SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-23087
STARTEC GLOBAL COMMUNICATIONS CORPORATION
10411 MOTOR CITY DRIVE
BETHESDA, MD 20817
(301) 365-8959
DELAWARE 52-2099559
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS:
COMMON STOCK, PAR VALUE
$0.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Non-affiliates of Startec Global Communications Corporation held 5,364,324
shares of Common Stock as of March 19, 1999. The fair market value of the stock
held by non-affiliates is $46,937,835 based on the sale price of the shares on
March 19, 1999.
As of March 19, 1999, 9,389,815 shares of Common Stock, par value $0.01,
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement to be delivered to
Stockholders in connection with the Annual Meeting of Stockholders are
incorporated by reference into Part III.
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STARTEC GLOBAL COMMUNICATIONS CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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PART I.
Item 1. Business................................................................................... 3
Item 2. Properties.................................................................................29
Item 3. Legal proceedings..........................................................................29
Item 4. Submission of matters to a vote of security holders........................................29
PART II.
Item 5. Market for the registrant's common stock and related
stockholder matters...................................................................29
Item 6. Selected financial data....................................................................31
Item 7. Management's discussion and analysis of financial
condition and results of operations...................................................32
Item 7A. Quantitative and qualitative disclosure about market
risk..................................................................................40
Item 8. Financial statements and supplementary data................................................41
Item 9. Changes in and disagreements with accountants on
accounting and financial disclosure...................................................63
PART III.
Item 10. Directors and executive officers...........................................................63
Item 11. Executive compensation.....................................................................63
Item 12. Security ownership of certain beneficial
owners and management.................................................................63
Item 13. Certain relationships and related transactions.............................................63
PART IV.
Item 14. Exhibits, financial statement schedules, and reports
on Form 8-K...........................................................................63
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PART I
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements are statements other than historical information or statements of
current condition. Some forward-looking statements may be identified by use of
terms such as "believes", "anticipates", "intends", or "expects". These
forward-looking statements relate to the plans, objectives and expectations of
Startec Global Communications Corporation (the "Company" or "Startec") for
future operations. In light of the risks and uncertainties inherent in all
forward-looking statements, the inclusion of such statements in this Form 10-K
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved or that any of the
Company's operating expectations will be realized. The Company's revenues and
results of operations are difficult to forecast and could differ materially from
those projected in the forward-looking statements contained herein as a result
of certain factors including, but not limited to, dependence on operating
agreements with foreign partners, significant foreign and U.S.-based customers
and suppliers, availability of transmission facilities, U.S. and foreign
regulations, international economic and political instability, dependence on
effective billing and information systems, customer attrition, significant
industry competition and rapid technological change. These factors should not be
considered exhaustive; the Company undertakes no obligation to release publicly
the results of any future revisions it may make to forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
ITEM 1. BUSINESS
OVERVIEW
Startec is a rapidly growing, facilities-based international long distance
telecommunications service provider. The Company markets its services to select
ethnic residential communities located in major metropolitan areas in the United
States and Europe 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 international
gateway switching facilities in New York, New York and Los Angeles, California
and is installing additional international gateway switching facilities in
Miami, Florida, as well as at a second site in New York, New York. The Company
expects to install multiple switches worldwide through 2000. The Company
operates points-of-presence ("POPs") in the United States, Europe and Asia and
plans to install additional POPs in the U.S., Canada, Europe and Asia during
1999 and 2000. Additionally, the Company owns capacity on 13 undersea fiber
optic cables and plans to acquire additional capacity in cable systems 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 capacity on two satellite earth stations in 1999
located over the Pacific and Atlantic Oceans. As the Company executes its
expansion strategy and encounters new marketing opportunities, management may
elect to relocate or re-deploy certain switches, POPs and other network
equipment to alternate locations.
Startec was founded in 1989 to capitalize on opportunities 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 once again expanded its
marketing efforts geographically at the end of 1998 by marketing to ethnic
segments in the United Kingdom and diversifying its customer base across a
broader spectrum of ethnic groups, including the Caribbean, Latin American and
Asian 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 as of December 31, 1995 to 122,057 as of December 31, 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'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 believes that its focused marketing programs and its
dedication to customer service
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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 ("CIC") 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, 1998 residential customers accounted for
approximately 33% 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 53 at December 31, 1998. For the year ended December 31, 1998,
carrier customers accounted for approximately 66.7% of the Company's net
revenues.
The Company's mission is to become the leading provider of voice and data
services to select ethnic communities located in major metropolitan areas in the
U.S., Canada and Europe with significant international long distance usage to
the emerging economies To achieve this goal, the Company is strategically
building network facilities to allow it to manage the origination, transmission
and termination pieces of a telephone call.
In 1998, the Company's board of directors and stockholders approved a
reorganization pursuant to which the Company's corporate structure would be
realigned to that of a publicly traded Delaware holding company
("Reorganization"). Pursuant to the reorganization plan, subsequent to year end,
all of the Company's assets were transferred into a Delaware subsidiary company
("New Parent"), with a subsequent transfer of those assets to multiple
subsidiaries of the New Parent. The Company was then merged with and into the
New Parent with the New Parent then assuming the Company's name. The merger did
not have an impact on the consolidated financial statements of the Company.
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
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long distance carriers to improve service quality while reducing costs.
o Popularity and acceptance of technology. The proliferation of
communications devices, including cellular telephones, and facsimile
machines, as well as the increased level of Internet usage led to a
general increase in the use of telecommunications services and
stimulated demand for faster transmission of data.
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 Postal, Telephone and Telegraph Companies ("PTT") 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.
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 (*).
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1998-1999 2000 and thereafter
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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 Philippines Singapore
Korea
AFRICA/MIDDLE Ivory Coast* Israel Senegal
EAST Mauritius
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The FCC has 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 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 member 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 local exchange
carrier's ("LEC") network and is transported to the caller's domestic long
distance carrier. The domestic long distance provider picks up the call and
carries the call to its own or another carrier's international gateway switch,
where an international long distance provider picks it up and sends it directly
or through one or more other long distance providers to a corresponding gateway
switch in the destination country. Once the traffic reaches the destination
country, it is routed to the party being called through that country's domestic
telephone network.
International long distance carriers are often categorized according to
ownership and use of transmission facilities and switches. No carrier utilizes
exclusively-owned facilities for transmission of all of its long distance
traffic. Carriers vary from being primarily facilities-based, meaning that they
own and operate their own land-based and/or undersea cable, 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, Sprint
and MCI/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.
Under Accounting Rate Mechanisms, 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.
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.
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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 international simple resale ("ISR"),
refiling 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 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.
BUSINESS STRATEGY
The Company's objectives are to (i) become the leading provider of voice
and data services to select ethnic communities located in major metropolitan
areas in the U.S., Canada and Europe with significant international long
distance usage to the emerging economies; and (ii) leverage its residential
telecommunications 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:
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o Expand the addressable market. The Company currently serves residential
customers in 20 major metropolitan areas in the U.S. and four in
Europe. The Company has also identified over 40 major markets outside
the United States, primarily in 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 30 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; (ii) marketing additional routes to existing customers who
principally use the Company's services for one route, and (iii)
expanding its products and services to include "dial-1", prepaid card
accounts and Internet access. Subsequent to year end 1998, the Company
has strategically installed or acquired telecommunications equipment in
Canada and five European cities which allows it to originate traffic
from customers in these locations.
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 1999 and through 2000 by
deploying additional switches, installing POPs, securing additional
ownership interests in undersea cable facilities and investing in
domestic cable facilities, deploying ATM/Internet Protocol ("IP")
capabilities in its network, 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. 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 POPs. As part of this hubbing strategy,
the Company has installed international gateway switches and POPs
throughout the United States, Europe and Asia. The POPs aggregate
traffic originating from the region around the city in which it is
located and route the traffic to the Company's international gateway
switches. Each of the POPs contains telecommunications equipment that
is scaleable to accommodate the traffic volume demands of each region.
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.
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o Expand service offerings to customers. The Company intends to expand
its service offerings to ethnic communities by: (i) deploying ATM/IP
telephony throughout its network; (ii) creating Virtual Communities on
its current Web site to connect customers from and in the emerging
economies; (iii) offering Internet Access services to customers in the
U.S.; and (iv) providing co-location and Web hosting facilities at its
main international gateway sites in New York and Los Angeles as well as
in Miami, where an international gateway site is scheduled to go online
in the second quarter of 1999.
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.
As part of its network deployment strategy, the Company is pursuing various
acquisitions and alliances. In 1998 and early 1999, the Company completed four
acquisitions. In September 1998, Startec acquired all of the outstanding stock
of Trans Pacific Technology, Inc., a signatory owner of the Sea-Me-We-3
("SMW-3") undersea cable consortium. The SMW-3 cable connects 34 countries
across Europe, the Middle East, and Asia. In December 1998, Startec acquired all
of the outstanding stock of PCI Communications, Inc. ("PCI"), a provider of
voice, data and Internet services located on the island of Guam in the Pacific
Rim. Through PCI, Startec obtained capacity on the TPC-5, Guam-Philippines and
China-U.S. undersea fiber optic cables. The Company also intends to expand upon
PCI's "dial-1" and ISP services, which it currently markets to residential and
business customers in Guam, and will make the Guam location an Asian hub for
Startec's network. Both acquisitions bolstered Startec's Asian network,
improving its ability to transmit calls on its managed network. In December
1998, Startec acquired Global Communications GmbH ("Global") in Germany. Global
has a Class IV nationwide telecommunications license for Germany, an
interconnection agreement with Deutsche Telekom and a Siemens EWSD switch
located in Dusseldorf. The Siemens EWSD switch has already completed the
Interoperability (IOP) certification testing required by Deutsche Telekom, which
typically takes 10 to 12 months to complete.
In February 1999, the Company announced the acquisition of 64.6% of the
outstanding shares of Phone Systems and Network, S.A ("PSN"), a French
switch-based reseller of long distance services. PSN operates switches in Paris
and Switzerland and has over 14,000 residential and business customers.
Additionally, it holds the L34.1 license in France, allowing it to provide
nationwide telecommunications services. In February 1999, the Company acquired a
20% ownership in a Nevada holding company with operations in Europe. These
acquisitions, combined with the Global acquisition, have accelerated Startec's
entry into the European markets and provide important licensing and network
components.
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, approximately 70% of international long
distance traffic was generated between North America and Western Europe in 1997.
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 122,057 as of December 31, 1998. Net revenues from
residential customers accounted for approximately 33%, 33% and 37% of the
Company's net revenues in the years ended December 31, 1998, 1997 and 1996,
respectively. As part of its strategy, the Company seeks to increase the
proportion of its net revenues derived from residential customers.
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
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carrier customers has grown significantly since the Company first began
marketing its services to this segment in late 1995. As of December 31, 1998,
the Company had 53 carrier customers. Revenues from carrier customers accounted
for 67%, 67% and 63% of the Company's net revenues in the years ended December
31, 1998, 1997 and 1996, respectively. During the year ended December 31, 1998,
the Company's five largest carrier customers accounted for 61% of net revenues,
with MCI/WorldCom accounting for 35% of net revenues. No other customer
accounted for 10% or more of the Company's net revenues during 1997. 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'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 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
representatives. 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'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 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 approximately 184 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'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's network from any country and will allow them to place
either collect or credit/debit card calls; prepaid domestic and international
calling cards, which may be used from any touchtone telephone in the United
States, Canada or Europe, and "dial-1" service for U.S. customers.
Carrier Customers
To maximize the efficiency of its network capacity, the Company sells its
international long distance services to other telecommunications carriers.
Startec has been actively marketing its services to carrier customers since late
1995 and believes that it has established a high degree of credibility and
valuable relationships with the leading carriers. The Company has a dedicated
marketing team serving the carrier market, including approximately 31 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.
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Future Service Offering
The Company is incorporating state-of-the-art technology in its network
infrastructure. It intends to expand its service offerings to ethnic communities
by: (i) deploying ATM/IP telephony throughout its network; (ii) creating Virtual
Communities on its current web site to connect customers from and in the
emerging economies; (iii) offering Internet access services to customers in the
U.S.; and (iv) providing co-location and web hosting facilities at its main
international gateway sites in New York and Los Angeles as well as at its Miami
international gateway site, which is scheduled to be operational in the second
quarter of 1999.
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 telecommunications
capabilities. The Company has been expanding its network to match increases in
its long distance traffic volume and to support the needs of its customers. The
network employs advanced switching technologies and is supported by monitoring
facilities and the Company's technical support personnel.
Customer Call Centers
As a part of its dedication to customer service, the Company intends to
build three customer service centers in Bethesda, Maryland, Guam and Europe in
1999. Each center will operate 24 hours a day, seven days a week and will
accommodate approximately 150 customer service representatives. The Bethesda
center will support the languages of the Middle East and Central Europe; the
Guam center will support Asian languages, while the European center will support
the languages of Western Europe.
Switching and Transmission Facilities
The Company currently operates a Nortel DMS 250/30 international gateway
switch in New York City and a Nortel GSP international gateway switch in Los
Angeles, California. The Company is also installing a Nortel GSP international
gateway switch in Miami, as well as at a second site in New York, New York. In
December 1998, the Company acquired a Siemens EWSD switch in Dusseldorf, Germany
through the acquisition of Global Communications GmbH. In February 1999, the
Company acquired a Telesoft Okoford switch in Paris, France through the
acquisition of a majority interest in Phone Systems Network. The Company has
also installed POPs in the U.S. and Europe. The POPs aggregate traffic
originating from the region around the city in which it is located and route the
traffic to the Company's international gateway switches. Each POP contains
telecommunications equipment that is scaleable to accommodate the traffic volume
demands of each region. The Company currently has 15 switch and POP sites in the
U.S., Europe and Asia.
The Company's international expansion strategy is predicated on the
installation of multiple switches and POPs throughout the world. The Company
plans to acquire multiple international gateway switches and POPs through 2000
to be installed in (i) Europe: the U.K., France, Germany, Spain, Belgium, Italy,
Austria, Denmark, Ireland, Switzerland, Greece and Portugal; (ii) North America:
the U.S., Canada, and Mexico; (iii) Asia and the Pacific Rim: Guam, Hong Kong,
Singapore and India; and (iv) Latin and South America: Argentina and Brazil.
These switches will be deployed in 1999 and 2000. As the Company executes its
expansion strategy, encounters new marketing opportunities and employs new
technology, management may elect to relocate or redeploy certain switches, POPs
and other network equipment to alternate locations from what is described above.
The Company generally installs switches and POPs in regions where it
believes it can achieve one or more of the following goals: (i) originate calls
from its own customer base, (ii) transmit 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 and POPs to be installed in the U.S., Canada and Europe
primarily to carry calls originated in those countries by the Company's
customers. The switches and POPs that the Company plans to install in Asia and
the Pacific Rim and in Latin and South America will be used both as "hubbing" or
transit sites and to terminate calls originated in other countries.
Startec currently owns IRUs on 13 cable systems, including the Canus-1,
Cantat-3, Columbus II, Gemini, TAT 12/13, TAT 14, Atlantic Crossing, TPC-5,
Guam-Philippines, China-US, and FLAG cables, and is a signatory owner on the
Columbus III and Sea-Me-We 3 cables. It accesses additional cables and satellite
facilities through arrangements with other carriers. During 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 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,
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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 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.
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 53 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 ATM/IP capabilities. 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 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
December 31, 1998, Startec had 40 operating agreements, which will provide
direct access to 36 countries after full implementation. At December 31, 1998,
23 of the 40 agreements have been implemented with the remainder to be
implemented during 1999. 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.
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, Los
Angeles, Miami and Washington, D.C. switches. 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.
MANAGEMENT INFORMATION AND BILLING SYSTEMS
The Company's operations use advanced information systems including call
data collection and call data storage linked to a
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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, Sprint and MCI/WorldCom 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 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 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 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
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to maintain its competitive position or what expenditures will be required to
develop and provide such products and services.
GOVERNMENT REGULATION
Overview
Startec's business is subject to varying degrees of regulation by United
States regulatory authorities at the federal and state level, as well as by
foreign regulatory authorities. In recent years, the regulation of the
telecommunications industry has been in a state of flux as a result of the
passage of new laws seeking to foster greater competition in telecommunications
markets. In particular, comprehensive amendments to the Communications Act of
1934, as amended ("1934 Act") were made by the Telecommunications Act of 1996
("1996 Act"). The purpose of the 1996 Act is to promote competition in all areas
of telecommunications by reducing unnecessary regulation at both the federal and
state levels to the greatest extent possible. State legislatures also have
passed new laws increasing competition. The FCC and state public service
commissions ("PSCs") have adopted many rules to implement new legislation and
encourage competition. These changes, which are still incomplete, have created
new opportunities for Startec and its competitors.
U.S. federal laws, including common carriage requirements under the 1934
Act and the FCC's rules, apply to Startec's international and interstate
facilities-based and resale telecommunications services. Applicable PSCs have
jurisdiction under separate state statutes over telecommunications services
originating and terminating within the same state. The FCC and the PSCs
generally have the authority to condition, modify, cancel, terminate or revoke
Startec's operating authority for failure to comply with federal and state laws
and applicable rules, regulations and policies. Fines or other penalties also
may be imposed for such violations. Any such action by the FCC and/or the PSCs
could have a material adverse effect on Startec's business, financial condition
and results of operations.
In addition, the laws of other countries directly apply only to carriers
doing business in those countries. Startec is affected indirectly by such laws
insofar as it is doing business in foreign countries, and indirectly to the
extent that such laws affect foreign carriers with which Startec does business.
The following summary of regulatory developments and legislation does not
purport to describe all present and proposed U.S. or foreign regulations and
legislation affecting the telecommunications industry. Other existing
regulations are currently the subject of judicial proceedings, legislative
hearings or administrative proposals which could change, in varying degrees, the
manner in which this industry operates. Neither the outcome of these
proceedings, nor their impact upon the telecommunications industry or Startec
can be predicted at this time. There can be no assurance that future regulatory
judicial and legislative changes will not have a material adverse effect on
Startec, that U.S. or foreign regulators or third parties will not raise
material issues with regard to Startec's compliance or noncompliance with
applicable laws and regulations, or that regulatory activities will not have a
material adverse effect on Startec's business, financial condition and results
of operations.
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U.S. Federal Regulation
INTERNATIONAL COMMON CARRIER SERVICES. In February 1997, 69 countries,
including the United States, Japan, and all of the member states of the EU,
signed the World Trade Organization Basic Telecommunications Services Agreement
("WTO Agreement") to facilitate competition in basic telecommunications
services. The WTO Agreement entered into force on February 5, 1998. Pursuant to
the terms of the WTO Agreement, signatories to the WTO Agreement have committed
to varying degrees and within varying timeframes to allow access to their
domestic and international markets to competing telecommunications providers,
allow foreign ownership interests in existing telecommunications carriers and
establish regulatory schemes to develop and implement policies to accommodate
telecommunications competition.
The FCC's new rules implementing the WTO Agreement, which took effect on
February 9, 1998 generally ease restrictions on entry by foreign
telecommunications carriers from WTO member countries into the U.S. and
streamline FCC regulation of such carriers. Foreign entry restrictions and full
FCC regulation remain in effect for foreign telecommunications carriers from
non-WTO countries. The FCC's new policies implementing the WTO Agreement also
address the applicability to companies from WTO member and non-member countries
of equivalency and other reciprocity principles regarding international
facilities-based and resale services, foreign ownership limitations and foreign
carrier entry into the U.S. market. At the same time, telecommunications markets
in many foreign countries are expected to be significantly liberalized, creating
additional competitive market opportunities for U.S. telecommunications
businesses such as Startec. Although many countries have agreed to make certain
changes to increase competition in their respective markets, there can be no
assurance that countries will enact or implement the legislation required to
effect the changes to which they have committed in a timely manner or at all.
Failure by a country to meet commitments made under the WTO Agreement may give
rise to a cause of action for the injured foreign countries to lodge a trade
dispute with the WTO. At this time, Startec is unable to predict the effect the
WTO Agreement and related developments might have on its business, financial
condition and results of operations.
International telecommunications carriers are required to obtain authority
from the FCC under Section 214 of the Communications Act in order to provide
international service that originates or terminates in the United States. U.S.
international common carriers also are required to file and maintain tariffs
with the FCC specifying the rates, terms, and conditions of their services. In
1989, Startec received Section 214 authority from the FCC to acquire and operate
satellite facilities for the provision of direct international service to Italy,
Israel, Kenya, India, Iran, Saudi Arabia, Pakistan, Sri Lanka, South Korea and
the United Arab Emirates. Startec was also 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, Startec was granted global facilities-based Section 214
authority under new FCC streamlined processing rules adopted in 1996 for
international carriers. Startec is classified by the FCC as a non-dominant
carrier on its international and domestic routes. A facilities-based global
Section 214 authorization enables Startec to provide international basic
switched, private
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line, data, television and business services using authorized facilities to
virtually all countries in the world. In March 1999, the FCC once again
streamlined its rules for licensing and regulating international carriers. Among
other things, under the most recent rules a carrier with global Section 214
authorization for facilities-based services will be allowed to utilize any
foreign submarine cable system in its provision of facilities-based
international services without additional authorization.
Under FCC rules which took effect on February 9, 1998, upon entry into
force of the WTO Agreement of February 5, 1998, the FCC replaced the
"equivalency" test with a rebuttable presumption in favor of the provision of
switched services over interconnected private lines ("international simple
resale" or "ISR") to WTO member countries. 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 percent of the settled U.S.-billed traffic between the U.S. and
that country are at or below the FCC's benchmark settlement rate for that
country, or the country satisfies the FCC's test for equivalent ISR policies.
The FCC will authorize ISR between the U.S. and a non-WTO member country only if
both the settlement rates for at least 50 percent of the settled U.S.-billed
traffic between the U.S. and that country are at or below the FCC's benchmark
settlement rate for that country, and the country satisfies the FCC's
equivalency test. To date, the FCC has approved ISR for international services
between the U.S. and eighteen foreign countries, including Australia, Austria,
Belgium, Canada, Denmark, France, Germany, Hong Kong, Ireland, Italy, Japan,
Luxembourg, the Netherlands, New Zealand, Norway, Sweden, Switzerland and the
United Kingdom. It is possible that ISR may be approved for additional countries
in the future. Pursuant to FCC rules and policies, Startec's authorization to
provide service via ISR will be expanded automatically to include countries
subsequently approved by the FCC for ISR.
Startec must also conduct its international business in compliance with the
FCC's international settlements policy ("IS Policy"). The IS Policy establishes
the parameters by which U.S.-based carriers and their foreign correspondents
settle the cost of terminating each other's traffic over their respective
networks. The precise terms of settlement are established in a correspondent
agreement (also referred to as an "operating agreement"), which also sets forth
the term of the agreement, the types of service covered by the agreement, the
division of revenues between the carrier that bills for the call and the carrier
that terminates the call at the other end, the frequency of settlements, the
currency in which payments will be made, the formula for calculating traffic
flows between countries, technical standards, and procedures for the settlement
of disputes. The amount of payments (the "settlement rate") is determined by the
negotiated accounting rate specified in the operating agreement. Under the IS
Policy, the settlement rate generally must be one-half of the accounting rate.
Carriers must obtain waivers of the FCC's rules if they wish to use an
accounting rate that differs from the prevailing rate or vary the settlement
rate from one-half of the accounting rate.
The IS Policy is designed to eliminate foreign carriers' incentives and
opportunities to discriminate in their operating agreements among different
U.S.-based carriers through a practice referred to as "whipsawing." Whipsawing
involves a foreign carrier varying the accounting and/or settlement rate offered
to different U.S.-based carriers for the benefit of the foreign carrier, which
could secure various incentives by favoring one U.S.-based carrier over another.
Under the uniform settlements policy, U.S.-based carriers can only enter into
operating agreements that contain the
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same accounting rate and settlement terms offered to all U.S.-based carriers in
that country and provide for proportionate return traffic. When a U.S.-based
carrier negotiates an accounting rate with a foreign carrier that is lower than
the accounting rate offered to another U.S.-based carrier for the same service,
the U.S.-based carrier with the lower rate must file a notification letter with
the FCC. If a U.S.-based carrier does not already have an operating agreement in
effect, it must file a request with the FCC to modify the accounting rate for
that country to introduce service with the foreign correspondent in that
country. A U.S.-based carrier also must request modification authority from the
FCC for any proposal that is not prospective, that is not a simple reduction in
the accounting rate, or that changes the terms and conditions of an existing
operating agreement. The notification and modification procedures are intended
to provide all U.S.-based carriers with an opportunity to compete in foreign
markets on a nondiscriminatory basis. Among other efforts to counter the
practice of whipsawing and inequitable treatment of similarly situated
U.S.-based carriers, the FCC adopted the principle of proportionate return -
which requires that the U.S. carrier terminate U.S.-inbound traffic in the same
proportion as the U.S.-outbound traffic that it sends to the foreign
correspondent - to assure that competing U.S.-based carriers have roughly
equitable opportunities to receive the return traffic that reduces the marginal
cost of providing international service.
Consistent with its pro-competition policies, the FCC has prohibited
U.S.-based carriers from agreeing to accept special concessions from any foreign
carrier or administration with market power. A special concession is any
arrangement that affects traffic flow to or from the U.S. that is offered
exclusively by a foreign carrier or administration to a particular U.S. carrier
that is not offered to similarly situated U.S. carriers authorized to serve a
particular route.
In 1996, the FCC amended the IS Policy to provide carriers with flexibility
to introduce alternative payment arrangements that deviate from the IS Policy.
As a result of the WTO Agreement, the FCC created a rebuttable presumption in
favor of alternative payment arrangements with WTO member countries. 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 target
ceilings for prices that U.S. carriers should pay to foreign carriers for
terminating U.S. calls overseas. While these rule changes may provide more
flexibility to Startec to respond more rapidly to changes in the global
telecommunications market, it will also provide similar flexibility to Startec's
competitors. Startec intends, where possible, to take advantage of lowered
accounting rates and more flexible settlement arrangements.
As of December 31, 1998, Startec had operating agreements and
interconnection arrangements with carriers in approximately 40 countries,
primarily in emerging economies. FCC regulations require that U.S. international
telecommunications carriers are required to file copies of their contracts with
foreign correspondents, including operating agreements, with the FCC within 30
days of execution. Startec has filed, or will file, each of its operating
agreements with the FCC as required. The FCC's rules also require Startec to
file periodically a variety of reports regarding its international traffic flows
and use of international facilities. Startec has on file and maintains with the
FCC annual circuit status reports and traffic data reports. An FCC rulemaking
proceeding is pending in which it has proposed to reduce certain reporting
requirements of common carriers. Startec is unable to predict the outcome of
this proceeding or its effect on Startec.
