exceed the amount sufficient, in the opinion of a nationally recognized firm of
independent public accountants selected by the Company, to provide for payment
in full of the first six scheduled interest payments due on the Notes (or, in
the event an interest
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payment or payments have been made, an amount sufficient to provide for payment
in full of any interest payments remaining, up to and including the sixth
scheduled interest payment) the Trustee will be permitted to release to the
Company, at the Company's request, any such excess amount.
The Notes are secured by a first priority security interest in the Pledged
Securities and in the Pledge Account and, accordingly, the Pledged Securities
and the Pledge Account also secure repayment of the principal amount (and
Liquidated Damages, if any) of the Notes to the extent of such security.
Under the Pledge Agreement, assuming that the Company makes the first six
scheduled interest payments on the Notes in a timely manner, any remaining
Pledged Securities will be released from the Pledge Account and the Notes
therefore will be unsecured.
RANKING
The Old Notes are, and the Exchange Notes will be, unsecured obligations
of the Company (except as described above) and rank senior in right of payment
to any existing and future obligations of the Company expressly subordinated in
right of payment to the Notes and pari passu in right of payment with all other
existing and future unsecured and unsubordinated obligations of the Company,
including trade payables. As of June 30, 1998, after giving pro forma effect to
the Reorganization, the Company and its consolidated Subsidiaries would have
had approximately $158.6 million of Indebtedness. Because the Company is a
holding company that conducts its business through its subsidiaries, all
existing and future Indebtedness and other liabilities and commitments of the
Company's subsidiaries, including trade payables, will be effectively senior to
the Notes. The Indenture limits, but does not prohibit, the incurrence of
certain additional Indebtedness by the Company and its Restricted Subsidiaries
and does not limit the amount of Indebtedness Incurred to finance the cost of
Telecommunications Assets. The Company anticipates that it and its Subsidiaries
will Incur substantial additional Indebtedness in the future. As of June 30,
1998, after giving pro forma effect to the Reorganization, the Company's
consolidated subsidiaries had aggregate liabilities of approximately $25.1
million, including approximately $647,000 of Indebtedness.
COVENANTS
Limitation on Indebtedness and Preferred Stock of Subsidiaries.
(a) Subject to paragraph (b) below, the Company will not, and will not
permit any of its Restricted Subsidiaries to, Incur any Indebtedness or,
in the case of Restricted Subsidiaries, issue or have outstanding
Preferred Stock (other than Acquired Preferred Stock); provided, however,
that the Company may Incur Indebtedness if, immediately thereafter, the
ratio of (i) the aggregate principal amount (or accreted value, as the
case may be) of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding as of the Transaction
Date to (ii) the Pro Forma Consolidated Cash Flow for the preceding two
full fiscal quarters multiplied by two, determined on a pro forma basis as
if any such Indebtedness had been Incurred and the proceeds thereof had
been applied at the beginning of such two fiscal quarters, would be
greater than zero and less than 5.0 to 1.
(b) The foregoing limitations of paragraph (a) of this covenant will not
apply to any of the following Indebtedness ("Permitted Indebtedness"), each
of which will be given independent effect:
(i) Indebtedness of the Company evidenced by the Notes;
(ii) Indebtedness of the Company or any Restricted Subsidiary
outstanding on the Issue Date;
(iii) Indebtedness of the Company or any Restricted Subsidiary under
one or more Credit Facilities, in an aggregate principal amount at any
one time outstanding not to exceed the greater of (x) $50.0 million and
(y) 85.0% of Eligible Accounts Receivable;
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(iv) Indebtedness of the Company or any Restricted Subsidiary
Incurred to finance the cost (including the cost of design, development,
construction, acquisition, licensing, installation or integration) of
Telecommunications Assets;
(v) Indebtedness of a Restricted Subsidiary owed to and held by the
Company or another Restricted Subsidiary, except that (A) any transfer
of such Indebtedness by the Company or a Restricted Subsidiary (other
than to the Company or another Restricted Subsidiary) and (B) the sale,
transfer or other disposition by the Company or any Restricted
Subsidiary of Capital Stock of a Restricted Subsidiary which is owed
Indebtedness by another Restricted Subsidiary shall, in each case, be an
incurrence of Indebtedness by such Restricted Subsidiary, subject to the
other provisions of the Indenture;
(vi) Indebtedness of the Company owed to and held by a Restricted
Subsidiary which is unsecured and subordinated in right to the payment
and performance to the obligations of the Company under the Indenture
and the Notes, except that (A) any transfer of such Indebtedness by a
Restricted Subsidiary (other than to another Restricted Subsidiary) and
(B) the sale, transfer or other disposition by the Company or any
Restricted Subsidiary of Capital Stock of a Restricted Subsidiary which
is owed Indebtedness by the Company shall, in each case, be an
incurrence of Indebtedness by the Company, subject to other provisions
of the Indenture;
(vii) Indebtedness of the Company or a Restricted Subsidiary issued
in exchange for, or the net proceeds of which are used to refinance
(whether by amendment, renewal, extension or refunding), then
outstanding Indebtedness of the Company or a Restricted Subsidiary,
other than Indebtedness Incurred under clauses (iii), (v), (vi), (viii),
(ix), (xi) and (xii) of this paragraph, and any refinancings thereof in
an amount not to exceed the amount so refinanced or refunded (plus
premiums, accrued interest, and reasonable fees and expenses); provided
that such new Indebtedness shall only be permitted under this clause
(vii) if: (A) in case the Notes are refinanced in part or the
Indebtedness to be refinanced is pari passu with the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made pari passu with, or subordinate in right
of payment to, the remaining Notes, (B) in case the Indebtedness to be
refinanced is subordinated in right of payment to the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made subordinate in right of payment to the
Notes at least to the extent that the Indebtedness to be refinanced is
subordinated to the Notes and (C) such new Indebtedness, determined as
of the date of Incurrence of such new Indebtedness, does not mature
prior to the Stated Maturity of the Indebtedness to be refinanced or
refunded, and the Average Life of such new Indebtedness is at least
equal to the remaining Average Life of the Indebtedness to be refinanced
or refunded; and provided further that in no event may Indebtedness of
the Company be refinanced by means of any Indebtedness of any Restricted
Subsidiary pursuant to this clause (vii);
(viii) Indebtedness of (x) the Company not to exceed, at any one time
outstanding, 2.00 times the Net Cash Proceeds from the issuance and
sale, other than to a Subsidiary, of Common Stock (other than Redeemable
Stock) of the Company (less the amount of such proceeds used to make
Restricted Payments as provided in clause (iii) or (iv) of the second
paragraph of the "Limitation on Restricted Payments" covenant) and (y)
the Company not to exceed, at one time outstanding, the fair market
value of any Telecommunications Assets acquired by the Company in
exchange for Common Stock of the Company issued after the Issue Date;
provided, however, that in determining the fair market value of any such
Telecommunications Assets so acquired, if the estimated fair market
value of such Telecommunications Assets exceeds (A) $2.0 million (as
estimated in good faith by the Board of Directors), then the fair market
value of such Telecommunications Assets will be determined by a majority
of the Board of Directors of the Company, which determination will be
evidenced by a resolution thereof, and (B) $10.0 million (as estimated
in good faith by the Board of Directors), then the Company will deliver
the Trustee a written appraisal as to the fair market value of such
Tele-
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communications Assets prepared by a nationally recognized investment
banking or public accounting firm (or, if no such investment banking or
public accounting firm is qualified to prepare such an appraisal, by a
nationally recognized appraisal firm); and provided further that, except
with respect to Acquired Indebtedness, such Indebtedness does not mature
prior to the Stated Maturity of the Notes and the Average Life of such
Indebtedness is longer than that of the Notes;
(ix) Indebtedness of the Company or any Restricted Subsidiary (A) in
respect of performance, surety or appeal bonds or letters of credit
supporting trade payables, in each case provided in the ordinary course
of business, (B) under Currency Agreements and Interest Rate Agreements
covering Indebtedness of the Company; provided that such agreements do
not increase the Indebtedness of the obligor outstanding at any time
other than as a result of fluctuations in foreign currency exchange
rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder, and (C) arising from agreements
providing for indemnification, adjustment of purchase price or similar
obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in any case
Incurred in connection with the disposition of any business, assets or
Restricted Subsidiary of the Company (other than Guarantees of
Indebtedness Incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary for the purpose of financing
such acquisition), in a principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary
in connection with such disposition;
(x) Indebtedness of the Company, to the extent that the net proceeds
thereof are promptly (A) used to repurchase Notes tendered in a Change
of Control offer or (B) deposited to defease all of the Notes as
described below under "Defeasance and Covenant Defeasance of Indenture";
(xi) Indebtedness of a Restricted Subsidiary represented by a
Guarantee of the Notes permitted by and made in accordance with the
"Limitation on Issuances of Guarantees of Indebtedness by Restricted
Subsidiaries" covenant; and
(xii) Indebtedness of the Company or any Restricted Subsidiary in
addition to that permitted to be incurred pursuant to clauses (i)
through (xi) above in an aggregate principal amount not in excess of
$10.0 million (or, to the extent not denominated in United States
dollars, the United States Dollar Equivalent thereof) at any one time
outstanding.
(c) For purposes of determining any particular amount of Indebtedness
under this "Limitation on Indebtedness and Preferred Stock of Subsidiaries"
covenant, Guarantees, Liens or obligations with respect to letters of
credit and other credit enhancements supporting Indebtedness otherwise
included in the determination of such particular amount shall not be
included; provided, however, that the foregoing shall not in any way be
deemed to limit the provision of "Limitation on Issuances of Guarantees of
Indebtedness by Restricted Subsidiaries." For purposes of determining
compliance with this "Limitation on Indebtedness" covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
types of Indebtedness described in the above clauses, the Company, in its
sole discretion may, at the time of such Incurrence, (i) classify such item
of Indebtedness under and comply with either of paragraph (a) or (b) of
this covenant (or any of such definitions), as applicable, (ii) classify
and divide such item of Indebtedness into more than one of such paragraphs
(or definitions), as applicable, and (iii) elect to comply with such
paragraphs (or definitions), as applicable in any order.
Limitation on Restricted Payments.
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) (A) declare or pay any dividend or make any
distribution in respect of the Company's Capital Stock to the holders thereof
(other than stock splits, dividends or distributions payable solely in shares
of Capital Stock (other than Redeemable Stock) of the Company or in options,
warrants or other rights to acquire
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such shares of Capital Stock) or (B) declare or pay any dividend or make any
distribution in respect of the Capital Stock of any Restricted Subsidiary to
any Person other than dividends and distributions payable to the Company or any
Restricted Subsidiary or to all holders of Capital Stock of such Restricted
Subsidiary on a pro rata basis; (ii) purchase, redeem, retire or otherwise
acquire for value any shares of Capital Stock of the Company (including
options, warrants or other rights to acquire such shares of Capital Stock) held
by any Person or any shares of Capital Stock of any Restricted Subsidiary
(including options, warrants and other rights to acquire such shares of Capital
Stock) held by any Affiliate of the Company (other than a wholly owned
Restricted Subsidiary) or any holder (or any Affiliate thereof) of 5.0% or more
of the Company's Capital Stock; (iii) make any voluntary or optional principal
payment, or voluntary or optional redemption, repurchase, defeasance, or other
acquisition or retirement for value, of Indebtedness of the Company that is
subordinated in right of payment to the Notes; or (iv) make any Investment,
other than a Permitted Investment, in any Person (such payments or any other
actions described in clauses (i) through (iv) being collectively "Restricted
Payments") if, at the time of, and after giving effect to, the proposed
Restricted Payment:
(A) a Default or Event of Default shall have occurred and be continuing;
(B) the Company could not Incur at least $1.00 of Indebtedness under
paragraph (a) of the "Limitation on Indebtedness and Preferred Stock
of Subsidiaries" covenant; and
(C) the aggregate amount of all Restricted Payments declared or made
from and after the Closing Date would exceed the sum of:
(1) Cumulative Consolidated Cash Flow minus 200% of Cumulative
Consolidated Fixed Charges;
(2) 100% of the aggregate Net Cash Proceeds from the issue or sale to
a Person, which is not a Subsidiary of the Company, of Capital Stock of
the Company (other than Redeemable Stock) or of debt securities of the
Company which have been converted into or exchanged for such Capital
Stock (except to the extent such Net Cash Proceeds are used to Incur new
Indebtedness outstanding pursuant to clause (viii) of paragraph (b) of
the "Limitation on Indebtedness and Preferred Stock of Subsidiaries"
covenant); and
(3) to the extent any Permitted Investment that was made after the
Closing Date is sold for cash or otherwise liquidated or repaid for
cash, the lesser of (i) the cash return of capital with respect to such
Permitted Investment (less the cost of disposition, if any) and (ii) the
initial amount of such Permitted Investment.
The foregoing provision shall not be violated by reason of: (i) the
payment of any dividend within 60 days after the date of declaration thereof
if, at said date of declaration, such payment would comply with the foregoing
paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of payment
to the Notes including a premium, if any, and accrued and unpaid interest and
Liquidated Damages, if any, with the net proceeds of, or in exchange for,
Indebtedness Incurred under clause (viii) of paragraph (b) of the "Limitation
on Indebtedness and Preferred Stock of Subsidiaries" covenant; (iii) the
repurchase, redemption or other acquisition of Capital Stock of the Company in
exchange for, or out of the Net Cash Proceeds of a substantially concurrent (A)
capital contribution to the Company or (B) issuance and sale of shares of
Capital Stock (other than Redeemable Stock) of the Company (except to the
extent such proceeds are used to incur new Indebtedness outstanding pursuant to
clause (viii) of paragraph (b) of the "Limitation on Indebtedness and Preferred
Stock of Subsidiaries" covenant); (iv) the acquisition of Indebtedness of the
Company which is subordinated in right of payment to the Notes in exchange for,
or out of the proceeds of, a substantially concurrent (A) capital contribution
to the Company or (B) issuance and sale of, shares of the Capital Stock of the
Company (other than Redeemable Stock) (except to the extent such proceeds are
used to incur new Indebtedness outstanding pursuant to clause (viii) of
paragraph (b) of the "Limitation on Indebtedness and Preferred Stock of
Subsidiaries" covenant); (v) payments or distributions to dissenting
stockholders in accordance with applicable law, pursuant to or in connection
with a consolidation, merger or transfer of assets that complies with the
provisions of the Indenture
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applicable to mergers, consolidations and transfers of all or substantially all
of the property and assets of the Company; (vi) other Restricted Payments not
to exceed $2.0 million; and (vii) investments in any Telecommunications Assets
acquired in exchange for Capital Stock of the Company (other than Redeemable
Stock) issued after the Issue Date or with the Net Cash Proceeds from the
concurrent issuance and sale of Capital Stock of the Company (other than
Redeemable Stock); provided that, except in the case of clause (i), no Default
or Event of Default shall have occurred and be continuing or occur as a
consequence of the actions or payments set forth therein. (Section 1012)
Each Restricted Payment permitted pursuant to the immediately preceding
paragraph (other than the Restricted Payment referred to in clause (ii)
thereof) and the Net Cash Proceeds from any capital contributions to the
Company or issuance of Capital Stock referred to in clauses (iii), (iv) and
(vii) of the immediately preceding paragraph, shall be included in calculating
whether the conditions of clause (C) of the first paragraph of this "Limitation
on Restricted Payments" covenant have been met with respect to any subsequent
Restricted Payments. In the event the proceeds of an issuance of Capital Stock
of the Company are used for the redemption, repurchase or other acquisition of
the Notes, then the Net Cash Proceeds of such issuance shall be included in
clause (C) of the first paragraph of this "Limitation on Restricted Payments"
covenant only to the extent such proceeds are not used for such redemption,
repurchase or other acquisition of the Notes.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries.
So long as any of the Notes are outstanding, the Company will not, and
will not permit any Restricted Subsidiary to, create or otherwise cause or
suffer to exist or become effective any consensual encumbrance or restriction
of any kind on the ability of any Restricted Subsidiary to (i) pay dividends or
make any other distributions on any Capital Stock of such Restricted Subsidiary
owned by the Company or any other Restricted Subsidiary, (ii) pay any
Indebtedness owed to the Company or any other Restricted Subsidiary (iii) make
loans or advances to the Company or any other Restricted Subsidiary or (iv)
transfer any of its property or assets to the Company or any other Restricted
Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Indenture or any other
agreements or instruments in effect on the Closing Date, and any extensions,
refinancings, renewals or replacements of such agreements; provided that the
encumbrances and restrictions in any such extensions, refinancings, renewals or
replacements are no less favorable in any material respect to the holders than
those encumbrances or restrictions that are then in effect and that are being
extended, refinanced, renewed or replaced; (ii) contained in the terms of any
Indebtedness or any agreement pursuant to which such Indebtedness was issued
(or, in the case of Acquired Preferred Stock, terms of such Acquired Preferred
Stock) if the encumbrance or restriction applies only in the event of a default
with respect to a financial covenant contained in such Indebtedness or
agreement (or, in the case of Acquired Preferred Stock, upon the default in the
payment of dividends upon such Acquired Preferred Stock) and such encumbrance
or restriction is not materially more disadvantageous to the holders of the
Notes than is customary in comparable financings (as determined by the Company)
and the Company determines that any such encumbrance or restriction will not
materially affect the Company's ability to make principal or interest payments
on the Notes; (iii) existing under or by reason of applicable law; (iv)
existing with respect to any Person or the property or assets of such Person
acquired by the Company or any Restricted Subsidiary, existing at the time of
such acquisition and not incurred in contemplation thereof, which encumbrances
or restrictions are not applicable to any Person or the property or assets of
any Person other than such Person or the property or assets of such Person so
acquired; (v) in the case of clause (iv) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant, (A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is, or is subject to, a
lease, purchase mortgage obligation, license, conveyance or contract or similar
property or asset, (B) existing by virtue of any transfer of, agreement to
transfer, option or right with respect to, or Lien on, any property or assets
of the Company or any Restricted Subsidiary not otherwise prohibited by the
Indenture or (C) arising or agreed to in the ordinary course of business, not
relating to any Indebtedness, and that do not, individually or in the
aggregate, detract from the value of property or assets of the Company or any
Restricted Subsidiary in any manner material to the Company or any Restricted
Sub-
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sidiary; or (vi) with respect to a Restricted Subsidiary and imposed pursuant
to an agreement that has been entered into for the sale or disposition of all
or substantially all of the Capital Stock of, or property and assets of, such
Restricted Subsidiary. Nothing contained in this "Limitation on Dividend and
Other Payment Restrictions Affecting Restricted Subsidiaries" covenant shall
prevent the Company or any Restricted Subsidiary from (1) creating, incurring,
assuming or suffering to exist any Liens otherwise permitted in the "Limitation
on Liens" covenant or (2) restricting the sale or other disposition of property
or assets of the Company or any of its Restricted Subsidiaries that secure
Indebtedness of the Company or any of its Restricted Subsidiaries. (Section
1013)
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries.
The Company will not, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue, transfer, convey, sell, lease or otherwise
dispose of any shares of Capital Stock (including options, warrants or other
rights to purchase shares of such Capital Stock) of such or any other
Restricted Subsidiary (other than to the Company or a wholly owned Restricted
Subsidiary or in respect of any director's qualifying shares or sales of shares
of Capital Stock to foreign nationals mandated by applicable law) to any Person
unless (A) the Net Cash Proceeds from such issuance, transfer, conveyance,
sale, lease or other disposition are applied in accordance with the provisions
of the "Limitation on Asset Sales" covenant, (B) immediately after giving
effect to such issuance, transfer, conveyance, sale, lease or other
disposition, such Restricted Subsidiary would no longer constitute a Restricted
Subsidiary and (C) any Investment in such Person remaining after giving effect
to such issuance, transfer, conveyance, sale, lease or other disposition would
have been permitted to be made under the "Limitation on Restricted Payments"
covenant if made on the date of such issuance, transfer, conveyance, sale,
lease or other disposition (valued as provided in the definition of
"Investment"); provided, however, that notwithstanding the foregoing, the
Company may, and may permit its Restricted Subsidiaries to, issue, transfer,
convey, sell or otherwise dispose of Capital Stock, (other than Redeemable
Stock) (including options, warrants or other rights to purchase shares of such
Capital Stock) of such or any other Restricted Cable Subsidiary so long as (x)
immediately after such transaction, the Company and/or its Restricted
Subsidiaries continue to beneficially own at least a majority of the Voting
Stock of such Restricted Cable Subsidiary and (y) the Net Cash Proceeds from
such transaction are applied in accordance with the provisions of the
"Limitation on Assets Sales" covenant. For purposes of the foregoing, a
"Restricted Cable Subsidiary" shall mean any Restricted Subsidiary of the
Company organized after the Closing Date for the purpose of designing,
developing, constructing, acquiring, licensing, owning and/or operating fiber
optic cable or similar transmission systems used in the telecommunications
business. (Section 1014)
Limitation on Transactions with Stockholders and Affiliates.
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or
assets, or the rendering of any service) with any holder (or any Affiliate of
such holder) of 10.0% or more of any class of Capital Stock of the Company or
any Restricted Subsidiary or with any Affiliate of the Company or any
Restricted Subsidiary, unless (i) such transaction or series of transactions is
on terms no less favorable to the Company or such Restricted Subsidiary than
those terms that could be obtained in a comparable arm's-length transaction
with a Person that is not such a holder or an Affiliate, (ii) if such
transaction or series of transactions involves aggregate consideration in
excess of $2.0 million, then such transaction or series of transactions is
approved by a majority of the Board of Directors of the Company (including a
majority of the disinterested members thereof, if any) and is evidenced by a
resolution thereof and (iii) if such transaction or series of transactions
involves aggregate consideration in excess of $10.0 million, then the Company
or such Restricted Subsidiary will deliver to the Trustee a written opinion as
to the fairness to the Company or such Restricted Subsidiary of such
transaction from a financial point of view from a nationally recognized
investment banking firm (or, if an investment banking firm is generally not
qualified to give such an opinion, by a nationally recognized appraisal firm or
accounting firm).
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The foregoing limitation does not limit, and will not apply to (i) any
transaction between the Company and any of its Restricted Subsidiaries or among
Restricted Subsidiaries; (ii) the payment or reimbursement of reasonable and
customary regular fees and expenses to directors of the Company who are not
employees of the Company; (iii) any Restricted Payments not prohibited by the
"Limitation on Restricted Payments" covenant; (iv) loans and advances to
officers or employees of the Company and its Subsidiaries not exceeding at any
one time outstanding $1.5 million in the aggregate; (v) employment and similar
agreements entered into between the Company or any of its Restricted
Subsidiaries with their respective employees in the ordinary course of
business; and (vi) operating and similar agreements entered into in the
ordinary course of the Company's business. (Section 1015)
Limitation on Liens.
Under the terms of the Indenture, the Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create, incur,
assume or suffer to exist any Lien (other than Permitted Liens) on any of its
assets or properties of any character (including, without limitation, licenses
and trademarks), or any shares of Capital Stock or Indebtedness of any
Restricted Subsidiary, whether owned at the date of the Indenture or thereafter
acquired, or any income, profits or proceeds therefrom, or assign or otherwise
convey any right to receive income thereof, without making effective provision
for all of the Notes and all other amounts ranking pari passu with the Notes to
be directly secured equally and ratably with the obligation or liability
secured by such Lien, or, if such obligation or liability is subordinated to
the Notes and other amounts ranking pari passu with the Notes, without making
provision for the Notes and such other amounts to be directly secured prior to
the obligation or liability secured by such Lien. (Section 1016)
Limitation on Sale-Leaseback Transactions.
The Company will not, and will not permit any of its Restricted
Subsidiaries to, enter into any Sale- Leaseback Transaction with respect to any
property of the Company or any of its Restricted Subsidiaries. Notwithstanding
the foregoing, the Company may enter into Sale-Leaseback Transactions;
provided, however, that (a) the Attributable Value of such Sale-Leaseback
Transaction shall be deemed to be Indebtedness of the Company and (b) after
giving pro forma effect to any such Sale-Leaseback Transaction and the
foregoing clause (a), the Company would be able to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to paragraph (a) set
forth in the covenant described under "-- Limitation on Indebtedness and
Preferred Stock of Subsidiaries."
Limitation on Asset Sales.
The Company will not, and will not permit any Restricted Subsidiary to,
make any Asset Sale, unless (i) the Company or the Restricted Subsidiary, as
the case may be, receives consideration at the time of such Asset Sale at least
equal to the fair market value of the assets sold or disposed of as determined
by the good faith judgment of the Board of Directors evidenced by a Board
Resolution and (ii) at least 75.0% of the consideration received for such Asset
Sale consists of cash or cash equivalents or the assumption of unsubordinated
Indebtedness.
The Company shall, or shall cause the relevant Restricted Subsidiary to,
within 360 days after the date of receipt of the Net Cash Proceeds from an
Asset Sale, (i) (A) apply an amount equal to such Net Cash Proceeds to
permanently repay unsubordinated Indebtedness of the Company or Indebtedness of
any Restricted Subsidiary, in each case, owing to a Person other than the
Company or any of its Restricted Subsidiaries or (B) invest an equal amount, or
the amount not so applied pursuant to clause (A), in property or assets of a
nature or type or that are used in a business (or in a Person having property
and assets of a nature or type, or engaged in a business) similar or related to
the nature or type of the property and assets of, or the business of, the
Company and its Restricted Subsidiaries existing on the date of such investment
(as determined in good faith by the Board of Directors, whose determination
shall be conclusive and evidenced by a Board Resolution) and (ii) apply (no
later than the end of the 360-day period referred to above) such excess Net
Cash Proceeds (to the extent not applied pursuant to clause (i)) as provided in
the following paragraphs of this "Limitation on Asset Sales" covenant. The
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amount of such Net Cash Proceeds required to be applied (or to be committed to
be applied) during such 360-day period referred to above in the preceding
sentence and not applied as so required by the end of such period shall
constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Excess Proceeds Offer (as defined
herein) totals at least $10.0 million, the Company must, not later than the
30th Business Day thereafter, make an offer (an "Excess Proceeds Offer") to
purchase from the holders on a pro rata basis an aggregate principal amount of
Notes equal to the Excess Proceeds on such date, at a purchase price equal to
100.0% of the principal amount of the Notes, plus, in each case, accrued and
unpaid interest and Liquidated Damages, if any, to the date of purchase (the
"Excess Proceeds Payment").
The Company shall commence an Excess Proceeds Offer by mailing a notice to
the Trustee and each holder stating: (i) that the Excess Proceeds Offer is
being made pursuant to this "Limitation on Asset Sales" covenant and that all
Notes validly tendered will be accepted for payment on a pro rata basis; (ii)
the purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is
mailed) (the "Excess Proceeds Payment Date"); (iii) that any Note not tendered
will continue to accrue interest pursuant to its terms; (iv) that, unless the
Company defaults in the payment of the Excess Proceeds Payment, any Note
accepted for payment pursuant to the Excess Proceeds Offer shall cease to
accrue interest and Liquidated Damages, if any, on and after the Excess
Proceeds Payment Date; (v) that holders electing to have a Note purchased
pursuant to the Excess Proceeds Offer will be required to surrender the Note,
together with the form entitled "Option of the Holder to Elect Purchase" on the
reverse side of the Note completed, to the Paying Agent at the address
specified in the notice prior to the close of business on the Business Day
immediately preceding the Excess Proceeds Payment Date; (vi) that holders will
be entitled to withdraw their election if the Paying Agent receives, not later
than the close of business on the third Business Day immediately preceding the
Excess Proceeds Payment Date, a telegram, facsimile transmission or letter
setting forth the name of such holder, the principal amount of Notes delivered
for purchase and a statement that such holder is withdrawing his election to
have such Notes purchased; and (vii) that holders whose Notes are being
purchased only in part will be issued new Notes equal in principal amount to
the unpurchased portion of the Notes surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
integral multiples thereof.
On the Excess Proceeds Payment Date, the Company shall (i) accept for
payment on a pro rata basis Notes or portions thereof tendered pursuant to the
Excess Proceeds Offer; (ii) deposit with the Paying Agent money sufficient to
pay the purchase price of all Notes or portions thereof so accepted; and (iii)
deliver, or cause to be delivered, to the Trustee all Notes or portions thereof
so accepted together with an Officers' Certificate specifying the Notes or
portions thereof accepted for payment by the Company. The Paying Agent shall
promptly mail to the holders of Notes so accepted payment in an amount equal to
the purchase price, and the Trustee shall promptly authenticate and mail to
such holders a new Note equal in principal amount to any unpurchased portion of
the Note surrendered; provided that each Note purchased and each new Note
issued shall be in a principal amount of $1,000 or integral multiples thereof.
To the extent that the aggregate principal amount of Notes tendered is less
than the Excess Proceeds, the Company may use any remaining Excess Proceeds for
general corporate purposes. The Company will publicly announce the results of
the Excess Proceeds Offer as soon as practicable after the Excess Proceeds
Payment Date. For purposes of this "Limitation on Asset Sales" covenant, the
Trustee shall act as the Paying Agent.
The Company will comply with Rule 14e-1 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and any other rules and regulations
thereunder to the extent such rules and regulations are applicable, in the
event that such Excess Proceeds are received by the Company under this
"Limitation on Asset Sales" covenant and the Company is required to repurchase
Notes as described above. (Section 1017)
Limitation on Issuances of Guarantees of Indebtedness by Restricted
Subsidiaries.
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee, assume or in any other manner become liable with
respect to any Indebtedness of the Company, other
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than Indebtedness under Credit Facilities incurred under clause (iii) of
paragraph (b) in the "Limitation on Indebtedness and Preferred Stock of
Subsidiaries" covenant, unless (i) such Restricted Subsidiary simultaneously
executes and delivers a supplemental indenture to the Indenture providing for a
Guarantee of the Notes on terms substantially similar to the guarantee of such
Indebtedness, except that if such Indebtedness is by its express terms
subordinated in right of payment to the Notes, any such assumption, Guarantee
or other liability of such Restricted Subsidiary with respect to such
Indebtedness shall be subordinated in right of payment to such Restricted
Subsidiary's assumption, Guarantee or other liability with respect to the Notes
substantially to the same extent as such Indebtedness is subordinated to the
Notes and (ii) such Restricted Subsidiary waives, and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Restricted Subsidiary as a result of any payment by such
Restricted Subsidiary under its Guarantee.
Notwithstanding the foregoing, any Guarantee by a Restricted Subsidiary
may provide by its terms that it will be automatically and unconditionally
released and discharged upon (i) any sale, exchange or transfer, to any Person
not an Affiliate of the Company, of all of the Company's and each Restricted
Subsidiary's Capital Stock in, or all or substantially all of the assets of,
such Restricted Subsidiary (which sale, exchange or transfer is not prohibited
by the Indenture) or (ii) the release or discharge of the guarantee which
resulted in the creation of such Guarantee, except a discharge or release by or
as a result of payment under such Guarantee. (Section 1018)
Business of the Company; Restriction on Transfers of Existing Business.
The Company will not, and will not permit any Restricted Subsidiary to, be
principally engaged in any business or activity other than a Permitted
Business. In addition, the Company and any Restricted Subsidiary will not be
permitted to, directly or indirectly, transfer to any Unrestricted Subsidiary
(i) any of the material licenses, agreements or instruments, permits or
authorizations used in the Permitted Business of the Company and any Restricted
Subsidiary on the Closing Date or (ii) any material portion of the "property
and equipment" (as such term is used in the Company's consolidated financial
statements) of the Company or any Significant Subsidiary used in the licensed
service areas of the Company and any Restricted Subsidiary as such exists on
the Closing Date. (Section 1019)
Limitation on Investments in Unrestricted Subsidiaries.
The Company will not make, and will not permit any of its Restricted
Subsidiaries to make, any Investments in Unrestricted Subsidiaries if, at the
time thereof, the aggregate amount of such Investments, together with any other
Restricted Payments made after the Closing Date, would exceed the amount of
Restricted Payments then permitted to be made pursuant to the "Limitation on
Restricted Payments" covenant. Any Investments in Unrestricted Subsidiaries
permitted to be made pursuant to this covenant (i) will be treated as the
making of a Restricted Payment in calculating the amount of Restricted Payments
made by the Company or a Subsidiary and (ii) may be made in cash or property
(if made in property, the Fair Market Value thereof as determined by the Board
of Directors of the Company (whose determination shall be conclusive and
evidenced by a Board Resolution) shall be deemed to be the amount of such
Investment for the purpose of clause (i)). (Section 1020)
Provision of Financial Statements and Reports.
The Company will file on a timely basis with the Commission, to the extent
such filings are accepted by the Commission and whether or not the Company has
a class of securities registered under the Exchange Act, the annual reports,
quarterly reports and other documents that the Company would be required to
file if it were subject to Section 13 or 15 of the Exchange Act. All such
annual reports shall include the geographic segment financial information
required to be disclosed by the Company under Item 101(d) of Regulation S-K
under the Securities Act. The Company will also be required (a) to file with
the Trustee, and provide to each holder, without cost to such holder, copies of
such reports and documents within 15 days after the date on which the Company
files such reports and documents with the Commission or the date on which the
Company would be required to file such reports and docu-
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ments if the Company were so required and (b) if filing such reports and
documents with the Commission is not accepted by the Commission or is
prohibited under the Exchange Act, to supply at the Company's cost copies of
such reports and documents to any prospective holder promptly upon request.
(Section 1009)
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder will have the
right to require the Company to repurchase all or any part of its Notes at a
purchase price in cash pursuant to the offer described below (the "Change of
Control Offer") equal to 101.0% of the principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if any, to the date of purchase
(subject to the right of holders of record to receive interest on the relevant
Interest Payment Date) (the "Change of Control Payment").
Within 30 days of the Change of Control, the Company will mail a notice to
the Trustee and each holder stating, among other things: (i) that a Change of
Control has occurred, that the Change of Control Offer is being made pursuant
to this "Repurchase of Notes upon a Change of Control" covenant and that all
Notes validly tendered will be accepted for payment; (ii) the circumstances and
relevant facts regarding such Change of Control; (iii) the purchase price and
the date of purchase (which shall be a Business Day no earlier than 30 days nor
later than 60 days from the date such notice is mailed) (the "Change of Control
Payment Date"); (iv) that any Note not tendered will continue to accrue
interest pursuant to its terms; (v) that, unless the Company defaults in the
payment of the Change of Control Payment, any Note accepted for payment
pursuant to the Change of Control Offer shall cease to accrue interest and
Liquidated Damages, if any, on and after the Change of Control Payment Date;
(vi) that holders electing to have any Note or portion thereof purchased
pursuant to the Change of Control Offer will be required to surrender such
Note, together with the form entitled "Option of the Holder to Elect Purchase"
on the reverse side of such Note completed, to the Paying Agent at the address
specified in the notice prior to the close of business on the Business Day
immediately preceding the Change of Control Payment Date; (vii) that holders
will be entitled to withdraw their election if the Paying Agent receives, not
later than the close of business on the third Business Day immediately
preceding the Change of Control Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such holder, the principal
amount of Notes delivered for purchase and a statement that such holder is
withdrawing his election to have such Notes purchased; and (viii) that holders
whose Notes are being purchased only in part will be issued new Notes equal in
principal amount to the unpurchased portion of the Notes surrendered; provided
that each Note purchased and each new Note issued shall be in a principal
amount of $1,000 or integral multiples thereof.
On the Change of Control Payment Date, the Company shall: (i) accept for
payment Notes or portions thereof tendered pursuant to the Change of Control
Offer; (ii) deposit with the Paying Agent money sufficient to pay the purchase
price of all Notes or portions thereof so accepted; and (iii) deliver, or cause
to be delivered, to the Trustee, all Notes or portions thereof so accepted
together with an Officer's Certificate specifying the Notes or portions thereof
accepted for payment by the Company. The Paying Agent shall promptly mail, to
the holders of Notes so accepted, payment in an amount equal to the purchase
price, and the Trustee shall promptly authenticate and mail to such holders a
new Note equal in principal amount to any unpurchased portion of the Notes
surrendered; provided that each Note purchased and each new Note issued shall
be in a principal amount of $1,000 or integral multiples thereof. The Company
will publicly announce the results of the Change of Control Offer on or as soon
as practicable after the Change of Control Payment Date. For purposes of this
"Repurchase of Notes upon a Change of Control" covenant, the Trustee shall act
as Paying Agent.
The Company shall not be required to make a Change of Control Offer upon a
Change of Control if a third party makes a Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements
applicable to a Change of Control Offer made by the Company and purchases all
Notes validly tendered and not withdrawn under such Change of Control Offer.
The Company will comply with Rule 14e-1 under the Exchange Act and any
other rules and regulations thereunder to the extent such rules and regulations
are applicable in the event that a Change of
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Control occurs and the Company is required to repurchase the Notes under this
"Repurchase of Notes upon a Change of Control" covenant. (Section 1010)
If the Company is unable to repay all of its Indebtedness that would
prohibit repurchase of the Notes or is unable to obtain the consents of the
holders of Indebtedness, if any, of the Company outstanding at the time of a
Change of Control whose consent would be so required to permit the repurchase
of Notes, then the Company will have breached such covenant. This breach will
constitute an Event of Default under the Indenture if it continues for a period
of 30 consecutive days after written notice is given to the Company by the
Trustee or the holders of at least 25.0% in aggregate principal amount of the
Notes then outstanding. In addition, the failure by the Company to repurchase
Notes at the conclusion of the Change of Control Offer will constitute an Event
of Default without any waiting period or notice requirements.
There can be no assurances that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities or Indebtedness of the Company which might
be outstanding at the time). The above covenant requiring the Company to
repurchase the Notes will, unless the consents referred to above are obtained,
require the Company to repay all indebtedness then outstanding which by its
terms would prohibit such Note repurchase, either prior to or concurrently with
such Note repurchase.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell,
convey, transfer, lease or otherwise dispose of all or substantially all of its
assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person or permit any Person to merge
with or into the Company, and the Company will not permit any of its Restricted
Subsidiaries to enter into any such transaction or series of transactions if
such transaction or series of transactions, in the aggregate, would result in
the sale, assignment, conveyance, transfer, lease or other disposition of all
or substantially all of the assets of the Company or the Company and its
Restricted Subsidiaries, taken as a whole, to any other Person or Persons,
unless: (i) either the Company will be the continuing Person, or the Person (if
other than the Company) formed by such consolidation or into which the Company
is merged or that acquired or leased such assets of the Company will be a
corporation organized and validly existing under the laws of the United States
of America or any jurisdiction thereof and shall expressly assume, by a
supplemental indenture, executed and delivered to the Trustee, all of the
obligations of the Company with respect to the Notes and under the Indenture;
(ii) immediately after giving effect to such transaction on a pro forma basis,
no Default or Event of Default shall have occurred and be continuing; (iii)
immediately after giving effect to such transaction on a pro forma basis, the
Company, or any Person becoming the successor obligor of the Notes, shall have
a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of
the Company immediately prior to such transaction; (iv) immediately after
giving effect to such transaction on a pro forma basis, the Company, or any
Person becoming the successor obligor of the Notes, as the case may be, could
Incur at least $1.00 of Indebtedness under paragraph (a) of the "Limitation on
Indebtedness and Issuance of Preferred Stock of Subsidiaries" covenant; and (v)
the Company delivers to the Trustee an Officers' Certificate (attaching the
arithmetic computations to demonstrate compliance with clauses (iii) and (iv))
and an Opinion of Counsel, in each case stating that such consolidation, merger
or transfer and such supplemental indenture complies with this provision and
that all conditions precedent provided for herein relating to such transaction
have been complied with; provided, however, that clauses (iii) and (iv) above
do not apply if, in the good faith determination of the Board of Directors of
the Company, whose determination shall be evidenced by a Board Resolution, the
principal purpose of such transaction is to change the state of incorporation
of the Company; provided further that any such transaction shall not have as
one of its purposes the evasion of the foregoing limitations; and provided
further that clauses (ii), (iv) and (v) above shall not apply to the
Reorganization. (Section 801)
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EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the
Indenture: (a) default in the payment of interest or Liquidated Damages, if
any, on the Notes when due and payable as to any Interest Payment Date falling
on or prior to May 15, 2001; (b) default in the payment of interest or
Liquidated Damages, if any, on the Notes when due and payable as to any
Interest Payment Date following May 15, 2001, and any such failure continues
for a period of 30 days; (c) default in the payment of principal of (or
premium, if any, on) any Note when the same becomes due and payable at
maturity, upon acceleration, redemption or otherwise; (d) default in the
payment of principal or interest or Liquidated Damages, if any, on Notes
required to be purchased pursuant to an Excess Proceeds Offer as described
under "Limitation on Asset Sales" or pursuant to a Change of Control Offer as
described under "Repurchase of Notes upon a Change of Control"; (e) failure to
perform or comply with the provisions described under "Consolidation, Merger
and Sale of Assets"; (f) default in the performance of or breach of any other
covenant or agreement of the Company set forth in the Indenture or under the
Notes and such default or breach continues for a period of 30 consecutive days
after written notice by the Trustee or the holders of 25.0% or more in
aggregate principal amount of the Notes then outstanding; (g) there occurs with
respect to any issue or issues of Indebtedness of the Company or any Restricted
Subsidiary having an outstanding principal amount of $5.0 million or more in
the aggregate for all such issues of all such Persons, whether such
Indebtedness now exists or shall hereafter be created, (I) an event of default
that has caused the holder thereof to declare such Indebtedness to be due and
payable prior to its Stated Maturity and such Indebtedness has not been
discharged in full or such acceleration has not been rescinded or annulled by
the expiration of any applicable grace period and/or (II) the failure to make a
principal payment at the final (but not any interim) fixed maturity date
thereon and such defaulted payment shall not have been made, waived or extended
by the expiration of any applicable grace period; (h) any final judgment or
order (not covered by insurance) for the payment of money in excess of $5.0
million in the aggregate for all such final judgments or orders against all
such Persons (treating any deductibles, self-insurance or retention as not so
covered) shall be rendered against the Company or any Restricted Subsidiary and
shall not be paid or discharged, and there shall be any period of 30
consecutive days following entry of the final judgment or order that causes the
aggregate amount for all such final judgments or orders outstanding and not
paid or discharged against all such Persons to exceed $5.0 million during which
a stay of enforcement of such final judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect; (i) a court having jurisdiction in
the premises enters a decree or order for (A) relief in respect of the Company
or any of its Significant Subsidiaries in an involuntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, (B) appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator or similar official of the Company or any of its
Significant Subsidiaries or for all or substantially all of the property and
assets of the Company or any of its Significant Subsidiaries or (C) the winding
up or liquidation of the affairs of the Company or any of its Significant
Subsidiaries and, in each case, such decree or order shall remain unstayed and
in effect for a period of 30 consecutive days; (j) the Company or any of its
Significant Subsidiaries (A) commences a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
consents to the entry of an order for relief in an involuntary case under any
such law, (B) consents to the appointment of or taking possession by a
receiver, liquidator, assignee, custodian, trustee, sequestrator or similar
official of the Company or any of its Significant Subsidiaries or for all or
substantially all of the property and assets of the Company or any of its
Significant Subsidiaries or (C) effects any general assignment for the benefit
of creditors; or (k) the Company asserts in writing that the Pledge Agreement
ceases to be in full force and effect before payment in full of the obligations
thereunder. (Section 501)
If an Event of Default (other than an Event of Default specified in clause
(i) or (j) above) occurs and is continuing under the Indenture, the Trustee or
the holders of at least 25% in aggregate principal amount of the Notes then
outstanding, by written notice to the Company (and to the Trustee if such
notice is given by the holders), may, and the Trustee at the request of such
holders shall, declare the principal of, premium, if any, accrued and unpaid
interest and Liquidated Damages, if any, on the Notes to be immediately due and
payable. Upon a declaration of acceleration, such principal of, premium, if
any, accrued interest and Liquidated Damages, if any, shall become immediately
due and payable. In the
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event of a declaration of acceleration because an Event of Default set forth in
clause (g) above has occurred and is continuing, such declaration of
acceleration shall be automatically rescinded and annulled if the default
triggering such Event of Default pursuant to clause (g) shall be remedied or
cured by the Company and/or the relevant Significant Subsidiaries or waived by
the holders of the relevant Indebtedness within 60 days after the declaration
of acceleration with respect thereto. If an Event of Default specified in
clause (i) or (j) above occurs, the principal of, premium, if any, accrued
interest and Liquidated Damages, if any, on the Notes then outstanding shall
ipso facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any holder. The holders of at least a
majority in aggregate principal amount of the outstanding Notes, by written
notice to the Company and to the Trustee, may waive all past defaults and
rescind and annul a declaration of acceleration and its consequences if (i) all
existing Events of Default, other than the nonpayment of the principal of,
premium, if any, accrued and unpaid interest and Liquidated Damages, if any, on
the Notes that have become due solely by such declaration of acceleration, have
been cured or waived (subject to certain limitations) and (ii) the rescission,
in the opinion of counsel, would not conflict with any judgment or decree of a
court of competent jurisdiction. For information as to the waiver of defaults,
see "-- Modification and Waiver." (Section 502)
The holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the
Trustee in personal liability, or that the Trustee determines in good faith may
be unduly prejudicial to the rights of holders of Notes not joining in the
giving of such direction and may take any other action it deems proper that is
not inconsistent with any such direction received from holders of Notes. No
holder may pursue any remedy with respect to the Indenture or the Notes unless:
(i) the holder gives the Trustee written notice of a continuing Event of
Default; (ii) the holders of at least 25% in aggregate principal amount of then
outstanding Notes make a written request to the Trustee to pursue the remedy;
(iii) such holder or holders offer the Trustee indemnity satisfactory to the
Trustee against any costs, liability or expense; (iv) the Trustee does not
comply with the request within 60 days after receipt of the request and the
offer of indemnity; and (v) during such 60-day period, the holders of a
majority in aggregate principal amount of then outstanding Notes do not give
the Trustee a direction that is inconsistent with the request. However, such
limitations do not apply to the right of any holder of a Note to receive
payment of the principal of, premium, if any, accrued interest or Liquidated
Damages, if any, on, such Note or to bring suit for the enforcement of any such
payment, on or after the due date expressed in the Notes, which right shall not
be impaired or affected without the consent of the holder. (Sections 507 and
508)
The Indenture will require certain officers of the Company to certify, on
or before a date not more than 120 days after the end of each fiscal year, that
a review has been conducted of the activities of the Company and the Company's
performance under the Indenture and that the Company has fulfilled all
obligations thereunder or, if there has been a default in the fulfillment of
any such obligation, specifying each such default and the nature and status
thereof. The Company will also be obligated to notify the Trustee of any
default or defaults in the performance of any covenants or agreements under the
Indenture. For these purposes, such compliance shall be determined without
regard to any grace period or notice requirement under the Indenture. (Section
1008)
DEFEASANCE AND COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company upon the Notes discharged with respect to the
outstanding Notes ("defeasance"). Such defeasance means that the Company will
be deemed to have paid and discharged the entire Indebtedness represented by
the outstanding Notes and to have satisfied all its other obligations under
such Notes and the Indenture insofar as such Notes are concerned except for (i)
the rights of holders of outstanding Notes to receive payments (solely from
monies deposited in trust) in respect of the principal of, premium, if any,
accrued interest and Liquidated Damages, if any, on such Notes when such
payments are due, (ii) the Company's obligations to issue temporary Notes,
register the transfer or exchange of any Notes, replace mutilated, destroyed,
lost or stolen Notes, maintain an office or agency for payments in respect of
the Notes and
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segregate and hold such payments in trust, (iii) the rights, powers, trusts,
duties and immunities of the Trustee and (iv) the defeasance provisions of the
Indenture. In addition, the Company may, at its option and at any time, elect
to have the obligations of the Company released with respect to certain
covenants and other provisions set forth in the Indenture, and any omission to
comply with such obligations will not constitute a Default or an Event of
Default with respect to the Notes ("covenant defeasance"). (Sections 1301, 1302
and 1303)
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit or cause to be deposited with the Trustee, as
trust funds in trust, specifically pledged as security for, and dedicated
solely to, the benefit of the holders of the Notes, cash in United States
dollars, U.S. Government Obligations (as defined in the Indenture), or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay and
discharge the principal of, premium, if any, and accrued interest and
Liquidated Damages, if any, on the outstanding Notes on the Stated Maturity (or
upon redemption, if applicable) of such principal, premium, if any, or
installment of interest and Liquidated Damages, if any; (ii) no Default or
Event of Default with respect to the Notes will have occurred and be continuing
on the date of such deposit or, insofar as an event of bankruptcy under clause
(i) or (j) of "Events of Default" above is concerned, at any time during the
period ending on the 123rd day after the date of such deposit; (iii) such
defeasance or covenant defeasance will not result in a breach or violation of,
or constitute a default under any material agreement or instrument (other than
the Indenture) to which the Company is a party or by which it is bound; (iv) in
the case of defeasance, the Company shall have delivered to the Trustee an
Opinion of Counsel stating that the Company has received from, or there has
been published by, the Internal Revenue Service a ruling, or since May 15,
1998, there has been a change in applicable federal income tax law, in either
case to the effect that, and based thereon such opinion shall confirm that, the
holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such defeasance had not occurred; (v) in
the case of covenant defeasance, the Company shall have delivered to the
Trustee an Opinion of Counsel to the effect that the holders of the Notes
outstanding will not recognize income, gain or loss for federal income tax
purposes as a result of such covenant defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such covenant defeasance had not occurred; and (vi)
the Company shall have delivered to the Trustee an Officer's Certificate and an
Opinion of Counsel, each stating that all conditions precedent provided for
relating to either the defeasance or the covenant defeasance, as the case may
be, have been complied with. (Section 1304)
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when, (ii) either (A) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or repaid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held by the Company and thereafter repaid to the Company or
discharged from such trust) have been delivered to the Trustee for cancellation
or (B) all Notes not theretofore delivered to the Trustee for cancellation
(except lost, stolen or destroyed Notes which have been replaced or paid) (i)
have become due and payable, or (ii) will become due and payable at their
Stated Maturity within one year, or (iii) are to be called for redemption
within one year under arrangements satisfactory to the Trustee for the giving
of notice of redemption by the Trustee in the name, and at the expense, of the
Company and the Company, in the case of (i), (ii) or (iii) above, has
irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, accrued interest and Liquidated Damages, if any, on the Notes
to the date of deposit (in the case of Notes which have become due and payable)
or to the Stated Maturities or Redemption Date, as the case may be, together
with irrevocable instructions from the Company directing the Trustee to apply
such funds to the payment thereof at maturity or redemption, as
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the case may be; (ii) the Company had paid all other sums payable under the
Indenture by the Company; and (iii) the Company has delivered to the Trustee an
officers' certificate and an opinion of counsel stating that all conditions
precedent under the Indenture relating to the satisfaction and discharge of the
Indenture have been complied with.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that no
such modification or amendment may, without the consent of each holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the principal amount of, or premium, if
any, or interest on any Note or extend the time for payment of interest on, or
alter the redemption provisions of, any Note, (iii) change the place or
currency of payment of principal of, or premium, if any, or interest on any
Note, (iv) impair the right of any holder of the Notes to receive payment of,
principal of and interest on such holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or after
the Stated Maturity (or, in the case of a redemption, on or after the
Redemption Date) of any Note, (v) reduce the above-stated percentage of
outstanding Notes the consent of whose holders is necessary to modify, amend,
waive, supplement or consent to take any action under the Indenture or the
Notes, (vi) waive a default in the payment of principal of, premium, if any, or
accrued and unpaid interest or Liquidated Damages, if any, on the Notes, (vii)
reduce or change the rate or time for payment of interest on the Notes, (viii)
reduce or change the rate or time for payment of Liquidated Damages, if any,
(ix) modify any provisions of any Guarantees in a manner adverse to the holders
or (x) reduce the percentage or aggregate principal amount of outstanding Notes
the consent of whose holders is necessary for waiver of compliance with certain
provisions of the Indenture or for waiver of certain defaults.
GOVERNING LAW AND SUBMISSION TO JURISDICTION
The Notes and the Indenture are governed and construed in accordance with
the laws of the State of New York. The Company will submit to the jurisdiction
of the U.S. federal and New York state courts located in the Borough of
Manhattan, City and State of New York for purposes of all legal actions and
proceedings instituted in connection with the Notes and the Indenture.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; provided, however, if the Trustee acquires any conflicting
interest, it must eliminate such conflict as soon as practicable, but in any
event within 90 days.
The holders of a majority in aggregate principal amount of the outstanding
Notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any holder of Notes, unless such holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other capitalized
term used herein for which no definition is provided.
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"Acquired Indebtedness" or "Acquired Preferred Stock" is defined to mean
Indebtedness or Preferred Stock, as the case may be, of a Person existing at
the time such Person becomes a Restricted Subsidiary or Indebtedness assumed in
connection with an Asset Acquisition by the Company or a Restricted Subsidiary
and not incurred in connection with, or in anticipation of, such Person
becoming a Restricted Subsidiary or such Asset Acquisition; provided that
Indebtedness or Preferred Stock, as the case may be, of such Person which is
redeemed, defeased, retired or otherwise repaid in full at the time of or
immediately upon the consummation of the transactions by which such Person
becomes a Restricted Subsidiary or such Asset Acquisition shall not be
considered as Indebtedness or Preferred Stock.
"Affiliate" is defined to mean, as applied to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, is defined to mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" is defined to mean (i) an investment by the Company or
any of its Restricted Subsidiaries in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or shall be merged
into or consolidated with the Company or any of its Restricted Subsidiaries or
(ii) an acquisition by the Company or any of its Restricted Subsidiaries of the
property and assets of any Person (other than the Company or any of its
Restricted Subsidiaries) that constitute substantially all of a division or
line of business of such Person.
"Asset Disposition" is defined to mean the sale or other disposition by
the Company or any of its Restricted Subsidiaries (other than to the Company or
another Restricted Subsidiary of the Company) of (i) all or substantially all
of the Capital Stock of any Restricted Subsidiary of the Company or (ii) all or
substantially all of the assets that constitute a division or line of business
of the Company or any of its Restricted Subsidiaries.
"Asset Sale" is defined to mean any sale, transfer or other disposition
(including by way of merger, consolidation or Sale-Leaseback Transactions) in
one transaction or a series of related transactions by the Company or any of
its Restricted Subsidiaries to any Person (other than the Company or any of its
Restricted Subsidiaries) of (i) all or any of the Capital Stock of any
Restricted Subsidiary (other than in respect of any director's qualifying
shares or investments by foreign nationals mandated by applicable law), (ii)
all or substantially all of the property and assets of an operating unit or
business of the Company or any of its Restricted Subsidiaries or (iii) any
other property and assets of the Company or any of its Restricted Subsidiaries
outside the ordinary course of business of the Company or such Restricted
Subsidiary and, in each case, that is not governed by the provisions of the
Indenture applicable to mergers, consolidations and sales of assets of the
Company and which, in the case of any of clause (i), (ii) or (iii) above,
whether in one transaction or a series of related transactions, (a) have a fair
market value in excess of $1.0 million or (b) are for net proceeds in excess of
$1.0 million; provided that sales or other dispositions of inventory,
receivables and other current assets in the ordinary course of business shall
not be included within the meaning of "Asset Sale."
"Attributable Value" is defined to mean, as to any particular lease under
which any Person is at the time liable other than a Capitalized Lease
Obligation, and at any date as of which the amount thereof is to be determined,
the total net amount of rent required to be paid by such person under such
lease during the remaining term thereof (whether or not such lease is
terminable at the option of the lessee prior to the end of such term),
including any period for which such lease has been, or may, at the option of
the lessor, be extended, discounted from the last date of such term to the date
of determination at a rate per annum equal to the discount rate which would be
applicable to a Capitalized Lease Obligation with like term in accordance with
GAAP. The net amount of rent required to be paid under any lease for any such
period shall be the aggregate amount of rent payable by the lessee with respect
to such period after excluding amounts required to be paid on account of
insurance, taxes, assessments, utility, operating and labor costs and similar
charges. "Attributable Value" means, as to a Capitalized Lease Obligation under
which any Person is at the time liable and at any date as of which the amount
thereof is to be determined, the capitalized amount thereof that would appear
on the face of a balance sheet of such Person in accordance with GAAP.
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"Average Life" is defined to mean, with respect to any Indebtedness, as at
any date of determination, the quotient obtained by dividing (i) the sum of the
products of (a) the number of years from such date to the date or dates of each
successive scheduled principal payment (including, without limitation, any
sinking fund requirements) of such Indebtedness and (b) the amount of each such
principal payment by (ii) the sum of all such principal payments.
"Board of Directors" is defined to mean the board of directors of the
Company or its equivalent, including managers or members of a limited liability
company, general partners of a partnership, limited partnership or limited
liability partnership or trustees of a business trust, or any duly authorized
committee thereof.
"Capital Stock" is defined to mean, with respect to any Person, any and
all shares, interests, participations, rights in or other equivalents (however
designated, whether voting or non-voting) in equity of such Person, whether now
outstanding or issued after the date of the Indenture, including, without
limitation, all Common Stock and Preferred Stock.
"Capitalized Lease Obligation" is defined to mean any obligation under a
lease of (or other agreement conveying the right to use) any property (whether
real, personal or mixed) that is required to be classified and accounted for as
a capital lease obligation under GAAP, and, for the purpose of the Indenture,
the amount of such obligation at any date shall be the capitalized amount
thereof at such date, determined in accordance with GAAP.
"Change of Control" is defined to mean such time as (i) a "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act)
becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) of more than 50.0% of the total voting power of the then
outstanding Voting Stock of the Company, or after the consummation of the
Reorganization, Subsidiary Holdings; (ii) individuals who at the beginning of
any period of two consecutive calendar years constituted the Board of Directors
(together with any directors who are members of the Board of Directors on the
date hereof and any new directors whose election by the Board of Directors or
whose nomination for election by the Company's stockholders was approved by a
vote of at least two-thirds of the members of the Board of Directors then still
in office who either were members of the Board of Directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the members of such
Board of Directors then in office; (iii) the sale, lease, transfer, conveyance
or other disposition (other than by way of merger or consolidation), in one or
a series of related transactions, of all or substantially all of the assets of
the Company and its Subsidiaries, taken as a whole, to any such "person" or
"group" (other than to the Company or a Restricted Subsidiary); (iv) the merger
or consolidation of the Company with or into another corporation or the merger
of another corporation with or into the Company in one or a series of related
transactions with the effect that, immediately after such transaction, any such
"person" or "group" of persons or entities shall have become the beneficial
owner of securities of the surviving corporation of such merger or
consolidation representing a majority of the total voting power of the then
outstanding Voting Stock of the surviving corporation; or (v) the adoption of a
plan relating to the liquidation or dissolution of the Company; provided,
however, that the consummation of the Reorganization shall not constitute or be
deemed to constitute a "Change of Control."
"Closing Date" is defined to mean the date on which the Notes are
originally issued under the Indenture.
"Common Stock" is defined to mean, with respect to any Person, any and all
shares, interests, participations, rights in or other equivalents (however
designated, whether voting or non-voting) of such Person's common stock,
whether now outstanding or issued after the date of the Indenture, including,
without limitation, all series and classes of such common stock.
"Consolidated Cash Flow" is defined to mean, for any period, the sum of
the amounts for such period of (i) Consolidated Net Income, (ii) Consolidated
Interest Expense, (iii) income taxes, to the extent such amount was deducted in
calculating Consolidated Net Income (other than income taxes (either positive
or negative) attributable to extraordinary and non-recurring gains or losses or
sales of
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assets), (iv) depreciation expense, to the extent such amount was deducted in
calculating Consolidated Net Income, (v) amortization expense, to the extent
such amount was deducted in calculating Consolidated Net Income, and (vi) all
other non-cash items reducing Consolidated Net Income (excluding any non-cash
charge to the extent that it represents an accrual of or reserve for cash
charges in any future period), less all non-cash items increasing Consolidated
Net Income, all as determined on a consolidated basis for the Company and its
Restricted Subsidiaries in conformity with GAAP.
"Consolidated Fixed Charges" is defined to mean, for any period,
Consolidated Interest Expense plus dividends declared and payable on Preferred
Stock.
"Consolidated Interest Expense" is defined to mean, for any period, the
aggregate amount of interest in respect of Indebtedness (including capitalized
interest, amortization of original issue discount on any Indebtedness and the
interest portion of any deferred payment obligation, calculated in accordance
with the effective interest method of accounting; all commissions, discounts
and other fees and charges owed with respect to letters of credit and bankers'
acceptance financing; the net costs associated with Interest Rate Agreements;
and interest on Indebtedness that is Guaranteed or secured by the Company or
any of its Restricted Subsidiaries) and all but the principal component of
rentals in respect of Capitalized Lease Obligations paid, accrued or scheduled
to be paid or to be accrued by the Company and its Restricted Subsidiaries
during such period.
"Consolidated Net Income" means, with respect to any Person, for any
period, the consolidated net income (or loss) of such Person and its Restricted
Subsidiaries for such period as determined in accordance with GAAP, adjusted,
to the extent included in calculating such net income, by excluding, without
duplication, (i) all extraordinary gains or losses, (ii) net income (or loss)
of any Person combined in such Person or one of its Restricted Subsidiaries on
a "pooling of interests" basis attributable to any period prior to the date of
combination, (iii) gains or losses (on an after-tax basis) in respect of any
Asset Sales by such Person or one of its Restricted Subsidiaries, (iv) the net
income of any Restricted Subsidiary of such Person to the extent that the
declaration of dividends or similar distributions by that Restricted Subsidiary
of that income is not at the time permitted, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulations applicable to that
Restricted Subsidiary or its stockholders, (v) any gain or loss realized as a
result of the cumulative effect of a change in accounting principles, (vi) any
amount paid or accrued as dividends on Preferred Stock of the Company or
Preferred Stock of any Restricted Subsidiary owned by Persons other than the
Company and any of its Restricted Subsidiaries, (vii) restructuring charges,
(viii) charges relating to the write-off of acquired in-process research and
development expenses and other intangible assets of a Person in connection with
the application of the purchase method of accounting and (ix) the net income
(or loss) of any Person (other than net income (or loss) attributable to a
Restricted Subsidiary) in which any Person (other than the Company or any of
its Restricted Subsidiaries) has a joint interest, except to the extent of the
amount of dividends or other distributions actually paid to the Company or any
of its Restricted Subsidiaries by such other Person during such period.
"Consolidated Net Worth" is defined to mean, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of the Company and its Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation), less any amounts attributable to Redeemable Stock or any equity
security convertible into or exchangeable for Indebtedness, the cost of
treasury stock and the principal amount of any promissory notes receivable from
the sale of the Capital Stock of the Company or any of its Subsidiaries, each
item to be determined in conformity with GAAP (excluding the effects of foreign
currency exchange adjustments under Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 52).
"Credit Facilities" is defined to mean one or more debt facilities or
commercial paper facilities with banks or other institutional lenders providing
for revolving credit loans, term loans, receivables financing or
securitizations (including through the sale of receivables to such lenders or
to special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended, restated,
modified, renewed, refunded, replaced or refinanced in whole or in part from
time to time.
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"Cumulative Consolidated Cash Flow" is defined to mean, for the period
beginning on the Closing Date through and including the end of the last fiscal
quarter (taken as one accounting period) preceding the date of any proposed
Restricted Payment, Consolidated Cash Flow of the Company and its Restricted
Subsidiaries for such period determined on a consolidated basis in accordance
with GAAP.
"Cumulative Consolidated Fixed Charges" are defined to mean the
Consolidated Fixed Charges of the Company and its Restricted Subsidiaries for
the period beginning on the Closing Date through and including the end of the
last fiscal quarter (taken as one accounting period) preceding the date of any
proposed Restricted Payment, determined on a consolidated basis in accordance
with GAAP.
"Cumulative Consolidated Interest Expense" is defined to mean, for the
period beginning on the Closing Date through and including the end of the last
fiscal quarter (taken as one accounting period) preceding the date of any
proposed Restricted Payment, Consolidated Interest Expense of the Company and
its Restricted Subsidiaries for such period determined on a consolidated basis
in accordance with GAAP.
"Currency Agreement" is defined to mean any foreign exchange contract,
currency swap agreement and any other arrangement and agreement designed to
provide protection against fluctuations in currency (or currency unit) values.
"Default" is defined to mean any event that is, or after notice or passage
of time or both would be, an Event of Default.
"Eligible Accounts Receivable" is defined to mean the accounts receivable
(net of any reserves and allowances for doubtful accounts in accordance with
GAAP) of any Person arising in the ordinary course of business that are not
more than 90 days past their due date, as shown on the most recent consolidated
balance sheet of such Person filed with the Commission, all in accordance with
GAAP.
"Eligible Institution" is defined to mean a commercial banking institution
that has combined capital and surplus of not less than $500.0 million or its
equivalent in foreign currency, and has outstanding debt with a rating of "A-3"
or higher according to Moody's Investors Service, Inc., or "A-" or higher
according to Standard & Poor's Ratings Services (or such similar equivalent
rating by at least one "nationally recognized statistical rating organization"
(as defined in Rule 436 under the Securities Act) at the time as of which any
investment or rollover therein is made.
"Event of Default" has the meaning set forth under "Events of Default"
herein.
"Fair Market Value" is defined to mean, with respect to any asset or
property, the sale value that would be obtained in an arm's length transaction
between an informed and willing seller under no compulsion to sell and an
informed and willing buyer under no compulsion to buy.
"GAAP" is defined to mean generally accepted accounting principles in the
United States as in effect from time to time, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession of the United States.
"Guarantee" is defined to mean any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such other Person (whether
arising by virtue of partnership arrangements, or by agreements to keep-well,
to purchase assets, goods, securities or services, to take-or-pay, or to
maintain financial statement conditions or otherwise) or (ii) entered into for
purposes of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided that the term "Guarantee"
shall not include endorsements for collection or deposit in the ordinary course
of business. The term "Guarantee" used as a verb has a corresponding meaning.
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"Incur" or "Incurrence" is defined to mean, with respect to any
Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become
liable for or with respect to, or become responsible for, the payment of,
contingently or otherwise, such Indebtedness, including an Incurrence of
Indebtedness by reason of the acquisition of more than 50.0% of the Capital
Stock of any Person; provided that neither the accrual of interest nor the
accretion of original issue discount shall be considered an Incurrence of
Indebtedness.
"Indebtedness" is defined to mean, with respect to any Person at any date
of determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), (iv) except with respect to
Trade Payables, all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, which purchase price is due more than
six months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services, (v) all
obligations of such Person as lessee under Capitalized Lease Obligations and
the Attributable Value under any Sale-Leaseback Transaction of such Person,
(vi) all Indebtedness of other Persons secured by a Lien on any asset of such
Person, whether or not such Indebtedness is assumed by such Person; provided
that the amount of such Indebtedness shall be the lesser of (A) the fair market
value of such asset at such date of determination or (B) the amount of such
Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such Person
to the extent such Indebtedness is Guaranteed by such Person, (viii) the
maximum fixed redemption or repurchase price of Redeemable Stock of the Company
or Preferred Stock of any Restricted Subsidiary at the time of determination
and (ix) to the extent not otherwise included in this definition, obligations
under Currency Agreements and Interest Rate Agreements. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and, with respect to
contingent obligations, the maximum liability upon the occurrence of the
contingency giving rise to the obligation; provided (x) that the amount
outstanding at any time of any Indebtedness issued with original issue discount
is the face amount of such Indebtedness less the remaining unamortized portion
of the original issue discount of such Indebtedness at such time as determined
in conformity with GAAP and (y) that Indebtedness shall not include any
liability for federal, state, local, foreign or other taxes.
"Interest Rate Agreement" is defined to mean interest rate swap
agreements, interest rate cap agreements, interest rate insurance, and other
arrangements and agreements designed to provide protection against fluctuations
in interest rates.
"Interest Rate Protection Obligations" is defined to mean the obligations
of any Person pursuant to any Interest Rate Agreements.
"Investment" in any Person is defined to mean any direct or indirect
advance, loan or other extension of credit (including, without limitation, by
way of Guarantee or similar arrangement; but excluding advances to customers in
the ordinary course of business that are, in conformity with GAAP, recorded as
accounts receivable on the balance sheet of the Company or its Restricted
Subsidiaries) or capital contribution to (by means of any transfer of cash or
other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
bonds, notes, debentures or other similar instruments issued by, such Person.
For purposes of the definition of "Unrestricted Subsidiary," the "Limitation on
Restricted Payments" covenant and the "Limitation on Issuance and Sale of
Capital Stock of Restricted Subsidiaries" covenant described above, (i)
"Investment" shall include (a) the fair market value of the assets (net of
liabilities) of any Restricted Subsidiary of the Company at the time that such
Restricted Subsidiary of the Company is designated an Unrestricted Subsidiary
and shall exclude the fair market value of the assets (net of liabilities) of
any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary of the Company and (b) the fair market
value, in the case of a sale of Capital Stock in accordance with the
"Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries" covenant such that a Person no longer constitutes a Restricted
Subsidiary, of the remaining assets (net of liabilities) of such Person after
such sale, and shall exclude the fair market value of the assets (net of
liabilities) of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsid-
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iary of the Company and (ii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer, in each case as determined by the Board of Directors in good
faith.
"Lien" is defined to mean any mortgage, charge, pledge, security interest,
encumbrance, lien (statutory or other), hypothecation, assignment for security
or other encumbrance upon or with respect to any property of any kind
(including, without limitation, any conditional sale or other title retention
agreement or lease in the nature thereof, any sale with recourse against the
seller or any Affiliate of the seller, or any agreement to give any security
interest).
"Marketable Securities" is defined to mean: (i) U.S. Government
Obligations which have a remaining weighted average life to maturity of not
more than one year from the date of Investment therein; (ii) any time deposit
account, money market deposit and certificate of deposit maturing not more than
180 days after the date of acquisition issued by, or time deposit of, an
Eligible Institution; (iii) certificates of deposit, Eurodollar time deposits
and bankers' acceptances with maturity of 90 days or less and overnight bank
deposits of any financial institution that is organized under the laws of the
United States of America or any state hereof, and which bank or trust company
has capital, surplus and undivided profits aggregating in excess of $300.0
million (or, to the extent non-United States dollar-denominated, the United
States Dollar Equivalent of such amount) and has outstanding debt which is
rated "A" (or such similar equivalent ratings or higher by at least one
"nationally recognized statistical rating organization" (as defined in Rule 436
under the Securities Act); (iv) commercial paper maturing not more than 180
days after the date of acquisition issued by a corporation (other than an
Affiliate of the Company) with a rating, at the time as of which any investment
therein is made, of "P-1" or higher according to Moody's Investors Service,
Inc., or "A-1" or higher according to Standard & Poor's Ratings Services (or
such similar equivalent rating by at least one "nationally recognized
statistical rating organization" (as defined in Rule 436 under the Securities
Act)); (v) auction rate preferred securities whose rates are reset based on
market levels for a par security not more than 90 days after the date of
acquisition with a rating, at the time as of which any investment therein is
made, of "A-3" or higher according to Moody's Investors Service, Inc., or "A-"
or higher according to Standard & Poor's Ratings Services (or such similar
equivalent rating by at least one "nationally recognized statistical rating
organization" (as defined in Rule 436 under the Securities Act)) and issued by
a corporation that is not an Affiliate of the Company; (vi) any banker's
acceptance or money market deposit accounts issued or offered by an Eligible
Institution; (vii) repurchase obligations with a term of not more than seven
days for U.S. Government Obligations entered into with an Eligible Institution;
and (viii) any fund investing exclusively in investments of the types described
in clauses (i) through (vii) above.
"Net Cash Proceeds" is defined to mean (a) with respect to any Asset Sale,
the proceeds of such Asset Sale in the form of cash or cash equivalents,
including payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any Restricted
Subsidiary of the Company) and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of: (i) brokerage
commissions, finders' fees and other fees and expenses (including fees and
expenses of counsel, accountants and investment bankers and other advisors)
related to such Asset Sale, (ii) provisions for all taxes payable as a result
of such Asset Sale without regard to the consolidated results of operations of
the Company and its Restricted Subsidiaries, taken as a whole (after taking
into account any available offsetting tax credits or deductions and any tax
sharing arrangements), (iii) payments made to repay Indebtedness or any other
obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by the
Company or any Restricted Subsidiary of the Company as a reserve against any
contingent liabilities associated with such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as determined in conformity
with GAAP, and (b) with respect to any issuance or sale of Capital Stock, the
proceeds of such issuance or sale in the form of cash or cash equivalents,
including payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof)
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when received in the form of cash or cash equivalents (except to the extent
such obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary of the Company) and proceeds from the conversion of other
property received when converted to cash or cash equivalents, net of attorneys'
fees, finders' fees, accountants' fees, underwriters' or placement agents'
fees, discounts or commissions and brokerage, consultant and other fees
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Permitted Business" is defined to mean any business involving voice, data
and other telecommunications services.
"Permitted Investment" is defined to mean (i) an Investment in a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; (ii) any Investment in Marketable Securities or
Pledged Securities; (iii) payroll, travel and similar advances to cover matters
that are expected at the time of such advances ultimately to be treated as
expenses in accordance with GAAP; (iv) loans or advances to officers and
employees that do not in the aggregate exceed $1.5 million at any time
outstanding; (v) stock, obligations or securities received in satisfaction of
judgments; (vi) Investments in any Person received as consideration for Asset
Sales to the extent permitted under the "Limitation on Asset Sales" covenant;
(vii) Investments in any Person at any one time outstanding (measured on the
date each such Investment was made without giving effect to subsequent changes
in value) in an aggregate amount not to exceed the greater of (A) $35.0 million
or (B) 15.0% of the Company's total consolidated assets; (viii) Investments in
deposits with respect to leases or utilities provided to third parties in the
ordinary course of business; (ix) Investments in Currency Agreements and
Interest Rate Agreements on commercially reasonable terms entered into by the
Company or any of its Restricted Subsidiaries in the ordinary course of
business in connection with the operation of the business of the Company or its
Restricted Subsidiaries; provided that such agreements do not increase the
Indebtedness of the obligor outstanding at any time other than as a result of
fluctuations in foreign currency exchange rates or interest rates or by reason
of fees, indemnities and compensation payable thereunder; (x) repurchases or
redemptions by the Company of Capital Stock from officers and other employees
of the Company or any of its Subsidiaries or their authorized representatives
upon the death, disability or termination of employment of such individuals, in
an aggregate amount not exceeding $1.0 million in any calendar year and $3.0
million from the date of the Indenture; and (xi) Investments in evidences of
Indebtedness, securities or other property received from another Person by the
Company or any of its Restricted Subsidiaries in connection with any bankruptcy
proceeding or by reason of a composition or readjustment of debt or a
reorganization of such Person or as a result of foreclosure, perfection or
enforcement of any Lien in exchange for evidences of Indebtedness, securities
or other property of such Person held by the Company or any of its
Subsidiaries, or for other liabilities or obligations of such Person to the
Company or any of its Subsidiaries that were created, in accordance with the
terms of the Indenture.
"Permitted Liens" is defined to mean (i) Liens for taxes, assessments,
governmental charges or claims that are being contested in good faith by
appropriate legal proceedings promptly instituted and diligently conducted and
for which a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made; (ii) statutory Liens of
landlords and carriers, warehousemen, mechanics, suppliers, materialmen,
repairmen or other similar Liens arising in the ordinary course of business and
with respect to amounts not yet delinquent or being contested in good faith by
appropriate legal proceedings promptly instituted and diligently conducted and
for which a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made; (iii) Liens incurred or
deposits made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security; (iv)
Liens incurred or deposits made to secure the performance of tenders, bids,
leases, statutory or regulatory obligations, bankers' acceptances, surety and
appeal bonds, government or other contracts, performance and return-of-money
bonds and other obligations of a similar nature incurred in the ordinary course
of business (exclusive of obligations for the payment of borrowed money); (v)
easements, rights-of-way, municipal and zoning ordinances and similar charges,
encumbrances, title defects or other irregularities that do not materially
interfere with the ordinary course of business of the Company or any of its
Restricted Subsidiaries; (vi)
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Liens (including extensions and renewals thereof) upon real or personal
property purchased or leased after the Closing Date; provided that (a) such
Lien is created solely for the purpose of securing Indebtedness Incurred in
compliance with the "Limitation on Indebtedness and Preferred Stock of
Subsidiaries" covenant (1) to finance the cost (including the cost of design,
development, construction, acquisition, installation or integration) of the
item of property or assets subject thereto and such Lien is created prior to,
at the time of or within six months after the later of the acquisition, the
completion of construction or the commencement of full operation of such
property or (2) to refinance any Indebtedness previously so secured, (b) the
principal amount of the Indebtedness secured by such Lien does not exceed 100%
of such cost and (c) any such Lien shall not extend to or cover any property or
assets other than such item of property or assets and any improvements on such
item; (vii) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its
Restricted Subsidiaries, taken as a whole; (viii) Liens encumbering property or
assets under construction arising from progress or partial payments by a
customer of the Company or its Restricted Subsidiaries relating to such
property or assets; (ix) any interest or title of a lessor in the property
subject to any Capitalized Lease Obligation or operating lease; (x) Liens
arising from filing Uniform Commercial Code financing statements regarding
leases; (xi) Liens on property of, or on shares of stock or Indebtedness of,
any corporation existing at the time such corporation becomes, or becomes a
part of, any Restricted Subsidiary; provided that such Liens do not extend to
or cover any property or assets of the Company or any Restricted Subsidiary
other than the property or assets acquired and were not created in
contemplation of such transaction; (xii) Liens in favor of the Company or any
Restricted Subsidiary; (xiii) Liens arising from the rendering of a final
judgment or order against the Company or any Restricted Subsidiary of the
Company that does not give rise to an Event of Default; (xiv) Liens securing
reimbursement obligations with respect to letters of credit that encumber
documents and other property relating to such letters of credit and the
products and proceeds thereof; (xv) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (xvi) Liens encumbering customary
initial deposits and margin deposits and other Liens that are either within the
general parameters customary in the industry or incurred in the ordinary course
of business, in each case, securing Indebtedness under Interest Rate Agreements
and Currency Agreements; (xvii) Liens arising out of conditional sale, title
retention, consignment or similar arrangements for the sale of goods entered
into by the Company or any of its Restricted Subsidiaries in the ordinary
course of business in accordance with the past practices of the Company and its
Restricted Subsidiaries prior to the Closing Date; (xviii) Liens existing on
the Closing Date or securing the Notes or any Guarantee of the Notes; (xix)
Liens granted after the Closing Date on any assets or Capital Stock of the
Company or its Restricted Subsidiaries created in favor of the holders; (xx)
Liens securing Indebtedness which is incurred to refinance secured Indebtedness
which is permitted to be Incurred under clause (viii) of paragraph (b) of the
"Limitation on Indebtedness and Preferred Stock of Subsidiaries" covenant;
provided that such Liens do not extend to or cover any property or assets of
the Company or any Restricted Subsidiary other than the property or assets
securing the Indebtedness being refinanced; and (xxi) Liens securing
Indebtedness under Credit Facilities incurred in compliance with clause (iv) of
paragraph (b) of the "Limitation on Indebtedness and Preferred Stock of
Subsidiaries" covenant.
"Pledge Account" is defined to mean an account established with the
Trustee pursuant to the terms of the Pledge Agreement for the deposit of the
Pledged Securities purchased by the Company with a portion of the net proceeds
from the Offering.
"Pledge Agreement" is defined to mean the Collateral Pledge and Security
Agreement, dated as of the date of the Indenture, from the Company to the
Trustee, governing the Pledge Account and the disbursement of funds therefrom.
"Pledged Securities" is defined to mean the securities purchased by the
Company with a portion of the net proceeds from the Offering, which shall
consist of U.S. Government Obligations, to be deposited in the Pledge Account.
The Pledged Securities may be held in book-entry form through First Union
National Bank acting as securities intermediary.
"Preferred Stock" is defined to mean, with respect to any Person, any and
all shares, interests, participations, rights or other equivalents (however
designated, whether voting or non-voting) of such
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Person's preferred or preference stock, whether now outstanding or issued after
the date of the Indenture, including, without limitation, all series and
classes of such preferred or preference stock.
"Pro Forma Consolidated Cash Flow" is defined to mean, for any period, the
Consolidated Cash Flow of the Company for such period calculated on a pro forma
basis to give effect to any Asset Disposition or Asset Acquisition not in the
ordinary course of business (including acquisitions of other Persons by merger,
consolidation or purchase of Capital Stock) during such period as if such Asset
Disposition or Asset Acquisition had taken place on the first day of such
period, including any related financing transactions and also giving pro forma
effect to any other Indebtedness repaid or discharged during such period other
than with respect to working capital borrowings.
"Public Equity Offering" is defined to mean an underwritten primary public
offering of Common Stock of the Company pursuant to an effective registration
statement under the Securities Act.
"Redeemable Stock" is defined to mean any class or series of Capital Stock
of any Person that by its terms (or by the terms of any security into which it
is exchangeable) or otherwise is (i) required to be redeemed on or prior to the
date that is 123 days after the date of the Stated Maturity of the Notes, (ii)
redeemable at the option of the holder of such class or series of Capital Stock
at any time on or prior to the date that is 123 days after the date of the
Stated Maturity of the Notes or (iii) convertible into or exchangeable for
Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a
scheduled maturity on or prior to the date that is 123 days after the date of
the Stated Maturity of the Notes; provided that any Capital Stock that would
not constitute Redeemable Stock but for provisions thereof giving holders
thereof the right to require such Person to repurchase or redeem such Capital
Stock upon the occurrence of an "asset sale" or "change of control" occurring
on or prior to the date that is 123 days after the date of the Stated Maturity
of the Notes shall not constitute Redeemable Stock if the "asset sale" or
"change of control" provisions applicable to such Capital Stock are no more
favorable to the holders of such Capital Stock than the provisions contained in
"Limitation on Asset Sales" and "Repurchase of Notes upon a Change of Control"
covenants described above and such Capital Stock specifically provides that
such Person will not repurchase or redeem any such stock pursuant to such
provisions on or prior to the date that is 123 days after the date of the
Company's repurchase of such Notes as are required to be repurchased pursuant
to the "Limitation on Asset Sales" and "Repurchase of Notes upon a Change of
Control" covenants described above.
"Registration Rights Agreement" is defined to mean the Registration Rights
Agreement, dated as of the date of the Indenture, by and among the Initial
Purchasers and the Company, concerning the registration and exchange of the
Notes.
"Restricted Subsidiary" is defined to mean any Subsidiary of the Company
other than an Unrestricted Subsidiary.
"Sale-Leaseback Transaction" of any person is defined to mean an
arrangement with any lender, investor or other Person ("Investor") or to which
such Investor is a party providing for the lease by such Person of any property
or asset of such Person which has been or is being sold or transferred by such
Person after the acquisition thereof or the completion of construction or
commencement of operation thereof to such Investor or to any Person to whom
funds have been or are to be advanced by such Investor on the security of such
property or asset. The stated maturity of such arrangement shall be the date of
the last payment of rent or any other amount due under such arrangement prior
to the first date on which such arrangements may be terminated by the lessee
without payment of a penalty.
"Significant Subsidiary" is defined to mean a Restricted Subsidiary that
is a "significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X
under the Securities Act and the Exchange Act.
"Stated Maturity" is defined to mean, (i) with respect to any debt
security, the date specified in such debt security as the fixed date on which
the final installment of principal of such debt security is due and payable and
(ii) with respect to any scheduled installment of principal of or interest on
any debt security, the date specified in such debt security as the fixed date
on which such installment is due and payable.
"Subsidiary" is defined to mean, with respect to any Person, any
corporation, association or other business entity of which more than 50.0% of
the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
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"Telecommunications Assets" is defined to mean, with respect to any
Person, equipment and other properties or assets (whether tangible or
intangible) used in the telecommunications business, including, without
limitation, rights with respect to IRUs, MAOUs or minimum investment units (or
similar interests) in fiber optic cable and international or domestic
telecommunications switches or other transmission facilities, including
monitoring and related administrative support facilities (or Common Stock of a
Person that becomes a Restricted Subsidiary, the assets of which consist
primarily of any such Telecommunications Assets), in each case purchased, or
acquired through a Capitalized Lease Obligation, by the Company or a Restricted
Subsidiary after the Closing Date.
"Trade Payables" is defined to mean any accounts payable or any other
indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by the Company or any of its Restricted Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods and
services.
"Transaction Date" is defined to mean, with respect to the Incurrence of
any Indebtedness by the Company or any of its Restricted Subsidiaries, the date
such Indebtedness is to be Incurred and with respect to any Restricted Payment,
the date such Restricted Payment is to be made.
"United States Dollar Equivalent" is defined to mean, with respect to any
monetary amount in a currency other than the United States dollar, at any time
for the determination thereof, the amount of United States dollars obtained by
converting such foreign currency involved in such computation into United
States dollars at the spot rate for the purchase of United States dollars with
the applicable foreign currency as quoted by Reuters at approximately 11:00
a.m. (New York City time) on the date not more than two business days prior to
such determination. For purposes of determining whether any Indebtedness can be
incurred (including Permitted Indebtedness), any Investment can be made and any
transaction described in the "Limitation on Transactions with Stockholders and
Affiliates" covenant can be undertaken (a "Tested Transaction"), the United
States Dollar Equivalent of such Indebtedness, Investment or transaction
described in the "Limitation on Transactions with Stockholders and Affiliates"
covenant will be determined on the date incurred, made or undertaken and no
subsequent change in the United States Dollar Equivalent shall cause such
Tested Transaction to have been incurred, made or undertaken in violation of
the Indenture.
"Unrestricted Subsidiary" is defined to mean (i) any Subsidiary of the
Company that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Restricted Subsidiary of the Company (including any newly acquired or newly
formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property
of, the Company or any Restricted Subsidiary; provided that (A) the Subsidiary
to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, that such designation would be
permitted under the "Limitation on Restricted Payments" covenant described
above, and such Subsidiary is not liable, directly or indirectly, with respect
to any Indebtedness other than Unrestricted Subsidiary Indebtedness. The Board
of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary of the Company; provided that immediately after giving effect to
such designation (x) the Company could Incur $1.00 of additional Indebtedness
under the first paragraph of the "Limitation on Indebtedness and Preferred
Stock of Subsidiaries" covenant described above and (y) no Default or Event of
Default shall have occurred and be continuing. Any such designation by the
Board of Directors shall be evidenced to the Trustee by promptly filing with
the Trustee a copy of the Board Resolution giving effect to such designation
and an Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"Unrestricted Subsidiary Indebtedness" is defined to mean any Indebtedness
of any Unrestricted Subsidiary (i) as to which neither the Company nor any
Restricted Subsidiary is directly or indirectly liable (by virtue of the
Company or any such Restricted Subsidiary being the primary obliger on,
guarantor of, or otherwise liable in any respect to, such Indebtedness) and
(ii) which, upon the occurrence of a default with respect thereto, does not
result in, or permit any holder of any Indebtedness of the
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Company or any Restricted Subsidiary to declare, a default of such Indebtedness
of the Company or any Restricted Subsidiary or cause the payment thereof to be
accelerated or payable prior to its Stated Maturity.
"U.S. Government Obligations" is defined to mean securities that are (x)
direct obligations of the United States for the timely payment of which its
full faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
the timely payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States, which, in either case, are not callable
or redeemable at the option of the issuer thereof, and shall also include a
depository receipt issued by a "bank" (as defined in Section 3(a)(2) of the
Securities Act), as custodian with respect to any such U.S. Government
Obligation or a specific payment of principal of or interest on any such U.S.
Government Obligation held by such custodian for the account of the holder of
such depository receipt, provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to
the holder of such depository receipt from any amount received by the custodian
in respect of the U.S. Government Obligation or the specific payment of
principal of or interest on the U.S. Government Obligation evidenced by such
depository receipt.
"Voting Stock" is defined to mean with respect to any Person, Capital
Stock of any class or kind ordinarily having the power to vote for the election
of directors, managers or other voting members of the governing body of such
Person.
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BOOK-ENTRY, DELIVERY AND FORM
Exchange Notes issued in exchange for the Old Notes currently represented
by one or more fully registered global notes ("Old Global Notes") will be
represented by one or more fully registered global notes (collectively, the
"Exchange Global Notes"). The Old Global Notes were deposited on the date of
the closing of the sale of the Old Notes, and the Exchange Global Notes will be
deposited on the date of the closing of the Exchange Offer, with, or on behalf
of, The Depository Trust company ("DTC") and registered in the name of DTC or a
nominee of DTC. "Global Notes" means the Old Global Notes or the Exchange
Global Notes, as the case may be.
Exchange Notes held by "qualified institutional buyers" (as defined in
Rule 144A promulgated under the Securities Act)("QIBs") who elect to take
physical delivery of their certificates instead of holding their interest
through the Exchange Global Notes and which are thus ineligible to trade
through DTC (collectively referred to herein as the "Non-Global Purchasers")
will be issued, in registered form, without interest coupons ("Certificated
Exchange Notes"). Upon a permitted transfer to a QIB of such Certificated
Exchange Notes initially issued to a Non-Global Purchaser, such Certificated
Exchange Notes will, unless the transferee requests otherwise or the Exchange
Global Notes have previously been exchanged in whole for such Certificated
Exchange Notes, be exchanged for an interest in the applicable Exchange Global
Notes. As described below under "--Certificated Exchange Notes," owners of
beneficial interests in an Exchange Global Note may receive physical delivery
of Certificated Exchange Notes only in the limited circumstances described
therein.
THE EXCHANGE GLOBAL NOTES. The Company expects that, pursuant to
procedures established by DTC, (i) upon deposit of the Exchange Global Notes,
DTC or its custodian will credit, on its internal system, the corresponding
principal amount of Exchange Global Notes to the respective accounts of persons
who have accounts with such depositary and (ii) ownership of the Exchange
Global Notes will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by DTC or its nominee (with respect
to interests of participants) and the records of participants (with respect to
interests of persons other than participants). Such accounts initially will be
designated by or on behalf of the Initial Purchasers and ownership of
beneficial interests in the Exchange Global Notes will be limited to persons
who have accounts with DTC ("participants") or persons who hold interests
through participants. Qualified institutional buyers may hold their interests
in the Exchange Global Notes directly through the DTC if they are participants
in such system, or indirectly through organizations which are participants in
such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee will be considered the sole owner or holder of the
Exchange Global Notes represented by the applicable Exchange Global Notes for
all purposes under the Indenture. No beneficial owner of an interest in the
Exchange Global Notes will be able to transfer such interest except in
accordance with DTC's applicable procedures in addition to those provided for
under the Indenture with respect to the Notes.
Payments of the principal of, premium (if any) and interest on, the
Exchange Global Notes will be made to DTC or its nominee, as the case may be,
as the registered owner thereof. None of the Company, the Trustee or any paying
agent will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in
the Exchange Global Notes or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment
of the principal of, premium (if any) and interest on, the Exchange Global
Notes, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of such Exchange Global Note, as shown on the records of DTC or its nominee.
The Company also expects that payments by participants to owners of beneficial
interests in any such Exchange Global Notes held through such participants will
be governed by standing instructions and customary practice, as is now the case
with securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
participants.
120
<PAGE>
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a Certificated Note for any reason,
including to sell Notes to persons in states which require physical delivery of
such securities or to pledge such securities, such holder must transfer its
interest in the applicable Exchange Global Note in accordance with the normal
procedures of DTC and the procedures set forth in the Indenture.
DTC has advised the Company that DTC will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in the applicable Exchange Global Note is credited
and only in respect of such portion of Notes, the aggregate principal amount of
Notes as to which such participant or participants has or have given such
direction. However, if there is an Event of Default under the Indenture, DTC
will exchange the applicable Exchange Global Note for Certificated Notes, which
it will distribute to its participants and which, if representing interests in
the applicable Exchange Global Note, will be legended as set forth in the
Indenture.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Exchange Global Note among participants of DTC,
it is under no obligation to perform such procedures, and such procedures may
be discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED EXCHANGE NOTES. If (i) the Company notifies the Trustee in
writing that the DTC is no longer willing or able to act as a depository and
the Company does not appoint a qualified successor within 90 days or (ii) the
Company, at its option, notifies the Trustee in writing that it elects to cause
the issuance of Exchange Notes in definitive form under the Indenture, then,
upon surrender by the relevant registered owner of its Exchange Global Note,
Certificated Exchange Notes in such form will be issued to each person that
such registered owner and the DTC identify as the beneficial owner of the
related Notes. In addition, subject to certain conditions, any person having a
beneficial interest in the Exchange Global Note may, upon request to the
Trustee, exchange such beneficial interest for Exchange Notes in the form of
Certificated Exchange Notes. Upon any such issuance, the Trustee is required to
register such Certificated Exchange Notes in the name of, and cause the same to
be delivered to, such person or persons (or the nominee of any thereof) in
fully registered form.
Neither the Company nor Trustee shall be liable for any delay by the
related registered owner or the DTC in identifying the beneficial owners of the
related Exchange Notes and each such person may conclusively rely on, and shall
be protected in relying on, instructions from such registered owner or of the
DTC for all purposes (including with respect to the registration and delivery,
and the principal amount of the Exchange Notes to be issued).
121
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the principal U.S. federal income tax
consequences to beneficial owners arising from the exchange of Old Notes for
Exchange Notes. This summary is based on the Internal Revenue Code of 1986, as
amended (the "Code"), final, temporary, and proposed Treasury regulations
promulgated thereunder, administrative pronouncements and rulings, and judicial
decisions, changes to any of which subsequent to the date hereof may affect the
tax consequences described herein, possibly with retroactive effect. In
addition, the recently enacted Taxpayer Relief Act of 1997 could affect an
investment in Notes in that, among other things, it reduces the rate of federal
income tax imposed on capital gains of individual taxpayers for capital assets
held more than eighteen months (and reduces such rate even further for capital
assets acquired after the year 2000 and held more than five years).
This summary discusses only Notes held as capital assets within the
meaning of Code section 1221. It does not discuss all of the tax consequences
that may be relevant to a Holder in light of the Holder's particular
circumstances or to Holders subject to special rules, such as certain financial
institutions, banks, insurance companies, tax-exempt organizations, U.S.
Holders subject to the alternative minimum tax, regulated investment companies,
dealers in securities or foreign currencies, persons holding Notes as part of a
straddle or hedging transaction, or U.S. Holders whose functional currency (as
defined in Code section 985) is not the U.S. dollar. Persons considering
purchasing Notes should consult their own tax advisors concerning the
application of U.S. federal tax laws to their particular situations as well as
any tax consequences arising under the laws of any state, local or foreign
taxing jurisdiction.
As used in this summary, the term "U.S. Holder" means the beneficial owner
of a Note that is, for U.S. federal income tax purposes, (i) a citizen or
resident of the U.S. (including certain former citizens and former long-term
residents); (ii) a corporation, partnership or other entity created or
organized in or under the laws of the U.S. or of any political subdivision
thereof; (iii) an estate the income of which is subject to U.S. federal income
taxation regardless of its source; or (iv) a trust with respect to the
administration of which a court within the U.S. is able to exercise primary
supervision and one or more U.S. persons have the authority to control all
substantial decisions of the trust. As used in this summary, the term "Non-U.S.
Holder" means a beneficial owner of a Note that is not a U.S. Holder.
EXCHANGE OF NOTES
The exchange of the Old Notes for the Exchange Notes pursuant to the
Exchange Offer will not constitute a material modification of the terms of the
Old Notes or the Exchange Notes and, thus, such exchange will not constitute an
exchange for U.S. federal income tax purposes. Accordingly, such exchange will
have no U.S. federal income tax consequences to the holders of the Old Notes or
the Exchange Notes, regardless of whether such holders participate in the
Exchange Offer. Consequently, each holder will continue to be required to
include interest on the Exchange Notes, or the Old Notes, if not exchanged, in
its gross income in accordance with its method of accounting for U.S. federal
income tax purposes and will have the same tax basis and holding period in the
Exchange Notes as in the Old Notes. The Company intends to treat the Exchange
Offer for U.S. federal income tax purposes in accordance with the position
described in this paragraph.
THE FEDERAL INCOME TAX SUMMARY SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR
SITUATION. HOLDERS OF NOTES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE PRECISE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF
ACQUIRING, OWNING AND DISPOSING OF THE NOTES.
122
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Old Notes, where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale.
The Company will not receive any proceeds from any sale of Old Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes, or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commission or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such person may be deemed to be underwriting compensations under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer other than commissions or concessions of any
brokers or dealers and will indemnify the holders of the Old Notes (including
any broker- dealers) against certain liabilities, including liabilities under
the Securities Act.
CERTAIN LEGAL MATTERS
The validity of the Exchange Notes offered hereby have been passed on for
the Company by Schnader Harrison Segal & Lewis LLP, Washington, D.C.
EXPERTS
The audited financial statements and schedule included in this Prospectus
and elsewhere in the Registration Statement 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.
123
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (the "Exchange Offer
Registration Statement") under the Securities Act with respect to the Exchange
Notes being offered by this Prospectus. This Prospectus does not contain all
the information set forth in the Exchange Offer Registration Statement and the
exhibits and schedules thereto, certain portions of which have been omitted
pursuant to the rules and regulations of the Commission. Statements made in
this Prospectus as to the contents of any contract, agreement or other document
are not necessarily complete. For further information with respect to the
Company and the Exchange Notes offered hereby, reference is made to the
Exchange Offer Registration Statement, including the exhibits thereto and the
financial statements, notes and schedules filed as a part thereof. With respect
to each such contract, agreement or other document filed or incorporated by
reference as an exhibit to the Exchange Offer Registration Statement, reference
is made to such exhibit for a more complete description of the matter involved,
and each such statement is qualified in its entirety by such reference.
The Company has agreed to file with the Commission, to the extent
permitted, and distribute to holders of the Exchange Notes, reports,
information and documents specified in Sections 13(a) and 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), so long as
the Exchange Notes are outstanding, whether or not the Company is subject to
such informational requirements of the Exchange Act.
The Company is subject to the informational and reporting requirements of
the Exchange Act and, in accordance therewith, files periodic reports, proxy
and information statements, and other information, with the Commission. Such
reports, proxy and information statements, and other information may be
inspected and copied at the public reference facilities of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at the regional offices of the Commission located at Northwestern Atrium, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can be
obtained from the Commission at prescribed rates by writing to the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a
Web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that are filed
electronically with the Commission. In addition, the Company's Common Stock is
quoted on the Nasdaq National Market, and reports proxy and information
statements and other information concerning the Company may also be inspected
at the offices of NASDAQ Operations, 1735 K Street, N.W., Washington, D.C.
20006.
124
<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").
CST: Companhia Santomensed De Telecommunicacoes.
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.
ISP (International Settlements Policy): A policy that governs the
settlements between U.S. carriers and their foreign correspondents of the cost
of terminating each other's network.
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.
G-1
<PAGE>
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 United States
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 carrier's facilities.
MAOU (Minimum Assignable Ownership Units): Capacity on a
telecommunications systems, usually an undersea fiber optic cable, required on
an ownership basis.
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 (Postal, Telephone and Telegraph Company): A foreign telecommunication
carrier that has been dominant in its home market and which may be wholly or
partially government-owned.
Private line: A dedicated telecommunications connection between end-user
locations.
Proportional return traffic: Under the terms of operating agreements,
foreign partners are required to deliver to the U.S.-based carriers traffic
flowing to the United States in the same proportion as the U.S.-based 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 United States
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.
SNO: A second network operator is a private carrier in a
recently-deregulated foreign nation in which the number of private carriers is
limited.
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.
Switched minutes: The number of minutes of telephone traffic carried on a
network using switched access.
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.
WTO: World Trade Organization.
G-2
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants ................................................. F-2
Consolidated Statements of Operations for the fiscal years ended December 31, 1995, 1996,
1997, and the six months ended June 30, 1997 and 1998 ................................... F-3
Consolidated Balance Sheets as of December 31, 1996, 1997, and as of June 30, 1998 ....... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the fiscal years
ended
December 31, 1995, 1996, 1997, and the six months ended June 30, 1998 ................... F-5
Consolidated Statements of Cash Flows for the fiscal years ended December 31, 1995, 1996,
1997, and the six months ended June 30, 1997 and 1998 ................................... F-6
Notes to Consolidated Financial Statements ............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Startec Global Communications Corporation:
We have audited the accompanying balance sheets of Startec Global
Communications Corporation (a Maryland corporation) as of December 31, 1996 and
1997, and the related statements of operations, changes in stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform 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 Global
Communications Corporation, as of December 31, 1996 and 1997, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 4, 1998
F-2
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------- -------------------------
1995 1996 1997 1997 1998
------------- ------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues ....................................... $ 10,508 $ 32,215 $ 85,857 $ 28,836 $ 63,353
Cost of services ................................... 9,129 29,881 75,783 25,250 54,485
--------- --------- --------- -------- --------
Gross margin ...................................... 1,379 2,334 10,074 3,586 8,868
General and administrative expenses ................ 2,170 3,996 6,288 2,461 6,852
Selling and marketing expenses ..................... 184 514 1,238 306 1,761
Depreciation and amortization ...................... 137 333 451 214 708
--------- --------- --------- -------- --------
Income (loss) from operations ..................... (1,112) (2,509) 2,097 605 (453)
Interest expense ................................... 116 337 762 252 2,577
Interest income .................................... 22 16 313 5 1,302
--------- --------- --------- -------- --------
Income (loss) before income tax provision ......... (1,206) (2,830) 1,648 358 (1,728)
Income tax provision ............................... -- -- 29 7 30
--------- --------- --------- -------- --------
Net income (loss) ................................. $ (1,206) $ (2,830) $ 1,619 $ 351 $ (1,758)
========= ========= ========= ======== ========
Basic earnings (loss) per share .................... $ (0.23) $ (0.52) $ 0.26 $ 0.06 $ (0.20)
========= ========= ========= ======== ========
Weighted average common shares outstanding --
basic ............................................. 5,317 5,403 6,136 5,403 8,926
========= ========= ========= ======== ========
Diluted earnings (loss) per share .................. $ (0.23) $ (0.52) $ 0.25 $ 0.06 $ (0.20)
========= ========= ========= ======== ========
Weighted average common and equivalent shares
outstanding -- diluted ............................ 5,317 5,403 6,423 5,589 8,926
========= ========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1996 1997 1998
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................................................... $ 148 $ 26,114 $120,121
Accounts receivable, net of allowance for doubtful accounts of approximately
$1,079, $2,353, and $2,982 respectively....................................... 5,334 16,980 23,293
Accounts receivable, related party ............................................. 78 377 778
Other current assets ........................................................... 211 1,743 1,974
-------- -------- --------
Total current assets ......................................................... 5,771 45,214 146,166
-------- -------- --------
PROPERTY AND EQUIPMENT:
Long distance communications equipment ......................................... 1,773 3,305 7,010
Computer and office equipment .................................................. 392 1,024 4,083
Less -- Accumulated depreciation and amortization .............................. (789) (1,240) (1,933)
-------- -------- --------
1,376 3,089 9,160
Construction in progress ....................................................... -- 2,095 1,087
-------- -------- --------
Total property and equipment, net ............................................ 1,376 5,184 10,247
-------- -------- --------
Deferred debt financing costs, net ............................................. -- 952 6,265
Restricted cash and pledged securities ......................................... 180 180 52,597
-------- -------- --------
Total assets ................................................................. $ 7,327 $ 51,530 $215,275
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ............................................................... $ 7,171 $ 15,420 $ 17,595
Accrued expenses ............................................................... 2,858 3,728 6,845
Short-term borrowings under receivables-based credit facility .................. 1,812 -- --
Capital lease obligations ...................................................... 226 331 381
Notes payable to related parties ............................................... 53 -- --
Notes payable to individuals and other ......................................... 650 -- --
-------- -------- --------
Total current liabilities .................................................... 12,770 19,479 24,821
-------- -------- --------
Capital lease obligations, net of current portion .............................. 546 417 266
Senior Notes ................................................................... -- -- 157,917
Notes payable to related parties, net of current portion ....................... 100 -- --
Notes payable to individuals and other, net of current portion ................. -- 44 --
-------- -------- --------
Total liabilities ............................................................ 13,416 19,940 183,004
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock; $1.00 par value; 100,000 shares authorized; no shares issued
and outstanding .............................................................. -- -- --
Voting common stock; $0.01 par value; 10,000,000 shares authorized at De-
cember 31, 1996; 20,000,000 shares authorized at December 31, 1997 and
June 30, 1998; 5,380,824, 8,811,999, and 8,964,315 shares issued and out-
standing at December 31, 1996, 1997 and June 30, 1998, respectively .......... 54 88 90
Nonvoting common stock; $1.00 par value; 25,000 shares authorized and
22,526 shares issued and outstanding at December 31, 1996; no shares au-
thorized, issued and outstanding at December 31, 1997 and June 30, 1998. 22 -- --
Additional paid-in capital ..................................................... 932 35,528 35,832
Warrants ....................................................................... -- 1,693 3,800
Unearned compensation .......................................................... -- (241) (215)
Accumulated deficit ............................................................ (7,097) (5,478) (7,236)
-------- -------- --------
Total stockholders' equity (deficit) ......................................... (6,089) 31,590 32,271
-------- -------- --------
Total liabilities and stockholders' equity (deficit) ......................... $ 7,327 $ 51,530 $215,275
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997,
AND THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
VOTING NONVOTING
COMMON STOCK COMMON STOCK ADDITIONAL
----------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 .............................. 4,574 $ 46 22 $ 22 $ 190
Net loss ................................................. -- -- -- -- --
Issuance of common stock ................................. 807 8 -- -- 742
----- ---- -- ----- --------
Balance at December 31, 1995 .............................. 5,381 54 22 22 932
Net loss ................................................. -- -- -- -- --
----- ---- -- ----- --------
Balance at December 31, 1996 .............................. 5,381 54 22 22 932
Net income ............................................... -- -- -- -- --
Conversion of nonvoting common shares to voting
common shares ........................................... 17 -- (17) (17) 17
Purchase and retirement of nonvoting common shares........ -- -- (5) (5) (40)
Net proceeds from initial public offering ................ 3,278 33 -- -- 34,961
Exercise of stock options ................................ 136 1 -- -- 143
Unearned compensation pursuant to issuance of stock
options ................................................. -- -- -- -- 385
Amortization of unearned compensation .................... -- -- -- -- --
Warrants issued in connection with equity ($870) and
debt placement ($823) ................................... -- -- -- -- (870)
----- ---- ----- ------- --------
Balance at December 31, 1997 .............................. 8,812 88 -- -- 35,528
Net loss (unaudited) ..................................... -- -- -- -- --
Warrants issued in connection with senior notes offer-
ing (unaudited) ......................................... -- -- -- -- --
Amortization of unearned compensation (unaudited) ........ -- -- -- -- --
Conversion of note payable to common stock (unaudit-
ed) ..................................................... 24 -- -- -- 44
Exercise of stock options (unaudited) .................... 128 2 -- -- 260
----- ---- ----- ------- --------
Balance at June 30, 1998 (unaudited) ...................... 8,964 $ 90 -- $ -- $ 35,832
===== ==== ===== ======= ========
<CAPTION>
UNEARNED ACCUMULATED
WARRANTS COMPENSATION DEFICIT TOTAL
---------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 .............................. $ -- $ -- $ (3,061) $ (2,803)
Net loss ................................................. -- -- (1,206) (1,206)
Issuance of common stock ................................. -- -- -- 750
------- ------- --------- ---------
Balance at December 31, 1995 .............................. -- -- (4,267) (3,259)
Net loss ................................................. -- -- (2,830) (2,830)
------- ------- --------- ---------
Balance at December 31, 1996 .............................. -- -- (7,097) (6,089)
Net income ............................................... -- -- 1,619 1,619
Conversion of nonvoting common shares to voting
common shares ........................................... -- -- -- --
Purchase and retirement of nonvoting common shares........ -- -- -- (45)
Net proceeds from initial public offering ................ -- -- -- 34,994
Exercise of stock options ................................ -- -- -- 144
Unearned compensation pursuant to issuance of stock
options ................................................. -- (385) -- --
Amortization of unearned compensation .................... -- 144 -- 144
Warrants issued in connection with equity ($870) and
debt placement ($823) ................................... 1,693 -- -- 823
------- ------- --------- ---------
Balance at December 31, 1997 .............................. 1,693 (241) (5,478) 31,590
Net loss (unaudited) ..................................... -- -- (1,758) (1,758)
Warrants issued in connection with senior notes offer-
ing (unaudited) ......................................... 2,107 -- -- 2,107
Amortization of unearned compensation (unaudited) ........ -- 26 -- 26
Conversion of note payable to common stock (unaudit-
ed) ..................................................... -- -- -- 44
Exercise of stock options (unaudited) .................... -- -- -- 262
------- ------- --------- ---------
Balance at June 30, 1998 (unaudited) ...................... $ 3,800 $ (215) $ (7,236) $ 32,271
======= ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ -------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ............................................................ $ (1,206) $(2,830) $ 1,619
Adjustments to net income (loss):
Depreciation and amortization ............................................... 137 333 451
Compensation pursuant to stock options ...................................... -- -- 144
Amortization of deferred debt financing costs and debt discounts ............ -- -- 237
Changes in operating assets and liabilities:
Accounts receivable, net .................................................... (1,342) (3,113) (11,646)
Accounts receivable, related party .......................................... (46) 241 (299)
Other current assets ........................................................ (83) (80) (429)
Accounts payable ............................................................ 1,135 2,515 8,249
Accrued expenses ............................................................ 637 1,578 (45)
-------- ------- ----------
Net cash (used in) provided by operating activities ....................... (768) (1,356) (1,719)
-------- ------- ----------
INVESTING ACTIVITIES:
Purchases of property and equipment .......................................... (200) (520) (3,881)
-------- ------- ----------
Net cash used in investing activities ..................................... (200) (520) (3,881)
-------- ------- ----------
FINANCING ACTIVITIES:
Net borrowings (repayments) under receivables-based credit facility .......... 570 1,242 (1,812)
Proceeds from senior notes and warrants offering ............................. -- -- --
Investment in pledged securities ............................................. -- -- --
Repayments under capital lease obligations ................................... (96) (91) (402)
Repayments under notes payable to related parties ............................ -- (5) (153)
Borrowings under notes payable to individuals and other ...................... 50 475 --
Repayments under notes payable to individuals and other ...................... (35) (125) (650)
Deferred debt financing costs ................................................ -- -- (366)
Net proceeds from issuance of common stock ................................... 750 -- 34,994
Proceeds from exercises of stock options ..................................... -- -- --
Purchase and retirement of nonvoting common stock ............................ -- -- (45)
-------- --------- ----------
Net cash provided by financing activities ................................. 1,239 1,496 31,566
-------- --------- ----------
Net increase (decrease) in cash and cash equivalents ...................... 271 (380) 25,966
Cash and cash equivalents at the beginning of the period .................... 257 528 148
-------- --------- ----------
Cash and cash equivalents at the end of the period .......................... $ 528 $ 148 $ 26,114
======== ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ................................................................ $ 87 $ 296 $ 591
======== ========= ==========
Income taxes paid ............................................................ $ -- $ -- $ 19
======== ========= ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Deferred debt financing and offering costs not paid .......................... $ -- $ -- $ --
Equipment acquired under capital lease ....................................... $ 285 $ 524 $ 378
Accrued expenses converted to a note ......................................... $ -- $ -- $ 44
Note payable to individual, converted to common stock ........................ $ -- $ -- $ --
In 1997, the Company recorded $1,103 in "Other current assets", $959 in
accrued expenses and $144 in equity, related to options exercised through
December 31, 1997. This amount was collected in January 1998 (Note 2)........
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1997 1998
----------- -------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ............................................................ $ 351 $ (1,758)
Adjustments to net income (loss):
Depreciation and amortization ............................................... 214 693
Compensation pursuant to stock options ...................................... 23 26
Amortization of deferred debt financing costs and debt discounts ............ -- 348
Changes in operating assets and liabilities:
Accounts receivable, net .................................................... (3,909) (6,313)
Accounts receivable, related party .......................................... (269) (401)
Other current assets ........................................................ (20) (231)
Accounts payable ............................................................ 4,032 2,175
Accrued expenses ............................................................ 92 3,117
--------- ---------
Net cash (used in) provided by operating activities ....................... 514 (2,344)
--------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment .......................................... (184) (5,672)
--------- ---------
Net cash used in investing activities ..................................... (184) (5,672)
--------- ---------
FINANCING ACTIVITIES:
Net borrowings (repayments) under receivables-based credit facility .......... 1,106 --
Proceeds from senior notes and warrants offering ............................. -- 160,000
Investment in pledged securities ............................................. -- (52,417)
Repayments under capital lease obligations ................................... (129) (185)
Repayments under notes payable to related parties ............................ -- --
Borrowings under notes payable to individuals and other ...................... 650 --
Repayments under notes payable to individuals and other ...................... -- --
Deferred debt financing costs ................................................ -- (5,637)
Net proceeds from issuance of common stock ................................... -- --
Proceeds from exercises of stock options ..................................... -- 262
Purchase and retirement of nonvoting common stock ............................ -- --
--------- ---------
Net cash provided by financing activities ................................. 1,627 102,023
--------- ---------
Net increase (decrease) in cash and cash equivalents ...................... 1,957 94,007
Cash and cash equivalents at the beginning of the period .................... 148 26,114
--------- ---------
Cash and cash equivalents at the end of the period .......................... $ 2,105 $ 120,121
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ................................................................ $ 269 $ 63
========= =========
Income taxes paid ............................................................ $ -- $ --
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Deferred debt financing and offering costs not paid .......................... $ 433 $ --
Equipment acquired under capital lease ....................................... $ 378 $ 84
Accrued expenses converted to a note ......................................... $ -- $ --
Note payable to individual, converted to common stock ........................ $ -- $ 44
In 1997, the Company recorded $1,103 in "Other current assets", $959 in
accrued expenses and $144 in equity, related to options exercised through
December 31, 1997. This amount was collected in January 1998 (Note 2)........
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. BUSINESS DESCRIPTION:
ORGANIZATION
Startec Global Communications Corporation (the "Company", formerly
Startec, Inc.), is a Maryland corporation founded in 1989 to provide
long-distance telephone services. The Company currently offers United
States-originated long-distance service to residential and carrier customers
through a flexible network of owned and leased transmission facilities, resale
arrangements, and 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.
REORGANIZATION
The Company's board of directors and stockholders have approved a
reorganization pursuant to which the Company's corporate structure will be
realigned to that of a publicly traded Delaware holding company. The
reorganization will consist of the transfer of substantially all of the
Company's assets into a newly incorporated Delaware subsidiary company ("New
Parent"), and the subsequent transfer of those assets to multiple subsidiaries
of the New Parent. After such transfer, the Company will be merged with and
into the New Parent. As of June 30, 1998, the New Parent and its subsidiaries
had been formed, but no transfer of assets had been made. The reorganization is
expected to be completed during the fourth quarter ended December 1998 and will
not have an impact on the consolidated financial statements of the Company.
INITIAL PUBLIC OFFERING
In October 1997, the Company completed an initial public offering of its
common stock (the "Initial Public Offering"). Together with the exercise of the
overallotment option in November 1997, the Offering placed 3,277,500 shares of
common stock at a price of $12.00 per share, yielding net proceeds (after
underwriting discounts, commissions, and other professional fees) to the
Company of approximately $35.0 million.
RISKS AND OTHER IMPORTANT FACTORS
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 United
States-based customers and suppliers, availability of transmission facilities,
United States 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.
F-7
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )
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 United States
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, cable television companies and utilities).
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 June 30, 1998 and for the six months
ended June 30, 1997 and 1998, has been prepared by the Company, without audit,
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 six months ended June 30,
1998 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 $2.0 million, $1.1
million and $1.4 million, or 19 percent, 3 percent, and 2 percent of net
revenues in 1995, 1996, and 1997, respectively, and $994,000 and $706,000, or 3
percent and 1 percent of
F-8
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )
net revenues in the six months ended June 30, 1997 and 1998, 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. The Company accrues disputed
vendor charges until such differences are resolved (see Notes 4 and 12).
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 others 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 in July 1997.
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 believes that no such impairment existed as of
December 31, 1996, 1997, and June 30, 1998.
The Company's estimates of anticipated gross revenues, the remaining
estimated lives of tangible 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.
OTHER CURRENT ASSETS
Included in other current assets as of December 31, 1997, is approximately
$1.1 million for amounts due from employees related to the exercise of stock
options in December 1997. No cash was advanced to these employees.
Additionally, none of these employees were executive officers of the Company.
All amounts due from employees for the payment of the exercise price and
related payroll taxes were collected in January 1998. During the second quarter
of 1998, the Company advanced an aggregate of
F-9
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )
approximately $737,000 to certain of its employees and officers. The loans bear
interest at a rate of 7.87% per year, and are due and payable on December 31,
1998. The loans are included in other current assets in the accompanying
consolidated balance sheet.
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:
<TABLE>
<S> <C>
Long-distance communications equipment (including undersea
cable) .................................................. 7 to 20 years
Computer and office equipment ............................ 3 to 5 years
</TABLE>
Long-distance communications equipment includes assets financed under
capital lease obligations of approximately $1,287,000, $1,456,000, and
$1,540,000 as of December 31, 1996, 1997, and June 30, 1998, respectively.
Accumulated depreciation on these assets as of December 31, 1996, 1997, and
June 30, 1998, was approximately $587,000, $672,000, and $838,000,
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
long-distance carriers. The Company's allowance for doubtful accounts is based
on current market conditions. The Company's four largest carrier customers
represented approximately 44 and 31 percent of gross accounts receivable as of
December 31, 1997 and June 30, 1998, respectively. Revenues from several
customers represented more than 10 percent of net revenues for the periods
presented (see Note 10). 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 7 percent and 5 percent of cost of
services in the year ended December 31, 1997 and the six months ended June 30,
1998, 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
expected amount to be realized.
EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board released
Statement No. 128, "Earnings Per Share." SFAS No. 128 requires dual
presentation of basic and diluted earnings per share on the face of the
statements of operations 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
F-10
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )
earnings per share is computed similarly to fully diluted earnins per share
under Accounting Principles Bulletin No. 15. In February 1998, the SEC released
Staff Accounting Bulletin ("SAB") No. 98, which revised the previous "cheap
stock" rules for earnings per share calculations in initial public offerings
under SAB No. 83. SAB No. 98 essentially replaces the term "cheap stock" with
"nominal issuances" of common stock. Nominal issuances arise when a company
issues common stock, options, or warrants for nominal consideration in the
periods preceding the initial public offering. SAB No. 98 was effective
immediately, and also reflects the requirements of SFAS No. 128. The Company
restated its earnings (loss) per share for all periods presented to be
consistent with SFAS No. 128 and SAB No. 98.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------- -------------------------
1995 1996 1997 1997 1998
------------ ------------ ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Weighted average common shares outstanding - basic..... 5,317 5,403 6,136 5,403 8,926
Dilutive effect of stock options and warrants ......... -- -- 287 186 --
----- ----- ----- ----- -----
Weighted average common and equivalent shares out-
standing - diluted ................................... 5,317 5,403 6,423 5,589 8,926
===== ===== ===== ===== =====
Per Share Amounts:
Basic ................................................ $ (0.23) $ (0.52) $ 0.26 $ 0.06 $ (0.20)
========= ========= ======= ======= =======
Diluted .............................................. $ (0.23) $ (0.52) $ 0.25 $ 0.06 $ (0.20)
========= ========= ======= ======= =======
</TABLE>
DEBT DISCOUNT AND DEFERRED DEBT FINANCING COSTS
As more fully discussed in Note 5 and Note 7, respectively, in July, 1997,
the Company entered into a credit facility (the "Loan") with a bank (the
"Lender"), and in May 1998, the Company completed the placement of $160 million
12% senior notes. Debt discount represents amounts ascribed to the warrants
issued in connection with the Loan and the senior notes. Deferred debt
financing costs represent underwriting discounts and commissions, legal fees,
and other costs incurred in connection with the origination of the Loan and the
placement of the senior notes. These costs are being amortized over the term of
the obligations using the effective interest method. As of December 31, 1997,
the unamortized debt discount and deferred debt financing costs were
approximately $658,000 and $294,000, respectively. As of June 30, 1998, the
unamortized debt discount and deferred debt financing costs were approximately
$2,577,000 and $5,771,000, respectively.
ADVERTISING COSTS
In accordance with Statement of Position 93-7, "Reporting on Advertising
Costs," costs for advertising are expensed as incurred within the fiscal year.
Such costs are included in "Selling and marketing expenses" in the statements
of operations.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information."
SFAS No. 130 requires "comprehensive income" and the components of "other
comprehensive income", to be reported in the financial statements and/or notes
thereto. Since the Company did not have any components of "other comprehensive
income", net income is the same as "total comprehensive income" for all periods
presented.
SFAS No. 131 requires an entity to disclose financial and descriptive
information about its reportable operating segments. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. SFAS No. 131 is not required for interim financial
reporting
F-11
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )
purposes during 1998. The Company is in the process of assessing the additional
disclosures, if any, required by SFAS No. 131. However, such adoption will not
impact the Company's results of operations or financial position, since it
relates only to disclosures.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1996 1997 1998
---------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Residential ............................. $ 3,840 $ 9,560 $ 13,100
Carrier ................................. 2,573 9,773 13,175
-------- -------- --------
6,413 19,333 26,275
Allowance for doubtful accounts ......... (1,079) (2,353) (2,982)
-------- -------- --------
$ 5,334 $ 16,980 $ 23,293
======== ======== ========
</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 $3,428,000 of residential receivables as of December 31,
1996 were pledged as security under the receivables-based credit facility
agreement discussed in Note 5. No receivables were pledged as of December 31,
1997 and June 30, 1998, as the related facility was extinguished in July 1997.
4. ACCRUED EXPENSES:
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1996 1997 1998
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Disputed vendor charges .......................... $ 2,057 $ 2,124 $2,124
Accrued payroll and related taxes ................ 368 1,194 381
Accrued excise taxes and related charges ......... 182 -- --
Accrued interest ................................. 88 22 2,209
Universal Service Fund payable ................... -- -- 964
Other ............................................ 163 388 1,167
------- ------- ------
$ 2,858 $ 3,728 $6,845
======= ======= ======
</TABLE>
Disputed vendor charges 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 provided approximately $1,414,000 and $67,000 in the
years ended December 31, 1996 and 1997, respectively, related to disputed
minutes for which the Company has not recognized any corresponding revenue. No
amounts were provided during the six months ended June 30, 1998. 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 presumably be
paid in cash.
5. CREDIT FACILITY:
Prior to July 1, 1997, the Company had an advanced payment agreement with
a third party billing company, which allowed the Company to take advances
against 70 percent of all records submitted for billing. Advances were secured
by the receivables involved. Approximately $1,812,000 was outstanding under
this receivables-based credit facility as of December 31, 1996, with a weighted
average interest rate on outstanding borrowings of 12.25 percent. In July 1997,
the Company paid the remaining amounts owed under this agreement using proceeds
from the Loan discussed below.
F-12
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )
On July 1, 1997 the Company entered into a Loan with the 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
revenues to Loan balance, interest coverage, and cash flow leverage, minimum
residential subscribers, and 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 July 1,
1998, should the Lender determine and assert based on its reasonable assessment
that a material adverse change has occurred, all amounts outstanding would
become due and payable. The weighted average borrowings and interest rate under
the Loan during 1997 were approximately $2,015,000 and 10 percent,
respectively. The highest balance outstanding during 1997 was approximately
$7,012,000. The Company had no outstanding balance under the Loan as of
December 31, 1997 and June 30, 1998.
In connection with the Loan, the Company issued the Lender warrants to
purchase 539,800 shares of the Company's common stock, representing 10 percent
of the outstanding common stock on the date of issuance. Warrants with respect
to 269,900 of such shares, or 5 percent of the outstanding common stock at the
time the warrants were issued, vested fully on the date of the issuance.
Vesting of the remaining warrants was contingent on the occurrence of certain
events, and, since the Company completed the Initial Public Offering prior to
December 31, 1997, no additional warrants will vest. The exercise price of the
warrants is $8.46 per share, and they expire on July 1, 2002. Upon completion
of the Initial Public Offering, the warrants ceased to be redeemable and,
accordingly, the fair value of approximately $823,000 ascribed to the warrants
is classified as a component of stockholders' equity as of December 31, 1997
and June 30, 1998. Proceeds from the Loan were used to pay down the
receivables-based credit facility (discussed above), to retire notes payable to
related parties and individuals and other (Note 7), to retire certain capital
lease obligations, to purchase long-distance communications equipment, and for
general working capital purposes.
In the second quarter of 1998, the Company amended the Loan (the "Amended
Loan"). In particular, among other amendments, the Amended Loan provides that
certain key financial covenants shall apply only in the event that the Company
attempts to borrow amounts under the Amended Loan. As of June 30, 1998, as a
result of the senior notes offering, the Company is not in compliance with
these covenants and is therefore unable to borrow any amounts under the Amended
Loan. The Amended Loan also provides for the release of the Lender's security
interest in the Company's stock owned by the majority stockholder and another
stockholder previously pledged to secure the Company's obligations under the
Loan.