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The FCC is currently considering whether to limit or prohibit the practice
whereby a carrier routes, through its facilities in a third country, traffic
originating from one country and destined for another country. The FCC has
permitted third country calling where all countries involved consent to this
type of routing arrangements, referred to as "transiting." Under certain
arrangements referred to as "refiling," the carrier in the destination country
does not consent to receiving traffic from the originating country and does not
realize the traffic it receives from the third country is actually originating
from a different country. The FCC to date has made no pronouncement as to
whether refile arrangements comport either with U.S. or ITU regulations. It is
possible that the FCC may determine that refiling, as defined, violates U.S.
and/or international law. To the extent that Startec's traffic is routed through
a third country to reach a destination country, such an FCC determination with
respect to transiting and refiling could have a material adverse effect on
Startec's business, financial condition and results of operations.
The FCC also regulates the ability of U.S.-based international carriers
affiliated with foreign carriers to serve markets where the foreign affiliate is
dominant. Previously, U.S. carriers were required to report any investment by a
foreign carrier of 10% or greater, and Startec reported the only foreign carrier
investment in Startec at the time, an affiliate of Portugal Telecom. Under the
FCC's new rules implementing the WTO Agreement, which took effect on February 9,
1998 the threshold for notification of affiliations with foreign carriers has
been increased to 25%. Under the new rules, Startec is affiliated with Global
Communications GmbH, a licensed carrier in Germany, and Phone Systems and
Network, S.A., a licensed carrier in France. The FCC considers a
foreign-affiliated U.S. carrier to be dominant on foreign routes where the
foreign affiliate is a monopoly or has more than 50 percent market share in
international or local telecommunications. None of the carriers with which
Startec is affiliated are considered dominant in their foreign markets, and
Startec is not regulated as dominant on any international route.
The FCC may condition, modify or revoke any of the Section 214
authorizations granted to Startec for violations of the Communications Act, the
FCC's rules and policies or the conditions of those authorizations or may impose
monetary forfeitures for such violations. Any such action on the part of the FCC
may have a material adverse effect on Startec's business, financial condition
and results of operations.
INTERNET SERVICES, IP TELEPHONY AND ADVANCED SERVICES. In the U.S.,
Internet services, including voice communications over the Internet or IP
protocols ("Internet Telephony") currently are treated as enhanced services and
may be provided on an unregulated basis. 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. This proceeding remains pending. In April 1998, the FCC filed a
report with Congress stating that Internet access falls into the category of
information services, and 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 services may be more like telecommunications
services than information services, and possibly should be subject to common
carrier regulation. To date, all aspects of Internet Telephony remain
unregulated. However, for the purpose of assisting in a
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determination of whether reciprocal compensation for traffic bound for Internet
service providers is due between competing local exchange carriers, FCC recently
has determined that Internet services are interstate rather than local in
nature. A petition for review of this decision has been filed by Bell Atlantic
in the U.S. Court of Appeals for the Eighth Circuit. Controversy over this and
related issues may lead to changes in federal or state regulatory treatment of
Internet related services. Startec cannot predict the outcome of these
proceedings.
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 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 our business, financial condition or results of operations.
Similarly, certain foreign governments have begun to consider more closely the
regulatory status of Internet services, especially Internet Telephony. We cannot
predict the likelihood that U.S. federal or state authorities or foreign
governments will impose additional regulation on our Internet-related services,
nor can we predict the impact that future regulation will have on our
operations.
The FCC also has initiated proceedings addressing the availability of
advanced communications services to all Americans. In February 1999, the FCC
issued a report in a inquiry proceeding concluding that no significant changes
in existing policies are presently, but that it should continue to monitor the
deployment of broadband services and issue another report in the year 2000. The
Commission said that in the meantime it will continue to allocate, auction, and
license more radio spectrum for uses that include broadband data transmission.
In a related rulemaking, the FCC has developed new rules on a wide variety
of issues associated with the provision of advanced services by wireline
carriers. The FCC clarified that the interconnection, unbundling and resale
obligations of incumbent local exchange carriers ("ILECs") under Section 251 of
the 1996 Act extend to their provision of advanced services, and proposed
measures to promote the deployment of advanced services by both ILECs and
competitive local exchange carriers ("CLECs"). In rules adopted in March 1999,
the FCC required expanded physical collocation rights for CLECs and strengthened
the rights of CLECs to order unbundled network elements required to provide
advanced services. However, the FCC also interpreted the 1996 Act as permitting
ILECs to deploy advanced services through separate affiliates which would not be
regulated as an ILEC. These new rules should enhance the flexibility of
Startec's options for terminating advanced services, but Startec cannot predict
the final outcome of these proceedings or any court appeals that might ensue.
INTERSTATE INTEREXCHANGE SERVICES. Startec's provision of domestic long
distance service in the United States is subject to regulation by the FCC and
certain state PSCs, who regulate to varying degrees interstate and intrastate
rates, respectively, ownership of transmission facilities, and the terms and
conditions under which Startec's domestic services are provided. Startec must
comply with the requirements of common carriage under the of 1934 Act. Pursuant
to the 1934 Act, Startec is subject to the general requirement that its charges
and regulations for communications services must be "just and reasonable" and
that it may not make any "unjust or unreasonable discrimination" in its charges
or regulations. Carriers such as Startec also are subject to a variety
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of miscellaneous regulations that, for instance, govern the documentation and
verifications necessary to change a consumer's long distance carrier, require
the filing of periodic reports, and restrict interlocking directors and
management. Startec also has filed domestic long distance tariffs with the FCC.
The FCC also has jurisdiction to act upon complaints against any common carrier
for failure to comply with its statutory obligations.
The FCC has established different levels of regulation for dominant and
non-dominant carriers. Among domestic common carrier service providers, only
GTE, the RBOCs and other ILECs are classified as dominant carriers, and all
other providers of domestic common carrier services, including Startec, are
classified as non-dominant carriers. The 1996 Act provides the FCC with the
authority to forebear from imposing any regulations it deems unnecessary,
including requiring non-dominant carriers to file tariffs. In November 1996, in
its first major exercise of regulatory forbearance authority granted by the 1996
Act, the FCC issued an order detariffing domestic interexchange services. The
order required mandatory detariffing and gave carriers such as Startec nine
months to withdraw federal tariffs and move to contractual relationships with
its customers. This order was to take effect as of December 1997. On February
13, 1997, however, the U.S. Court of Appeals for the District of Columbia
Circuit stayed the FCC's order pending judicial review. The appeals remain
pending.
Should the appeals fail and the FCC's order become effective, Startec 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 Startec secure contractual agreements with its customers
regarding many of the terms of its existing tariffs or face possible claims
arising because the rights of the parties are no longer clearly defined. To the
extent that Startec's customer base involves "casual calling" customers, the
potential absence of tariffs could require Startec to establish contractual
methods to limit potential liability. On August 20, 1997, the FCC partially
reconsidered its order by allowing dial-around carriers such as Startec to
maintain tariffs on file with the FCC.
The 1996 Act directs the FCC, in cooperation with state regulators, to
establish a Universal Service Fund ("USF") that will provide subsidies to
carriers that provide service to under-served individuals and in high cost
areas. A portion of carriers' contributions to the USF also will be used to
provide telecommunications related facilities for schools, libraries and certain
rural health care providers. The FCC released its order in June 1997. For the
first and second calendar quarters of 1998, the FCC established payment rates
for all interexchange carriers that amount to 3% to 4% of eligible intrastate,
interstate, and international long distance service revenues.
In July 1998, the FCC extended by six months, or to July 1, 1999, the date
on which so-called "non-rural" LECs will first receive explicit subsidies for
the services provided to rural subscribers. Implementation of the subsidy will
increase burdens on interexchange carriers that must contribute to the USF. The
FCC allows interexchange carriers to recover the international and interstate
portions of these payments by passing the charges through to their customers.
Certain features of the universal service funding mechanism have not yet been
finalized, including the input values for the cost of network components and
other parameters that will be used in econometric models to estimate non-rural
carriers' reimbursable costs for providing
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supported services. Also, the FCC's implementation of universal service
requirements remains subject to judicial and additional FCC review. Startec is
unable to predict the potential impact of these universal service funding
reforms. Based upon its domestic interexchange revenues, Startec has applied to
the FCC for a waiver of USF contribution requirements. Startec cannot predict
the likelihood that its request will be granted.
CASUAL CALLING ISSUES. The FCC has adopted new rules that expand the number
of codes available for casual calling services. An increase in the number of
codes available for casual calling allows for increased competition in the
casual calling industry. In addition, the FCC is considering rules to require
dominant local exchange carriers and competitive local exchange carriers to make
billing arrangements available on a nondiscriminatory basis to casual calling
service providers. The Company already has LEC billing arrangements in place but
may wish to take advantage of rules the FCC may adopt to develop new billing
arrangements with competing LECs. Competing casual calling providers without
billing arrangements also would benefit from such a nondiscriminatory billing
obligation.
OTHER LEGISLATIVE AND REGULATORY INITIATIVES. The 1996 Act is designed to
promote local competition through state and federal deregulation. As part of its
pro-competitive policies, the 1996 Act frees the RBOCs from the judicial orders
that prohibited their provision of long distance services outside of their
operating territories ("LATAs"). The 1996 Act provides specific guidelines that
allow the RBOCs to provide long distance inter-LATA service to customers inside
its region, subject to a demonstration to the FCC and state regulators that the
RBOC has opened up its local network to competition and met a "competitive
checklist" of requirements designed to provide competing network providers with
nondiscriminatory access to the RBOC's local network.
Some RBOCs have filed applications with various state public utility
commissions and the FCC seeking approval to offer in-region interLATA service.
Some states have denied these applications while others have approved them.
However, to date, even where the RBOCs' applications have received state
approval the FCC has denied each of the RBOCs' applications brought before it.
The grant of such authority could permit RBOCs to compete with Startec in the
provision of domestic and international long distance services.
On December 31, 1997, in striking down an FCC order concerning requests by
SBC, US West and Bell Atlantic to enter the long distance market, a Federal
District Court in Texas found unconstitutional certain provisions of the 1996
Act restricting the RBOCs from offering such services in their operating regions
until they could demonstrate that their networks have been made available to
competitive providers of local exchange service in those regions. In September
1998, the U.S. Court of Appeals for the Fifth Circuit reversed the District
Court's decision that the challenged provisions of the 1996 Act were prohibited
"bills of attainder." In January 1999, the U.S. Supreme Court declined to review
the Fifth Circuit's decision. A separate petition remains pending at the Supreme
Court for review of a decision by the U.S. Court of Appeals for the District of
Columbia rejecting similar claims by BellSouth.
To originate and terminate calls in connection with providing their
services, long distance carriers such as Startec must purchase "access services"
from ILECs or CLECs. Access charges
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represent a significant portion of Startec's cost of U.S. domestic long distance
services and, generally, such access charges are regulated by the FCC for
interstate services and by PSCs for intrastate services. In May 1997, the FCC
released an order that fundamentally restructured the "access charges" that
ILECs charge to interexchange carriers and end user customers. Appeals by
numerous parties were denied by the Eighth Circuit Court of Appeals on August
19, 1998. Subsequently, the FCC proposed various measures to accelerate
reductions in ILEC access charges and to give ILECs increased flexibility to set
prices in response to competition. Together, these actions could significantly
reduce the prices of ILEC access services to Startec, as well as to its
competitors.
In implementing the local competition provisions of the 1996 Act, the FCC
has promulgated a series of rules regarding interconnection between ILECs and
CLECs. The issues addressed by the FCC have included requirements for
non-discriminatory interconnection, access to unbundled network elements,
physical collocation of equipment, transport and termination charges, pricing
methodologies, resale requirements and access to rights of way. Most provisions
of the FCC's orders adopting these interconnection rules were appealed, and
numerous appeals were consolidated for consideration by the Eighth Circuit. In a
decision released in July 1997 and modified in August 1997, the Court of Appeals
upheld in part and reversed in part the FCC's orders. In addition, in August
1998, the Eighth Circuit issued a ruling in a related appeal upholding the FCC's
regulations that "shared transport" be made available as an unbundled network
element.
On January 25, 1999, the U.S. Supreme Court reversed important portions of
the Eighth Circuit's holding, ruling that the FCC properly exercised its
authority under the 1996 Act in many respects. The Eighth Circuit Court of
Appeals has not yet reinstated the FCC rules that the Supreme Court affirmed.
Several ILECs have asked the Eighth Circuit not to reinstate those rules until
it considers their argument that the FCC's pricing rules for network elements
represent an unconstitutional taking of property without just compensation. Even
if the Eighth Circuit recalls its prior mandate, it remains to be seen how soon
or how vigorously the FCC will enforce its pricing rules for unbundled network
elements.
Certain other aspects of the FCC's interconnection orders were vacated by
the Eighth Circuit but were not appealed to the Supreme Court; thus, they remain
vacated. These include FCC rules that had directed ILECs to combine network
elements requested by competitors whether or not those elements had previously
been combined, and a provision requiring ILECs to provide interconnection
superior in quality to those provided by the ILECs to themselves, when requested
to do so by competitors. A trade association representing competitive long
distance carriers has petitioned the Eighth Circuit to interpret the Supreme
Court's decision as implying that the new combinations rule should be
reinstated, even though it was not directly addressed by the Supreme Court.
The ultimate resolution of local interconnection issues could enhance
Startec's flexibility in terminating customer traffic. Certain additional
provisions of the 1996 Act, and the rules that have been proposed to be adopted
pursuant thereto, could materially affect the growth and operation of the
telecommunications industry and the services provided by Startec. Further,
certain of the 1996 Act's provisions have been, and likely will continue to be,
judicially
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challenged. Startec is unable to predict the outcome of such rulemakings or
litigation or the substantive effect of the new legislation and the rulemakings
on Startec's business, financial condition and results of operations.
State Regulation
INTRASTATE SERVICES Section 253 of the 1996 Act prohibits states and
localities from adopting or imposing any legal requirement that may prohibit, or
have the effect of prohibiting, the ability of any entity to provide any
interstate or intrastate telecommunications services. The FCC has the authority
to preempt any such state or local requirements to the extent necessary to
enforce the open market entry requirements of the 1996 Act. States and
localities may, however, continue to regulate the provision of intrastate
telecommunications services, and, presumably, require carriers to obtain
certificates or licenses before providing service.
Startec generally is required to obtain certification from the relevant
state PSC prior to the initiation of intrastate service and to file tariffs with
such states. Through its subsidiary, Startec Global Licensing Company, Startec
currently is authorized (or certification is not required) to provide service in
40 states and the District of Columbia. Additional applications for approval are
pending in three states. In some states where Startec already is certified, it
is seeking or may seek modification of its certification to provide
facilities-based, in addition to resale, services. Although Startec intends and
expects to obtain operating authority in each jurisdiction in which operating
authority is required, there can be no assurance that one or more of these
jurisdictions will not deny Startec's request for operating authority. Any
failure to maintain proper federal and state certification or tariffs, or any
difficulties or delays in obtaining required certifications could have a
material adverse effect on Startec's business, financial condition and results
of operations.
Many states also impose various reporting requirements and/or require prior
approval for transfers of control of certified carriers, corporate
reorganizations, acquisitions of telecommunications operations, assignments of
carrier assets, carrier stock offerings, and incurrence by carriers of
significant debt obligations. Certificates of authority can generally be
conditioned, modified, canceled, terminated, or revoked by state regulatory
authorities for failure to comply with state law and/or the rules, regulations,
and policies of the PSCs. Fines and other penalties also may be imposed for such
violations. Any such action by the PSCs could have a material adverse effect on
Startec's business, financial condition and results of operations. As Startec
expands its operations into other states, it may become subject to the
jurisdiction of their respective public service commissions for certain services
offered by Startec. Startec monitors regulatory developments in all 50 states to
ensure regulatory compliance.
Foreign Regulation
EUROPEAN UNION. As Startec has expanded its operations into Europe, it has
become subject to the regulations established by various European governments.
These regulations, in turn, are evolving within the context of a European-wide
telecommunications framework established by the European Commission ("EC") for
the entire European Union ("EU"). The EU consists of the following fifteen
member states: Austria, Belgium, Denmark, Finland, France, Germany, Greece,
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Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the
United Kingdom. The expansion by Startec of its business into any EU country may
be directly or indirectly affected by the EC regulatory framework.
EU member states are required to implement directives issued by the EC
authorities (the EU Commission and the Council of the European Union) by passing
national legislation. If an EU member state fails to effect such directives with
national (or, as the case may be, regional, community or local) legislation
and/or fails to render the provisions of such directives effective within its
territory, the EC may take action against the EU member state, including in
proceedings before the European Court of Justice, to enforce the directives.
The EC and Council of the EU have issued a number of key regulations and
directives establishing basic principles for the liberalization of the EU
telecommunications market. The general framework for this liberalized
environment has been set out in the EC's Services Directive (the "Services
Directive"). The Services Directive sets out principles relating to restrictions
on the number of licenses permitted and to procedures, fees, essential
requirements and appeals. The Services Directive directs EU member states to
permit the competitive provision of all telecommunications services with the
exception of voice telephony (which does not include value-added services and
voice services within closed user groups) and certain other services that have
been gradually liberalized through subsequent amendments to the Services
Directive.
The Full Competition Directive, adopted in March 1996 (the "Full
Competition Directive"), amended the Services Directive to set January 1, 1998
as the date by which all EU member states were required to remove all remaining
restrictions on the provision of telecommunications services and
telecommunications infrastructure, including voice telephony. Certain
derogations from compliance with this timetable have been granted. The
derogations granted by the EC are as follows: Luxembourg (July 1, 1998), Spain
(November 30, 1998), Ireland (January 1, 2000), Portugal (January 1, 2000) and
Greece (January 1, 2001).
This basic framework has been advanced by a series of harmonization
directives, which include the so-called Open Network Provision directive
("ONP"), which established the basic rules for access to the public network, the
Leased Lines Directive, which required the incumbent carriers to lease lines to
competitors and end-users and to establish cost accounting systems for those
products by the end of 1993, the Licensing Directive of April 1997, which set
out framework rules for the procedures associated with the granting of national
authorizations for the provision of telecommunications services and for the
establishment or operation of any infrastructure for the provision of
telecommunications services, and the Interconnection Directive of June 1997,
which sets out the regulatory framework for securing in the EU the
interconnection of telecommunications networks.
A 1998 amendment to the Interconnection Directive calls for the
introduction of operator number portability by January 1, 2000 and extended the
requirement of number portability to the entire fixed network. The amended
Directive further requires the introduction of carrier preselection for at least
all fixed network operators by January 1, 2000.
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Each EU member state in which Startec currently conducts its business has a
different regulatory regime, and Startec expects such differences to continue.
Accordingly, we must obtain different approvals, where required, from country to
country. As part of the EC commitment, all EU member states are also signatories
to the WTO Agreement.
AUSTRIA. Austria joined the EU in January 1995 and, consequently, became
subject to the telecommunications directives of the EC, including the agreement
for total market liberalization by January 1998. In compliance with the EU
directives, in particular in response to an official EU directive warning
Austria of the consequences of delaying deregulation, a new telecommunications
law ("TKG 97") was passed by Parliament on August 1, 1997. The TKG 97 introduced
full competition to the Austrian telecommunications market and established a new
independent regulatory body, the Telekom Control Commission, to issue licenses
and monitor compliance with telecom regulations.
Under the TKG 97, an individual license is required only for the provision
of public voice telephony services, leased lines offered to the public by means
of a fixed telecommunications network, public mobile telephony services and
other mobile communications provided using a mobile communications network. All
other services, public or non-public, may be provided upon notification to the
Telekom Control Commission. Currently, Internet telephony is not covered by the
legal provisions for "public voice telephony service." Any operator or service
provider can offer Internet services.
Startec Global Communications U.K. Ltd. ("Startec UK"), a wholly owned
subsidiary of Startec Global Communications Corporation, was incorporated on
April 27, 1998. Startec UK holds various telecommunications licenses and/or
authorizations that allow it to offer services both in the United Kingdom and
other European countries. In Austria, Startec UK holds a license for the
provision of voice telephone by self-operated telecommunications network in
Austria. This license allows for interconnection to Telekom Austria AG, the
former monopoly PTT, and for the provision of retail and wholesale services in
Austria.
CANADA. The Canadian market has been significantly liberalized over the
past year. As of October 1, 1998, international voice service, previously
provided exclusively by Teleglobe, was opened to full competition. The domestic
long distance market also has become more competitive as a result of the break
up of the Stentor Alliance, comprised of nine provincial incumbent local
exchange carriers, and the announcement by other companies of their intent to
offer nationwide long distance service. Additionally, the Canadian government
has relaxed long distance routing restrictions so that carriers may now route
domestic and international traffic according to the most economical route, even
by transiting or hubbing through the United States. These market and regulatory
changes will provide increased opportunity for competitive entry in both
domestic and international long distance services markets. Section 16 of the
Telecommunications Act restricts Canadian facilities based carriers to a maximum
total of 46.7% of direct and indirect foreign ownership of voting shares.
Startec Global Communications Company (Canada) ("Startec Canada"), was
incorporated on July 29, 1998. Startec Canada has obtained a Class A License,
enabling it to provide commercial and wholesale telecommunication services in
Canada. Startec has also obtained extra-provincial
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registrations in Nova Scotia, Ontario, Manitoba, Alberta and British Columbia.
Startec currently offers retail prepaid services in British Columbia, Quebec and
Ontario and wholesale carrier services nationwide.
FRANCE. In July 1996, legislation was enacted providing for the immediate
liberalization of all telecommunications activities in France, but maintaining a
partial exception for the provision of voice telephony. Voice telephony was
subsequently fully liberalized on January 1, 1998. The establishment and
operation of public telecommunications networks and the provision of voice
telephony are subject to individual licenses, which are granted by the minister
in charge of telecommunications upon recommendation of France's independent
regulatory authority, the Autorite de Regulation des Telecommunications ("ART").
Startec Global Communications Corporation recently purchased a 64.6%
ownership interest in Phone Systems & Network, S.A. ("PSN"), a French company
listed on the Nouveau Marche. (On March 18, 1999, the Company launched a public
tender offer in order to acquire additional shares of the company.) PSN holds a
Voice Telephony License (Section L34.1 of the French Post and Telecommunications
Code) which allows it to provide deregulated communications services nationwide.
The license also entitles PSN to obtain interconnect with the former monopoly
carrier France Telecom, S.A. Currently, PSN provides prepaid and post-paid
telecommunications services in France, the United Kingdom, Switzerland, Belgium
and Germany. France is a key component of Startec's European expansion. The
acquisition of PSN enables Startec to greatly accelerate its plans in the
European market.
GERMANY. The German Telecommunications Act of July 25, 1996 liberalized all
telecommunications activities, but postponed effective liberalization of voice
telephony until January 1, 1998. The German Telecommunications Act has been
complemented by several Ordinances. The most significant Ordinances concern
license fees, rate regulation, interconnection, universal service, frequencies
and customer protection.
Under the German regulatory scheme, licenses can be granted within four
license classes. A license is required for operation of transmission lines that
extend beyond the limits of a property and that are used to provide
telecommunications services for the general public. The licenses required for
the operation of transmission lines are divided into three infrastructure
license classes: mobile telecommunications (license class 1), satellite (license
class 2), and telecommunications services for the general public (license class
3). In addition to the infrastructure licenses, a license is required for
operation of voice telephony services over self-operated telecommunications
networks (license class 4). A class 4 license does not include the right to
operate transmission lines.
Startec Global Communications (Germany) GmbH ("Startec Germany"), is a
wholly owned subsidiary of Startec. In December 1998, Startec Germany purchased
Global Communications GmbH, a German carrier with Siemens EWSD switch located in
Dusseldorf. Global Communications GmbH holds a Class 4 (Nationwide) license, and
an interconnection agreement with Deutsche Telekom which allows the Company to
provide a full range of telecommunication services and to obtain interconnection
with Deutsche Telekom. An interconnection agreement with Deutsche Telekom has
been signed with final physical
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interconnect pending. Currently also, Startec Germany has installed a POP site
in Frankfurt which is being upgraded to a Siemens EWSD switch. Startec offers
wholesale and retail prepaid services in Germany.
IRELAND. Ireland has recently accelerated the liberalization of its
telecommunications market, implementing full competition a year ahead of
schedule. On December 1, 1998 Ireland granted 29 new telecommunications licenses
of which 21 were general licenses for public voice telephony. The Office of the
Director of Telecommunications Regulation (ODTR), created by the
Telecommunications (Miscellaneous Provisions) Act of 1996 is currently working
on a broad range of regulatory initiatives to bring Ireland up to par with other
European countries with more advanced liberalization regimes.
In Ireland, Startec U.K. holds a General Telecommunications License, which
allows Startec to offer retail and wholesale telecommunication services in
Ireland and to interconnect to Telecom Eireann.
THE NETHERLANDS. The Dutch Telecommunications Act of 1998 ("Dutch Telecom
Act"), which became effective December 15, 1998, provides the current regulatory
framework for the provision of telecommunications services in the Netherlands.
The new regime closely parallels the EU Licensing Directive requiring individual
licenses only for the use of spectrum. All other services including the
installation and provision of public telecommunications networks, leased lines
and broadcasting networks may be provided pursuant to registration. The newly
enacted Dutch Telecom Act also facilitates the construction of
telecommunications networks by giving registered carriers access to
rights-of-way, subject to certain conditions.
In the Netherlands, Startec holds a Special Network Access Registration,
which allows for retail and wholesale services and interconnection with Royal
KPN Netherlands, N.V. Startec has installed a POP in the Netherlands, and
currently offers carrier wholesale and prepaid retail services to customers in
the Netherlands.
NEW ZEALAND. The New Zealand market is fully liberalized. In New Zealand,
Startec UK holds a registration as an operator under the Telecommunications
(International Services) Regulations 1994. Startec has not yet commenced
services in New Zealand.
SWITZERLAND. Switzerland is not a member of the EU. Nonetheless, a new
Telecommunications Act was adopted by the Swiss Parliament in April 1997 and
took effect on January 1, 1998, together with Ordinances containing more
detailed regulations covering telecommunications services, frequency management,
numbering, terminal equipment and license fees. The new Telecommunications Act
liberalized the Swiss telecommunications market as of January 1, 1998.
The newly enacted Swiss telecommunications regulatory framework facilitates
market entry by: (1) applying a notification procedure for resellers; (2)
applying a procedure for operators wishing to be granted a concession for the
establishment and operation of transmission facilities; and (3) providing
rights-of-way, subject to a procedure of authorization, over the public domain
to facilities-based carriers. Pro-competitive regulation is also applicable in
the area of numbering.