6. STOCKHOLDERS' EQUITY (DEFICIT):
In July 1997, the Company exchanged 17,175 shares of its outstanding
nonvoting common stock for authorized voting common stock and purchased the
remaining 5,351 shares of outstanding nonvoting common stock from a former
officer and director of the Company for $45,269. In August 1997, the Company
increased its authorized shares of common stock to 20,000,000 and created a
preferred class of stock with 100,000 shares of $1.00 par value preferred stock
authorized for issuance.
F-13
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )
STOCK OPTION PLANS
1997 Performance Incentive Plan
In August 1997, the stockholders of the Company approved the 1997
Performance Incentive Plan (the "Performance Plan"). The Performance Plan
provides for the award to eligible employees of the Company and others of stock
options, stock appreciation rights, restricted stock, and other stock-based
awards, as well as cash-based annual and long-term incentive awards. In 1998,
the Board of Directors and stockholders approved an increase in the shares
authorized for issuance under the Performance Plan to 18.5 percent of the
common shares outstanding. The options expire 10 years from the date of grant
and vest ratably over five years. The Performance Plan provides that all
outstanding options become fully vested in the event of a change in control, as
defined. As of December 31, 1997 and June 30, 1998, approximately 352,000 and
1,171,698 options, respectively, were available for grant under the Performance
Plan.
Amended and Restated Stock Option Plan
The Company's Amended and Restated Stock Option Plan, reserves 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 of the
optionee. 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 conjunction with this amendment, all
options outstanding were cancelled , and certain options were reissued at their
original exercise prices. Pursuant to Accounting Principles Board Opinion No.
25 " Accounting for Stock Issued to Employees" ("APB No. 25") and its related
interpretations, 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. The Company recognized approximately
$131,000 in compensation expense for the year ended December 31, 1997 as the
vesting of the options accelerated upon completion of the Initial Public
Offering.
A summary of the Company's aggregate stock option activity and related
information under the Performance Plan and the Amended and Restated Option
Plan, is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------------------- ------------------------
1995 1996 1997 1998
--------------------- ----------------------- ------------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ----------- ----------- ----------- ------------- ----------- ------------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning
of period ..................... 103,200 $ 0.30 143,200 $ 0.38 138,300 $ 0.38 531,666 $ 9.96
Granted ........................ 40,000 0.60 -- -- 668,366 8.14 136,000 17.97
Exercised ...................... -- -- -- -- (136,500) 1.05 (125,316) 1.85
Forfeited/Surrendered .......... -- -- (4,900) 0.36 (138,500) 0.38 (46,000) 10.00
------- ------- ------- ------- -------- ------- -------- --------
Options outstanding at end of
period ........................ 143,200 $ 0.38 138,300 $ 0.38 531,666 $ 9.96 496,350 $ 14.20
======= ======= ======= ======= ======== ======= ======== ========
Options exercisable at end of
period ........................ -- -- 133,266 $ 1.85 7,950 $ 1.85
======= ======= ======== ======= ======== ========
</TABLE>
F-14
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )
Exercise prices for options outstanding as of June 30, 1998, are as follows
(unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ --------------------------------
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER OF OPTIONS CONTRACTUAL LIFE EXERCISE NUMBER OF OPTIONS EXERCISE
EXERCISE PRICES OUTSTANDING IN YEARS PRICE OUTSTANDING PRICE
- - -------------------- ------------------- ------------------ ----------- ------------------- ----------
<S> <C> <C> <C> <C> <C>
$1.85 -- $1.85 7,950 8.55 $ 1.85 7,950 $ 1.85
$9.87 -- $10.00 191,900 9.27 10.00 -- --
$12.00 -- $12.00 7,500 9.13 12.00 -- --
$14.25 -- $15.00 62,000 9.93 14.27 -- --
$16.56 -- $16.56 160,000 9.44 16.56 -- --
$18.00 -- $26.75 67,000 9.72 22.22 --
- - -------------------- ------- ---- -------- -----
$1.85 -- $26.75 496,350 9.45 $ 14.20 7,950 $ 1.85
==================== ======= ==== ======== ===== =======
</TABLE>
The Company has elected to account for stock and stock rights in
accordance with APB No. 25. SFAS No. 123, "Accounting for Stock-Based
Compensation," 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.
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 during the years ended December 31, 1995, 1997 and the six
months ended June 30, 1998, 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, 6.2 and 6.2 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 stock
rights.
The weighted-average fair value of options granted during the years ended
December 31, 1995, 1997, and the six months ended June 30, 1998, was $0.34,
$4.32 and $9.22 per share, respectively. For purposes of pro forma disclosures,
the estimated fair value of 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
approximately $1,209,000 and $2,833,000, respectively, or $0.23 and $0.52 per
share (basic and diluted), respectively. Pro forma net income for 1997 would
have been approximately $1,600,000, or $0.26 per share (basic) and $0.25 per
share (diluted). Pro forma net loss for the six months ended June 30, 1998
would have been approximately $2,146,000, or $0.24 per share (basic and
diluted). The provisions of SFAS No. 123 are not required to be applied to
awards granted prior to January 1, 1995. The impact of applying SFAS No. 123
may not necessarily be indicative of future results.
In December 1997, under the Performance Plan, the Company granted to
several consultants options to acquire 30,000 shares of the Company's common
stock in lieu of payment of certain consulting services to be performed in the
future. Pursuant to SFAS No. 123, the Company will recognize compensation
expense for the fair value of these options granted to consultants, as
calculated using the Black-Scholes option pricing model, using the weighted
average assumptions described above. The fair value of these options is
approximately $254,000 and will be recognized ratably over estimated service
period.
F-15
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )
COMMON STOCK WARRANTS
The Company issued to certain underwriters involved in the Initial Public
Offering, warrants to purchase up to 150,000 shares of common stock at an
exercise price of $13.20 per share. The warrants are exercisable for a period
of five years beginning October 1998. The holders of the warrants will have no
voting or other stockholder rights unless and until the warrants are exercised.
The fair value of these warrants was approximately $870,000, and is classified
in stockholders' equity.
See Note 5 and Note 7, respectively, for a discussion of the warrants
issued to the Lender in connection with the Loan and the warrants issued in
connection with the senior notes offering.
STOCKHOLDER RIGHTS PLAN
The Board of Directors has adopted a stockholder rights plan ("Rights" and
"Rights Plan"), which is designed to protect the rights of its stockholders and
deter coercive or unfair takeover tactics. It is not in response to any
acquisition proposal. Preferred stock purchase rights have been granted as a
dividend at the rate of one Right for each outstanding share of Common Stock
held of record as of the close of business on April 3, 1998.
Each Right, when exercisable, would entitle the holder thereof to purchase
1/1,000th of a share of Series A Junior Participating Preferred Stock ("Junior
Preferred Stock") at a price of $175 per 1/1000th share. The Company's Board of
Directors designated 25,000 shares of the authorized Preferred Stock for this
purpose. The Rights, which have no voting rights, will expire on March 25,
2008.
At the time of adoption of the Rights Plan, the Rights are neither
exercisable nor traded separately from the Common Stock. Subject to certain
limited exceptions, the Rights will be exercisable only if a person or group,
other than an Exempt Person, as defined in the Rights Plan, becomes the
beneficial owner of 10% or more of the Common Stock or announces a tender or
exchange offer which would result in its ownership of 10% or more of the Common
Stock. Ten days after a public announcement that a person has become the
beneficial owner of 10% or more of the Common Stock or ten days following the
commencement of a tender or exchange offer which would result in a person
becoming the beneficial owner of 10% or more of the Common Stock (the earlier
of which is called the "Distribution Date"), each holder of a Right, other than
the acquiring person, would be entitled to purchase a certain number of shares
of Common Stock for each Right at one-half of the then-current market price. If
the Company is acquired in a merger, or 50% or more of the Company's assets are
sold in one or more related transactions, each Right would entitle the holder
thereof to purchase common stock of the acquiring company at one half of the
then-market price of such common stock.
At any time after a person or group becomes the beneficial owner of 10% or
more of the Common Stock, the Board of Directors may exchange one share of
Common Stock for each Right, other than Rights held by the acquiring person.
Generally, the Board of Directors may redeem the Rights at any time until 10
days following the public announcement that a person or group of persons has
acquired beneficial ownership of 10% or more of the outstanding Common Stock.
The redemption price is $.001 per Right.
7. NOTES PAYABLE:
SENIOR NOTES AND WARRANTS OFFERING
In May 1998, the Company completed the placement of $160 million 12%
senior notes due 2008 and warrants to purchase 200,226 shares of common stock
at an exercise price of $24.20 per share. This placement yielded net proceeds
of approximately $155 million, of which approximately $52 million was used to
purchase U.S. Government obligations which have been pledged to fund the first
six interest
F-16
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )
payments due on the senior notes. The senior notes are recorded at a discount
of $2.1 million to their face amount to reflect the value attributed to
warrants. The senior notes are unsecured and require semi annual interest
payments beginning November 15, 1998. The senior notes and warrants have
certain registration rights.
NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1996 1997 1998
-------- ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to parties related to the primary stockholder and
president of the Company, bearing interest at rates ranging from
15 to 25 percent. .............................................. $ 153 $ -- $ --
Less Current Portion ............................................ (53) -- --
----- ---- ----
Long-term Portion ............................................... $ 100 $ -- $ --
===== ==== ====
</TABLE>
NOTES PAYABLE TO INDIVIDUALS AND OTHER
Notes payable to individuals and other consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1996 1997 1998
-------- ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to various parties, bearing interest at rates ranging
from 15 to 25 percent ............................................. $ 650 $ -- $ --
Note payable to individual, convertible into 24,000 shares of voting
common stock upon maturity in 1999 ................................ -- 44 --
------ ---- ----
650 44 --
Less Current Portion ............................................... (650) -- --
------ ---- ----
Long-term Portion .................................................. $ -- $ 44 $ --
====== ==== ====
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases office space, equipment and undersea fiber optic cable
under operating leases. Rent expense was approximately $94,000, $135,000 and
$313,000 for the years ended December 31, 1995, 1996 and 1997, respectively,
and $65,000 and $375,000 for the six months ended June 30, 1997 and 1998,
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 (in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- - ---------------------------------------------- --------- ----------
<S> <C> <C>
1998 ......................................... $ 398 $ 615
1999 ......................................... 393 712
2000 ......................................... 53 733
2001 ......................................... -- 657
2002 ......................................... -- 537
------ -------
$ 844 $ 3,254
=======
Less - Amounts representing interest ......... (96)
Less - Current portion ....................... (331)
------
Long-term Portion ............................ $ 417
======
</TABLE>
F-17
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )
LEASE WITH RELATED PARTY
The Company has entered into an agreement with an affiliate of a
stockholder 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
approximately $46,000 in accounts payable as of June 30, 1998, related to this
agreement. Unpaid amounts bear interest at the 180-day LIBOR rate, plus one
quarter percent. The amounts to be paid by the Company under this operating
lease are included in the future minimum commitments schedule above.
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 AND PLEDGED SECURITIES
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. The Company was required to purchase U.S.
Government obligations which have been pledged to fund the first six interest
payments due on the senior notes (Note 7).
EMPLOYEE BENEFIT PLANS
Effective March 1998, the Company adopted a defined contribution plan
under section 401(k) of the Internal Revenue Code (the "Plan"). Employees are
eligible for the Plan after completing at least one year of service and
attaining age 20. The Plan allows for employee contributions up to 15% of their
compensation.
LITIGATION
Certain claims have been asserted 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 consolidated
financial statements.
9. RELATED-PARTY TRANSACTIONS:
The Company has an agreement with an affiliate of a stockholder of the
Company that calls for the purchase and sale of long distance services.
Revenues generated from this affiliate amounted to approximately $1.0 million,
$1.5 million and $1.9 million, or 10, 5 and 2 percent of total net revenues for
the years ended December 31, 1995, 1996, and 1997, respectively, and $1.2
million and $1.0 million, or 4 percent and 2 percent of total net revenues for
the six months ended June 30, 1997 and 1998, respectively. The Company was in a
net accounts receivable position with this affiliate of approximately $14,000,
$377,000, and $778,000 as of December 31, 1996, 1997, and June 30, 1998,
respectively. Services provided by this affiliate and recognized in cost of
services amounted to approximately $134,000, $663,000 and $680,000 for the
years ended December 31, 1995, 1996 and 1997, respectively, and $495,000 and
$256,000 for the six months ended June 30, 1997 and 1998, respectively.
The Company provided long-distance services to an affiliated entity owned
by the primary stockholder 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. No services were provided in 1997 and 1998. The affiliate
was unable to collect approximately $150,000 and $95,000 from its resi-
F-18
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )
dential customers in the years ended December 31, 1995 and 1996, respectively.
Accounts receivable from this affiliated entity were approximately $64,000 as
of December 31, 1996. There were no amounts outstanding from this affiliate as
of December 31, 1997 and June 30, 1998.
The Company had notes payable to parties related to the primary
stockholder and president of the Company which were paid in full in July 1997
(see Note 7) and a lease with an affiliate of a stockholder of the Company (see
Note 8).
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 (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- -----------------------
1995 1996 1997 1997 1998
---------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Asia/Pacific Rim ................. $ 6,970 $ 13,824 $ 42,039 $12,083 $29,676
Middle East/North Africa ......... 694 8,276 21,236 8,090 12,743
Sub-Saharan Africa ............... 35 1,136 6,394 2,371 4,329
Eastern Europe ................... 317 2,650 7,964 2,848 6,625
Western Europe ................... 1,647 1,783 1,913 904 1,307
North America .................... 494 3,718 3,398 1,559 2,874
Other ............................ 351 828 2,913 981 5,799
-------- -------- -------- ------- -------
$ 10,508 $ 32,215 $ 85,857 $28,836 $63,353
======== ======== ======== ======= =======
</TABLE>
SIGNIFICANT CUSTOMERS
A significant portion of the Company's net revenues is derived from a
limited number of customers. During the years ended December 31, 1996 and 1997,
the Company's five largest carrier customers accounted for approximately 40 and
47 percent, respectively, of the Company's total net revenues. In addition,
during the six months ended June 30, 1998, the Company's five largest carriers
accounted for approximately 33% of net revenues, with one carrier customer
accounting for approximately 19% 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 total net revenues (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
--------- --------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Videsh Sanchar Nigam Limited ("VSNL") $1,959 * * * *
WorldCom, Inc. ...................... * $7,383 $19,886 $7,694 $11,838
Frontier ............................ * * 12,420 * *
</TABLE>
* Revenue provided was less than 10 percent of total revenues for the year.
SIGNIFICANT SUPPLIERS
A significant portion of the Company's cost of services is purchased from
a limited number of suppliers. Including charges in dispute (see Note 4),
purchases from the five largest suppliers represented approximately 47 and 38
percent of cost of services in the year ended December 31, 1997 and the six
months ended June 30, 1998, respectively. The following suppliers provided 10
percent or more of the Company's total cost of services (in thousands):
F-19
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- ---------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
VSNL .............................. $7,155 $7,525 * $3,405 *
Cherry Communications ............. * 3,897 * * *
WorldCom, Inc. .................... * 3,972 $9,918 3,774 *
Pacific Gateway Exchange. ......... * * 8,893 * $5,993
Star Telecom ...................... * * * 1,348 *
</TABLE>
* Cost of services provided was less than 10 percent of total cost of services
for the year.
The cost of services attributable to VSNL include charges that are in
dispute, as discussed in Note 4. VSNL is a government-owned, foreign carrier
that has a monopoly on telephone service in India.
11. INCOME TAXES:
The Company has net operating loss carryforwards ("NOLs") for Federal
income tax purposes of approximately $2,564,000 and $1,878,000 as of December
31, 1996 and 1997, respectively, which may be applied against future taxable
income and expire in years 2010 and 2011. The Company utilized a portion of
these NOLs to partially offset its taxable income for the year ended December
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.
The tax effect of significant temporary differences, which comprise the
deferred tax assets and liabilities, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- -----------
DEFERRED TAX ASSETS:
<S> <C> <C>
Net operating loss carryforwards ......... $ 1,014 $ 725
Allowance for doubtful accounts .......... 336 909
Contested liabilities .................... 814 1,024
Cash to accrual adjustments .............. 778 460
Other .................................... 17 119
-------- --------
Total deferred tax assets ............... 2,959 3,237
Deferred tax liabilities:
Depreciation ............................. 66 204
Other .................................... -- 42
-------- --------
Total deferred tax liabilities .......... 66 246
-------- --------
Net deferred tax assets .................. 2,893 2,991
Valuation allowance ...................... (2,893) (2,991)
-------- --------
$ -- $ --
======== ========
</TABLE>
F-20
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )
Pursuant to Section 448 of the Internal Revenue Code, the Company was
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 the
years ended December 31, 1995 and 1996. A provision for Federal alternative
minimum tax was recorded for the year ended December 31, 1997. The components
of income tax expense for the year ended December 31, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31,
1997
------------------
<S> <C>
Current Provision
Federal ............................................. $ 171
Federal alternative minimum tax ..................... 29
State ............................................... 23
Deferred benefit
Federal ............................................. (86)
State ............................................... (12)
Benefit of net operating loss carryforwards ......... (194)
Increase in valuation allowance ....................... 98
------
$ 29
======
</TABLE>
The provision for income taxes results in an effective rate which differs
from the Federal statutory rate as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31,
1997
------------------
<S> <C>
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 ........................ 1.8
Benefit of net operating loss carryforwards ............ (38.6)
-----
Effective rate ......................................... 1.8%
=====
</TABLE>
F-21
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )
12. QUARTERLY DATA (UNAUDITED):
The following quarterly financial data has been prepared from the
financial records of the Company without audit, and reflects all adjustments
which, in the opinion of management, were of a normal recurring nature (except
as discussed in notes (1), (2) and (3) below) and necessary for a fair
presentation of the results of operations for the interim periods presented.
The operating results for any quarter are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
QUARTERS ENDED
(IN THOUSANDS)
----------------------------------------------------------------
1996 1997
-------------------------------------------------- -------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
----------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues (1) ..................... $ 4,722 $ 8,485 $ 7,652 $ 11,356 $ 12,372
Gross margin (2)(3)(1) ............... 255 563 889 627 1,607
Income (loss) from operations......... (444) (409) (740) (916) 256
Net income (loss) .................... $ (497) $ (465) $ (815) $ (1,053) $ 137
======== ======== ======== ========= =========
Basic earnings (loss) per share ...... $ (0.09) $ (0.09) $ (0.15) $ (0.19) $ 0.03
========= ========= ========= ========= =========
Weighted average common
shares outstanding - basic .......... 5,403 5,403 5,403 5,403 5,403
========= ========= ========= ========= =========
Diluted earnings (loss) per share $ (0.09) $ (0.09) $ (0.15) $ (0.19) $ 0.03
========= ========= ========= ========= =========
Weighted average common
shares and equivalent - di-
luted ............................... 5,403 5,403 5,403 5,403 5,474
========= ========= ========= ========= =========
<CAPTION>
QUARTERS ENDED
(IN THOUSANDS)
--------------------------------------------------------------------
1997 1998
----------------------------------------- --------------------------
JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net revenues (1) ..................... $ 16,464 $ 25,757 $ 31,264 $ 29,891 $ 33,462
Gross margin (2)(3)(1) ............... 1,979 3,089 3,399 4,236 4,632
Income (loss) from operations......... 349 738 754 713 (1,166)
Net income (loss) .................... $ 214 $ 413 $ 855 $ 899 $ (2,657)
========= ========= ========= ========= ========
Basic earnings (loss) per share ...... $ 0.04 $ 0.08 $ 0.10 $ 0.10 $ (0.30)
========= ========= ========= ========= ========
Weighted average common
shares outstanding - basic .......... 5,403 5,403 8,324 8,909 8,942
========= ========= ========= ========= ========
Diluted earnings (loss) per share $ 0.04 $ 0.07 $ 0.10 $ 0.10 $ (0.30)
========= ========= ========= ========= ========
Weighted average common
shares and equivalent - di-
luted ............................... 5,646 5,760 8,709 9,365 8,942
========= ========= ========= ========= ========
</TABLE>
- - ----------
(1) During the second quarter of 1998, upon receipt of favorable collection
data, the Company reduced its allowance for doubtful accounts by
approximately $337,000.
(2) Vendor disputes and other disputed charges resolved in the fourth quarter
of 1997 resulted in net credits as estimated by management of
approximately $300,000, recognized as lower cost of services and general
and administrative expenses.
(3) During the first quarter of 1997, the Company's gross margin improved by
approximately $1.0 million over the fourth quarter of 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 of 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 residential traffic
originated on-net.
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Startec Global Communications Corporation:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Startec Global Communications Corporation (a
Maryland corporation) included in this registration statement and have issued
our report thereon dated March 4, 1998. Our audits were 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 audits 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.,
March 4, 1998
S-1
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- - -------------------------------------------------- ----------- ---------- -------------- -------------- ----------
ADDITIONS
-------------------------
BALANCE CHARGED CHARGED TO
AT TO COSTS OTHER BALANCE
BEGINNING AND ACCOUNTS DEDUCTIONS AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBER(A) DESCRIBER(B) PERIOD
- - -------------------------------------------------- ----------- ---------- -------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Reflected as reductions to the related assets:
Provisions for uncollectible accounts (deduc-
tions from trade accounts receivable)
Year ended December 31, 1995 ..................... $ 752 $ 150 $ 174 $ (619) $ 457
Year ended December 31, 1996 ..................... 457 783 464 (625) 1,079
Year ended December 31, 1997 ..................... 1,079 57 1,864 (647) 2,353
</TABLE>
- - ----------
(a) Represents reduction of revenue for accrued credits on residential
business.
(b) Represents amounts written off as uncollectible.
S-2
<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 $160,000,000
CONNECTION WITH THE EXCHANGE OFFER
OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN [GRAPHIC OMITTED]
AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OTHER
THAN THE EXCHANGE NOTES OFFERED HEREBY
NOR DOES IT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO
BUY, ANY OF THE EXCHANGE NOTES TO ANY STARTEC GLOBAL
PERSON IN ANY JURISDICTION IN WHICH IT COMMUNICATIONS CORPORATION
WOULD BE UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION OFFER TO EXCHANGE
CONTAINED HEREIN IS CORRECT AS OF ANY 12% SERIES A
TIME SUBSEQUENT TO THE DATE HEREOF. SENIOR NOTES DUE 2008
FOR ANY AND ALL
12% SENIOR NOTES DUE 2008
--------------------------------
TABLE OF CONTENTS
<CAPTION>
PAGE
----------
<S> <C>
Summary ................................................ 1
Risk Factors ........................................... 15
The Exchange Offer ..................................... 29
Use of Proceeds ........................................ 38
Capitalization .........................................
Selected Financial and Other Data ...................... 39
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 40 ----------------------------
The International Telecommunications Industry .......... 50 PROSPECTUS
Business ............................................... 55 , 1998
Management ............................................. 72 ----------------------------
Principal Stockholders ................................. 81
Certain Transactions ................................... 83
Description of Capital Stock ........................... 84
Description of Other Indebtedness ...................... 91
Description of Units ................................... 92
Description of Notes ................................... 92
Book-Entry, Delivery and Form .......................... 120
Certain United States Federal Income Tax
Considerations ...................................... 122
Plan of Distribution ................................... 123
Certain Legal Matters .................................. 123
Experts ................................................
Available Information .................................. 124
Glossary of Terms ...................................... G-1
Index to Financial Statements .......................... F-1
</TABLE>
UNTIL ___, 1998 (40 DAYS AFTER
THE DATE OF THIS PROPSECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE
EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN SELLING EXCHANGE NOTES
RECEIVED IN EXCHANGE FOR OLD NOTES
HELD FOR THEIR OWN ACCOUNT. SEE "PLAN
OF DISTRIBUTION."
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
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 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).
II-1
<PAGE>
(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.
Upon completion of the Reorganization the Delaware Charter will provide
that the Company shall indemnify 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
the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise to
the fullest extent permitted by the DGCL, as the same may hereafter be amended,
or as otherwise permitted by law.
Section 145 of the DGCL permits a corporation to indemnify its directors
and officers against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlements actually and reasonably incurred by them in
connection with any action, suit or proceeding brought by third parties, if
such directors or officers acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reason to believe
their conduct was unlawful. In a derivative action, i.e., one by or in the
right of the corporation, indemnification may be made only for expenses
actually and reasonably incurred by directors and officers in connection with
the defense or settlement of an action or suit, and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent
that the court in which the action or suit was brought shall determine upon
application that the defendant officers or directors are fairly and reasonable
entitled to indemnity for such expenses despite such adjudication of liability.
As permitted by Section 102(b)(7) of the DGCL, the Delaware Charter
provides that no director of the Company will be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the Company; (2) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of the law; (3) under Section 174
of the DGCL regarding improper dividends; or (4) for any transaction from which
a director derived an improper benefit.
II-2
<PAGE>
The Company intends to maintain, at its expense, a policy of insurance
which insures its directors and officers, subject to certain exclusions and
deductions as are usual in such insurance policies, against certain liabilities
which may be incurred in such capacities.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
- - ----------- ---------------------------------------------------------------
1.1 -- Purchase Agreement, dated May 18, 1998, among the Company,
Lehman Brothers Inc., Goldman, Sachs & Co. and ING Baring
(U.S.) Securities, Inc. (the "Initial Purchasers").
3.1* * -- Certificate of Incorporation of the Registrant.
3.2* * -- Bylaws of the Registrant.
4.1 + -- Indenture, dated as of May 21, 1998, between the Registrant and
First Union National Bank.
4.2 + -- Form of 12% Series A Senior Notes due 2008.
4.3 + -- Registration Rights Agreement, dated as of May 21, 1998, among
the Registrant and the Initial Purchasers.
4.4 + -- Warrant Agreement, dated as of May 21, 1998 by and between the
Company and First Union National Bank, as Warrant Agent.
4.5 + -- Form of Warrant (included as Exhibit A to Exhibit 4.4)
4.6 + -- Collateral Pledge and Security Agreement, dated as of May 21,
1998, by and between the Company and First Union National Bank,
as Trustee.
5.1* -- Opinion of Schnader Harrison Segal & Lewis, LLP.
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 August 28, 1997.
10.5* * -- Employment Agreement dated as of July 1, 1997 by and between
Startec, Inc. and Ram Makunda.
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 Makunda dated as of
February 8, 1995, as amended as of June 16, 1997.
10.11** -- Service Agreement by and between Companhia Santomensed De
Telecommunicacoes 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.
II-3
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- - ----------- ---------------------------------------------------------------
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 Services Agreement by and between Cherry
Communications, Inc. and Startec, Inc. dated as of June 7,
1995.
10.21 + -- Agreement by and between Northern Telecom Inc. and the Company,
dated as of Decem- ber 23, 1997.
10.22 + -- Indefeasible Right of Use Agreement by and between Teleglobe
Cantat-3, Inc. and the Company, dated as of September 15, 1997
(Canus 1 Cable System).
10.23 + -- Indefeasible Right of Use Agreement by and between Teleglobe
Cantat-3, Inc. and the Company, dated as of September 15, 1997
(Cantat 3 Cable System).
10.24 -- Loan and Security Agreement by and between Prabhav V. Maniyar
and the Company, dated June 30, 1998.
10.25 -- Lease by and between The Vaswani Place Corporation and the
Company, dated as of October 27, 1998.
10.26 -- Indefeasible Right of Use Agreement by and between Cable &
Wireless Inc. and the Com- pany, dated June 9, 1998 (Gemini
Cable System).
10.27 -- First Amendment to Lease by and between The Vaswani Place
Corporation and the Com- pany, dated May 11, 1998.
10.28 -- International Facilities License, United Kingdom.
12.1 -- Computation of Ratio of Earnings to Fixed Charges.
21.1 -- Subsidiaries of Registrant.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Schnader Harrison Segal & Lewis LLP (included in the
opinion filed as Exhibit 5.1).
24.1 -- Power of Attorney (included on signature page hereof).
25.1 -- Statement of Eligibility of Trustee.
27.1 -- Financial Data Schedule.
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.
99.3 -- Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
99.4 -- Form of Letter to Clients.
99.5* -- Guides for Certification of Taxpayer Identification Number on
Form W-9.
- - ----------
* To be filed by amendment.
** Incorporated by reference from the Company's Registration Statement on Form
S-1 (SEC File No. 333-32753).
+ Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998.
(B) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules are included in Part II of the
Registration Statement: Schedule II Valuation and Qualifying Account
II-4
<PAGE>
Schedules not listed above are omitted because they are not applicable,
not required, or the required information is included in the Financial
Statements or the Notes thereto.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes that insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 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 Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it becomes effective.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to such request.
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 Bethesda, Maryland on August 14,
1998.
STARTEC GLOBAL COMMUNICATIONS CORPORATION
By: /s/ Ram Mukunda
------------------------------
Name: Ram Mukunda
Title: President, Chief Executive Officer
and Treasurer
POWER OF ATTORNEY
NOW 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 acting individually, as his attorneys-in-fact and
agents, each with full power of substitution and resubstitution, for him in his
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, 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 of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - --------------------------- ------------------------------------- ----------------
<S> <C> <C>
/s/ Ram Mukunda President, Chief Executive Officer, August 14, 1998
- - -------------------------
Treasurer and Director (Principal
Ram Mukunda
Executive Officer)
/s/ Prabhav B. Maniyar Senior Vice President, Chief August 14, 1998
- - -------------------------
Financial Officer, Secretary and
Prabhav B. Maniyar
Director (Principal Financial and
Accounting Officer)
/s/ Nazir G. Dossani Director August 14, 1998
- - -------------------------
Nazir G. Dossani
/s/ Richard K. Prins Director August 14, 1998
- - -------------------------
Richard K. Prins
/s/ Vijay Srinivas Director August 14, 1998
- - -------------------------
Vijay Srinivas
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- - ----------- ---------------------------------------------------------------
1.1 -- Purchase Agreement, dated May 18, 1998, among the Company,
Lehman Brothers Inc., Goldman, Sachs & Co. and ING Baring
(U.S.) Securities, Inc. (the "Initial Purchasers").
3.1* * -- Certificate of Incorporation of the Registrant.
3.2* * -- Bylaws of the Registrant.
4.1 + -- Indenture, dated as of May 21, 1998, between the Registrant and
First Union National Bank.
4.2 + -- Form of 12% Series A Senior Notes due 2008.
4.3 + -- Registration Rights Agreement, dated as of May 21, 1998, among
the Registrant and the Initial Purchasers.
4.4 + -- Warrant Agreement, dated as of May 21, 1998 by and between the
Company and First Union National Bank, as Warrant Agent.
4.5 + -- Form of Warrant (included as Exhibit A to Exhibit 4.4)
4.6 + -- Collateral Pledge and Security Agreement, dated as of May 21,
1998, by and between the Company and First Union National Bank,
as Trustee.
5.1* -- Opinion of Schnader Harrison Segal & Lewis, LLP.
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 August 28, 1997.
10.5* * -- Employment Agreement dated as of July 1, 1997 by and between
Startec, Inc. and Ram Makunda.
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 Makunda dated as of
February 8, 1995, as amended as of June 16, 1997.
10.11** -- Service Agreement by and between Companhia Santomensed De
Telecommunicacoes 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.
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- - ----------- ---------------------------------------------------------------
10.20** -- Carrier Services Agreement by and between Cherry
Communications, Inc. and Startec, Inc. dated as of June 7,
1995.
10.21 + -- Agreement by and between Northern Telecom Inc. and the Company,
dated as of Decem- ber 23, 1997.
10.22 + -- Indefeasible Right of Use Agreement by and between Teleglobe
Cantat-3, Inc. and the Company, dated as of September 15, 1997
(Canus 1 Cable System).
10.23 + -- Indefeasible Right of Use Agreement by and between Teleglobe
Cantat-3, Inc. and the Company, dated as of September 15, 1997
(Cantat 3 Cable System).
10.24 -- Loan and Security Agreement by and between Prabhav V. Maniyar
and the Company, dated June 30, 1998.
10.25 -- Lease by and between The Vaswani Place Corporation and the
Company, dated as of October 27, 1998.
10.26 -- Indefeasible Right of Use Agreement by and between Cable &
Wireless Inc. and the Com- pany, dated June 9, 1998 (Gemini
Cable System).
10.27 -- First Amendment to Lease by and between The Vaswani Place
Corporation and the Com- pany, dated May 11, 1998.
10.28 -- International Facilities License, United Kingdom.
12.1 -- Computation of Ratio of Earnings to Fixed Charges.
21.1 -- Subsidiaries of Registrant.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Schnader Harrison Segal & Lewis LLP (included in the
opinion filed as Exhibit 5.1).
24.1 -- Power of Attorney (included on signature page hereof).
25.1 -- Statement of Eligibility of Trustee.
27.1 -- Financial Data Schedule.
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.
99.3 -- Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
99.4 -- Form of Letter to Clients.
99.5* -- Guides for Certification of Taxpayer Identification Number on
Form W-9.
- - ----------
* To be filed by amendment.
** Incorporated by reference from the Company's Registration Statement on Form
S-1 (SEC File No. 333-32753).
+ Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998.
STARTEC GLOBAL COMMUNICATIONS CORPORATION
160,000 UNITS CONSISTING OF
$160,000,000 12% SENIOR NOTES DUE 2008
AND WARRANTS TO PURCHASE 200,226 SHARES OF COMMON STOCK
PURCHASE AGREEMENT
Lehman Brothers Inc., May 18, 1998
As Representative of the Initial
Purchasers named in Schedule I,
Three World Financial Center
New York, New York 10285
Ladies and Gentlemen:
Startec Global Communications Corporation, a Maryland
corporation (the "Company"), proposes to sell to you (the "Representative") and
the other purchasers named in Schedule I hereto (collectively, the "Initial
Purchasers") an aggregate of 160,000 units (the "Units"), each consisting of
$1,000 principal amount of the Company's 12% Senior Notes due 2008 (the "Notes")
and a warrant (all such warrants, in the aggregate, the "Warrants") to purchase
1.25141 shares of the Company's common stock, par value $0.01 per share (the
"Common Stock"). The Notes will be issued pursuant to an Indenture to be dated
as of May 21, 1998 (the "Indenture") between the Company and First Union
National Bank, as trustee (the "Trustee"). The Warrants will be issued pursuant
to a Warrant Agreement to be dated as of May 21, 1998 (the "Warrant Agreement")
between the Company and First Union National Bank, as warrant agent (the
"Warrant Agent"). Capitalized terms used but not defined in this Agreement shall
have the meaning given to such terms in the Indenture.
<PAGE>
The Units will be offered and sold without being registered
under the Securities Act of 1933, as amended (the "Securities Act"), in reliance
on exemptions therefrom.
The Initial Purchasers and the Company will enter into a
Registration Rights Agreement, to be dated as of the Closing Date (the
"Registration Rights Agreement") to be substantially in the form attached hereto
as Exhibit A.
The holders of the Notes and their direct and indirect
transferees will be entitled to the benefits of a Collateral Pledge and Security
Agreement, to be dated the Closing Date (the "Pledge Agreement"), from the
Company to the Trustee, whereby the Company will deposit with the Trustee an
amount in cash or U.S. Government Obligations equal to the required payment of
the first six scheduled interest payments on the Notes.
In connection with the offer of the Notes, the Company has
prepared a preliminary offering memorandum (the "Preliminary Memorandum") and in
connection with the sale of the Units will prepare a final offering memorandum
(the "Memorandum" and together with the Preliminary Memorandum, the "Offering
Documents") setting forth or including a description of the terms of the Notes
(and, in the case of the Memorandum, the Units and the Warrants), the terms of
the offering, a description of the Company and any material developments
relating to the Company occurring after the date of the most recent financial
statements included therein.
1. Representations, Warranties and Agreements of the Company.
The Company represents and warrants to, and agrees with the Initial Purchasers
that, as of the date hereof:
(a) The Preliminary Memorandum as of its date did
not, and the Memorandum at the date hereof, does not,
2
<PAGE>
and at the Closing Date (as defined), will not, contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, except that the representations
and warranties set forth in this Section 1(a) do not apply to
statements or omissions in the Offering Documents based upon
information furnished to the Company in writing by or on behalf of the
Initial Purchasers expressly for use therein. No order preventing the
use of any of the Offering Documents, or any amendment or supplement
thereto, or any order asserting that any of the transactions
contemplated by this Agreement are subject to the registration
requirements of the Securities Act of 1933 or any state securities or
blue sky laws has been issued.
(b) Assuming (i) that the representations and warranties of
the Initial Purchasers in Sections 3 and 6 hereof are true and correct
and (ii) compliance by the Initial Purchasers with the covenants set
forth in Sections 3 and 6 hereof, it is not required by applicable law
or regulation in connection with the offer, sale and delivery of the
Units to you in the manner contemplated by this Agreement and the
Memorandum to register the Units, Notes or Warrants under the
Securities Act or to qualify the Indenture in respect of the Notes
under the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act").
(c) The Company, and each of the subsidiaries of the Company
has been duly organized and is validly existing and in good standing
under the laws of their respective jurisdictions of organization, is
duly qualified to do business and is in good standing in each
jurisdiction in which their respective ownership or lease of property
or the conduct of their respective businesses requires such
qualification, except where
3
<PAGE>
the failure to be so qualified would not reasonably be expected to have
a material adverse effect on the consolidated financial position,
stockholder's equity, results of operations, business or property of
the Company and the subsidiaries of the Company taken as a whole (a
"Material Adverse Effect"), and each has all power and authority
necessary to own or hold its respective properties and to conduct the
business in which it is engaged.
(d) The Company has an authorized capitalization as set forth
in the Memorandum, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully
paid and non-assessable and conform in all material respects to the
description thereof contained in the Memorandum; all of the issued
shares of capital stock of each subsidiary of the Company (the "Equity
Interests") have been duly and validly authorized and issued and are
fully paid and nonassessable and the Equity Interests are owned
directly or indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims.
(e) The Warrant Agreement has been duly authorized and, when
duly executed and delivered by the proper officers of the Company
(assuming due execution and delivery by the Warrant Agent) and
delivered by the Company, will constitute a valid and legally binding
agreement of the Company enforceable against the Company in accordance
with its terms, except (i) where the enforceability thereof may be
limited by bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar laws now or hereafter in effect
relating to rights of creditors and other obligees generally, (ii)
where the remedy of specific performance and other forms of equitable
relief may be subject to certain equitable defenses and
4
<PAGE>
principles and to the discretion of the court before which the
proceedings may be brought and (iii) where rights to indemnity and
contribution hereunder may be limited by applicable law and public
policy.
(f) The Warrants have been duly authorized and, when duly
executed, countersigned and delivered to and paid for by the Initial
Purchasers in accordance with the terms of this Agreement, will be (x)
valid and binding obligations of the Company enforceable in accordance
with their terms, except (i) where the enforceability thereof may be
limited by bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar laws now or hereafter in effect
relating to rights of creditors and other obligees generally and (ii)
where the remedy of specific performance and other forms of equitable
relief may be subject to certain equitable defenses and principles and
to the discretion of the court before which the proceedings may be
brought, and (y) entitled to the benefits of the Warrant Agreement. The
shares of Common Stock issuable upon exercise of the Warrants (the
"Warrant Shares") have been duly reserved for issuance by the Company
and, upon the exercise of the Warrants and receipt by the Company of
the exercise price payable upon such exercise, the Warrant Shares will
be duly authorized, validly issued, fully paid and non-assessable and
will not have been issued in violation of preemptive or similar rights.
(g) The Indenture has been duly authorized and, when duly
executed and delivered by the proper officers of the Company (assuming
due execution and delivery by the Trustee) and delivered by the
Company, will constitute a valid and legally binding agreement of the
Company enforceable against the Company in accordance with its terms,
except (i) where the enforceability thereof may be limited by
bankruptcy, insolvency,
5
<PAGE>
reorganization, fraudulent conveyance, moratorium or other similar laws
now or hereafter in effect relating to rights of creditors and other
obligees generally, (ii) where the remedy of specific performance and
other forms of equitable relief may be subject to certain equitable
defenses and principles and to the discretion of the court before which
the proceedings may be brought and (iii) for the waiver of rights and
defenses contained in Sections 111 and 514 of the Indenture.
(h) This Agreement has been duly authorized, executed and
delivered by the Company and, assuming due execution and delivery by
the Initial Purchasers, constitutes a valid and legally binding
agreement of the Company enforceable against the Company in accordance
with its terms, except (i) where the enforceability hereof may be
limited by bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar laws now or hereafter in effect
relating to rights of creditors and other obligees generally, (ii)
where the remedy of specific performance and other forms of equitable
relief may be subject to certain equitable defenses and principles and
to the discretion of the court before which the proceedings may be
brought and (iii) where rights to indemnity and contribution hereunder
may be limited by applicable law and public policy.
(i) The Registration Rights Agreement has been duly authorized
by the Company, and when duly executed and delivered by the Company
(assuming due execution and delivery by the Initial Purchasers), will
constitute a valid and legally binding agreement of the Company
enforceable against the Company in accordance with its terms, except
(i) where the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium or other
similar laws now or hereafter in effect relating
6
<PAGE>
to rights of creditors and other obligees generally, (ii) where the
remedy of specific performance and other forms of equitable relief may
be subject to certain equitable defenses and principles and to the
discretion of the court before which the proceedings may be brought and
(iii) where rights to indemnity and contribution thereunder may be
limited by applicable law and public policy.
(j) The Pledge Agreement has been duly authorized by the
Company and, when duly executed and delivered by the Company (assuming
due execution and delivery by the Trustee and the Securities
Intermediary, as defined in the Pledge Agreement), will constitute a
valid and legally binding agreement of the Company enforceable against
the Company in accordance with its terms, except (i) where the
enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other similar laws
now or hereafter in effect relating to rights of creditors and other
obligees generally, (ii) where the remedy of specific performance and
other forms of equitable relief may be subject to certain equitable
defenses and principles and to the discretion of the court before which
the proceedings may be brought and (iii) where rights to indemnity and
contribution thereunder may be limited by applicable law and public
policy; and upon the Closing Date, the pledge of Collateral (as defined
in the Pledge Agreement) securing the payment of the Obligations (as
defined in the Pledge Agreement) for the benefit of the Trustee and the
holders of the Notes will constitute a first priority perfected
security interest in such Collateral, enforceable against all creditors
of the Company and any persons purporting to purchase any of the
Collateral from the Company.
7
<PAGE>
(k) The Notes have been duly authorized and, when duly
executed, authenticated and delivered to and paid for by the Initial
Purchasers in accordance with the terms of this Agreement, will be (x)
valid and binding obligations of the Company enforceable in accordance
with their terms, except (i) where the enforceability thereof may be
limited by bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar laws now or hereafter in effect
relating to rights of creditors and other obligees generally, (ii)
where the remedy of specific performance and other forms of equitable
relief may be subject to certain equitable defenses and principles and
to the discretion of the court before which the proceedings may be
brought, and (iii) for the waiver of rights and defenses contained in
Sections 111 and 514 of the Indenture and (y) entitled to the benefits
of the Indenture and the Registration Rights Agreement.
(l) The Exchange Notes have been duly authorized and, when
executed, authenticated and delivered to the holders of Notes who
acquire such Exchange Notes pursuant to the Exchange Offer contemplated
by the Registration Rights Agreement, will be (x) valid and binding
obligations of the Company enforceable in accordance with their terms,
except (i) where the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other similar laws now or hereafter in effect relating to
rights of creditors and other obligees generally, (ii) where the remedy
of specific performance and other forms of equitable relief may be
subject to certain equitable defenses and principles and to the
discretion of the court before which the proceedings may be brought,
and (iii) for the waiver of rights and defenses contained in Sections
111 and 514 of the Indenture and (y) entitled to the benefits of the
Indenture.
8
<PAGE>
(m) The execution, delivery and performance by the Company of
this Agreement, the Registration Rights Agreement, the Indenture, the
Pledge Agreement, the Warrant Agreement, the Warrants, the Notes and
the Exchange Notes, and the consummation by the Company of the
transactions contemplated herein (the "Transactions"), (i) will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to which
the Company or any of the subsidiaries of the Company is a party or by
which the Company or any of the subsidiaries of the Company is bound or
to which any of the properties or assets of the Company or any of the
subsidiaries of the Company is subject, other than those agreements
identified on Schedule 1(m) hereto with respect to which the Company
has obtained or will prior to the Closing obtain waivers or consents to
the extent necessary to permit the consummation of the transactions
contemplated hereby and by the Warrant Agreement and the Registration
Rights Agreement, (ii) will not result in any violation of the
provisions of the charter or by-laws of the Company or any of the
subsidiaries of the Company, (iii) will not result in any violation of
any statute or order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Company, any of the
subsidiaries of the Company or any of their properties or assets and
(iv) except for such consents, approvals, authorizations, registrations
or qualifications as may be required (x) under applicable state
securities laws in connection with the purchase and sale of the Units,
Notes and Warrants by the Initial Purchasers, or (y) under applicable
federal or state securities laws in connection with the delivery of the
Exchange Notes pursuant to the Exchange Offer, or the registration of
the Notes or Exchange Notes pursuant to any Shelf
9
<PAGE>
Registration Statement, in each case as contemplated by the
Registration Rights Agreement, or in connection with the Warrant
Registration Statement contemplated by the Warrant Agreement, will not
require any consent, approval, authorization or order of, or filing or
registration with, any court or governmental agency or body; provided,
however, that the Company shall not be in breach of this representation
where, with respect to clauses (i), (iii) and (iv) of this paragraph,
such conflicts, breaches, violations, defaults or failures to make or
obtain any consent, approval, qualification, authorization or order to
make such filing or registration would not have a Material Adverse
Effect.
(n) None of the Company or any of the subsidiaries of the
Company has sustained, since the date of the latest quarterly financial
statements included in the Memorandum, any material loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree; and, since
such date, there has not been any change in the capital stock or
long-term debt of the Company or any of the subsidiaries of the Company
except as set forth in the Memorandum, or any Material Adverse Effect,
or any development or circumstances which could reasonably be expected
to result in a Material Adverse Effect.
(o) The financial statements (including the related notes)
included in the Offering Documents present fairly the financial
condition and results of operations of the entities purported to be
shown thereby, at the dates and for the periods indicated, and have
been prepared in conformity with generally accepted accounting
principles applied on a consistent basis throughout the periods
involved (except that the unaudited financial statements may be subject
to normal
10
<PAGE>
year-end adjustments). The other financial and statistical data related
to the Company set forth in the Offering Documents (and any amendment
or supplement thereto) is, in all material respects, accurately
presented and prepared on a basis consistent with such financial
statements and the books and records of the Company. The industry,
customer and statistical data and estimates included in the Memorandum
are based on or derived from sources that the Company believes are
reliable and accurate in all material respects.
(p) Arthur Andersen LLP, who have certified certain financial
statements of the Company, whose report is included in the Memorandum
and who have delivered the initial letter referred to in Section 8(g)
hereof, are independent public accountants as required by the
Securities Act and the rules and regulations promulgated thereunder
(the "Rules and Regulations") during the periods covered by the
financial statements on which they reported contained in the
Memorandum.
(q) The Company and each of the subsidiaries of the Company
owns or possesses adequate rights to use all material patents, patent
applications, trademarks, service marks, trade names, trademark
registrations, service mark registrations, copyrights, license
applications and licenses ("Intellectual Property") which are necessary
for the conduct of their respective businesses and has no reason to
believe that the conduct of their respective businesses will conflict
with, and have not received any notice of any claim of conflict with,
any Intellectual Property or related rights of others, except as set
forth in the Memorandum or where (i) the failure to own or possess
adequate rights to use such Intellectual Property or (ii) such
conflicts, if any, would not have a Material Adverse Effect.
11
<PAGE>
(r) The Company and each of the subsidiaries of the Company
has good and marketable title in fee simple to all real property and
good and marketable title to all personal property owned by it, in each
case free and clear of all liens, encumbrances and defects, except such
as are described in the Memorandum or such as do not materially affect
the value of such property and do not materially interfere with the use
made and proposed to be made of such property by the Company and each
of the subsidiaries of the Company, and all real property and buildings
held under lease by the Company and each of the subsidiaries of the
Company are held by it 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 each of the subsidiaries of the Company.
(s) There are no legal or governmental proceedings pending to
which the Company or any of the subsidiaries of the Company is a party
or of which any property or asset of the Company or any of the
subsidiaries of the Company is the subject which, if determined
adversely to the Company or any of the subsidiaries of the Company,
could reasonably be expected to have a Material Adverse Effect; and to
the best of the Company's knowledge, no such proceedings are threatened
or contemplated by governmental authorities or threatened by others
that are required to be disclosed in the Memorandum which are not so
disclosed.
(t) No relationship, direct or indirect, exists between or
among the Company, on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company, on the other hand,
which is required to be disclosed in the Memorandum which is not so
disclosed.
12
<PAGE>
(u) Since the date as of which information is given in the
Memorandum through the date hereof, and except as may otherwise be
disclosed in the Memorandum, the Company has not (i) issued or granted
any securities, other than in connection with any employment contract,
benefit plan or other similar arrangement with or for the benefit of
any one or more employees, officers, directors or consultants, or in
connection with a dividend reinvestment or stock purchase plan, (ii)
incurred any liability or obligation, direct or contingent, other than
liabilities and obligations which were incurred in the ordinary course
of business, (iii) entered into any transaction not in the ordinary
course of business or (iv) declared or paid any dividend on capital
stock.
(v) None of the Company or any of the subsidiaries of the
Company (i) is in violation of its charter or by-laws (ii) is in
default in any material respect, and no event has occurred which, with
notice or lapse of time or both, would constitute such a default, in
the due performance or observance of any time period, covenant or
condition contained in any material indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which it is a party
or by which it is bound or to which any of its properties or assets is
subject, including, without limitation, operating agreements, except
where it would not reasonably be expected to have a Material Adverse
Effect, or (iii) is in violation in any material respect of any law,
ordinance, governmental rule, regulation or court decree to which it or
its properties or assets may be subject or has failed to obtain any
material license, permit, certificate, franchise or other governmental
authorization or permit necessary to the ownership of its properties or
assets or to the conduct of its business, except where it
13
<PAGE>
would not reasonably be expected to have a Material
Adverse Effect.
(w) None of the Company or any of the subsidiaries of the
Company, or, to the best knowledge of the Company, any director,
officer, agent, employee or other person associated with or acting on
behalf of the Company or any of the subsidiaries of the Company, has
used any corporate funds for any unlawful contribution, gift,
entertainment or other unlawful expense relating to political activity;
made any direct or indirect unlawful payment to any foreign or domestic
government official or employee from corporate funds; violated or is in
violation of any provision of the Foreign Corrupt Practices Act of
1977; or made any bribe, rebate, payoff, influence payment, kickback or
other unlawful payment.
(x) None of the Company or any subsidiary of the Company is an
"investment company" within the meaning of such term under the
Investment Company Act of 1940, as amended, and the rules and
regulations of the Securities and Exchange Commission (the
"Commission") thereunder (the "Investment Company Act").
(y) None of the Company or any of the affiliates of the
Company (each, as defined in Rule 501(b) of Regulation D under the
Securities Act, an "Affiliate") has directly, or through any agent
(other than the Initial Purchasers in connection with this Agreement),
(i) sold, offered for sale, solicited offers to buy or otherwise
negotiated in respect of, any security (as defined in the Securities
Act) which is or will be integrated with the sale of the Units, the
Notes or the Warrants in a manner that would require the registration
under the Securities Act of the Units, the Notes or the Warrants, or
(ii) engaged or will engage in any form of general solicitation or
general
14
<PAGE>
advertising (as those terms are used in Regulation D under the
Securities Act) in connection with the offering of the Units, the Notes
and the Warrants, or in any manner involving a public offering within
the meaning of Section 4(2) of the Securities Act.
(z) None of the Company, the Affiliates or any person acting
on its or their behalf (other than the Initial Purchasers in connection
with this Agreement) has engaged or will engage in any directed selling
efforts (as that term is defined in Regulation S under the Securities
Act ("Regulation S")) with respect to the Units, the Notes or the
Warrants and each of the Company and its Affiliates and any person
acting on its or their behalf (other than the Initial Purchasers in
connection with this Agreement) has complied and will comply with the
offering restrictions requirement of Regulation S.
(aa) Other than as disclosed in the Offering Documents, no
holder of any security of the Company or any of its subsidiaries will
have, as of the Closing Date, any right to require registration of any
security of the Company or any of its subsidiaries, other than those
agreements identified on Schedule 1(m) hereto with respect to which the
Company has obtained or prior to the Closing will obtain waivers or
consents permitting the consummation of the transactions contemplated
by the Registration Rights Agreement and the Warrant Agreement without
participation of any holders of rights thereto.
(ab) Neither the Company nor any of its subsidiaries is
involved in any labor dispute nor, to the knowledge of the Company, is
any dispute threatened, in each case which would have a Material
Adverse Effect.
15
<PAGE>
(ac) Neither the Company nor any of its subsidiaries has
violated any safety or similar law applicable to its business, nor any
federal or state law relating to discrimination in the hiring,
promotion or pay of employees nor any applicable federal or state wages
and hours laws, nor any provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or the rules and
regulations promulgated thereunder, except for such instances of
noncompliance that, either singly or in the aggregate would not have a
Material Adverse Effect.
(ad) The Company and each of its subsidiaries is in compliance
with all applicable existing federal, state, local and foreign laws and
regulations (collectively, "ENVIRONMENTAL LAWS") relating to protection
of human health or the environment or imposing liability or standards
of conduct concerning any Hazardous Material (as defined below), except
for such instances of noncompliance that, either singly or in the
aggregate, would not have a Material Adverse Effect. The term
"HAZARDOUS MATERIAL" means (i) any "hazardous substance" as defined by
the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, (ii) any "hazardous waste" as defined by the
Resource Conservation and Recovery Act, as amended, (iii) any petroleum
or petroleum product, (iv) any polychlorinated biphenyl and (v) any
pollutant or contaminant or hazardous, dangerous or toxic chemical,
material, waste or substance regulated under or within the meaning of
any other Environmental Law. To the knowledge of the Company, there is
no alleged or potential liability (including, without limitation,
alleged or potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property
damages, personal injuries, or penalties) of the Company or any of its
subsidiaries arising out of, based on, or resulting from (A) the
16
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presence or release into the environment of any Hazardous Material at
any location currently or previously owned by the Company or any of its
subsidiaries or at any location currently or previously used or leased
by the Company or any of its subsidiaries, or (B) any violation or
alleged violation of any Environmental Law, except, in each case,
alleged or potential liabilities that, singly or in the aggregate,
would not have a Material Adverse Effect.
(ae) All income tax returns required to be filed by the
Company or any of its subsidiaries in any jurisdiction have been filed,
and all taxes (including, but not limited to, withholding taxes,
penalties and interest, assessments, fees and other charges due or
claimed to be due from any taxing authority) shown to be due on such
returns have been paid other than those (i) being contested in good
faith and for which adequate reserves have been provided, or (ii)
currently payable without penalty or interest.
(af) Except as, singly or in the aggregate, would not have a
Material Adverse Effect, (i) the Company and its subsidiaries, have (A)
such permits, licenses, franchises and authorizations of governmental
or regulatory authorities (federal, foreign, state or local)
("PERMITS") as are necessary to own, lease and operate their properties
and to conduct their businesses as presently conducted, and (B)
fulfilled and performed all of their material obligations with respect
to the Permits, and (ii) no event has occurred that would allow, or
after notice or lapse of time would allow, revocation or termination of
any Permit or that would result in any other material impairment of the
rights granted to the Company or any of its subsidiaries under any
Permit, and the Company has no reason to believe that any governmental
body or agency
17
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is considering limiting, suspending or revoking any Permit.
(ag) The Company and its subsidiaries maintain adequate
insurance for their businesses and the value of their properties and
all such insurance is outstanding and in force as of the date hereof.
(ah) The Company and its subsidiaries maintain a system of
internal accounting controls sufficient to provide assurance that: (i)
transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for
assets; and (iii) the recorded accountability for assets is compared
with the existing assets at reasonable intervals and appropriate action
is taken with respect thereto.
(ai) When the Units are issued and delivered pursuant to this
Agreement, the Units, Notes and Warrants will not be of the same class
(within the meaning of Rule 144A under the Securities Act) as
securities of the Company that are listed on a national securities
exchange registered under Section 6 of the Exchange Act or that are
quoted in a United States automated inter-dealer quotation system.
(aj) Assuming (i) that the representations and warranties of
the Initial Purchasers in Sections 3 and 6 hereof are true, and (ii)
compliance by the Initial Purchaser with their covenants set forth in
Sections 3 and 6 hereof, the purchase and resale of the Units pursuant
hereto is exempt from the registration requirements of the Securities
Act.
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<PAGE>
(ak) The execution and delivery of this Agreement, the
Registration Rights Agreement, the Indenture, the Pledge Agreement and
the Warrant Agreement and the sale of the Units to be purchased by the
Eligible Purchasers will not involve any prohibited transaction within
the meaning of Section 406 of ERISA or Section 4975 of the Code. The
representation made in the preceding sentence is made in reliance upon
and subject to the accuracy of, and compliance with, the
representations and covenants made or deemed made by the Eligible
Purchasers as set forth in the Offering Documents under the section
entitled "Notice to Investors."
(al) The Company understands that the Initial Purchasers and,
for purposes of the opinions to be delivered to the Initial Purchasers
pursuant hereto, counsel to the Company and counsel to the Initial
Purchasers will rely upon the accuracy and truth of the foregoing
representations and the Company hereby consents to such reliance.
2. Purchase of the Units by the Initial Purchasers. (a) On the
basis of the representations and warranties herein contained, and subject to the
terms and conditions hereinafter set forth, the Company agrees to sell to the
Initial Purchasers and the Initial Purchasers agree, severally and not jointly,
to purchase from the Company, the respective number of Units set forth in
Schedule I hereto opposite their names at a purchase price of $970 per Unit.
(b) The Company shall not be obligated to deliver any of the
Units, except upon payment for all of the Units to be purchased as hereinafter
provided.
19
<PAGE>
3. Sale and Resale of the Units by the Initial Purchasers. (a)
You have advised the Company that you propose to offer the Units for resale upon
the terms and conditions set forth in this Agreement and in the Memorandum. You
hereby represent and warrant to, and agree with, the Company that you (i) are
purchasing the Units pursuant to a private sale exempt from registration under
the Securities Act, (ii) will not solicit offers for, or offer or sell, the
Units by means of any form of general solicitation or general advertising (as
such terms are used in Regulation D under the Securities Act) or in any manner
involving a public offering within the meaning of Section 4(2) of the Securities
Act and (iii) will solicit offers for the Units only from, and will offer, sell
or deliver the Units, as part of their initial offering, only to (A) in the case
of offers inside the United States, persons whom you reasonably believe to be
qualified institutional buyers ("Qualified Institutional Buyers") as defined in
Rule 144A under the Securities Act, as such rule may be amended from time to
time ("Rule 144A") or, if any such person is buying for one or more
institutional accounts for which such person is acting as fiduciary or agent,
only when such person has represented to you that each such account is a
Qualified Institutional Buyer, to whom notice has been given that such sale or
delivery is being made in reliance on Rule 144A, in each case, in transactions
under Rule 144A, and (B) in the case of offers outside the United States, to
persons other than U.S. persons (as defined in Regulation S) in accordance with
Rule 903 of Regulation S.
(b) In connection with the transactions described in
subsection (a)(iii)(B) of this Section 3, you have offered and sold the Units,
and will offer and sell the Units, (i) as part of your distribution at any time
and (ii) otherwise until the expiration of the applicable "distribution
compliance period" (as defined in Regulation S) (the "Restricted Period"), only
in accordance with Rule 903 of Regulation S and that you will not engage in
hedging
20
<PAGE>
transactions with respect to the equity securities comprising part of the Units
unless conducted in compliance with the Securities Act. Accordingly, the Initial
Purchasers represent and agree that, with respect to the transactions described
in subsection (a)(iii)(B) of this Section 3, neither they, nor any of their
Affiliates, nor any person acting on their behalf has engaged or will engage in
any directed selling efforts with respect to the Units, and that they have
complied and will comply with the offering restrictions of Regulation S. The
Initial Purchasers agree that, at or prior to the confirmation of sale of the
Units pursuant to subsection (a)(iii)(B) of this Section 3, they shall have sent
to each distributor, dealer or person receiving a selling concession, fee or
other remuneration that purchases Units, Notes or Warrants from the Initial
Purchasers during the Restricted Period, a confirmation or notice to
substantially the following effect:
The Securities covered hereby have not been registered under the U.S.
Securities Act of 1933 (the "Securities Act") and (A) may not be
offered or sold within the United States or to, or for the account or
benefit of U.S. Persons (i) as part of their distribution at any time
or (ii) otherwise until the expiration of the applicable "distribution
compliance period", except pursuant to an effective registration
statement under the Securities Act or pursuant to an available
exemption, including Regulation S or Rule 144A under the Securities
Act, and (B) hedging transactions with respect to the equity securities
constituting part of the Units may not be conducted during the
applicable distribution compliance period except in accordance with the
Securities Act. The terms used above have the meaning given to them by
Regulation S.
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<PAGE>
(c) (i) You have not offered or sold and will not offer or
sell any Units to persons in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers or Securities Regulations 1995 (the "Regulations"); (ii) you have
complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by you in relation to the Units
in, from or otherwise involving the United Kingdom; and (iii) you have only
issued or passed on and will only issue or pass on in the United Kingdom any
document received by you in connection with the issuance of the Units to a
person who is of a kind described in Section 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom
such document may otherwise lawfully be issued or passed on.
(d) The Initial Purchasers understand that the Company, and
for purposes of the opinions to be delivered to the Initial Purchasers pursuant
hereto, counsel to the Company and counsel to the Initial Purchasers will rely
upon the accuracy and truth of the foregoing representations and the Initial
Purchasers hereby consent to such reliance.
4. Delivery of and Payment for the Units. (a) Payment of the
purchase price for, and delivery of, the Units shall be made at the offices of
Weil, Gotshal & Manges LLP, New York, New York or at such other place as shall
be agreed upon by the Company and you, at 9:30 a.m. (New York time), on May 21,
1998 or at such other time or date as you and the Company shall determine (such
date and time of payment and delivery being herein called the "Closing Date").