27
<PAGE>
Startec Global Communications (Switzerland) GmbH ("Startec Switzerland"), a
wholly owned subsidiary of Startec, was incorporated on August 5, 1998. Startec
Switzerland holds a Registration for the Supply of Telecommunications Services
in Switzerland, which allows for interconnection with Swisscom S.A. as well as
for the provision of wholesale and retail services. Startec Switzerland has
installed a POP site in Geneva through which retail prepaid and wholesale
carrier services are provided in Switzerland.
THE UNITED KINGDOM. The Telecommunications Act 1984 (the "U.K. Act")
provides a licensing and regulatory framework for telecommunications activities
in the United Kingdom, which are fully competitive. The Secretary of State for
Trade and Industry at the Department of Trade and Industry (the "Secretary of
Trade") is responsible for granting licenses under the U.K. Act and for
overseeing telecommunications policy, while the Director General of
Telecommunications (the "Director General") and his office are responsible,
among other things, for enforcing the terms of such licenses. The Director
General will recommend the grant of a license to operate a telecommunications
network to any applicant that the Director General believes has a reasonable
business plan, the necessary financial resources and where there are no other
overriding considerations against the grant of a license. In December 1996, the
British Government introduced the International Facilities License ("IFL") which
authorizes holders to provide international telecommunications services over
their own international infrastructure and/or by making use of IRUs in undersea
cables.
Startec U.K. holds an IFL which enables Startec to own telecommunications
facilities entering the U.K. and gives Startec UK the rights and obligations to
interconnect with British Telecom Communications at wholesale interconnect
rates. Startec Global Communications Corporation also holds an International
Simple Voice Resale ("ISVR") license in the U.K. Startec UK has a POP in London
and is in the process of upgrading to a Siemens EWSD switch. Currently, Startec
UK offers wholesale carrier and retail prepaid services in the U.K.
28
<PAGE>
EMPLOYEES
As of December 31, 1998, the Company had 338 full-time employees and 71
part-time employees. The Company's employees are not currently represented by a
collective bargaining agreement. The Company believes that it has good relations
with its employees.
ITEM 2. PROPERTIES
The following table sets forth certain information as of December 31, 1998,
relating to facilities used by the Company. All of the properties are leased.
<TABLE>
<CAPTION>
SQUARE DATE PLACED
FOOTAGE IN SERVICE
-------------- --------------
LEASED OFFICE SPACE CALL CENTERS
------------------- ------------
<S> <C> <C> <C>
Bethesda, MD (1) 49,500 Bethesda, MD 1991
Bethesda, MD 43,700 Guam, United States 1996
Los Angeles, CA (2) 7,300
Los Angeles, CA 4,300
Guam, United States 8,000
London, UK 520
Frankfurt, Germany 9,000
Miami, Fl (2) 10,000
New York, NY (2) 2,100
Saipan 1,000
</TABLE>
------------------------------------
(1) Headquarters of Startec Global Communications Corporation.
(2) Facilities that house the switches
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incidental to
the conduct of its business. The Company is not currently a party to any lawsuit
or proceeding which, in the opinion of management, is likely to have a material
adverse effect on the Company's business, financial condition or result of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Shares of the Company's Common Stock, par value $0.01 per share, were
initially offered to the public on October 9, 1997 at a price of $12.00 per
share. The common stock is listed on the NASDAQ National Market under the ticker
symbol "STGC". The Company has not declared any cash dividends on the common
stock. The Company intends to retain future earnings, if any, for use in its
business and does not anticipate paying regular cash dividends on the common
stock.
29
<PAGE>
The following table sets forth, on a per share basis, the range of the
high and low sale prices for the common stock as reported by the NASDAQ National
Market, for the periods indicated during the two fiscal years ended December 31,
1998. Such prices reflect inter-dealer prices, without retail mark-up, mark-down
or commission, and do not necessarily represent actual transactions.
HIGH LOW
------------ -------------
1997
4th Quarter (from 10/8/97).......... 22 3/8 14 1/2
1998
1st Quarter......................... 26 3/4 18
2nd Quarter......................... 29 1/8 8 11/16
3rd Quarter......................... 14 1/2 5 1/2
4th Quarter......................... 12 1/2 3 3/8
1999
1st Quarter (through 3/19/99).......10 7/16 7 5/8
As of March 19, 1999, there were approximately 42 stockholders of record of the
Company's common stock.
30
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data of the
Company which have been derived from the Company's audited financial statements
for the five most recent years ended December 31, 1998. The following
information should be read in conjunction with the Company's selected financial
statements and notes thereto presented elsewhere herein. See "Consolidated
Financial Statements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." included herein.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues ................................................ $ 161,169 $ 85,857 $ 32,215 $ 10,508 $ 5,108
Cost of services............................................. 141,176 75,783 29,881 9,129 4,701
--------- --------- --------- --------- ---------
Gross margin............................................... 19,993 10,074 2,334 1,379 407
General and administrative................................... 20,520 6,288 3,996 2,170 1,159
Selling and marketing expenses............................... 7,876 1,238 514 184 91
Depreciation and amortization................................ 2,253 451 333 137 90
--------- --------- --------- --------- ---------
Income (loss) from operations ............................. (10,656) 2,097 (2,509) (1,112) (933)
Interest income (expense), net............................... (7,404) (449) (321) (94) (46)
--------- --------- --------- --------- ---------
Income (loss) before taxes and extraordinary items......... (18,060) 1,648 (2,830) (1,206) (979)
--------- --------- --------- --------- ---------
Net income (loss)(1) ...................................... $ (18,574) $ 1,619 $ (2,830) $ (1,206) $ (979)
========= ========= ========= ========= =========
Basic earnings (loss) per common share(2):
Income (loss) before extraordinary items .................. $ (2.02) $ 0.26 $ (0.52) $ (0.23) $ (0.21)
Net income (loss)(1)....................................... (2.08) 0.26 (0.52) (0.23) (0.21)
Weighted average common shares outstanding-basic........... 8,945 6,136 5,403 5,317 4,596
Diluted earnings (loss) per common share(2):
Income (loss) before extraordinary items .................. $ (2.02) $ 0.25 $ (0.52) $ (0.23) $ (0.21)
Net income (loss)(1)....................................... (2.08) 0.25 (0.52) (0.23) (0.21)
Weighted average common and equivalent shares
outstanding-diluted................................... 8,945 6,423 5,403 5,317 4,596
OTHER FINANCIAL DATA:
EBITDA(3) ................................................... $ (8,403) $ 2,548 $ (2,176) $ (975) $ (843)
Capital expenditures ........................................ 34,931 3,881 520 200 44
BALANCE SHEET DATA:
Cash and cash equivalents ................................... $ 81,456 $ 26,114 $ 148 $ 528 $ 257
Working capital (deficit).................................... 81,414 25,735 (6,999) (3,744) (3,295)
Total assets................................................. 225,982 51,530 7,327 4,044 1,954
Long term obligations........................................ 165,490 461 646 361 6
Total stockholders' equity (deficit)......................... 15,480 31,590 (6,089) (3,259) (2,803)
</TABLE>
- ----------
(1) In 1998, the Company recognized a $514,000 extraordinary loss on the early
extinguishment of debt.
(2) Basic earnings (loss) per common share is computed by dividing net income
(loss) by the weighted average number of shares of common stock
outstanding. Diluted earnings (loss) per common share is computed by
dividing net income (loss) by the weighted average number of shares of
common stock outstanding plus other dilutive securities.
(3) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation and amortization. EBITDA should not be considered as a
substitute for income from operations (loss), net income (loss), 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.
31
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of the financial condition and
results of operations should be read in conjunction with the financial
statements, related notes, and other detailed information included elsewhere in
this Form 10-K. Certain information contained below and elsewhere in this Form
10-K, 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 Communications, Inc. ("Startec" or the "Company") is a
rapidly growing, facilities based international long distance telecommunications
service provider. The Company markets its services to select ethnic residential
communities in the United States and Europe and to leading international long
distance carriers. The Company's annual revenues have increased more than
fourteen-fold over the last four years from approximately $10.5 million for the
year ended December 31, 1995 to approximately $161.2 million for the year ended
December 31, 1998. The Company reported a 1998 net loss of $18.6 million, or
$2.08 per diluted common share compared to net income of $1.6 million, or $0.25
per diluted common share in 1997. The number of the Company's residential
customers increased from 10,675 customers as of December 31, 1995 to 122,057
customers as of December 31, 1998.
Startec was founded in 1989 to capitalize on opportunities 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 once again expanded its
marketing efforts geographically at the end of 1998 by marketing to ethnic
segments in the United Kingdom and diversifying its customer base across a
broader spectrum of ethnic groups, including the Caribbean, Latin American and
Asian communities.
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
53 at December 31, 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, 1998
and 1997, approximately 65% and 60%, 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 received and revenues
recorded by the Company.
32
<PAGE>
Substantially all of the Company's revenues for the past three fiscal years
have been derived from calls originated within the United States and 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.
For the year ended December 31,
1998 1997 1996
------------- ------------ -------------
Asia/The Pacific Rim 44.8 % 49.0 % 43.0 %
Middle East/North Africa 18.8 24.7 25.7
Sub-Saharan Africa 8.1 7.4 3.5
Eastern Europe 9.6 9.3 8.2
Western Europe 1.7 2.2 5.5
North America 3.5 4.0 11.5
Other 13.5 3.4 2.6
------------- ------------ -------------
Total 100.0 % 100.0 % 100.0 %
============= ============ =============
<PAGE>
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 own 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 does not recognize a credit
to cost of services until the dispute is resolved. 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
gross margin on the outbound traffic. Revenue recognized from return traffic was
approximately $2.6 million, $1.4 million, and $1.1 million, or 2%, 2%, and 3% of
net revenues in 1998, 1997, 1996, 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 received and revenues recorded 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 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 on an annual basis 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.
33
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
net revenues for the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Net revenues...................................... 100.0 % 100.0 % 100.0 %
Cost of services.................................. 87.6 88.3 92.8
------------ ------------ -----------
Gross margin.................................. 12.4 11.7 7.2
General and administrative expenses............... 12.7 7.3 12.4
Depreciation and amortization..................... 1.4 0.5 1.0
------------ ------------ -----------
Income (loss) from operations................... (6.6) 2.5 (7.8)
Interest expense................................... (8.0) (0.9) (1.1)
Interest income.................................... 3.4 0.3 0.1
------------ ------------ -----------
Income (loss) before taxes and extraordinary item (11.2)% 1.9% (8.8)%
============= ============ =============
</TABLE>
1998 compared to 1997
Net Revenues. Net revenues for the year ended December 31, 1998 increased
approximately $75.3 million, or 88%, to approximately $161.2 million from $85.9
million for the year ended December 31, 1997. Residential revenue increased in
comparative periods by approximately $25.1 million or 88%, to approximately
$53.7 million for 1998 from approximately $28.6 million in 1997. The increase in
residential revenue is due to an increase in residential customers to over
122,057 for December 1998 from approximately 71,500 for December 1997. Carrier
revenue for 1998 increased approximately $50.2 million, or 88%, to approximately
$107.5 million from approximately $57.3 million for 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 additional
carrier customers and increased sales to existing carrier customers.
Gross Margin. Gross margin increased approximately $9.9 million to
approximately $20 million for the year ended December 31, 1998 from
approximately $10.1 million for the year ended December 31, 1997. Gross margin
improved as a percentage of net revenues for the year ended December 31, 1998 to
12.4% from 11.7% for the year ended December 31, 1997. Gross margin for 1998 was
favorably impacted by rate adjustments which reduce termination costs. These
rate adjustments occur routinely in the normal course of business.
General and Administrative. General and administrative expenses for the
year ended December 31, 1998 increased approximately $14.2 million or 225% to
approximately $20.5 million from $6.3 million for the year ended December 31,
1997. The increase was primarily due to an increase in personnel to 409 at
December 31, 1998 from 124 at December 31, 1997, and to a lesser extent, an
increase in billing processing fees as a result of the increased residential
customer base. As a percentage of net revenues, general and administrative
expenses increased to 12.7% in 1998 from 7.3% in 1997 due to the Company's
continued worldwide development and expansion.
Selling and Marketing. Selling and marketing expenses for the year ended
December 31, 1998 increased approximately $6.7 million or 558% to approximately
$7.9 million from approximately $1.2 million for the year ended December 31,
1997. As a percentage of net revenues, selling and marketing expenses increased
to 4.9% from 1.4% in the respective periods. The increase is primarily due to
the Company's efforts to market to new customer groups.
Depreciation and Amortization. Depreciation and amortization expenses for
the year ended December 31, 1998 increased to approximately $2.3 million from
approximately $451,000 for the year ended December 31, 1997, primarily due to
increases in capital expenditures pursuant to the Company's strategy of
expanding its network infrastructure.
Interest expense. Interest expense for the year ended December 31, 1998
increased to approximately $12.8 million from approximately $762,000 for the
year ended December 31, 1997, as a result of the Senior Notes and Warrants
Offering consummated in 1998, the proceeds of which are being used to fund
expansion and working capital needs.
Interest income. Interest income for 1998 increased to $5.4 million from
$313,000 in 1997. The increase is primarily due to the net proceeds from the
Senior Notes and Warrants Offering consummated in 1998.
Income (loss) before extraordinary item. Loss before extraordinary item for
1998 was $18.1 million compared to income before extraordinary item of $1.6
million in 1997 as a result of the items discussed above.
Extraordinary loss. In December 1998, the Company repaid and extinguished
an existing bank credit facility. In connection with the extinguishment, the
Company recognized an extraordinary loss of $514,000, which represents the
write-off of unamortized
34
<PAGE>
deferred financing fees.
Net Income (loss). Net loss was approximately $18.6 million in 1998 as
compared to net income of approximately $1.6 million in 1997.
1997 Compared To 1996
Net revenues. 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. Gross margin increased approximately $7.8 million to
approximately $10.1 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.
General and administrative. 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. 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. 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. 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. Net income was approximately $1.6 million in 1997 as
compared to a net loss of approximately $2.8 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
For fiscal year 1998, the Company reported an increase in cash and cash
equivalents of $55.3 million not including restricted cash and pledged
securities of $44.2 million. This increase is primarily due to net proceeds from
the issuance of senior notes ("Senior Notes") of $155 million. The Company plans
to fund its future capital and operating requirements through a combination of
operating cash flow, and debt and equity financing. The Company plans to utilize
these sources of capital to further expand and develop the Company's existing
network and fund capital acquisitions.
35
<PAGE>
As a result of completing the Senior Notes and Warrants Offering and the
Company's pursuant expansion, the Company expects that it will incur negative
EBITDA and significant operating losses and net losses on an annual basis for
the next several years, as it incurs additional costs associated with the
development and expansion of its marketing programs and its entry into new
markets, the introduction of new telecommunications services, and as a result of
the interest expense associated with its financing activities. 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 Senior
Notes. Approximately $52 million of the net proceeds of the Senior Notes was
used to purchase the pledged securities, which will assure holders of the Senior
Notes that they will receive all scheduled cash interest payments through
November 2001. The Company may be required to obtain additional financing in
order to pay interest in the Senior Notes after November 2001 and to repay the
Senior Notes at their maturity.
Capital acquisitions and expenditures
During 1998, the Company installed a new Nortel GSP international gateway
switch and an Internet Protocol in Los Angeles for approximately $4.6 million.
The Company is also installing a Nortel GSP international gateway switch in
Miami, as well as at a second site in New York City. The Company has also
installed POPs in the U.S. and Europe. The POPs aggregate traffic originating
from the region around the city in which it is located and route the traffic to
the Company's international gateway switches. Each POP contains
telecommunications equipment that is scaleable to accommodate the traffic volume
demands of each region. The Company currently has 15 switch and POP sites in the
U.S., Europe and Asia. Moreover, the Company plans to invest in or acquire two
satellite earth stations during 1999.
The Company's international expansion strategy is predicated on the
installation of multiple switches and POPs throughout the world. The Company
plans to acquire multiple international gateway switches and POPs through 2000
to be installed in (i) Europe: the U.K., France, Germany, Spain, Belgium, Italy,
Austria, Denmark, Ireland, Switzerland, Greece and Portugal; (ii) North America:
the U.S., Canada, and Mexico; (iii) Asia and the Pacific Rim: Guam, Hong Kong,
Singapore and India; and (iv) Latin and South America: Argentina and Brazil.
These switches will be deployed in 1999 and 2000. As the Company executes its
expansion strategy, encounters new marketing opportunities and employs new
technology, management may elect to relocate or redeploy certain switches, POPs
and other network equipment to alternate locations from what is described above.
The Company generally installs switches and POPs 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 and POPs to be installed in Canada and Europe primarily to
carry calls originated in those countries by the Company's customers. The
switches and POPs that the Company plans to install in Asia and the Pacific Rim
and in Latin and South America will be used both as "hubbing" or transit sites
and to terminate calls originated in other countries.
Also during 1998, Startec negotiated the acquisition of capacity on 11
fiber optic cable systems across the Atlantic and Pacific oceans. Startec now
has capacity on 13 cable systems, including signatory ownership in the
Sea-Me-We-3 undersea fiber optic cable. Startec also signed an agreement to
purchase capacity in the Trans Atlantic undersea cable, TAT-14. Additionally,
the Company purchased DS-3 capacity on the Gemini transatlantic cable between
New York and the United Kingdom. Through these cables, Startec will have access
to key cities in Europe and Asia. Securing ownership interests at the signatory
level in undersea fiber optic cable allows the Company to manage transmission
capacity as well as transmission costs. In addition to the cable capacity
acquisitions, Startec has secured 40 operating agreements in 36 different
countries as of December 31, 1998. Twenty-three of these operating agreements
have been implemented as of December 31, 1998.
In November 1998, the Company acquired PCI Communications, Inc. ("PCI") for
$2.65 million. PCI is a provider of voice and data services located in the
Pacific Rim island of Guam. PCI has signatory status on the TPC-5,
Guam-Philippines and China-U.S. cables. The acquisition accelerates the
Company's network deployment in the Asia-Pacific region and will also allow
Startec to access a U.S. based satellite line of sight that extends from
Southeast Asia to Central Europe.
In December 1998, the Company acquired Global Communications GmbH of
Germany ("Global") for $5.4 million. Global has a Class IV nationwide
telecommunications license for Germany, an interconnection agreement with
Deutsche Telekom and a Siemens EWSD switch located in Dusseldorf.
In February 1999, the Company acquired a 64.6% ownership in Phone Systems
and Network Inc. of France ("PSN") for approximately $3.8 million in cash and
425,000 shares of Startec common stock for a total consideration of $7.6
million. PSN is a facilities based provider in France, with switches in Paris
and Switzerland. PSN also provides services on a switchless reseller basis in
Belgium. Common shares of PSN are traded on the Nouveau Marche exchange in
France.
36
<PAGE>
In February 1999, the Company acquired a 20% ownership in a Nevada holding
company which has operations in Europe. The Company was acquired for
approximately $1.2 million. Concurrent with the acquisition, Startec received a
$2.5 million note payable from the company convertible at the Company's option
into common shares equivalent to an additional 28% fully diluted ownership.
The Company's business strategy contemplates aggregate capital expenditures
(including capital expenditures, working capital and other general corporate
purposes) of approximately $87.5 million through December 31, 1999. Of such
amount, the Company intends to use approximately $79.5 million to fund capital
expenditures to expand and develop the Company's network.
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'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.
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.
Capital transactions
In December 1998, Startec entered into a credit facility for up to $35
million with NTFC Capital Corporation ("NTFC Facility"), a financing arm of GE
Capital. The line of credit is flexible and may be used to finance switches,
associated telecommunications equipment, undersea fiber optic cables, and the
expansion of facilities in the Company's targeted marketing areas. Each
borrowing under the NTFC Facility bears interest at a fixed rate equal to the
average yield to maturity of the five-year Treasury Note plus the Rate
Adjustment (as defined in the agreement). Individual borrowings under the NTFC
Facility are amortized over 60 months from the date of advance with a final
maturity of all outstanding amounts of January 2004. As of December 31, 1998,
approximately $8.9 million bearing interest at 8.91% was outstanding. Principal
and interest payments of approximately $184,000 are due monthly in arrears.
In May 1998, the Company issued $160 million of 12% Senior Notes yielding
net proceeds of approximately $155 million, of which approximately $52.4 million
was used to purchase securities which are pledged and restricted for use as the
first six interest payments due on the Senior Notes. As part of the offering,
the Company issued warrants to purchase 200,226 shares of common stock. The
warrants are exercisable subsequent to November 1998 at an exercise price of
$24.20 per share. The Company intends to apply approximately $102 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 Senior Notes
are unsecured and require semi-annual interest payments which began November
1998.
After taking into account the net proceeds to the Company from the Senior
Notes 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 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
sources, such as bank lenders, asset-based financiers or equipment vendors,
there can be no assurance 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.
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
Senior Notes and Warrants 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 2000. There can be no assurance 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 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
37
<PAGE>
change or prove to be inaccurate or the Company's capital resources 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 terms of the Senior Notes.
The Company completed an 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 debt, for working capital and general corporate purposes.
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 Senior Notes.
Cash flows
The Company's liquidity requirements arise from cash used in operating
activities, purchases of network equipment and payments on outstanding
indebtedness.
As a result of the Senior Notes and Warrants Offering, the Company's cash
and cash equivalents increased to approximately $81.4 million at December 31,
1998 from approximately $26.1 million at December 31, 1997. Net cash used by
operating activities was approximately $25.5 million for 1998, and $1.7 million
for 1997. The decrease in cash from operations 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 $37.6 million and
$3.9 million for 1998 and 1997, respectively. Net cash used in investing
activities for 1998 was primarily related to acquisitions and capital
expenditures made in connection with its network expansion.
Net cash provided by financing activities was approximately $118.4 million
and $31.6 million for 1998 and 1997, respectively. Cash provided by financing
activities for 1998 primarily resulted from the Senior Notes and Warrants
Offering.
Year 2000 compliance
Many of the world's computer systems (including those in non-information
technology equipment and systems) currently record years in a two-digit format.
If not addressed, such computer systems will be unable to properly interpret
dates beyond the year 1999, which could lead to business disruptions in the U.S.
and internationally (the "Y2K" issue). A number of the Company's technology
systems are affected by the Y2K issue. To ensure that the Company will be Y2K
compliant before the new millenium, the Company formed a Y2K compliance team in
the fourth quarter of 1997 and allocated corporate resources to determine the
extent which the Y2K issue affected the Company and to formulate a Y2K
compliance plan. Since then, the Company has been reviewing its embedded
technology and infrastructure equipment, as well as non-embedded technology
equipment to identify those that contain two-digit year codes, and is in the
process of upgrading its infrastructure and corporate facilities to achieve Y2K
compliance. In addition, the Company is actively working with its suppliers,
vendors and customers to assess their compliance and remediation efforts and the
Company's exposure to Y2K problems that may be caused by the failure of such
suppliers, vendors and customers to become Y2K compliant in a timely manner. The
Company is proceeding on a schedule which it believes will allow it to be Y2K
compliant by the end of the third quarter of 1999.
The Company is focusing on three major areas of concern for the Y2K issue:
embedded technology and infrastructure equipment, non-embedded technology
equipment and third party suppliers compliance. The Y2K compliance team created
a five stage process for becoming Y2K compliant. The five process stages are (1)
compiling a complete inventory of all date sensitive technology equipment; (2)
prioritizing systems affected based on revenues, strategic issues, and risk
exposure; (3) performing modification of affected systems; (4) completing
testing of modified systems; and (5) performing implementation of modified
systems. The Company has completed the inventory of its date sensitive
technology equipment and is in various stages of prioritizing and testing a
number of the affected systems.
Embedded technology and infrastructure equipment. The embedded technology
and infrastructure equipment area of concern
38
<PAGE>
consists primarily of switches, POPs, fiber optic cables and various platforms.
Much of this equipment is purchased from third party vendors and has been
certified by the vendor to be Y2K compliant. The certified pieces of equipment,
such as many of the switches need only to be individually tested by the Vendor
and/or the Company to ensure compliance. Much of the infrastructure equipment
contains both embedded and non-embedded technology requiring duplicative
efforts. Portions of this equipment, such as the Magellan platform, have had
their non-embedded technology certified as compliant while the embedded
technology is non-compliant. All embedded technology systems and infrastructure
equipment are scheduled to be Y2K compliant by the end of the third quarter of
1999. In addition, in order to protect against the acquisition of additional
non-compliant products, the Company now requires suppliers to warrant that
products sold or licensed to the Company are Y2K compliant. However, there can
be no assurance of the accuracy or completeness of any such representations made
to the Company.
Non-embedded technology equipment. Non-embedded technology systems include
predominately applications software and interfacing software. Much of this
equipment has previously been upgraded to Y2K compliance through software
upgrades and the purchase of new systems. Specific areas of concern for
non-embedded technology include the software monitoring and managing the
Company's call center and customer care database as well as network support.
Expenditures regarding non-embedded technology are not expected to be material.
Nonetheless, the Company is in the process of prioritizing those systems that
are not Y2K compliant and upgrading or replacing non-compliant systems. All
non-embedded technology systems are scheduled to be Y2K compliant by the end of
August 1999.
Newly consummated acquisitions. The Company is rapidly expanding through
increased capital expenditures and acquisitions of companies. Upon acquisition,
acquired companies become subject to the five step process of becoming Y2K
compliant as discussed above. Time lines for dates of completion of the
Company's Y2K compliance process are developed individually for each
acquisition. Currently, all companies that have been acquired by the Company to
date are on schedule to be Y2K compliant by December 1999, however, there can be
no assurance that all acquired companies will be Y2K compliant by 2000.
Third party suppliers. The Company is currently communicating with its
critical suppliers, vendors and customers about their plans and progress in
addressing the Y2K issue. Detailed evaluations of the most critical third
parties have been initiated. The Company is also in the process of evaluating
and prioritizing the environments in which the Company operates. Many of the
Company's residential and commercial markets include areas of emerging economies
where the Y2K compliance issue does not appear to be a priority. The Company
plans to monitor progress made in these areas to mitigate any future exposure
however, the Company has limited, if any, control over the progress made by
these third parties, and therefore, is unable to predict the potential effect on
the Company's operations if the third parties in these foreign markets fail to
address the Y2K issue. These evaluations will be followed by the development of
contingency plans, commencing in the second quarter of 1999, with completion
expected by the end of the third quarter of 1999.