22
<PAGE>
(b) On the Closing Date, payment for the Units shall be made
in immediately available funds by wire transfer to such account as the Company
shall specify prior to the Closing Date or by such means as the parties hereto
shall agree prior to the Closing Date against delivery to you of the
certificates evidencing the Notes and Warrants that collectively comprise the
Units. Upon delivery, the Notes and Warrants shall be in definitive form and
registered in such names and in such denominations as you shall request in
writing not less than two full Business Days prior to the Closing Date. The
certificates evidencing the Notes and Warrants shall be delivered to you on the
Closing Date for the respective accounts of the Initial Purchasers, with any
transfer taxes payable in connection with the transfer of the Units to the
Initial Purchasers duly paid, against payment of the purchase price therefor.
For the purpose of expediting the checking and packaging of certificates
evidencing the Units, the Company agrees to make such certificates available for
inspection not later than 2:00 P.M. on the Business Day prior to the Closing
Date.
5. Further Agreements of the Company. The Company further
agrees:
(a) To furnish to you, without charge, during the period
referred to in paragraph (c) below, as many copies of the Memorandum
and any supplements and amendments thereto as you may reasonably
request.
(b) Prior to making any amendment or supplement to the
Memorandum, the Company shall furnish a copy thereof to the Initial
Purchasers and counsel to the Initial Purchasers and will not effect
any such amendment or supplement to which the Initial Purchasers shall
reasonably object by notice to the Company after a reasonable period of
review, which shall not in any
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<PAGE>
case be longer than three Business Days after receipt of such copy.
(c) If, at any time prior to completion of the distribution of
the Units by you to purchasers, any event shall occur or condition
exist as a result of which it is necessary, in the opinion of counsel
for you or counsel for the Company, to amend or supplement the
Memorandum in order that the Memorandum will not include an untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements therein not misleading in light of the
circumstances existing at the time it is delivered to a purchaser, or
if it is necessary to amend or supplement the Memorandum to comply with
applicable law, to promptly prepare such amendment or supplement as may
be necessary to correct such untrue statement or omission or so that
the Memorandum, as so amended or supplemented, will comply with
applicable law and to furnish you such number of copies as you may
reasonably request.
(d) So long as the Units, Notes or Warrants are outstanding
and are "restricted securities" within the meaning of Rule 144(a)(3)
under the Securities Act during any period in which it is not subject
to and in compliance with Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), to furnish to
holders of the Units, Notes and Warrants and prospective purchasers of
the Units, Notes and Warrants designated by such holders, upon request
of such holders or such prospective purchasers, the information
required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
(e) For a period of five years following the date of the
Memorandum to furnish to the Initial Purchasers copies of all public
reports and all reports and
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<PAGE>
financial statements furnished by the Company to the principal national
securities exchange upon which securities of the Company may be listed
pursuant to requirements of or agreements with such exchange or to the
Commission pursuant to the Exchange Act or any rule or regulation of
the Commission thereunder.
(f) Promptly from time to time to take such action as the
Initial Purchasers may reasonably request to qualify the Units, Notes
and Warrants for offering and sale under the securities laws of such
jurisdictions as the Initial Purchasers may request and to comply with
such laws so as to permit the continuance of sales and dealings therein
in such jurisdictions for as long as may be necessary to complete the
distribution of the Units, Notes and Warrants; provided, however, that
in no event shall the Company be obligated to qualify to do business in
any jurisdiction where it is not now so qualified or to take any action
which would subject it to service of process in suits, other than those
arising out of the offering or sale of the Units, Notes and Warrants,
in any jurisdiction where it is not now so subject. In each
jurisdiction in which the Units, Notes and Warrants have been so
qualified, the Company will file such statements and reports as may be
required by the laws of such jurisdiction to continue such
qualification in effect for a period of not less than one year from the
effective date of the Registration Statement. The Company will also
supply the Initial Purchasers with such information as is necessary for
the determination of the legality of the Units, Notes and Warrants for
investment under the laws of such jurisdictions as the Initial
Purchasers may reasonably request.
(g) Not to offer, sell, contract to sell or otherwise dispose
of any additional securities of the
25
<PAGE>
Company substantially similar to the Units, Notes and Warrants (but not
including the Exchange Notes (as defined in the Registration Rights
Agreement)) or any securities convertible into or exchangeable for or
that represent the right to receive any such similar securities, other
than either the Units, Notes and Warrants to be sold hereunder or
securities issued upon conversion, exchange or exercise of securities
outstanding on the date of this Agreement, without the consent (which
consent shall not be unreasonably withheld) of the Initial Purchasers
during the period beginning from the date of this Agreement and
continuing for 180 days following the Closing Date.
(h) To use its best efforts to permit the Units, Notes and
Warrants to be designated Private Offerings, Resales and Trading
through Automated Linkages Market ("PORTAL") securities in accordance
with the rules and regulations adopted by the National Association of
Securities Dealers, Inc. relating to trading in the PORTAL Market and
to permit the Units, Notes and Warrants to be eligible for clearance
and settlement through The Depository Trust Company ("DTC").
(i) Except following the effectiveness of the Registration
Statement (as defined in the Registration Rights Agreement) and the
Warrant Registration Statement (as defined in the Warrant Agreement),
not to, and will cause its respective Affiliates not to, solicit any
offer to buy or offer to sell the Units, Notes and Warrants by means of
any form of general solicitation or general advertising (as those terms
are used in Regulation D under the Securities Act) or in any manner
involving a public offering within the meaning of Section 4(2) of the
Securities Act.
(j) Not to, and will cause its respective Affiliates not to,
sell, offer for sale or solicit
26
<PAGE>
offers to buy or otherwise negotiate in respect of any security (as
defined in the Securities Act) in a transaction that could be
integrated with the sale of the Units, Notes and Warrants in a manner
that would require the registration under the Securities Act of the
Units, Notes and Warrants.
(k) To use reasonable best efforts to ensure that none of the
Company or any subsidiary of the Company shall become an "investment
company" within the meaning of such term under the Investment Company
Act.
(l) None of the Company, the Affiliates of the Company or any
person acting on its or their behalf (other than the Initial Purchasers
in connection with this Agreement) will engage in any directed selling
efforts (as that term is defined in Regulation S) with respect to the
Units, Notes and Warrants, and each of the Company and the Affiliates
of the Company and each person acting on its or their behalf (other
than the Initial Purchasers in connection with this Agreement) will
comply with the offering restrictions of Regulation S.
(m) The Company shall use its reasonable best efforts to cause
the Warrant Shares to be admitted for quotation in the Nasdaq Stock
Market.
6. Offering of Securities; Restrictions on Transfer. (a) Each
Initial Purchaser, severally and not jointly, represents and warrants that such
Initial Purchaser is a Qualified Institutional Buyer. Each Initial Purchaser,
severally and not jointly, agrees with the Company that (i) it will not solicit
offers for, or offer to sell, the Units, Notes and Warrants by any form of
general solicitation or general advertising (as those terms are used in
Regulation D under the Securities Act) or in any manner involving a
27
<PAGE>
public offering within the meaning of Section 4(2) of the Securities Act and
(ii) it will solicit offers for such Units, Notes and Warrants only from, and
will offer such Units, Notes and Warrants only to, persons that it reasonably
believes to be, in the case of offers inside the United States, Qualified
Institutional Buyers and (B) in the case of offers outside the United States,
persons other than U.S. persons ("foreign purchasers," which term shall include
dealers or other professional fiduciaries in the United States acting on a
discretionary basis for foreign beneficial owners (other than an estate or
trust)) that, in each case, in purchasing such Units, Notes and Warrants are
deemed to have represented and agreed as provided in the Memorandum in the
section entitled "Notice to Investors."
(b) Each Initial Purchaser, severally and not jointly,
represents, warrants and agrees with respect to offers and sales outside the
United States that:
(i) it understands that no action has been or will be
taken in any jurisdiction by the Company that would permit a public
offering of the Units, Notes and Warrants, or possession or
distribution of either the Preliminary Memorandum or the Memorandum or
any other offering or publicity material relating to the Units, Notes
and Warrants, in any country or jurisdiction where action for that
purpose is required;
(ii) such Initial Purchaser will comply with all applicable
laws and regulations in each jurisdiction in which it acquires, offers,
sells or delivers Units, Notes and Warrants or has in its possession or
distributes either the Preliminary Memorandum or the Memorandum or any
such other material, in all cases at its own expense;
(iii) the Units, Notes and Warrants have not been and will
not be registered under the Securities Act and
28
<PAGE>
may not be offered or sold within the United States or to, or for the
account or benefit of, U.S. persons except in accordance with
Regulation S under the Securities Act or pursuant to an exemption from
the registration requirements of the Securities Act or pursuant to an
effective registration statement under the Securities Act;
(iv) such Initial Purchaser has offered the Units, Notes
and Warrants and will offer and sell the Units, Notes and Warrants (A)
as part of their distribution at any time and (B) otherwise until the
expiration of the applicable "distribution compliance period" (as
defined in Regulation S), only in accordance with Rule 903 of
Regulation S or another exemption from the registration requirements of
the Securities Act or pursuant to an effective registration statement
under the Securities Act. Accordingly, neither such Initial Purchaser,
its Affiliates nor any persons acting on its or their behalf has
engaged or will engage in any directed selling efforts (within the
meaning of Regulation S) with respect to the Units, Notes and Warrants,
and any such Initial Purchaser, its Affiliates and any such persons has
complied and will comply with the requirements of Regulation S,
including the requirement that it will not conduct hedging transactions
with respect to the equity securities constituting part of the Units
during the applicable distribution compliance period except in
compliance with the Securities Act; and
(v) such Initial Purchaser has (A) not offered or sold and
will not offer or sell any Units, Notes and Warrants to persons in the
United Kingdom except to persons whose ordinary activities involve them
in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise
in circumstances which
29
<PAGE>
have not resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Regulations; (B) complied and
will comply with all applicable provisions of the Financial Services
Act 1986 with respect to anything done by it in relation to the Units,
Notes and Warrants in, from or otherwise involving the United Kingdom;
and (C) only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the
issuance of the Units, Notes and Warrants to a person who is of a kind
described in Section 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 or is a person to
whom such document may otherwise lawfully be issued or passed on.
Terms used in this Section 6 have the meanings given to them by Regulation S.
7. Expenses. The Company agrees to pay all expenses incident
to the performance of its obligations under this Agreement, including: (i) the
costs incident to the authorization, issuance, sale and delivery of the Units,
Notes and Warrants and any taxes payable in that connection; (ii) the costs
incident to the preparation of the Offering Documents and any amendments or
supplements thereto; (iii) the fees and disbursements of the Company's counsel
and accountants and the Trustee and Warrant Agent and their counsel; (iv) the
qualification of the Units, Notes and Warrants under securities or Blue Sky
laws, including filing fees and the reasonable fees and disbursements of counsel
for the Initial Purchasers in connection therewith and in connection with the
preparation of any Blue Sky or legal investment memoranda; (v) the printing and
delivery to the Initial Purchasers in quantities as hereinabove stated of copies
of the Memorandum and any amendments or supplements thereto; (vi) the fees and
expenses, if any, incurred in connection with the admission of the Units, Notes
and
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Warrants for trading in PORTAL or any other appropriate market system; (vii) the
costs and expenses of the Company relating to investor presentations on any
"road show" undertaken in connection with the marketing of the Units, Notes and
Warrants; and (viii) all other costs and expenses incident to the performance of
the obligations of the Company hereunder.
8. Conditions to the Initial Purchasers' Obligations. The
obligations of the Initial Purchasers hereunder are subject to the accuracy,
when made and on the Closing Date, of the representations and warranties of the
Company contained herein, to the performance by the Company of its respective
obligations hereunder, and to each of the following additional terms and
conditions:
(a) The Initial Purchasers shall not have discovered and
disclosed to the Company on or prior to the Closing Date that the
Memorandum or any amendment or supplement thereto contains any untrue
statement of a fact which, in the opinion of Weil, Gotshal & Manges
LLP, counsel for the Initial Purchasers, is material or omits to state
any fact which, in the opinion of such counsel, is material and is
required to be stated therein or is necessary to make the statements
therein not misleading.
(b) All corporate proceedings and other legal matters incident
to the authorization, form and validity of this Agreement, the
Registration Rights Agreement, the Pledge Agreement, the Indenture, the
Notes, the Warrant Agreement, the Warrants, the Memorandum and all
other legal matters relating to this Agreement and the transactions
contemplated hereby shall be satisfactory in all respects to counsel
for the Initial Purchasers, and the Company shall have furnished to
such counsel all documents and information
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<PAGE>
that they may reasonably request to enable them to pass upon such
matters.
(c) Schnader, Harrison Segal & Lewis LLP shall have furnished
to the Initial Purchasers its written opinion, as counsel to the
Company, addressed to the Initial Purchasers and dated the Closing
Date, in form and substance reasonably satisfactory to the Initial
Purchasers, to the effect set forth in Exhibit B hereto and to such
further effect as counsel to the Initial Purchasers may reasonably
request.
(d) Kelley, Drye & Warren LLP shall have furnished to the
Initial Purchasers its written opinion, as regulatory counsel to the
Company, addressed to the Initial Purchasers and dated the Closing
Date, to the effect set forth in Exhibit C hereto and to such further
effect as counsel to the Initial Purchasers may reasonably request.
(e) You shall have received on the date hereof and the Closing
Date a letter, dated the date hereof and the Closing Date, as the case
may be, in form and substance reasonably satisfactory to you, from
Arthur Andersen LLP, independent public accountants, containing
statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information, including the
financial information contained or incorporated by reference in the
Memorandum as identified by you.
(f) The Company shall have furnished to the Initial Purchasers
a certificate, dated the Closing Date, of the President or a Vice
President of the Company and the Treasurer or Chief Financial Officer
stating that:
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(i) The representations, warranties and agreements
of the Company in Section 1 hereof are true and correct
as of the Closing Date and the Company has complied
with all its agreements contained herein;
(ii) (A) None of the Company or any of the
subsidiaries of the Company has sustained, since the
date of the latest quarterly financial statements
included in the Memorandum, any material loss or
interference with its business from fire, explosion,
flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or
governmental action, order or decree; or (B) since such
date there has not been any change in the capital stock
or long-term debt of the Company or any of the
subsidiaries of the Company, except as set forth in the
Memorandum; or (C) any Material Adverse Effect, or any
development or circumstance which could reasonably be
expected to result in a Material Adverse Effect; and
(iii) They have carefully examined the Offering
Documents and, in their opinion (A) none of the
Offering Documents, as of its date and as of the
Closing Date, included or includes any untrue statement
of a material fact or omitted or omits to state any
material fact necessary to make the statements therein,
in the light of the circumstances under which they were
made, not misleading, and (B) since the date of the
Memorandum, no event has occurred which was required
under the Securities Act to have been set forth in a
supplement or amendment to the Memorandum.
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<PAGE>
(g) (i) None of the Company or any of the subsidiaries of the
Company shall have sustained, since the date of the latest audited
financial statements included in the Memorandum, any loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree or (ii) since
such date there shall not have been any change in the capital stock or
long-term debt of the Company or any of the subsidiaries of the Company
or any change, or any development involving a prospective change, in or
affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and the
subsidiaries of the Company taken as a whole, otherwise than as set
forth or contemplated in the Memorandum, the effect of which, in any
such case described in clause (i) or (ii), is, in the judgment of the
Initial Purchasers, so material and adverse as to make it impracticable
or inadvisable to proceed with the offering or the delivery of the
Units, Notes and Warrants on the terms and in the manner contemplated
in the Memorandum.
(h) The Initial Purchasers shall have received on the Closing
Date the Registration Rights Agreement executed by the Company.
(i) Each of the Company and the Trustee shall have executed
and delivered the Notes, the Indenture and the Pledge Agreement on or
prior to the Closing Date.
(j) Each of the Company and the Warrant Agent shall have
executed and delivered the Warrants and the Warrant Agreement on or
prior to the Closing Date.
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(k) The Initial Purchasers shall have received from Weil,
Gotshal & Manges LLP, counsel to the Initial Purchasers, such opinion
or opinions, dated the Closing Date, with respect to such matters as
the Initial Purchasers may reasonably require, and the Company shall
have furnished to such counsel such documents and information as they
may reasonably request for the purpose of enabling them to pass upon
such matters.
All opinions, letters, evidence and certificates mentioned
above or elsewhere in this Agreement shall be deemed to be in compliance with
the provisions hereof only if they are in form and substance reasonably
satisfactory to counsel for the Initial Purchasers.
9. Indemnification and Contribution. (a) The Company shall
indemnify and hold harmless each Initial Purchaser, its officers,
directors and agents and each person, if any, who controls any Initial
Purchaser within the meaning of Section 15 of the Securities Act, from
and against any loss, claim, damage or liability, joint or several, or
any action in respect thereof (including, but not limited to, any loss,
claim, damage, liability or action relating to purchases and sales of
Units, Notes and Warrants), to which such Initial Purchaser, officer,
director or controlling person may become subject, under the Securities
Act or otherwise, insofar as such loss, claim, damage, liability or
action arises out of, or is based upon, (i) any untrue statement or
alleged untrue statement of a material fact contained in (A) the
Preliminary Memorandum, the Memorandum or in any amendment or
supplement thereto or (B) any blue sky application or other document
prepared or executed by the Company (or based upon any written
information furnished by the Company) specifically for the purpose of
qualifying any or all of the Units, Notes and Warrants under the
securities laws of any state or other jurisdiction (any such
application, document or information being hereinafter called a "Blue
Sky Application"), (ii) the
35
<PAGE>
omission or alleged omission to state in the Preliminary Memorandum, the
Memorandum or in any amendment or supplement thereto, or in any Blue Sky
Application any material fact required to be stated therein or necessary to make
the statements therein not misleading or (iii) any act or failure to act, or any
alleged act or failure to act, by any Initial Purchaser in connection with, or
relating in any manner to, the Units, Notes and Warrants or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon matters
covered by clause (i) or (ii) above (provided that the Company shall not be
liable in the case of any matter covered by this clause (iii) to the extent that
it is determined in a final judgment by a court of competent jurisdiction that
such loss, claim, damage, liability or action resulted solely from any such act
or failure to act undertaken or omitted to be taken by such Initial Purchaser
through its gross negligence or wilful misconduct), and shall reimburse each
Initial Purchaser and each such officer, director or controlling person promptly
upon demand for any legal or other expenses reasonably incurred by that Initial
Purchaser, officer, director or controlling person in connection with
investigating or defending or preparing to defend against any such loss, claim,
damage, liability or action as such expenses are incurred upon written
submission to the Company of documentation evidencing such incurrence; provided,
however, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage, liability or action arises out of, or is
based upon, any untrue statement or alleged untrue statement or omission or
alleged omission made in the Preliminary Memorandum, the Memorandum or in any
such amendment or supplement, or in any Blue Sky Application in reliance upon
and in conformity with the written information concerning such Initial Purchaser
furnished to the Company by or on behalf of any Initial Purchaser specifically
for inclusion therein; provided, further, that the Company shall not be liable
to any Initial
36
<PAGE>
Purchaser under the indemnity agreement in this paragraph (a) with respect to
the Preliminary Memorandum to the extent that any such loss, claim, damage or
liability of such Initial Purchaser results from the fact that such Initial
Purchaser sold Units, Notes and Warrants to a person as to whom it is
established that there was not sent or given, at or prior to the written
confirmation of such sale, a copy of the Memorandum, or of the Memorandum as
then amended or supplemented, in any case where such delivery is required by the
Act if the Company has previously furnished copies thereof in sufficient
quantity to such Initial Purchaser and the loss, claim, damage or liability of
such Initial Purchaser results from an untrue statement or omission of a
material fact contained in the Preliminary Offering Memorandum which was
identified at such time to such Initial Purchaser and corrected in the
Memorandum or in the Memorandum as then amended or supplemented. The foregoing
indemnity agreement is in addition to any liability which the Company may
otherwise have to any Initial Purchaser or to any officer, director or
controlling person of that Initial Purchaser.
(b) Each Initial Purchaser, severally and not jointly, shall
indemnify and hold harmless the Company, its directors and officers, and each
person, if any, who controls the Company within the meaning of Section 15 of the
Securities Act, from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof, to which the Company or any such
director, officer or controlling person may become subject, under the Securities
Act or otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained in (A) the Preliminary Memorandum, the
Memorandum or in any amendment or supplement thereto or (B) any Blue Sky
Application or (ii) the omission or alleged omission to state in the Preliminary
Memorandum, the Memorandum or in any amendment or supplement thereto, or in
37
<PAGE>
any Blue Sky Application any material fact required to be stated therein or
necessary to make the statements therein not misleading, but in the case of
clauses (i) and (ii) only to the extent that the untrue statement or alleged
untrue statement or omission or alleged omission was made in reliance upon and
in conformity with the written information concerning such Initial Purchaser
furnished to the Company or the Trustee by or on behalf of that Initial
Purchaser specifically for inclusion therein, and shall reimburse the Company
and any such director, officer or controlling person promptly on demand for any
legal or other expenses reasonably incurred by the Company or any such director,
officer or controlling person in connection with investigating or defending or
preparing to defend against any such loss, claim, damage, liability or action as
such expenses are incurred. The foregoing indemnity agreement is in addition to
any liability which any Initial Purchaser may otherwise have to the Company or
any such director, officer or controlling person.
(c) Promptly after receipt by an indemnified party under this
Section 9 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 9, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 9 except to the extent the
indemnifying party has been materially prejudiced by such failure and provided
further that the failure to notify the indemnifying party shall not relieve it
from any liability which it may have to an indemnified party otherwise than
under Section 9(a) or (b) hereof. If any such claim or action shall be brought
against an indemnified party, and it shall notify the indemnifying party
thereof, the indemnifying party shall be entitled to participate therein and, to
the extent that it
38
<PAGE>
wishes, jointly with any other similarly notified indemnifying party, to assume
the defense thereof with counsel reasonably satisfactory to the indemnified
party. After notice from the indemnifying party to the indemnified party of its
election to assume the defense of such claim or action, the indemnifying party
shall not be liable to the indemnified party under this Section 9 for any legal
or other expenses subsequently incurred by the indemnified party in connection
with the defense thereof other than reasonable costs of investigation; provided,
however, that the indemnified party shall have the right to employ separate
counsel to represent jointly the indemnified party and its respective directors,
officers and controlling persons who may be subject to liability arising out of
any claim in respect of which indemnity may be sought by the indemnified party
against the indemnifying party under this Section 9 if such indemnified party
shall have been advised in writing that the representation of such indemnified
party and those directors, officers, and controlling persons by the same counsel
would be inappropriate under applicable standards of professional conduct due to
actual differing interests between them, and in that event the fees and expenses
of such separate counsel shall be paid by the indemnifying party. It is
understood that the indemnifying party shall not be liable for the fees and
expenses of more than one separate firm (in addition to local counsel in each
jurisdiction) for all indemnified parties in connection with any proceeding or
related proceedings. Each indemnified party, as a condition of the indemnity
agreements contained in Sections 9(a) and 9(b), shall use its best efforts to
cooperate with the indemnifying party in the defense of any such action or
claim. No indemnifying party shall (i) without the prior written consent of the
indemnified parties (which consent shall not be unreasonably withheld), settle
or compromise or consent to the entry of any judgment with respect to any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
39
<PAGE>
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action,
suit or proceeding, or (ii) be liable for any settlement of any such action
effected without its written consent (which consent shall not be unreasonably
withheld), but if settled with its written consent or if there be a final
judgment in favor of the plaintiff in any such action, the indemnifying party
agrees to indemnify and hold harmless any indemnified party from and against any
loss of liability by reason of such settlement or judgment in accordance with
this Section 9.
(d) If the indemnification provided for in this Section 9
shall for any reason be unavailable to or insufficient to hold harmless an
indemnified party under Section 9(a) or 9(b) in respect of any loss, claim,
damage or liability, or any action in respect thereof, referred to therein, then
each indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company, on the one hand, and the Initial Purchasers, on the
other hand, from the offering of the Units 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 the Company, on the one hand, and the
Initial Purchasers, on the other hand, with respect to the statements or
omissions which resulted in such loss, claim, damage or liability, or action in
respect thereof, as well as any other relevant equitable considerations. The
relative benefits received by the Company, on the one hand, and the Initial
Purchasers, on the other hand, with respect to such offering shall be deemed to
40
<PAGE>
be in the same proportion as the total net proceeds from the offering of the
Units purchased under this Agreement (before deducting expenses) received by the
Company, on the one hand, and the total underwriting commissions and discounts
received by the Initial Purchasers with respect to the Units purchased under
this Agreement, on the other hand, bear to the total gross proceeds from the
offering of the Units under this Agreement, in each case as set forth in the
table on the cover page of the Memorandum. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company, on the one hand,
or the Initial Purchasers, on the other hand, the intent of the parties and
their relative knowledge, access to information and opportunity to correct or
prevent such statement or omission. Each of the Company and the Initial
Purchasers agrees that it would not be just and equitable if contribution
pursuant to this Section 9(d) were to be determined by pro rata allocation (even
if either the Initial Purchasers or the Company, as the case may be, were
treated as one entity for such purpose) or by any other method of allocation
which does not take into account the equitable considerations referred to
herein. The amount paid or payable by an indemnified party as a result of the
loss, claim, damage or liability, or action in respect thereof, referred to
above in this Section 9(d) shall be deemed to include, subject to limitations
set forth above, 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 Section 9(d), no Initial
Purchaser shall be required to indemnify or contribute any amount in excess of
the amount by which the proceeds received by the Initial Purchasers from an
offering of the Units exceeds the amount of any damages which such Initial
Purchaser has otherwise paid or become liable to pay by reason of any untrue or
alleged untrue statement or omission or alleged omission.
41
<PAGE>
No person guilty of fraudulent misrepresentation (within the meaning of Section
11 (f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The remedies provided
for in this Section 9 are not exclusive and shall not limit any rights or
remedies which may otherwise be available to any indemnified party at law or in
equity. The Initial Purchasers' obligations to contribute as provided in this
Section 9(d) are several in proportion to their respective underwriting
obligations and not joint.
(e) Each of the Initial Purchasers confirms and the Company
acknowledges that (i) the last paragraph on the cover page, (ii) the
stabilization legend on page (iv) and (iii) the fifth paragraph, the sixth
paragraph, the seventh, the ninth and the first two sentences of the eleventh
paragraph under the caption "Plan of Distribution" constitute the only
information concerning the Initial Purchasers furnished in writing to the
Company by or on behalf of the Initial Purchasers specifically for inclusion in
the Memorandum.
10. Default by Any Initial Purchaser. If, on the Closing Date,
any Initial Purchaser or Initial Purchasers shall fail or refuse to
purchase Units which it or they have agreed to purchase hereunder on
such date and the aggregate number of Units with respect to which such
default occurs is more than one-tenth of the aggregate number of Units
to be purchased on such date and arrangements satisfactory to the
Initial Purchasers and the Company for the purchase of such Units are
not made within 36 hours after such default, this Agreement shall
terminate without liability on the part of any non-defaulting Initial
Purchaser or of the Company. In any such case, either you, on the one
hand, or the Company, on the other hand, shall have the right to
postpone the Closing Date, but in no event for longer than seven days,
in order that the required changes, if any, in the Memorandum or in any
other documents or arrangements that may be
42
<PAGE>
effected. If, on the Closing Date, any Initial Purchaser or Initial Purchasers
shall fail or refuse to purchase Units which it or they have agreed to purchase
hereunder on such date and the aggregate number of Units with respect to which
such default occurs is less than one-tenth of the aggregate number of Units to
be purchased on such date then the Company shall have the right to require each
non-defaulting Initial Purchaser to purchase the number of Units which such
Initial Purchaser agreed to purchase hereunder and, in addition, to require each
non-defaulting Initial Purchaser to purchase its pro rata share (based on the
total number of Units which such Initial Purchaser agreed to purchase hereunder)
of the Units of such defaulting Initial Purchaser or Initial Purchasers. The
term "Initial Purchaser," as used in this Agreement, shall include any person
substituted for a defaulting Initial Purchaser pursuant to this Section 10 with
like effect as if such person had originally been a party to this Agreement,
with respect to the Units. Any action taken under this paragraph shall not
relieve any defaulting Initial Purchaser from liability in respect of any
default of such Initial Purchaser under this Agreement.
11. Termination. The obligations of the Initial Purchasers
hereunder may be terminated by them by notice given to and received by the
Company prior to delivery of and payment for the Units if, prior to that time,
(i) trading in securities generally on the New York Stock Exchange or the
American Stock Exchange or in the over-the-counter market shall have been
suspended or minimum prices shall have been established on any such exchange or
such market by the Commission, by such exchange or by any other regulatory body
or governmental authority having jurisdiction, (ii) a banking moratorium shall
have been declared by federal or New York State authorities, (iii) the United
States shall have become engaged in hostilities, there shall have been an
escalation in hostilities involving the United States or there shall have been a
declaration of a national emergency or war by the United States or (iv)
43
<PAGE>
there shall have occurred such a material adverse change in general economic,
political or financial conditions (or the effect of international conditions on
the financial markets in the United States shall be such) as to make it, in the
judgment of the Initial Purchasers, impracticable or inadvisable to proceed with
the offering or delivery of the Units on the terms and in the manner
contemplated in the Memorandum.
12. Reimbursement of Initial Purchaser's Expenses. If the sale
of Units provided for herein is not consummated because (i) any condition to the
obligations of the Initial Purchasers set forth in Section 8 hereof is not
satisfied in any material respect or (ii) of any refusal, inability or failure
on the part of the Company to perform any agreement herein or comply with any
provision hereof in any material respect other than by reason of a default by
the Initial Purchasers, the Company shall reimburse the Initial Purchasers for
the reasonable fees and expenses of its counsel and for such other out-of-pocket
expenses as shall have been incurred by them in connection with this Agreement
and the proposed purchase of the Units, and upon demand the Company shall pay
the full amount thereof to the Initial Purchasers. Notwithstanding the
foregoing, if this Agreement shall be terminated pursuant to Section 10 hereof,
the Company shall not then be under any liability to any Initial Purchaser
except as provided in Sections 7 and 9 hereof.
13. Notices, Etc. All statements, requests, notices and
agreements hereunder shall be in writing, and:
(a) if to the Initial Purchasers, shall be
delivered or sent by mail or facsimile transmission to:
44
<PAGE>
Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Attention: Syndicate Department
(Fax: 212-528-6395); and
Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Attention: Registration Department
(Fax: 212-357-1557); and
ING Baring (U.S.) Securities, Inc.
230 Park Avenue
New York, New York 10169
Attention: Syndicate Department
(Fax: 212-808-2733); and
(b) if to the Company, shall be delivered or sent by mail or
facsimile transmission to the address of the Company set forth in the
Memorandum, Attention: Chief Financial Officer (Fax: 301-365-1744).
Any such statements, requests, notices or agreements shall take effect at the
time of receipt thereof.
14. Persons Entitled to Benefit of Agreement. This Agreement
shall inure to the benefit of and be binding upon the Initial Purchasers, the
Company, and their respective successors. The term "successor" shall not include
a purchaser, in its capacity as such, of the Units, Notes or Warrants from the
Initial Purchasers. This Agreement and the terms and provisions hereof are for
the sole benefit of only those persons, except that (x) the representations,
warranties, indemnities and agreements of the Company contained in this
Agreement shall also be deemed to be for the benefit of the officers and
directors of the
45
<PAGE>
Initial Purchasers and the person or persons, if any, who control the Initial
Purchasers within the meaning of Section 15 of the Securities Act and (y) the
representations, warranties, indemnities and agreements of the Initial
Purchasers contained in this Agreement shall be deemed to be for the benefit of
directors and officers of the Company and any person controlling the Company
within the meaning of Section 15 of the Securities Act. Nothing in this
Agreement is intended or shall be construed to give any person, other than the
persons referred to in this Section 14, any legal or equitable right, remedy or
claim under or in respect of this Agreement or any provision contained herein.
15. Survival. The respective indemnities, representations,
warranties and agreements of the Company, on the one hand, and the Initial
Purchasers, on the other hand, contained in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement, shall survive the
delivery of and payment for the Units and shall remain in full force and effect,
regardless of any investigation made by or on behalf of any of them or any
person controlling any of them.
16. Definition of the Term "Business Day." For purposes of
this Agreement, "Business Day" means any day on which the New York Stock
Exchange, Inc. is open for trading.
17. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
18. Counterparts. This Agreement may be executed in one or
more counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
46
<PAGE>
19. Headings. The headings herein are inserted for convenience
of reference only and are not intended to be part of, or to affect the meaning
or interpretation of, this Agreement.
47
<PAGE>
If the foregoing correctly sets forth the agreement between
the Company and the Initial Purchasers, please indicate your acceptance in the
space provided for that purpose below.
Very truly yours,
STARTEC GLOBAL COMMUNICATIONS
CORPORATION
By: ___________________________________
Name:
Title:
Accepted, May 18, 1998
LEHMAN BROTHERS INC.
Acting severally on behalf of itself
and the other Initial Purchasers
named in Schedule I hereto.
By: Lehman Brothers Inc.
By: ___________________________
Name:
Title:
48
<PAGE>
SCHEDULE I
Number of Units
Initial Purchaser To Be Purchased
----------------- ---------------
Lehman Brothers Inc............................ 96,000
Goldman, Sachs & Co............................ 48,000
ING Baring (U.S.) Securities, Inc. ............ 16,000
------
Total......... 160,000
=======
<PAGE>
EXHIBIT A
[INSERT COPY OF REGISTRATION RIGHTS AGREEMENT]
<PAGE>
EXHIBIT B
FORM OF OPINION OF COUNSEL
TO THE COMPANY
TO BE DELIVERED PURSUANT TO SECTION 8(c)
(i) The Company and each of the subsidiaries of the Company have been duly
formed and are validly existing as corporations, in good standing under the laws
of their respective jurisdictions of organization, are duly qualified to do
business and are in good standing as foreign corporations in each jurisdiction
in which their respective ownership or lease of property or the conduct of their
respective businesses requires such qualification and have all corporate power
and authority necessary to own or hold their respective properties and conduct
the businesses in which they are engaged as described in the Memorandum;
(ii) The Company has an authorized capitalization as set forth
in the Memorandum, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and
non-assessable and conform in all material respects to the description thereof
contained in the Memorandum; and all of the issued shares of capital stock of
each subsidiary of the Company have been duly and validly authorized and issued
and are fully paid, non-assessable and are owned directly or indirectly by the
Company, to such counsel's knowledge after due inquiry, free and clear of all
liens, encumbrances or claims;
(iii) To such counsel's knowledge after due inquiry, there are
no legal or governmental proceedings pending to which the Company or any of the
subsidiaries of
A-1
<PAGE>
the Company is a party or of which any property or assets of the Company or any
of the subsidiaries of the Company is the subject which could reasonably be
expected to have a Material Adverse Effect on the Company and the subsidiaries
of the Company, taken as a whole, or on the power or ability of the Company to
perform its obligations under the Purchase Agreement, the Indenture, the Notes,
the Pledge Agreement, the Warrant Agreement, the Warrants or the Registration
Rights Agreement or to consummate the transactions contemplated by the
Memorandum; and, to such counsel's knowledge after due inquiry, no such
proceedings are threatened or contemplated by governmental authorities or
threatened by others;
(iv) The Memorandum and any further amendments or supplements
thereto made by the Company prior to the Closing Date (other than the financial
statements, related schedules, notes and auditors' reports thereon and other
financial, accounting and statistical data and information contained therein or
omitted therefrom, as to which such counsel need express no opinion) comply as
to form in all material respects with the requirements of the Securities Act and
the Rules and Regulations;
(v) To such counsel's knowledge after due inquiry, there are
no contracts or other documents which are required to be described in the
Memorandum by the Securities Act or by the Rules and Regulations which have not
been described in the Memorandum;
(vi) To such counsel's knowledge after due inquiry, there are
no statutes or regulations (other than those related to telecommunications
regulations, as to which such counsel need express no opinion) that are required
to be described in the Offering Memorandum that are not described as required.
A-2
<PAGE>
(vii) The Indenture has been duly authorized and, when duly
executed and delivered by the proper officers of the Company (assuming due
execution and delivery by the Trustee) and delivered by the Company, will
constitute a valid and legally binding agreement of the Company enforceable
against the Company in accordance with its terms, except (i) where the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other similar laws now or hereafter in
effect relating to rights of creditors and other obligees generally, (ii) where
the remedy of specific performance and other forms of equitable relief may be
subject to certain equitable defenses and principles and to the discretion of
the court before which the proceedings may be brought and (iii) for the waiver
of rights and defenses contained in Sections 111 and 514 of the Indenture.
(viii) The Registration Rights Agreement has been duly
authorized by the Company, and when duly executed and delivered by the Company,
will constitute a valid and legally binding agreement of the Company enforceable
against the Company in accordance with its terms, except (i) where the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other similar laws now or hereafter in
effect relating to rights of creditors and other obligees generally, (ii) where
the remedy of specific performance and other forms of equitable relief may be
subject to certain equitable defenses and principles and to the discretion of
the court before which the proceedings may be brought and (iii) where rights to
indemnity and contribution thereunder may be limited by applicable law and
public policy.
(ix) The Pledge Agreement has been duly authorized by the
Company and, when duly executed and delivered by the Company, will constitute a
valid and legally binding agreement of the Company enforceable against the
Company in accordance with its terms, except (i) where
A-3
<PAGE>
the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other similar laws now or
hereafter in effect relating to rights of creditors and other obligees
generally, (ii) where the remedy of specific performance and other forms of
equitable relief may be subject to certain equitable defenses and principles and
to the discretion of the court before which the proceedings may be brought and
(iii) where rights to indemnity and contribution thereunder may be limited by
applicable law and public policy; and upon the Closing Date, the pledge of
Collateral (as defined in the Pledge Agreement) securing the payment of the
Obligations (as defined in the Pledge Agreement) for the benefit of the Trustee
and the holders of the Notes will constitute a first priority perfected security
interest in such Collateral, enforceable against all creditors of the Company
and any persons purporting to purchase any of the Collateral from the Company;
(x) The Notes have been duly authorized and, when executed,
authenticated and delivered to and paid for by the Initial Purchasers in
accordance with the terms of this Agreement, will be (x) valid and binding
obligations of the Company enforceable in accordance with their terms, except
(i) where the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other similar laws now or
hereafter in effect relating to rights of creditors and other obligees
generally, (ii) where the remedy of specific performance and other forms of
equitable relief may be subject to certain equitable defenses and principles and
to the discretion of the court before which the proceedings may be brought, and
(iii) for the waiver of rights and defenses contained in Sections 111 and 514 of
the Indenture and (y) entitled to the benefits of the Indenture and the
Registration Rights Agreement.
A-4
<PAGE>
(xi) The Exchange Notes have been duly authorized and, when
executed, authenticated and delivered to the holders of Notes who acquire such
Exchange Notes pursuant to the Exchange Offer contemplated by the Registration
Rights Agreement, will be (x) valid and binding obligations of the Company
enforceable in accordance with their terms, except (i) where the enforceability
thereof may be limited by bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar laws now or hereafter in effect relating
to rights of creditors and other obligees generally, (ii) where the remedy of
specific performance and other forms of equitable relief may be subject to
certain equitable defenses and principles and to the discretion of the court
before which the proceedings may be brought, and (iii) for the waiver of rights
and defenses contained in Sections 111 and 514 of the Indenture and (y) entitled
to the benefits of the Indenture.
(xii) The Warrant Agreement has been duly authorized and, when
duly executed and delivered by the proper officers of the Company (assuming due
execution and delivery by the Warrant Agent) and delivered by the Company, will
constitute a valid and legally binding agreement of the Company enforceable
against the Company in accordance with its terms, except (i) where the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other similar laws now or hereafter in
effect relating to rights of creditors and other obligees generally, (ii) where
the remedy of specific performance and other forms of equitable relief may be
subject to certain equitable defenses and principles and to the discretion of
the court before which the proceedings may be brought and (iii) where rights to
indemnity and contribution hereunder may be limited by applicable law and public
policy.
(xiii) The Warrants have been duly authorized and, when
executed, countersigned and delivered to and paid for
A-5
<PAGE>
by the Initial Purchasers in accordance with the terms of this Agreement, will
be (x) valid and binding obligations of the Company enforceable in accordance
with their terms, except (i) where the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or
other similar laws now or hereafter in effect relating to rights of creditors
and other obligees generally, and (ii) where the remedy of specific performance
and other forms of equitable relief may be subject to certain equitable defenses
and principles and to the discretion of the court before which the proceedings
may be brought and (y) entitled to the benefits of the Warrant Agreement. The
shares of Common Stock initially issuable upon exercise of the Warrants (the
"Warrant Shares") have been duly reserved for issuance by the Company and, upon
the exercise of the Warrants and receipt by the Company of the exercise payable
upon such exercise, the Warrant Shares will be duly authorized, validly issued,
fully paid and non-assessable and will not have been issued in violation of
preemptive or similar rights.
(xiv) The Purchase Agreement has been duly authorized,
executed and delivered by the Company and constitutes a valid and legally
binding agreement of the Company enforceable against the Company in accordance
with its terms, except (i) where the enforceability hereof may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or
other similar laws now or hereafter in effect relating to rights of creditors
and other obligees generally, (ii) where the remedy of specific performance and
other forms of equitable relief may be subject to certain equitable defenses and
principles and to the discretion of the court before which the proceedings may
be brought and (iii) where rights to indemnity and contribution hereunder may be
limited by applicable law and public policy;
A-6
<PAGE>
(xv) The issue and sale of the Units being delivered on the
Closing Date by the Company, the issue and sale of the Exchange Notes, the
compliance by the Company with all of the provisions of the Purchase Agreement,
the Registration Rights Agreement, the Pledge Agreement, the Warrant Agreement
and the Indenture and the consummation of the transactions contemplated hereby
and thereby, will not result in a material breach or violation of any of the
terms or provisions of, or constitute a default under, (i) any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument
identified on Schedule B hereto, which schedule includes all such material
agreements and instruments known to such counsel to which the Company or any of
the subsidiaries of the Company is a party or by which the Company or any of the
subsidiaries of the Company is bound or to which any of the property or assets
of the Company or any of the subsidiaries of the Company is subject (the
"Material Agreements"), which breach or default, as the case may be, is
reasonably likely to have a Material Adverse Effect, (ii) nor will such actions
result in any violation of the provisions of (A) the charter, by-laws, limited
liability company agreement, limited partnership agreement or operating
agreement of the Company or any of the subsidiaries of the Company or (B) to
counsel's knowledge, any statute or any order, rule or regulation known to such
counsel of any court or governmental agency or body of the United States, the
State of New York, the State of Maryland, or established pursuant to the
Delaware General Corporation Law having jurisdiction over the Company or any of
the subsidiaries of the Company or any of their properties or assets; except for
such consents, approvals, authorizations, registrations or qualifications as may
be required under the Exchange Act and applicable state securities laws in
connection with the purchase and distribution of the Units by the Initial
Purchasers, no consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body is required for
the execution, delivery and performance of the Purchase
A-7
<PAGE>
Agreement by the Company and the consummation by the Company of the transactions
contemplated thereby;
(xvi) To the knowledge of counsel after due inquiry, none of
the Company or any of the subsidiaries of the Company (i) is in violation of its
charter or by-laws (ii) is in default in any material respect, and no event has
occurred which, with notice or lapse of time or both, would constitute such a
default, in the due performance or observance of any time period, covenant or
condition contained in any Material Agreement, except where it would not
reasonably be expected to have a Material Adverse Effect, or (iii) is in
violation in any material respect of any law, ordinance, governmental rule,
regulation or court decree to which it or its properties or assets may be
subject or has failed to obtain any material license, permit, certificate,
franchise or other governmental authorization or permit necessary to the
ownership of its properties or assets or to the conduct of its business, except
where it would not reasonably be expected to have a Material Adverse Effect;
(xvii) Except as set forth in the Memorandum, to such
counsel's knowledge after due inquiry, there are no contracts, agreements or
understandings between the Company, on the one hand, and any person, on the
other hand, granting such person the right (other than rights which have been
waived or satisfied) to require the Company to file a registration statement
under the Securities Act with respect to any securities of the Company owned or
to be owned by such person or to require the Company to include such securities
with any securities being registered pursuant to any other registration
statement filed by the Company under the Securities Act;
(xviii) None of the Company or any of the subsidiaries of the
Company is required to register as an "investment company" or an entity
"controlled" by an
A-8
<PAGE>
investment company, as such terms are defined in the Investment Company Act of
1940, as amended;
(xix) The statements under the captions "Certain Relationships
and Related Transactions," "Description of Units," "Description of Notes,"
"Description of Warrants", "Exchange Offer and Registration Rights" and
"Description of Capital Stock" in the Memorandum, insofar as such statements
constitute a summary of legal matters, documents or proceedings referred to
therein, are correct in all material respects;
(xx) Such counsel is of the opinion that the statements in the
Memorandum under the caption "Certain United States Federal Income Tax
Considerations" are accurate in all material respects and fairly summarize the
matters referred to therein; and
(xxi) Based upon the representations, warranties, and
agreements of the Company in Sections 1(w), 1(x), 5(h), 5(i), 5(j) and 5(l) of
the Purchase Agreement and of the Initial Purchasers in Section 6 of the
Purchase Agreement, it is not necessary in connection with the offer, sale and
delivery of the Units to the Initial Purchasers under the Purchase Agreement or
in connection with the initial resale of such Units by the Initial Purchasers in
accordance with Section 6 of the Purchase Agreement to register the Units, Notes
and Warrants under the Securities Act of 1933, it being understood that no
opinion is expressed as to any subsequent resale of any security.
In rendering such opinion, such counsel may state that their
opinion is limited to matters governed by the federal laws of the United States
of America, the laws of the State of New York and the State of Maryland. Such
counsel shall also have furnished to the Initial Purchasers a written statement,
addressed to the Initial Purchasers and dated such Closing Date, in form and
substance reasonably
A-9
<PAGE>
satisfactory to the Initial Purchasers, to the effect that (x) in connection
with the preparation of the Memorandum, such counsel have participated in
conferences with certain officers and directors of the Company, the independent
public accountants of the Company and other representatives of the Company, at
which the contents of the Memorandum and related matters were discussed, and (y)
based on such participation, no facts have come to the attention of such counsel
which lead them to believe that the Memorandum (except for financial statements
and related notes and auditors' reports thereon, the financial statement
schedules and the other financial and accounting data and information included
therein or omitted therefrom, as to which such counsel need make no statement),
as of the date thereof contained, and as of the Closing Date contains, any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading, or that
the Memorandum (except for financial statements and related notes and auditors'
reports thereon, the financial statement schedules and the other financial and
accounting data and information included therein or omitted therefrom, as to
which such counsel need make no statement) contained as of the date thereof, or
as of the Closing Date contains, any untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The foregoing statement may be qualified by a
statement to the effect that such counsel does not assume any responsibility for
the accuracy, completeness or fairness of the statements contained in the
Memorandum (except to the extent provided in paragraphs (xix) and (xx) above).
A-10
<PAGE>
EXHIBIT C
FORM OF OPINION OF
REGULATORY COUNSEL TO THE COMPANY
TO BE DELIVERED PURSUANT TO SECTION 8(d)
The statements under the captions "Government Regulations" in
the Offering Documents, insofar as such statements constitute a summary of legal
matters, documents or proceedings referred to therein are correct in all
material respects.
Such counsel shall have furnished to the Initial Purchases a
written statement, addressed to the Initial Purchasers and dated such Closing
Date, in form and substance satisfactory to the Initial Purchasers, to the
effect that (x) in connection with the preparation of the Offering Documents,
such counsel have participated in conferences with certain officers, directors
and other representatives of the Company, at which the contents of the Offering
Documents and related matters were discussed, and (y) based on such
participation, no facts have come to the attention of such counsel which lead
them to believe that the Offering Documents (except for financial statements and
related notes and auditors' reports thereon and other financial and accounting
data and information included therein or omitted therefrom as to which such
counsel need make no statement), contained as of the date thereof, or as of the
Closing Date contains, any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading, or that the Offering Documents (except for financial
statements and schedules included therein or omitted therefrom, as to which such
counsel need make no statement) contains any untrue statement of a material fact
or omits to state a material
<PAGE>
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The foregoing statement may be qualified by statement to the effect
that such counsel does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Offering Documents
except for the statements made in the Offering Documents under the caption
"Government Regulation."
EXHIBIT 12.1
RATIOS OF EARNINGS TO FIXED CHARGES
The Company's consolidated ratios of earnings to fixed charges for each of
the periods indicated are set forth below:
STARTEC GLOBAL COMMUNICATIONS
CORPORATION AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1997 1998
------------ ---------- ------------ ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income tax
provision ...................... $ (1,668) $ (979) $ (1,206) $ (2,830) $ 1,648 $ 358 $ (1,728)
Fixed charges(1) ................ 71 70 116 358 779 261 2,577
-------- ------ -------- -------- ------- ------- --------
Earnings available for fixed
charges ........................ (1,597) (909) (1,090) (2,472) 2,427 619 849
Fixed charges ................... 71 70 116 358 779 261 2,577
-------- ------ -------- -------- ------- ------- --------
Ratio of earnings to fixed charg-
es(2) .......................... -- -- -- -- 3.12x 2.37x --
</TABLE>
- - ----------
(1) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" are defined as income (loss) before income tax provision plus
fixed charges. Fixed charges consist of interest expense, amortization of
deferred debt financing costs and the estimated interest portion of rental
payments on operating leases.
(2) Earnings were inadequate to cover fixed charges for the fiscal years ended
December 31, 1993, 1994, 1995, 1996 and the six months ended June 30, 1998
by approximately $1.7 million, $1.0 million, $1.2 million, $2.8 million,
and $1.7 million, respectively.
LOAN AND SECURITY AGREEMENT
by and between
PRABHAV V. MANIYAR
("Borrower")
and
STARTEC GLOBAL COMMUNICATIONS CORPORATION
("Lender")
June 30, 1998
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (the "Agreement") is made as of June 30,
1998 by and between Prabhav V. Maniyar ("Borrower"), and Startec Global
Communications Corporation, a Maryland corporation ("Lender").
RECITALS
A. Whereas, Borrower desires to borrow funds from Lender and Lender is
willing to establish such arrangements for and make loans to Borrower, on the
terms and conditions set forth below.
B. Whereas, the parties desire to define the terms and conditions of their
relationship and to reduce their agreements to writing.
NOW, THEREFORE, in consideration of the promises and covenants contained in
this Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
SECTION 1.1. AGREEMENT. "Agreement" means this Loan and Security Agreement,
as it may be amended or supplemented from time to time.
SECTION 1.2. APPLICABLE INTEREST RATE. "Applicable Interest Rate" means an
interest rate of 7.87% per annum.
SECTION 1.3. BORROWED MONEY. "Borrowed Money" means any obligation to repay
money, any indebtedness evidenced by this Loan and Security Agreement.
SECTION 1.4. BORROWER. "Borrower" has the meaning set forth in the
Preamble.
SECTION 1.5. BUSINESS DAY. "Business Day" means any day on which financial
institutions are open for business in the State of Maryland, excluding Saturdays
and Sundays.
SECTION 1.6. CLOSING DATE. "Closing" and "Closing Date" mean the date on
which this Agreement is executed by and between the Borrower and the Lender.
2
<PAGE>
SECTION 1.7. LENDER. "Lender" has the meaning set forth in the Preamble.
SECTION 1.8. LOAN. "Loan" has the meaning set forth in Section 2.1(a).
SECTION 1.9. LOAN DOCUMENTS. "Loan Documents" means and includes this
Agreement and each and every other document now or hereafter delivered in
connection therewith, as any of them may be amended, modified, or supplemented
from time to time.
SECTION 1.10. PERSON. "Person" means an individual, partnership,
corporation, trust, joint venture, joint stock company, limited liability
company, association, unincorporated organization, Governmental Authority, or
any other entity.
SECTION 1.11. TERM. "Term" has the meaning set forth in Section 2.3.
ARTICLE II
LOAN
SECTION 2.1. TERMS.
(a) Borrower and Lender agree that the aggregate principal amount
given by Lender to Borrower hereunder (the "Loan") will be Five Hundred and
Fifty Thousand Dollars ($550,000.00).
(b) Borrower hereby agrees to repay Lender the principal amount of the
Loan pursuant to the terms and conditions set forth herein. Borrower further
agrees to pay the Lender interest on the Loan from the date hereof until repaid,
at a rate per annum in arrears (on the basis of the actual number of days
elapsed over a year of 360 days) equal to the Applicable Interest Rate.
SECTION 2.2. PAYMENTS. Principal payable on account of this Loan shall be
due and payable by Borrower to Lender immediately upon the earliest of (i)
December 31, 1998 or (ii) the termination of this Agreement pursuant to Section
2.4(b) hereof. Interest shall be due and payable on the last Business Day of
each calendar quarter or upon the termination of this Agreement. Pursuant to
Section 2.4(b), the Loan may be prepaid in whole or in part at any time or from
time to time without premium or penalty.
3
<PAGE>
SECTION 2.3. TERM.
(a) This Agreement shall be in effect from the Closing Date until
December 31, 1998 ("the Term"), unless terminated as provided in this Section,
and this Agreement may be renewed for one-year periods thereafter upon the
mutual written agreement of the parties.
(b) Borrower may terminate this Agreement at any time, provided that
as of the effective date of such termination, Borrower shall pay to Lender (in
addition to accrued interest) the full amount of any outstanding principal then
due and owning on the Loan.
SECTION 2.4. SECURITY
(a) Borrower and Lender agree that this Loan shall be secured by, and
Lender shall have legal recourse to, all of Borrower's personal estate,
including, but not limited to all now-owned and hereafter acquired real or
personal property, deposit accounts, money, insurance proceeds, securities and
rights to payment of every kind and description, and all of Borrower's contract
rights, and all of Borrower's rights, remedies, interest, security and liens, in
any real or personal property. Lender's right of recourse to the security
described herein shall be secondary to any pre-existing security interests in
such property held by any other Persons.
ARTICLE III
MISCELLANEOUS
SECTION 3.1. ENTIRE AGREEMENT; AMENDMENTS. This Agreement constitutes the
full and entire understanding and agreement among the parties with regard to
their subject matter and supersedes all prior written or oral agreements,
understandings, representations and warranties made with respect thereto. No
amendment, supplement or modification of this Agreement or any waiver of any
provision thereof shall be made except in writing executed by the party against
whom enforcement is sought.
SECTION 3.2. NOTICES. Any notice or other communication required or
permitted hereunder shall be in writing and personally delivered, mailed by
registered or certified mail (return receipt requested and postage prepaid),
sent by telecopier (with a confirming copy sent by regular mail), or sent by
prepaid overnight courier service, and addressed to the relevant party at its
address set forth below, or at such other address as such party may, by written
notice, designate as its address for purposes of notice hereunder.
4
<PAGE>
(a) If to Lender, at:
Startec Global Communications Corporation
10411 Motor City Drive
Bethesda, Maryland 20817
Attention: Subhash Pai, Vice President and Controller
Telephone: (301) 365-8969
(b) If to Borrower, at:
Prabhav V. Maniyar
303 Ainstree Ct.
Vienna, VA 22180
Attention: Prabhav Maniyar
Telephone: (703) 242-6562
If mailed, notice shall be deemed to be given five (5) days after being sent, if
sent by personal delivery or telecopier, notice shall be deemed to be given when
delivered, and if sent by prepaid courier, notice shall be deemed to be given on
the next Business Day following deposit with the courier.
SECTION 3.3. SEVERABILITY. If any term, covenant or condition of this
Agreement, or the application of such term, covenant or condition to any party
or circumstance shall be found by a court of competent jurisdiction to be, to
any extent, invalid or unenforceable, the remainder of this Agreement and the
application of such term, covenant, or condition to parties or circumstances
other than those as to which it is held invalid or unenforceable, shall not be
affected thereby, and each term, covenant or condition shall be valid and
enforced to te fullest extent permitted by law. Upon determination that any such
term, covenant or condition is invalid, illegal or unenforceable, the parties
hereto shall amend this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner.
SECTION 3.4 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one instrument.
SECTION 3.5. INTERPRETATION. No provision of this Agreement or any other
Loan Document shall be interpreted or construed against any party because that
party or its legal representative drafted that provision. The titles of the
paragraphs of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement. Any pronoun used in this
Agreement shall be deemed to include singular and plural and masculine, feminine
and neuter gender as the case may be. The words "herein," "hereof," and
"hereunder" shall be deemed to refer to this entire Agreement, except as the
context otherwise requires.
5
<PAGE>
SECTION 3.6. THIRD PARTIES. No rights are intended to be created hereunder
for the benefit of any third party donee, creditor, or incidental beneficiary of
Borrower. Nothing contained in this Agreement shall be construed as a delegation
to Lender of Borrower's duty of performance, including, without limitation,
Borrower's duties under any account or contract in which Lender has a security
interest.
SECTION 3.7. CONSTRUCTION. The validity and construction of this Agreement
and all matters pertaining hereto shall be determined in accordance with the
laws of the State of Maryland.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first written above.
LENDER:
ATTEST: STARTEC GLOBAL COMMUNICATIONS,
CORPORATION
a Maryland corporation
By: /s/ Subhash Pai By: /s/ Ram Mukunda
--------------- ---------------
Name: Subhash Pai Name: Ram Mukunda
Title: Vice President and Controller Title: President and C.E.O.
BORROWER:
ATTEST: PRABHAV V. MANIYAR
By: /s/ Subhash Pai By: /s/ Pabhav V. Maniyar
--------------- ---------------------
Name: Subhash Pai
Title: Vice President and Controller
6
THE VASWANI PLACE CORPORATION
("Landlord")
LEASE
with
STARTEC GLOBAL COMMUNICATIONS CORPORATION,
("TENANT")
<PAGE>
TABLE OF CONTENTS
-----------------
1. DEMISED PREMISES 4
2. TERM 4
3. USE 5
4. MINIMUM RENT 5
5. TAXES AND OPERATING EXPENSES; ADDITIONAL RENT 5
6. RENTAL ESCALATION 7
7. SECURITY DEPOSIT 7
8. DELETED
9. COMPLETION OF PREMISES 8
10. RULES AND REGULATIONS 8
11. SERVICES 9
12. INDEMNIFICATION 10
13. PUBLIC LIABILITY INSURANCE 11
14. FIRE OR OTHER CASUALTY 11
15. EMINENT DOMAIN 12
16. ALTERATIONS 12
17. MAINTENANCE 13
18. COMPLIANCE WITH LAWS 14
19. MECHANIC'S LIENS 14
20. SIGNS; ADVERTISEMENTS 15
21. WEIGHTS; SAFES 15
22. ENTRY FOR REPAIRS AND INSPECTIONS 16
<PAGE>
23. PARKING AND COMMON AREAS 16
24. LIEN FOR RENT 16
25. OTHER COVENANTS OF TENANT 17
26. OTHER MUTUAL COVENANTS 18
27. DEFAULTS; REMEDIES 20
28. SUBORDINATION 22
29. LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT 23
30. ESTOPPEL STATEMENT 23
31. HOLDING OVER 23
32. MISCELLANEOUS 23
33. PRIOR AGREEMENTS; AMENDMENTS 24
34. CAPTIONS 24
35. BENEFIT AND BURDEN 24
36. SEVERABILITY 25
37. GOVERNING LAW 25
38. NO PARTNERSHIP 25
39. OPTIONS TO EXTEND TERM 25
40. ELECTRONIC SECURITY 25
41. OTHER RIGHTS OF LANDLORD 25
EXHIBIT A: Demised Premises Floor Plan
EXHIBIT B: Tenant Improvements
EXHIBIT C: Rules & Regulations
EXHIBIT D: Tenant's Corporate Resolution
EXHIBIT E: Tenant's Reserved Parking
EXHIBIT F: Cleaning Services Schedule
3
<PAGE>
LEASE
THIS LEASE ("Lease") made and entered into as of this 27th day of October,
1997 by and between The VASWANI PLACE Corporation, a corporation registered in
the state of Maryland, USA, whose principal address of business is 10411 Motor
City Drive, Bethesda, Maryland, USA ("Landlord") manager of the real property
("Property") and the building known as the VASWANI PLACE ("Building") situated
thereon located at 10411 Motor City Drive, Bethesda, Maryland, 20817, and
Startec Global Communications Corporation, a corporation registered in the state
of Maryland, USA, whose principal address of business is 10411 Motor City Drive,
Bethesda, Maryland, 20817, USA ("Tenant").
WITNESSETH THAT, in consideration of the rents and mutual covenants and
agreements hereinafter stipulated and intending to be legally binding, 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 located in Montgomery Mall Auto Park,
Montgomery County, Maryland, consisting of approximately 27,710.75 rentable
square feet on the third (3rd) and fourth (4th) floor of the Building located at
10411 Motor City Drive as shown on the floor plan(s) attached hereto as Exhibit
A which shall be supplied in advance by Landlord to 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, 1997, and shall end
on the last day of the calendar month in which occurs the day preceding the
fifth (5th) anniversary of the Term Commencement Date (the "Term").
B. Deleted
C. Deleted
<PAGE>
3. USE:
Tenant will use and occupy the Demised Premises for general
office purposes and without the prior written consent of the Landlord, the
demised premises will not be used for any other 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 set 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 Four Hundred Ninety Nine Thousand Six Hundred and Twenty
Four and 81/100 dollars ($499,624.81), which amount shall be the product of
eighteen dollars and three cents ($18.03) multiplied by the total number of
square feet (27,710.75) in the Demised Premises as specified in Article 1. Such
sum shall be payable during the Term, in advance, in equal monthly installments
of Forty One Thousand Six Hundred and Thirty Five and 40/100 Dollars
($41,635.40). Subject to the Provisions of Section 26 (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. Notwithstanding any other provisions of this Lease,
Landlord agrees to provide Tenant with a one-time rent credit towards the first
month's rent (November 1997) in the amount of Nineteen Thousand and Ninety Seven
and 90/100 Dollars ($19,097.90) and a one-time credit towards the second month's
rent (December 1997) in the amount of Nine Thousand Five Hundred Forty Eight and
95/100 Dollars ($9,548.95). This amount constitutes one and one-half month's
"free" rent for the 12,710.75 square feet rentable space increase over Tenant's
existing leased space.
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 thirty (30) calendar days written notice to
Tenant, without demand and without deduction, set-off, or counterclaim by
Tenant.
5. ADDITIONAL RENT, TAXES AND OPERATING EXPENSES:
A. As used in this Lease, the following terms shall have the
meaning ascribed to them as specified below:
(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.