Risk and contingency plan. There are many risks associated with the Y2K
issue, including the possibility of a failure of the Company's routing and
compression equipment, computer, and non-information technology systems. Such
failures could have a material adverse effect upon the Company and may cause
systems malfunctions, incorrect or incomplete transaction processing, the
inability to reconcile accounting books and records, the inability of the
Company to manage its business as well as potentially losing customers and
increasing risk associated with litigation. In addition, even if the Company
successfully becomes Y2K compliant, it can be materially and adversely affected
by failures of third parties to become Y2K compliant. The failure of third
parties with which the Company has financial or operational relationships such
as LECs, carriers, cable suppliers, billing agents, satellite facilities,
equipment suppliers, financial institutions, payroll contractors, regulatory
agencies and utility companies, to become Y2K compliant in a timely manner could
result in material adverse effects on the Company's results of operations. The
Company is currently working diligently to become Y2K compliant by the third
quarter of 1999. However, there can be no assurance that the Company will be
successful in taking corrective action in a timely manner. The Company has
started to develop contingency plans with regard to its key technology systems,
although there can be no assurance that these contingency plans will
successfully avoid a service disruption. The Company intends to document Y2K
contingency plans as part of its Y2K risk mitigation efforts by the end of July
1999.
Costs. Total costs incurred up to December 31, 1998 specifically associated
with becoming Y2K compliant have been less than $300,000. The total estimated
specific costs of becoming Y2K compliant is estimated to be less than $1.5
million. These costs will be included in the Y2K compliance costs once the
specific Y2K components can be identified and allocated. Costs associated with
the identification and testing of third party compliance will also be included
once such costs can be identified.
Readers are cautioned that certain of the statements made herein with
respect to the Y2K issue are forward-looking statements. These statements, which
include statements concerning the Company's expectations about future costs and
timely completion of its Y2K modifications are subject to uncertainties that
could cause actual results to differ materially from what has been discussed
above. Factors that could influence the amount of future costs and the effective
timing of remediation efforts include the success of the Company in identifying
embedded technology and infrastructure equipment as well as non-embedded
equipment that contain two-digit year codes, the nature and amount of
programming and testing required to upgrade or replace each of the affected
systems and equipment, the nature and amount of testing, verification, the rate
and magnitude of related labor costs, and the success of the Company's
suppliers, in addressing the Y2K issue.
39
<PAGE>
Recent accounting pronouncements
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 requires the reporting of comprehensive
income (loss) in addition to net income (loss) from operations. Comprehensive
income is a more inclusive reporting methodology that includes disclosure of
certain financial information that historically has not been recognized in the
calculation of net loss. The adoption of SFAS No. 130 had no impact on the
Company" net loss, as reported, and comprehensive loss.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131"), was issued which redefines how operating
segments are determined and requires disclosures of certain financial
descriptive information about a company's operating segments. The January 1,
1998 adoption of SFAS No. 131 currently has had minimal impact on the required
disclosures and descriptive information about the Company's operations. The
Company operates in a single business segment managed on a regional basis.
Currently, operating segments outside the North American region are immaterial.
In March 1998, Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), was
issued which provides guidance on addressing whether and under what conditions
the costs of internal use software should be capitalized. SOP 98-1 is effective
for all transactions entered into in fiscal years beginning after December 15,
1998; however, earlier adoption is encouraged. The Company adopted the
guidelines of SOP 98-1 on January 1, 1998, pursuant to which the Company
capitalized approximately $910,000 for 1998.
In April 1998, Statement of Position 98-5, "Reporting on the Costs of
Start-Up Activities" ("SOP 98-5"), was issued which requires that entities
expense costs of start-up activities as incurred. The Company adopted SOP 98-5
on January 1, 1998 and expensed approximately $166,000 of start-up costs
incurred for organizational activities associated with the Company's facilities
in the United Kingdom in 1998.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including changes in interest rates,
and to foreign currency exchange rate risks. The Company does not hold any
financial instruments for trading purposes. The Company believes that its
primary market risk exposure relate the effects that changes in interest rates
have on its investments and those portions of its outstanding indebtedness that
do not have fixed rates of interest. In this regard, changes in interest rates
affect the interest earned on the Company's investments in cash equivalents,
which consist primarily of demand deposits and money market accounts, and U.S.
Government obligations which have been purchased by the Company and pledged to
make certain interest payments on the Senior Notes. In addition, changes in
interest rates impact the fair value of the Company's long-term debt obligations
(including the Senior Notes). As of December 31, 1998, the fair value of the
Senior Notes was approximately $144 million and the fair value of the securities
pledged to make certain interest payments on the Senior Notes was approximately
$45.18 million. Changes in interest rates also affect the Company's borrowings
under its vendor financing facility with NTFC, which provides that each
borrowing under the facility bears interest at a fixed rate equal to the average
yield to maturity of the five-year Treasury Note plus an agreed-upon rate
adjustment.
The Company's foreign operations to date have not been material, and,
therefore any foreign exchange rate fluctuations relating to the Company's
results of foreign operations have also not been material. The Company has not
entered into foreign currency exchange forward contracts or other derivative
arrangements to manage risks associated with foreign exchange rate fluctuations.
Foreign exchange rate fluctuations exposure may increase in the future as the
size and scope of the Company's foreign operations increases.
Additional information relating to the fair value of certain of the
Company's financial assets and liabilities is included in Note 11 in the Notes
to Consolidated Financial Statements.
40
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants........................................................................42
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996...........................................................................43
Consolidated Balance Sheets as of December 31, 1998 and 1997....................................................44
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended December 31, 1998, 1997 and 1996.............................................45
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996..............................................................................................46
Notes to Consolidated Financial Statements......................................................................47
</TABLE>
41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Startec Global Communications Corporation:
We have audited the accompanying consolidated balance sheets of Startec
Global Communications Corporation (a Maryland corporation) and subsidiaries as
of December 31, 1998 and 1997, and the related consolidated statements of
operations, changes in stockholders' equity (deficit), and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Startec Global
Communications Corporation and subsidiaries, as of December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 23, 1999
42
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Net revenues................................................. $161,169 $ 85,857 $ 32,215
Cost of services............................................. 141,176 75,783 29,881
------------- ------------ ------------
Gross margin........................................... 19,993 10,074 2,334
General and administrative expenses.......................... 20,520 6,288 3,996
Selling and marketing expenses............................... 7,876 1,238 514
Depreciation and amortization................................ 2,253 451 333
------------- ------------ ------------
Income (loss) from operations.......................... (10,656) 2,097 (2,509)
Interest expense............................................. (12,830) (762) (337)
Interest income.............................................. 5,426 313 16
------------- ------------ ------------
Income (loss) before income taxes...................... (18,060) 1,648 (2,830)
Income tax provision......................................... - 29 -
------------- ------------ ------------
Income (loss) before extraordinary item................ (18,060) 1,619 (2,830)
Extraordinary item-loss on early extinguishment of debt...... (514) - -
------------- ------------ ------------
Net income (loss)...................................... $ (18,574) $ 1,619 $ (2,830)
============= ============ ============
Basic earnings (loss) per common share:
Income (loss) before extraordinary item...................... $ (2.02) $ 0.26 $ (0.52)
Extraordinary item-loss on early extinguishment of debt...... (0.06) - -
------------- ------------ ------------
Basic earnings (loss) per common share....................... $ (2.08) $ 0.26 $ (0.52)
============= ============ ============
Diluted earnings (loss) per common share:
Income (loss) before extraordinary item...................... $ (2.02) $ 0.25 $ (0.52)
Extraordinary item-loss on early extinguishment of debt...... (0.06) - -
------------- ------------ ------------
Diluted earnings (loss) per common share..................... $ (2.08) $ 0.25 $ (0.52)
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
43
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 81,456 $ 26,114
Accounts receivable, net of allowance for doubtful accounts of $2,659
and $2,353, respectively.................................................. 40,370 16,980
Accounts receivable, related party.............................................. 684 377
Other current assets............................................................ 3,916 1,743
--------- ---------
Total current assets................................................. 126,426 45,214
Property and equipment, net of accumulated depreciation and amortization of
$3,493 and $1,240, respectively........................................... 43,525 5,184
Restricted cash and pledged securities......................................... 44,336 180
Intangibles, net and other long term assets.................................... 11,695 952
--------- ---------
$ 225,982 $ 51,530
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 36,273 $ 15,420
Accrued expense................................................................. 6,845 3,728
Vendor financing................................................................ 1,476 --
Capital lease obligations....................................................... 402 331
Note payable to individuals and other........................................... 16 --
--------- ---------
Total current liabilities............................................ 45,012 19,479
Senior notes.................................................................... 158,022 --
Vendor financing, net of current portion........................................ 7,409 --
Capital lease obligations, net of current portion............................... 59 417
Note payable to individuals and other........................................... -- 44
--------- ---------
Total liabilities.................................................... 210,502 19,940
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value; 20,000,000 shares authorized, 8,964,815
and 8,811,999 shares issued and outstanding, respectively................. 90 88
Additional paid-in capital...................................................... 39,632 37,221
Unearned compensation........................................................... (190) (241)
Accumulated deficit............................................................. (24,052) (5,478)
--------- ---------
Total stockholders' equity........................................... 15,480 31,590
--------- ---------
$ 225,982 $ 51,530
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
44
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
VOTING NONVOTING
COMMON STOCK COMMON STOCK
------------------ ---------------- ADDITIONAL
PAID-IN UNEARNED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
--------- --------- ------- --------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 5,381 $ 54 22 $ 22 $ 932 $ - $ (4,267)
Net loss................................. - - - - - - (2,830)
-------- --------- ------- --------- ----------- ------------- -----------
Balance at December 31, 1996 5,381 54 22 22 932 - (7,097)
Net income............................... - - - - - - 1,619
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 employee stock options..... 136 1 - - 143 - -
Unearned compensation pursuant to
issuance of stock options............. - - - - 385 (385) -
Amortization of unearned compensation - - - - - 144 -
Warrants issued in connection with
equity and debt placement............. - - - - 823 - -
-------- --------- ------- --------- ----------- ------------- -----------
Balance at December 31, 1997 8,812 88 - - 37,221 (241) (5,478)
Net loss................................. - - - - - - (18,574)
Amortization of unearned compensation. - - - - - 51 -
Exercise of employee stock options....... 129 2 - - 260 - -
Shares issued in repayment of
note payable to individual............ 24 - - - 44 - -
Warrants issued in connection with -
Senior Notes Offering................. - - - - 2,107 - -
-------- --------- ------- --------- ----------- ------------- -----------
Balance at December 31, 1998 8,965 $ 90 - $ - $ 39,632 $ (190) $ (24,052)
======== ========= ======= ========= =========== ============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
45
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
--------------- --------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)....................................................... $ (18,574) $ 1,619 $ (2,830)
Extraordinary item-loss on early extinguishment of debt................. 514 - -
Adjustments to net income (loss):
Depreciation and amortization......................................... 2,253 451 333
Compensation pursuant to stock options................................ 51 144 -
Amortization of deferred debt financing costs and debt
discounts.......................................................... 947 237 -
Changes in operating assets and liabilities:
Accounts receivable, net.............................................. (22,315) (11,646) (3,113)
Accounts receivable, related party.................................... (307) (299) 241
Accounts payable...................................................... 13,248 8,249 2,515
Accrued expenses...................................................... 745 (45) 1,578
Other................................................................. (2,039) (429) (80)
--------------- --------------- -------------
Net cash used in operating activities.............................. (25,477) (1,719) (1,356)
--------------- --------------- -------------
INVESTING ACTIVITIES:
Acquisitions............................................................ (2,648) - -
Purchases of property and equipment..................................... (34,931) (3,881) (520)
--------------- --------------- -------------
Net cash used in investing activities.............................. (37,579) (3,881) (520)
--------------- --------------- -------------
FINANCING ACTIVITIES:
Proceeds from Senior Notes and Warrants Offering........................ 160,000 - -
Proceeds from sale of pledged securities................................ 8,261 - -
Proceeds from vendor financing.......................................... 8,885 - -
Net proceeds from issuance of common stock.............................. 262 34,994 -
Investments in pledged securities....................................... (52,417) - -
Payments of debt financing costs........................................ (6,222) (366) -
Repayments under capital lease obligations.............................. (371) (402) (91)
Net borrowings (repayments) under receivables-based
credit facility.................................................... - (1,812) 1,242
Borrowings under notes payable to individuals and other................. - - 475
Repayments under notes payable to individuals and other................. - (650) (125)
Repayments under notes payable to related parties....................... - (153) (5)
Purchase and retirement of nonvoting common stock....................... - (45) -
--------------- --------------- -------------
Net cash provided by financing activities.......................... 118,398 31,566 1,496
--------------- --------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... ................... 55,342 25,966 (380)
CASH AND CASH EQUIVALENTS, beginning of year............................ 26,114 148 528
--------------- --------------- -------------
CASH AND CASH EQUIVALENTS, end of year.................................. $ 81,456 $ 26,114 $ 148
=============== =============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid........................................................... $ 9,408 $ 591 $ 296
Income taxes paid....................................................... 10 19
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Equipment acquired under capital lease.................................. $ 84 $ 378 $ 524
Shares issued in repayment of note payable to individual................ 44 - -
Accrued expenses converted to a note.................................... - 44 -
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
46
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
Startec Global Communications Corporation (the "Company", formerly Startec,
Inc.), is a Maryland corporation founded in 1989 to provide international
long-distance telephone services. The Company currently offers U.S.-originated
international 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.
In 1998, the Company's board of directors and stockholders approved a
reorganization pursuant to which the Company's corporate structure would be
realigned to that of a publicly traded Delaware holding company
("Reorganization"). Pursuant to the reorganization plan, subsequent to year end,
all of the Company's assets were transferred into a Delaware subsidiary company
("New Parent"), with a subsequent transfer of those assets to multiple
subsidiaries of the New Parent. The Company was then merged with and into the
New Parent with the New Parent then assuming the Company's name. The merger did
not impact the consolidated financial statements of the Company.
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 Initial Public 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 million.
Principles of consolidation
The consolidated financial statements of the Company include the accounts
of the Company and its wholly-owned subsidiaries. All material intercompany
transactions and balances have been eliminated.
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. During 1998,
the Company recorded a net favorable retroactive PTT rate adjustment in the
amount of $953,000 in a manner consistent with its policy of recording credits
when received. The rate adjustment relates to traffic sent from April 1997
through December 1998 and is reflected in cost of services in the accompanying
consolidated statement of operations. These rate adjustments occur routinely.
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 $2.6 million, $1.4
million and $1.1 million, or 2 percent, 2 percent, and 3 percent of net revenues
in 1998, 1997, and 1996, respectively. There can be no assurance that traffic
will be
47
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
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
received and revenues recorded by the Company.
International operations
The consolidated statements of operations include amounts related to
non-U.S. subsidiaries. In 1998, the Company recognized net revenues of
approximately $23,000 and a net loss of approximately $340,000 attributable to
non-U.S. subsidiaries.
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 Note 4).
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 consolidated balance sheets approximates fair value.
Pledged Securities and restricted cash
In connection with the Senior Notes and Warrants Offering, the Company
placed $52 million of net proceeds into marketable securities to fund the first
six payments of interest on the Senior Notes which are payable semi-annually in
November and May. Subsequent to the November 1998 interest payment, pledged
securities totaled $44.2 million. 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. The
pledged securities and restricted cash are shown as long term assets in the
accompanying consolidated balance sheets. The Company has both the positive
intent and ability to hold the pledged securities and restricted cash until
maturity. Accordingly, these instruments are carried at amortized cost.
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. All amounts
due from employees for the payment of the exercise price and related payroll
taxes were collected in January 1998. During 1998, the Company advanced an
aggregate of approximately $1.4 million to certain of its employees and
officers. The secured loans bear interest at a rate of 7.87% per year, and are
due and payable on December 31, 1999. The loans are included in other current
assets in the accompanying consolidated balance sheets.
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, 1998 and 1997.
The Company's estimates of anticipated gross revenues, the remaining
estimated lives of tangible and intangible assets, or both, could be reduced
significantly in the future due to changes in technology, regulation, available
financing, or competitive pressures. As a result, the carrying amount of
long-lived assets could be reduced materially in the future.
Property and equipment
Property and equipment are stated at historical cost. Depreciation is
provided for financial reporting purposes using the straight line method over
the following estimated useful lives:
48
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
Property and leasehold improvements..................... 5 years
Long-distance communications equipment (including
undersea cable)..................................... 7 to 20 years
Computer and office equipment........................... 3 to 5 years
Long-distance communications equipment includes assets financed under
capital lease obligations of approximately $1,540,000 and $1,456,000 as of
December 31, 1998 and 1997, respectively.
Maintenance and repairs are expensed as incurred. Replacements and
improvements are capitalized. Gains on sales of assets are recognized at the
time of sale or deferred to the extent required by generally accepted accounting
principles.
Intangible assets
Intangible assets, capitalized in connection with acquisitions made during
the fourth quarter of 1998 are reflected within intangibles and other long term
assets in the accompanying consolidated balance sheets. At December 31, 1998,
intangible assets, net of accumulated amortization, consisted of goodwill, a
German telecommunications license and a covenant not to compete of $3.5 million,
$1.8 million and $250,000, respectively. Goodwill and covenants not to compete
are amortized on a straight-line basis over 30 and 5 years, respectively. The
German telecommunications license acquired through the acquisition of Global
Communications GmbH of Germany is amortized on a straight-line basis over 30
years. Accumulated amortization at December 31, 1998 was immaterial.
Debt discounts and deferred debt financing costs
Deferred debt financing costs of $6.2 million, net of amortization of
$380,000 incurred primarily in connection with the 1998 Senior Notes and
Warrants Offering are reflected within intangible and other long term assets.
Debt discounts associated with the Senior Notes and Warrants Offering total $2.1
million, net of amortization of $129,000 are reflected as a reduction of the
Senior Notes. Debt discounts and deferred debt financing costs are amortized
over the remaining life of the debt using the effective interest method.
Concentration of credit 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 32 and 44 percent of gross accounts receivable as of
December 31, 1998 and 1997, respectively. Revenues from several customers
represented more than 10 percent of net revenues for the periods presented (see
Note 10). Including charges in dispute (see Note 4), purchases from the five
largest suppliers represented approximately 30 and 47 percent of cost of
services for the years ended December 31, 1998 and 1997, respectively. Services
purchased from several suppliers represented more than 10 percent of cost of
services in the periods presented (see Note 10). One of these suppliers,
representing 4and 7 percent of cost of services in the year ended December 31,
1998 and 1997, respectively, is based in a foreign country.
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires that deferred income taxes reflect the expected tax
consequences on future years of differences between the tax bases of assets and
liabilities and their bases for financial reporting purposes. Valuation
allowances are established when necessary to reduce deferred tax assets to the
expected amount to be realized.
Earnings (loss) per common 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. Weighted average
common shares outstanding
49
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
consist of the following as of December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Weighted average common shares
outstanding - basic...................... 8,945 6,136 5,403
Stock options and warrant
equivalents.............................. - 287 -
------------ ------------ -------------
Weighted average common and
equivalent shares outstanding - diluted.. 8,945 6,423 5,403
============ ============ =============
</TABLE>
Options and warrants to purchase 1,366,726 and 138,300 shares of common
stock, were excluded from the computation of diluted loss per share in 1998 and
1996, respectively, because inclusion of these options would have an
anti-dilutive effect on loss per share.
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 accompanying
consolidated statements of operations.
Year 2000
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify the year. The effects of the Year 2000 issue may be
experienced before, on, or after January 1, 2000, and if not addressed, the
impact on operations and financial reporting may range from minor errors to
significant systems failure, which could affect the Company's ability to conduct
normal business operations. It is not possible to be certain that all aspects of
the Year 2000 issue affecting the Company, including those related to the
efforts of customers, suppliers, vendors or other third parties will be fully
resolved.
Risk 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 U.S.-based
customers and suppliers, availability of transmission facilities, U.S. and
foreign regulations, international economic and political instability,
dependence on effective billing and information systems, customer attrition, and
rapid technological change. Many of the Company's competitors are significantly
larger and have substantially greater financial, technical, and marketing
resources than the Company; employ larger networks and control transmission
lines; offer a broader portfolio of services; have stronger name recognition and
loyalty; and have long-standing relationships with the Company's target
customers. In addition, many of the Company's competitors enjoy economies of
scale that can result in a lower cost structure for transmission and related
costs, which could cause significant pricing pressures within the long-distance
telecommunications industry. If the Company's competitors were to devote
significant additional resources to the provision of international long-distance
services to the Company's target customer base, the Company's business,
financial condition, and results of operations could be materially adversely
affected.
The Company has devoted substantial resources to the buildout of its
network and the development and expansion of its marketing programs. As a
result, the Company experienced operating losses and negative cash flows from
operations in 1998. These losses and negative operating cash flows are expected
to continue for additional periods in the future. There can be no assurance that
the Company's operations will become profitable or will produce positive cash
flows. The Company's capital requirements for the continued buildout of its
network and growth of its customer base are substantial. The Company intends to
fund its operational and capital requirements in 1999 using cash on hand and its
available credit facility. However, there can be no assurance that the Company
will not need additional external financing sooner than currently anticipated,
or that such financing would be available on terms management finds acceptable
or at all. In the event that the Company is unable to obtain such additional
financing, it will be required to limit or curtail its expansion plans.
In the United States, the Federal Communications Commission ("FCC") and
relevant state Public Service Commissions have the authority to regulate
interstate and intrastate telephone service rates, respectively, ownership of
transmission facilities, and the terms and conditions under which the Company's
services are provided. Legislation that substantially revised the U.S.
50
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
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.
Recent accounting pronouncements
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 requires the reporting of comprehensive
income (loss) in addition to net income (loss) from operations. Comprehensive
income is a more inclusive reporting methodology that includes disclosure of
certain financial information that historically has not been recognized in the
calculation of net loss. The adoption of SFAS No. 130 had no impact on the
Company's net loss, as reported, and comprehensive loss.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131"), was issued which redefines how operating
segments are determined and requires disclosures of certain financial
descriptive information about a company's operating segments. The January 1,
1998 adoption of SFAS No. 131 currently has had minimal impact on the required
disclosures and descriptive information about the Company's operations. The
Company operates in a single business segment managed on a regional basis.
Currently, operating segments outside the North American region are immaterial.
In March 1998, Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), was
issued which provides guidance on addressing whether and under what conditions
the costs of internal use software should be capitalized. SOP 98-1 is effective
for all transactions entered into in fiscal years beginning after December 15,
1998; however, earlier adoption is encouraged. The Company adopted the
guidelines of SOP 98-1 on January 1, 1998, pursuant to which the Company
capitalized approximately $910,000 for 1998.
In April 1998, Statement of Position 98-5, "Reporting on the Costs of
Start-Up Activities" ("SOP 98-5"), was issued which requires that entities
expense costs of start-up activities as incurred. The Company adopted SOP 98-5
on January 1, 1998 and expensed approximately $166,000 of start-up costs
incurred for organizational activities associated with the Company's facilities
in the United Kingdom in 1998.
2. ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following (in thousands):
DECEMBER 31,
---------------------------
1998 1997
------------ -------------
Residential.......................... $ 20,340 $ 9,560
Carrier.............................. 22,689 9,773
------------ -------------
43,029 19,333
Allowance for doubtful accounts...... (2,659) (2,353)
------------ -------------
$ 40,370 $ 16,980
============ =============
The Company has certain service providers that are also customers. The
Company settles amounts receivable and payable from and to certain of these
parties on a net basis.
51
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
3. PROPERTY AND EQUIPMENT:
Property and equipment, including equipment under capital leases consist of
the following at December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
DEPRECIABLE
LIVES 1998 1997
---------------- ------------- ------------
<S> <C> <C> <C>
Property and leasehold improvements 5 years $ 1,314 $ 186
Long distance communications equipment 7 to 20 years 29,017 3,305
Company and office equipment 3 to 5 years 4,746 838
------------- ------------
35,077 4,329
Less: accumulated depreciation and amortization (3,493) (1,240)
------------- ------------
31,584 3,089
Construction in progress 11,941 2,095
------------- ------------
$ 43,525 $ 5,184
============= ============
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997 and 1996
was $2.3 million , $451,000, and $333,000 respectively. Construction in progress
consists primarily of network infrastructure equipment that has not been placed
into service; accordingly no depreciation has been recorded.
4. ACCRUED EXPENSES:
Accrued expenses consist of the following (in thousands):
DECEMBER 31,
---------------
1998 1997
------ ------
Accrued interest ........................................... $2,496 $ 22
Disputed vendor charges .................................... 774 2,124
Accrued marketing expense .................................. 667 --
Accrued payroll and related taxes........................... 513 1,194
Accrued excise taxes and related charges ................... 1,295 --
Other ...................................................... 1,100 388
------ ------
$6,845 $3,728
====== ======
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 provided approximately $67,000 in the year ended December
31, 1997 related to disputed minutes for which the Company has not recognized
any corresponding revenue. During 1998, the Company paid $1,350,000 of the
disputed charges and continues to dispute the remaining balance. 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. DEBT:
Debt consists of the following (in thousands):
DECEMBER 31,
--------------------
1998 1997
--------- -------
Senior notes, with a rate of 12% due May 2008 ............ $ 160,000 $ --
NTFC Financing Agreement, with a rate of 8.91%
maturing January 2004 ............................... 8,885 --
Note payable to individuals and other..................... 16 44
Capital lease obligations................................. 461 748
--------- -------
169,362 792
Less: discount on Senior Notes............................ (1,978) --
Less: current portion .................................... (1,894) (331)
--------- -------
$ 165,490 $ 461
========= =======
52
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
Senior Notes and Warrants Offering
In May 1998, the Company issued $160 million of 12% senior unsecured notes
("Senior Notes") with a final maturity of May 2008. Warrants to purchase 200,226
shares of common stock were issued in conjunction with the Senior Notes
issuance. The Senior Notes are recorded at a discount of $2.1 million to their
face amount to reflect the fair market value attributable to the warrants. The
warrants are exercisable subsequent to November 1998 at an exercise price of
$24.20 per share. The Company received net proceeds of $155 million, net of
offering expenses. Concurrent with the issuance, the Company purchased $52
million in U.S. Government obligations from proceeds of the offering. The U.S.
Government obligations are pledged to fund the first six interest payments on
the Senior Notes. Interest on the Senior Notes is payable semi-annually in
arrears in May and November commencing November 1998. Accrued interest as of
December 31, 1998 was $2.5 million. As of December 31, 1998, no Warrants issued
in connection with the Senior Notes have been exercised.
Under the terms of the Senior Notes, the Company is subject to certain
covenants which, among other things, restrict the ability of the Company to
incur additional indebtedness, pay dividends or make distributions in respect to
capital stock or make certain restricted payments; create liens; or merge or
sell all or substantially all of its assets. The Senior Notes are redeemable at
the option of the Company, in whole or in part on or after May 15, 2003, at the
redemption prices set forth below, plus accrued and unpaid interest and
liquidated damages as defined in the indenture, if any, to the date of
redemption.
REDEMPTION
YEAR PRICE
--------- -------------------
2003.......................... 106%
2004.......................... 104%
2005.......................... 102%
2006(and thereafter).......... 100%
In addition, at any time prior to May 15, 2001, through proceeds of a
public equity offering, the Company may redeem up to 35% of the Senior Notes
originally outstanding at a redemption price of 112% of the principal amount
thereof, plus accrued and unpaid interest and liquidated damages, if any, to the
date of redemption. Upon a change of control, the Company will be required to
offer to repurchase the outstanding Senior Notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages, if any, to the date of purchase.
The Senior Notes are unsecured obligations of the Company and rank pari
passu in right of payment with all other existing and future unsecured and
unsubordinated obligations of the Company unless expressly noted.
NTFC Capital Corp. Financing Agreement
In December 1998, the Company entered into a vendor financing facility for
up to $35 million with NTFC Capital Corporation, a financing arm of GE Capital
("NTFC Facility"). The facility and may be used to finance switches, associated
telecommunications equipment, undersea fiber optic cables, and the expansion of
facilities in the Company's targeted marketing areas. Each borrowing under the
NTFC Facility bears interest at a fixed rate equal to the average yield to
maturity of the five-year Treasury Note plus the Rate Adjustment (as defined in
the agreement). Individual borrowings under the NTFC Facility are amortized over
60 months from the date of advance with a final maturity of all outstanding
amounts of January 2004. As of December 31, 1998, approximately $8.9 million
bearing interest at 8.91% was outstanding under the facility. Principal and
interest payments of approximately $184,000 are due monthly in arrears.
Under the terms of the NTFC Facility, the Company is subject to certain
financial and operational covenants, including but not limited to restrictions
on the Company's ability to pay dividends and level of indebtedness.
Commercial Loan Agreement
In July 1997, the Company entered into a loan agreement ("Loan") with a
commercial bank ("Lender"). The Loan provides for maximum borrowings of up to
$10 million through December 31, 1997, and the lesser of $15 million or 85
percent of eligible
53
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
accounts receivable, as defined, thereafter until maturity in December 1999. The
Loan required a $150,000 commitment fee to be paid at closing, and a quarterly
commitment fee of one quarter percent of the unused portion. In December 1998,
the Company terminated the Loan. In connection with the termination, the Company
recognized an extraordinary loss of $514,000 related to the write-off of
deferred financing costs and debt discounts related to the Loan.
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. Fifty percent, or
269,900 of the warrants, vested fully on the date of the issuance. Vesting on
the remaining warrants was contingent on the occurrence of certain events. In
December 1997, as a result of the Company's completed Initial Public Offering of
common stock, the remaining warrants were retired. The exercise price of the
outstanding warrants is $8.46 per share, and they expire on July 1, 2002. The
fair market value of the warrants is approximately $823,000 and is classified as
a component of stockholders' equity. As of December 31, 1998, 269,900 warrants
from this issuance were outstanding.
Debt maturities as of December 31, 1998, excluding capital lease
obligations, are as follows (in thousands);
1999............................................ $ 1,475
2000........................................... 1,613
2001........................................... 1,763
2002........................................... 1,927
2003........................................... 2,107
Thereafter..................................... 160,000
-----------
$ 168,885
===========
6. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases office space and equipment under non-cancelable
operating leases. Rent expense was approximately $1 million, $313,000, and
$135,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
The terms of the office lease require the Company to pay a proportionate share
of real estate taxes and operating expenses. The Company also leases equipment
under capital lease obligations. The future minimum commitments under lease
obligations are as follows (in thousands):
CAPITAL OPERATING
FOR THE YEAR ENDING DECEMBER 31, LEASES LEASES
---------------------------------------- ------------ -------------
1999................................ $ 434 $ 2,031
2000................................ 60 2,000
2001................................ - 1,802
2002................................ - 1,589
2003................................ - 781
Thereafter.......................... - 1,320
------------ -------------
494 $ 9,523
=============
Less - Amounts representing interest.. (33)
Less - Current portion................ (402)
------------
Long-term Portion..................... $ 59
============
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 in June 1996. 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.
54
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
Litigation
Certain claims and suits have been filed or are pending against the
Company. In management's opinion, resolution of these matters will not have a
material impact on the Company's financial position or results of operations and
adequate provision for any potential losses has been made in the accompanying
consolidated financial statements
7. STOCKHOLDERS' EQUITY (DEFICIT):
Common and preferred stock
In 1997, the Board of Directors authorized 100,000 shares of $1.00 par
value preferred stock. Concurrent with the approval of the Reorganization, the
Board of Directors approved an increase in the authorized shares of common and
preferred stock. Subsequent to year end 1998, total common and preferred shares
authorized increased to 40,000,000 and 1,000,000, respectively pursuant to the
Reorganization. The Board of Directors has the authority to issue these shares
and to determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without further vote or action by the
stockholders.
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.
Stock option plans
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 ten 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, 1998 and 1997, approximately 914,890 and 352,000 options,
respectively, were available for grant under the Performance 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. In
conjunction with the Company's January 20, 1997 amendment to the plan, all
options were cancelled and certain options were reissued at their original
exercise prices and compensation expense was recognized for the excess of the
fair value of the common stock over the exercise price of the related options.
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.
On December 14, 1998, the Company repriced 581,150 options outstanding,
which had exercise prices ranging between $10.00 and $26.75 per share to the
then market price of $9.00 per share. This was the Company's first repricing of
options and the repricing did not benefit executive officers, affiliates, or
major shareholders.
A summary of the status of the Company's stock option plans as of
December 31, 1998, 1997 and 1996 and changes during the years ending on those
dates is presented in the following chart:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- -------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
PRICE PER PRICE PER PRICE PER
OPTIONS SHARE OPTIONS SHARE OPTIONS SHARE
------------ ----------- -------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning
of year January 1, 531,666 $ 9.96 138,300 $ 0.38 143,200 $ 0.38
Granted 977,900 10.54 668,366 8.14 - -
Exercised (125,816) 1.85 (136,500) 1.05 - -
Canceled (640,150) 12.81 (138,500) 0.38 (4,900) 0.36
------------ ----------- -------------- ----------- ------------ ------------
Options outstanding at
December 31, 743,600 $ 9.64 531,666 $ 9.96 138,300 $ 0.38
============ =========== ============== =========== ============ ============
Options exercisable at
December 31, 76,530 $ 9.23 133,266 $ 1.85 - $ -
============ =========== ============== =========== ============ ============
</TABLE>
55
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------- ----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL PRICE PER NUMBER PRICE PER
EXERCISE PRICES OUTSTANDING LIFE SHARE EXERCISABLE SHARE
----------------- -------------- --------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
$1.85 - $1.85 7,450 8.05 $ 1.85 7,450 $ 1.85
$4.75 - $4.75 15,000 9.75 4.75 -- --
$8.00 - $10.00 631,150 8.80 9.08 60,080 9.16
$12.00 - $12.00 7,500 8.63 12.00 1,500 12.00
$14.25 - $16.56 82,500 9.25 15.30 7,500 16.56
----------------- -------------- --------------- ------------- -------------- -------------
$1.85 - $16.56 743,600 8.86 $ 9.64 76,530 $ 9.23
================= ============== =============== ============= ============== =============
</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 year ended December 31, 1998 and 1997, was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions: risk-free interest rates of 4.56
percent and 6.2 percent; no dividend yield; weighted-average expected lives of
the options of five years, and expected volatility of 95 percent and 50 percent,
respectively. 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 1998 and 1997,
was $7.84 per share and $4.32 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 1998 and 1996 would have
been approximately $19,125,000 and $2,833,000, respectively, or $2.14 and $0.52
per share (basic and diluted), respectively. Pro forma net income for 1997 would
have been $1,600,000, or $0.26 per share (basic) and $0.25 per share (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 at issuance
was approximately $254,000 and will be recognized ratably over the estimated
service period.
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
56
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
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.
Warrant and registration rights
The Company agreed to issue to certain underwriters of 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 when issued, and is
classified in stockholders' equity.
As of December 31, 1998, the Company has warrants outstanding of 470,126 in
connection with debt issuances and agreements. Warrants issued in connection
with the Senior Notes and Warrants Offering have an exercise price of $24.20 and
expire May 2008. Warrants issued in connection with the Commercial Loan
Agreement have an exercise price of $8.46 and are exercisable for a period of
five years beginning July 1997. The holders of the warrants will have no voting
or other stockholder rights unless and until the warrants are exercised.
Employee benefit plans
During 1998, the Company adopted the Startec Employee 401(K) Plan (the
"Plan"), a defined contribution 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. In September 1998,
the Company adopted a contribution matching plan pursuant to which the Company,
at its discretion, may contribute shares of the Company's Common Stock in an
amount up to five percent of employee contributions. These shares will vest
ratably over a five year period from the date of employment.
8. INCOME TAXES:
The Company has net operating loss carryforwards ("NOLs") for Federal
income tax purposes of approximately $25,483,000 and $1,878,000, as of December
31, 1998 and 1997, respectively, which may be applied against future taxable
income and expire between 2010 and 2013. 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 and projected operating losses, a valuation
allowance equal to the net deferred tax asset was recorded for all periods
presented.
57
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
The tax effect of significant temporary differences, which comprise the
deferred tax assets and liabilities, are as follows (in thousands):
DECEMBER 31,
1998 1997
------------ ------------
Deferred tax assets:
Net operating loss carryforwards......... $ 9,842 $ 725
Allowance for doubtful accounts.......... 1,378 909
Contested liabilities.................... 553 1,024
Cash to accrual adjustments.............. 230 460
Other.................................... 155 119
------------ ------------
Total deferred tax assets............. 12,158 3,237
------------ ------------
Deferred tax liabilities:
Depreciation............................. 1,227 204
Other.................................... 19 42
------------ ------------
Total deferred tax liabilities........ 1,246 246
------------ ------------
Net deferred tax assets.................... 10,912 2,991
Valuation allowance........................ (10,912) (2,991)
------------ ------------
$ - $ -
============ ============
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, 1998 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):
1997
--------------
Current Provision
Federal.................................... $ 171
Federal alternative minimum tax............ 29
State...................................... 23
--------------
223
--------------
Deferred benefit
Federal.................................... (86)
State...................................... (12)
Benefit of net operating loss carryforwards. (96)
--------------
(194)
--------------
$ 29
==============
The provision for income taxes for the year ended December 31, 1997 results in
an effective rate which differs from the Federal statutory rate as follows:
1997
--------------
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%
==============
58
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
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 $1.9 million, $1.9
million, and $1.5 million, or 1, 2, and 5 percent of total net revenues for the
years ended December 31, 1998, 1997, and 1996, respectively. The Company was in
a net accounts receivable position with this affiliate of approximately $684,000
and $377,000 as of December 31, 1998 and 1997, respectively. Services provided
by this affiliate and recognized in cost of services amounted to approximately
$366,000, $680,000 and $663,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
The Company also has a lease with an affiliate of a stockholder of the
Company (see Note 6).
10. BUSINESS SEGMENT DATA AND SIGNIFICANT CUSTOMERS AND SUPPLIERS:
The Company classifies its operations into one industry segment, long
distance telecommunications services. Substantially all of the Company's
revenues for each period presented were derived from calls originated within the
United States and terminated outside the United States.
Net revenues terminated by geographic area were as follows (in thousands):
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
Asia/Pacific Rim................. $ 72,274 $ 42,039 $ 13,824
Middle East/North Africa......... 30,303 21,236 8,276
Sub-Saharan Africa............... 13,020 6,394 1,136
Eastern Europe................... 15,539 7,964 2,650
Western Europe................... 2,725 1,913 1,783
North America.................... 5,661 3,398 3,718
Other............................ 21,647 2,913 828
------------ ----------- ------------
$ 161,169 $ 85,857 $ 32,215
============ =========== ============
Significant customers
A significant portion of the Company's net revenues is derived from a
limited number of customers. During 1998, 1997 and 1996, the Company's five
largest carrier customers accounted for approximately 61 percent, 47 percent and
40 percent of net revenues, respectively. One customer accounted for ten percent
or more of net revenues in 1998 and 1996 while two customers accounted for ten
percent or more of net revenues during 1997. 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 the year indicated (in thousands):
DECEMBER 31,
-------------------------------------------
1998 1997 1996
---- ---- ----
MCI/WorldCom, Inc............ $ 38,289 $ 19,886 $ 7,383
Frontier..................... - 12,420 -
Significant suppliers
59
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
A significant portion of the Company's cost of services is purchased from a
limited number of suppliers. The following suppliers provided 10 percent or more
of the Company's total cost of services in the year indicated (in thousands):
DECEMBER 31,
--------------------------------------
1998 1997 1996
---- ---- ----
Pacific Gateway Exchange.......... $ 14,421 $ 8,893 $ -
MCI/WorldCom, Inc................. - 9,918 3,972
Videsh Sanchar Nigam Limited ("VSNL") - - 7,525
Cherry Communications............... - - 3,897
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. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of certain financial assets and liabilities are shown below:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------
CARRYING FAIR
AMOUNT VALUE
------------- ------------
<S> <C> <C>
Financial assets:
Pledged short-term marketable securities......... $ 44,156 $ 45,180
Financial liabilities:
Senior Notes, excluding debt discount............ 160,000 144,000
Vendor financing................................... 8,885 8,885
</TABLE>
Short-term marketable securities and the Senior Notes are valued based on
quoted market prices. The fair value of the vendor financing is estimated based
on expected future payments discounted at the Company's incremental borrowing
rate.
The carrying amounts for current assets, restricted cash and current
liabilities approximate their fair value due to their short maturity. 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. However, given the terms and
conditions of these instruments, if these financial instruments were with
unrelated parties, interest rates and payment terms could be different than the
currently stated rates and terms.
12. ACQUISITIONS:
In November 1998, the Company acquired PCI Communications, Inc. ("PCI") for
$2.65 million. PCI is a provider of voice and data services located in the
Pacific Rim island of Guam. PCI has signatory status on the TPC-5,
Guam-Filipinos and China-U.S. cables. The acquisition will allow Startec to
access a U.S. based satellite line of sight that extends from Southeast Asia to
Central Europe. The purchase price was allocated to the net assets acquired
based upon the estimated fair value of such assets, which resulted in an
allocation of $1 million to goodwill and $250,000 to a covenant not to compete
agreement. Purchase price allocations have been completed on a preliminary basis
and are subject to adjustment should new or additional facts about the business
become known.
In December 1998, the Company acquired Global Communications GmbH of
Germany ("Global") for $5.4 million. Global has a Class IV nationwide
telecommunications license for Germany, an interconnection agreement with
Deutsche Telekom and a Siemens EWSD switch located in Dusseldorf. The purchase
price was allocated to the net assets acquired based upon the estimated fair
value of
60
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
such assets, which resulted in an allocation of $2.5 million to goodwill.
Purchase price allocations have been completed on a preliminary basis and are
subject to adjustment should new or additional facts about the business become
known.
The Company has accounted for all of the referenced acquisitions using the
purchase method. Accordingly, the results of operations of the acquired
companies are included in the accompanying consolidated statements of operations
of the Company, as of the date of their respective acquisition.
The Company's summarized, unaudited consolidated pro forma results of
operations, assuming the above PCI transaction occurred on January 1, 1997 are
as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Net Revenues...................................... $ 166,195 $ 93,291
Income (loss) from operations..................... (11,384) 737
Income (loss) before extraordinary item........... (18,655) 480
Net income........................................ (19,169) 480
Basic earnings (loss) per common share:
Income (loss) before extraordinary item......... (2.08) 0.08
Net income (loss) per common share.............. (2.14) 0.08
Diluted earnings (loss) per common share:
Income (loss) before extraordinary item......... (2.08) 0.07
Net income (loss) per common share.............. (2.14) 0.07
</TABLE>
Operations for Global were not significant for 1998 and 1997.
13. QUARTERLY FINANCIAL 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) and (2) 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>
1998
---------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------------------------------------------------------
(in thousands, except per common share amounts)
<S> <C> <C> <C> <C>
Net revenues (1)......................................... $ 29,891 $ 33,461 $ 47,448 $ 50,369
Gross margin (1)......................................... 4,236 4,632 5,496 5,629
Income (loss) from operations............................ 713 (1,166) (3,282) (6,921)
Income (loss) before extraordinary item.................. 899 (2,657) (6,015) (10,287)
Net income (loss)........................................ 899 (2,657) (6,015) (10,801)
Basic earnings (loss) per common share:
Income (loss) before extraordinary item................. 0.10 (0.30) (0.67) (1.15)
Net income (loss)....................................... 0.10 (0.30) (0.67) (1.21)
Weighted average common shares
outstanding-basic...................................... 8,909 8,942 8,964 8,965
Diluted earnings (loss) per common share:
Income (loss) before extraordinary item.................. 0.10 (0.30) (0.67) (1.15)
Net income (loss)........................................ 0.10 (0.30) (0.67) (1.21)
Weighted average common and equivalent shares
outstanding-diluted.................................... 9,365 8,942 8,964 8,965
</TABLE>
61
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------------------------------------------------------
(in thousands, except per common share amounts)
<S> <C> <C> <C> <C>
Net revenues........................................... $ 12,372 $ 16,464 $ 25,757 $ 31,264
Gross margin (2)....................................... 1,607 1,979 3,089 3,399
Income from operations................................. 256 349 738 754
Net income............................................. 137 214 413 855
Basic earnings per common share:
Net income......................................... 0.03 0.04 0.08 0.10
Weighted average common shares
outstanding-basic................................ 5,403 5,403 5,403 8,324
Diluted earnings per common share:
Net income......................................... 0.03 0.04 0.07 0.10
Weighted average common and equivalent shares
outstanding-diluted.............................. 5,474 5,646 5,760 8,709
- --------------------
</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.
14. SUBSEQUENT EVENTS:
In February 1999, the Company acquired a 64.6% ownership in Phone Systems
and Network Inc. of France ("PSN") for approximately $3.8 million in cash and
425,000 shares of Startec common stock for a total consideration of $7.6
million. PSN is a facilities based provider in France, with switches in Paris
and Switzerland. PSN also provides services on a switchless reseller basis in
Belgium. Common shares of PSN are traded on the Nouveau Marche exchange in
France.
In February 1999, the Company acquired a 20% ownership in a Nevada holding
company with operations in Europe. The Company was acquired for approximately
$1.2 million. Concurrent with the acquisition, Startec received a $2.5 million
note payable from the company convertible at the Company's option into common
shares equivalent to an additional 28% fully diluted ownership.
62
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information concerning directors and executive officers required
by this item is incorporated by reference to the information contained under the
captions "Election of Directors", "Meetings and Committees of the Board" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy
Statement for the Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the information contained under the caption "Compensation of Directors and
Executive Officers" in the Company's Proxy Statement for the Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the information contained under the caption "Ownership of the Capital Stock of
the Company" in the Company's Proxy Statement for the Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the information contained under the caption "Certain Relationships and Related
Transactions" in the Company's Proxy Statement for the Annual Meeting of
Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this Annual Report on
Form 10-K:
(a) 1. FINANCIAL STATEMENTS. The financial statements of the Company and the
related Report of Independent Public Accountants are filed as Item 8
hereof.
(a) 2. FINANCIAL STATEMENT SCHEDULE. The Financial Statement Schedule described
below is filed as part of this report.
Description:
Report of Independent Public Accountants Schedule II - Valuation and
Qualifying Accounts
(a) 3. EXHIBITS. The Exhibits required to be filed pursuant to Form 10-K are
identified in the Exhibit Index.
(b) REPORTS ON FORM 8-K
On December 15, 1998, the Company filed a Form 8-K with the Securities and
Exchange Commission.
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Startec Global Communications Corporation
By /s/ Prabhav V. Maniyar
-------------------------------------
Senior Vice President, Chief Financial
Officer, Secretary and Director
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
STARTEC GLOBAL COMMUNICATIONS CORPORATION
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Ram Mukunda President, Chief Executive Officer, March 30, 1999
--------------- Treasurer and Director (Principal
Ram Mukunda Executive Officer)
/s/ Prabhav V. Maniyar Senior Vice President, Chief Financial March 30, 1999
- ---------------------- Officer, Secretary and Director
Prabhav V. Maniyar (Principal Financial and Accounting
Officer)
/s/ Vijay Srinivas Director March 30, 1999
- -------------------
Vijay Srinivas
/s/ Nazir G. Dossani Director March 30, 1999
- --------------------
Nazir G. Dossani
/s/ Richard K. Prins Director March 30, 1999
- -------------------
Richard K. Prins
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
2.1**** Agreement and Plan of Reorganization dated June 30, 1998 by and
between Startec Global Communications Corporation and Startec
Global Holding Corporation
2.2#### Stock Purchase Agreement dated as of November 30, 1998 by and
between the Company and Pacific Systems Corporation
2.3 Quota Purchase Agreement by and between Martin Otten and Rolf
Otten, on the one part, and the Company, on the other part,
effective as of December 31, 1998.
3.1**** Restated Certificate of Incorporation.
3.2**** Bylaws.
4.1* Specimen of Common Stock Certificate.
4.2* Warrant Agreement dated as of July 1, 1997 by and between
Startec, Inc. and Signet Bank.
4.3* Form of Underwriters' Warrant Agreement (including Form of
Warrant).
4.4* Voting Agreement dated as of July 31, 1997 by and between Ram
Mukunda and Vijay and Usha Srinivas.
4.5*** Indenture, dated as of May 21, 1998, between the Company and
First Union National Bank.
4.6*** Form of 12% Series A Senior Notes due 2008
4.7*** Registration Rights Agreement, dated as of May 21, 1998, among
the Company, Lehman Brothers Inc., Goldman Sachs & Co. and ING
Barings (U.S.) Securities, Inc.
4.8*** Warrant Agreement, dated as of May 21, 1998 by and between the
Company and First Union National Bank, a Warrant Agent
4.9*** Form of Warrant (included as Exhibit A to Exhibit 4.8)
4.10*** Collateral Pledge and Security Agreement, dated as of May 21,
1998 by and between the Company and First Union National Bank,
as Trustee
4.11** Rights Agreement, dated as of March 26, 1998, between the
Company and Continental Stock Transfer & Trust Company.
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 Mukunda.
10.6* Employment Agreement dated as of July 1, 1997 by and between
Startec, Inc. and Prabhav V. Maniyar.
10.7* Amended and Restated Stock Option Plan.
10.8* 1997 Performance Incentive Plan.
10.9* Subscription Agreement by and among Blue Carol Enterprises,
Limited, Startec, Inc. and Ram Mukunda dated as of February 8,
1995.
10.10* Agreement for Management Participation by and among Blue Carol
Enterprises, Limited, Startec, Inc. and Ram 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 Protuguesa Radio Marconi,
S.A. and
<PAGE>
Startec, Inc. dated as of June 15, 1996.
10.13*+ Indefeasible Right of Use Agreement between Companhia
Portuguesa Radio Marconi, S.A. and Startec, Inc. dated as of
January 1, 1996.
10.14*+ International Telecommunication Services Agreement between
Videsh Sanchar Nigam Ltd. and Startec, Inc. dated as of
November 12, 1992.
10.15*+ Digital Service Agreement with Communications Transmission
Group, Inc. dated as of October 25, 1994.
10.16*+ Lease Agreement by and between GPT Finance Corporation and
Startec, Inc. dated as of January 10, 1990.
10.17*+ Carrier Services Agreement by and between Frontier
Communications Services, Inc. and Startec, Inc. dated as of
February 26, 1997.
10.18*+ Carrier Services Agreement by and between MFS International,
Inc. and Startec, Inc. dated as of July 3, 1996.
10.19*+ International Carrier Voice Service Agreement by and between
MFS International, Inc. and Startec, Inc. dated as of June 6,
1996.
10.20*+ Carrier 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 December 23, 1997
10.22*** Indefeasible Right of Use Agreement by and between Telegloble
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 (as amended and related by
agreement dated December 31, 1998. See Exhibit 10.41 below).
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 Company, dated June 9, 1998 (Gemini Cable
System)
10.27# First Amendment to Lease by and between The Vaswani Place
Corporation and the Company, dated May 11, 1998.
10.28# International Facilities License, United Kingdom
10.29## Columbus III Cable System Construction and Maintenance
Agreement dated February 11, 1998.
10.30### TAT-14 Cable Network Construction and Maintenance Agreement
dated as of September 2, 1998.
10.31### SEA-ME-WE Construction and Maintenance Agreement dated as of
January 1, 1997.
10.32### Amendment dated as of July 8, 1998 by and between Cable &
Wireless, Inc. and the Company to the Indefeasible Right of Use
Agreement, dated as of June 9, 1998 (Gemini Cable System).
10.33### Rack Space Agreement by and between Americatel Corporation and
the Company, dated as of July 27, 1998.
10.34### Rack Space Agreement by and between IXC Carrier, Inc. and the
Company, dated as of July 6, 1998 (Los Angeles).
10.35### Rack Space Agreement by and between IXC Carrier, Inc. and the
Company, dated as of August 19, 1998 (Dallas).
10.36### Co-Location Agreement by and between Espirit Telecom Benelux BV
and the Company., dated as of September 21, 1998
10.37### Sublease Agreement by and between Information Systems &
Networks, Inc. and the Company dated as of August 11, 1998.
10.38### Master Supply Agreement by and between TTN, Inc. and the
Company dated as of September 21, 1998.
10.39 Loan and Security Agreement by and between NTFC Capital
Corporation and the Company, dated as of December 31, 1998.
10.40 Loan and Security Agreement by and between Ram Mukunda and the
Company, dated as of October 8, 1998.
10.41 Loan and Security Agreement by and between Prabhav V. Maniyar
and the Company, dated as of December 31, 1998.
10.42 TPC-5 Cable Network IRU Agreement between Companhia Portuguesa
Radio Marconi, SA and the Company, dated December 15, 1998.
10.43 TPC-5 Cable Network Indefeasible Right of Use Agreement between
KDD Corporation and the Company dated December 31, 1998.
10.44 TAT-12/13 Cable Network IRU Agreement between Companhia
Portuguesa Radio Marconi, SA and the Company, dated December
15, 1998.
10.45 Lease between 36 North East Second Street, L.L.C and the
Company executed on November 30, 1998.
10.46 Lease between 36 North East Second Street, L.L.C and the
Company executed on October 29, 1998
21.1 Subsidiaries of Company.
<PAGE>
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
- ----------
* 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 Current Report on Form 8-K
filed on April 8, 1998
*** Incorporated by reference from the Company's Quarterly Report on Form 1
0-Q for the quarter ended June 30, 1998
**** Incorporated by reference from the Company's Registration Statement on
Form S-4 (SEC File No. 333-58247)
# Incorporated by reference from the Company's Registration Statement on
Form S-4 (SEC File No. 333-61779)
## Incorporated by reference from the Company's Registration Statement on
Form S-1 (SEC File No. 333-64465)
### Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998.