5
<PAGE>
(2) "Base Year" for real estate taxes and operating
expenses shall be calendar year 1997. Landlord represents that the Building has
been fully assessed for the Base Year.
(3) "Tenant's Proportionate Share" shall be 28.02%,
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 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 emended 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; (e) costs of supplies, tools, materials necessary for the
normal operation, maintenance, and repair of the Building, Property and
equipment; (f) 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 as specified in Article
4, commencing on the first day of the first calendar month following Tenant's
receipt of Landlord's statement thereof, 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 Landlord 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.
C. (1) 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 were 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.
(2) 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.
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(3) 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 expenses
($100,000 x 20%) paid in monthly installments ($20,000 \ 12) or $1,666.67 in
additional monthly rent.
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. The cost of additional electric
consumption by Tenant shall be billed directly to Tenant from Landlord.
6. RENTAL ESCALATION:
In addition to the adjustment to the monthly rent for increases
in Real Estate Taxes and Operating Expenses as specified in Article 6, Tenant's
Base Year Rental will be increased in the beginning of the second (2nd) Lease
year, and upon the anniversary of each Lease year 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 total sum of Forty One Thousand Six Hundred and Thirty Five and
40/100 Dollars ($41,635.40) representing one month's rent as security Deposit
(Landlord acknowledges $7,419.50 of the deposit sum from the previous Lease
which Tenant acknowledges may be applied to this 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 without interest by
Landlord 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 Security 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 Security Deposit, either in
whole or in part, Tenant shall within five (5) calendar days restore the amount
so used by Landlord. Following termination of this Lease and satisfaction of all
Tenant obligations thereunder, Landlord shall return to Tenant without interest
any unused portion of the Security Deposit.
8. DELETED.
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9. COMPLETION OF DEMISED PREMISES:
Promptly after the execution of this Lease by the parties hereto,
the Landlord shall cause the Demised Premises to be vacated to accommodate
Tenant's occupancy. Tenant shall Lease the Demised Premises in its "AS IS"
condition. Tenant will make improvements to the property (Alterations) prior to
its occupancy. Tenant represents that the cost of said improvements will be at
least One Hundred Thousand dollars ($100,000). Landlord has the right to
reasonably approve all Tenant improvements as required by Tenant before
construction (in accordance with paragraph 16 Alterations, herein.). All costs
for improvements, including design services and permit fees, are to be paid
directly by Tenant. Providing Tenant's construction costs for the improvements
to the Demised Premises exceeds $100,000, Landlord agrees to reduce the rent
during the anticipated construction period in the amount of $100,000. The rent
reduction will be $20,000 per month, beginning with the second month of the
Lease Term, for months two through six of the Lease Term (December 1997 April
1998). Upon completion of the Improvements, Tenant shall provide Landlord with
the actual cost of the construction, supported by paid invoices. Upon
completion, if the actual construction costs for the Tenant Improvements are
less than $100,000, Tenant shall pay the difference to Landlord within 10 days
of completion.
Tenant agrees that during the Improvement phase of the Lease Term
(reasonably estimated to occur during the first six months of the Term) Tenant,
Tenant's Agent(s), Contractor(s), Architect(s), etc., will strictly adhere to
the rules and Regulations attached hereto as Exhibit "C". Furthermore, Tenant
agrees that any and all construction performed will be conducted in a
workman-like manner, without interfering with the Building's normal business
activities. Tenant agrees to complete the Demised Premises in such manner as to
allow the occupancy of an additional tenant on floor(s) where Tenant does not
occupy the entire space. Such completion will include, at Tenant's expense, a
fire corridor in accordance with all applicable fire and building codes.
Construction related services shall be conducted via the usage of the Service
elevator and all Construction related Trash shall be properly and timely removed
by the Tenant.
10. 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 fight 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 that the Demised
Premises are a part; and nothing herein shall impose any obligation on Landlord
to enforce the Rules and 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.
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11. 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 on 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 Twenty Five (25) card
keys. Additional card keys are available at $10.00 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 daily use
of first class office buildings in Montgomery County, Maryland. Any and all
additional or specialized janitorial service desired by Tenant or required by
Tenant's extended use of the building (i.e. more than one shift of workers)
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 F specifies existing Building Cleaning standards and procedures.
E. All structural repairs to the Building and all 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.
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F. Water for drinking, lavatory, and toilet purposes drawn
through fixtures installed by Landlord.
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 electrically operated equipment or other
machinery, other than typical 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 nor warrant that any of
the services referred to in this Article 11 will be free from occasional
interruption from causes beyond the reasonable control of Landlord. However, in
such event, the Landlord will use its 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 fixtures, or electrical wires or fixtures unless due to Landlord's
negligence. No interruption of service shall ever be deemed an eviction or
disturbance thereof or render Landlord liable to Tenant for damages by abatement
of Rent or otherwise or relieve Tenant from performance of Tenant's obligations
under this Lease. In the event of damage to the Building or the Premises whereby
Tenant is unable to conduct its normal business for a period of Five (5)
consecutive business days, the Landlord shall abate the rent due until such
services are restored.
12. 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 directly or
indirectly from any cause whatsoever in connection with the occupancy, conduct,
operation, ownership, or maintenance of the Demised Premises, or from any work
or thing whatever done or which was not done in and on the Demised Premises, or
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 either 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.
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13. 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 of such
term, comprehensive general public liability insurance coveting injury to
persons of not less than $1,000,000 per person and $2,000,000.00 per accident,
and damage to property of at least $2,000,000.00 per accident.
B. All such policies of insurance shall name Landlord and, if
required, mortgagee of Landlord as additional insured. 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 by Tenant shall be effective without Tenant's having
provided thirty (30) calendar 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) calendar days' prior to expiration of any such policies.
14. FIRE OR OTHER CASUALTY:
A. 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)
calendar days from the date of such damage, Landlord may at its option either:
(a) by written notice to Tenant given within sixty (60) calendar 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) calendar 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.
B. 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 or the Building and such repairs are not
substantially complete within one hundred twenty (120) calendar days of the
occurrence of the damage.
C. 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.
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15. 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 Article 15A hereof, provided, however, that diminution of floor
area. 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 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 Article 15A hereof, by Landlord sending written notice
to such effect to Tenant, whereupon Tenant shall, within a reasonable time
period, vacate the Demised Premises.
16. ALTERATIONS:
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 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
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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
times, and in such manner, as Landlord determines will not unreasonably
interfere with the use of the Building by other Tenants and their respective
demised premises. All Alterations shall be made only by such contractors or
mechanics as are previously approved in waiting by Landlord. Such approval by
Landlord shall not be unreasonably withheld or delayed. Approval of
contractor(s) or mechanic(s) by Landlord shall be based upon the contractor(s)
or mechanic(s) being properly licensed, their financial posture, experience, and
past job performance. Tenant shall pay prevailing wages to all contractor(s) and
mechanic(s). Unless stipulated otherwise by the Landlord at the time approval of
improvements to be made is granted, Tenant shall not be required to remove any
improvements made to the Premises.
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.
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 sole cost and expense and Tenant shall, at its
sole 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 sole cost and
expense, and the Tenant hereby agrees to reimburse the Landlord for the cost and
expense 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 Demised Premises is a part and could likely cause Landlord
to suffer and incur substantial monetary damage or injury for which Tenant would
be solely and exclusively liable.
17. MAINTENANCE:
A. Demised Premises: Tenant shall keep the Demised Premises and
the fixtures and equipment therein in good order and condition, will not cause
the Demised Premises and the fixtures and equipment therein to suffer either
waste or injury thereto, and shall at the expiration of or early 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 beyond the Tenant's reasonable control, 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
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forthwith. Tenant shall be required to give Landlord immediate written notice of
the need for any repair which, if not promptly repaired, will constitute an
unsafe condition which might cause injury or which Tenant believes constitutes a
condition affecting the occupancy of the Building. The Landlord shall, at
reasonable times and on prior reasonable written 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 sole
and exclusive 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 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, or to the extent as may be necessary in the reasonable 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.
18. 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, at its sole and exclusive cost and
expense, for obtaining and maintaining proper occupancy permits throughout the
Term of the Lease.
19. MECHANIC'S LIENS:
Tenant shall not create, or permit to be created, or to remain,
and shall discharge and have removed or have obtained 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 any mechanic's laborer's or materialmen's lien shall, at any
time,
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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 and exclusive 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 its 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(s) or to any portion
of the Demised Premises or to the Property or Building which may or might arise
by reason of Tenant making any Alterations, additions, or improvements to the
Demised Premises, the Building, or to the Property.
20. SIGNS; ADVERTISEMENTS:
Without the prior written consent of Landlord, whose 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 or placed thereon or any part of the Property, without the
prior written consult of Landlord, and, if any such sign, advertisement, or
notice is exhibited by Tenant without the prior written consent of Landlord,
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 and exclusive and
expense of the Tenant. Landlord shall have the right to prohibit any
advertisement of Tenant which, in its reasonable business judgment, tends to
impair the business or commercial reputation of the Building or its desirability
as a high-quality office facility to be leased by tenants and, upon prior
written notice from Landlord, Tenant shall immediately refrain from and
discontinue any such advertisement.
Landlord will provide on behalf of Tenant, at Landlord's sole and
exclusive cost and expense, Building standard signage to identify Tenant on one
entrance door to Demised Premises and on a Building directory in the Building
lobby.
21. 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 to
the Building or Property 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 and exclusive cost and expense of Tenant.
No furniture, equipment, or other bulky matter of any description will be
received into the Building or carried in the elevators except in the manner and
during the times approved in advance in a writing by Landlord, whose approval
shall not be unreasonably withheld. All moving of furniture, equipment, and
other bulky material within public areas of the Property or Building shall be
under the direct reasonable control and supervision of Landlord, who shall not
be responsible for any damage to or charges for
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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.
22. ENTRY FOR REPAIRS AND INSPECTIONS:
Tenant will permit Landlord, or its agent, employees, or
contractors, with reasonable prior written notice to Tenant, 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 reasonable judgment of Landlord may
be deemed necessary to maintain or protect the Demised Premises, the Building,
or the Property, 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 prior oral or written notice, and make whatever repairs are
necessary to protect the Demised Premises, Building, or the Property.
23. PARKING AND COMMON AREAS:
Landlord will provide fifty (50) reserved parking spaces to
Tenant for the Term of the Lease at a location on the Property determined from
time to time by Landlord (Exhibit "E"), at no charge throughout the Term of the
Lease. Landlord shall be entitled to relocate or reduce the physical size of the
parking spaces at any time in order to construct alterations or additions to the
Building or the Property. Additional parking needs of the Tenant will be
considered upon written request made by Tenant.
24. 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 part of any property as may be exchanged, replaced or sold from
time to time in the ordinary course of business operations 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.
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25. OTHER COVENANTS OF TENANT:
A. Use
(1) 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 monies raised by taxation;
(ii) any individual or entity for the purpose of engaging in
non-commercial activity or whose activities would contravene public policy.
(2) Tenant understands that any violation of the restrictions
herein 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 Demised
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:
(i) solely and exclusively permit the demised premises to be
overloaded (to include number of occupants), damaged, or defaced;
(ii) place a load upon the premises exceeding sixty-five
(65) pounds of live load per square foot of floor area; and
(iii) 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, the
Building, or the Property which may prevent the obtaining of any insurance
(including fire, emended coverage, and public liability insurance) on the
Demised Premises, the Building, or on any property therein, or the Property, 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 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
Demised 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.
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D. Assignment or Sublease
(1) 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 written consent of the Landlord,
references elsewhere in this Lease to assignees, subtenants, or other persons
notwithstanding. Any assignment or subletting, even with the prior written
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 so construed as implying Landlord's 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.
(2) 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 written consent of the Landlord having been
obtained.
(3) Notwithstanding any provision above to the
contrary, before Tenant may assign this Lease or sublet Demised 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) calendar 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) calendar days after the date of Landlord's
acceptance. Upon such acceptance and termination, all accounts and interests of
the parties shall be settled to the Date of Termination. Any profits net of
reasonable subleasing expenses shall be split in a fifty/fifty percent (50%/50%)
basis with the Landlord.
(4) Notwithstanding any other provision of this Lease,
the Parties acknowledge that they have executed a Landlord Consent Agreement
dated July 1, 1997 in which Landlord, among other things, agreed to Tenant
granting a lien on Tenant's leasehold interest under the existing Lease to
Signet Bank. The Parties agree that that Consent Agreement remains in full force
and effect with regard to this Lease and that every reference therein to "Lease"
means this Lease.
E. Corporate Authority - Tenant represents and warrants that the
person executing this Lease is authorized by Startec Global Communications, Inc.
to execute and bind the corporation to this Lease.
26. 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:
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A. Waiver of Subrogation - Landlord and Tenant hereby waive all
fights 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. If the
waiver of subrogation results in an increase in insurance premiums, then in that
event the Waiver of subrogation shall not apply.
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 security
system, 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 Demised Premises, the
Building, or the Property of which the Demised 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
Demised Premises may be a part, or from 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 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 in writing, within ten (10) calendar days, of any ownership
changes of Tenant.
D. Waiver - The waiver of any covenants or conditions 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 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, Maryland
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
name(s) and address(es) of both Landlord and Tenant, a description of said
Demised Premises, said Building, and said Property, the duration of the Term of
Lease (including the exact commencement and ending dates of each Term) and a
reference to any special clauses contained in this Lease which might
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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, such recordation or making public to
constitute a material breach of this Lease.
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 by Tenant shall become overdue for ten (10)
calendar days beyond the date on which said sums of money are due and payable,
Landlord will assess against Tenant a late charge of one and one-half percent
(1.5%) of payment per month or portion thereof, accruing from the date the
payment was originally due. The sums so overdue shall become immediately due and
payable by Tenant to Landlord as liquidated damages for Tenant's failure to make
prompt payment of said sums, and the full amount of late charges shall be
immediately payable by Tenant on Landlord's written 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 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 fight 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) calendar days beyond the due date for such rental
payment would be computed as follows: $1,500.00 x 0.04 = $60.00 (late payment).
27. DEFAULTS; REMEDIES:
In the event (1) Tenant shall at any time 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)
calendar 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) calendar days after written notice thereof
from Landlord to Tenant; or (2) if Tenant: (i) shall be adjudicated as
bankruptcy; (ii) or shall make an assignment for the benefit of creditors; (iii)
or shall file a bill in equity; (iv) or otherwise initiate proceedings for the
appointment of a receiver of Tenant's assets; (v) or shall file any proceedings
in bankruptcy or for reorganization or an arrangement under any federal or state
law; (vi) 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; (vii) or if Tenant is levied upon or sold by sheriffs or Marshall's
or constable's sale or other legal process; (vii) or if Tenant attempts to
remove its property from the Demised Premises other than in the ordinary course
of business, then the occurrence of any such event shall constitute an event of
default and a breach under this Lease, and after having provided Tenant with ten
(10) calendar days written notice, then, and in addition to any other rights or
remedies Landlord may have under this Lease either at law or in equity, Landlord
shall have the following rights:
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A. To accelerate the whole, or any part thereof 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 oral or written
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 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.
E. 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 either at law or in equity.
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F. No waiver by Landlord of any breach by Tenant of any of
Tenant's obligations, agreements, or covenants herein shall constitute 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)
calendar days.
G. 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:
(1) 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;
(2) no shareholder of the Landlord shall be sued
or named as a party in any suit or action;
(3) no service of process shall be made against
any shareholder of Landlord;
(4) 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; and
(5) both Landlord and any shareholder may invoke
and enforce these covenants and agreements.
28. SUBORDINATION:
A. 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, within ten (10)
calendar days after a request is made in writing to Landlord, 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 ten (10) calendar day period. Landlord shall
obtain a standard Non-Disturbance, Subordination and Attornment Agreement from
the superior lien holder. 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
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judicial sale may, at, or prior to, the time of any such sale or within sixty
(60) calendar days thereafter, notify Tenant to vacate and surrender the Demised
Premises within ninety (90) calendar days of the date of such sale, and in the
event such notice is given, this Lease shall terminate and expire ninety (90)
calendar days after such sale.
B. This section is subject to any of the rights of the Tenant
pursuant to any non-disturbance agreement delivered and subject to Article 25D.
29. 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 either at law or in equity, cure on behalf of Tenant
any default hereunder by Tenant, and Tenant shall reimburse Landlord for any
sum(s) paid or cost(s) incurred by Landlord in curing such default, including,
but not limited to, reasonable attorney's fees incurred, and also including
interest at the prime rate as determined by reference to this rate so cited in
the Wall Street Journal on the first (lst) day of the month of default plus
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.
30. 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 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.
31. 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 (1/30th) of Two hundred
percent (200%) of the rent payable for the previous month of the Term, plus all
additional rent payable hereunder.
32. MISCELLANEOUS:
A. Landlord and Tenant each represent and warrant to the other
that neither of them has employed any broker in carrying on the negotiations
relative to this Lease. Landlord and
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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.
B. The word "Tenant", as used in this Lease, shall be construed
to mean Tenant(s) 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 and its heir(s), legal representative(s), successor(s) and assign(s),
provided that, without in any way limiting the right afforded to Tenant pursuant
to Article 25(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 prior 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, 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.
33. PRIOR AGREEMENTS:
The Parties acknowledge the existence of a Lease between the same
parties dated September 1, 1994, under which Tenant occupies space in the
Building. It is the parties intention that said existing Lease be terminated
upon and by the execution of this Lease. Nothing included in this Lease is
intended to affect the rights and obligations of the Parties under the previous
Lease. Neither party hereto has made any representation or promises with regard
to the current terms and conditions 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.
34. CAPTIONS:
The captions of the Articles in this Lease are inserted and
included solely for convenience, and shall not be considered or given any effect
in construing the provisions hereof.
35. 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.
<PAGE>
36. 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
enforceable to the fullest extent permitted by law.
37. GOVERNING LAW:
This Lease shall be governed by the laws of the State of Maryland.
38. NO PARTNERSHIP:
Nothing in this Lease shall be deemed or construed to create a
partnership, joint venture, of, or between, Landlord and Tenant, or to otherwise
create any other business and/or legal relationship between the parties hereto
other than that of Landlord and Tenant.
39. OPTIONS TO EXTEND TERM:
Provided that Tenant is still in occupancy of Demised Premises,
and has not been in default of the Lease, Tenant shall have the option to renew
this Lease of Demised Premises for two (2) additional five (5) year terms
("Renewal Term") at the end of the fifth (5th) Lease Year with eight (8) months
prior written notice to Landlord at one hundred percent (100%) of the fair
market rental value of Demised Premises.
40. ELECTRONIC SECURITY:
Landlord warrants that the Building contains an electronic
security system of which the Tenant will be granted access, and further warrant
that the Building will maintain this or an equivalent security system throughout
the term of the Lease and any renewal periods. Any additional security or
security systems, or any operational modifications to the existing security
system, desired by Tenant shall be considered an "Alteration" under paragraph 16
herein.
41. OTHER RIGHTS OF LANDLORD:
A. Landlord may, at its sole and exclusive discretion, 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 Tenant has provided Landlord with written
notice to do so.
<PAGE>
B. Landlord may, at its sole and exclusive discretion, show the
Demised Premises to prospective purchasers, tenants, or brokers during the last
one hundred and eighty (180) days of the Term. Landlord may, at its sole and
exclusive discretion, show the Demised Premises to prospective purchasers,
tenants, or brokers at all reasonable times provided that prior written notice
is given to Tenant in each case, and that Tenant's use and occupancy of the
Demised Premises shall not be materially inconvenienced by any action of
Landlord. Landlord may, at its sole and exclusive discretion, place and maintain
"FOR RENT" signage on the Demised Premises during the last one hundred eighty
(180) days of the Lease Term. Such "FOR RENT" signage shall not unreasonably
interfere with Tenant's usage of the Demised Premises.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Lease the day and year first above written.
WITNESS: LANDLORD:
VASWANI PLACE Corporation
BY:
------------------------[SEAL]
ROMA MALKAN:
WITNESS: TENANT:
Startec Global Communications Corporation
BY: /s/ RAM MUKUNDA
------------------------[SEAL]
RAM MUKUNDA
By:
<PAGE>
EXHIBIT "A"
DEMISED PREMISES FLOOR PLAN
<PAGE>
[GRAPHIC OMITTED]
<PAGE>
[GRAPHIC OMITTED]
<PAGE>
EXHIBIT "B"
FLOOR PLAN- ALTERATIONS
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EXHIBIT "C"
RULES AND REGULATIONS
1. The entries, passageways, corridors, stairways and halls shall not be
obstructed by Tenant in any way, or manner, or by any article, thing,
or device, and Landlord reserves the right to remove any obstruction
without prior oral or written notice to Tenant at Tenant's sole and
exclusive cost and expense.
2. No person of Tenants, whether employee, invitee, or otherwise, shall
disturb, or otherwise annoy, the occupants of the Building by the use
of radios, television, vocal or instrumental music, unnecessary noise,
or vibration, or offensive odors or by interference in any way. Tenant
shall not do or permit its employees, invitees, or otherwise to do
anything that will injure the business or commercial reputation of the
Building, otherwise interfere with Landlord's ability to Lease office
space in the Building, or otherwise interfere with other Tenants' use
of leased space in the building.
3. The janitors employed by Landlord will be provided with a pass key to
offices in the Building, and no other janitors may be employed in the
Building and no other person other than the janitors of said Building
shall clean said premises unless Landlord shall, in writing, give its
prior written consent thereto.
4. All necessary keys for Demised Premises will be furnished by Landlord
to Tenant, but if more than three (3) keys for any door-lock shall be
desired, the costs and expenses thereof for the additional number
must be borne solely and exclusively by the Tenant. Tenant will not
have any duplicate keys made except by or through Landlord. At the
termination of this Lease, Tenant must return all keys to Landlord.
5. No additional locks shall be placed by Tenant upon any door of the
Building without the prior written consent of the Landlord.
6. The Demised Premises shall not be used by Tenant for the purpose of
lodging or sleeping rooms, or for any immoral or illegal purpose.
7. No sign, advertisement, or notice may be displayed by Tenant in any
part of the outside or inside of Building, or on or about the Demised
Premises, except as expressly specified and approved by the Landlord
in writing. Landlord may remove any and all such matter of materials,
and all signs other than those approved, placed in violation hereof,
without prior oral or written notice to the Tenant and at the
Tenant's sole and exclusive expense. Any newspaper, magazine, or
other advertising done from Demised Premises or referring to the said
Demised Premises, which in the reasonable opinion of the Landlord is
objectionable, shall be immediately discontinued upon receipt of
written notice from the Landlord. Pictures must be hung by picture
hangers, and no tape is permitted on the walls.
8. The water-closets, other water fixtures and plumbing, shall not be
used by Tenant for any other purpose other than those for which they
were constructed, and any damage resulting to
29
<PAGE>
them from misuse or the defacing or injury of any part of the Demised
Premises, the Building, or the Property, shall be borne by the Tenant
who shall occasion it.
9. The Tenant shall not allow anything to be placed against, or near,
the glass in the partitions, between the premises leased and the
halls or corridors of the Building, which shall diminish the light
in, or prove unsightly from, the halls, corridors, or windows.
10. Safes, furniture, and other heavy or bulky articles or equipment
shall be moved into or out of the Demised Premises or the Building
only with the prior written consent of the Landlord first obtained,
and then only in the manner and at such time as the Landlord may in
writing direct. All such articles must first be brought into from the
service entrance and, if necessary, unpacked there before being taken
on the elevator. Safes and other heavy articles shall be placed by
the Tenant in such places only as may be first specified in writing
by the Landlord, and the Tenant shall be liable for, and hold the
Landlord harmless from, any damage to the Demised Premises, the
Building, or Property of its Tenants or others or injuries sustained
by any person whatsoever caused by, or resulting from, the moving of
such articles in or out of the Demised Premises, or from overloading
a floor, or in any other manner. In no event shall the maximum weight
per square foot for load distribution exceed the Building design
live-load of sixty-five (65) pounds.
11. All Tenants and their employees shall enter and exit the Building
before and after normal business hours (after 6:00 PM and before 8:00
AM), and Saturday (except from 8:00 a.m. to 1:00 p.m.) and Sunday
using the electronic security system installed and operated by
Landlord. All Tenants and their employees shall abide by any
reasonable regulations and procedures relating to the security system
established by the Landlord, its agents, and assigns. There will be a
fee of $10.00 for each entrance card lost, destroyed, or misplaced,
necessitating replacement.
12. No vending machines are permitted in any Tenant's office space.
13. Landlord reserves the right to control access to parking areas of the
Building and to limit such access to Tenants who have rented parking
privileges at the prevailing rate. Parking in the oval area
immediately in front of the Building is reserved for visitors and
clients of Building Tenants and shall not be used by Tenant or
Tenant's employees.
14. Landlord reserves the right to make such other and further reasonable
rules and regulations as in its judgment may from time to time be
needed for the safety, care and cleanliness of the premises and for
the preservation of good order therein and the same shall be as
binding upon Tenant as if they had been inserted herein at the time
of the execution hereof
<PAGE>
EXHIBIT "D"
TENANT'S CORPORATE RESOLUTIONS
31
<PAGE>
EXHIBIT "E"
TENANT'S RESERVED PARKING
[GRAPHIC OMITTED}
~ ISN
~ FAA
~ STARTEC
~ ENTERPRISE
& HANDICAPPED
PERIMETER PARKING
Public Parking Public Parking
32
Public Parking Public Parking Public Parking Public Parking
<PAGE>
EXHIBIT "F"
CLEANING SERVICES SCHEDULE
32
<PAGE>
STATEMENT OF WORK
Scope - The contractor shall furnish, at its own expense, all labor,
materials, equipment, supervision and perform satisfactorily,
the services at the frequencies and during the times and
under the conditions as specified in this Statement of Work.
Materials are to include trash bags, chemicals, rags and all
other materials necessary to fulfill this Statement of Work,
with the exception of light bulbs, disposable restroom
materials and filters, which the Vaswani Place shall procure
and make available.
Times - Housekeeping services will be required on a daily basis,
Monday through Friday, and are to start at 5:30 P.M. and
continue until 4th/Day completed, which shall be no later
than 8:00 P.M.. The following Holidays will not require
housekeeping services:
July 4th (Friday)
Nov. 11th (Tuesday)
Sept. 1st (Monday)
Nov. 27th-(Thursday)
Oct. 13th (Monday)
Dec. 25th (Thursday)
Frequencies and Specifications:
DAILY
o Empty wastebaskets in all offices, restrooms
and lobby. Disposable plastic bag liners shall
be used.
o Clean ashtrays in all offices and lobby.
Ashtray to be wiped with a damp rag.
o Vacuum all carpets in offices, hallways, and
lobby.
o Sweep all non-carpeted areas..
o Mop lobby non-carpeted areas, restroom floors
and kitchen areas.
o Clean restroom mirrors, walls and partitions.
o Clean and disinfect restroom sinks, commodes
and urinals.
o Clean and disinfect drinking fountains.
o Clean lobby and elevator glass, hall mirrors,
brass and other bright work (no ammonia, or
abrasive polish to be used)
o Vacuum elevator carpets and tracks.
o Refill restroom supplies (tissue, towels,
soap, etc.) to be provided by the Vaswani
Place.
o Dust lobby, boardroom, private lobby (7th),
6th and 7th floor reception and other
incidental furniture.
o In kitchen areas, all surfaces including sink
countertop, microwave tables to be wiped
clean.
220
<PAGE>
o Computer room - dust all horizontal services
with a damp cloth (not wet) and vacuum floor
o Spot clean: walls, floors, doors & jams,
baseboards, inside windows, etc. in all
occupied areas as required.
o Lock office doors unless otherwise indicated.
o Turn off lights unless otherwise indicated.
Weekly
o Complete dusting: pictures, grills, ledges,
sills, blinds, curtains. o Detailed vacuum,
all occupied areas o Clean all interior glass
(non-ammonia cleaner) o Polish all brass and
bright areas (non-abrasive polish) o Replace
sand in butt recepticals u Mop and buff: Lobby
area, non-carpeted areas, restroom floors, and
kitchen floors
o Computer room - mop floor (no buff)
Monthly
o Machine scrub restroom walls, partitions
o Clean walls, all
o Clean wall outlets, switches, baseboards,
doors
o Clean fire extinguishers
o Clean exterior light fixtures, air vents
o Vacuum furniture (sofas, chairs, etc.) in main
lobby, reception (6th o & 7th) private lobby,
offices
o Damp wash venition blinds, sills, grills,
treatment (bacterial) of traps and floor
drains, all.
Quarterly
o Strip and wax all occupied offices, hall and
lobby non-carpeted areas.
Semi-Annually
o Wash interior and lenses of all light fixtures
o Clean all vertical surfaces
o Clean all walls (over 70")
o Shampoo all carpets in offices, hallways and
lobby o Clean all exterior windows and bright
areas.
Conditions of Services
Change of Times and Specifications - The owner may, at any time, and with
two day written notice to contractor, change the time and/or frequency and/or
specification of services under this Statement of work. Any such change in
services which shall constitute an increase or decrease in costs, the increase
or decrease in costs shall be arrived by mutual agreement of owner (or its
authorized agents.) and con. tractor, and contractor shall put into writing, any
increase or decrease in cost and all changes occurring to this Statement of
Work, and deliver within 2 days to owner.
<PAGE>
Contractor Employees - Contractor shall furnish qualified and experienced
employees and supervisors to carry out the work to be performed by contractor as
specified in this Statement of Work. All personnel hired by contractor shall be
thoroughly screened, including police clearance, as permissable by law, and
shall wear identification badges furnished by the contractor.
Group Supervisor - Contractor shall provide one group supervisor to be
responsible for overseeing the entire cleaning operation. This individual will
maintain liaison with the Property manager.
Insurance- Contractor shall secure at it's expense, and keep in force until
the termination of contract of services, adequate insurance for it's employees
and contractor shall indemnify owner, it's agents and employees against all
liability or loss, and against all claims or actions based upon or rising out of
damage or injury (including death) caused or substained in connection with the
performance of services as specified
Equipmentand Materials -Contractor shall provide and bear all responsibility
for any equipment and materials owned or rented by contractor, required in the
performance of services as specified herein.
Non-Performance/Termination - Upon failure of the contractor to perform
services as provided herein this Statement of Work, the owner has the right to
immediately terminate the contract of service, and/or deduct from the monthly
billing that portion of cost related to the work not performed or actual cost
incurred by owner to complete such services. Owner shall maintain the right, at
anytime and without penality, to terminate services upon 30 days written notice.
Thirty day written notice is not required for termination due to
non-performance.
--------------------------------------
INDEFEASIBLE RIGHT OF USE OF AGREEMENT
RELATING TO THE GEMINI CABLE SYSTEM
--------------------------------------
<PAGE>
PARTIES:
(1) CABLE & WIRELESS INC., with its principal place of business located at 8219
Leesburg Pike, Vienna, Virginia 22182 ("C&W"); and
(2) STARTEC, INC., with its principal place of business located at 10411 Motor
City Drive, Suite 301, Bethesda, Maryland 20817 ("the Purchaser").
BACKGROUND:
(A) It is acknowledged that Gemini Submarine Cable System Limited, a company
(registered number EC22408) incorporated under the laws of Bermuda
("Gemini") which expression shall include its successors or assigns, is to
provide, construct, operate and maintain an integrated submarine and
terrestrial optical fiber cable system (the "Cable System") between the
Terminal Points as set out in Schedule 1.
(B) Gemini is allocating capacity in the Cable System in whole circuits
interconnecting the Terminal Points at the STM-1 level.
(C) C&W has acquired rights with respect to certain capacity in the Cable
System until the Retirement Date (as defined below), and C&W is entitled to
grant IRUs over such capacity to authorized carriers.
(D) The Purchaser is the holder of valid Licences (as defined below) granted by
the relevant authorities in the United States and the United Kingdom.
(E) The Purchaser wishes to acquire form C&W and C&W is willing to grant the
Purchaser an IRU over certain of its capacity in the Cable System subject
to the following terms and conditions.
NOW IT IS AGREED AS FOLLOWS:
1 DEFINITIONS
1.1 In this Agreement, the following words and phrases shall have the following
meanings ascribed to them unless the context otherwise requires:
"CAPACITY" means the capacity in the Cable System to be acquired by the
Purchaser as detailed in Schedule 1;
"COMMENCEMENT DATE" means the date on which the Capacity is activated for
the Purchaser;
"DS-3" means a 44.736 Mbits/sec bi-directional digital line section passing
between two system interface points, (i.e., the Terminal Points set out in
Schedule 1) together with the interconnection interfaces pertaining thereto
in accordance with ITU-TS recommendations;
"LICENCES" mean those consents, permits and other approvals referred to in
clause 5.1(d);
"OPERATION AND MAINTENANCE CHARGES" OR "O&M CHARGES" mean the charges in
relation to the operation and maintenance of the Cable System to be paid by
Purchaser as set out in Schedule 2;
"OUT-OF-SYSTEM RESTORATION" means the provision of restoration on a cable
other than the Cable System as set out in Clause 8;
"PURCHASER PARTY" means (i) the Purchaser, (ii) any permitted assignee of
the Purchaser using Capacity, and (iii) any customer of the Purchaser or of
any such permitted assignee using Capacity;
"RETIREMENT DATE" means the date the Cable System is retired with respect
to the Capacity;
"STM-1" mens a 155.220 Mbit/ sec bi-directional digital line section
passing between two system interface points (i.e., the Terminal Points set
out in Schedule 1), together with the interconnection interfaces pertaining
thereto (this supports end to end transport of a VC4), in accordance with
ITU-TS recommendations.
1.2 The headings are included for convenience only and shall not affect the
interpretation or construction of this Agreement.
1.3 In this Agreement, unless the context requires otherwise, any reference to:
(a) a "party" or "the parties" is to a party or the parties (as the case
may be) toAgreement;
(b) a Recital, Clause or a Schedule is to a recital of, clause of or a
schedule to this Agreement (as the case may be);
(c) "this Agreement" includes the Schedules, which form part of this
Agreement for all purposes.
2 GRANT AND DURATION OF IRU, AND ACTIVATION OF CAPACITY
C&W hereby grants to the Purchaser an IRU (indefeasible right of use) in
the Capacity over the length of the Cable System between the Terminal
Points with effect from the Commencement Date and continuing until the
Retirement Date, unless this Agreement is terminated earlier in accordance
with the provisions of Clause 10 hereof, whereupon such IRU shall terminate
automatically.
C&W will request Gemini to activate the Capacity within approximately
thirty (30) days after C&W receiving a written activation request from the
Purchaser.
<PAGE>
This Agreement and the grant of the IRU in the Capacity herein does not
include any provision of or connection to (i) any equipment or facilities
that may be required for signal conversion and/or extension of
communications connectivity beyond the Terminal Points set out in Schedule
1, and (ii) for DS-3 Capacity, any multiplex equipment required to derive a
DS-3 from the STM-1 links made available by Gemini over the Cable System.
In the event that C&W and the Purchaser enter into a separate agreement for
the provision of all or a portion of such equipment and/or facilities, only
the terms of that separate agreement this Agreement.
3 PURCHASE
The Purchaser will pay to C&W, on the date of this Agreement, the Purchase
Price set out in Schedule 2.
4 OPERATION AND MAINTENANCE CHARGES
The Purchaser shall pay to C&W the O&M Charges set out in Schedule 2 within
thirty (30) days of the date of the relevant invoices.
5 CONDITIONS OF USE AND THE PROVISION OF CAPACITY
5.1 The Purchaser represents to and covenants with C&W as follows:
(a) The Purchaser is an entity, duly organized and validly existing under
the laws of its state or jurisdiction of organization, is qualified to
do business in all jurisdictions (domestic and foreign) in which such
qualification is required by applicable law, and has the requisite
authority to execute this Agreement and to perform its obligations
hereunder;
(b) This Agreement constitutes a valid and binding obligation of the
Purchaser. enforceable against the Purchaser in accordance with its
terms;
(c) There are no pending, or, to the Purchaser's knowledge, threatened
claims, actions, suits, audits, investigations or proceedings by or
against the Purchaser which could have a material adverse effect on
the Purchaser's ability to perform its obligations under this
Agreement:
(d) The Purchaser has obtained and shall maintain in good standing, all
necessary consents, approvals, licenses, permits and other approvals,
both governmental and private, as may be necessary to permit the
Purchaser to perform its obligations under this Agreement and to
acquire and use the Capacity:
(e) The Purchaser shall perform its obligations under this Agreement and
use the Capacity in a manner consistent with applicable law, and shall
not use, or permit the Capacity to be used, for any illegal purpose or
in any other unlawful manner;
(f) The Purchase shall not create or permit to exist, any liens,
encumbrances or charges to be placed upon the Capacity or the
Purchasers rights under this Agreement other than liens, encumbrances
or charges of financial institutions or others against the Purchaser's
assets generally in connection with financing arrangements by the
Purchaser; and
(g) The Purchaser shall cause each other Purchaser Party to comply with
the obligations of this Agreement as such requirements are applicable
to each such Purchaser Party.
C&W represents to and covenants with Purchaser as follows:
(a) C&W is an entity, duly organized and validly existing under the laws
of its state or Jurisdiction of organization, is qualified to do
business in all jurisdictions (domestic and foreign) in which such
qualification is required by applicable law, and has the requisite
authority to execute this Agreement and to perform its obligations
hereunder;
(b) This Agreement constitutes a valid and binding obligation of C&W,
enforceable against C&W in accordance with its terms;
(c) There are no pending, or, to C&W's knowledge, threatened claims,
actions, suits, audits, investigations or proceedings by or against
C&W which could have a material adverse effect on C&W's ability to
perform its obligations under this Agreement; and
(d) C&W has obtained and shall maintain in good standing, all necessary
consents, approvals, licenses, permits and other approvals, both
governmental and private, as may be necessary io permit C&W to perform
its obligations under this Agreement.
5.2 The Purchaser shall obtain and maintain in force all such approvals,
consents, governmental authorization, licenses and permits as may be
required or as may be stipulated as necessary from time to time by Gemini.
5.3 C&Ws performance of this Agreement is contingent upon:
(i) the provision and continuing operation of the Cable System, and
(ii) it obtaining and maintaining in force all approvals, consents,
governmental authorizations, licences and permits as may be required
(which C&W agrees to use all reasonable efforts to obtain and
maintain).
5.4 The Capacity shall be Made available to C&W, at such times as may be
required by Gemini and at such other times as are agreeable to both C&W and
the Purchaser, or any duly authorized agent of C&W to make such
<PAGE>
tests and adjustments as may be necessary for the maintenance of such
Capacity.
6 OPERATION OF EQUIPMENT
6.1 The use and operation by the Purchaser or any other Purchaser Party of the
Capacity and any equipment associated with it shall be such as not to (i)
interrupt, interfere with or impair service over any of the facilities
comprising the Cable System or any other rights of use with respect to any
other capacity on the Cable System, (ii) impair privacy of any
communications over such facilities, (iii) cause damage to plant, (iv) be
hazardous to any person, or (v) prevent the use of similar or other
equipment by the other users of the Cable System. The Purchaser shall hold
harmless C&W and bear the cost of any additional protective apparatus
reasonably required to be installed because of the use and/or operation of
such Capacity and/or equipment by any Purchaser Party, and the cost of any
damages relating thereto.
6.2 The Purchaser shall obtain the prior written consent of C&W before
installing or using or permitting any other Purchaser Party to install or
use any equipment in connection with the Cable System. Any consent granted
by G&W to the Purchaser pursuant to this Clause may be immediately revoked
and the use of the, Capacity immediately suspended at any time by C&W if
the provisions of Clause 6.1 are not fulfilled and any such revocation
and/or suspension shall co6tinue until such time as C&W determines, in its
sole opinion, that the problem that gave rise to such suspension has been
corrected.
7 INTELLECTUAL PROPERTY
No licence under patent or any other intellectual property right whatsoever
shall be granted by C&W to the Purchaser or other Purchaser Party pursuant
to this Agreement including without limit in connection with any Purchaser
Party's use of the Cable System.
8 RESTORATION
The parties acknowledge that one of the two (2) transmission paths within
the Cable System has not yet been completed. Once both transmission paths
a@e in operation, in the event of failure of one of one of the two
transmission paths within the Cable System, restoration of the Capacity
will be provided by use of all or portion(s) of the other transmission path
within the Cable System at no charge to the Purchaser; provided, however,
that if both transmission paths fail at the same time, then (i) if Schedule
1 indicates that Out-of System Restoration is to be provided, Out-of-System
Restoration will be provided but only if restoration facilities are made
available to Gemini on another cable system, and (ii) if Schedule 1
indicates that Out-of System Restoration is not to be provided, no such
restoration shall be provided. If Out-ofSystem Restoration is provided, the
Purchaser shall pay Restoration Charges in accordance with the terms
detailed in Schedule 2. The Purchaser shall pay to C&W the Restoration
Charges within thirty (30) days of the date of the relevant invoice.
9 REDUCTION IN SYSTEM CAPACITY AND INCREASE IN COMMUNICATION CAPABILITY
9.1 If the capacity of the Cable System is reduced as a result of physical
deterioration or for other reasons during the term of this Agreement and
the Capacity allocated to C8,W is reduced as 2 result thereof, then (i)
upon notice to the Purchaser, the Capacity shall also be reduced, with such
reduction being in the same proportion as the capacity of the Cable System
is reduced in so far as this is feasible as determined by C&W, and (ii) If
the costs to C&W with respect to the O&M Charges are reduced as a result
thereof, the O&M Charges shall be equitably reduced.
9.2 Subject to Clause 6, the Purchaser shall at its own expense have the right
to increase the communication capability of the Capacity by the use of
equipment which will increase the amount, or make more efficient use of the
capacity, or both, or by other means as it may from time to time determine.
10 TERMINATION OF AGREEMENT
10.1 This Agreement shall terminate forthwith on the Retirement Date (including
circumstances in which Gemini decides to retire the Cable System from
service in accordance with appropriate national and international
regulations in accordance therewith), unless earlier terminated in
accordance with Clause 10.2 or 10.3 below.
10.2 This Agreement may be terminated by C&W (i) by thirty (30) days written
notice if the Purchaser fails to make any payment when due, or (ii) if the
Purchaser is in breach of any other provision of this Agreement, which, if
remediable, has not been remedied within thirty (30) days of notice thereof
being given to the Purchaser. In this event, C&W shall (i) be entitled to
reclaim the rapacity, (ii) be relieved of any liability to any Purchaser
Party arising out of such termination and reclamation, and (iii)l be
entitled to pursue any and all rights and legal and equitable remedies
(including its rights and remedies to enforce the Purchaser's obligations
under this Agreement).
10.3 This Agreement shall terminate forthwith in the event of:
(a) any action by the FCC or other applicable regulatory or governmental
authority directing either party to terminate this Agreement or
declaring that this Agreement is in any way inconsistent with FCC
rules or other applicable laws, rules and regulations or
(b) upon the expiration or earlier revocation of any licence, consent,
permit or other approval granted to either party by a regulatory or
governmental authority and required by such party to perform its
obligations or exercise its rights in accordance with the terms of
this Agreement.
<PAGE>
In the event of such termination, all SUM5 due and payable hereunder
shall immediately accrue and become due and payable and the Capacity
shall be immediately be reclaimed by C&W without it being liable to the
Purchaser 6r any other Purchaser Party as a result thereof.
11 LIABILITIES
11.1 Except as expressly set forth in this Agreement, neither C&W nor any
company granting it capacity in the Cable System shall be liable to the
Purchaser or other Purchaser Party or any person or entity claiming through
or under any Purchaser Party, directly or indirectly, for any loss or
damage (whether direct, indirect, general special or consequential)
sustained for any cause or reason whatsoever relating to or arising out of
the construction, operation, repair, maintenance or decommissioning of the
Cable -System, or 5ny facilities associated with the Cable System,
including, but not limited to, any damage sustained by reason of any delay
in commencing or failure to commence operation of, or any failure in or
breakdown of the -Cable System, or any facilities associated with the Cable
System, or for any interruption, and however long it shall last. In no
event shall C&W or any company granting it capacity in the Cable System be
liable to the Purchaser or any other Purchaser Party, or any person or
entity claiming through or under them, I .
(i) for any loss of business, anticipated savings or profits, or any loss
of value of equipment, including software, or
(ii) any indirect, incidental, special or consequential loss or damage,
however arising.
11.2 The Purchaser shall indemnify, hold harmless and defend C&W and its
directors, employees, representatives and agents from and against all
claims, demands, actions, suits, proceedings, writs, judgements, orders and
decrees brought, made or rendered against them or any of them and all
damages, losses and expenses suffered or incurred by them or any of them
howsoever arising out of or related to the Purchaser Party's use of the
Cable System or any equipment used in connection therewith, or ownership of
the IRU interest in the Capacity, except where such claim arises directly
8S 2 result of the negligence or wilful misconduct of C&W.
12 FORCE MAJEURE
C&W shall not be liable to the Purchaser for the failure to perform any
obligation hereunder, or any loss or damage which may be suffered by any
Purchaser Party or any person or entity claiming through or under an
Purchaser Party, due to any cause beyond C&W's reasonable control,
including without limitation, any acts Of ly God, inclement weather,
failure or shortage or power supplies, unavailability of materials, flood,
drought, lightning or fire, strike, lockout, trade dispute or labor
disturbance, the act or omission of government, other telecommunications
operators, administrations or other competent authority, military
operations, riot, or difficulty, or delay or failure in manufacture,
production or supply by third parties.
13 NATURE OF RIGHTS AND RELATIONSHIP
13.1 All rights granted hereby and obligations entered into hereunder ire purely
contractual. Other than the IRU interests in the Capacity as set out in
this Agreement, nothing herein contained shall have effect to grant any
ownership, proprietary or possessory rights in any of the subject-matter
hereof to the Purchaser or any other Purchaser Party.
13.2 The relationship between C&W and the Purchaser shall not be that of
partners, joint venturers or principal/agent and nothing contained herein
shall be deemed to constitute a partnership, joint venture or agency
relationship between them.
14 ASSIGNMENT OF RIGHTS
C&W and its assignees shall be entitled to assign this Agreement at any
time and from time to time. The Purchaser shall not be entitled to assign,
transfer, or otherwise dispose of any of its rights or obligations
hereunder to any third party without the consent of C&W, such consent not
to be unreason-ably withheld. An assignment shall include any change of
voting or management control.
15 AMENDMENTS, WAIVER AND ENTIRE AGREEMENT
15.1 This Agreement may only be amended with written consent(s) signed by duly
authorized signatories of both parties.
15.2 No failure or delay, by either party to exercise any of its rights
hereunder shall constitute a waiver of all or part of same, unless and to
the extent that such party gives written confirmation that it expressly
waives its rights. No waiver of rights in respect of any act or default
shall affect any other rights, or any future rights in respect of a similar
or other act or default.
15.3 This Agreement represents the entire agreement and understanding between
the parties in respect of the grant of the IRU by C&W to the Purchaser and
supersedes any previous agreement between the parties in relation to that
subject matter and each party confirms that it has not entered into this
Agreement in reliance upon any representation or promise other than those
expressly set out herein.
16 EXECUTION OF MULTIPLE COPIES
This Agreement may be executed by duly authorized signatories on behalf of
both parties in two (2) counterparts and in such event each such
counterpart when so executed and delivered shall be an original, and such
counterparts shall together (as well as separately) constitute one and the
same instrument.
<PAGE>
SCHEDULE I
THE CABLE SYSTEM
Anticipated Retirement Date February, 2023
Terminal Points
US End Cable System ADM at 60 Hudson Street,
New York City
UK End Cable System ADM within Cable &
Wireless office at Bracknell
Notices to Purchaser (per Clause 19.1) Mr. F. Maquignon
Startec Global Communications, Inc.
10411 Motor City Drive
Suite 301
Bethesda, Maryland 20817
Capacity (between Terminal Points)
Quantity of STM-ls None
Quantity of DS-3s 1
Out-of-System Restoration
If the Capacity is an STM-1 N/A
If the Capacity is a DS-3 Restoration will be provided subject to
the conditions set out in Clause 8 of
this Agreement
For operational matters, the Purchaser
shall contact
For a STM-1 Capacity Gemini Network Control Center
For a DS-3 Capacity G&W
<PAGE>
SCHEDULE 2
PURCHASE PRICE, O&M CHARGES, RESTORATION CHARGES, AND INTERIM
RESTORATION ARRANGEMENT
PURCHASE PRICE: $4,250,000
ANNUAL O&M CHARGES
The O&M Charge shall be an annual charge. For 1998, the annual charge to be paid
by the Purchaser shall be equal to the sum7 of (i) $28,125, and (ii) 1/12th of
$128,000 multiplied by the number of months from the date of this Agreement
through December 31, 1998., For 1999, the annual charge shall be $128,000.
Starting with January 1, 2000 and continuing for each January 1st thereafter,
the annual charge shall increase by three and one-half percent (3.5%) per annum
on a compounded basis. The O&M Charge will be invoiced in advance an or about
January is' of each year except that for 1998 the amount due shall be payable in
full upon signature of this Agreement,
RESTORATION CHARGES
The Restoration Charges shall be the amount payable by Purchaser to C&W in
respect of any restoration of the Capacity by another cable system on a per
incident basis. The Restoration Charges shall be calculated in accordance with
the Purchase pro rata share (based upon the ratio of Purchase activated Capacity
on the Cable System to the total of all activated capacity on the Cable System
that is restored) of the total costs incurred in connection with such
restoration of all such capacity on the Cable System. Restoration Charges shall
be invoiced by C&W following an incident.
INTERIM RESTORATION AGREEMENT
A. It is acknowledged that the northern transmission path in the Cable System
is not currently ready for service. The period time from the Commencement
Date through the date the northern transmission path in the Cable System is
completed and ready for service as certified by Gemini is referred to
herein as the "Interim Period".
B. With respect to Clause 8 and Schedule 1 of this Agreement, during the
Interim Period restoration shall only be carried out by using another cable
system. A restoration carried-out during the Interim Period is referred to
herein as an "Interim Period Restoration".
C. If an Interim Period Restoration is carried out prior to April 1, 1999
("FY'99 Interim Period Restoration"), the Purchaser shall not have any
payment obligations to C8,W with respect to such a restoration unless any
costs incurred by C&W in connection with the FY'99 Interim Period
Restoration (including, without limitation, costs to resume use of the
Cable System) are not covered by the insurance policy ("Policy") under
which C&W is to be an insured with respect to such restorations
("Additional FY'99 Interim Period Restoration Costs"). If any Additional
FY'99 Interim Period Restoration Costs are incurred, the Purchaser shall
reimburse G&W for such costs within thirty (30) days after receiving C&Ws
invoice therefor. If the Interim Period extends beyond March 31, 1999 and
an Interim Period Restoration is carried out after that date ("FY'00
Interim Period Restoration"), unless the parties modify this Agreement
prior to April 1, 1999 to provide otherwise, the Purchaser shall pay a
Restoration Charge as set forth above for the FY'00 Interim Period
Restoration, and the terms of the preceding sentences of this paragraph C
and the terms of paragraphs D, E and F below shall not apply with respect
to the FY'00 Interim Period Restoration.
D. With respect to Additional FY'99 Interim Period Restoration Costs, C&W
understands that the following are some (but not all) of the exclusions,
limitations and exceptions regarding which costs are to be covered by the
Policy: (a) wear, tear, gradual deterioration, rust or corrosion, inherent
vice, damp or mildew, shrinkage, evaporation, loss of weight,
contamination, change of color, texture or finish; (b) moth, vermin,
insects, change in temperature or humidity of or to the property; (c) that
part of the property's own mechanical or electrical breakdown, failure,
derangement or disturbance, latent defects, faulty materials, defective
design or defective workmanship; (d) atmospheric or climatic conditions
when property is in transit unless reasonable precautions have been taken
to protect the property against loss, destruction or damage; (a) war,
invasion, act of foreign enemy, hostilities (whether war be declared or
not), civil war, rebellion, revolution, insurrection of military or usurped
power; (@ confiscation, destruction or requisition by order of any
Government, Customs, Public or Municipal Authority except destruction by
order of any Government, Public or Municipal Authority to prevent loss or
damage by perils insured hereby; (g) any restoration costs incurred later
than three (3) months from the date a covered event occurs; and (h)
coverage shall be reduced by an allowance equal to any reduction in
operating costs.
The preceding is only a synopsis, in general terms, of what C&W understands
to be the relevant exclusions, limitations and exceptions to be in the
Policy, and including this synopsis herein does not in any manner
whatsoever change, modify or replace the actual complete terms and
conditions of the Policy, including without limitation, the exclusions,
limitations and exceptions therein ("Actual Terms"). To the extent the
Actual Terms differ from those set out herein, the Actual Terms shall
govern.
E. The Purchaser hereby specifically acknowledges that in accordance with the
preceding terms, additional amounts shall be due and payable to C&W for (i)
any costs incurred with respect to a FY'00 Interim Period Restoration, and
(ii) any Additional FY'99 Interim Period Restoration Costs, i.e., any costs
incurred by C&W in connection with a FY'99 Interim Period Restoration
(including, without limitation, costs to resume use of the Cable System)
which are not covered by the Policy based on its coverage descriptions,
exclusions, limitations, exceptions and other Actual Terms.
F. C&W is not licensed to nor is it hereby selling insurance to or arranging
insurance for the Purchaser, nor is CWI licensed to nor is it representing
any insurance carrier in selling insurance to or arranging insurance for
the Purchaser or otherwise.
<PAGE>
17 SUCCESSORS
This Agreement shall be binding on the parties, their lawful successors and
their permitted assigns.
18 LAW AND JURISDICTION
This Agreement is made in and governed by and subject to the laws and the
jurisdiction of the courts of the Commonwealth of Virginia.
19 NOTICES
19.1 All notices to be given hereunder shall, if given to:
C&W, be sent or transmitted to:
Cable &Wireless, Inc.
8219 Leesburg Pike
Vienna, Virginia 22182
Facsimile No: 703-760-3640
For the attention of: Contract Management Department
The Purchaser, be sent or transmitted to: Refer to Schedule 1.
Or shall be sent or transmitted to such other addresses as may be notified
in writing by either party to the other from time to time in accordance
with the provisions of this Clause,
19.2 Any notice given pursuant to this Agreement shall be in writing, signed by
(or by some person duly authorized by) the person giving it and may be
served by leaving it or sending it by facsimile, by hand delivery or
prepaid certified mail to the address of the relevant party set out or
referenced above in this Clause (or as otherwise notified from time to time
hereunder), Any notice given pursuant to this Agreement shall be in writing
signed by or by some person duly authorized b the Person giving it and m be
served by leaving it or sending it by facsimile, by hand delivery or
prepaid certified mail to the address o@ the relevant party set out or
referenced above in this Clause (or as otherwise notified from time to time
hereunder). Any notice shall be deemed to have been given when delivered as
follows:
(a) in the case of facsimile, upon receipt of the appropriate electronic
confirmation;
(b) in the case of certified mail, the time of delivery recorded by the
postal service;
(c) in the case of by hand delivery, the actual time of delivery,
20. CONFIDENTIALITY
The terms and provisions of this Agreement including details of the charges
shall not be disclosed by the Purchaser to any other person or entity
without C&VVs prior written consent in each instance.
C&W may disclose to Gemini and any C&W affiliate with a need to know the
name, address, telephone number, facsimile number and e-mail address of the
Purchaser and the IRU interest in the Capacity granted herein for the
purpose of administering the Cable System.
21. TAXES AND LATE PAYMENT FEES
The Purchase Price, O&M Charges, Restoration Charge s and other amounts due
hereunder do not include any applicable taxes which the Purchaser shall pay
upon receipt of an itemized invoice therefor.
If the Purchaser fails to pay an invoice when due, then G&W may, in
addition to any other remedy available, assess a late payment fee, The late
payment fee shall be applied on balances that remain unpaid thirty (30)
days following the invoice date in the amount of the lesser of (i) one and
one-half percent (1 1/2%) per month of the amount of the late payment
starting from the invoice date; or (ii) the maximum amount allowed under
applicable law.
EXECUTION
The parties have shown their acceptance of the terms of this Agreement by
executing it below,
Startec Global
Communications, Inc. Cable & Wireless, Inc.
Signature:/s/ Fabrice Maquignon Signature:/s/
----------------------- -----------------------
Printed Name: Fabrice Maquignon Printed Name:
-------------------- --------------------
Title: Senior Manager Europe Title:
--------------------------- ----------------------------
Date: 6/9/98 Date:
---------------------------- -----------------------------
<PAGE>
July 6, 1998
Mr. Fabrice Maquignon
Senior Manager, Europe
Startec Global Communications, Inc.
10411 Motor City Drive
Suite 301
Bethesda, Maryland 20817
Dear Mr. Maquignon:
Cable & Wireless, Inc. ("C&W USA") is pleased that Startec Global
Communications, Inc. ("Startec") has elected to purchase, on an IRU basis, a
DS-3 of capacity on the Gemini cable system from C&W USA as indicated by
Startec's signature of the Indefeasible Right of Use Agreement ("Agreement")
In order for the Agreement to be processed, C&W USA needs to ensure that C&W USA
and Startec are in complete agreement regarding their understanding of the
following issue related to the Agreement
Annual O&M Charges: With respect to the "Annual O&M Charges" section of
Schedule 2 of the Agreement, the three and one-half percent (3.5%) increase
shall commence as of January 1, 1999; not as of January 1, 2000.
Accordingly, the Annual O&M Charge for 1999 will be $132,480 ($128,000
annual charge for 1998 plus 3.5% increase added thereon).
If Startec agrees that this letter should be an amendment to the Agreement upon
full execution and delivery of the Agreement, you are requested to sign in the
space provided below and return a signed copy of this letter to my attention.
Upon receipt of a signed copy of this letter, C&W USA will continue processing
the Agreement.
Should you have any questions regarding this letter, please call Susan Ludwig at
(703) 760-3607.
Again, C&W USA is pleased to have been selected to provide capacity for Startec,
and we look forward to working with you on this project.
Sincerely,
/s/ Richard A. Berman
Richard A. Berman
Director, Contract Management
Agreed to by Startec Global Communications, Inc.
Signature:/s/ Subhash Pai
---------------------------------------
Printed Name: Subhash Pai
------------------------------------
Title: V P Controller
-------------------------------------------
Date: 7/8/98
--------------------------------------------
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE ("this First Amendment") is entered into this
____ day of May, 1998, by and between THE VASWANI PLACE CORPORATION (the
"Landlord"), and STARTEC GLOBAL COMMUNICATIONS CORPORATION .
W I T N E S S E T H :
WHEREAS, pursuant to that certain Lease dated October 27, 1997 (the
"Lease"), Landlord leased to Tenant certain space consisting of Twenty-Seven
Thousand Seven Hundred Eleven (27,711) Rentable Square Feet of office space on
the third and fourth floors of Landlord's office building located at 10411 Motor
City Drive, Bethesda, Maryland (the "Building"); and
WHEREAS, Tenant has been occupying the space governed by the Lease since
November 1, 1997; and
WHEREAS, Tenant wishes to lease additional space from Landlord consisting
of Nine Thousand Seven Hundred Forty-Three (9,743) Rentable Square Feet (the
"New Space"); so that Tenant shall occupy all Rentable Square Feet on the third
and fourth floors of the Building; and
WHEREAS, Landlord is desirous of leasing to Tenant the New Space on the
terms and conditions set forth herein and in the Lease; and
WHEREAS, the parties hereto are mutually desirous of amending and modifying
the Lease to govern the additional space to be leased to the Tenant; and
WHEREAS, unless otherwise provided herein, all terms used in this First
Amendment that were defined in the Lease shall have the meanings provided for in
the Lease.
<PAGE>
2
NOW, THEREFORE, for an in consideration of the above promises and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree that the
aforesaid Lease shall be and the same is hereby modified and amended as follows:
1. RECITALS: The foregoing recitals are intended to be a material part of
this First Amendment and are incorporated herein by this reference.
2. DEMISED PREMISES: Paragraph 1 of the Lease shall now provide that the
Tenant shall lease from Landlord Rentable Square Footage on the third and fourth
floors consisting of Thirty-Seven Thousand Four Hundred Fifty-Four (37,454)
Rentable Square Feet, which shall consist of an additional Nine Thousand Seven
Hundred Forth-Three (9,743) Rentable Square Feet over the original Twenty-Seven
Thousand Seven Hundred Eleven (27,711) Rentable Square Feet in the Lease
(hereinafter referred to as "the Demised Premises").
3. TERM. Paragraph 2 of the Lease shall be amended so that the Term shall
include the New Space governed by this Lease Amendment.
4. RENT FOR NEW SPACE: The parties agree that paragraph 4A of the Lease
shall be amended to include the New Space and that Tenant shall pay to Landlord
the sum of $18.03 a square foot for the New Space.
5. FREE RENT FOR NEW SPACE: The parties agree that the Tenant shall be
provided free rent for the New Space for a period of ninety (90) days or for the
months of May, June and July, 1998. This free rent will consist of the sum of
$14,639.23 per month for each of the three months.
<PAGE>
3
6. ADDITIONAL RENT: From and after May 6, 1998, Paragraph 5(A)(3) shall be\
amended to increase the percentage therein so as to reflect the percentage which
the square footage of the Demised Premises bears to the square footage of the
Building.
7. ADDITIONAL PARKING: Paragraph 23 of the Lease is amended to provide
Tenant with one hundred (100) reserved parking spaces of which fifteen (15) of
such reserved parking spaces shall be underground in Landlord's ground floor. In
the event Landlord constructs a second building adjacent to the Building,
Landlord shall provide the Tenant with equivalent alternative parking.
8. ADDITIONAL SECURITY: Tenant shall have the right, subject to Landlord's
advance approval, to place a security guard outside of its Suite entrance door
on the third and fourth floors, and in any other area of the Demised Premises at
Tenant's expense so long as such guards do not violate fire code regulations and
standards.
9. UTILITIES: Paragraphs 5(a)(4), 5 (D) and 11(A) of the Lease shall be
amended as follows:
(a) Tenant has the right to utilize certain of the Demised Premises
for a television terminal room where there are located screens and terminals. It
is agreed that the Landlord shall install a re-registering meter for the
electricity to this location and shall collect from the Tenant charges for
electricity used in the television terminal area. The installation of the
re-registering meters shall be at Tenant's expense. If Tenant's usage of
electricity in areas of the Demised Premises other than the television terminal
area exceeds by reasonable comparison, on a square foot basis, other building
tenants' electricity usage, then Landlord, at
<PAGE>
4
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
in such areas.