#### Incorporated by reference from the Company's Current Report on Form
8-K/A filed on February 12, 1999.
+ Portions of the Exhibit have been omitted pursuant to a grant of
Confidential Treatment by the Securities and Exchange Commission under
Rule 406 of the Securities Act of 1933, as amended, and the Freedom of
Information Act.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Startec Global Communications Corporation:
We have audited, in accordance with generally accepted auditing
standards, the consolidated financial statements of Startec Global
Communications Corporation and subsidiaries (a Maryland corporation) included in
this Form 10-K and have issued our report thereon dated February 23, 1999. Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in Item 14 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.
February 23, 1999
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------------
CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER ENDING
DESCRIPTION BALANCE EXPENSES(A) ACCOUNTS(B) DEDUCTIONS(C) BALANCE
---------- ------------- -------------- ---------------- -------------
Reflected as reductions to the related assets:
Provisions for uncollectible accounts
(deductions from trade accounts receivable)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996. $ 457 $ 783 $ 464 $ (625) $ 1,079
Year ended December 31, 1997. 1,079 57 1,864 (647) 2,353
Year ended December 31, 1998. 2,353 329 827 (850) 2,659
</TABLE>
(a) Includes $329,000 of reserves recognized in purchase accounting in 1998.
(b) Represents a reduction of residential revenue not expected to be realized.
(c) Represents amounts written off as uncollectible.
S-1
EXHIBIT 2.3
QUOTA PURCHASE AGREEMENT
PREAMBLE
WHEREAS; Mr. Martin Otten is the owner of two quotas in the nominal value of DM
850,000.00 and DM 50,000.00 in Global Communications GmbH, Eupener Strasse
57-59, 50933 Cologne, registered with the commercial register of the Lower Court
of Cologne under HRB 25429 ("COMPANY") with a registered stated capital
amounting to DM 1,000,000. Mr. Rolf Otten is the owner of one quota in the
nominal value of DM 100,000.00 in the Company. The aforementioned quotas
("QUOTAS") form 100% of the registered stated capital of the Company.
WHEREAS; Sellers desire to sell and Buyers desire to purchase the Quotas of the
Company under the terms and conditions set forth herein.
Now, THEREFORE; the parties agree as follows:
1. PURCHASE AND SALE
Sellers hereby sell assign and transfer to Buyer the Quotas in the Company
including the right to undistributed profits and all other rights
pertaining to the Quotas, and Buyer purchases and accepts the transfer of
said Quotas for the herein below stated purchase price. The assignment and
transfer of the Quotas shall be subject to the condition precedent set out
in clause 2.1.
2. TRANSFER OF LEGAL TITLE AND LEGAL OWNERSHIP
2.1 The transfer of legal title in the Quotas is conditional upon the
payment of the A-Consideration as set out in Clause 3.1 to the escrow
account as described in Clause 3.2.
2.2 The Buyer shall be entitled to all profits and losses as of 30
December 1998, 24:00 hrs. ("EFFECTIVE DATE") and all retained profits
of prior business years. Risk shall pass to the Buyer as of the
Effective Date. As of the Effective Date the Sellers are obliged not
to perform or exercise any of their shareholder's rights in the
Company without prior consent of the Buyer. Mr. Martin Otten as the
registered director of the Company is aware and acknowledges this
obligation
2.3 From the Effective Date the Buyer is entitled to review the business
documents of the Company. Such documents shall be delivered to the
Buyer within three weeks after the Effective Date.
2.4 The risk of loss in respect of the Quotas shall pass to the Buyer as
of the Effective Date.
<PAGE>
3. CONSIDERATION
3.1 The following two items comprise the purchase price for the Quotas
sold hereunder: an amount of DM 9,000,000 (German marks nine million,
"A-CONSIDERATION") and an additional amount of DM 350,000 (German
marks three hundred fifty thousand, "B-CONSIDERATION").
3.2 The payment of the A-Consideration shall be made in full to an escrow
account provided by the notary Mr. Gerhard Grossmann, Frankfurt/Main
pursuant to the escrow agreement attached hereto as ANNEX 3.2. The
A-Consideration becomes due as of the December 30, 1998. Default
interest in the statutory amounts shall be payable by Buyer if payment
of the A-Consideration has not been effected by January 10, 1999.
3.3 It is the understanding of the parties that the A-Consideration is to
pay off (1) all outstanding liabilities in the amount of DM
6,103,168.94 (2) all liability reserves (Ruckstellungen) in the amount
of DM 187,452 and (3) the outstanding share capital in the amount of
DM 665,000, as well as (4) liabilities as referenced to in clause 6.2.
The Company hereby requests the payment of the respective outstanding
amounts of the share capital.
The balance between the A-Consideration and the sum of the
aforementioned amounts will be paid for goodwill (DM 2,044,379).
3.4 The A-Consideration will be adjusted downwards in the market value of
any liabilities or liability reserves against the Company which have
-- in violation of German GAAP -- not been shown in the Company's
preliminary balance sheet and profit and loss statements as of 31
December 1998 ("BALANCE SHEET") attached hereto as ANNEX 3.4.
Further downside adjustments shall be made with regard to any costs
which are shown in the balance sheet but which are not related to the
Company's German business.
The adjustment of the A-Consideration shall be made by a deduction of
the A-Consideration in the amount of the market value of the
respective liabilities, liability reserves or costs in accordance with
the escrow agreement.
2
<PAGE>
3.5 The B-Consideration to be effected to Mr. Martin Otten is subject to
the following conditions, it being understood that the external costs
incurred in the fulfilment of the conditions shall be borne by the
Company or the Buyer:
a. the arrangement of an irrevocable offer by
STAR-Telecommunications Deutschland GmbH ("STAR") to amend the
existing co-location agreement between STAR and the Company which
provides for a fixed lease term until 31 December 1999 and an
option in favour of the Company to prolong the lease term for one
further year as additional fixed terms;
b. the co-operation in obtaining an offer by DTAG for the Company
for an interconnection agreement (ZusammenschluBvereinbarung)
which includes originating services for carrier network operators
(Zufuhrungsleistungen fur Verbindungsnetzbetreiber) and no more
than 2 PoI;
c. the delivery of two ICAs (Interconnect Accesses) [Interconnection
Anschlusse] for terminating as well as originating services of
DTAG at a PoI in Dusseldorf;
d. the making available of a calling card platform billing system
for use by the Company, subject to separate agreement;
e. submission of a security concept for use by the Company and best
efforts to obtain unconditional approval of such concept by the
Regulatory Authority for Telecommunication and Post in accordance
with Section 87 of the German Telecommunications Act as soon as
possible;
f. submission of a call monitoring for use by the Company concept
and best efforts to obtain unconditional approval of such
concepot by the Regulatory Authority for Telecommunication and
Post in accordance with Section 88 of the German
Telecommunications Act as soon as possible;
g. the fulfilment of the conditions (a), (b) and the delivery of one
ICA under (c) as well as the submission of the concepts under (e)
and (f) within three months after having received clear
instructions by the Buyer.
The B-Consideration shall amount to DM 200,000 if the conditions as required
under (g) will be fulfilled within 6 months including the second ICA foreseen
under (c). If those conditions are met within nine months the B-Consideration
amounts to DM 100,000. Thereafter no B-Consideration is owed to Mr. Martin
Otten.
3
<PAGE>
4. REPRESENTATIONS AND WARRANTIES OF THE SELLERS
In addition to and not to the exclusion of any warranties implied under
law, Sellers represent and warrant in the form of an independent warranty
without fault (verschuldensunabhangige Garantie) that the following
statements are correct. Unless stated otherwise, hereinafter, the
warranties relate to the Effective Date.
4.1 The information contained in the Preamble above is correct. Company is
a limited liability company duly organised, validly existing and in
good standing under the laws of Germany with a stated capital of DM,
1,000,000.00 and is duly qualified of conduct its present business.
4.2 The Quotas are paid-up in the amount of DM 335,000.00 in cash and are
non-assessable. No disclosed or hidden repayments (offene oder
verdeckte Ruckzahlungen) have been effected from the assets required
in order to maintain the paid-up share capital. There are no
agreements, options, warrants or rights outstanding to purchase or
otherwise acquire Quotas or any other interests in Company. Sellers
are the owner, free and clear of any encumbrances, of all Quotas sold
hereunder and by this Agreement and this Agreement shall convey to
Buyer full title thereto, free and clear of all liens, encumbrances,
or other charges. In particular, the Quotas and/or rights resulting
therefrom were neither pledged nor transferred for security purposes,
and neither option rights of first refusal thereto exist. There are no
outstanding resolutions on distributions of profit or capital.
4.3 All necessary approvals and ratifications required from Sellers in
order to consummate this Agreement have been granted. There are no
further approvals and ratifications necessary on behalf of Sellers for
a valid and binding sale and assignment of Sellers Quotas. The Company
hereby declares its consent to the sale and transfer of the Quotas.
4.4 The Company has no Company law relationship of any kind with third
parties; in particular, it does not hold any participation or
sub-participation in any other company, it has not entered into any
affiliation agreements within the meaning of secs. 291, 292 German
Stock Corporation Act (Aktiengesetz - "AKTG"), it has not entered into
any co-operation agreement and has not
4
<PAGE>
issued any letters of comfort in favour of other companies. No third
party has any right to or interest in the profit of the Company.
4.5 As between the Company on the one part and the Sellers and
undertakings affiliated to the Sellers pursuant to sec. 15 AktG on the
other part, there are no contractual relationships of any kind
whatsoever.
4.6 Company's financial Balance Sheet is prepared in accordance with the
generally accepted accounting principles (Grundsatze ordnungsgemaBer
Buchfuhrung), consistently applied, and in accordance with the books
and records of the Company and present a true and fair view of the
asset position (Vermogenslage), financial position (Finanzlage) and
earnings position (Ertragslage) of the Company as of December 31,
1998.
4.7 There has been no material adverse change in the business, properties
or financial condition of the Company since the Balance Sheet has been
prepared.
4.8 Except as disclosed in ANNEX 4.8, there are no actions, claims, suits,
proceedings, or governmental investigations pending, or to the
knowledge of the Sellers threatened, or any known basis therefor,
against or to the knowledge of the Sellers affecting the Company,
except claims and actions as to which the Company is fully covered by
insurance.
4.9 Company has good and marketable title to all the assets and property
reflected in the Balance Sheet (other than property disposed of in the
ordinary course of business after the Balance Sheet date), free and
clear of all liens, charges and encumbrances except those which are
disclosed in the Balance Sheet and such imperfections of title and
encumbrances which do not interfere with the use of the assets or
impair the operations of Company, including customary title retentions
by suppliers. All lease pursuant to which Company leases real or
personal property are valid and enforceable substantially in
accordance with their terms. Company is not in default under any such
lease. The purchase agreement regarding the purchase of the Siemens
EWSD Switch and ancillary voice and data communications equipment is
concluded with the Company
5
<PAGE>
and Company holds and expectant right (Anwartschaftsrecht) to the
Siemens EWSD Switch and all ancillary voice and data communications
equipment as documented in the invoices provided to Buyers in written
form and as located at the co-location site of Company with STAR
TELECOM at Prinzenallee 9, Dusseldorf, and that such Switch and
equipment are free of any third party rights. The EWSD Switch is
covered by a producer warranty by Siemens until April 30, 1999.
4.10 Company has obtained all consents, licenses and permits to be issued
to the Company by a governmental or public entity which is required
for its operations as presently conducted; in particular, the Company
holds a national class 4 license ("LICENSE") granted by the
"Regulierungsbehorde fur Telekommunikation und Post" on August 21,
1998 (license number 98 04 0614 A), The License has not been revoked
at the Effective Date and will not be revoked by the Regulatory
Authority for Telecommunication and Post due to reasons or events
relating to the time period until the Effective Date.
4.11 Company has not received notice of violation of any applicable
regulations, ordinance or other law, regulation or requirements
relating to its operations or to its properties, and Sellers are not
aware of any pending actions, claims and notices of claim.
4.12 Company has performed all obligations required to be performed by it
to the date of this agreement, and is not in default in any respect
under any contract, agreement lease, license or other documents, which
default would have a material adverse effect on the operations of
Company.
4.13 Company is not in default of any order, writ, injunction or decree of
any court or governmental department.
4.14 Since the Balance Sheet has been prepared, Company has not , (i) sold,
assigned or granted rights with respect to any inventions, patents,
patent applications, licenses, written know-how, secret processes or
trade secrets, (ii) entered into any transactions or series of
transactions other that in the ordinary course of business, (iii) made
any material change in their
6
<PAGE>
accounting or billing policy practices or procedures, (iv) made any
distributions of cash or assets to its shareholders, neither by way of
dividends nor otherwise, (v) mortgaged, pledged or subjected to lien
or encumbrance any of its properties or assets, or (vi) increased the
rate of compensation of its key employees.
4.15 The entering into and implementation of this agreement does not
violate any obligation or commitment of Company or the Sellers, nor
will it affect any existing agreements in particular any lease or loan
agreements.
4.16 The Company has submitted all declarations and prepayment notices with
regard to income taxes, trade taxes, turnover taxes, wage taxes, and
social security charges ("TAXES") concerning the period until December
31, 1998, completely and accurately. Taxes have been paid when due or
have been reserved against on the Balance Sheet. The Company, as of
the Effective Date, will have prepared and timely filed or may have
timely filed requests for extension of filing periods for all required
tax returns and as of the Effective Date is not in default in the
payment of such due Taxes.
4.17 The only employees of the Company as of 1 January 1999 will be Mr.
Fees and Mr. Rauen employed under the conditions disclosed to the
Buyer.
4.18 The acquisition of the Quotas by the Buyer does not constitute a
transfer of all, or substantially all of the Sellers' assets within
the meaning of Section 419 German Civil Code (BGB).
4.19 Pursuant to the letter of intent between the Company and Technology
Control Services, Inc. dated May 21, 1998 the Company has no
obligation exceeding 100,000 Schweizer Franken.
4.20 All information furnished to the Buyer or to its advisers in
connection with the acquisition of the Company is correct. The Sellers
have not withheld any material information in this context from the
Buyer or its advisers.
5. LEGAL CONSENQUENCES
5.1 If and to the extent to which any of the representations and
warranties extended by Sellers under Clause 4 other than Clause 4.16
above are not true,
7
<PAGE>
Sellers will put the Company in the same position they would be in had
the representations and warranties been true. Sellers are obliged to
compensate Buyer in money ("DAMAGES") if Sellers do not put the
Company in such position within a reasonable period of time, one month
at the longest, or if the restitution of such status should prove to
be impossible.
The compensation shall be made by deduction of the Damages from the
A-Consideration in accordance with the escrow agreement. In the event
that the escrow funds are fully released the Damages shall be paid
directly by the Sellers to the Buyer.
5.2 To the extent the representations under 4.16 are breached, assessed
taxes and/or interest payments (minus interest reimbursements) must be
reimbursed by Sellers to the Company, if and to the extent to which
such Taxes and interest payments are not covered by Balance Sheet
reserves and relate to time periods prior to December 31, 1998. Tax
savings realized by the Company for the time period up to December 31,
1998, will be set off against additional taxes to be paid by the
Company for periods up to December 31, 1998; the same applies if tax
savings or additional tax payments are owed for different fiscal
years. Sellers are not liable for additional taxes caused by changes
to and changes in the evaluation of Balance Sheet items if the changes
are not provided by law.
5.3 Damage claims for breach of representations and warranties may be
asserted only if they exxceed an amount of DM 10,000.00 (Freigrenze).
5.4 Any claims by Buyer based on a breach of the representations and
warranties set forth under Clause 4 above must be made in writing
vis-a-vis Sellers and shall be time-barred 12 (twelve) months after
the Effective Date and shall be time-barred if Buyer does not start
arbitration proceedings which have been claimed within the 12-months
period within an additional period of three months after expiry of the
initial 12 months' period. However, if the claim pertains to tax or
other public levy liabilities or to liabilities for claims raised by
third parties, the claim shall be time-barred six month after the
claim has
8
<PAGE>
become final and unappealable. Sellers shall not be liable for a
breach of representation, warranty or covenant if and to the extent
that (i) the amount of the claim is covered by an insurance of the
Company or satisfied by a third party not being an affiliate of Buyer
(within the meaning of sec. 15 AktG) or (ii) results from a failure of
Buyer to mitigate damages pursuant to sec. 254 of the German Civil
Code.
5.5 Claims for damages under this Clause 5 are limited in total to 50% of
the purshace price. In the event that damages have been caused by
gross negligence, the limitation of liability is extended to 100% of
the purchase price. Sellers are jointly and severally liable for
damages.
5.6 Sellers liability under this section 5 is excluded if and to the
extent that the underlying facts have been disclosed to Buyer prior to
December 30, 1998 within the meaning of sec. 460 German Civil Code.
6. INDEMNIFICATION
6.1 The Sellers shall jointly and severally indemnify and hold the Buyer
harmless against any and all liabilities, penalties or other claims
arising from the dispute regarding the Company's name as disclosed in
Annex 4.8.
6.2 The Sellers shall jointly and severally indemnify and hold the Buyer
harmless against any other obligations of the Company as of December
30, 1998 exceeding DM 10,000, except to the extent that such
obligations or their existence have been disclosed to the Buyer, in
particular contingent liability in the amount of approximately DM
40,000 claimed by Siemens.
6.3 Sellers acknowledge that certain positions of the invoices provided to
Buyer in relation to the Switch and related equipment contain products
and services which either relate directly or indirectly to specific
envisaged corporate customers of Sellers without being of interest to
Buyer or which have not been provided by Siemens or other contractors
yet. The parties agree to hold a review within six weeks from the
Effective Date in order to determine such positions, it being
understood that such positions in sum will be deducted from the
consideration in accordance with Clause 3.4 above.
9
<PAGE>
Furthermore, Sellers shall jointly and severally indemnify and hold
the Buyer harmless against a future claim in the approximate amount of
DM 800,000 of Aspect Telecommunications, Ratingen, for delivery of an
ordered PBX-facility expected in January 1999.
6.4 Sellers jointly and severally undertake to hold harmless and indemnify
Buyer against any and all administrative fees and costs relating to
permits, approvals and/or allocations other than the national class 4
license addressed in Clause 4.11 above applied for or granted by the
Regulatory Authority for Telecommunication and Post before the
Effective Date.
6.5 Except as regards claims under Clause 6.4 above, the Buyer shall
immediately inform the Sellers in writing if any third party claims
have been asserted or threatened against the Buyer which could result
in the Sellers becoming liable under an indemnity under this Clause 6.
In such case, the Buyer must within a reasonable period of time make
available to the Sellers relevant documents and furnish all relevant
information as well as allow the Sellers to inspect the documents and
books of the Company to the extent that this is necessary in order to
evaluate the justification of the asserted or threatened claims. In
respect to such asserted claims, the Buyer shall not be entitled to
effect any comprise (Vergleich) or make any acknowledgement
(Anerkenntnis) which could result in an obligation on the Sellers part
without the Sellers prior written consent. The Buyers must enable the
Sellers to effect a third party intervention (Nebenintervention). Any
procedural orders (comprise, declaration of settlement
(Erledigungserklarung), judicial confession (gerichtliches
Gestandnis), acknowledgment)) require the Sellers prior written
consent.
6.6 If on the grounds of certain facts the Buyer is entitled to both an
indemnity pursuant to Clause 6 and to claims pursuant to Clause 5,
then the Buyer may decide at its complete discretion which entitlement
it shall assert against the Sellers.
6.7 Any claims by Buyer based on the aforementioned indemnifications must
be made in writing vis-a-vis Sellers and shall be time-barred 18
(eighteen)
10
<PAGE>
months after the Effective Date and shall be time-barred if Buyer does
not start arbitration proceedings which have been claimed within the
18-months period within an additional period of three months after
expiry of the initial 18 months' period.
6.8 Clause 5.1 para. 2 shall apply accordingly.
7. MISCELLANEOUS
7.1 It is expressly understood that the Buyer is entitled to use the name
of the Company for a period of 9 months commencing on the Effective
date. Thereafter the Buyer undertakes to file all necessary documents
to the commercial register in order to change the name of the Company
and Mr. Martin Otten shall be entitled to use the name of the Company
for his own purposes. However, the Buyer retains the right to use the
components "Global Communication" inter alia for the future name of
the Company.
7.2 Subject to a separate agreement to be concluded between the parties,
Buyer commits to provide to Sellers or an entity designated by
Sellers, and Sellers commit to exclusively acquire from Buyer, all
services which Buyer obtains from Deutsche Telekom AG ("TELEKOM") on
the basis of the existing agreements between Company and Telekom or
agreements replacing or amending the existing agreements
("AGREEMENTS") at the prices charged by Telekom to Buyer plus Buyers
costs and a maximum 15% service fee if and to the extent that Buyer
has available service capacity and that Sellers can demonstrate that
Sellers intend to offer these services to clients in the insurance and
banking business in Germany which are not intended or existing clients
of the Buyer; this shall, in particular, apply for freephone services.
Buyer will keep Sellers informed about any material changes of the
terms of the Agreements.
7.3 The parties will conclude a separate agreement as to the terms under
which Mr. Martin Otten may continue to act as Managing Director of
Company after December 20, 1998, if so agreed by the parties.
11
<PAGE>
8. GENERAL
8.1 Each party agrees to bear the fees and costs of all, consultants,
brokers, lawyers and other advisors employed by it in connection with
the transaction contemplated by this agreement.
8.2 Transfer taxes, the costs of this notarial deed and other costs, if
any, arising in connection with the transfer of the Quotas shall be
borne by Buyer.
8.3 All notices, requests, demands and other communications required or
permitted to be given hereunder shall be in writing by registered air
mail, telefax copy and shall be sent to the address set forth below or
to such other address as the party in question may have substituted
therefor by notice to the other in accordance with this provision:
If to Seller:
Mr. Martin Otten, Eupener Str 57-59, Koln, Telefax-No.: 0221-94 98 60
30,
Tel.: 0221-94 98 60 11
If to Buyer:
Startec Global Communications, attn. Mr. Ram Mukunda, 10411 Motor
Drive, Bethesda, MD 20817, Maryland, USA (Fax: +1-301-365-8969, Tel:
+1-301-767 1447), with a copy to Clifford Chance, attn. Sven-Erik
Heun, Oberlindau 54-56, 60323 Frankfurt am Main (Fax: +49-69-97155
555, Tel.: +49-69-97155-0).
8.4 The parties agree that all notices to third parties and all other
publicity concerning the transactions contemplated by this agreement
shall be agreed between before the initial release.
8.5 This agreement, including the exhibits attached thereto and made a
part hereof, contains the entire understanding of the parties hereto
with respect to the subject matter contained herein and supersedes all
prior arrangements and understandings, whether oral or written.
Provisions of this agreement may be amended only by written instrument
signed by the parties.
12
<PAGE>
8.6 In the event that one or more provisions of this agreement shall be
invalid of unenforceable or this agreement is incomplete, the validity
and enforceability of the other provisions of this agreement shall not
be affected hereby. In such cases the parties hereto agree hereby on
such valid and enforceable provision or on provisions completing this
agreement which are commensurate with the commercial intent of this
agreement. The same applies in the event of an omission.
8.7 This agreement shall be exclusively governed by and constructed in
accordance with the laws of Germany under exclusion of the United
Nations Convention on the international Sale of Goods.
8.8 All disputes from this agreement including the validity shall be
finally settled by arbitration in accordance with the Arbitration
Rules of the German Institution of Arbitration e.V. (DIS) without
recourse to the ordinary courts of law. The arbitration tribunal may
also decide on the validity of this agreement to arbitrate. There
shall be one arbitrator. The arbitration procedure shall be held in
Frankfurt am Main and shall be carried on in the English language
only. All documents must be submitted in the English language, or,
where the original is in a different language, with a translation in
English, certified by a sworn interpreter. German substantive law
(materielles Recht) as provided in Clause 8.7 shall apply.
The notary instructed both parties that
-- the purchaser of Quotas is liable for unpaid or repaid subscriptions;
-- only such party is recognized as the shareholder by a GmbH who has
notified the GmbH of the assignment of the Quotas.
The Buyer requested the notary to notify the Company of the assignment of Quotas
hereunder in accordance with Section 16 GmbHG.
The above protocol and the exhibits thereto were read to the parties present in
the English language, approved by them and signed by them and the notary in
their on hand as follows:
13
EXHIBIT 10.39
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT ("Agreement"), is dated as of December 31,
1998 (the "Closing Date"), by and between the following parties:
LENDER/SECURED PARTY: NTFC CAPITAL CORPORATION, a Delaware corporation with
offices at 501 Corporate Centre Drive, Franklin, Tennessee
37067 ("Lender")
BORROWER/DEBTOR: STARTEC GLOBAL COMMUNICATIONS CORPORATION, a Maryland
corporation with its principal place of business at 10411
Motor City Drive, Bethesda, Maryland ("Borrower")
This Agreement includes the general terms and conditions contained herein and
all the exhibits and schedules attached hereto, all of which are incorporated
herein. In the event of an express conflict between the general terms and
conditions and any exhibit or schedule, the additional terms and conditions
stated in the schedule shall control.
By executing this Agreement, Lender agrees to make loans to Borrower, and
Borrower agrees to borrow from Lender and to provide collateral to secure such
loans, all on the terms and conditions set forth herein.
IN WITNESS WHEREOF, the parties have executed this Agreement by their duly
authorized representatives:
LENDER: BORROWER:
- ------- ---------
NTFC CAPITAL CORPORATION STARTEC GLOBAL COMMUNICATIONS CORPORATION
BY: BY:
-------------------------------- ----------------------------------
TITLE: TITLE:
----------------------------- --------------------------------------
DATE: DATE:
----------------------------- ---------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE 1: DEFINITIONS
1.01. Certain Definitions...................................... 1
1.02. Accounting Principles; Subsidiaries...................... 8
1.03. UCC Terms................................................ 8
1.04. General Construction; Captions........................... 8
1.05. References to Documents and Laws......................... 8
ARTICLE 2: LOANS
2.01. Commitment............................................... 9
2.02. Note and Payment Terms................................... 9
2.03. Procedures for Borrowing..................................10
2.04. Prepayments.............................................. 11
2.05. Computation of Interest.................................. 12
2.06. Payments................................................. 12
2.07. Indemnity................................................ 12
2.08. Use of Proceeds.......................................... 12
2.09. Fees..................................................... 12
2.10. Lender's Expenses........................................ 13
ARTICLE 3: COLLATERAL AND SECURITY AGREEMENT
3.01. Grant of Security Interest............................... 13
3.02. Priority of Security Interests........................... 14
3.03. Further Documentation; Pledge of Instruments............. 14
3.04. Further Identification of Collateral..................... 14
3.05. Remedies................................................. 14
3.06. Standard of Care......................................... 14
3.07. Advances to Protect Collateral........................... 15
3.08. License to Use........................................... 15
3.09. Subsidiary Guarantees.................................... 15
ARTICLE 4: REPRESENTATIONS AND WARRANTIES
4.01. Organization and Qualification........................... 15
4.02. Authority and Authorization.............................. 15
4.03. Execution and Binding Effect............................. 15
4.04. Governmental Authorizations.............................. 16
4.05. Regulatory Authorizations................................ 16
4.06. Material Agreement; Absence of Conflicts................. 16
4.07. No Restrictions.......................................... 16
4.08. Financial Statements..................................... 16
4.09. Financial Accounting Practices........................... 17
4.10. Accurate and Complete Disclosure......................... 17
4.11. No Event of Default; Compliance with Material
Agreements............................................... 17
4.12. Litigation............................................... 17
4.13. Rights to Property....................................... 17
4.14. Financial Condition...................................... 17
<PAGE>
4.15. Taxes.................................................... 17
4.16. No Material Adverse Change............................... 18
4.17. No Regulatory Event...................................... 18
4.18. Trade Relations.......................................... 18
4.19. No Brokerage Fees........................................ 18
4.20. Margin Stocks; Regulations U and X .......................18
4.21. Intentionally Deleted.................................... 18
4.22. Intentionally Deleted.................................... 18
4.23. Security Interests....................................... 18
4.24. Place of Business........................................ 18
4.25. Location of Collateral................................... 19
4.26. Clear Title To Collateral................................ 19
4.27. Assumed Names............................................ 19
4.28. Intentionally Deleted.................................... 19
4.29. Nortel Purchase Agreement................................ 19
4.30. Subsidiaries of Borrower................................. 19
ARTICLE 5: CONDITIONS OF CLOSING
5.01. Closing Certificates..................................... 19
5.02 Opinions of Counsel...................................... 19
5.03. Closing Documents........................................ 19
ARTICLE 6: CONDITIONS OF LENDING
6.01. Conditions for Initial Advance........................... 20
6.02. Conditions for All Advances.............................. 20
6.03. Affirmation of Representations and Warranties............ 22
6.04. Deadline for Funding Conditions.......................... 22
ARTICLE 7: AFFIRMATIVE COVENANTS
7.01. Reporting and Information Requirements................... 22
7.02 Other Notices............................................ 23
7.03. Inspection Rights........................................ 23
7.04. Preservation of Corporate Existence and Qualification.... 24
7.05. Continuation of Business................................. 24
7.06. Insurance................................................ 24
7.07. Payment of Taxes, Charges, Claims and Current
Liabilities.............................................. 25
7.08. Financial Accounting Practices........................... 26
7.09. Compliance with Laws..................................... 26
7.10. Use of Proceeds.......................................... 26
7.11. Government Authorizations; Regulatory Authorizations,
Etc...................................................... 26
7.12. Contracts and Franchises................................. 27
7.13. Consents................................................. 27
7.14. Financial Covenants...................................... 27
7.15. Construction and Storage................................. 27
7.16. Upgrade Equipment........................................ 27
<PAGE>
ARTICLE 8: NEGATIVE COVENANTS
8.01. Additional Indebtedness.................................. 28
8.02. Restrictions on Liens and Sale of Collateral............. 28
8.03. Intentionally Deleted.................................... 28
8.04. Prohibition of Mergers, Acquisitions, Name, Office or
Business Changes......................................... 28
8.05. Limitation on Equity Payments............................ 28
8.06. Limitation on Investments, Advances and Loans............ 28
8.07. Intentionally Deleted.................................... 29
8.08. Intentionally Deleted.................................... 29
8.09. Removal of Collateral.................................... 29
8.10. Assumed Names............................................ 29
ARTICLE 9: EVENTS OF DEFAULT
9.01. Events of Default........................................ 29
9.02. Consequences of an Event of Default...................... 31
9.03. Exercise of Rights....................................... 31
9.04. Rights of Secured Party.................................. 31
9.05. Notices, Etc. Waived..................................... 32
9.06. Additional Remedies...................................... 32
9.07. Application of Proceeds.................................. 33
9.08. Discontinuance of Proceedings............................ 33
9.09. Power of Attorney........................................ 33
9.10. Regulatory Matters....................................... 34
ARTICLE 10: GENERAL CONDITIONS/MISCELLANEOUS
10.01. Modifications and Waivers................................ 34
10.02. Advances Not Implied Waivers............................. 34
10.03. Deviation from Covenants................................. 35
10.04. Holidays................................................. 35
10.05. Records.................................................. 35
10.06. Notices.................................................. 35
10.07. FCC and PUC Approval..................................... 36
10.08. Lender Sole Beneficiary.................................. 36
10.09. Lender's Review of Information........................... 36
10.10. No Joint Venture......................................... 36
10.11. Severability............................................. 36
10.12. Rights Cumulative........................................ 37
10.13. Duration; Survival....................................... 37
10.14. Governing Law............................................ 37
10.15. Counterparts............................................. 37
10.16. Successors and Assigns................................... 37
10.17. Participation............................................ 38
10.18. Time of Essence.......................................... 38
10.19. Disclosures and Confidentiality.......................... 38
10.20. Jurisdiction and Venue................................... 39
10.21. Jury Waiver.............................................. 39
10.22. Limitation on Liability.................................. 40
<PAGE>
10.23. Borrower Waivers......................................... 40
10.24. Schedules................................................ 40
10.25. Agreement to Govern...................................... 40
10.26. Entire Agreement......................................... 40
10.27. Construction............................................. 41
<PAGE>
LOAN AND SECURITY AGREEMENT
---------------------------
THIS LOAN AND SECURITY AGREEMENT ("Agreement") is dated as of the
"Closing Date" set forth on Schedule 1 hereto, by and between the entity or
entities described on Schedule 1 hereto (collectively, "Borrower") and NTFC
CAPITAL CORPORATION, a Delaware corporation ("Lender"), with offices at 501
Corporate Centre Drive, Franklin, Tennessee 37067.
B A C K G R O U N D:
--------------------
A. Borrower has entered into a certain purchase agreement with Northern
Telecom Inc., as described on Schedule 1 hereto, providing for Borrower's
purchase of certain telecommunications equipment and the license of associated
software, all as described therein, and has requested Lender to extend credit to
Borrower to finance such purchase and license, as described on Schedule 1
hereto, and to make credit available for the purchase of additional
telecommunications equipment, in each case as described herein.
B. Lender is willing to extend such credit to Borrower upon the terms
and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained and intending to be legally bound hereby, the parties
hereto agree as follows:
ARTICLE 1: DEFINITIONS
----------------------
1.01. Certain Definitions. Certain terms are defined on Schedule 1
hereto. In addition to other words and terms defined in the preamble hereof or
elsewhere in this Agreement, or on the Schedules hereto, the following words and
terms shall have the following meanings unless the context otherwise clearly
requires:
"Advance(s)": any advance or loan of funds made by Lender to Borrower
pursuant to this Agreement.
"Affiliate": as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under common control with such Person.
For purposes of this definition and the definition of "Subsidiary", a Person
shall be deemed to control another Person if such first Person possesses,
directly or indirectly, the power to direct, or to cause the direction of, the
management and policies of such other Person, whether through ownership of
voting securities, by contract or otherwise. The "Affiliates" of Borrower shall
also include any Person that owns of record or beneficially at least 10% of the
outstanding capital stock of Borrower (excluding capital stock issuable upon the
exercise of stock options).
"Borrowing Certificate": a certificate substantially in the form of
Exhibit B hereto.
"Borrowing Date": any Business Day on which an Advance is made to
Borrower hereunder.
"Business Day": a day other than a Saturday, Sunday or other day on
which commercial banks in Nashville, Tennessee are authorized or required by law
to close.
"Calendar Quarter": each three-month period starting on each January
1, April 1, July 1, and
<PAGE>
October 1, during the term of this Agreement, as appropriately adjusted if
Borrower changes its fiscal year in accordance with this Agreement.
"Carrier": any interexchange carrier or other provider of
telecommunications long distance service, or local exchange company or other
provider of local telecommunications service.
"Cash": at any time, the cash, cash equivalents or marketable
investment grade securities held by Borrower free of any claims or encumbrances.
"Cash Flow": during any fiscal period of Borrower, EBITDA, less any
Equity Payments pursuant to Section 8.05 hereof or payments on Subordinated
Indebtedness made during such period.
"Certificate of Financial Condition": a certificate in the form of
Exhibit F hereto, executed by Borrower.
"Change in Control": any change in the control of, or the actual and
then current ability or right to control, a majority of the outstanding shares
of voting capital stock of Borrower or in the ability or right to control the
election of at least a majority of the board of directors of Borrower.
"Closing Date": as defined on Schedule 1 hereto.
"Code": the Internal Revenue Code of 1986 and the U. S. Treasury
Regulations promulgated thereunder, all as amended from time to time.
"Collateral": as defined in Section 3.01 hereof.
"Commitment": as defined in Section 2.01 hereof.
"Communications Law": any and all of (i) the Communications Act of
1934, as amended and any similar or successor federal statute, and the rules and
regulations of the FCC thereunder, (ii) any applicable state law governing the
provision of telecommunications services, and the rules and regulations of the
PUC, all as the same may be in effect from time to time.
"Consent": a consent to a collateral assignment of the Nortel Purchase
Agreement, a consent to a collateral assignment of the Vendor Purchase
Agreement, a Landlord Consent, and/or a Mortgagee's Consent.
"Contingent Obligation": as to any Person, any obligation of such
Person guaranteeing, directly or indirectly, any Indebtedness, leases, dividends
or other obligations ("primary obligations") of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, including, without
limitation, any obligation of such Person, whether or not contingent, (a) to
purchase any such primary obligation or any property constituting direct or
indirect security therefor, (b) to advance or supply funds (i) for the purchase
or payment of any such primary obligation or (ii) to maintain working capital or
equity capital of the primary obligor or otherwise to maintain the solvency of
the primary obligor, (c) to purchase property, securities or services primarily
for the purpose of assuring the owner of any such primary obligation of the
ability of the primary obligor to make payment of such primary obligation or (d)
otherwise to assure or hold harmless the owner of such primary obligation
against loss in respect thereof.
2
<PAGE>
"Debt Service": for any fiscal period of Borrower, the sum of all
principal and interest payments that Borrower is required to make during such
period on account of all of its Indebtedness including, without limitation, (a)
amounts due during such period on account of capitalized leases, (b) the then
current portion of any long-term Indebtedness, including any Subordinated
Indebtedness, (c) amounts due on short-term Indebtedness, and (d) amounts due
under this Agreement and the Note.
"Default": any of the conditions or occurrences specified in Section
9.01, whether or not any requirement for the giving of notice, the lapse of
time, or both, or any other condition has been satisfied.
"Default Rate": a rate of interest equal to the lesser of (i) three
percentage points in excess of the Interest Rate, or (ii) the maximum
permissible rate under applicable law in effect at any time.
"EBITDA": for any fiscal period, Borrower's actual operating earnings
from ongoing operations and before interest, taxes, depreciation and
amortization for such fiscal period.
"Equipment": as defined in Section 3.01 hereof.
"Equity Payment": other than as required in connection with the Units
Offering, or as required by the terms of the Units, any distribution of earnings
or capital to any stockholders of Borrower, or any redemption of stock or other
ownership interests, either directly or indirectly, whether in cash or property
or in obligations of Borrower.
"Event of Default": any of the events specified in Section 9.01
hereof, provided that any requirement for the giving of notice, the lapse of
time, or both, or any other condition, under Section 9.01 or otherwise, has been
satisfied.
"Exchange Act": means the Securities Exchange Act of 1934, as amended.
"FCC": the Federal Communications Commission of the United States of
America, and any successor, in whole or in part, to its jurisdiction.
"Financing Termination Date": as defined on Schedule 2.02 hereto.
"First Borrowing Date": the date of the first Advance by Borrower
hereunder.
"Fixed Charges": with respect to any fiscal period of Borrower, its
Debt Service, plus non-financed capital expenditures.
"GAAP": subject to Section 1.02 hereof, generally accepted accounting
principles in the United States of America (as such principles may change from
time to time) applied on a consistent basis (except for changes in application
in which Borrower's independent certified public accountants concur), applied
both to classification of items and amounts.
"General Intangibles": as defined in Section 3.01 hereof.
"Governmental Actions": duly-authorized actions taken by any
Governmental Authority.
3
<PAGE>
"Governmental Authority": the United States federal government, any
state or political subdivision thereof, any city or municipal entity, and any
entity exercising executive, legislative, judicial, regulatory, administrative
or other quasi-governmental functions.
"Indebtedness": as to any Person, at a particular time, (a)
indebtedness for borrowed money or for the deferred purchase price of property
or services in respect of which such Person is liable, contingently or
otherwise, as obligor, guarantor or otherwise, or in respect of which such
Person otherwise assures a creditor against loss, (b) obligations under leases
which shall have been or should be, in accordance with GAAP, recorded as capital
leases in respect of which obligations such Person is liable, contingently or
otherwise, as obligor, guarantor or otherwise, or in respect of which
obligations such Person assures a creditor against loss (c) obligations of such
Person to purchase or repurchase accounts receivable, chattel paper or other
payment rights sold or assigned by such Person, and (d) indebtedness or
obligations of such Person under or with respect to letters of credit, notes,
bonds or other debt instruments; provided, however, that none of the
above-described Indebtedness shall include or be deemed to include the Senior
Notes or any securities issued in connection with any refinancing thereof except
for the purpose of calculating the ratios specified in Schedule 7.14 hereto.
"Initial Payment Date": as defined on Schedule 2.02 hereto.
"Interest Rate": as defined on Schedule 2.02 hereto.
"Landlord Consent": a consent substantially in the form of Exhibit E
hereto or in other form acceptable to Lender, to be executed by the
owner/landlord, sublessor and/or licensor (including carriers) of any real
property where any of the Equipment is to be located.
"Law": any law, constitution, statute, regulation, rule, ordinance,
order, injunction, writ, decree or award of any Governmental Authority or court
of competent jurisdiction or of any arbitrator (including but not limited to the
Code, the UCC, any applicable tax law, product safety law, occupational safety
or health law or Communications Law).
"Lender's Expenses": as defined in Section 2.10 hereof.
"Lien": any mortgage, pledge, hypothecation, lien (statutory or
other), judgment lien, security interest, security agreement, charge or other
encumbrance, or other security arrangement of any nature whatsoever, including,
without limitation, any installment contract, conditional sale or other title
retention arrangement, any sale of accounts receivable or chattel paper, and any
assignment, deposit arrangement or lease intended as, or having the effect of,
security and the filing of any financing statement under the UCC or comparable
law of any jurisdiction.
"Loan": each of the loans and loan facilities described in Section
2.01 hereof and all Advances pursuant hereto.
"Loan Documents": a collective reference to this Agreement, the Note,
the Security Documents, and all other documents, instruments, agreements and
certificates evidencing or securing any advance hereunder or any obligation for
the payment or performance thereof and/or executed and delivered in connection
with any of the foregoing.
4
<PAGE>
"Mandatory Prepayments": as defined in Section 2.04(b) hereof.
"Material Adverse Effect": or "Material Adverse Change": any fact,
circumstance or condition that would reasonably be expected to have a material
adverse effect on, or material adverse change in, (i) the business, operations
or financial condition of Borrower and its Subsidiaries, taken together as a
whole, (ii) the ability of Borrower to perform its obligations under this
Agreement, the Note, or the other Loan Documents, or (iii) Lender's ability to
enforce the rights and remedies granted under this Agreement or the other Loan
Documents, in all cases whether attributable to a single circumstance or event
or an aggregation of circumstances or events.
"Mortgagee's Consent": a consent substantially in the form of Exhibit
E-1 hereto, to be executed by any Person holding a lien on real property leased
or otherwise provided to Borrower, on which any of the Equipment is located.
"Maturity Date": the date defined on Schedule 2.02 hereto, on which
all principal due under the Note shall be finally due and payable.
"Nortel": Northern Telecom Inc., a Delaware corporation.
"Nortel Equipment": the equipment and licensed or sub-licensed
software manufactured or supplied by Nortel to Borrower with respect to which
Advances hereunder are used directly or indirectly to finance the acquisition
cost thereof at any time pursuant to the Nortel Purchase Agreement or any
purchase order issued by Borrower to Nortel or otherwise, including installation
and construction services provided by Nortel pursuant thereto.
"Nortel Purchase Agreement": the Nortel Purchase Agreement identified
on Schedule 4.29 hereto, together with any amendments or supplements thereto,
and any other purchase agreement between Nortel and Borrower and all purchase
orders and invoices issued pursuant thereto, all subject to the approval of
Lender.
"Note": collectively, one or more promissory notes issued by Borrower
to Lender pursuant to this Agreement, and all extensions, renewals,
modifications, replacements, amendments, restatements and refinancings thereof.
"Obligations": all indebtedness, liabilities and obligations of
Borrower to Lender of any class or nature, whether arising under or in
connection with this Agreement and/or the other Loan Documents, whether now
existing or hereafter incurred, direct or indirect, absolute or contingent,
secured or unsecured, matured or unmatured, joint or several, whether for
principal, interest, fees, expenses, lease obligations, indemnities or
otherwise, including, without limitation, future advances of any sort, all
future advances made by Lender for taxes, levies, insurance and/or repairs to or
maintenance of the Collateral, the unpaid principal amount of, and accrued
interest on, the Note, and any expenses of collection or protection of Lender's
rights, including reasonable attorneys' fees.
"Organizational Documents": with respect to a corporation, the
articles of incorporation and by-laws of such corporation; with respect to a
partnership, the certificate of partnership (or limited partnership, as
applicable) and partnership agreement, together with the analogous documents for
any corporate or
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partnership general partner; with respect to a limited liability company, the
articles of organization and operating agreement of such limited liability
company; and in any case, any other document governing the formation and conduct
of business by such entity.
"Payment Date": as defined on Schedule 2.02 hereto.
"Payment Schedule": as defined on Schedule 2.02 hereto.
"Permits": all consents, licenses, notices, approvals, authorizations,
filings, orders, registrations, and permits required by any Governmental
Authority for the construction and operation of the Equipment (excluding
Regulatory Authorizations), issued or obtained as and when required in
accordance with all Requirements of Law.
"Permitted Encumbrances": the Liens permitted under Section 8.02
hereof.
"Person": an individual, corporation, limited liability company,
partnership, business or other trust, unincorporated association, joint venture,
joint-stock company, Governmental Authority or any other entity.
"Proceeds": as defined in Section 3.01 hereof.
"PUC": the public utilities commission for the state or any other
jurisdiction in which Borrower operates its telecommunications business or any
portion of the Equipment is located, or any successor agency, and any successor,
in whole or in part, to its functions or jurisdictions, and any other Persons
specified as such on Schedule 1 hereto.
"Purchase Agreement": individually and collectively, the Nortel
Purchase Agreement and the Vendor Purchase Agreement.
"Regulatory Authorizations": all approvals, authorizations, licenses,
filings, notices, registrations, consents, permits, exemptions, registrations,
qualifications, designations, declarations, or other actions or undertakings now
or hereafter made by, to or in respect of any telecommunications Governmental
Authority, including, without limitation, any certificates of public convenience
and all grants, approvals, licenses, filings and registrations from or to the
FCC or PUC or under any Communications Law necessary in order to enable Borrower
to own, construct, maintain and operate the Equipment, and any authorizations
specified on Schedule 1 hereto.
"Regulatory Event": any of the following events: (i) Lender becomes
subject to regulation as a "carrier," a "telephone company," a "common carrier,"
a "public utility" or otherwise under any applicable law or governmental
regulation, federal, state or local, solely as a result of the transactions
contemplated by this Agreement and the other Loan Documents, or (ii) Borrower
becomes subject to regulation by any Governmental Authority in any way that is
materially different from the regulation existing at the Closing Date and that
could materially adversely affect Borrower's ability to perform its material
obligations under the Loan Documents or Lender's rights thereunder, or (iii) the
FCC or PUC issues an order revoking, denying or refusing to renew, or
recommending the revocation, denial or non-renewal of, any material Regulatory
Authorization.
"Required Consents": the Governmental Authority approvals or consents
of other Persons required
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with respect to Borrower's execution, delivery and performance of this Agreement
and the other Loan Documents, as described in Section 4.04 hereto.
"Requirement of Law": as to any Person, the Organizational Documents
of such Person, and any law, treaty, rule or regulation, or determination of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its properties or transactions or to
which such Person or any of its property or transactions is subject, including
all provisions of all applicable state and federal constitutions, statutes,
rules, regulations and orders of Governmental Authorities, all Permits or
Regulatory Authorizations issued to Borrower, and all Communications Laws.
"Responsible Officer": with respect to a corporation, its President or
any Vice President or Treasurer; with respect to a partnership, its general
partner (or the President, any Vice President or Treasurer of any corporate
general partner, as applicable); with respect to a limited liability company, a
member or manager (or the President, any Vice President or Treasurer of any
corporate member or manager), or the President or any Vice President of any
other Person.
"SEC": the United States Securities and Exchange Commission.
"Security Documents": this Agreement, the Consents, all financing
statements, and any other documents granting, evidencing, or perfecting any
security interest or Lien with respect to or securing any of the Obligations.
"Senior Notes": means the Borrower's 12% Series A Senior Notes due
2008, issued pursuant to an Indenture (the "Indenture"), dated as of May 21,
1998, between the Borrower and First Union National Bank.
"Site(s)": any of the sites where Equipment is or is to be located.
"Software" and "Software Licenses": any software now or hereafter
owned by, or licensed to, Borrower that is contained in the Equipment supplied
by Nortel or any Vendor.
"Subsidiary": as to any Person, any corporation or other entity that
is an Affiliate of such Person and of which shares of stock or equity interests
having ordinary voting power with respect to the election of one or more
directors or other managers of such corporation are at the time directly or
indirectly owned or controlled by such Person (regardless of any contingency
which does or may suspend or dilute the voting rights of such class).
"Subordinated Indebtedness": Indebtedness of Borrower for money
borrowed for the use of Borrower, payment of which is fully subordinated to the
payment of all Obligations of Borrower to Lender upon terms and provisions
reasonably acceptable to Lender.
"Total Debt": at any time, the total outstanding liabilities of
Borrower, including, without limitation, current liabilities, long term
Indebtedness, all lease obligations under finance leases, capital leases, all
Contingent Obligations, and all the Obligations.
"UCC": the Uniform Commercial Code as the same may from time to time
be in effect in the State of New York, or the Uniform Commercial Code of another
jurisdiction, to the extent it may be required to
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apply to any item or items of Collateral.
"Units": means 160,000 Units, consisting of $160 million in aggregate
principal amount of 12% Series A Senior Notes due 2008 and Warrants to Purchase
200,226 shares of common stock of the Borrower offered and sold on or about May
21, 1998.
"Units Offering": means the offering of the Units on or about May 21,
1998 by the Borrower.
"Vendor" means any manufacturer or supplier of Vendor Equipment or
licensor or supplier of Software, in each case other than Nortel.
"Vendor Equipment" means any equipment, upgrades, switches and
licensed or sub-licensed Software manufactured, or supplied to Borrower, by a
Vendor.
"Vendor Purchase Agreement": any purchase agreement, together with any
amendments or supplements thereto, between a Vendor and Borrower or an assignor
of Borrower and all purchase orders and invoices issued pursuant thereto for the
sale of Vendor Equipment, all subject to the approval of Lender, not to be
unreasonably withheld or delayed.
1.02. Accounting Principles; Subsidiaries. Except as otherwise
provided in this Agreement, all computations and determinations as to accounting
or financial matters and all financial statements to be delivered pursuant to
this Agreement shall be made and prepared in accordance with GAAP (including
principles of consolidation where appropriate), consistently applied, and all
accounting or financial terms shall have the meanings ascribed to such terms by
GAAP. If, at any time, Borrower has any Subsidiaries, all accounting and
financial terms herein shall be deemed to include references to consolidated and
consolidating principles, and covenants, representations and agreements with
respect to Borrower and its properties and activities shall be deemed to refer
to Borrower and its consolidated Subsidiaries collectively.
1.03. UCC Terms. Except as otherwise provided or amplified (but not
limited) herein, terms used in this Agreement that are defined in the UCC shall
have the same meanings herein.
1.04. General Construction; Captions. All definitions and other terms
used in this Agreement shall be equally applicable to the singular and plural
forms thereof, and all references to any gender shall include all other genders.
The words "hereof", "herein" and "hereunder" and words of similar import when
used in this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement, and Section, subsection, schedule and
exhibit references are to this Agreement unless otherwise specified. The
captions and table of contents in this Agreement and the other Loan Documents
are for convenience only, and in no way limit or amplify the provisions hereof.
1.05. References to Documents and Laws. All defined terms and
references in this Agreement or the other Loan Documents with respect to any
agreements, notes, instruments, certificates or other documents shall be deemed
to refer to such documents and to any amendments, modifications, renewals,
extensions, replacements, restatements, substitutions and supplements of and to
such documents. All references to statutes and related regulations shall include
any amendments thereof and any successor statutes and regulations.
ARTICLE 2: LOANS
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2.01. Commitment. Subject to the terms and conditions herein provided,
and so long as no Default has occurred and is continuing hereunder, Lender
agrees to lend to Borrower from time to time before the Financing Termination
Date, an aggregate principal amount not to exceed the amount set forth on
Schedule 2.01 hereto as the maximum principal amount (the "Commitment"). All
Advances hereunder shall be used solely for the purchase of Nortel Equipment and
Vendor Equipment and related services (exclusive of sales tax), and amounts not
exceeding the amount (if any) specified on Schedule 2.01 hereto may be used for
legal fees, charges, expenses and closing costs and other expenses incurred by
Borrower or incurred by Lender and payable by Borrower under Section 2.10
hereof, provided, however, that the Borrower may not use more than thirty
percent (30%) of the aggregate principal amount of all Advances made hereunder
for purchases of Vendor Equipment and related services, provided, further, that
in each case such amount has been approved by Nortel prior to the date of the
Advance therefor.
2.02. Note and Payment Terms.
(a) Promissory Note. The Loan shall be evidenced by the Note
substantially in the form of Exhibit A hereto, with appropriate
insertions. The Note shall be executed by Borrower, payable to the
order of Lender, and shall evidence the obligation of Borrower to repay
all principal amounts advanced under or pursuant to this Agreement,
together with interest and all other amounts due thereunder. The Note
shall be dated the Closing Date, have a stated maturity that is the
Maturity Date, and bear interest at the Interest Rate from the First
Borrowing Date until the principal amount and any other amount due
under the Note is paid in full (whether on the Maturity Date, by
acceleration or otherwise). All schedules attached to the Note shall be
deemed a part thereof. Any such schedule may be amended by Lender from
time to time to reflect changes in the amounts includable thereon, but
the failure to attach any schedule shall not diminish the obligation of
Borrower to repay all amounts due hereunder or on the Note.