(b) Tenant intends on utilizing the HVAC system on an overtime basis
and in some locations of the Demised Premises, on a 24-hour basis. The parties
agree that Landlord shall have the right, at its option, to install a
re-registering meter for such overtime HVAC, at Tenant's expense, as well as to
charge Tenant its pro rata portion for any additional equipment that may be
required by Landlord in providing such overtime HVAC.
(c) In calculating overall Operating Expenses described in Paragraph
5(A)(4) of the Lease, Tenant's pro rata share of Operating Expenses associated
with electricity shall be reduced to reflect the proportion of space that is
separately metered. Only square footage of the Demised Premises that is not
separately metered shall be used in calculating Operating Expenses associated
with electricity.
(d) Upon reasonable notice (except in cases of emergency, in which no
notice shall be required) Landlord and its agents shall be permitted reasonable
access to the Demised Premises and the right to install facilities within or
thorugh the Demised Premises in order to install and service the systems deemed
necessary by Landlord for Tenant or to provide to other tenants of the Building
the service and utilities referred to in this section.
10. CONDITION OF NEW LEASE: Landlord shall lease to Tenant the New Space in
its "AS IS" condition, subject to the removal by the Landlord of its property in
such space. Any build-out or improvement of such space by Tenant shall be at its
expense, subject to approval of the Landlord which shall not be unreasonably
withheld.
<PAGE>
5
11. CONTINUATION OF LEASE: Except as otherwise provided herein, all of the
terms and conditions of the Lease shall remain in full force and effect.
IN WITNESS WHEREOF, the respective parties have hereunto set their hands
and seals or caused these presence to be duly signed and seal on their behalf
the day and year first above appearing.
WITNESS: LANDLORD:
THE VASWANI PLACE CORPORATION
/s/ By:/s/ ROMA MALKANI
- - ------------------------------ -----------------------------
ROMA MALKANI
TENANT:
WITNESS. STARTEC GLOBAL
COMMUNICATIONS
CORPORATION
By:/s/ Charles W. Kage By:/s/ RAM MUKUNDA
--------------------------- -----------------------------
Title: Director MIS RAM MUKUNDA, President, CEO
------------------------
LICENCE GRANTED BY
THE SECRETARY OF STATE FOR TRADE AND INDUSTRY TO
IFL LIMITED UNDER SECTION 7 OF THE
TELECOMMUNICATIONS ACT 1984
APRIL 1998
<PAGE>
TABLE OF CONTENTS
THE LICENCE
SCHEDULE 1: CONDITIONS INCLUDED UNDER SECTION 7 OF THE ACT
PART 1: Definitions and interpretation relating to the Conditions in
Schedule 1
PART 2: Special Conditions referred to in section 8 of the Act
1 Requirement to provide telecommunication services
2 Universal Service
3 Director Information
4 Public Emergency Call Services
5 Planning and implementation of special arrangements for Emergencies
6 Requirement to provide Connection Services
7 Essential requirements to interconnect
8 Collocation and facility sharing
9 Significant Market Power
10 Provision by others of services by means of the Applicable Systems
11 Publication of charges, terms and conditions to be applied
12 Prohibition on undue preference and undue discrimination
PART 3: Other Conditions included under section 7 of the Act
13 Maintenance of effective competition where the licensee operates a
system or provides services overseas
14 Fair Trading
<PAGE>
15 Esential Interfaces
16 Special or exclusive rights in non-telecommunication sectors
17 Customer Interface Standards
18 Restrictions On Advertising
19 Metering and Billing Arrangements
20 Numbering arrangements
21 Arrangements for parallel accounting
22 Arrangements for parallel accounting
23 Prohibition of exclusive dealing in international services
24 Notification of changes in Shareholdings
25 Licensee's Group
26 Payment of fees
27 Requirement to furnish information to the Director
28 Requirement to submit accounts to the Director
29 Leased Lines
30 Availability of information
31 Termination of offerings
32 Access, usage and essential requirements
33 Provision of a minimum set of Relevant Private Circuits
34 Control by the Director
35 Tariff principles and cost accounting
36 Exceptions and limitations on obligations in Schedule 1
PART 3: Conditions included under Section 7 of the Act for the Purposes of
Access Control Services
37 Requirement to provide access control services
<PAGE>
38 Transcontrol requirements imposed on the operators of access control
services
39 Prohibition of linked sales
40 Publication of charges, terms and conditions to be applied
41 Intellectual property
42 Requirements to keep separate financial accounts in respect of
Access Control Services
43 Code of practice on the confidentiality of customer information
44 Exceptions and limitations on obligations in Part 3 of Schedule 1
SCHEDULE 2: REVOCATION
SCHEDULE 3: AUTHORISATION TO CONNECT OTHER TELECOMMUNICATION SYSTEMS AND
APPARATUS TO THE APPLICABLE SYSTEMS AND TO PROVIDE TELECOMMUNICATION
SERVICES BY MEANS OF THE APPLICABLE SYS- TEMS
<PAGE>
LICENCE GRANTED BY
THE SECRETARY OF STATE FOR TRADE AND INDUSTRY TO
IFL LIMITED
UNDER SECTION 7 OF THE TELECOMMUNICATIONS ACT 1984
THE LICENCE
1 The Secretary. of State, in exercise of the powers conferred on her by section
7 of the Telecommunications Act 1984 (hereinafter referred to as "the Act") and
after consulting the Director hereby grants to IFL Limited (hereinafter referred
to as "the Licensee") a licence, for the period specified in paragraph 2,
subject to the Conditions set out in the Schedule 1 and to revocation as
provided for in paragraph 2 and in Schedule 2, to run telecommunication systems
of every, description within the United Kingdom ("the Applicable Systems") and
authorises the Licensee to do all or any of the acts specified in Schedule 3.
Duration
2 This Licence shall enter into force on the date of signature and shall be of
six months' duration in the first instance but, without prejudice to Schedule 2
to this Licence, shall be subject to revocation thereafter on one month's notice
in writing of such revocation.
Interpretation
3 The Interpretation Act 1978 shall apply for the purpose of interpreting this
Licence as if it were an Act of Parliament. In this Licence, except as
hereinafter provided or unless the context otherwise requires, words or
expressions shall have the meaning assigned to them and otherwise any word or
expression shall have the same meaning as it has in the Act. For the purposes of
interpreting this Licence, headings and titles shall be disregarded.
4 In this Licence, "Licence" means a licence granted or having effect as if
granted under section 7 of the Act.
5 For the purposes of this Licence the "Applicable Systems" means any or all of
the telecommunication systems run by the Licensee under this Licence unless the
context otherwise requires.
6 Where this Licence provides for any power of the Secretary of State or the
Director to give any direction, notice or consent or make any specification,
designation or determination, it implies, unless tile contrary intention
appears. a power, exercisable in the same manner and subject to the same
conditions or limitations, to revoke, amend or give or make again an,,' such
direction, notice, consent, specification, designation or determination: and any
reference however expressed to the Director making any determination about any
matter shall be construed as making such determination after consultation with
the Licensee and where appropriate with any other person who may have a relevant
interest in the matter to which the determination relates.
<PAGE>
7 Any notification which is required to be given under this Licence by the
Secretary of State or the Director shall be satisfied by serving the document by
post on the Licensee at the Licensee's registered office.
Jonathan Wood
For the Secretary of State
April 1998
<PAGE>
SCHEDULE 1: CONDITIONS INCLUDED UNDER SECTION 7 OF THE ACT
PART 1: DEFINITIONS AND INTERPRETATION RELATING TO THE CONDITIONS IN SCHEDULE 1
1. In this Schedule unless the context otherwise requires:
(a) "Accounting Rate Service" means each telecommunications service to
each country and territory for which a separate accounting rate has
been agreed, not including Transit Services;
(b) "Applicable Terminal Equipment" means apparatus which is applicable
terminal equipment within the meaning of regulation 4 of the
Telecommunications Terminal Equipment Regulations 1992;
(c) "Approved Apparatus" means in relation to any system apparatus
approved under section 22 of the Act for connection to that system;
(d) "Associated Person" means any member of the Licensee's Group or a
person with a Participating Interest in a member of the Licensee's
Group or in whom a member of the Licensee's Group has a Participating
Interest;
(e) "Authorised Overseas System" means any telecommunication system
outside the United Kingdom which is authorised to be connected to the
Applicable Systems under Schedule 3;
(f) "Compatibility" means that between the parties concerned there is no
reasonably foreseeable risk of:
(i) duplication of any Number; or
(ii) any other related effect, such as would introduce ambiguity or
errors or impose undue restrictions on any' user or group of
users:
(g) "Compliant Terminal Equipment" means Applicable Terminal Equipment
which satisfies the requirements of regulation 8 of the
Telecommunications Terminal Equipment Regulations 1992:
(h) "Condition" means a Condition in this Schedule:
(i) "Connectable System" means a telecommunication system which is
authorised to be run under a Licence/which authorises connection of
that system to the Applicable Systems:
<PAGE>
(j) "Connection Service" means a telecommunication service consisting in
the conveyance of any Message which has been, or is to be, conveyed by
means of the Applicable Systems:
(k) "Dwelling-House" has the same meaning as in section 202 of the
Broadcasting Act 1990;
(l) "Emergency" means an emergency of any kind, including any circumstance
whatever resulting from major accidents, natural disasters and
incidents involving toxic or radio-active materials;
(m) "Emergency Organisations" means in respect of any locality:
(i) the relevant public police, fire, ambulance and coastguard
services for that locality; and
(ii) any other similar organisation in respect of which any public
telecommunications operator licensed to operate in the locality
in question is providing a Public Emergency Call Service on the
day on which this Licence enters into force;
(n)
(i) in relation to telecommunication services other than Access
Control Services means in relation to a Point of Connection an
interface at which in the opinion of the Director it is essential
that interoperability between the Applicable Systems and the
respective Operator's telecommunication systems is available; and
(ii) in relation to Access Control Set-vices means an interface at
which, in the opinion of the Director, it is essential that
interoperability between the Applicable Systems and the Third
Party's Access Control System, a Conditional Access System or a
Transmission System, as the case may be, is available;
(o) "European Public Operator" means a person authorised in another Member
State to provide public telecommunications networks and publicly
available telecommunications services and whose name has been notified
by that Member State to the Commission under Article 18 of the
Interconnection Directive as a person covered by Annex II of that
Directive:
(p) "Group" means a parent undertaking and its subsidiary undertaking or
undertakings within the meaning of section 258 of the Companies Act
1985 as substituted by section 21 of the Companies Act 1989: and
"Licensee's Group" means a Group in respect of which the Licensee is
either a parent undertaking or a subsidiary undertaking:
(q) "Interconnection Directive Conditions" means Conditions2,6, 7, 8, 9.
and 16:
(r) "interconnection Directive" means Directive 97 33 EC on
interconnection in telecommunications with regard to ensuring
universal service and
<PAGE>
interoperability through the application of the principles of Open
Network Provision (ONP);
(s) "Interconnection Regulations" means the Telecommunications
(Interconnection) Regulations 1997 (S.I. 1997/'293 I);
(t) "international Business" means the business of providing
telecommunication services including, without limitation, any services
comprised in a Relevant International Function, which consist in the
conveyance of Messages to countries or territories outside the United
Kingdom carried on under a Licence and include the running of such
parts of the Applicable Systems as are used for the provision of those
services, and the installation, maintenance, adjustment, repair,
alteration, moving, removal or replacement of such Systems and any
apparatus comprised therein;
(u) "International Conveyance Service" means a telecommunication service
consisting in the conveyance of any Message which has been or is to be
conveyed by means of any telecommunication system outside the United
Kingdom the connection of which to a system by means of which that
service is provided is authorised by a Licence;
(v) "International Private Leased Circuit" means a communication facility
which is:
(i) comprised both in a public telecommunication system and in an
equivalent telecommunication system in a country or territory
other than the United Kingdom;
(ii) for the conveyance of Messages between:
(A) in the case of outbound Messages, the last point of
connection within the United Kingdom at which the route of
the Messages is selected and the first point of connection
in any country or territory other than the United Kingdom;
(B) in the case of inbound Messages, the last point of
connection in any country' or territory other than the
United Kingdom and the first point of connection in the
United Kingdom at which the route of the Messages is
selected;
(iii) made available to a particular Service Provider:
(iv) such that all of the Messages transmitted at any of the points
mentioned in paragraph {i) are received at every other such
point: and
(v) such that all the points mentioned in paragraph (ii) are points
of connection between telecommunications systems referred to in
paragraph (i): and
<PAGE>
(vi) such that all the points mentioned in paragraph (ii) are fixed by
the way in which the facility is installed and cannot otherwise
be selected by persons or telecommunication apparatus sending
Messages by means of that facility; but
(vii)excluding from the extent of the facility any Private Leased
Circuit installed between the particular Service Provider and any
other person in the United Kingdom.
(w) "International Simple Data Resale Services" means telecommunication
services consisting in the conveyance of Messages which do not include
two-way live speech, but include only such switching, processing, data
storage or protocol conversion as is necessary for the conveyance of
those Messages in real time, which have been or are to be conveyed by
means of all of the following:
(i) a Public Switched Network;
(ii) an International Private Leased Circuit; and
(iii)the equivalent of a Public Switched Network in another country or
territory;
provided that conveyance of a Message by means of a PuNic Switched
Network or, as the case may be, the equivalent of a Public Switched
Network in another country or territory, shall be disregarded where
that Message is so conveyed in circumstances specified for the time
being by the Secretary of State as not being material for the purposes
of paragraph 3 of Schedule 3 to this Licence and included in a list
kept for the purpose by the Director and made available by him for
inspection by the general public;
(x) "International Simple Voice Resale Services" means telecommunication
services consisting in the conveyance of Messages which include
two-way live speech which have been or are to be conveyed by means of
all of the following:
(i) a Public Switched Network;
(ii) an International Private Leased Circuit; and
(iii)tile equivalent of a Public Switched Network in another country
or territory;
provided that conveyance of a Message by means of a Public Switched
Network or, as tile case may be, the equivalent of a Public Switched
Network in another country or territory shall be disregarded where
that .Message is so conveyed in circumstances specified for the time
being by the Secretary of State as not being material for the purposes
of paragraph 3 of Schedule 3 to this Licence and included in a list
kept for the purpose by the Director and made available by him for
inspection by the general public:
<PAGE>
(y) "Leased Lines Directive" means Council Directive 92/44/EEC on the
application of open network provision to leased lines as amended by
Council Directive 97/51/EC amending Council Directives 90/387/EEC and
92/44fEEC for the purpose of adaptation to a competitive environment
in telecommunications;
(z) "Leased Lines Regulations" means the Telecommunication (Open Network
Provision and Leased Lines) Regulations 1997 (S.I. 1997/2932),
(aa) "Leased Lines Directive Conditions" means Conditions 29 to 35;
(bb) "Major Office" means the Licensee's registered office and such other
offices as the Director, having consulted the Licensee, may direct;
(cc) "Message" means anything falling within paragraphs (a) to (d) of
section 4(1) of the Act;
(dd) "Network Connecting Apparatus" means telecommunication apparatus
comprised in the Applicable Systems which is not Network Termination
and Testing Apparatus and is connected to another telecommunication
system;
(ee) "Network Termination Point" means any point:
(i) within an item of Network Connecting Apparatus at which energy of
any of the forms specified in section 4(1) of the Act is conveyed
directly to or from apparatus comprised in a telecommunication
system other than one in which that Network Connecting Apparatus
is comprised; or
(ii) within an item. of Network Termination and Testing .Apparatus at
which such energy is conveyed directly to any Relevant Terminal
Apparatus;
(ff) "Network Termination and Testing Apparatus" means an item of
telecommunication apparatus comprised in the Applicable Systems
installed in a fixed position on Served Premises which enables:
(i) Approved .Apparatus to be readily connected to. and disconnected
from. the Applicable Systems;
(ii) the conveyance of Messages between such Apparatus and the
Applicable Systems; and
(iii)the due functioning of the Applicable Systems to be tested. but
the only other (pound)unctions of which, if any, are:
(A) to supply energy between such Apparatus and the Applicable
Systems:
<PAGE>
(B) to protect the safety or security of the operation of the
Applicable Systems; or
(C) to enable other operations exclusively related to the
running of the Applicable Systems to be performed or the due
functioning of any system to which the Applicable Systems
are or are to be connected to be tested (separately' or
together with the Applicable Systems).
(gg) "Number" means any identifier which would need to be used in
conjunction with any public switched service for the purposes of
establishing a connection with any Network Termination Point, user,
telecommunication apparatus connected to any Public Switched Network
or service element, but not including any identifier which is not
accessible to the generality of users of a public switched service;
(hh) "Numbering Plan" means a plan describing the method adopted or to be
adopted for allocating and re-allocating a Number to any Network
Termination Point, user telecommunication apparatus or service
element;
(ii) "Operator" means a Schedule 2 Public Operator or any person who is
authorised or permitted to run telecommunication systems or provide
telecommunication services by means of a Relevant Connectable System
or both;
(jj) "Operator having Significant Market Power" means a Public Operator
which the Director has determined to be an organisation having
Significant Market Power in accordance with Regulation 4 of the
Interconnection Regulations;
(kk) "Parent Undertaking".has the same meaning as in section 258 of the
Companies Act 1985 as substituted by section 21 of the Companies Act
1989;
(ll) "Participating interest" has the same meaning as in section 260 of the
Companies Act 1985 as substituted by section 22 of the Companies Act
1989;
(mm) "Point of Connection" means a point at which the Applicable Systems
and an Operator's system are connected;
(nn) "Private Leased Circuit" means a communication facility which is:
(i) provided by means of one or more public telecommunication
systems;
(ii) for the conveyance of Messages between points, all of which are
points of connection between telecommunication systems referred
to in paragraph (i) and other telecommunication systems:
(iii) made available to a particular person or particular persons:
<PAGE>
(iv) such that all of the Messages transmitted at any of the points
mentioned in paragraph (it) are received at every other such
point; and
(v) such that the points mentioned in paragraph (it) are fixed by the
way in which the facility is installed and cannot otherwise be
selected by persons or telecommunication apparatus sending
Messages by means of that facility:
(oo) "Public Emergency Call Services" means a telecommunication service by
means of which any member of the public may, at any time and without
incurring any charge, by means of an item of telecommunication
apparatus which is lawfully connected to the Applicable Systems and
which is capable of transmitting and receiving unrestricted two way
voice telephony services when so connected, communicate as swiftly as
practicable with any of the Emergency Organisations for the purpose of
notifying them of an Emergency;
(pp) "Public Operator" means any person who is authorised or permitted to
run publicly available telecommunication systems or provide publicly
available telecommunication services or both;
(qq) "Public Switched Network" means a public telecommunication system by
means of which two-way telecommunication services are provided whereby
Messages are switched incidentally to their conveyance, and, for the
avoidance of doubt, a Public Switched Network does not include Private
Leased Circuits or International Private Leased Circuits;
(rr) "Relevant Apparatus" means any apparatus which is, or is to be,
connected to any of the switched Applicable Systems;
(ss) "Relevant Company" means:
(i) the Licensee; or
(ii) a Parent Undertaking in relation to the Licensee;
(tt) "Relevant Connectable System" means a Connectable System which is
authorised to be run under a Licence which authorises the provision by
means of that system of Connection Services for reward to the general
public, or an,,' class of the general public, not being a system:
(i) authorised to be run under a Licence granted to all persons or
persons of any class: and
(ii) for the connection of which, and for the provision of matters
necessary for such connection, the Licensee offers terms and
conditions which satisfy the requirements of Condition 1l of
Schedule l.
and not being a system which the Director has determined ought not to be
deemed a Relevant Connectable System for the purposes of this Licence:
<PAGE>
(uu) "Relevant International Function" means the business of providing any
of the following telecommunication services by means of the Applicable
Systems:
(i) International Simple Voice Resale or International Simple Data
Resale or both;
(ii) provision to others of International Private Leased Circuits;
(iii)provision of services under any agreement falling within the
description contained in Condition 6.1 in Schedule 1;
(iv) provision of International Conveyance Services (but not including
International Simple Voice Resale or International Simple Data
Resale), charges for which are to be settled at accounting rates;
(v) provision of International Conveyance Services (but not including
International Simple Voice Resale or International Simple Data
Resale), charges for which are not to be settled at accounting
rates, and where the Messages conveyed in the provision of such
service are conveyed over a circuit which is capable of conveying
two-way live speech;
(vi) provision of International Conveyance Services (including
International Simple Voice Resale or International Simple Date
Resale), charges for which are not to be settled at accounting
rates, and where the Messages conveyed in the provision of such
service are conveyed over a circuit which is not capable of
conveying two-way live speech;
(vii)the installation, maintenance, adjustment, repair, alteration,
moving, removal or replacement of any apparatus comprised or to
be comprised in the Applicable Systems; or
(viii) provision of any other services included in the Licensee's
International Business but not included in any of (uu)(i) to
(vii) above.
(vv) "Relevant System" means a Connectable System which is. or is to be.
connected to any of the switched Applicable Systems;
(ww) "Relevant Terminal Apparatus" means:
(i) "Terminal Apparatus", that is to say any telecommunication
apparatus installed on Served Premises by means of which Messages
are initially transmitted or ultimately received: and
(ii) any other telecommunication apparatus directly connected to
Terminal Apparatus (including apparatus which is Terminal
Apparatus by virtue of this sub-paragraph) which would, if it
were run with such Terminal Apparatus and an,.' other apparatus
by means of which it is so
<PAGE>
connected, constitute a system authorised to be run by the person
running that Terminal Apparatus under a Licence;
(xx) "Schedule 2 Public Operator" means an organisation described in
Schedule 2 to the Interconnection Regulations which is authorised or
permitted to run publicly available telecommunications systems or
provide publicly available telecommunications services or both:
(yy) "Served Premises" means a single set of premises in single occupation
where apparatus has been installed for the purpose of the provision of
telecommunication services by means of the Applicable Systems at those
premises;
(zz) "Service Provider" means (except for the purposes of Condition0) any
person who is in the business of providing telecommunication services
of any description;
(aaa)"Shares" has the same meaning as in section 259(2) of the Companies
Act 1985, as substituted by section 22 of the Companies Act 1989, and
the term "Shareholding" is to be construed accordingly;
(bbb)"Specified Numbering Scheme" means a scheme for the allocation and
reallocation of Numbers which is specified by the Director for the
purpose of this Licence and described in a list kept for that purpose
by him and made available by him for inspection by the general public.
(ccc)"Specified Person" means a person specified for the time being by the
Director (and who has consented to be so specified) for the purpose of
keeping and making available for inspection by the general public a
list such as is referred to in Condition 17;
(ddd)"Subscriber" means a person (other than a public telecommunications
operator) to whom there are provided switched voice telephony services
by means of the Applicable Systems;
(eee)"Subsidiary" has the meaning given to it in section 736 of the
Companies Act 1985, as substituted by section 144(1) of the Companies
Act 1989;
(fff)"Systems Business" means the following activities of the Licensee or
of any wholly owned Subsidiary to the extent that they are undertaken
in the United Kingdom taken together:
(i) the running of the Applicable Systems: and
(ii) the installation, maintenance, adjustment, repair, alteration,
moving. removal or replacement of any apparatus comprised or to
be comprised in the Applicable Systems;
(ggg)"Transit Service" means any telecommunications service consisting in
the conveyance of any Message which originates outside the United
Kingdom and
<PAGE>
is not to be terminated within the United Kingdom and for which a
separate accounting rate has been agreed;
(hhh)"Well Established International Operator" means an Operator having
25% or more of what is in the opinion of the Director the relevant
market, unless the Director determines that the Operator is not a Well
Established International Operator, or an Operator having less than
25% of what is in the opinion of the Director the relevant market
which is determined by the Director to be a Well Established
International Operator.
ADDITIONAL DEFINITIONS AND INTERPRETATION RELATING TO THE CONDITIONS IN
PART 3 TO SCHEDULE 1
(a) "Access Control Services" means telecommunication services, other than
Conditional Access Services, by means of which the supply to consumers
of a Relevant Other Telecommunication Service of any description may
be controlled and, without prejudice to the generality of the
foregoing includes:
(i) Encryption Services, that is to say:
(A) and encryption or scrambling of signals for a Relevant Other
Telecommunication Service of any description; and
(B) the conveyance by the Applicable System of encryption or
scrambling information;
(ii) Subscriber Authorisation Services, that is to say -
(A) the actuation or control or the remote actuation or control
of decoders; or
(B) the initial transmission of messages connected with
subparagraph (a)(ii)(A) above;
(iii) Subscriber Management Services, that is to say:
(A) the preparation, or preparation and supply to consumers of
Essential Components; or
(B) the preparation from consumers' orders of instructions for
authorisation signals for transmission to decoders,
(C) or both:
or any other component of a telecommunication service where failure to
provide such :2 part means that such Relevant Other Telecommunication
Service could not be supplied to consumers:
<PAGE>
(b) "Access Control Services Business" means the business of providing
Access Control Services and includes the running of such parts of the
Applicable Systems as are used for the provision of those services,
and the installation, maintenance, adjustment, repair, alteration,
moving, removal or replacement of such Systems and any apparatus
comprised therein;
(c) "Access Control System" means a telecommunication system by means of
which Access Control Services may be provided and to the extent that
the telecommunication system concerned is so used and does not include
a Transmission System run by the person providing the Access Control
Services;
(d) "Cable Operator" has the same meaning as in the Telecommunications
(Advanced Television Standards) Regulations 1996.
(e) "Code of Practice" means:
(i) any Code of Practice from time to time agreed between all
Licensees providing Access Control Services and approved by the
Director;
(ii) in the absence of an agreed Code of Practice under sub-paragraph
(i) any model Code of Practice issued by the Director; or
(iii)in the absence of an agreed Code of Practice under sub-paragraph
(i) or a Code of Practice issued by the Director under
subparagraph (ii), any Code of Practice submitted by the Licensee
to the Director and agreed by him.
(f) "Conditional Access Services" has the same meaning as in Directive
95/47/EC of the European Parliament and of the Council on the use of
standards for the transmission of television signals and the Advanced
Television Standards Regulations 1996 (SI 1996/3151);
(g) "Conditional Access System" means a telecommunication system by means
of which access to Digital Television Services may be controlled so
that only those viewers who are authorised to receive such services do
so:
(h) "Digital Television Services" has the same meaning as in the Advanced
Television Standards Regulations 1996 (SI 1996/3151 ):
(i) "Essential Component" means the smart card or other technological
component in electronic or tangible form. which is necessary for the
reception of authorisation signals and thus to enable consumers to
access and use an,,' Relevant Other Telecommunication Service, for
insertion or incorporation into or other interoperation with an;'
other telecommunication apparatus run by a consumer:
(j) "Industrial or [ntellectual Property" includes, without prejudice to
its generality, parents, designs, know-how, and copyright:
<PAGE>
(k) "Product" includes any item which is used for the provision of an
Access Control Service;
(l) "Relevant Intellectual Property Right" means any right, which is
wholly or partly controlled by a member of the Licensee's Group, in
Industrial or Intellectual Property or is subject to an agreement, an
arrangement or concerted practice to which a member of the Licensee's
Group is a party;
(m) "Third Party" means a person who provides Relevant Other
Telecommunication Services;
(n) "Transmission System" means a telecommunication system by means of
which Messages comprising Relevant Other Telecommunication Services
are transmitted to consumers and any point to point telecommunication
system connected thereto (including, without prejudice to the
generality of the foregoing, a studio or outside broadcast link) which
conveys such Messages to the point of reception by consumers, and
includes a multiplex and a cable system but does not include any
telecommunication system or telecommunication apparatus which for the
time being is or formed part of an Access Control System;
(o) "Transmission System Operator" means a person operating a Transmission
System on behalf of a Third Party.
2
(a) words and expressions used in the Interconnection Conditions shall
unless the context otherwise requires have the same meaning as in the
Interconnection Regulations;
(b) the Interconnection Conditions are inserted for the purposes of the
application of the Interconnection Directive to the Licensee and shall
accordingly be construed in accordance with that Directive;
(c) in the event of any conflict between any provision of the
Interconnection Conditions and any provision of any other Condition of
this Licence, the latter provision shall, to the extent of such
conflict, be taken to be disapplied;
(d) subject to paragraph (c) above, the Licensee is not required to give
effect to any obligation in any Interconnection Condition in so far as
the Licensee is required to give effect to such obligation under an,.'
other Condition of the Licence.
3
(a) Words and expressions used in the Leased Lines Directive Conditions
shall unless the context otherwise requires have the same meaning as
in the Leased Lines Regulations:
<PAGE>
(b) the Leased Lines Directive Conditions are inserted for the purposes of
the application of the Leased Lines Directive and shall accordingly be
construed in accordance with that Directire; and
(c) in the event of any conflict between any provision of the Leased Lines
Directive Conditions and any provision of any other Condition of this
Licence, the latter provision shall, to the extent of such conflict,
be taken to be disapplied.
4 Any reference in any Condition in this Schedule, however expressed, to the
Director notifying the Licensee about any matter, affording the Licensee an
opportunity to make representations, taking representations by the Licensee into
account, or explaining, or giving reasons for, any matter to the Licensee, shall
be without prejudice to any obligation of due process or similar obligation
which the Director is or may be under by virtue of any rule or principle of law
or otherwise.
5 Expressions cognate with those referred to in this Schedule or a part thereof
shall be construed accordingly.
<PAGE>
PART 2: SPECIAL CONDITIONS REFERRED TO IN SECTION 8 OF THE ACT
CONDITION 1
REQUIREMENTS TO PROVIDE TELECOMMUNICATION SERVICES
1.1 The Licensee shall take all reasonable steps to provide by means of the
Applicable Systems to any Operator who so requests International Conveyance
Services to the extent necessary to satisfy all reasonable demands for such
Services by such Operator.
<PAGE>
CONDITION 2
UNIVERSAL SERVICE.
2.1 This Condition applies where the Licensee is an operator of a fixed public
telecommunications network and where the Licence confers a Condition imposing
universal service obligations on the Licensee.
2.2 The Licensee shall, at the request of the Director and within such period as
may be determined by him, calculate the net costs incurred by the Licensee in
carrying out universal service obligations as defined in regulation 2(2) of the
Interconnection Regulations. Such calculations shall be carried out in
accordance with the requirements of Schedule 5 to the Interconnection
Regulations.
<PAGE>
CONDITION 3
DIRECTORY INFORMATION
3.1 This Condition shall only apply where the Applicable Systems are connected
to a telecommunication system not run under a Licence issued to a particular
person.
3.2 Subject to paragraph 3.5, where the Licensee provides switched voice
telephony services by means of any of the Applicable Systems which is connected
to an Authorised Overseas System by means of which such services are provided,
then, if a directory information service is provided by means of that Authorised
Overseas System in respect of that Authorised Overseas System, the Licensee
shall provide to any person to whom it provides switched voice telephony
services by means of that Applicable System information as to how that person
may avail himself by means of that Applicable System and that Authorised
Overseas System when connected together of the directory, information service
provided and shall take all reasonable steps to secure that that can be done.
3.3 Where the Licensee provides switched voice telephony services by means of
any of the Applicable Systems which is connected to both:
(a) an Authorised Overseas System by means of which such services are
provided; and
(b) a Connectable System in the United Kingdom by means of which such
services are provided which is run under a Licence which does not
authorise the connection of that system to a system outside the United
Kingdom so as to convey Messages from the United Kingdom to a place
outside the United Kingdom
it shall not unreasonably refuse to provide to the operator of that Connectable
System access to such directory information services relating to the Authorised
Overseas System as the Licensee makes available to those to whom it provides
voice telephony sservices.
3.4 The directory information service provided by the Licensee under paragraph
3.2 shall include a service which the Director determines to be satisfactory
whereby director",' information is made available in a form which is appropriate
to meet their needs to persons who are so blind or otherwise disabled as to be
unable to use a telephone director'},' in a form in which it is generally
available to persons to whom the Licensee provides services: and the service so
provided to such persons shall from the date on which this Licence enters into
force be provided free of charge or, if the Director is satisfied that that is
not practicable, the Licensee shall provide, in accordance with arrangements
agreed with the Director. appropriate reasonable compensation in respect of
charges that are paid.
3.5 The obligation in paragraph 3.2 shall not apply:
(a) when the directory information requested relates to a person who has
requested the Licensee or the operator of the connected
telecommunication system not to provide such information in relation
to him: or
<PAGE>
(b) in respect of any person to whom switched voice telephony services are
provided by means of the Applicable Systems if that person has
notified the Licensee in writing that he is able to obtain from
another public telecommunications operator who provides switched voice
telephony services within the United Kingdom to that person
information as to how to avail himself of such directory information
service as may be provided in respect of any Authorised Overseas
System which is connected to the Applicable Systems.
3.5 This Condition is without prejudice to Condition 6.
<PAGE>
CONDITION 4
PUBLIC EMERGENCY CALL SERVICES
4.1 This Condition shall only apply where the Applicable Systems are connected
to a telecommunication system not run under a Licence issued to a particular
person.
4.2 The Licensee shall ensure, except to the extent that the Director determines
is not reasonably practicable, that both the numbers 999 and 112 are available
as emergency call numbers so that any member of the public by dialling either
the number 999 or the number 112 on telecommunication apparatus which is
lawfully connected to the Applicable Systems at any place in the United Kingdom
and which is capable of transmitting and receiving unrestricted two way voice
telephony services when so connected is provided with a Public Emergency Call
Service.
4.3 Where the Director has made a determination in accordance with paragraph 4.2
the Licensee shall take all reasonable steps to ensure that persons to whom
there are provided by means of the Applicable Systems services which do not
include a Public Emergency Call Service are notified in writing that the
services so provided do not include a Public Emergency Call Service.
4.4 For the purposes of this Condition telecommunication apparatus shall be
regarded as capable of transmitting and receiving unrestricted two way voice
telephony services only if it is capable of both:
(a) transmitting for conveyance by means of an Applicable System specific
signals designated by the Licensee for the purpose of establishing
communication with voice telephony apparatus controlled by the
Emergency Organisations; and
(b) transmitting and receiving uninterrupted simultaneous two way speech
to be conveyed, or as the case may be conveyed, by means of that
Applicable System.
4.5 In this Condition, the United Kingdom does not include an,.' area to which
the Act is extended under section 107.
<PAGE>
CONDITION 5
PLANNING AND IMPLEMENTATION OF SPECIAL ARRANGEMENTS FOR EMERGENCIES
5.1 The Licensee shall, after consultation with such authorities responsible for
Emergency Organisations and such departments of central and local government as
the Director may from time to time determine and whose names are notified to the
Licensee by him for the purpose, make plans or other arrangements for the
provision or, as the case may be, the rapid restoration of such
telecommunication services as are practicable and may reasonably be required in
Emergencies.
5.2 The Licensee shall, on request by any such person as is designated for the
purpose in the relevant plans or arrangements, implement those plans or
arrangements insofar as it is reasonable and practicable to do so.
5.3 Nothing in this Condition precludes the Licensee from:
(a) recovering the costs which it incurs in making or implementing any
such plans or arrangements from those on behalf of or in consultation
with whom the plans or arrangements are made; or
(b) making implementation of any plans or arrangements conditional upon
the person or persons for whom or on whose behalf that plan or
arrangement is to be implemented indemnifying the Licensee for all
costs incurred as a consequence of the implementation.
<PAGE>
CONDITION 6
REQUIREMENT TO PROVIDE CONNECTION SERVICES
6.1 Subject to paragraphs 6.6 and 6.7 and any exercise by the Director of his
functions under regulations 6(3) or 6(4) of the Interconnection Regulations, the
Licensee shall offer to enter into an agreement with an Operator or a European
Public Operator or offer to amend such an agreement, as the case may be, within
a reasonable period, if such Operator requires it to:
(a) connect, and keep connected, to any of the Applicable Systems, or to
permit to be so connected and kept connected, any Relevant Connectable
System run by the Operator or a telecommunication system run by a
European Public Operator and accordingly to establish and maintain
such one or more points of connection as are reasonably required and
are of sufficient capacity and in sufficient number to enable Messages
conveyed or to be conveyed by means of any of the Applicable Systems
in such a way as conveniently to meet all reasonable demands for the
conveyance of Messages between the Operator's system and the
Applicable Systems. and
(b) to provide such other telecommunication services (including the
conveyance of Messages which have been, or are to be, transmitted or
received at such points of connection), information and other services
which, to the extent the parties do not agree (or the Licensee is not
in any event so required under or by virtue of another Condition), the
Director may determine are reasonably required (but no more than
reasonably required) to secure that points of connection are
established and maintained and to enable the Operator or the European
Public Operator as the case may be effectively to provide the
Connection Services which it provides or proposes to provide.
6.2 The Licensee or the Operator or the European Public Operator as the case may
be may at any time request the Director to make a direction in order
(a) to specify issues which must be covered in an interconnection
agreement; or
(b) to lay down specific conditions to be observed by one or more parties
to the agreement; or
(c) if he thinks fit. to set time limits within which negotiations are to
be completed;
and a direction under this paragraph operates as an exercise by the Director of
the power of direction conferred by regulation 6.3 or 6.4 of the Interconnection
Regulations as the case may be.
6.3 The Licensee shall secure that the agreement to be entered into. or an
amendment under paragraph 6.1 above is offered on terms and conditions which are
<PAGE>
reasonable. To the extent that the terms and conditions oran agreement made
under paragraph 6.1 (whether on or after the coming into force of this
paragraph) cease to be reasonable, the Licensee shall, within a reasonable
period, offer to the Operator or the European Public Operator, as the case may
be, or agree with the Operator or the European Public Operator, as the case may
be. to amend the agreement so that the terms and conditions of the agreement are
reasonable.
6.4 The Licensee shall comply with:
(a) the requirements of any direction given to the Licensee under
paragraph 6.2 or under regulations 6(3) and 6(4) of the
Interconnection Regulations in relation to any negotiations or
agreement to which it is or is intended to be a party; and
(b) the requirements of any direction given to the Licensee under
regulation 6(6) or regulation 6(7) of the Interconnection Regulations
in relation to any dispute over the terms of an agreement under
paragraph 6.1 above.
6.5 An agreement made pursuant to this Condition shall not contain any
restrictive provision, unless, before the agreement is made, the Director has
consented to the inclusion of such a provision. For the purposes of this
paragraph, a provision in an agreement is a restrictive provision if by virtue
of the existence of such a provision (taken alone or with other provisions) the
agreement is one to which the Restrictive Trade Practices Act 1976 would apply
but for paragraph I(I) of Schedule 3 to that Act.
6.6 If the Director is considering whether a determination or consent under this
Condition is appropriate, he shall notify' the Licensee and Interested Parties
of his proposed decision or the options which he is considering, and his
reasons, and give them a reasonable opportunity to make representations. On
making or refusing a determination or direction or giving or refusing consent,
he shall notify, the Licensee and Interested Parties of the determination,
consent or refusal, as the case may be, and his reasons.
6.7 Paragraph 6.1 above does not apply to the extent that the Director has
consented to limiting such obligation on a temporary, basis and on the grounds
that there are technically and commercially viable alternatives to the
interconnection requested, and that the requested interconnection is
inappropriate in relation to the resources available to meet the request.
6.8 For the avoidance of doubt:
(a) any question as to whether any term or condition (including a charge)
is reasonable shall be decided by the Director having regard to an,.'
guidelines on the application of this Condition issued from time to
time by the Director: and
(b) in considering whether a term or condition (including a charge) is
reasonable. the Director may take. into account, inter alia. the
effective date of the term, or condition and the period during which
such term or condition may already have been in effect: the Director
may conclude that a reasonable charge is one which is offered or
agreed, as the case may be. on terms that it take effect in agreements
made under paragraph 6.1 above From the date of a complaint or the
date on which the term was first offered or accepted by the Licensee
or an
<PAGE>
Operator or a European Public Operator from any other date which is
considered by the Director to be appropriate in the circumstances.
6.9 The Licensee shall provide financial information to the Director promptly on
request and to the level of detail required by the Director under Part IV of
Schedule 3 to the Interconnection Regulations.
6.10 The Licensee shall comply with any request by the Director under Regulation
6(5) of the Interconnection Regulations to inspect any interconnection agreement
entered into by the Licensee in its entirety.
6.11 The Licensee shall comply with any requirement made by the Director as a
last resort under regulation 6(10) of the Interconnection Regulations to
interconnect in order to protect essential public interests, 'and shall comply
with any terms set by the Director for such purpose.
"Interested Parties" means those persons (if any), other than the Licensee, with
whom, in any particular case, the Director considers it appropriate to consult.
<PAGE>
CONDITION 7
ESSENTIAL REQUIREMENTS TO INTERCONNECT
7.1 Where the Director specifies conditions based on essential requirements
pursuant to regulation 7(1) of the Interconnection Regulations for inclusion in
any interconnection agreement to which the Licensee is a party, the Licensee
shall forth with secure the incorporation of those terms and conditions in such
agreement.
<PAGE>
CONDITION 8
COLLOCATION AND FACILITY SHARING
8.1 The Licensee shall comply with any decision by the Director under regulation
10(2) of the Interconnection Regulations.
8.2 The Licensee shall comply with any facility or property sharing arrangement,
or both, specified by the Director in accordance with regulation 10(3) of the
Interconnection Regulations.
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CONDITION 9
SIGNIFICANT MARKET POWER
9.1 Except as otherwise specified, paragraphs 9.2 to 9.20 apply to Operators
having Significant Market Power and in respect of the relevant market or markets
in which the Operator has such power.
9.2 The Licensee shall meet all reasonable requests for access to its Applicable
Systems including access at points other than the network termination points
offered to the majority of end users.
9.3
(a) This paragraph applies where the Licensee is an Operator having
Significant Market Power running the systems or providing the services
described in Parts I and II of Schedule 1 to the Interconnection
Regulations, or, as described in Part III of Schedule 1 which has been
notified as an Operator having Significant Market Power on the
national market for interconnection.
(b) The Licensee shall secure, and shall be able to demonstrate to the
satisfaction of the Director at his request, that the charges offered,
payable or proposed to be offered or payable by an Operator to the
Licensee for each Standard Service are reasonably derived from the
costs of providing the Service based on a forward looking incremental
cost approach (except to the extent the Director considers it
appropriate that for a transitional period, or in any particular case,
the Licensee apply another cost standard3. The Licensee shall comply
with any adjustment required by the Director.
9.4 Subject to Conditions 6.1 and 6.2 the Licensee shall, subject to the ability
of whom an offer is made pursuant to paragraph 9.5 to decline that offer, secure
(a) Standard Services are offered to Operators at the same charges and
associated terms and conditions referred to in paragraph 9.13(a). and
(b) where the Licensee uses a service or provides it to itself, or it is
used by or provided to any body corporate controlled by it. which
service is the same as a Standard Service the amount applied and
incorporated in the Transfer Charge in respect of that use or
provision is equal to the amount applied to that service in the charge
payable by an Operator to the Licensee for that Standard Service.
9.5
(a) This paragraph applies only to Operators having Significant Market
Power running the systems or providing the services described in Parts
I and II of Schedule I to all the Interconnection Regulations.
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(b) An offer between the Licensee and an Operator under paragraph 6. I to
provide a Standard Service shall not be conditional on the acceptance
by the Operator or the inclusion in the agreement of any other terms
and conditions except for terms and conditions which are necessarily
incidental to the provision of the Standard Service in question.
9.6
(a) This paragraph applies only to Operators having Significant Market
Power running the systems or providing the services described in Parts
I and [I of Schedule I to the Interconnection Regulations.
(b) The Licensee may set different tariffs, terms and conditions for
interconnection for different categories of organisations which are
authorised to provide telecommunication systems or telecommunication
services, where such differences can be objectively justified on the
basis of the type of interconnection provided or on the basis of
relevant conditions of the licence.
9.7 On entering into an agreement or amendment under Condition 6.1 the Licensee
shall send to the Director and the Operator a copy of the agreement or
amendment.
9.8
(a) Subject to paragraph (b) the Licensee or the Operator may within 14
days from entering into the agreement or amendment make a
representation to the Director that any part of the agreement or
amendment deals with its commercial strategy and require the Director
to make a determination to that effect.
(b) Details of interconnection charges, terms and conditions and an3,'
contributions to universal service obligations cannot be excluded from
the agreement or amendment.
9.9 A determination made in response to a requirement under paragraph 9.8 shall
specify any exclusions to be made from the agreement or modification before it
is published under paragraph 9.10.
9.10 The Licensee not earlier than 14 days after entering into the agreement or,
ira request has been made under paragraph 9.8(a), receipt of a determination
made under paragraph 9.9. whichever is the later, shall publish the agreement or
amendment as soon as reasonably practicable. Publication shall be effected by
the Licensee, except to the extent that the Director may consent to an
alternative location or to an alternative method of publication, making
available in a publicly accessible part of ever5 Major Office. in such manner
and in such place that it is readily available for inspection free of charge by
members of the public a list of all such agreements and amendments together with
a notice of the address and telephone number or' the person to whom an,,'
request for a cop.,.' of an,. or all of such list. agreements or amendments or
any part of them may be made.
9.11 The Licensee shall send a copy of such list or (following publication! any
agreement or amendment or part of them to any person who may request it within 7
working days of receiving :he request.
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9.12
(a) The Licensee shall, within a reasonable period following its request,
send to any Operator which informs the Licensee it is considering
requiring the Licensee to offer to enter into an agreement or to amend
such an agreement under Condition 6. I. all necessary information and
specifications, in order to facilitate the conclusion of an agreement,
including, except to the extent that the Director may otherwise
consent, information on changes planned for implementation within the
next six months.
(b) Information received by the Licensee from an Operator shall be used
only for the purpose for which it was supplied. The Licensee shall not
pass such information on to other departments, subsidiaries or
partners for which such information could provide a competitive
advantage.
9.13
(a) This paragraph and paragraphs 14 to 16 apply ,,,,'here the Licensee is
an Operator having Significant Market Power running the systems or
providing the services described in Parts I and II of Schedule 1 to
the Interconnection Regulations.
(b) Except to the extent that the Director may otherwise consent, on 1
January, 1998 (if list has not previously been published), or within
three months of being determined by the Director as having Significant
Market Power (whichever is the later), and every six months from the
date of the previous publication, the Licensee shall, in accordance
with sub-paragraphs (c), (d) and (e), publish a reference
interconnection offer comprising a full list of Standard Services
("the Standard List") specifying:
(i) the charge offered to Operators requiring the Licensee to offer
to enter into an agreement under Condition 6. l for each Standard
Service and the amounts applied to each component within that
service; and
(ii) the location in the Licensees current standard interconnection
agreement of the terms and conditions associated with the
provision of each Standard Service.
(c) Except to the extent that the Director may otherwise consent, within
I0 working days from the date on which a proposal to change a charge
or to offer a new Standard Service comes into effect, the Licensee
shall amend the Standard List to take account of the change and shall
publish the amendment by' sending it to the Director and to all
Operators with which it has entered into (or offered to enter into) an
agreement under Condition 6.1.
(d) The Licensee shall send a copy of the current Standard List, any
amendments not incorporated into the List or the current standard
interconnection agreement offered to Operators requiring the Licensee
to offer to enter into an agreement under Condition 6.1 to any person
who may request it on payment of a reasonable charge. The Licensee
shall send the copy within 7 working days after receiving payment of
that charge.
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(e) Except to the extent that the Director may consent to an alternative
location or to an alternative method of publication, the Licensee
shall make available in a publicly accessible part of every Major
Office, in such manner and in such place that it is readily available
for inspection free of charge by members of the public, a notice of
the address and telephone number of the person to whom any request for
a copy of the current Standard List, any amendments or the standard
interconnection agreement may be made.
9.14
(a) Subject to sub-paragraph (c), and except to the extent that
enforcement action is taken by the Director:
(i) in the case of a Competitive Standard Service, not less than 28
days, and
(ii) in the case of all other Standard Services. not less than 90
days;
before any change to a charge for a Standard Service, or any offer of
a new Standard Service, is to come into effect, the Licensee shall
send to the Director and all Operators with which it has entered into
(or offered to enter into) an agreement under Condition 6.1 written
notice of a proposal (a "Network Charge Change Notice") which
identifies:
(iii)the Standard Service, the current charge offered for, and the
location in the Licensee's current standard interconnection
agreement of the terms and conditions associated with, the
provision of the Service and the proposed charge, or the proposed
new Standard Service, new charge and associated terms and
conditions, as the case may be; and
(iv) the proposed effective date or period;
and the Licensee shall not offer or apply any such proposed charge or
new Standard Service to any Operator before the expiry, of the
relevant notice period or the proposed effective date, whichever is
later.
(b) Except to the extent that the Director may consent to an alternative
location or to an alternative method of publication the Licensee shall
make available in a publicly accessible part of ever}' .Major Office,
in such manner and in such place that it is readily available for
inspection free of charge by members of the public, a notice of the
address and telephone number of the person to whom any request for a
copy of a Network Charge Change Notice may be made, and for a period
of one ,.'ear after it has been sent to the Director. the Licensee
shall send a copy of a Notice to any person who may request it, within
7 working days of receipt of the request.
(c) if, before it comes into effect, the Licensee withdraws a Network
Charge Change Notice. or extends or changes the effective date or
period, then the Licensee shall send to the Director. to all Operators
with which it has entered into (or offered to enter into) an agreement
under Condition 6. and to every
<PAGE>
person who on or before that date requested a copy of the Network
Charge Change Notice which has been withdrawn or extended, written
notice of the withdrawal, extension or change forthwith. Except to the
extent that the Director may consent to an alternative location or to
an alternative method of publication, the Licensee shall make
available in a publicly accessible part of every Major Office, in the
manner and place specified in subparagraph (b), a notice of the
address and telephone number of the person to whom any request for a
copy of a notice may be made, and for a period of one year after it
has been sent to the Director, the Licensee shall send a copy of a
notice to any person who may request it (or the Network Charge Change
Notice to which it relates), within 7 working days of receipt of the
request.
9.15
(a) The Director shall, following a representation by the Licensee or an
Operator that the market for a Standard Service is competitive,
determine whether or not that market is competitive.
(b) If the Director determines that the market is competitive, then that
Standard Service shall be a Competitive Standard Service.
(c) The Director may, following a representation by the Licensee or an
Operator that the market for a Competitive Standard Service is not or
has ceased to be competitive, determine that the market is not
competitive. When the Director determines that the market for a
Competitive Standard Service is not competitive, that Standard Service
shall cease to be a Competitive Standard Service.
9.16 If the Director is considering whether a determination, direction or
consent under this Condition is appropriate, he shall notify the Licensee and
Interested Parties of his proposed decision or the options which he is
considering, and his reasons, and give them a reasonable opportunity to make
representations. On making or refusing a determination or direction or giving or
refusing consent, he shall notify the Licensee and Interested Parties of the
determination, direction or consent or refusal, as the case may be, and his
reasons.
9.17 Paragraphs 9.18 to 9.21 apply where the Licensee is an Operator having
Significant Market Power running the systems or providing the services described
in Parts I and II of Schedule 1 to the Interconnection Regulations.
9.18
(a) Subject to sub-paragraph (b), the Licensee shall maintain a cost
accounting system which:
(i) in the opinion of the Director is suitable.to demonstrate that
its charges have been fairly and properly calculated; and
(ii) provides the information for the time being required to be
provided by virtue of Article 7.5 of', and Annex V to, the
Interconnection Directive.
(b) The Licensee shall be deemed to be complying with the requirements of
subparagraph (a) at any time within the period of 2 years from the
designation of
<PAGE>
the Licensee as an Operator having Significant Market Power if it is
at that time complying with directions then in force which have been
given to it by the Director for the purpose of ensuring that its cost
accounting system enables it to demonstrate that its charges have been
fairly and properly calculated.
9.19 The Licensee shall make available to any person on request a description of
its cost accounting system showing the main categories under which costs are
grouped and the rules used for the allocation of costs to interconnection.
9.20 Where the annual turnover of the Licensee in telecommunications activities
in the UK is more than 20 million ECU the Licensee shall keep separate accounts
for, on the one hand, activities related to interconnection - covering both
interconnection services provided to or used by itself or any body corporate
controlled by it and interconnection services provided to others -and, on the
other hand, other activities, so as to identify all elements of cost and
revenue, with the basis of their calculation and the detailed attribution
methods used, related to its interconnection activity, including an itemised
breakdown of fixed assets.
9.21
(a) For each financial year ending on or after 1 January 1998, the
Licensee shall procure in respect of the separate accounts described
in paragraph 9.20 an audit report by the Licensee's auditor for the
time being appointed in accordance with the Companies Act 1985 which
shall conform to Auditing Standards and in which the Auditor shall
state whether in its opinion the accounts fairly present in accordance
with the cost accounting systems the results of the relevant
activities and the costs incurred for the relevant financial year.
(b) For each financial year ending on or after 1 January 1998, the
Licensee shall publish the separate accounts and the report of the
auditor within two months after the date on which the Licensee's
annual statutory financial statements are published and, in any event,
within four months after the end of the period to which they relate.
9.22 In this Condition:
(i) "Auditing Standards" means United Kingdom auditing standards and
guidelines issued from time to time by the Auditing Practices
Board or its predecessor body;
"Competitive Standard Service" means a Standard Service. the
market for which has been determined by the Director to be
competitive and a new Standard Service offered in accordance with
paragraph 9.15 and which in either case has not ceased to be ::
Competitive Standard Service pursuant to paragraph 9.15(c).
"Network Charge Change Notice" has the meaning given paragraph
9.14(a):
<PAGE>
"Standard Service" means a service including a Competitive
Standard Service which an Operator has required from the Licensee
and which the Licensee is obliged to provide, or to offer to
enter into an agreement to provide, under Condition 6. I; and
"Transfer Charge" means the charge which is applied by the
Licensee to itself or to any body corporate controlled by it for
the use or provision of a service which is the same as a Standard
Service;
(b) references to a charge for a Standard Service shall include the
means of calculating that charge;
(c) references to a charge being payable are references to a charge
being payable in accordance with an agreement made in pursuance
of this Condition;
(d) for the avoidance of doubt any question as to whether any charge
is reasonably derived from costs shall be decided by the Director
having regard to any guidelines on the application of this
Condition issued from time to time by the Director;
(e) any reference to "service" (or "Standard Service") shall be taken
to include a reference to goods or information.
<PAGE>
CONDITION 10
PROVISION BY OTHERS OF SERVICES BY MEANS OF THE APPLICABLE
SYSTEMS
10.1 The Licensee shall permit any person, who is licensed to run a Connectable
System under a Licence which authorises it to provide telecommunication services
to others, including Connection Services, to provide such services whilst that
Connectable System is connected to the relevant Applicable System.
10.2 The Licensee shall permit any person:
(a) using telecommunication apparatus which has been lawfully connected to
the Applicable Systems or which is connected to another
telecommunication system which itself has been lawfully connected to
the Applicable Systems; or
(b) running a telecommunication system which is so connected,
to provide by means of the Applicable Systems any service other than the
installation, maintenance, adjustment, repair, alteration, moving, removal or
replacement of telecommunication apparatus comprised in the Applicable Systems.
<PAGE>
CONDITION 11
PUBLICATION OF CHARGES, TERMS AND CONDITIONS TO BE APPLIED
11.1The Licensee shall, except insofar as the Director may otherwise consent in
writing and except in respect of charges, terms and conditions which have been
or could be the subject of a direction under Condition 6 and published pursuant
to regulations 6 and 8 of the Interconnection Regulations under Condition 6:
(a) publish in the manner and at the times specified in paragraph 11.4 a
notice specifying, or specifying the method that is to be adopted for
determining, the charges and other terms and conditions on which it
offers:
(i) to provide each description of telecommunication services other
than Access Control Services by means of the Applicable Systems;
or
(ii) to maintain, adjust, repair or replace any apparatus comprised in
the Applicable Systems; or
(iii)to connect to the Applicable Systems any other system which is
not and is not to be comprised in the Applicable Systems; or
(iv) to grant permission to connect such systems to, or to provide
services other than Access Control Services by means of, the
Applicable Systems;
where such things are done in accordance with an obligation imposed by
or under this Licence.
(b) Where the Licensee does any of the things described in paragraphs
11.1(a)(i) to 11.l(a)(iv) it shall do those things at the charges and
on the other terms and conditions so published and not depart
therefrom. Provided that this obligation will not be breached by
variations to the charges, terms and conditions referred to in
paragraph 11.1(a) to the extent that the method which is adopted for
determining those variations has been disclosed to the Director,
except insofar as those charges, terms and conditions relate to a
particular market in respect of which the Director has made a
determination that the Licensee is a Well Established International
Operator.
11.2 Where the Director has made a determination that the Licensee is a Well
Established International Operator in a particular market the Licensee shall
specify the precise amount of such charges in accordance with paragraph 11.1
(a). insofar as the,,.' relate to the market in respect of which such a
determination has been made.
11.3 The requirement to publish under paragraph 11.1 shal1 not apply in respect
of any service which is materially different from any service already provided
by the Licensee by means of' the Applicable Systems until such time as it is
provided and a copy of' the notice shall be sent to the Director at that time.
<PAGE>
11.4 Publication of the notice shall be effected by:
(a) sending a copy thereof to the Director to arrive not more than 28 days
after the date on which the Licensee first provides services under the
Licence and thereafter not less than one day before any proposal to
amend any charge, term or condition or the method of determining the
same is to become effective: provided that where the Director has made
a determination that the Licensee is a Well Established International
Operator in a particular market, this subparagraph shall have effect
as if the words "28 days" were substituted for the words "one day"
insofar as any such proposal relates to the provision of services in
relation to the market in respect of which such a determination has
been made;
(b) placing as soon as practicable thereafter a copy thereof in a publicly
accessible part of every Major Office of the Licensee in such a manner
and in such a place that it is readily available for inspection free
of charge by members of the general public during such hours as the
Secretary of State may by order prescribe under section 19(4) of the
Act that the register of Licences and final and provisional orders is
to be open to public inspection, or in the absence of any such order
having been made by the Secretary of State, during normal office
hours; and
(c) sending a copy thereof or such part or parts thereof as are
appropriate to any person who may request such a copy.
11.5 The obligations imposed on the Licensee by this Condition are without
prejudice to any determination which the Director may make under Condition 13 of
this Licence.
11.6 For the avoidance of doubt, where the Licensee is a Regulated Supplier of
Access Control Services on whom the Director has served a Regulated Supplier
Notice the obligations imposed on the Licensee by this Condition shall be
without prejudice to any requirements imposed on the Licensee by Condition 40
relating to the publication of charges, terms and conditions on which the
Licensee offers to provide such Access Control Services.
<PAGE>
CONDITION 12
PROHIBITION ON UNDUE PREFERENCE AND UNDUE DISCRIMINATION
12.1 The Licensee shall not (whether in respect of the charges or other terms or
conditions applied or otherwise) show undue preference to, or exercise undue
discrimination against, particular persons or persons of any class or
description as respects:
(a) the connection to the Applicable Systems of any other system which is
not and is not to be comprised in the Applicable Systems in accordance
with an obligation imposed by or under this Licence; or
(b) the maintenance, adjustment, repair or replacement of any apparatus
comprised in the Applicable Systems in accordance with an obligation
imposed by or under this Licence; or
(c) the provision by means of the Applicable Systems of any
telecommunication service in accordance with an obligation imposed by
or under this Licence; or
(d) the granting of permission to connect such systems to, or to provide
services by means of the Applicable Systems in accordance with an
obligation imposed by or under this Licence.
12.2 The Licensee may be deemed to have shown such undue preference or to have
exercised such undue discrimination if it unfairly favours to a material extent
a business carried on by it in relation to the doing of any of the things
mentioned in paragraph 12.1 so as to place at a significant competitive
disadvantage persons competing with that business.
12.3 Any question relating to whether any act done or course of conduct pursued
by the Licensee amounts to such undue preference or such undue discrimination
shall be determined by the Director, but nothing done in any manner by the
Licensee shall be regarded as undue preference or undue discrimination if and to
the extent that the Licensee is required or permitted to do the thing in that
manner by or under any provision of this Licence.
12.4 The obligations imposed on the Licensee by this Condition are without
prejudice to any determination which the Director may make under Condition 13 of
this Licence.
<PAGE>
PART 3: OTHER CONDITIONS INCLUDED UNDER SECTION 7 OF THE ACT
CONDITION 13
MAINTENANCE OF EFFECTIVE COMPETITION WHERE THE LICENSEE OPERATES A
SYSTEM OR PROVIDES SERVICE OVERSEAS
13.1 This Condition shall apply where the Licensee or any Associated Person is
the operator of any telecommunication system or provides telecommunication
services in a country or territory, outside the United Kingdom.
13.2 Where it appears to the Director that as a result of any act or omission of
the Licensee either by itself or with or through any Associated Person
competition in the provision of any telecommunication service or any particular
description of telecommunication services in the United Kingdom is being or is
likely to be restricted, distorted or prevented he may make a determination to
that effect.
13.3 Where the Director makes a determination under paragraph 13.2 the Licensee
shall take such steps as the Director may direct for the purpose of remedying
the situation. In particular (and without prejudice to the generality of the
foregoing) any such direction may require compliance by the Licensee with any
other Condition, as appropriate, including in particular any Condition providing
for publication of charges, terms and conditions or prohibiting undue
discrimination and undue preference, in relation to the provision of any
telecommunication service within the United Kingdom notwithstanding that any
condition precedent to the application of that Condition is not otherwise
satisfied.
<PAGE>
CONDITION 14
FAIR TRADING
14.1 The Licensee shall not do any thing, whether by act or omission, which has
or is intended to have or is likely to have the effect of preventing,
restricting or distorting competition where such act or omission is done in the
course of, as a result of or in connection with, providing telecommunication
services, or any particular description of telecommunication service, or running
a telecommunication system.
For the purpose of this Condition such an act or omission will take the form of:
(a) any abuse by the Licensee, either alone or with other undertakings, of
a dominant position within the United Kingdom or a substantial part of
it. Such abuse may, in particular, consist in:
(i) directly or indirectly imposing unfair purchase or selling prices
or other unfair trading conditions;
(ii) limiting production, markets or technical development to the
prejudice of consumers;
(iii)applying dissimilar conditions to equivalent transactions with
other parties, thereby placing them at a competitive
disadvantage; or
(iv) making the conclusion of contracts subject to acceptance by the
other parties of supplementary obligations which, by their nature
or according to commercial usage, have no connection with the
subject of such contracts; or
(b) the making (including the implementation) of any agreement, the
compliance with any decision of any association of undertakings or the
carrying on of any concerted practice with any other undertaking which
has the object or effect of preventing, restricting or distorting
competition within the United Kingdom.
14.2
(a) An act or omission of a kind described in paragraph 14.1 is not
prohibited where:
(i) it has or would have no appreciable effect on competition; or
(ii) it has or would have no effect on competition between persons
engaged in commercial activities connected with
telecommunications and it would have no effect on users of
telecommunication services.
(b) An act or omission of a kind described in paragraph l4.1(b) is not
prohibited by this Condition if the agreement decision or concerted
practice contributes to improving the provision of any goods or
services or to promoting technical
<PAGE>
or economic progress, while allowing consumers a fair share of the
resulting benefit and does not:
(i) impose on the parties concerned restrictions which are not
indispensable to attaining those objectives; and
(ii) afford such parties the possibility of eliminating competition in
respect of a substantial part of the goods or services in
question.
(c) This Condition shall not apply to any provision of an agreement
insofar as it is a provision by virtue of which the Restrictive Trade
Practices Act 1976 applies to that agreement.
(d) This Condition shall not apply to a merger situation qualifying for
investigation under the Fair Trading Act 1973.
14.3 Whether any act or omission is prohibited by this Condition shall be
determined:
(a) with a view to securing that there is no inconsistency with the
general principles having application to similar questions of directly
applicable competition law, in particular those laid down by the Court
of Justice of the European Communities on the scope of the competition
rules contained in the EC Treaty and block exemptions adopted by the
European Commission under Article 85(3); and
(b) having regard to:
(i) any decision taken, or notice issued, by the European Commission
in applying the competition rules contained in the EC Treaty and
any relevant pronouncement of the Director General of Fair
Trading or report of the Monopolies and Mergers Commission; and
(ii) any guidelines on the application of this Condition issued from
time to time by the Director.
14.4
(a) If it appears to the Director that an act or omission of the Licensee
is or was prohibited by this Condition he may make an initial
determination to that effect (an "Initial Determination").
(b) Before making an Initial Determination the Director shall give a
notice to the Licensee:
(i) stating that he is investigating a possible contravention or this
Condition:
(ii) setting out the reasons why it appears to him that this Condition
may be being, or may have been, breached, including any matters
of fact or law which he thinks relevant:
<PAGE>
(iii)requesting within a reasonable period laid down by the Director
such further information as he may require from the Licensee in
order to complete his Determination; and
(iv) where appropriate, setting out the steps he believes the Licensee
would have to take in order to remedy the alleged breach.
14.5
(a) Within 28 days of the Director:
(i) making an Initial Determination;
(ii) making a provisional' order; or
(iii)giving notice of his proposal to make a final order under
section 17(1) of the Act;
in respect of the contravention in question, the Licensee may notify
the Director that it:
(iv) requires him to make a final determination (a "Final
Determination") of the matter;
(v) requires that in making the Final Determination he take into
account a report of a body of experts appointed by him to
consider the matter ("the Advisory Body").
(b) Before making a Final Determination the Director shall -
(i) give a notice to the Licensee setting out the matters referred to
in paragraph 14.4(b); and
(ii) if the Licensee has given notice under sub-paragraph 14.5(a)(v)
above, take into account the report of the Advisory Body on the
matter.
(c) The Director shall then determine whether he is satisfied that the act
or omission in respect of which the Initial Determination ',','as made
is or was prohibited by this Condition.
14.6
(a) Before making his Initial Determination or Final Determination the
Director shall give the Licensee, and any other person whom he
considers it appropriate to consult, such period within which to make
representations (both orally, and in writing) in response to the
notice as he considers reasonable in all the circumstances.
(b) The Director shall notify the Licensee and any other person whom he
considers it appropriate to notify of every Initial Determination and
Final Determination made by him and of his reasons for making it: and
he shall, if
<PAGE>
so requested by the Licensee, publish any report of the Advisory Body
on the matter, subject to such exclusions as he may consider it
appropriate to make of matters of a kind mentioned in section 48(2) of
the Act.
14.7 The Director shall publish a description of his office's procedures for the
enforcement of this Condition including the steps taken to ensure that he has
access to appropriate independent advice in enforcing this Condition.
14.8 This Condition shall not limit or affect in any way the Licensee's
obligations arising under any other Condition of this Licence nor limit the
Director's powers of enforcement under sections 16 to 18 of the Act.
14.9
(a) On the coming into force of any Act or subordinate legislation which:
(i) contains a prohibition enforceable by the Director, or gives to
the Director the power to enforce an existing prohibition, of any
behaviour prohibited under paragraph 14.1;
(ii) gives to third parties in respect of a breach of that prohibition
at least the rights they have under section 18 of the Act in
respect of a breach of a provisional or final order; and
(iii)permits the imposition on the Licensee of monetary penalties in
respect of the breach of that prohibition
this Condition shah cease to apply to the behaviour prohibited by or
the prohibition enforceable by such Act or subordinate legislation.
(b) If this Condition still has effect on 31st July 2001, it shall cease
to have effect after that date.
14.10 The prohibition in paragraph 14.l(b) shall not apply to acts or omissions
done prior to the expiry of three months from the date of this Licence in
pursuance of agreements entered into prior to the date of this Licence.
<PAGE>
CONDITION 15
ESSENTIAL INTERFACES
15.1 This Condition operates without prejudice to the provisions of Condition 6.
15.2 The licensee shall take full account of such standards, if any, as are
listed in the Official Journal of the European Communities as being suitable for
the purposes of interconnection.
15.3 The Director may, having first notified the Licensee of his proposal and
given the Licensee not less than 28 days in which to make representations,
specify an Essential Interface.
15.4 Where in pursuance of paragraph 15.3 the Director specifies an interface as
an Essential Interface, and the Licensee thereafter makes that interface
available to an Operator or, in the case of Access Control Services, to a Third
Party in relation to the Licensee's Applicable Systems, it shall do so in such a
manner as it considers appropriate, but shall ensure such availability is in
compliance with a Relevant Standard if the Operator or the Third Party, as the
case may be, so requires.
15.5
(a) For the purposes of paragraph 15.4 "Relevant Standard" means:
(i) standards listed in the Official Journal of the European
Communities, if any, as being suitable for the purposes of
interconnection, or in the absence of such standards
(ii) standards adopted.by European standardisation bodies such as the
European Telecommunications Standards Institute (ETSI) or the
European Committee for Standardisation/European Committee for
Electrotechnical Standardisation (CEN/CENELEC), or in the absence
of such standards
(iii)international standards or recommendations adopted by the
International Telecommunications Union (ITU), the International
Organisation for Standardisation (ISO) or the International
Electrotechnical Committee (IEC), or in the absence of' such
standards
(iv) any other standard specified by the Director after notifying the
Licensee of his proposal and allowing the Licensee adequate time,
being not less than 28 days, in which to make representations,
provided that the Director shall not specify a standard if an
appropriate European or other international standard is expected
to be promulgated within a reasonable time, including, by way of
example, if the European Telecommunications Standards Institute
have published a work programme for the development of such a
standard.
<PAGE>
to the extent that such a standard is necessary, to ensure
interoperability.
(b) Where in pursuance of paragraph 15.5(a)(iv) the Director
specifies a standard as a Relevant Standard, he shall include in
that Relevant Standard a technical specification, using all
reasonable endeavours to obtain the agreement of the Licensee and
other relevant licensees to a technical specification applicable
to that Relevant Standard, being a specification defined if
possible by reference to:
(i) standards listed in the Official Journal of the European
Communities, if any, as being suitable for the purposes of
interconnection, or in the absence of such standards
(ii) standards adopted by European standardisation bodies such as
the European Telecommunications Standards Institute (ETSI)
or the European Committee for Standardisation/European
Committee for Electrotechnical Standardisation
(CEN/CENELEC), or in the absence of such standards
(iii)in the absence of such standards, international standards
or recommendations adopted by the International
Telecommunications Union (ITU), the International
Organisation for Standardisation (ISO) or the International
Electrotechnical Committee (IEC).
15.6 Where the Director has been unable in accordance with paragraph 15.5(b) to
secure the agreement of the Licensee and other relevant licensees to a technical
specification within a period not exceeding 3 months from the date he first
sought the agreement of the Licensee and other relevant licensees under that
paragraph, the Director shall adopt for inclusion in the Relevant Standard an
appropriate technical specification which has been promulgated by a recognised
standards body, including, by way of example, the European Telecommunications
Standards Institute; or the British Standards Institute, or other such body as
the Director considers to be representative of all relevant telecommunications
interests and has notified the Licensee and other relevant licensees.
15.7 The Director shall specify a Relevant Standard in pursuance of paragraph
15.5 only if the owners of relevant intellectual property rights have agreed to
grant any necessary licences in respect thereof to the Licensee on reasonable
terms.
15.8 For the avoidance of doubt this Condition shall not:
(a) without prejudice to paragraph 15.4. prevent the Licensee using such
interfaces as it considers appropriate in relation to the Applicable
Systems; or
(b) where it makes available to an Operator or in the case of Access
Control Services. to a Third Party an interface which the Director has
specified as an Essential Intertface. require the Licensee to comply
with the Relevant Standard if the Operator or the Third Party, as the
case may be does not require it to do so.
<PAGE>
15.9 When implementing an Essential Interface, the Licensee shall not be obliged
to conform with the Relevant Standard:
(a) if to do so would necessitate the Licensee:
(i) acquiring apparatus, software or other goods or supplies of any
kind, or implementing any operation, incompatible with, as the
case may be, apparatus, software or such other goods or supplies
already in use at the time, or the subject of contracts for their
procurement for use, in connection with the Applicable Systems,
or, in the case of an operation, incompatible with any other
operation being carried out at the time in connection therewith;
or
(ii) incurring any cost, or having to resolve technical difficulties,
disproportionate to the benefits to be gained from the
implementation of the Relevant Standard,
provided that the Licensee shall take reasonable steps to incorporate
the Relevant Standard in its plans for network development, with a
view to implementation of that Standard in connection with the
Applicable Systems, but without the Licensee incurring any incremental
expenditure which, but for the implementation of the Relevant
Standard, would not have been incurred;
(b) if the Relevant Standard is inappropriate for the particular
application for any reason, including, without limitation:
(i) that it does not afford the Licensee adequate protection for the
security of the Applicable Systems;
(ii) that its implementation would be liable to cause material
impairment in the quality of any telecommunication service
provided by means of the Applicable Systems;
(iii)that it does not cater adequately for billing, metering or other
customer administration systems; or
(iv) that it is technically inadequate in the light of technical
developments which have taken place since it was originally
created;
(c) if the Essential Interface concerned is of a genuinely innovative
nature and accordingly the use in connection with it of the Relevant
Standard would not be appropriate;
(d) if compliance with the Relevant Standard would involve the
infringement by the Licensee of any intellectual property right vested
in any person; or
(e) if the Licensee sets out the reasons why he should not be obliged to
conform with the Relevant Standard and the Director so agrees.
<PAGE>
15.10 Where paragraph 15.9(b) or 15.9(c) applies, the Licensee shall notify the
Director thereof in writing, providing an explanation why.
15.11 It is a precondition of any obligation on the Licensee under this
Condition that an equivalent Condition to this Condition is included in the
respective Licences of all Operators or, in the case of Access Control Services,
all Third Pat:ties running telecommunication systems that are connected to the
Applicable Systems.
<PAGE>
CONDITION 16
SPECIAL OR EXCLUSIVE RIGHTS IN NON-TELECOMMUNICATION SECTORS
16.1 Where the Licensee has special or exclusive fights for the provision of
services in sectors other than telecommunications, within the meaning of Article
8(1) of the Interconnection Directive, and the Licensee's annual turnover from
its telecommunications activities in the Community exceeds 50 million ECU, the
Licensee shall keep draw up, submit to independent audit and publish separate
accounts for telecommunications activities in the Community, to the extent that
would be required if the telecommunications activities in question were carried
out by legally independent companies, so as to identify all elements of cost and
revenue, with the basis of their calculation and the detailed attribution
methods used, related to their telecommunications activities including an
itemised breakdown of fixed assets, or have structural separation for the
telecommunications activities.
<PAGE>
CONDITION 17
RESTRICTIONS ON ADVERTISING
17.1 Where the Licensee sends and conveys Messages on its own behalf, or on
behalf of any member of its Group, by means of the Applicable Systems for the
purposes of the advertising, the offering for supply or provision or the supply
or provision of goods, services or any other thing, and receives from any person
who runs a telecommunication system by means of which that person receives such
Messages a request to cease so sending them to a telecommunication system run by
that person, then:
(a) the Licensee and every member of the Licensee's Group shall cease
sending such Messages to any telecommunication system run by that
person and identified for the purpose to the Licensee by reference to
a Number which is used to make calls to that telecommunication system;
and
(b) the Licensee or a member of the Licensee's Group shall maintain, or
secure that there is maintained, a record giving particulars of the
persons and the Numbers referred to in paragraph 17.l(a) and shall
make that record available for inspection on reasonable notice by the
Director.
17.2 Where:
(a) in respect of a telecommunication system run by him or on his behalf,
a person has notified a Specified Person that he does not wish to
receive unsolicited calls (whether of a general or a particular kind)
made for the purpose of the advertising or the offering for supply or
provision or the supply or provision of goods, services or any other
thing; and
(b) a Specified Person keeps a list of such notifications in a form
specified by the Director and made available for inspection by the
general public,
neither the Licensee nor any member of the Licensee's Group nor their agent,
subcontractor or employee shall make such unsolicited calls by means of the
Applicable Systems to the telecommunication systems so listed.
17.3 Paragraph 17.2 shall have effect only ',','here the Director has determined
for the time being:
(a) the description of unsolicited call to which that paragraph shall
apply; and
(b) the description or descriptions of persons who shall be entitled to
notify a Specified Person under that paragraph in relation to any such
description of unsolicited call
and such determinations are described in a list kept for the purpose by the
Director and made available by him for inspection by the general public.
<PAGE>
CONDITION 18
CUSTOMER INTERFACE STANDARDS
18.1 This Condition shall only apply where the Applicable Systems are connected
to a telecommunication system not run under a licence issued to a particular
person.
18.2 The Licensee shall ensure that on each occasion on which it introduces an
interface provided or to be provided at a Network Termination Point on the
Applicable Systems not previously so provided a notice is published specifying
the technical characteristics of the interface introduced.'
18.3 The technical characteristics to be included in such a notice shall
include:
(a) physical, electrical and other relevant characteristics;
(b) network interworking and service management protocols; and
(c) reference to national and international standards and recommendations
with which the interface complies,
in sufficient detail for compatible terminal apparatus to be produced, tested
and approved.
18.4 Subject to paragraph 18.5, any notice under this Condition shall be
published in a manner appropriate for bringing the matters to which the notice
relates to the attention of persons likely to be affected by or to have an
interest in them.
18.5 Where the Director following any representation or observation made to him
concludes that a notice under paragraph 18.2 has not been published in an
appropriate manner he may direct the Licensee to carry out such further
publication as he considers reasonably necessary to meet the requirements of
paragraph 18.4.
<PAGE>
CONDITION 19
METERING AND BILLING ARRANGEMENTS
19.1 This Condition shall only apply where the Applicable Systems are connected
to a telecommunication system not run under a Licence issued to a particular
person.
19.2 As regards any description of Meter in use on a date specified by the
Director in connection with the Applicable Systems and which has been specified
by the Director, the Licensee shall apply for Approval as soon as is practicable
and in any case not later than such date as the Director may determine in
relation to that description of Meter.
19.3 As regards any description of Meter specified by the Director and not in
use in connection with the Applicable Systems on the date specified under
paragraph 19.2, the Licensee shall, unless the Director consents otherwise,
apply for Approval not later than such date as is further specified by the
Director or not less than six months before the date on which the Licensee
intends to bring that Meter into such use, whichever shall be the later.
19.4 The Licensee shall not after such date as the Director may determine in
relation to any description of Meter so specified by him, keep in use or bring
into use in connection with the Applicable systems, any Meter of a description
so specified which is not Approved or for which the Licensee has not made an
application for Approval.
19.5 Where Approval is not granted to or is withdrawn from a particular
description of Meter the Licensee shall, as soon as is reasonably practicable
but in any event not more than 7 days after the date o f any refusal or
withdrawal of approval, either;
(a) inform the Director of the action to be taken by the Licensee to
remedy the absence of Approval in relation to that description of
Meter and the anticipated date of such Approval; of
(b) inform the Director that the Licensee intends to cease use of that
description of Meter in connection with the Applicable Systems in
accordance with a timetable for the withdrawal thereof which the
Licensee shall provide to the Director on request.
19.6 The Licensee shall not render any bill in respect of any description of
telecommunication Service provided by means of the Applicable Systems unless
every amount (other than an indication of unit charge) stated in that bill is no
higher than an amount which represents the true extent of any such Service
actually provided by the Licensee to the customer in question. In this paragraph
"customer" does not include an Operator.
19.7 Without prejudice to the generality of paragraph 19.6 the Licensee shall at
all times maintain in operation such a Billing Process as facilitates compliance
by the Licensee with. and is calculated to prevent contravention by it of that
paragraph.
19.8 The Licensee shall not be regarded as being in contravention or' its
obligation under paragraph 19.6 except where the failure is in relation to the
Billing Process and the Licensee has failed to take all reasonable steps to
prevent a contravention of that obligation.
<PAGE>
19.9 The Licensee shall keep such records as may be necessary or as may be
determined by the Director to be necessary' for the purpose of satisfying the
Director that the Billing Process has the characteristics required by paragraph
19.7, provided that nothing in this paragraph shall require the Licensee to
retain any records for more than 2 years from the date on which they came into
being.
19.10 For the purpose of giving the Director an independent quality assurance
from time to time that the Billing Process has the characteristics required by
paragraph 19.7, the Licensee shall, where the Director has prima facie grounds
to believe the Billing Process does not have those characteristics and has so
notified the Licensee, extend its prompt co-operation to the Director and, in
particular, on request by the Director shall;
(a) furnish the Director in accordance with the Director's reasonable
requirements any Information, document (including any facility
enabling him to read data not held in readable form) or other thing;
(b) carry out (or cause to be carried out by such person having such
special expertise as the Director may specify, and to whom the
Director has raised no reasonable objection) in such manner as the
Director may specify, an examination of the whole or of any part of
the Billing Process and as soon as practicable after the conclusion of
such examination and in any event not later than 28 days thereafter,
furnish to the Director a written report by the Licensee or that
specified person, as the case may be, of the results of such
examination;
(c) on reasonable notice by him allow during normal business hours the
Director and, on production of his special authority in that behalf,
any member of his staff, access to any relevant premises, plant or
equipment of the Licensee;
(d) on reasonable notice by him allow during normal business hours the
Director and, on production of-his special authority in that behalf
any member of his staff, to examine or test the whole or any part of
the Billing Process including any plant or equipment whether or not
forming part of the Applicable Systems;
(e) for the purpose of paragraphs 19.10(c) and 19.10(d). allow the
Director to be accompanied by any person as the Director may specify
and to whom the Licensee has raised no reasonable objection whose
assistance he might reasonably require for the purpose described at
the beginning of this paragraph provided that the Director shall have
given the Licensee notice (save in exceptional circumstances) of at
least 5 working days of the identity of that person; and
(f) install and keep installed an;' equipment (wheter or not supplied bv
the Director) For the purpose of verifying.
(i) the accuracy and reliability of any equipment or apparatus
(including any Meter) of the Licensee
<PAGE>
(ii) in the case of any Meter which is or is required to be Approved
and is in use in connection with the Applicable Systems,
compliance with any conditions or other matters which may be
required as regards such use of that Meter.
19.11 In this Condition:
(a) "Approval" and "Approved" mean approval and approved under section 24
of the Act;
(b) "Billing Process" means Metering systems and Billing Systems taken
together, where "Billing System" means the totality of all apparatus,
data, procedures and activities which the Licensee employs to
determine the charges to be sought for Service usage recorded by a
Metering System based on published or previously negotiated pricing
structures and to present these charges on customers' bills and
"Metering System" means the totality of all apparatus, data,
procedures and activities which the Licensee employs to determine the
extent of any telecommunication Services provided by means of the
Applicable Systems;
(c) "Information" includes accounts, estimates and returns;
(d) "Meter" means any system or apparatus constructed or adapted for use
in ascertaining the extent of telecommunication Services provided by
means of the Applicable Systems; and
(e) "Service" includes any service provided by an,,, person to whom the
Licensee is bound to account for any part of the amount charged by the
Licensee.
<PAGE>
CONDITION 20
NUMBERING ARRANGEMENTS
20.1 This Condition shall only apply where the Applicable Systems are connected
to a telecommunication system not being run under a Licence issued to a
particular person, or where the Licensee has been granted Numbers by the
Director.
20.2 The Licensee shall from the day on which it first provides a switched
telecommunication service or any other telecommunication service in connection
with which the Licensee allocates to users Numbers adopt a Numbering Plan and
shall furnish details thereof to the Director and on request to any other person
having a reasonable interest.
20.3 The Numbering Plan shall describe the method adopted and to be adopted for
allocating and reallocating in respect of each Network Termination Point such
Number or Numbers as may be necessary, for each item of Relevant Apparatus or
each Relevant System that is or is to be connected by means of that Network
Termination Point to any of the switched Applicable Systems.
20.4 The Licensee shall install, maintain or adjust its switched Applicable
Systems so that those Systems convey messages to Network Termination Points in
respect of which Numbers have been allocated in accordance with the Numbering
Plan.
20.5 The Licensee shall from time to time consult:
(a) the Director about the arrangements for the allocation and
reallocation of Numbers within the Numbering Plan; and
(b) in one body approved by the Director for the purpose and
representative of telecommunications operators and other persons whom
the Director considers appropriate about any developments of,
additions to or replacements of, the Numbering Plan.
20.6 The Licensee shall from time to time prepare, taking into account the
consultations mentioned in paragraph 20.5(b), and furnish to the Director
proposals for developing, adding to or replacing the Numbering Plan and changing
the switched Applicable Systems to the extent necessary to secure that:
(a) sufficient Numbers are made available, having regard to the
anticipated growth in demand for telecommunication services, for a
Number or Numbers to be allocated without undue delay;
(b) Numbers include as few digits as practicable and their allocation does
not confer any undue advantage on the Licensee or undue disadvantage
on persons running Relevant Systems'
(c) the cost of changing any of the switched Applicable Systems or any
Relevant Apparatus or Relevant System in order to accommodate the
revised Numbering Plan is reasonable, and
<PAGE>
(d) inconvenience caused by the alteration of the Numbering Plan to the
Licensee and to persons using Relevant Apparatus or Relevant Systems
in respect of which Numbers have previously been allocated is
minimised.
20.7 If the Director determines that the Numbering Plan with any developments,
additions and replacements submitted in accordance with paragraph 20.6 is
sufficient to provide compatibility with the numbering arrangements applied or
to be applied by telecommunications operators and to meet the objectives
specified in paragraph 20.6 the Licensee shall adopt the Numbering Plan but, if
the Director determines that it is not compatible with numbering arrangements
applied or to be applied by another public telecommunications operator or will
not be sufficient to achieve the objectives specified in paragraph 20.6, then
the Licensee shall adopt the Numbering Plan with such developments, additions or
replacements as the Director may determine are best calculated to secure the
objectives specified in paragraph 20.6.
20.8 Before making a determination under paragraph 20.7 the Director shall take
account of:
(a) the state of technical development of the Applicable Systems and the
Licensee's plans for their commercial development;
(b) the balance of advantage between:
(i) making developments of, additions to or replacements of numbering
arrangements applied or to be applied, or making changes to
systems run, by others; and
(ii) making any requirement of the Licensee;
(c) the cost to the Licensee and to those to whom the Licensee provides
telecommunication services arising from any determination;
(d) any obligations and recommendations of the International
Telecommunication Union which apply' to Her Majesty's Government and
are accepted by it and an,,' other standard to which the Director
consents for the purpose from time to time; and
(e) the views of the Licensee and such other persons (including operators
of telecommunication systems, those to whom telecommunication services
are provided or telecommunication apparatus is supplied and producers
of telecommunication apparatus) as appear to the Director to have an
interest in the matter.
20.9 Where tile License has adopted a Numbering Plan i:l accordance with
paragraph 20.7 or the Director has made a determination under that paragraph (by
virtue of which the Licensee shall adopt the Numbering Plan). the Numbering Plan
so adopted shall be the Licensee's Numbering Plan until the Licensee adopts a
Numbering Plan pursuant to the following provisions of this Condition. The
Numbering Plan referred to in the following provisions of this Condition is the
Numbering Plan adopted pursuant to those provisions.
<PAGE>
20.10 The Director may determine a Specified Numbering Scheme (the "Scheme") in
accordance with the National Numbering Conventions (the "Conventions") published
in accordance with paragraph 20.14 and he will allocate Numbers from this Scheme
to the Licensee in accordance with the Conventions. The initial allocation of
Numbers to the Licensee shall be of those Numbers to which the Numbering Plan
referred to in paragraph 20.3 relates and of any other Numbers to which any
other Numbering Plan in force immediately before such allocation relates,
provided that, at such time of initial allocation, those Numbers are currently
in use by the Licensee, and where not so in use, the Director shall have due
regard to the Licensee's plans and future requirements for its use and
allocation of additional Numbers. The Director shall, at the request from time
to time of the Licensee, allocate to it:
(a)such quantity of additional Numbers as it may require; and
(b) in accordance with the Conventions, such specific Numbers as it may
request and which the Director is satisfied are not required for other
purposes.
20.11 The Licensee shall adopt a Numbering Plan for such Numbers as the Director
may allocate to it from time to time in accordance with the Conventions. It
shall within three months of being notified of such allocation furnish details
of the Numbering Plan to the Director, and keep him informed of material changes
to the Numbering Plan as they occur. The Licensee shall also furnish details of
the Numbering Plan together with any material changes to that Numbering Plan on
request to any other person having a reasonable interest. Except where the
Director agrees other,vise, the Numbering Plan shall be consistent with the
Conventions published in accordance with paragraph 20.14. If the Numbering Plan
is not consistent with those Conventions, the Director may direct the Licensee
to adopt and furnish him with a new Numbering Plan or to take such other
reasonable remedial action which does not cause undue inconvenience to the
Licensee's customers, as may be necessary to ensure consistency.
20.12 The Licensee shall install, maintain and adjust its switched Applicable
Systems so that those Systems route Messages and other,vise operate in
accordance with the Numbering Plan. The Licensee shall not use Numbers other
than those allocated to it from the Scheme except:
(a) with tile written consent of the Director; or
(b) where the use of those Numbers is the subject of an agreement to which
Condition 6 applies.
<PAGE>
20.13
(a) The Licensee shall provide to the Director, on request, such
information about its operations under its Numbering Plan as he may
reasonably require to administer the Scheme and in particular on:
(i) the percentages of Numbers in significant ranges which have
already been allocated to end-users or which for other reasons
are unavailable for further allocation;
(ii) any allocation of blocks of Numbers to any person for purposes
other than end use;
(iii)Numbers whose use has been transferred at an end-user's request
to another Operator; and
(iv) the Licensee's current forecasts of all of the above matters.
(b) The Licensee shall not be required to provide information about
individual end-user customers.
(c) In making any such request the Director shall ensure that no undue
burden is imposed on the Licensee in procuring and furnishing such
information and, in particular, that the Licensee is not required to
procure or furnish information which would not normally be available
to it, unless the Director is satisfied that such information is
essential to the administration of the Scheme.
20.14
(a) The Conventions referred to in this Condition will be a set of
principles and rules published from time to time by the Director after
consultation with interested parties who are members of the
Telecommunications Numbering and Addressing Body-and, if deemed
appropriate, with end-users.
(b) In consulting the said interested parties, the Director shall afford a
reasonable period, not being less than 28 days, for them to make
representations, and he shall take the said representations into
account when publishing the Conventions. The Conventions shall govern
the specification and application of the Scheme and the Numbering Plan
of the Licensee and may also include such other matters relating to
the use and management of Numbers as (but not limited to):
(i) criteria and procedures relating to tile application for.
allocation of and withdrawal of Numbers:
(ii) dialing plans:
(iii) access codes:
(iv) prefixes:
<PAGE>
(v) standard ways of recording Numbers for convenience or ease of
use, such as the grouping of digits in Numbers of particular
lengths; and
(vi) methods of enabling end-users to understand the meaning implicit
in Numbers or other dialled digits, and in particular the rate at
which a call to a particular Number will be chargeable.
(c) The Director may from time to time amend or withdraw a Convention
already published, after consultation with interested parties who are
members of the Telecommunications Numbering and Addressing Body. The
Licensee shall not be required to comply with any such amendment or
withdrawal unless the Licensee has been given a reasonable period of
notice, such notice not being less than three months. Numbers
allocated to the Licensee may only be withdrawn after similar
consultation and notice, and the Director shall consult end-users
affected by such withdrawal. Subject to overriding national interests,
or where there is no alternative solution available, the power to
withdraw Numbers shall not apply to any Numbers which the Director has
approved from time to time as part of a specific service of the
Licensee, which, as a result of investment by the Licensee, has a
recognised identity and quality associated with that particular Number
and which the Licensee is using and plans to continue to use.
20.15 In deciding on the details of and any subsequent changes to the Scheme and
the Conventions, and when making or changing Number allocations within the
Scheme or making determinations under this Condition, the Director shall ensure
that the Scheme complies with the Conventions and shall have regard to:
(a) the need for sufficient Numbers to be made available, having regard to
the anticipated growth in demand for telecommunication services,
together with the need for good husbandry, of that supply at any time;
(b) the need to ensure Compatibility with the Numbering Plans adopted or
to be adopted by telecommunications operators;
(c) the convenience and preferences of end-users;
(d) the requirements of effective competition;
(e) the practicability of implementing the Conventions in licensed systems
by the date when the Conventions are intended to apply:
(f) any costs or inconvenience imposed on tile Licensee; other
telecommunications operators, end-users and other interested parties
(including those overseas):
(g) any relevant international agreements, recommendations or standards:
(h) the views of the Licensee and other interested parties: and
(i) any other matters he regards as relevant
<PAGE>
20.16 The Licensee shall not, unless the Director consents otherwise, charge any
person for a Number which is allocated to him (other than a coveted Number
allocated to a person who is not a public telecommunications operator at the
request of such a person), but nothing in this Condition shall preclude the
Licensee from recovering from the operator of a Relevant System the reasonable
costs associated with allocating Numbers to and routing calls to that System;
save that in the case of any dispute or difference as to those costs the
Director may determine them and the Licensee shall not be obliged so to allocate
Numbers and route calls unless such operator agrees to bear the costs so
determined.
20.17 For the purposes of this Condition, "Telecommunications Numbering and
Addressing Body" means a body approved by the Director as representative of the
Licensee and other persons whom the Director considers it appropriate to include
in consultations about the content of the Conventions and the Scheme.
20.18 For the avoidance of doubt, it is hereby declared that this Condition
applies notwithstanding any arrangements for numbering arising by virtue of any
agreement to which Condition 6 applies. But nothing in this paragraph shall
affect the operation of any such agreements entered into before the coming into
force of this Licence.
20.19 The Numbers to which this Condition applies are Numbers:
(a) of a class described in CCITT Recommendation E. 160, E. 163, E. 164,
E. 165, E. 166 or F.69 or their functional successors; or
(b) which are of a class described in CCITT Recommendation X. 121 and
which include any Data Network Identification Code which has been:
(i) allocated before 14 November 1986 in accordance with a Numbering
Plan furnished to the Director; or
(ii) specified by the Director for the purposes of this Licence and
described in a list kept for that purpose by the Director and
made available by him for inspection to the general public
<PAGE>
CONDITION 21
ARRANGEMENTS FOR PROPORTIONATE RETURN
21.1 This Condition shall apply in respect of the conveyance of Messages to or
from each country and territory in the world other than as specified from time
to time by the Secretary of State.
21.2 Except insofar as the Director may otherwise consent in writing, the
Licensee shall ensure (using the most up-to-date information available) that
over each quarterly period for each Accounting Rate Service the First Ratio
shall be no greater than the Second Ratio.
21.3 Where it appears to the Director that in respect of any country, or
territory the obligation imposed by paragraph 21.2 is being breached, he may
make a determination to that effect and the Licensee shall take such steps as
the Director may direct for the purpose of remedying the situation. In
particular, and without prejudice to the generality of the foregoing, any such
direction may require the Licensee to cease to convey any Messages to that
country or territory.
21.4 In this Condition:
(a) "First Ratio" means the volume of Messages comprised in each
Accounting Rate Service which are conveyed by the Applicable Systems
and are delivered to the United Kingdom divided by the volume of all
Messages comprised in each Accounting Rate Service which are delivered
to the United Kingdom; and
(b) "Second Ratio" means the volume of all Messages comprised in each
Accounting Rate Service .which are conveyed by the Applicable Systems
and are sent from the United Kingdom divided by the volume of all
Messages comprised in each Accounting Rate Service which are sent from
the United Kingdom.
<PAGE>
CONDITION 22
ARRANGEMENTS FOR ACCOUNTING IN RESPECT OF INTERNATIONAL CONVEYANCE SERVICES
22.1 This Condition shall apply in respect of the conveyance of Messages to or
from each country and territory in the world other than as specified from time
to time by the Secretary of State.
22.2 The Licensee shall inform the Director of accounting rates and methods of
settlement and division of the accounting rates agreed for all Accounting Rate
Services, before those rates are put into operation.
22.3 As soon as practicably possible after making any correspondent arrangement
with an overseas operator, the Licensee shall inform the Director and all other
holders of a Licence authorising the provision of International Conveyance
Services in the United Kingdom and who are operating, or who have announced an
intention to operate on that particular route, of the terms of that arrangement,
in particular and without prejudice to the generality, of the foregoing,
including details of any changes to existing accounting rates or methods of
settlement or division of the accounting rates.
22.4 Where it appears to the Director that any accounting rate or methods of
settlement or division of the accounting rates agreed by the Licensee in respect
of any Accounting Rate Service has or is likely to have an effect to the
detriment of providers and users of International Conveyance Services in the
United Kingdom, he may make a determination to that effect and the Licensee
shall take such steps as the Director may direct for the purpose of remedying
the situation. In particular, and without prejudice to the generality of the
foregoing, any such direction may require the Licensee to cease to convey any
Messages to that country or territory.
<PAGE>
CONDITION 23
PROHIBITION OF EXCLUSIVE DEALING IN INTERNATIONAL SERVICES
23.1 The Licensee shall not enter into any agreement or arrangement with any
person running an Authorised Overseas System on terms or conditions which
unfairly preclude or restrict the provision by another public telecommunications
operator of International Conveyance Services.
23.2 The Licensee shall not unreasonably exclude any other public
telecommunications operator who is authorised by a licence to connect his system
to another telecommunication system situated outside the United Kingdom so as to
convey Messages to that other system from a reasonable opportunity to
participate in any international arrangements into which it proposes to enter
after the date on which this Licence enters into force for the installation and
operation of any submarine cable linking any of the Applicable Systems to any
telecommunication system outside the United Kingdom.
<PAGE>
CONDITION 24
NOTIFICATION OF CHANGES IN SHAREHOLDINGS
24.1 The Licensee shall notify the Secretary. of State if an undertaking becomes
a Parent Undertaking in relation to the Licensee.
24.2 Subject to paragraph 24.3, the Licensee shall notify the Secretary of State
of:
(a) any change in the proportion of the Shares held in a Relevant Company
by any person;
(b) the acquisition of any Shares in a Relevant Company by a person not
already holding any such Shares and the proportion of any such Shares
held by that person immediately after that acquisition.
24.3 The Licensee shall be obliged to notify the Secretary of State of any
acquisition of Shares or change in the Shareholding of a Relevant Company by any
person only if, by reason of that acquisition or change, the total number of
Shares in that Relevant Company held by that person otherwise than as trustee or
nominee for another person together with any Shares held by any nominee or
trustee for that person immediately after that change or acquisition:
(a) exceeds 15 per cent of the total number of Shares in that company
(where it did not exceed 15 per cent prior to that change or
acquisition);
(b) exceeds 30 per cent of the total number of Shares in that company
(where it did not exceed 30 per cent prior to that change or
acquisition); or
(c) exceeds 50 per cent of the total number of Shares in that company
(where it did not exceed 50 per cent prior to that change or
acquisition),
provided that where a Relevant Company is a public company as defined in section
I of the Companies Act 1985, the obligation shall be discharged by forwarding to
the Secretary of State as soon as practicable all information in respect of that
acquisition or that change as is entered on or received for entry on the
register required to be maintained by that Relevant Company under section 211 of
the Companies Act 1985.
(d) In any case referred to in paragraph 24.1 or 24.2, notification shall
be given by a date which is 30 days prior to the taking effect of such
change or acquisition. as the case may be. or as soon as practicable
after that date.
<PAGE>
CONDITION 25
LICENSEE'S GROUP
25.1 Without prejudice to the Licensee's obligations under these Conditions in
respect, in particular, of anything done on its behalf, where:
(a) the Director determines either:
(i) that a member of the Licensee's Group has done something which
would, if it had been done by the Licensee, be prohibited or not
be authorised under these Conditions; or
(ii) that a member of the Licensee's Group has done something which
would, if it had been done by the Licensee, require the Licensee
to take or refrain from taking a particular action under these
Conditions and that neither the Licensee nor the member has met
that further requirement; and
(b) the Director is not satisfied that the Licensee has taken all
reasonable steps to prevent any member acting in that way,
then the Director may direct the Licensee to take such steps as the Director
deems appropriate for the purpose of remedying the matter, including refraining
from carrying on with that member such commercial activities connected with
telecommunications as the Director may determine.
25.2 Where these Conditions apply in respect of the Applicable Systems they do
not apply in respect of any other telecommunication system, whether run by the
Licensee or another.
25.3 Where any person becomes a member of the Licensee's Group then the Licensee
shall not be subject to paragraph 25.1 before that is reasonably practicable but
shall be so not later than one year after that person becomes such a member or
such later date as the Director may determine.
25.4 This Condition shall not apply to any particular member of the Licensee's
Group if and to the extent that the Director so determines.
<PAGE>
CONDITION 26
PAYMENT OF FEES
26.1 The Licensee shall pay' the following amounts to the Secretary of State at
the times stated:
(a) on the grant of this Licence the sum of(pound)7,000;
(b) on 1 April 1999 a renewal fee of (at the option of the Director)
either (pound)8,000 or such amount which shall represent a fair
proportion, to be determined each year by the Director according to a
method that has been disclosed to the Licensee, of the estimated costs
to be incurred in that fiscal year by the Director in the regulation
and enforcement of telecommunication licences and in the exercise of
his other functions under the Act. The first renewal fee shall be
increased by the proportion which the period from the date of granting
of this Licence until the next following 1 April 1999 bears to the
period of one year: and
(c) when the Director so determines, a special fee which shall represent a
fair proportion, to be determined by the Director according to a
method that has been disclosed to the Licensee of the amount, if any.
by which the aggregate of:
(i) the costs estimated to have been already incurred in that fiscal
year by the Director in the regulation and enforcement of
telecommunication licences and in the exercise of his other
functions under the Act;
(ii) the costs estimated to have been already incurred in that fiscal
year by the Monopolies and Mergers Commission following licence
modification references under section 13 of the Act; and
(iii)the estimated costs to be incurred in the remainder of that
fiscal year:
(A) by the Director in the regulation and enforcement of
telecommunication licences and in the exercise of' his other
functions under the Act; and
(B) by the Monopolies and Mergers Commission following licence
modification, references under section 13 of the Act.
exceeds the renewal fee for that year.
save always that the aggregate of the renewal fee and the special fee for any
fiscal year shall not exceed 0.08%, or the annual turnover of the Systems
Business in the financial year before the last complete financiaI year of the
Licensee before the renewal fee is payable, or (pound)35.000 (adjusted in the
mariner described in paragraph 20.1(b) whichever is the greater {the "normal
aggregate fee" ), unless the Director' determines that the costs incurred in any
fiscal year by
<PAGE>
him and the Monopolies and Mergers Commission in respect of the Licensee's
activities exceeds the normal aggregate fee, in which case the aggregate of the
renewal fee and the special fee for the following year shall be such amount as
the Director determines is sufficient to take account of that excess as well as
of the other costs to be incurred as mentioned in this paragraph.
<PAGE>
CONDITION 27
REQUIREMENT TO FURNISH INFORMATION TO THE DIRECTOR
27.1 Without prejudice to any other provision in this Licence relating to the
provision of information, the Licensee shall furnish to the Director, in such
manner and at such times as the Director may reasonably request, such
information in the form of documents, accounts, estimates, returns and without
prejudice to the generality of the foregoing, such other information as he may
reasonably require for the purpose of verifying that the Licensee is complying
with these Conditions and for statistical purposes..
27.2 In making any such request the Director shall ensure that no undue burden
is imposed on the Licensee in procuring and furnishing such information and, in
particular, that the Licensee is not required to procure or furnish information
which would not normally be available to it unless the Director considers that
the particular information is essential for the purposes referred to in
paragraph 27.1.
<PAGE>
CONDITION 28
REQUIREMENT TO SUBMIT ACCOUNTS TO THE DIRECTOR
28.1 Without prejudice to any other provision in this Licence relating to the
maintenance of accounting records, the Licensee shall maintain such accounting
records dealing separately with its International Business carried on in the
United Kingdom as will enable it to show separately and explain, in response to
any request from the Director under paragraph 28.4, all the transactions to
which paragraph 28.2 refers.
28.2 This paragraph refers to:
(a) all transactions between each Relevant International Function run as
part of the Licensee's International Business; and
(b) all transactions between the Licensee's International Business and:
(i) any other business carried on by the Licensee whether in the
United Kingdom or elsewhere; or
(ii) the business of any Associated Person whether in the United
Kingdom or elsewhere.
28.3 The Licensee shall update the accounting records referred to in paragraph
28.1 no less frequently than monthly and those records shall include in
particular the costs (including capital costs), revenue and a reasonable
assessment of assets employed in and liabilities attributable to the
International Business and, separately, the amount of any material item o f
revenue, cost. asset or liability, which has been either:
(a) charged from or to any other business of the Licensee or Associated
Person together with a description of the basis of the value on which
the charge was made; or
(b) determined by apportionment or attribution from an activity common to
the business and any other business of the Licensee or any Associated
Person and, if not otherwise disclosed, the basis of the apportionment
or attribution.
28.4 The Director may at any time request from the Licensee copies of any of the
accounting records and detailed attribution policies and procedures which the
Licensee is obliged to maintain by this Condition, covering any period between:
(a) the date on which the Licensee first carried on and International
Business in the United Kingdom or, if later, the date of this Licence:
and
(b) the date on which such records were, or should have been last updated
in accordance with paragraph 28.3.
The Licensee shall provide any such records requested by the Director within 28
days of receiving such a request in writing.
<PAGE>
28.5
(a) Accounting records submitted to the Director shall be prepared in the
formats and in accordance with the accounting principles and rules
which apply to the annual statutory' accounts of the Licensee and
shall state the attribution policies and procedures used and where the
Licensee is a body corporate incorporated outside the United Kingdom
the preparation and adoption of those accounts shall comply with the
requirements of sections 226 and 231 to 234A of the Companies Act 1985
as if that body corporate were incorporated in the United Kingdom.
(b) The Licensee shall procure [where the Director directs] in respect of
each set of accounting records [submitted to the Director] an audit
report [which shall conform to UK auditing standards by the auditor]
in which the auditor shall state whether in his opinion the record
complies with paragraph 28.1 and is fairly presented in accordance
with the formats, accounting principles, rules and requirements
referred to in paragraph 28.5(a).
28.6 Where it appears to the Director that to do so would be beneficial to the
promotion or maintenance of competition he may direct the Licensee to publish
the accounting statements submitted to the Director in such manner as he may
specify. In so directing the Licensee the Director shall have regard to the need
for excluding, so far as that is practicable, any matter where publication of
that matter might, in the opinion of the Director, seriously and prejudicially
affect the interests of the Licensee or any Associated Person.
<PAGE>
CONDITION 29
APPLICATION OF THE LEASED LINES DIRECTIVE CONDITIONS
29.1 The Leased Lines Directive Conditions shall only apply to the extent set
out in paragraph 29.2.
29.2 Where:
(a) the Director has determined in accordance with regulation 8 of the
Leased Lines Regulations that the Licensee is an organization having
significant market power in respect of a relevant private circuit
market or that no holder of a Relevant Licence is an organization
having significant market power in respect of that market; and
(b) the Director directs the Licensee to comply with all or some of
Conditions 30 to 35 in respect of any relevant private circuit market
specified by the Director to the extent specified by the Director,
those Conditions shall apply in accordance with that direction.
<PAGE>
CONDITION 30
AVAILABILITY OF INFORMATION.
30.1 The Licensee shall publish by notice in accordance with the presentation
given in paragraphs A to C of Schedule 2 to the Leased Lines Regulations
information on offerings on technical characteristics, tariffs and supply and
usage conditions in respect of Relevant Private Circuits. The information shall
be published in the manner provided in these Conditions for the publication of
the charges and other terms and conditions on which the Licensee offers inter
alia to provide telecommunication services other than Relevant Private Circuits
by means of any of the Applicable Systems. Changes in existing offerings and
information on new offerings shall be published as soon as possible and, unless
the Director agrees otherwise, no later than twenty-eight days before the
implementation.
30.2 The supply conditions published in accordance with paragraph 30.1 shall
include at least the elements defined in paragraph C of Schedule 2 to the Leased
Lines Regulations.
<PAGE>
CONDITION 31
CONDITIONS FOR THE TERMINATION OF OFFERINGS
31.1 The Licensee shall not terminate an existing offering of a Relevant Private
Circuit unless:
(a) the offering has continued for a reasonable period of time; and
(b) the Licensee has consulted with the users affected.
Without prejudice to any other remedy or right of appeal which the user may have
in law or in accordance with contract or these Conditions, where the user does
not agree with the termination date as envisaged by the Licensee, he may bring
the case before the Director.
<PAGE>
CONDITION 32
ACCESS, USAGE AND ESSENTIAL REQUIREMENTS
32.1 The Licensee shall not restrict access to and usage of Relevant Private
Circuits save as permitted by the Director.
32.2 No technical restrictions shall be introduced or maintained for the
interconnection of Relevant Private Circuits to each other or to public
telecommunications networks
32.3 In relation to Relevant Private Circuits, the Licensee shall not be held to
have failed to comply with these Conditions if the Licensee takes the following
measures in order to safeguard the security of network operations during the
period when an emergency situation prevails:
(a) the interruption of the service;
(b) the limitation of service features; or
(c) the denial of access to the service,
provided that the following conditions are satisfied:
(i) the Licensee makes every reasonable endeavour to ensure that
service is maintained to all users;
(ii) and the Licensee takes as soon as reasonably possible all
reasonable steps to notify-thE users and the Director of the
beginning and the end of the emergency as well as the nature and
extent of temporary, service restrictions;
and in this paragraph, an emergency situation means an exceptional case of force
majeure, which, without prejudice to the generality thereof, includes extreme
weather, earthquake, flood, lightning or fire.
32.4 Where a user's terminal equipment no longer complies with the approval
conditions laid down in accordance with Council Directive 91/263/EEC or Council
Directive 93/97/EEC for its connection to the network termination point of the
type of Relevant Private Circuit concerned, the Licensee may, notwithstanding
any obligation under this Licence to provide to users access to and usage of
Relevant Private Circuits, interrupt the provision of' the Relevant Private
Circuit concerned until the terminal equipment is disconnected From the network
termination point provided that the Licensee:
(a) immediately informs the user about the interruption giving reasons for
it: and
<PAGE>
(b) restores the provision of the Relevant Private Circuit concerned as
soon as the user has ensured that the terminal equipment is
disconnected from the network termination point.
<PAGE>
CONDITION 33
PROVISION OF A MINIMUM SET OF RELEVANT PRIVATE CIRCUITS
33.1 The Licensee shall provide such of the minimum set of Relevant Private
Circuits with harmonised technical characteristics specified in Schedule 3 to
the Leased Lines Regulations as may be specified by the Director in any
direction referred to in Condition 29.2(b). The Licensee shall ensure, if it
provides other Relevant Private Circuits beyond the minimum set, that such
provision does not impede the provision of the minimum set.
<PAGE>
CONDITION 34
CONTROL BY DIRECTOR
34.1 The Licensee shall not take for reasons of the alleged failure of the user
of a Relevant Private Circuit to comply with the usage conditions any measure
(including, without prejudice to the generality of the foregoing, the refusal to
provide a Relevant Private Circuit, the interruption of the provision of
Relevant Private Circuits or the reduction of the availability of Relevant
Private Circuit features) unless:
(a) the measure is a specified measure authorised by the Director in the
case.of a defined infringement of usage conditions; or
(b) the Licensee has been notified in accordance with regulation 10 of the
Leased Lines Regulations that the Director consents to the taking of
the measure
34.2 Nothing in these Conditions shall prevent the Licensee, where it considers
it unreasonable to provide a Relevant Private Circuit in response to a
particular request under its tariffs and supply conditions published in
accordance with Condition 30, from varying those conditions in that case with
the consent of the Director.
<PAGE>
CONDITION 35
TARIFF PRINCIPLES AND COST ACCOUNTING
35.1 The Licensee shall ensure that tariffs for Relevant Private Circuits follow
the basic principles of cost orientation and transparency in accordance with the
following rules:
(a) tariffs for Relevant Private Circuits shall be independent of the type
of application which the users of the Relevant Private Circuits
implement, without prejudice to the principle of non-discrimination
set out in these Conditions;
(b) tariffs for Relevant Private Circuits shall normally contain the
following elements:
(i) an initial connection charge; and
(ii) a periodic rental charge, that is to say, a flat-rate element,
and when other tariff elements are applied, these shall be transparent
and based on objective criteria;
(c) tariffs for Relevant Private Circuits apply to the facilities provided
between Network Termination Points at which the user has access to the
Relevant Private Circuits. For Relevant Private Circuits provided by
more than one organisation notified in accordance with regulation
12(I) of the Leased Lines Regulations, half-circuit tariffs, that is
to say, from one Network Termination Point to a hypothetical
mid-circuit point, can be applied.
35.2 The Licensee shall formulate and put in practice a cost accounting system
suitable for the implementation of paragraph 35.1. Without prejudice to the
generality of the foregoing, the system shall include the following elements:
(a) the costs of the Relevant Private Circuits shall in particular include
the direct costs incurred by the Licensee for setting up, operating
and maintaining Relevant Private Circuits, and for marketing and
billing them: and
(b) common costs, that is to say. costs which can neither be directly
assigned to Relevant Private Circuits nor to other activities, shall
be allocated as Follows:
(i) whenever possible, common cost categories shall be allocated
based upon direct analysis of the origin of the costs themselves.
(ii) when direct analysis is not possible, common cost categories
shall be allocated based upon an indirect linkage to another cost
category or group of cost categories for which a direct
assignment or allocation is possible and such indirect linkage
shalt be based on comparable cost structures:
<PAGE>
(iii)when neither direct nor indirect measures of cost allocation can
be found, the cost category shall be allocated on the basis of a
general allocator computed by using the ratio of all expenses
directly or indirectly assigned or allocated, on the one hand, to
Relevant Private Circuits and, on the other hand, to other
services
35.3 Other cost accounting systems may be applied only if they are suitable for
the implementation of paragraph 35.1 and have as such been approved by the
Director for application by the Licensee.
<PAGE>
CONDITION 36
EXCEPTIONS AND LIMITATIONS ON OBLIGATIONS IN SCHEDULE 1 OTHER THAN PART 3
36.1 Unless the context otherwise requires and subject to paragraph 36.9, the
Licensee's obligations under these Conditions have effect subject to the
following exceptions and limitations.
36.2 The Licensee is not obliged to do anything which is not practicable.
36.3 The Licensee shall not be held to have failed to comply with an obligation
imposed upon it by or under these Conditions if and to the extent that the
Licensee is prevented from complying with that obligation by any physical,
topographical or other natural obstacle, by the malfunction or failure of any
apparatus or equipment owing to circumstances beyond the control of the
Licensee, by the act of any national authority, local authority or international
organisation or as the result of fire, flood, explosion, accident, emergency,
riot or war.
36.4 An obligation to provide any telecommunication service shall not apply:
(a) where there is no reasonable demand for it; or
(b) where provision of the service requested would expose any person
engaged in its provision to undue risk to health or safety; or
(c) where the Licensee is unable to obtain (either because it has not been
developed or for some other reason beyond the Licensee's control)
anything necessary, to provide a service of the quality or standard
required by the person who requests the provision of the service and,
in the event of dispute, any question as to whether he is so unable
shall be determined by the Director; or
(d) where the person to whom the Licensee would otherwise be under an
obligation to provide any service requests a service at a place in
which the apparatus necessary, to provide that service in that area
has not been installed (or in which the installation of such apparatus
has not been completed) or as the case may be such apparatus has not
been adapted or modified to make it capable of providing that service
or the trained manpower necessary, to provide that service is not
available in that area. provided that in every case where the Licensee
declines to provide a service to which this paragraph relates it shall
have published or furnished to the Director, within 28 days (or such
longer period as the Director considers reasonable) following receipt
by it of the request that that service be provided, proposals for:
(i) progressively installing or completing the installation,
adaptation or modification of the apparatus; or
(ii) the location of the trained manpower.
<PAGE>
necessary for the provision of that service in that area and the
Director has not determined that those proposals are unreasonable
or are not being effectively carried out; or
(e) where the person to whom the Licensee would otherwise be under an
obligation to provide any service requests a service at a place in an
area in which the demand or the prospective demand for the service is
not sufficient, having regard to the revenue likely to be earned from
the provision of the service in that area, to meet all the costs
reasonably to be incurred by the Licensee in providing the service
there, including:
(i) the cost of apparatus necessary, for the provision of the service
there;
(ii) the cost of installing, maintaining and operating such apparatus
for the purpose of providing the service there; and
(iii)the cost of the trained manpower necessary to provide the service
there; or
(f) where the Licensee notifies the Director that it is not reasonably
practicable in all the circumstances to provide the service requested
at the time or place demanded, giving his reasons therefore, and the
Director agrees.
36.5 The Licensee shall not be obliged to connect or to keep connected to the
Applicable Systems or to permit to be so connected or kept connected any
telecommunication system or telecommunication apparatus or to provide
telecommunication services or to permit the provision of any service if the
person to or for whom that is or is to be done:
(a) has not entered or will not enter into a contract for the purpose with
the Licensee for reasons other than the unreasonable refusal of the
Licensee to agree terms for the purpose but this paragraph does not
apply in a case where the Director is satisfied that:
(i) the Licensee has not published standard terms and conditions
which it proposes to apply for the purpose in question, or the
transaction is not fit to be governed by such terms and
conditions; and
(ii) the Licensee has unreasonably refused to agree terms and
conditions for the purpose;
(b) is, or in the Director's opinion has given reasonable cause to believe
that he may become:
(i) in breach of a contract with the Licensee for the provision of.
telecommunication services by the Licensee: or
(ii) in default in regard to any debt or liability owed to the
Licensee in respect of any such contract:
<PAGE>
(c) is using, or permitting the use of, apparatus so connected or kept
connected for an,,, illegal purpose or has done so in the past and is
likely to do so again; or
(d) has obtained, or attempted to obtain, any telecommunication service
from the Licensee by corrupt, dishonest or illegal means at any time.
36.6 Nothing in these Conditions shall prevent the Licensee from withdrawing
from, or declining to provide to, any person any telecommunication service which
the Licensee has notified the Director that it is providing in a limited area,
or to a limited class of customers, for the purpose of evaluating the technical
feasibility of, or the commercial prospects for. that service.
36.7 Nothing in these Conditions shall require the Licensee to provide any
telecommunication service, or to provide any telecommunication service of any
particular class or description, if it provides instead a service, or a service
of a class or description, which satisfies the purposes of that requirement at
least to the same extent.
36.8 This Condition shall apply without prejudice to any limitation or
qualification of the requirements imposed by or under any other Condition.
36.9 This Condition does not apply to Condition 6, 12 and 14 and:
(a) only paragraphs 36.1, 36.2.36.3 and 36.8 apply to Conditions 11 19.2
19.3 25, 26 and 27;
(b) only paragraphs 36.1, 36.5(a) and 36.8 apply to Condition 5.2;
(c) only paragraphs 36.1, 36.2.36.3, 36.5 and 36.8 and 23.8 apply to
Condition 20:
(d) only paragraphs 36.1, 36.2: 36.3, 36.4(b), 36.5(a) and 36.8 apply to
Condition 4; and
(e) only paragraphs 36.1, 36.2.36.3, 36.4, 36.6, 36.8 apply to Condition
5.1;
but paragraph 36.2 does not apply to Condition 10 or Condition 24.
<PAGE>
PART 3: CONDITIONS INCLUDED UNDER SECTION 7 OF THE ACT FOR THE PURPOSES OF
ACCESS CONTROL SERVICES
CONDITION 37
REQUIREMENT TO PROVIDE ACCESS CONTROL SERVICES '
37.1 This Condition and Conditions 38 - 44 below apply in respect of the
provision of Access Control Services by a Regulated Supplier where the Director
has served a Regulated Supplier Notice. In the event of any conflict between
such a Condition and any other Condition of this Licence, the former shall
apply. "Regulated Supplier" and "Regulated Supplier Notice" have the meanings
assigned to them in paragraphs 37.2 and 37.3 below,
37.2 Subject to paragraph 37.3 where:
(a) the Licensee supplies or intends to supply Access Control Services to
another person in respect of Relevant Other Telecommunication Services
or includes Access Control Services provided by means of an Applicable
System in any Relevant Other Telecommunication Service provided by
means of that or any other Applicable System or any other
telecommunication system run under a Licence granted to the Licensee
or any other person;
(b) a Third Party supplies or intends to supply to the public a Relevant
Other Telecommunication Service in respect of which the use of Access
Control Services is necessary;
(c) there is no other supplier of Access Control Services or the supply of
Access Control Services in respect of that Relevant Other
Telecommunication Service, or Relevant Other Telecommunication
Services of that description cannot be secured from any other source
on an economic basis or at all, that is to say without imposing costs,
penalties or other inhibitions on the Third Party. or the consumer of
those services, which would make the price to the consumer of those
services either not competitive with that charged by other persons for
a Relevant Other Telecommunication Service or Relevant Other
Telecommunication Services of a description supplied or intended to be
supplied by the Third Party or such as to be likely to prevent the
first supply to consumers of a particular Relevant Other
Telecommunication Service; and
(d) the Third Party has requested the provision to it by the Licensee of
Access Control Services.
the Licensee is a Regulated Supplier of.Access Control Services.
unless the Director has agreed following a representation from the
Licensee that in all the circumstances and having regard particularly
to the number of consumers who have Essential Components enabling them
to seek the supply of services to which access is controlled by means
of Access Control Services provided by means of the Applicable Systems
and to the costs to the Licensee arising from the provision of.Access
Control Services to other persons it is not reasonably
<PAGE>
practicable for the Licensee to supply such Services and has deemed
the Licensee not to be a Regulated Supplier.
37.3
(a) The obligations and provisions in paragraphs 37.5 and 37.6 below, and
Conditions 38 to 44 below shall not come into force unless the
Director has served on the Licensee a notice ("a Regulated Supplier
Notice") specifying the matters set out in sub-paragraph (b) of this
paragraph informing the Licensee that it appears to the Director that
the Licensee may be a Regulated Supplier and informing the Licensee of
its right within a period of 28 days to make a representation under
paragraph 37.2 and either the time for making such a representation
has elapsed or the Director in response to such a representation has
informed the Licensee under paragraph 37.4 that he has decided not to
deem the Licensee not to be a Regulated Supplier
(b) Regulated Supplier Notice shall specify
(i) the Access Control Services which the Director considers are or
may be supplied;
(ii) the Relevant Other Telecommunication Service in respect of which
they are or may be supplied; and
(iii)how the requirements of paragraphs 37.2(b) and 37.2(c)above are
or may be satisfied.
37.4
(a) A representation made under paragraph 37.2 above shall be in writing,
and shall be sent to the Director and to any Third Party who has
applied to the Licensee for the supply of Access Control Services. The
Director shall publish the representation-in such manner as he
considers appropriate to bring it to the attention of those likely to
be affected and invite observations to be submitted within a period of
not less than 28 days;
(b) When the Director has considered the representation and any
observations made he shall prepare a draft decision and statement of
reasons for that decision and send it to the Licensee, any Third Party
and any other person who has submitted observations and invite
comments giving those persons a period of not less than 14 days within
which to comment;
(c) After considering an,.' comments received the Director shall inform
the Licensee of his decision and shall publish it in like manner as
the representation was published.
37.5 The Licensee, if it is a Regulated Supplier, shall offer that Access
Control Service requested to any person on fair, reasonable and
non-discriminatory terms, where a Third Party requires such Access Control
Service in order to supply a Relevant Other Telecommunication Service of any
description.
<PAGE>
37.6 Where the Licensee provides, or intends to provide, any Access Control
Service in accordance with the offer referred to in paragraph 37.5 above, the
Licensee shall co-operate with the Third Party and do whatever is necessary and
reasonable to ensure interoperability of the Applicable System and associated
apparatus to enable the Access Control Services to be provided and maintained.
<PAGE>
CONDITION 38
TRANSCONTROL REQUIREMENTS IMPOSED ON THE OPERATORS OF ACCESS CONTROL SERVICES
38.1 Where the Licensee, as a Regulated Supplier provides, or intends to
provide. to a Third Party any Access Control Service in relation to the
provision of Relevant Other Telecommunication Services which are, or are to be,
conveyed by means of public telecommunication systems run by a Cable Operator,
it shall co-operate with the Cable Operator, including providing it with any
necessary assistance and information, so that the Cable Operator is able to
transcontrol and retransmit the Relevant Other Telecommunication Service
cost-effectively using its own Access Control Service, without incurring
unnecessary or unreasonable expense.
38.2 Nothing in paragraph 38.1 above shall prevent the Licensee charging and
being paid for the assistance and information so provided.
<PAGE>
CONDITION 39
PROHIBITION OF LINKED SALES
39.1 If it is a Regulated Supplier, the Licensee shall not make the provision to
any person of any Access Control Service conditional upon the acquisition by any
person of:
(a) any other service (whether an Access Control Service or otherwise)
which is not part of the particular Access Control Service requested
save where that Service cannot be provided without the provision of
that other service; or
(b) any computer programme, telecommunication apparatus or
telecommunication system, save where the Access Control Service
requested cannot be provided otherwise.
39.2 Except where the Director has agreed otherwise, the Licensee shall not
provide an Access Control Service together with any of the things described in
paragraph 39.1 (a) or39.1 (b) above in a manner, or for charges, or on terms or
conditions more favourable than would have been available for providing the
Access Control Service requested without that other thing.
39.3 Notwithstanding paragraphs 39.1 and 39.2 the Licensee may:
(a) where it supplies as part of the same transaction or interconnected
series of transactions two or more items of apparatus for the
provision of Access Control Services for connection to any of the
Applicable Systems, offer quantity discounts or more favourable terms
and conditions in respect of quantity in relation to such apparatus
which it so supplies whether those items of apparatus are of the- same
or different descriptions;
(b) where the Director consents, impose such conditions as are incidental
to the provision of the Access Control Service or the supply of the
apparatus requested;
(c) where it provides by means of or in relation to any of the Applicable
Systems and as part of the same transaction or an interconnected
series of transactions, two or more Access Control Services or
Relevant Other Telecommunication Services which are of the same
description or which are so related as to permit economies of scope
when they are provided together, offer such quantity discounts or such
more favourable terms and conditions in respect of quantity for those
services as have been published in accordance with Condition 40.
<PAGE>
CONDITION 40
PUBLICATION OF CHARGES, TERMS AND CONDITIONS TO BE APPLIED IN RESPECT OF ACCESS
CONTROL SERVICES
40.1 If it is a Regulated Supplier, the Licensee shall, except in so far as the
Director may otherwise consent in writing and without prejudice to the
requirements of Condition 11:
(a) publish in the manner and at the times specified in paragraph 40.2 a
notice specifying, or specifying the method that is to be adopted for
determining, the charges and other terms and conditions on which it
offers: (i) to provide each Access Control Service, or package of such
services; or
(ii) to provide Access Control Services by means of, any of the
Applicable Systems; and
(b) where it does any of the things mentioned in paragraph 40.1 (a)(i) or
40.1 (a)(ii), do those things at the charges and on the other terms
and conditions so published.
40.2 Publication of the notice shall be effected by:
(a) sending a copy' thereof to the Director to arrive not more than 28
days after the date on which the Licensee first provides services
under the Licence and thereafter not less than 28 days before any
proposal to amend any charge, term or condition or the method of
determining the same is to become effective;
(b) placing as soon as practicable thereafter a copy thereof in a publicly
accessible part of the Major Office of the Licensee in such manner and
in such place that it is readily available for inspection free of
charge by members of the general public during such hours as the
Secretary, of State may prescribe under section 19(4) of the 1984 Act
that the register of Licences and orders is to be open to public
inspection or in the absence of any such order having been made by the
Secretary of State. during normal office hours; and
(c) sending a copy thereof or such part or parts thereof as are
appropriate to any person who may request such a copy.
<PAGE>
CONDITION 41
INTELLECTUAL PROPERTY
41.1 If it is a Regulated Supplier, where it appears to the Director that any
Relevant Intellectual Property Right has been, is being or is likely to be
exercised (whether by the Licensee or by any other person in pursuance of an
agreement, arrangement or concerted practice to which the Licensee is a party.)
so as to prevent:
(a) any Access Control System, Conditional Access System. Transmission
System, Essential Component or other telecommunication system or
telecommunication apparatus which may lawfully be connected to any of
the Applicable Systems, from being so connected either at all or on
reasonable charges, terms and conditions; or
(b) any Access Control Service which may lawfully be provided by means of
the Applicable Systems, from being so provided or obtained either at
all or on reasonable charges, terms and conditions;
he may direct the Licensee in writing in accordance with paragraph 41.2 or 41.3.
41.2 Where the exercise of the Relevant Intellectual Property Right prevents a
Product from being made available either at all or on reasonable charges, terms
and conditions to the person wishing to make such a connection or to provide or
obtain an Access Control Service, the Director may direct the Licensee to take
such steps as are within the power of the Licensee and are, in the opinion of
the Director, reasonable and necessary in all the circumstances to secure that
the Product is made available to that person on charges, terms and conditions
acceptable to that person or which (in default of agreement) are, in the opinion
of the Director, reasonable to enable such connection to be made or such service
to be provided or obtained.
41.3 Where paragraph 41.1 applies in circumstances other than those described in
paragraph 41.2, the Director may direct the Licensee to take such. steps as are
within the power of the Licensee and are, in the opinion of the Director,
reasonable and necessary in all the circumstances to secure that the person
wishing to make such a connection or to provide or obtain such an Access Control
Service is enabled to make use of the Relevant Intellectual Property Right for
the purpose of making the connection or of providing or obtaining the service,
upon charges, terms and conditions acceptable to that person or which (in
default of agreement) are, in the opinion of the Director. reasonable for such
purpose.
<PAGE>
CONDITION 42
REQUIREMENT TO KEEP SEPARATE FINANCIAL ACCOUNTS
42.1 If it is a Regulated Supplier, the Licensee shall keep separate financial
accounts regarding its operation of Access Control Services save that where, the
Licensee also runs a Conditional Access System it shall not be obliged by this
Condition to keep accounts in respect of Access Control Services separate from
those in respect of Conditional Access Services provided by means of a
Conditional Access System.
42.2 The Licensee shall maintain such accounting records dealing separately with
its Access Control Services Business as will enable it to show separately and
explain, in response to any request from the Director under paragraph 42.5, all
the transactions to which paragraph 42.3 refers.
42.3 This paragraph refers to all transactions between the Licensee's Access
Control Services Business and:
(a) any other business carried on by the Licensee whether in the United
Kingdom or elsewhere; or
(b) the business of any Associated Person whether in the United Kingdom or
elsewhere: or
(c) the business of any Third Party; or
(d) any other person or class of persons notified to the Licensee by the
Director.
42.4 The Licensee shall update the accounting records referred to in paragraph
42.1 no less frequently than monthly and those records shall include in
particular the costs (including capital costs), revenue and a reasonable
assessment of assets employed in and liabilities attributable to the Access
Control Services Business, and separately, the amount of any material item of
revenue, cost, asset or liability which has been either:
(a) charged from or to any other business of the Licensee or the business
of an Associated Person or Third Party together with a description of
the basis of the value on which the charge was made: or
(b) determined by apportionment or attribution from an activity common to
the business and any other business of the Licensee or any Associated
Person and. if not otherwise disclosed, the basis of the apportionment
or attribution.
42.5 The Director may at any time request from the Licensee copies of any of the
accounting records and detailed attribution policies and procedures which the
Licensee is obliged to maintain by this Condition, covering any period between:
(a) the date on which the Licensee first carried on any Access Control
Services Business in the United Kingdom; and
<PAGE>
(b) the date on which such records were, or should have been last updated
in accordance with paragraph 42.4.
The Licensee shall provide any such records requested by the Director within 28
days of receiving such a request in writing.
42.6 The provisions of Conditions 27.5 and 27.6 shall apply to this Condition in
the same way as they apply to Condition 27.
<PAGE>
CONDITION 43
CODE OF PRACTICE ON THE CONFIDENTIALITY OF CUSTOMER INFORMATION
43.1 If it is a Regulated Supplier, subject to the other provision of this
Licence, the Licensee shall take all reasonable steps to safeguard the privacy
and confidentiality of any information about a Third Party and its business
(including subscriber data) to whom it provides Access Control Services,
acquired by it in relation to the provision of those Services, and shall use its
best endeavours to secure that:
(a) no person acting on behalf of the Licensee or any member of the
Licensee's Group divulges or uses any such information except as may
be necessary in the course of providing such services to the Third
Party; and
(b) no such person seeks such information other than is necessary for the
purpose of providing Access Control Services to the Third Party.
43.2 Paragraph 43.1 above does not apply where:
(a) the information relates to a specific party and that party has
consented in writing to such information being divulged or used, and
such information is divulged or used in accordance with the terms of
that consent, or
(b) the it formation is in the public domain.
43.3 Without prejudice to the obligation in paragraph 43.l the Licensee shall
take all reasonable steps to prevent any failure to comply with paragraph 43.1
above, including, without prejudice to the generality of the foregoing:
(a) imposing restrictions on the communication and disclosure of
information to persons acting on behalf of the Licensee or members of
its Group other than to those directly engaged in the provision of
Access Control Services to the Third Party
(b) imposing restrictions on access by persons other than those directly
engaged in the provision of Access Control Services to the Third Party
to:
(i) premises or parts of premises used for the Third Party's
business: and
(ii) information relating to that business and its customers.
43.4 The Licensee shall take reasonable steps to ensure that the Licensee and
any persons acting on its behalf and members of the Licensee's Group and any
persons acting on their behalf observe the provisions of a Code of Practice
which:
(a) specifies the persons to whom they may not disclose information about
a customer of the Licensee's business providing Access Control
Services without prior written consent of that customer;
<PAGE>
(b) makes provision for any disclosure of information without the
customer's consent.
43.5 The Licensee shall within three months of first running an Applicable
System confirm in writing to the Director that the Licensee has taken all
reasonable steps to ensure that it and its employees are observing the
provisions of a Code of Practice.
43.6 This Condition is without prejudice to the duties at law of the Licensee
towards its customer.
<PAGE>
CONDITION 44
EXCEPTIONS AND LIMITATIONS ON OBLIGATIONS IN PART 3 OF SCHEDULE I
44.1 Nothing in this Part of this Schedule shall require the Licensee to do any
thing which the Director has agreed is impracticable on technical or commercial
grounds or on the grounds that he could not reasonably be expected to do that
thing.
44.2 Nothing in this Part of this Schedule shall require the Licensee to do
anything which the Director has agreed would prejudice the security of the
Licensee's Access Control Services Business or any apparatus comprised in it so
that its ability to combat piracy is materially compromised.
<PAGE>
SCHEDULE 2: REVOCATION
1 Notwithstanding paragraph 3 of the Licence the Secretary of State may at any
time revoke this Licence by at least 30 days' notice given to the Licensee in
writing in any of the following circumstances:
(a) if the Licensee agrees in writing with the Secretary. of State that
this Licence should be revoked; or
(b) if either
(i) an undertaking has become a Parent Undertaking in relation to the
Licensee; or
a change or acquisition of a description specified in paragraphs 24.2 and 24.3
of Condition 24 of Schedule 1 to this Licence has taken place;
and either
(ii) the Licensee has duly notified the Secretary. of State in
accordance with those paragraphs; or
(iii)the Licensee has failed to notify the Secretary of State that
such event, change or acquisition has taken place in accordance
with an obligation under that Condition;
and
(iv) the Secretary of State has notified the Licensee in writing that
he is minded to revoke this Licence on the grounds either that:
(A) the event, change or acquisition would in his opinion be
against the interests of national security or relations with
the government of a country or territory outside the United
Kingdom; or
(B) the Licensee has committed a breach of Condition 24 of
Schedule I; and
(v) the event, change or acquisition has not been reversed or
remedied within 30 days of the receipt by' the Licensee of such
notification; or
(c) if, following a change or acquisition of the type referred to in
Condition 24 of Schedule I to this Licence, the Secretary of State
considers, or the Director has notified the Secretary of State that
the Director considers, that the Licensee is relying, has relied or is
likely to rely on this Licence in circumstances in which an effect of
such reliance is, was or may be that the Licensee or any member of the
Licensee's Group is or was relieved wholly or
<PAGE>
in part of any obligation, limitation or restriction imposed by a
Licence issued to the Licensee or any member of the Licensee's Group;
or
(d) where the Licensee has failed to comply with a final order (or a
provisional order confirmed) under section 16 of the Act and the
Secretary. of State has given the Licensee not less than 30 days'
notice in writing that, if the Licensee fails to comply with the order
within that period of 30 days, he intends to revoke the Licence.
provided that no such notice of intention shall be given where the
question of the validity of the order is the subject of any court
proceedings, and where that question becomes so subject during the 30
day notice period, that period shall cease to run until the final
disposal of those proceedings (including any Appeal); or
(e) if the Licensee:
(i) is deemed to be unable to pay its debts (within the meaning of
section 123 of the Insolvency Act 1986 as applied for the
purposes of this Licence by paragraph 2(b)), convenes any meeting
with its creditors generally with a view to the general
readjustment or rescheduling of its indebtedness or makes a
general assignment for the benefit of its creditors generally; or
(ii) enters into administration, receivership or liquidation; or
(iii)ceases to provide telecommunication services of the type
authorised in paragraph 3 of Schedule 3 to this Licence; or
(f) if the Licensee or any other person takes any action for the voluntary
winding-up or dissolution of the Licensee; or
(g) if the Licensee enters into any scheme of arrangement under the
Insolvency Act 1986 (other than in any such case for the purpose of
reconstruction or amalgamation upon terms and within such period as
may previously have been approved in writing by the Secretary of
State); or
(h) if an administrator, receiver, trustee or similar officer of the
Licensee, or of all or an,,' material part of the revenues and assets
of it. is appointed; or
(i) if any order is made for the compulsory winding-up or dissolution
of the Licensee: or
(ii) if any amount payable under Condition 26 of Schedule 1 is unpaid
30 days after it becomes due and remains unpaid for a period of
14 days after :he Secretary of State notifies the Licensee that
the payment is overdue.
2 For the purposes of paragraph 1(e)(i), in applying section 123 of the
Insolvency Act l986:
<PAGE>
(a) if a written demand served on the Licensee is satisfied prior to the
expiry of the notice of revocation the Secretary of State shall not
revoke the Licence; and
(b) the figure of "(pound)750", or such other money sum as may be
specified from time to time pursuant to sections 123(3) and 416 of the
Insolvency Act 1986, shall be deemed to be replaced by "250,000" or
such higher figure as the Director may from time to time determine.
3 In this Schedule:
(a) "Group" means a parent undertaking and its subsidiary undertaking or
undertakings within the meaning of section 258 of the Companies Act
1985 as substituted by section 21 of the Companies Act 1989; and
"Licensee's Group" means a Group in respect of which the Licensee is
either a parent undertaking or a subsidiary undertaking; and
(b) "Parent Undertaking" has the same meaning as in section 258 of the
Companies Act 1985 as substituted by section 21 of the Companies Act
1989.
4 For the purposes of this Schedule "Appeal" includes further appeal and
application for leave to appeal or further to appeal.
<PAGE>
(i) Encryption Services, that is to say:
(A) any encryption or scrambling of signals for a Relevant Other
Telecommunication Service of any description; and
(B) the conveyance by the Applicable System of encryption or
scrambling information;
(ii) Subscriber Authorisation Services, that is to say:
(A) the actuation or control or the remote actuation or control
of decoders; or
(B) the initial transmission of messages connected with
subparagraph (a)(ii)(A) above;
(iii) Subscriber Management Services, that is to say:
(A) the preparation, or preparation and supply to consumers of
Essential Components; or
(B) the preparation from consumers' orders of instructions for
authorisation signals for transmission to decoders,
(C) or both;
or any other component of a telecommunication service where failure to provide
such a part means that such Relevant Other Telecommunication Service could not
be supplied to consumers;
(b) "Applicable Terminal Equipment" means apparatus which is applicable
terminal equipment within the meaning of regulation 4 of the
Telecommunications Terminal Equipment Regulations 1992;
(c) "Compliant Terminal Equipment" means Applicable Terminal Equipment
which satisfies the requirements of regulation 8 of the
Telecommunications Terminal Equipment Regulations 1992;
(d) "Conditional Access Services" has the same meaning as in Directive
95/47/EC of the European Parliament and of the Council on the use of
standards for the transmission of television signals and the Advanced
Television Standards Regulations. 1996 (S.I. 1996/3151 );
(e) "Dwelling-House" has the same meaning as in section 202 of the
Broadcasting Act 1990;
(f) "EUTELSAT Convention" means the Convention establishing the European
Telecommunications Satellite Organisation EUTELSAT including its
Preamble and its Annexes, opened for signature by governments at
Paris. France on 15 July 1982. and any subsequent amendments made to
it;
<PAGE>
(g) "EUTELSAT Operating Agreement" means the Operating Agreement relating
to the European Telecommunications Satellite Organisation EUTELSAT,
including its Preamble and Annexes, opened for signature at Paris,
France on 15 July 1982, and any subsequent amendments made to it;
(h) "INMARSAT Convention" means the Convention establishing the
International Mobile Satellite Organisation (formerly the
International Maritime Satellite Organisation) INMARSAT including its
Preamble and its Annex, opened for signature by governments at London,
England on 3 September 1976, and any subsequent amendments made to it;
(i) "INMARSAT Operating Agreement" means the Agreement, including its
Annex, opened for signature at London, England on 3 September 1976 by
entities designated by governments party to the INMARSAT Convention,
and any subsequent amendments made to it;
(j) "INTELSAT Agreement" means the Agreement including its Annexes but
excluding all titles of Articles, opened for signature by governments
at Washington DC, USA, on 20 August 1971 by which the International
Telecommunications Satellite Organisation INTELSAT was established,
and any subsequent amendments made to it;
(k) "INTELSAT Operating Agreement" means the Agreement, including its
Annex but excluding all titles of Articles, opened for signature at
Washington DC, USA, on 20 August 1971, by governments or
telecommunications entities designated by governments in accordance
with the provisions of the INTELSAT Agreement, and any subsequent
amendments made to it;
(L) "International Private Leased Circuit" means a communication facility
which is:
(i) comprised both in a public telecommunication system and in an
equivalent telecommunication system in a country, or territory
other than the United Kingdom;
(ii) for the conveyance of Messages between:
(A) in the case of outbound Messages, the last point of
connection within the United Kingdom at which the route of
the Messages is selected and the first point of connection
in any country or territory other than the United Kingdom;
(B) in the case of in bound Messages. the last point of
(connection in any country or territory other than the
United Kingdom and the first point of connection in the
United Kingdom at which the route of the Messages is
selected:
(iii) made available to a particular Service Provider:
<PAGE>
(iv) such that all of the Messages transmitted at any of the points
mentioned in paragraph (i) are received at every other such
point; and
(v) such that all the points mentioned in paragraph (ii) are points
of connection between telecommunications systems referred to in
paragraph (i); and
(vi) such that all the points mentioned in paragraph (ii) are fixed by
the way in which the facility is installed and cannot otherwise
be selected by persons or telecommunication apparatus sending
Messages by means of that facility; but
(vii)excluding from the extent of the facility any other private
leased circuit installed between the particular Service Provider
and any other person in the United Kingdom;]
(m) "International Simple Data Resale Services" means telecommunication
services consisting in the conveyance of Messages which do not include
two-way live speech, but include only such switching, processing, data
storage or protocol conversion as is necessary for the conveyance of
those Messages in real time, which have been or are to be conveyed by
means of all of the following;
(i) a Public Switched Network;
(ii) an International Private Leased Circuit; and
(iii)the equivalent of a Public Switched Network in another country
or territory;
provided that conveyance of a Message by means of a Public Switched
network or, as the case may be, the equivalent of a Public Switched
Network in another country or territory, shall be disregarded where
that Message is so conveyed in circumstances specified for the time
being by the Secretary of State as not being material for the purposes
of paragraph 3 and included in a list kept for the purpose by the
Director and made available by him for inspection by the general
public:
(n) "International Simple Voice Resale Services" means telecommunication
services consisting in the conveyance of Messages which include
two-way live speech which have been or are to be conveyed by means of
all of the following:
(i) a Public Switched Network;
(ii) an International Private Leased Circuit; and
(iii)the equivalent of a Public Switched Network in another country
or territory;
<PAGE>
provided that conveyance of a Message by means of a Public Switched
Network or, as the case may be, the equivalent of a Public Switched
Network in another country or territory, shall be disregarded where
that Message is so conveyed in circumstances specified for the time
being by the Secretary of State as not being material for the purposes
of paragraph 3 and included in a list kept for the purpose by the
Director and made available by him for inspection by the general
public;
(o) "Message" means anything falling within paragraphs (a) to (d) of
section 4(1) of the Act;
(p) "Mobile Radio Tails Service" means a telecommunication service
consisting in the conveyance of Messages through the agency of
Wireless Telegraphy to or from the Applicable Systems directly from or
to any apparatus desired or adapted to be capable of being used while
in motion;
(q) "Private Leased Circuit" means a communication facility which is:
(i) provided by means of one or more public telecommunications
systems:
(ii) for the conveyance of Messages between points, all of which are
points of connection between telecommunication systems referred
to in paragraph 4(q)(i) and other telecommunication systems;
(iii) made available to a particular person or particular persons;
(iv) such that all of the Messages transmitted at any of the points
mentioned in paragraph 4(q)(ii) are received at every other such
point; and
(v) such that the points mentioned in paragraph 4(q)(ii) are fixed by
the way in which the facility is installed and cannot otherwise
be selected by persons or telecommunication apparatus sending
Messages by means of that facility:
(r) "Public Switched Network" means a public telecommunication system by
means of which two-way telecommunication services are provided whereby
Messages are switched incidentally to their conveyance, and, for the
avoidance of doubt, a Public Switched Network does not include Private
Leased Circuits or International Private Leased Circuits; and
(s) "Service Provider" means any person who is in the business of
providing telecommunication services of any description;
"Wireless Telegraphy" has the same meaning as in the Wireless Telegraphy
Act 1949.
5 Expressions cognate with those referred to in this Schedule shall be construed
accordingly.
<PAGE>
PRICR POUND 10
Copies of this Licence are available from the OFTEL library, 50 Ludgate Hill,
London EC4M 7JJ (telephone 0171 634 8764)
c. Crown copyright
Issued by the Department of Trade and Industry
Subsidiaries
Startec Global Holding Corporation, a Delaware corporation
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 13, 1998
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION
UNDER THE TRUST INDENTURE ACT OF 1939, AS AMENDED,
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an application to determine eligibility of a trustee
pursuant to Section 305(b) (2) _____
----------------------
FIRST UNION NATIONAL BANK
(Exact name of Trustee as specified in its charter)
<TABLE>
<S> <C> <C>
230 SOUTH TRYON STREET, 9TH FL.
CHARLOTTE, NC 28288-1179 22-1147033
(Address of principal executive office) (Zip Code) (I.R.S. Employer Identification No.)
Patricia A. Welling (804) 343-6067
800 East Main Street, Richmond, Virginia 23219
STARTEC GLOBAL COMMUNICATIONS CORPORATION
(Exact name of obligor as specified in its charter)
Maryland 52-1660985
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
10411 Motor City Drive
Suite 301
Bethesda, MD 20817
(Address of principal executive offices) (Zip Code)
</TABLE>
------------------------------
12% SENIOR NOTES DUE 2008 12% SERIES
A SENIOR NOTES DUE 2008
(Title of the indenture securities)
================================================================================
<PAGE>
1. GENERAL INFORMATION.
(a) The following are the names and addresses of each examining or
supervising authority to which the Trustee is subject:
The Comptroller of the Currency, Washington, D.C.
Federal Reserve Bank of Richmond, Richmond, Virginia.
Federal Deposit Insurance Corporation, Washington, D.C.
Securities and Exchange Commission, Division of Market Regulation,
Washington, D.C.
(b) The Trustee is authorized to exercise corporate trust powers.
2. AFFILIATIONS WITH OBLIGOR.
The obligor is not an affiliate of the Trustee.
3. VOTING SECURITIES OF THE TRUSTEE.
Response not required.
(See answer to Item 13)
4. TRUSTEESHIPS UNDER OTHER INDENTURES.
Response not required.
(See answer to Item 13)
5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR OR
UNDERWRITERS.
Response not required.
(See answer to Item 13)
6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS OFFICIALS.
Response not required.
(See answer to Item 13)
7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR THEIR OFFICIALS.
Response not required.
(See answer to Item 13)
8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE.
Response not required.
3
<PAGE>
(See answer to Item 13)
9. SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE.
Response not required.
(See answer to Item 13)
10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF CERTAIN
AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR.
Response not required.
(See answer to Item 13)
11. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON
OWNING 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR.
Response not required.
(See answer to Item 13)
12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE.
Response not required.
(See answer to Item 13)
13. DEFAULTS BY THE OBLIGOR.
A. None
B. None
14. AFFILIATIONS WITH THE UNDERWRITERS.
Response not required.
(See answer to Item 13)
15. FOREIGN TRUSTEE.
Trustee is a national banking association organized under the
laws of the United States.
16. LIST OF EXHIBITS.
(1) *Articles of Incorporation.
(2) Certificate of Authority of the Trustee to conduct business.
No Certificate of Authority of the Trustee to
4
<PAGE>
commence business is furnished since this authority is continued
in the Articles of Association of the Trustee.
(3) *Certificate of Authority of the Trustee to exercise corporate
trust powers.
(4) *By-Laws.
(5) Inapplicable.
(6) Consent by the Trustee required by Section 321(b) of the Trust
Indenture Act of 1939 as amended.
Included at Page 5 of this Form T-1 Statement.
(7) *Report of condition of Trustee. (Incorporated herein by
reference per SEC registration number 333- 58547).
(8) Inapplicable.
(9) Inapplicable.
* Exhibits thus designated have heretofore been filed with the
Securities and Exchange Commission, have not been amended since filing
are incorporated herein by reference (See Exhibit T-1 Registration
Number 333- 58547).
5
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the Trustee, FIRST UNION NATIONAL BANK, a national banking association
organized and existing under the laws of the United States of America, has duly
caused this Statement of Eligibility and Qualification to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the City of
Richmond, and in the Commonwealth of Virginia on the 11th day of August, 1998.
FIRST UNION NATIONAL BANK
(Trustee)
BY:/s/ Patricia A. Welling
------------------------------------
Patricia A. Welling, Vice President
EXHIBIT T-1 (6)
CONSENT OF TRUSTEE
Under Section 321(b) of the Trust Indenture Act of 1939 and in
connection with the issuance by Startec Global Communications Corporation of its
12% Senior Notes due 2008, and its 12% Series A Senior Notes due 2008, First
Union National Bank , as the Trustee herein named, hereby consents that reports
of examinations of said Trustee by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon requests therefor.
FIRST UNION NATIONAL BANK
BY:/s/ Patricia A. Welling
------------------------------------
Patricia A. Welling, Vice President
Dated: August 11, 1998
----------------
6
LETTER OF TRANSMITTAL
TO TENDER FOR EXCHANGE
12% SENIOR NOTES DUE 2008
OF
STARTEC GLOBAL COMMUNICATIONS CORPORATION
- - --------------------------------------------------------------------------------
PURSUANT TO THE PROSPECTUS, DATED , 1998, THE EXCHANGE OFFER WILL EXPIRE AT
5:00 P.M., NEW YORK CITY TIME, ON , 1998 UNLESS EXTENDED.
- - --------------------------------------------------------------------------------
TO: FIRST UNION NATIONAL BANK (THE "EXCHANGE AGENT")
<TABLE>
<S> <C> <C>
By Registered or By Facsimile: Hand or Overnight
Certified Mail: (704) 590-7628 Courier:
Michael Klotz Michael Klotz
First Union Customer First Union Customer
Information Center Confirm by telephone: Information Center
Corporate Trust (704) 590-7408 Corporate Trust
Operations-NC1153 Operations-NC1153
1525 West W.T. Harris Blvd. 3C3 1525 West W.T. Harris Blvd. 3C3
Charlotte, NC 28288-1153 Charlotte, NC 28288-1153
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF
TRANSMITTAL IS COMPLETED.
THE UNDERSIGNED ACKNOWLEDGES THAT HE OR SHE HAS RECEIVED THE PROSPECTUS,
DATED , 1998 (THE "PROSPECTUS") OF STARTEC GLOBAL COMMUNICATIONS
CORPORATION (THE "COMPANY") AND THIS LETTER OF TRANSMITTAL (THE "LETTER OF
TRANSMITTAL"), WHICH TOGETHER CONSTITUTE THE COMPANY'S OFFER (THE "EXCHANGE
OFFER") TO EXCHANGE ITS 12% SERIES A SENIOR NOTES DUE 2008 (THE "EXCHANGE
NOTES") FOR AN EQUAL PRINCIPAL AMOUNT OF ITS 12% SENIOR NOTES DUE 2008 (THE
"OLD NOTES" AND, TOGETHER WITH THE EXCHANGE NOTES, THE "NOTES"). THE TERMS OF
THE EXCHANGE NOTES ARE IDENTICAL IN ALL MATERIAL RESPECTS TO THE OLD NOTES,
EXCEPT THAT THE EXCHANGE NOTES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND, THEREFORE, WILL NOT BEAR LEGENDS
RESTRICTING THEIR TRANSFER AND WILL NOT CONTAIN CERTAIN PROVISIONS RELATING TO
AN INCREASE IN THE INTEREST RATE WHICH WERE INCLUDED IN THE OLD NOTES UNDER
CERTAIN CIRCUMSTANCES RELATING TO THE TIMING OF THE EXCHANGE OFFER. THE TERM
"EXPIRATION DATE" SHALL MEAN 5:00 P.M., NEW YORK CITY TIME, ON , 1998,
UNLESS THE COMPANY, IN ITS SOLE DISCRETION, EXTENDS THE EXCHANGE OFFER, IN
WHICH CASE THE TERM SHALL MEAN THE LATEST DATE AND TIME TO WHICH THE EXCHANGE
OFFER IS EXTENDED. CAPITALIZED TERMS USED BUT NOT DEFINED HEREIN HAVE THE
MEANING GIVEN TO THEM IN THE PROSPECTUS.
The Letter of Transmittal is to be used by holders of Old Notes if
certificates are to be forwarded herewith. Holders of Old Notes whose
certificates are not immediately available, or who are unable to deliver their
certificates and all other documents required by this Letter of Transmittal to
the Exchange Agent on or prior to the Expiration Date, must tender their Old
Notes according to the guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus. See
Instruction 1.
The term "holder" with respect to the Exchange Offer means any person in
whose name Old Notes are registered on the books of the Company or any other
person who has obtained a properly completed bond power from the registered
holder. The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer. Holders who wish to tender their Old Notes must complete
this Letter of Transmittal in its entirety.
The undersigned acknowledges that if it is a broker-dealer holding Old
Notes acquired for its own account as a result of market-making activities or
other trading activities (other than Old Notes acquired directly from the
Company), such holder may be deemed to be an "underwriter" within the meaning
of the Securities Act and, therefore, must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of Exchange
Notes received in respect of such Old Notes pursuant to the Exchange Offer.
Notwithstanding the foregoing, the undersigned shall not be deemed to admit
that it is an "underwriter" within the meaning of such term under the
Securities Act.
<PAGE>
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL CAREFULLY
BEFORE COMPLETING THE LETTER OF TRANSMITTAL
<PAGE>
[_] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOULSY SENT TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING (SEE INSTRUCTION 1):
Name(s) of Registered Holder(s)______________
Window Ticket Number (if any)______________
Date of Execution of Notice of Guaranteed Delivery___________
Name of Institution which Guaranteed Delivery_______________
[_] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OF SUPPLEMENTS
THERETO:
Name:------------------------- Address:-------------------------
- - --------------------------------------------------------------------------------
DESCRIPTION OF 12% SENIOR NOTES DUE 2008
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL PRINCIPAL AMOUNT
- - -----------------------------------------------------------------------------------------------------------------------
NAMES AND ADDRESS(ES) OF REGISTERED CERTIFICATE AMOUNT REPRESENTED BY TENDERED (MUST BE IN
HOLDER(S) (PLEASE FILL IN, IF BLANK) NUMBER(S) CERTIFICATES) INTEGRAL MULTIPLES OF $1,000)*
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
------------------------------------------------------------------------------
------------------------------------------------------------------------------
------------------------------------------------------------------------------
------------------------------------------------------------------------------
------------------------------------------------------------------------------
------------------------------------------------------------------------------
</TABLE>
* Unless indicated in the column labeled "Principal Amount Tendered," any
tendering holder of 12% Senior Notes due 2008 will be deemed to have
tendered the entire aggregate principal amount represented by the column
labeled "Aggregate Principal Amount Represented by Certificate(s)." If the
space provided above is inadequate, list the certificate numbers and
principal amounts on a separate signed schedule and affix the list to this
Letter of Transmittal. The minimum permitted tender is $1,000 in principal
amount. All other tenders must be integral multiples of $1,000.
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------
SPECIAL REGISTRATION INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 4, 5 AND 6) (SEE INSTRUCTIONS 4, 5 AND 6)
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C>
To be completed ONLY if certificates for Old Notes in To be completed ONLY if certificates for Old Notes in
a principal amount not tendered, or Exchange Notes a principal amount not tendered, or Exchange Notes
issued in exchange for Old Note accepted for exchange issued in exchange for Old Notes accepted for ex
are to be issued in the name of someone other than the change, are to be sent to someone other than the un-
undersigned. dersigned, or to the undersigned at an address other
than that shown above.
- - -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the undersigned
hereby tenders to the Company the principal amount of Old Notes indicated
above. Subject to and effective upon the acceptance for exchange of the
principal amount of Old Notes tendered in accordance with this Letter of
Transmittal, the undersigned sells, assigns and transfers to, or upon the order
of, the Company all right, title and interest in and to the Old Notes tendered
hereby. The undersigned hereby irrevocably constitutes and appoints the
Exchange Agent its agent and attorney-in-fact (with full knowledge that the
Exchange Agent also acts as the agent of the Company) with respect to the
tendered Old Notes with full power of substitution to (i) deliver certificates
for such Old Notes to the Company and deliver all accompanying evidences of
transfer and authenticity to, or upon the order of, the Company and (ii)
present such Old Notes for transfer on the books of the Company and receive all
benefits and otherwise exercise all rights of beneficial ownership of such Old
Notes, all in accordance with the terms of the Exchange Offer. The power of
attorney granted in this paragraph shall be deemed to be irrevocable and
coupled with an interest.
<PAGE>
The undersigned hereby represents and warrants that he or she has full
power and authority to tender, sell, assign and transfer the Old Notes tendered
hereby and that the Company will acquire good and unencumbered title thereto,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim, when the same are acquired by the Company. The
undersigned and any beneficial owner of Old Notes hereby further represent that
any Exchange Notes acquired in exchange for Old Notes tendered hereby will have
been acquired in the ordinary course of business of the undersigned and any
such beneficial owner of Old Notes receiving such Exchange Notes, that neither
the holder nor any such beneficial owner is participating in, intends to
participate in or has an arrangement or understanding with any person to
participate in the distribution of such Exchange Notes and that neither the
holder nor any such beneficial owner is an "affiliate," as defined in Rule 405
under the Securities Act, of the Company. The undersigned and each beneficial
owner acknowledge and agree that any person participating in the Exchange Offer
for the purpose of distributing the Exchange Notes must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transactions of the Exchange Notes
acquired by such person and may not rely on the position of the Staff of the
Securities and Exchange Commission set forth in the no-action letters discussed
in the Prospectus under the caption "The Exchange Offer." If the undersigned is
not a broker-dealer, the undersigned represents that it is not engaged in, and
does not intend to engage in, a public distribution of Exchange Notes. The
undersigned and each beneficial owner will, upon request, execute and deliver
any additional documents deemed by the Exchange Agent or the Company to be
necessary or desirable to complete the assignment, transfer and purchase of the
Old Notes tendered hereby.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted validly tendered Old Notes when, as and if the Company has given oral
or written notice thereof to the Exchange Agent.
If any tendered Old Notes are not accepted for exchange pursuant to the
Exchange Offer for any reason, certificates for any such unaccepted Old Notes
will be returned, without expense, to the undersigned at the address shown
below or at a different address as may be indicated herein under "Special
Delivery Instructions" as promptly as practicable after the Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
The undersigned understands that tenders of Old Notes pursuant to the
procedures described under the caption "The Exchange Offer--Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer, subject only to withdrawal of
such tenders on the terms set forth in the Prospectus under the caption "The
Exchange Offer--Withdrawal of Tenders."
Unless otherwise indicated under "Special Registration Instructions,"
please issue the certificates representing the Exchange Notes issued in
exchange for the Old Notes accepted for exchange and any certificates for Old
Notes not tendered or not exchanged, in the name(s) of the undersigned.
Similarly, unless otherwise indicated under "Special Delivery Instructions,"
please send the certificates representing the Exchange Notes issued in exchange
for the Old Notes accepted for exchange and any certificates for Old Notes not
tendered or not exchanged (and accompanying documents, as appropriate) to the
undersigned at the address shown below the undersigned's signature(s). In the
event that both "Special Registration Instructions" and "Special Delivery
Instructions" are completed, please issue the certificates representing the
Exchange Notes issued in exchange for the Old Notes accepted for exchange in
the name(s) of, and return any certificates for Old Notes not tendered or not
exchanged to, the person(s) so indicated. The undersigned understands that the
Company has no obligation pursuant to the "Special Registration Instructions"
and "Special Delivery Instructions" to transfer any Old Notes from the name of
the registered holder(s) thereof if the Company does not accept for exchange
any of the Old Notes so tendered.
Holders who wish to tender their Old Notes and whose Old Notes are not
immediately available or who cannot deliver their certificates and all other
documents required by this Letter of Transmittal to the Exchange Agent prior to
the Expiration Date, may tender their Old Notes according to the guaranteed
delivery procedures set forth in the Prospectus under the caption "The Exchange
Offer--Guaranteed Delivery Procedures." See Instruction 1 regarding the
completion of this Letter of Transmittal printed below.
<PAGE>
- - --------------------------------------------------------------------------------
PLEASE SIGN HERE
WHETHER OR NOT
OLD NOTES ARE BEING PHYSICALLY TENDERED HEREBY
[X] ---------------------------------------------------------------------------
Date:
--------------
[X]
---------------------------------------------------------------------------
Date:
--------------
Signature(s) of Registered Holder(s) or Authorized Signatory _______________
Area Code and Telephone Number:_______________
The above lines must be signed by the registered holder(s) as their name(s)
appear(s) on the Old Notes or by person(s) authorized to become registered
holder(s) by a properly completed bond power from the registered holder(s), a
copy of which must be transmitted with this Letter of Transmittal. If the Old
Notes to which this Letter of Transmittal relate are held of record by two or
more joint holders, then all such holders must sign this Letter of Transmittal.
If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or other person acting in a
fiduciary or representative capacity, then such person must (i) set forth his
or her full title below and (ii) unless waived by the Company, submit evidence
satisfactory to the Company of such person's authority so to act. See
Instruction 4 regarding the completion of this Letter of Transmittal printed
below.
Name(s):
------------------------------------------------------------------------
(PLEASE PRINT)
Capacity:
----------------------------------------------------------------------
(PLEASE PRINT)
Address:
------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Signature(s)Guaranteed by an Eligible Institution: (If required by
Instruction 4)
(Authorized Signature)
----------------------------------------------------------
(Title)
-------------------------------------------------------------------------
(Name of Firm)
-------------------------------------------------------------------
Date:
---------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OLD NOTES; GUARANTEED
DELIVERY PROCEDURES. The tendered Old Notes as well as a properly completed and
duly executed copy of this Letter of Transmittal or facsimile hereof and any
other documents required by this Letter of Transmittal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. The method of delivery of the tendered Old
Notes, this Letter of Transmittal and all other required documents to the
Exchange Agent is at the election and risk of the holder and, except as
otherwise provided below, the delivery will be deemed made only when actually
received by the Exchange Agent. Instead of delivery by mail, it is recommended
that the holder use an overnight or hand delivery service. In all cases,
sufficient time should be allowed to assure timely delivery. No Letter of
Transmittal or Old Notes should be sent to the Company.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, this Letter
of Transmittal or any other documents required hereby to the Exchange Agent
prior to the Expiration Date must tender their Old Notes according to the
guaranteed delivery procedures set forth in the Prospectus. Pursuant to such
procedure: (a) such tender must be made by or through an Eligible Institution
(defined below); (b) prior to the Expiration Date, the Exchange Agent must have
received from the Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the holder, the certificate
number or numbers of such Old Notes and the principal amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing that,
within three New York Stock Exchange trading days after the Expiration Date,
this Letter of Transmittal (or facsimile hereof) together with the
certificate(s) representing the Old Notes and any other required documents will
be deposited by the Eligible Institution with the Exchange Agent; and (c) such
properly completed and executed Letter of Transmittal (or facsimile hereof), as
well as the certificate(s) representing all tendered Old Notes in proper form
for transfer and all other documents required by this Letter of Transmittal
must be received by the Exchange Agent within three New York Stock Exchange
trading days after the Expiration Date, all as provided in the Prospectus under
the caption "The Exchange Offer--Guaranteed Delivery Procedures." Any holder
who wishes to tender his or her Old Notes pursuant to the guaranteed delivery
procedures described above must ensure that the Exchange Agent receives the
Notice of Guaranteed Delivery prior to 5:00 p.m., New York City time, on the
Expiration Date. Upon request to the Exchange Agent, a Notice of Guaranteed
Delivery will be sent to holders who wish to tender their Old Notes according
to the guaranteed delivery procedures set forth above.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes, and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any
irregularities or conditions of tender as to particular Old Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in this Letter of Transmittal) shall be firm and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of defects or
irregularities with respect to tenders of Old Notes, nor shall any of them
incur any liability for failure to give such notification. Tenders of Old Notes
will not be deemed to have been made until such defects or irregularities have
been cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering
holders, unless otherwise provided in this Letter of Transmittal, as soon as
practicable following the Expiration Date.
2. TENDER BY HOLDER. Only a holder of Old Notes may tender such Old Notes
in the Exchange Offer. Any beneficial owner of Old Notes who is not the
registered holder and who wishes to tender should arrange with such registered
holder to execute and deliver this Letter of Transmittal on such owner's behalf
or must, prior to completing and executing this Letter of Transmittal and
delivering his or her Old Notes, either make appropriate arrangements to
register ownership of the Old Notes in such owner's name or obtain a properly
completed bond power from the registered holder.
3. PARTIAL TENDERS. Tenders of Old Notes will be accepted only in integral
multiples of $1,000. If less than the entire principal amount of any Old Notes
is tendered, the tendering holder should fill in the principal amount tendered
in the fourth column of the box entitled "Description of 12% Senior Notes due
2008" above. The entire principal amount of any Old Notes delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise indicated.
If the entire principal amount of all Old Notes is not tendered, then Old Notes
for the principal amount of Old Notes not tendered and a certificate or
certificates representing Exchange Notes issued in exchange for any Old Notes
accepted will be sent to the holder at his or her registered address, unless a
different address is provided in the appropriate box on this Letter of
Transmittal, promptly after the Old Notes are accepted for exchange.
<PAGE>
4. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES. If this Letter of Transmittal (or facsimile hereof) is
signed by the registered holder(s) of the Old Notes tendered hereby, the
signature must correspond with the name(s) as written on the face of the Old
Notes without alteration, enlargement or any change whatsoever.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered holder or holders of Old Notes tendered and the certificate or
certificates for Exchange Notes issued in exchange therefor is to be issued (or
any untendered principal amount of Old Notes is to be reissued) to the
registered holder and neither the "Special Delivery Instructions" nor the
"Special Registration Instructions" has been completed, then such holder need
not and should not endorse any tendered Old Notes, nor provide a separate bond
power. In any other case, such holder must either properly endorse the Old
Notes tendered or transmit a properly completed separate bond power with this
Letter of Transmittal with the signatures on the endorsement or bond power
guaranteed by an Eligible Institution.
If this Letter of Transmittal (or facsimile hereof) is signed by a person
other than the registered holder or holders of any Old Notes listed, such Old
Notes must be endorsed or accompanied by appropriate bond powers in each case
signed as the name of the registered holder or holders appears on the Old
Notes.
If this Letter of Transmittal (or facsimile hereof) or any Old Notes or
bond powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, or officers of corporations or others acting in a fiduciary
or representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, evidence satisfactory to the Company of their
authority so to act must be submitted with this Letter of Transmittal.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 4 must be guaranteed by an Eligible Institution which is a member
of (a) the Securities Transfer Agents Medallion Program, (b) the New York Stock
Exchange Medallion Signature Program or (c) the Stock Exchange Medallion
Program.
Except as otherwise provided below, all signatures on this Letter of
Transmittal must be guaranteed by a firm that is a member of a registered
national securities exchange or the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent in
the United States or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended (an
"Eligible Institution"). Signatures on this Letter of Transmittal need not be
guaranteed if (a) this Letter of Transmittal is signed by the registered
holder(s) of the Old Notes tendered herewith and such holder(s) have not
completed the box set forth herein entitled "Special Registration Instructions"
or the box entitled "Special Delivery Instructions" or (b) such Old Notes are
tendered for the account of an Eligible Institution.
5. SPECIAL REGISTRATION AND DELIVER INSTRUCTIONS. Tendering holders should
indicate, in the applicable box or boxes, the name and address to which
Exchange Notes or substitute Old Notes for principal amounts not tendered or
not accepted for exchange are to be issued or sent, if different from the name
and address of the person signing this Letter of Transmittal. In the case of
issuance in a different name, the taxpayer identification or social security
number of the person named must also be indicated.
6. TRANSFER TAXES. The Company will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, certificates representing Exchange Notes or Old Notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or are to
be registered in the name of, any person other than the registered holder of
the Old Notes tendered hereby, or if tendered Old Notes are registered in the
name of any person other than the person signing this Letter of Transmittal, or
if a transfer tax is imposed for any reason other than the exchange of Old
Notes pursuant to the Exchange Offer, then the amount of any such transfer
taxes (whether imposed on the registered holder or on any other persons) will
be payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with this Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
7. WAIVER OF CONDITIONS. The Company reserves the right, in its sole
discretion, to amend, waive or modify specified conditions in the Exchange
Offer in the case of any Old Notes tendered.
8. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES. Any tendering holder
whose Old Notes have been mutilated, lost, stolen or destroyed should contact
the Exchange Agent at the address indicated herein for further instructions.
9. REQUESTS FOR ASSISTANCE OF ADDITIONAL COPIES. Questions and requests
for assistance and requests for additional copies of the Prospectus or this
Letter of Transmittal may be directed to the Exchange Agent at the address
specified in the Prospectus. Holders may also contact their broker, dealer,
commercial bank, trust company or other nominee for assistance concerning the
Exchange Offer.
<PAGE>
(DO NOT WRITE IN SPACE BELOW)
CERTIFICATE SURRENDERED
- - --------------------------------------------------------------------------------
OLD NOTES TENDERED
- - --------------------------------------------------------------------------------
OLD NOTES ACCEPTED
- - --------------------------------------------------------------------------------
Delivery Prepared by
------------------------------------------------------------
Checked by
----------------------------------------------------------------------
Date __________________
STARTEC GLOBAL COMMUNICATIONS CORPORATION
NOTICE OF GUARANTEED DELIVERY
OF
12% SENIOR NOTES DUE 2008
- - --------------------------------------------------------------------------------
AS SET FORTH IN THE PROSPECTUS, DATED , 1998 (AS THE SAME MAY BE AMENDED
FROM TIME TO TIME, THE "PROSPECTUS"), OF STARTEC GLOBAL COMMUNICATIONS
CORPORATION (THE "COMPANY") UNDER THE CAPTION ("THE EXCHANGE OFFER--GUARANTEED
DELIVERY PROCEDURES") THIS FORM OR ONE SUBSTANTIALLY EQUIVALENT HERETO MUST BE
USED TO ACCEPT THE COMPANY'S OFFER (THE "EXCHANGE OFFER") TO EXCHANGE ITS 12%
SERIES A SENIOR NOTES DUE 2008 (THE "EXCHANGE NOTES"), WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), FOR AN EQUAL PRINCIPAL AMOUNT OF ITS 12% SENIOR NOTES DUE 2008 (THE
"OLD NOTES"), IF (I) CERTIFICATES REPRESENTING THE OLD NOTES TO BE EXCHANGED
ARE NOT LOST BUT ARE NOT IMMEDIATELY AVAILABLE OR (II) TIME WILL NOT PERMIT
ALL REQUIRED DOCUMENTS TO REACH THE EXCHANGE AGENT PRIOR TO THE EXPIRATION
DATE. THIS FORM MAY BE DELIVERED BY AN ELIGIBLE INSTITUTION BY MAIL OR HAND
DELIVERY OR TRANSMITTED, VIA FACSIMILE, TO THE EXCHANGE AGENT AT ITS ADDRESS
SET FORTH BELOW NOT LATER THAN 5:00 P.M., NEW YORK CITY TIME, ON , 1998.
ALL CAPITALIZED TERMS USED HEREIN BUT NOT DEFINED HEREIN SHALL HAVE THE
MEANINGS ASCRIBED TO THEM IN THE PROSPECTUS.
- - --------------------------------------------------------------------------------
TO: FIRST UNION NATIONAL BANK (THE "EXCHANGE AGENT")
<TABLE>
<S> <C> <C>
By Registered or By Facsimile: Hand or Overnight
Certified Mail: (704) 590-7628 Courier:
Michael Klotz Michael Klotz
First Union Customer First Union Customer
Information Center Information Center
Corporate Trust Confirm by telephone: Corporate Trust
Operations-NC1153 (704) 590-7408 Operations-NC1153
1525 West W.T. Harris Blvd. 3C3 1525 West W.T. Harris Blvd. 3C3
Charlotte, NC 28288-1153 Charlotte, NC 28288-1153
</TABLE>
DELIVERY, OR TRANSMISSION VIA FACSIMILE, OF THIS INSTRUMENT TO AN ADDRESS
OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
Ladies and Gentlemen:
The undersigned hereby tender(s) for exchange to the Company, upon the
terms and subject to the conditions set forth in the Prospectus and Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Old Notes set forth below pursuant to the guaranteed delivery procedures set
forth in the Prospectus under the caption "The Exchange Offer--Guaranteed
Delivery Procedures."
The undersigned understands and acknowledges that the Exchange Offer will
expire at 5:00 p.m., New York City time, on , 1998, unless extended by the
Company. With respect to the Exchange Offer, "Expiration Date" means such time
and date, or if the Exchange Offer is extended, the latest time and date to
which the Exchange Offer is so extended by the Company.
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death or incapacity of the undersigned
and every obligation of the undersigned under this Notice of Guaranteed
Delivery shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives of the undersigned.
<PAGE>
- - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT OF OLD NOTES EXCHANGED:
$__________________
<TABLE>
<S> <C>
SIGNATURES CERTIFICATE NOS. OF OLD
NOTES (IF AVAILABLE)
--------------------------- ---------------------------
--------------------------- ---------------------------
Signature of Owner
--------------------------- ---------------------------
Signature of Owner
(if more than one)
- - ---------------------------- Total $ __________________
Dated:
- - --------------------------------------------------------------------------------
</TABLE>
- - --------------------------------------------------------------------------------
IF OLD NOTES WILL BE BOOK-ENTRY TRANSFER,
<TABLE>
<S> <C>
Names(s): PROVIDE THE DEPOSITORY TRUST
COMPANY ("DTC") ACCOUNT NO.:
---------------------------- ----------------------------
(Please Print)
Address (Include Zip Code):
----------------------------
----------------------------
----------------------------
Area Code and Telephone No.
----------------------------
Capacity (full title), if
signing in a representative
capacity
----------------------------
Taxpayer Identification or
Social Security No.:
--------
-------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
- - --------------------------------------------------------------------------------
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm which is a member of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., or is a
commercial bank or trust company having an office or correspondent in the
United States, or is otherwise an "eligible guaranteed institution" within the
meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended,
guarantees deposit with the Exchange Agent of the Letter of Transmittal (or
facsimile thereof), together with the Old Notes tendered hereby in proper form
for transfer (or confirmation of the book-entry transfer of such Old Notes
into the Exchange Agent's account at the Book-Entry Transfer Facility
described in the Prospectus under the caption "The Exchange Offer--Guaranteed
Delivery Procedures" and in the Letter of Transmittal) and any other required
document, all by 5:00 p.m., New York City time, on the third New York Stock
Exchange trading day following the Expiration Date.
<TABLE>
<S> <C>
AUTHORIZED SIGNATURE
Name of Firm: Name:
---------------- -------------------
Address: Title:
--------------------- ------------------
Area Code and Telephone
Date: No.:
----------------------- ----------
</TABLE>
NOTE: DO NOT SEND OLD NOTES WITH THIS FORM. ACTUAL SURRENDER OF OLD NOTES MUST
BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, THE LETTER OF TRANSMITTAL.
- - --------------------------------------------------------------------------------
3
STARTEC GLOBAL COMMUNICATIONS CORPORATION
OFFER TO EXCHANGE ITS 12% SERIES A SENIOR NOTES DUE 2008
FOR ANY AND ALL OF ITS OUTSTANDING 12% SENIOR NOTES DUE 2008
- - --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998 UNLESS EXTENDED.
- - --------------------------------------------------------------------------------
, 1998
To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees:
STARTEC GLOBAL COMMUNICATIONS CORPORATION (the "Company") is offering upon
the terms and conditions set forth in the Prospectus, dated , 1998 (as the
same may be amended from time to time, the "Prospectus"), and in the related
Letter of Transmittal enclosed herewith, to exchange (the "Exchange Offer") its
12% Series A Senior Notes due 2008 (the "Exchange Notes") for an equal
principal amount of its 12% Senior Notes due 2008 (the "Old Notes" and together
with the Exchange Notes, the "Notes"). As set forth in the Prospectus, the
terms of the Exchange Notes are identical in all material respects to the Old
Notes, except for certain transfer restrictions relating to the Old Notes and
except that the Exchange Notes will not contain certain provisions relating to
an increase in the interest rate which were included in the Old Notes under
certain circumstances relating to the timing of the Exchange Offer. Old Notes
may only be tendered in integral multiples of $1,000.
THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CONDITIONS. SEE "THE EXCHANGE
OFFER -- CONDITIONS" IN THE PROSPECTUS.
Enclosed herewith for your information and forwarding to your clients are
copies of the following documents:
1. The Prospectus, dated , 1998.
2. The Letter of Transmittal to exchange Notes for your use and for the
information of your clients. Facsimile copies of the Letter of Transmittal may
be used to exchange Notes.
3. A form of letter which may be sent to your clients for whose accounts
you hold Old Notes registered in your name or in the name of your nominee, with
space provided for obtaining such client's instructions with regard to the
Exchange Offer.
4. A Notice of Guaranteed Delivery.
5. Guidelines of the Internal Revenue Service for Certification of
Taxpayer Identification Number on Substitute Form W-9.
Your prompt action is requested. We urge you to contact your clients as
promptly as possible. Please note the Exchange Offer will expire at 5:00 p.m.,
New York City time, on , 1998, unless extended. Please furnish copies of
the enclosed materials to those of your clients for whom you hold old Notes
registered in your name or in the name of your Nominee as quickly as possible.
In all cases, exchanges of Old Notes accepted for exchange pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
(a) certificates representing such Old Notes, (b) the Letter of Transmittal (or
facsimile thereof) properly completed and duly executed with any required
signature guarantees, and (c) any other documents required by the Letter of
Transmittal.
If holders of Old Notes wish to tender, but it is impracticable for them
to forward their certificates for Old Notes prior to the expiration of the
Exchange Offer or to comply with the book-entry transfer procedures on a timely
basis, a tender may be offered by following the guaranteed delivery procedure
described in the Prospectus under "The Exchange Offer -- Guaranteed Delivery
Procedures."
<PAGE>
The Exchange Offer is not being made to (nor will tenders be accepted from
or on behalf of) holders of Old Notes residing in any jurisdiction in which the
making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction.
The Company will not pay any fees or commissions to brokers, dealers or
other persons for soliciting exchanges of Notes pursuant to the Exchange Offer.
The Company will, however, upon request, reimburse you for customary clerical
and mailing expenses incurred by you in forwarding any of the enclosed
materials to your clients. The Company will pay or cause to be paid any
transfer taxes payable on the transfer of Notes to it, except as otherwise
provided in Instruction 6 of the Letter of Transmittal.
Questions and requests for assistance with respect to the Exchange Offer
or for copies of the Prospectus and Letter of Transmittal may be directed to
the Exchange Agent at its address set forth in the Prospectus.
Very truly yours,
STARTEC GLOBAL COMMUNICATIONS
CORPORATION
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR
ANY OTHER PERSON TO ACT AS THE AGENT OF THE COMPANY, OR ANY AFFILIATE THEREOF,
OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENT OR USE ANY DOCUMENT
ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE ENCLOSED
DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN.
STARTEC GLOBAL COMMUNICATIONS CORPORATION
OFFER TO EXCHANGE ITS 12% SERIES A SENIOR NOTES DUE 2008
FOR ANY AND ALL OF ITS OUTSTANDING 12% SENIOR NOTES DUE 2008
- - --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998 (THE "INITIAL EXPIRATION DATE"), UNLESS EXTENDED.
- - --------------------------------------------------------------------------------
To Our Clients:
Enclosed for your consideration is a Prospectus, dated , 1998 (as the
same may be amended from time to time, the "Prospectus"), and a Letter of
Transmittal (the "Letter of Transmittal") relating to the offer by Startec
Global Communications Corporation (the "Company") to exchange (the "Exchange
Offer") its 12% Series A Senior Notes due 2008 (the "Exchange Notes") for an
equal principal amount of its 12% Senior Notes due 2008 (the "Old Notes") upon
the terms and conditions set forth in the Prospectus and in the related Letter
of Transmittal. As set forth in the Prospectus, the terms of the Exchange Notes
are identical in all material respects to the Old Notes, except for certain
transfer restrictions relating to the Old Notes and except that the Exchange
Notes will not contain certain provisions relating to an increase in the
interest rate which were included in the Old Notes under certain circumstances
relating to the timing of the Exchange Offer. The Exchange Offer is subject to
certain customary conditions. See "The Exchange Offer" in the Prospectus. Old
Notes may be tendered only in integral multiples of $1,000.
The material is being forwarded to you as the beneficial owner of Old
Notes carried by us for your account or benefit but not registered in your
name. An exchange of any Old Notes may only be made by us as the registered
holder and pursuant to your instructions. Therefore, the Company urges
beneficial owners of Old Notes registered in the name of a broker, dealer,
commercial bank, trust company or other nominee to contact such holder promptly
if they wish to exchange Old Notes in the Exchange Offer.
Accordingly, we request instructions as to whether you wish us to exchange
any or all such Old Notes held by us for your account or benefit, pursuant to
the terms and conditions set forth in the Prospectus and Letter of Transmittal.
We urge you to read carefully the Prospectus and Letter of Transmittal before
instructing us to exchange your Old Notes.
Your instructions to us should be forwarded as promptly as possible in
order to permit us to exchange Old Notes on your behalf in accordance with the
provisions of the Exchange Offer. The Exchange Offer expires at 5:00 p.m., New
York City time, on , 1998, unless extended. With respect to the Exchange
Offer, "Expiration Date" means the Initial Expiration Date, or if the Exchange
Offer is extended, the latest time and date to which the Exchange Offer is so
extended by the Company. Tender of Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration Date.
Your attention is directed to the following:
1. The Exchange Offer is for the exchange of $1,000 principal amount of
the Exchange Notes for each $1,000 principal amount of the Old Notes, of which
$160,000,000 aggregate principal amount of the Old Notes was outstanding as of
May 21, 1998. The terms of the Exchange Notes are identical in all material
respects to the Old Notes, except for certain transfer restrictions relating to
the Old Notes and except that the Exchange Notes will not contain certain
provisions relating to an increase in the interest rate which were included in
the Old Notes under certain circumstances relating to the timing of the
Exchange Offer.
2. THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CONDITIONS. SEE "THE EXCHANGE
OFFER -- CONDITIONS" IN THE PROSPECTUS.
<PAGE>
3. The Exchange Offer and withdrawal rights will expire at 5:00 p.m., New
York City time, on |, 1998, unless extended.
4. The Company has agreed to pay the expenses of the Exchange Offer.
5. Any transfer taxes incident to the transfer of Notes from the tendering
holder to the Company will be paid by the Company, except as provided in the
Prospectus and the Letter of Transmittal.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL EXCHANGES BE ACCEPTED
FROM OR ON BEHALF OF, HOLDERS OF OLD NOTES RESIDING IN ANY JURISDICTION IN
WHICH THE MAKING OF THE EXCHANGE OFFER OR ACCEPTANCE THEREOF WOULD NOT BE IN
COMPLIANCE WITH THE LAWS OF SUCH JURISIDICTION.
If you wish us to exchange any or all of your Old Notes held by us for
your account or benefit, please so instruct us by completing, executing and
returning to us the instruction form that appears below.
THE ACCOMPANYING LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR
INFORMATIONAL PURPOSES ONLY AND MAY NOT BE USED BY YOU TO EXCHANGE OLD NOTES
HELD BY US AND REGISTERED IN YOUR NAME FOR YOUR ACCOUNT OR BENEFIT.
INSTRUCTIONS
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer of Startec Global
Communications Corporation.
This will instruct you to exchange the aggregate principal amount of Old
Notes indicated below (or, if no aggregate principal amount is indicated below,
all Old Notes) held by you for the account or benefit of the undersigned,
pursuant to the terms of and conditions set forth in the Prospectus and the
Letter of Transmittal.
- - -------------------------------
Aggregate Principal Amount of Old Notes to be exchanged
$--------------------- *
* I (WE) UNDERSTAND THAT IF I (WE) SIGN THESE INSTRUCTION FORMS WITHOUT
INDICATING AN AGGREGATE PRINCIPAL AMOUNT OF OLD NOTES IN THE SPACE ABOVE, ALL
OLD NOTES HELD BY YOU FOR MY (OUR) ACCOUNT WILL BE EXCHANGED.
Dated:
- - ------------------------------------- -------------------------
- - ------------------------------------- (Area code and telephone number)
- - ------------------------------------- -------------------------------------
(Taxpayer Identification or Social
(Please print name(s) and address here) Security Number)
- - -------------------------------------
- - -------------------------------------
- - -------------------------------------
- - ------------
* UNLESS OTHERWISE INDICATED, IT WILL BE ASSUMED THAT ALL OF YOUR OLD NOTES ARE
TO BE EXCHANGED.
2
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> JUN-30-1997 JUN-30-1998
<EXCHANGE-RATE> 1 1
<CASH> 2,106 120,121
<SECURITIES> 0 0
<RECEIVABLES> 10,820 26,275
<ALLOWANCES> 1,576 2,982
<INVENTORY> 0 0
<CURRENT-ASSETS> 11,928 146,166
<PP&E> 2,728 12,180
<DEPRECIATION> 1,003 1,933
<TOTAL-ASSETS> 14,265 215,275
<CURRENT-LIABILITIES> 19,220 24,821
<BONDS> 0 157,917
0 0
0 0
<COMMON> 77 90
<OTHER-SE> 5,638 32,181
<TOTAL-LIABILITY-AND-EQUITY> 14,265 215,275
<SALES> 28,836 63,353
<TOTAL-REVENUES> 28,836 63,353
<CGS> 25,250 54,485
<TOTAL-COSTS> 25,250 54,485
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 252 2,577
<INCOME-PRETAX> 358 (1,728)
<INCOME-TAX> 7 30
<INCOME-CONTINUING> 351 (1,758)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 351 (1,758)
<EPS-PRIMARY> (.06) (.20)
<EPS-DILUTED> (.06) (.20)
</TABLE>