(b) Interest Payments. Interest shall continue to accrue on
the principal amount outstanding on the Note at the Interest Rate and
shall be payable, in arrears, on each Payment Date, with the principal
payments described below.
(c) Principal Payments. All principal amounts due with respect
to the Note shall be payable in installments in accordance with the
Payment Schedule set forth on Schedule 2.02 hereto, commencing on the
Initial Payment Date and on each Payment Date thereafter until the
Maturity Date. The principal payment amounts shall be recalculated by
Lender if any Advances are made hereunder after the Initial Payment
Date, based on the aggregate amount of all Advances made at any time.
Borrower and Lender understand that this payment schedule is intended
to amortize fully the principal amount of the Note and any other
principal and interest amounts outstanding will be added to the final
payment on the Maturity Date. In any event, the entire outstanding
principal amount of the Note and all accrued but unpaid interest and
all other outstanding amounts due thereunder shall be paid on the
Maturity Date.
(d) Late Payments and Default Rate. Notwithstanding the
foregoing, if Borrower shall fail to pay, within ten (10) days after
the due date thereof, any principal amount or interest or other amount
payable under this Agreement or under the Note, Borrower shall pay to
Lender, to defray the administrative costs of handling such late
payments, an amount equal to interest on the amount unpaid, to the
extent permitted under applicable Law, at the Default Rate (instead of
the Interest
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Rate), from the due date until such overdue principal amount or
interest is paid in full (both before and after judgment) whether or
not any notice of default in the payment thereof has been delivered
under Section 9.01 hereof. In addition, but without duplication, upon
the occurrence and during the continuance of an Event of Default, all
outstanding principal and interest hereunder shall bear interest at
the Default Rate (instead of the Interest Rate) until such amounts are
paid in full or such Event of Default is waived in writing by Lender.
(e) Excess Interest. Notwithstanding any provision of the
Note, this Agreement or any other Loan Document to the contrary, it is
the intent of Lender and Borrower that Lender or any subsequent holder
of the Note shall never be entitled to receive, collect, reserve or
apply, as interest, any amount in excess of the maximum rate of
interest permitted to be charged by applicable Law, as amended or
enacted from time to time. In the event Lender, or any subsequent
holder of the Note, ever receives, collects, reserves or applies, as
interest, any such excess, such amount which would be excessive
interest shall be deemed a partial prepayment of principal due under
the Note and treated as such, or, if the principal indebtedness and all
other amounts due are paid in full, any remaining excess funds shall
immediately be applied to any other outstanding Obligations of Borrower
due to Lender, and if none is outstanding, shall be paid to Borrower.
In determining whether or not the interest paid or payable, under any
specific contingency, exceeds the highest lawful rate, Borrower and
Lender shall, to the maximum extent permitted under applicable Law, (a)
exclude voluntary prepayments and the effects thereof as it may relate
to any fees charged by Lender, and (b) amortize, prorate, allocate, and
spread, in equal parts, the total amount of interest throughout the
entire term of the Note; provided that if the indebtedness is paid and
performed in full prior to the end of the full contemplated term
hereof, and if the interest received for the actual period of existence
hereof exceeds the maximum lawful rate, Lender or any subsequent holder
of the Note shall refund to Borrower the amount of such excess or
credit the amount of such excess against the principal portion of the
indebtedness, as of the date it was received, and, in such event,
Lender shall not be subject to any penalties provided by any laws for
contracting for, charging, reserving or receiving interest in excess of
the maximum lawful rate.
2.03. Procedures for Borrowing.
(a) Timing of Advances. Advances shall not be made more than
once per calendar month, and all Advances in any calendar month shall
be made on the same Borrowing Date. Each Advance (other than the last
Advance) shall be in an aggregate principal amount of not less than
$25,000. No amounts may be borrowed hereunder on or after the Financing
Termination Date. Lender is hereby authorized to retain from each
Advance all amounts of Lender's Expenses accrued and unpaid by
Borrower, for which invoices have been sent to Borrower at least five
(5) Business Days before such Advance. In any event, all outstanding
legal fees, charges and expenses not paid by Borrower prior to any
Borrowing Date shall be paid before any Advance is made or concurrently
with such Advance.
(b) Borrowing Certificates. To request an Advance hereunder,
Borrower shall send to Lender, at least five (5) Business Days prior to
the requested Borrowing Date, a completed Borrowing Certificate, along
with invoices and such other supporting documentation as Lender may
reasonably request. Lender is hereby authorized to add to any Borrowing
Certificate all amounts payable by Borrower to Lender in respect of
legal fees, charges and expenses arising or incurred by Lender, to the
extent such fees, charges and expenses have then been incurred or
charged and may
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be paid from proceeds of the Loan.
(c) Transmission of Advances. Advances shall be made by wire
transfer to the account(s) specified in the applicable Borrowing
Certificate, except that (i) proceeds of the Loan may be transmitted,
at Lender's option, directly to an Nortel or Vendor account for payment
of any unpaid Nortel or Vendor invoices, and (ii) Advances shall be
made to Borrower only to the extent that Borrower provides Lender with
satisfactory evidence that the amount of such Advance has been paid to
Nortel or the Vendor. No further authorization shall be necessary for
any such direct disbursements, and each such Advance shall satisfy pro
tanto the obligations of Lender under this Agreement.
(d) Borrowing Dates. Advances shall be made by Lender on the
Borrowing Date specified in the applicable Borrowing Certificate if all
conditions for such Advance have been satisfied, or on such later
Business Day as all conditions for such Advance shall have been
satisfied, as determined by Lender.
(e) Advances After Default. At its option, during the
continuance of a Default, Lender may, but shall not be obligated to,
make Advances to any Person (including without limitation Nortel and
any Vendor, suppliers, sub-contractors and materialmen) to whom Lender
in good faith determines payment is due with respect to the Equipment,
and any Advances so made shall be deemed made as of the Business Day on
which the Person to whom payment is made receives the same. No further
authorization from Borrower shall be necessary to warrant such direct
Advances, and the execution of this Loan Agreement by Borrower shall,
and hereby does, constitute an irrevocable authorization and power of
attorney to advance proceeds hereunder. All such Advances shall satisfy
pro tanto the obligations of Lender hereunder and shall be secured by
the Security Documents as fully as if made directly to Borrower.
2.04. Prepayments.
(a) Voluntary Prepayments. Borrower may, at its option, at any
time and from time to time, prepay the Loan in whole or in part, upon
at least ten (10) Business Days prior written notice to Lender
specifying the date and amount of prepayment, in a minimum amount of
$25,000, plus the premium described below, and all accrued but unpaid
interest thereon. Such notice shall be irrevocable and the principal
amount specified in such notice shall be due and payable on the date
specified together with accrued interest on the amount prepaid. Any
such prepayment shall be subject to a prepayment premium equal to a
percentage of the amount prepaid as follows: three percent (3%) if the
prepayment is made prior to the first anniversary of the Closing Date,
two percent (2%) if the prepayment is made more than one (1), but not
more two (2) years after the Closing Date, one percent (1%) if the
prepayment is made more than two (2) but not more than three (3) years
after the Closing Date, and without a premium if the prepayment is made
more than three (3) years after the Closing Date. Amounts prepaid may
not be reborrowed and shall be applied as provided in Section 2.04(c).
Mandatory Prepayments, excess interest payments under Section 2.02(g)
or prepayments made from insurance proceeds pursuant to Section 6.03 or
with any condemnation proceeds shall not be subject to a prepayment
premium.
(b) Mandatory Prepayment. Upon Lender's demand, all
Obligations arising from Advances for Equipment financed for purchase
under the Nortel Purchase Agreement will become
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due and payable pursuant to the terms of the Note if such Nortel
Agreement is terminated prior to the completion and acceptance of such
Equipment. Any such Mandatory Prepayments shall not require the
payment of any premium or penalty.
(c) Application of Prepayments. Any prepayments shall be
applied first to interest, then to premium, then to expenses, and then
to the installments of principal in reverse chronological order from
the Maturity Date.
2.05. Computation of Interest. Interest shall be calculated daily on
the basis of a 365-day year for the actual days elapsed in the period during
which it accrues.
2.06. Payments. All payments and prepayments (if any) to be made in
respect of principal, interest, prepayment premiums or other amounts due from
Borrower hereunder or under the Note shall be payable on or before 1:00 p.m.,
Nashville time, on the Business Day when due, without presentment, demand,
protest or notice of any kind, all of which are hereby expressly waived, and an
action therefor shall immediately accrue. Such payments shall be made to Lender
at Lender's office at 501 Corporate Centre Drive, Franklin, Tennessee 37067, or
such other location specified in writing by Lender, in immediately available
funds, without setoff, recoupment, counterclaims or any other deduction of any
nature.
2.07. Indemnity. Borrower hereby indemnifies Lender against any losses,
claims, penalties, expenses, actions, suits, obligations, liabilities and Liens
(and all costs and expenses, including reasonable attorneys' fees incurred in
connection therewith), that Lender has sustained or incurred or may sustain or
incur in connection with any of the Collateral, or the enforcement, performance
or administration of the Loan Documents, or as a consequence of any Default by
Borrower in the performance or observance of any covenant or condition contained
in this Agreement or the Loan Documents, including without limitation, the
breach of any representation or warranty, any failure of Borrower to pay when
due (by acceleration or otherwise) any principal, interest, fee or any other
amount due hereunder or under the Note, and any failure of Borrower to comply
with all applicable Requirements of Law (collectively, "Claims") except to the
extent of any Claims caused solely by Lender's gross negligence or willful
misconduct. Borrower's obligations under this Section 2.07 shall be part of the
Obligations and shall be secured by the Collateral. Borrower agrees that upon
written notice by Lender of the assertion of any Claims, Borrower shall, at
Lender's option, either assume full responsibility for, or reimburse Lender for
the reasonable costs and expenses of, the defense thereof. Lender shall have no
liability for consequential or incidental damages of any nature unless such
damages arise as a result of Lender's gross negligence or willful misconduct.
The provisions of this Section 2.07 shall survive the termination of this
Agreement and payment of the Obligations for a period of two years.
2.08. Use of Proceeds. The proceeds of the Advances hereunder shall be
used by Borrower only for the purposes and in the amounts described in Section
2.01 hereof, and no amounts repaid may be reborrowed (except for any voluntary
prepayments as permitted pursuant to Section 2.04(a).
2.09. Fees. Borrower shall pay Lender the fees described on Schedule
2.09 hereto in connection with this Agreement.
2.10. Lender's Expenses. Borrower agrees (a) to pay or reimburse Lender
for all its reasonable costs, fees, charges and expenses incurred or arising in
connection with the negotiation, review, preparation and execution of this
Agreement, the Loan Documents, any commitment or proposal letter, or any
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amendment, supplement, waiver, modification to, or restructuring of this
Agreement, the Obligations or the other Loan Documents, including, without
limitation, reasonable legal fees and disbursements, expenses, document charges
and other charges and expenses of Lender in connection with this Agreement, (b)
to pay or reimburse Lender for all its reasonable costs, fees, charges and
expenses incurred in connection with the administration of the Loan or the
enforcement, protection or preservation of any rights under or in connection
with this Agreement or any other Loan Documents, including, without limitation,
reasonable legal fees and disbursements, audit fees and charges, and all
out-of-pocket expenses, (c) to pay, indemnify, and to hold Lender harmless from,
any and all recording and filing fees and taxes and any and all liabilities with
respect to, or resulting from any delay in paying, stamp, excise and other taxes
(excluding income and franchise taxes and taxes of similar nature), if any,
which may be payable or determined to be payable in connection with the
execution and delivery or recordation or filing of, or consummation of any of
the transactions contemplated by, or any amendment, supplement or modification
of, or any waiver or consent under or in respect of, this Agreement and the
other Loan Documents. All of the amounts described in this Section are referred
to collectively as the "Lender's Expenses", shall be payable upon Lender's
demand, and shall accrue interest at the Interest Rate in effect when such
demand is made from five (5) days after the date of demand until paid in full.
All Lender's Expenses, and interest thereon, shall be part of the Obligations
and shall be secured by the Collateral. The agreements in this Section 2.10
shall survive repayment of the Obligations. All Lender's Expenses that are
outstanding on any Borrowing Date shall be paid before or with any Advance
relating thereto. If Borrower has not paid to Lender the amount of all Lender's
Expenses billed to Borrower at least five (5) Business Days before such
Borrowing Date, Lender shall be authorized to retain from any Advance on such
Borrowing Date the amount of such Lender's Expenses that remain unpaid.
Borrower's obligation to pay Lender's Expenses shall not be limited by any
limitation on the amount of the Commitment that may be designated as available
for such purposes, and any amounts so designated shall be used to pay Lender's
Expenses accrued at the time of any Advance before any of Borrower's legal fees
or similar expenses.
ARTICLE 3: COLLATERAL AND SECURITY AGREEMENT
--------------------------------------------
3.01. Grant of Security Interest. Borrower (as debtor) hereby assigns
to Lender as collateral, and grants to Lender (as secured party) a continuing
security interest in and to, all of Borrower's right, title and interest in and
to the following kinds and types of property, whether now owned or hereafter
acquired or arising, wherever located, together with all substitutions therefor
and all accessions, replacements and renewals thereof, and in all proceeds
thereof (collectively, the "Collateral"):
(a) All Nortel Equipment financed or refinanced with
proceeds of an Advance and all Vendor Equipment financed or
refinanced with proceeds of an Advance, and in each case any
and all additions, substitutions, and replacements to or of
any of the foregoing, together with all attachments,
components, parts, improvements, upgrades, and accessions
installed thereon or affixed thereto (collectively,
"Equipment") and Borrower's rights under each Nortel Purchase
Agreement and each Vendor Purchase Agreement relating to such
Equipment;
(b) All general intangibles and intangible property
(including all contracts and contract rights) constituting
part of, or provided by or through Nortel or any Vendor in
connection with, the Equipment which are necessary for the
proper operation of the Equipment, including (without
limitation) amounts due under licenses, license rights, rights
in intellectual property, Software, Software Licenses,
computer programming (including
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source codes, object codes and all other embodiments of
computer programming or information), refunds, warranties and
indemnification rights directly used in the Equipment, and all
amounts owed at any time to Borrower by Lender or Nortel or by
a Vendor in connection with a Vendor Purchase Agreement
relating to Equipment (collectively, "General Intangibles");
and
(c) All proceeds and products of any of the
foregoing, including without limitation (i) any and all
proceeds of any indemnity, warranty or guaranty payable to
Borrower from time to time with respect to any of the
Collateral, and (ii) any and all payments (in any form
whatsoever) made or due and payable to Borrower from time to
time in connection with any requisition, confiscation,
condemnation, seizure or forfeiture of all or any part of the
Collateral by any Governmental Authority (or any Person acting
under color of governmental authority) (collectively,
"Proceeds").
3.02. Priority of Security Interests. The security interests granted by
Borrower to Lender are and shall be continuing and indefeasible first-priority
security interests in the Collateral, subject to no Liens except for Permitted
Encumbrances as defined and permitted under Section 8.02 hereof.
3.03. Further Documentation; Pledge of Instruments. At any time and
from time to time, upon the written request of Lender, and at the sole expense
of Borrower, Borrower shall promptly execute, deliver and record any documents,
instruments, agreements and amendments, and take all such further action, as
Lender may reasonably deem necessary or appropriate in obtaining the full
benefits of this Agreement and of the rights and powers herein granted,
including, without limitation, the filing of any financing statements or
amendments under the UCC. Borrower also hereby authorizes Lender to file any
such financing statement or amendment thereto, or with a copy or telecopy of
Borrower's signature, to the extent permitted by applicable Law, or to execute
any financing statement or amendment thereof on behalf of Borrower as Borrower's
attorney-in-fact. If any amount payable under or in connection with any of the
Collateral shall be or become evidenced by any promissory note or other
instrument or any certificated securities, such note, instrument or certificate
shall be immediately pledged and delivered to Lender hereunder, duly endorsed in
a manner satisfactory to Lender.
3.04. Further Identification of Collateral. Borrower shall furnish to
Lender from time to time statements and schedules further identifying and
describing the Collateral and such other reports in connection with the
Collateral as Lender may reasonably request, all in reasonable detail.
3.05. Remedies. Lender shall have all the rights and remedies of a
secured party under the UCC, and shall be entitled to exercise any and all
remedies available under Article 9 hereof or otherwise available at law or in
equity upon the occurrence of an Event of Default.
3.06. Standard of Care. Lender shall be deemed to have exercised
reasonable care in the custody and preservation of any of the Collateral in its
possession if it treats the Collateral in the manner in which it would treat its
own property or otherwise takes such action for that purpose as Borrower
requests in writing, but Lender's failure to comply with any such request shall
not of itself be deemed a failure to exercise reasonable care, and no failure of
Lender to preserve or protect any rights with respect to such Collateral against
prior parties, or to do any act with respect to the preservation of such
Collateral not so requested by Borrower, shall be deemed a failure to exercise
reasonable care in the custody or preservation of such Collateral.
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3.07. Advances to Protect Collateral. All expenses of protecting,
storing, warehousing, insuring, handling, maintaining and shipping the
Collateral (including, without limitation, all rent payable by Borrower to any
landlord of any Site), and, any and all taxes shall be borne and paid by
Borrower. Lender may (but shall not be obligated to) make advances to preserve,
protect or obtain any of the Collateral, including advances to cure, with the
prior consent of Borrower, defaults under any lease agreements for Sites or
advances to pay taxes, insurance and the like, and all such advances shall
become part of the Obligations owing to Lender hereunder and shall be payable to
Lender on demand, with interest thereon from the date of such advance until paid
at the Default Rate in effect on the date of such advance.
3.08. License to Use. So long as an Event of Default is continuing,
Lender is hereby granted a license or other right to use , in connection with
the Equipment and without charge, the Software and the Software Licenses
pertaining to the Equipment.
3.09. Subsidiary Guarantees. Payment of the Borrower's Obligations
shall also be unconditionally guaranteed by any existing Subsidiary of the
Borrower, as well as all future Subsidiaries of the Borrower, pursuant to the
form of Guaranty Agreement attached as Exhibit G to this Agreement, during such
time as, with regard to any single Subsidiary, any such single Subsidiary's
assets or revenues (whichever applies first) meet or exceed 10% of the
Borrower's consolidated assets or revenues (as applicable) as of the Closing
Date, as of the end of each of the Borrower's fiscal years thereafter, or as of
the end of the Borrower's fiscal quarter immediately preceding any Borrowing
Date, or, with regard to any group of Subsidiaries, the combined combined assets
or revenues of any such group of Subsidiaries (whichever applies first) meet or
exceed 15% of the Borrower's consolidated assets or revenues (as applicable) as
of the Closing Date, as of the end of each of the Borrower's fiscal years
thereafter, or as of the end of the Borrower's fiscal quarter immediately
preceding any Borrowing Date.
ARTICLE 4: REPRESENTATIONS AND WARRANTIES
-----------------------------------------
Borrower hereby represents and warrants to Lender as follows:
4.01. Organization and Qualification. Borrower is duly organized,
validly existing and in good standing as a corporation under the laws of
Maryland. Borrower is duly qualified to do business and in good standing in each
jurisdiction in which the failure to receive or retain such qualification would
have a Material Adverse Effect.
4.02. Authority and Authorization. Borrower has all requisite corporate
right, power and authority to execute and deliver and perform its obligations
under this Agreement, to make the borrowings provided for herein, and to execute
and deliver and to perform its obligations under the Note. Borrower's execution,
delivery and performance of the Loan Documents have been duly and validly
authorized by all necessary corporate action on the part of Borrower.
4.03. Execution and Binding Effect. This Agreement, the Note and all
other Loan Documents have been or will be duly and validly executed and
delivered by Borrower, and constitute or, when executed and delivered will
constitute, the legal, valid and binding obligations of Borrower enforceable in
accordance with their respective terms, except as such enforceability may be
limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
receivership, moratorium or other Laws affecting creditors' rights generally.
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4.04. Governmental Authorizations. Except for the consents identified
on Schedule 4.04 hereto (the "Required Consents"), no authorization, consent,
approval, license, exemption or other action by, and no registration,
qualification, designation, declaration or filing with, any Governmental
Authority (other than the filing of UCC financing statements and continuation
statements) is or will be necessary in connection with execution and delivery of
this Agreement, the Note or any other Loan Documents by Borrower, consummation
of the transactions herein or therein contemplated, performance of or compliance
by Borrower with the terms and conditions hereof or thereof.
4.05. Regulatory Authorizations. The Borrower holds all material
authorizations, permits and licenses required by the FCC or the PUC or any
Communications Law for the operation of the Equipment, and all such Regulatory
Authorizations are in full force and effect, are subject to no further
administrative or judicial review and are therefore final. Lender will not, by
reason of the execution, delivery and performance (other than the enforcement of
remedies) of any of the Loan Documents, be subject to the regulation or control
of either the FCC or the PUC. The Regulatory Authorizations will be described on
Schedule 4.05 within 30 days after the Closing Date.
4.06. Material Agreements; Absence of Conflicts. The execution and
delivery of this Agreement, the Note and the other Loan Documents, the
consummation of the transactions herein or therein contemplated and the
performance of or compliance with the terms and conditions hereof or thereof by
Borrower will not (a) materially violate any applicable Law; (b) conflict with
or result in a material breach of or a default under the Organizational
Documents of Borrower or any material agreement or instrument to which Borrower
is a party or by which Borrower or its properties is bound; or (c) result in the
creation or imposition of any Lien upon any property (now owned or hereafter
acquired) of Borrower except as otherwise contemplated by this Agreement, except
with respect to Permitted Encumbrances or as contemplated by this Agreement and
the Security Documents or which would not have a Material Adverse Effect.
4.07. No Restrictions. Borrower is not a party or subject to any
contract or agreement which restricts its right or ability to incur
Indebtedness, other than as set forth on Schedule 4.07, none of which prohibit
Borrower's execution of or compliance with this Agreement. Borrower has not
agreed or consented to cause or permit in the future (upon the happening of a
contingency or otherwise) any of the Collateral, whether now owned or hereafter
acquired, to be subject to a Lien that is not a Permitted Encumbrance.
4.08. Financial Statements. Borrower has furnished to Lender the most
recent annual or quarterly financial statements of Borrower, certified by a
Responsible Officer of Borrower, including balance sheets and related statements
of income and retained earnings and changes in financial position, as described
on Schedule 4.08 hereof. Such financial statements (including the notes thereto)
present fairly the financial condition of Borrower on a consolidated basis as of
the end of each such fiscal period and the results of its operations and the
changes in its financial position for the fiscal period then ended, all in
conformity with GAAP applied on a basis consistent with that of the preceding
fiscal period. Any pro forma financial statements delivered by Borrower to
Lender were prepared in good faith.
4.09. Financial Accounting Practices. Borrower has made and kept books,
records and accounts which, in reasonable detail, accurately and fairly reflect
its respective transactions and dispositions of its assets, and Borrower shall
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that (a) transactions are executed in accordance with
management's general or specific authorization, (b) transactions are recorded as
necessary (i) to permit preparation of financial statements in conformity with
GAAP and (ii) to maintain accountability for assets, (c) access to assets is
permitted only in accordance with management's general or specific authorization
and (d) the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with respect to
any differences.
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4.10. Accurate and Complete Disclosure. No representation or warranty
made by Borrower under this Agreement and no statement made by Borrower in any
financial statement, certificate, report, exhibit or document furnished by
Borrower to Lender pursuant to or in connection with this Agreement (including,
without limitation, any filings with the SEC, the FCC or the PUC) is or was
false or misleading as of the date made in any material respect (including by
omission of material information necessary to make such representation, warranty
or statement not misleading). To the best of the knowledge of Borrower, there
are no existing facts that would reasonably be expected to result in a Material
Adverse Effect which has not been set forth in the financial statements referred
to in Section 4.08 hereof or otherwise disclosed in writing to Lender prior to
the First Borrowing Date.
4.11. No Event of Default; Compliance with Material Agreements. No
event has occurred and is continuing and no condition exists which constitutes a
Default or an Event of Default after giving effect to the Advance to be made on
the First Borrowing Date. As of the date hereof, Borrower is not in violation of
any term of its material agreements or instruments to which it is a party or by
which it or its properties is bound which would reasonably be expected to result
in a Material Adverse Effect.
4.12. Litigation. Except as set forth in Schedule 4.12 or as otherwise
disclosed by the Borrower pursuant to the Exchange Act, there is no pending
action, suit or (to the best of Borrower's knowledge) threatened proceeding by
or before any Governmental Authority against or affecting Borrower or any of its
properties, rights or licenses which, if adversely decided, would reasonably be
expected to result in a Material Adverse Effect.
4.13. Rights to Property; Intellectual Property. Borrower has good and
marketable title, subject only to the Permitted Encumbrances, to the Collateral
and to all personal and real property purported to be owned by it as reflected
in the most recent balance sheet referred to in Section 4.08 hereof (except as
sold or otherwise disposed of in the ordinary course of business as no longer
used or useful in the conduct of the business). Borrower owns or possesses the
right to use all material patents, trademarks, service marks, trade names,
copyrights, know-how, franchises, software and software licenses necessary for
the operation of its business.
4.14. Financial Condition. Borrower's financial condition is accurately
described in the Certificate of Financial Condition executed by Borrower
pursuant hereto.
4.15. Taxes. Borrower's federal tax identification number is set forth
on Schedule 1 hereto. All tax returns required to be filed by Borrower have been
properly prepared, executed and filed, and all taxes, assessments, fees and
other governmental charges upon Borrower or upon any of its respective
properties, incomes, sales or franchises which are shown to be due and payable
thereon have been paid, other than taxes or assessments the validity or amount
of which Borrower is contesting in good faith. The reserves and provisions for
taxes on the books of Borrower are adequate for all open years and for its
current fiscal period.
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4.16. No Material Adverse Change. Since the date of the financial
statements referenced in Section 4.08, there has been no Material Adverse
Change.
4.17. No Regulatory Event. No Regulatory Event has occurred and is
continuing.
4.18. Trade Relations. There exists no actual or, to the best of
Borrower's knowledge, threatened termination, cancellation or limitation of the
business relationship between Borrower and any Carrier, any labor organizations,
any material customer or any group thereof whose agreements with Borrower are
material to the business of Borrower, or with any material Supplier, and there
exists no present condition or state of facts or circumstances which would have
a Material Adverse Effect or prevent Borrower from conducting its business after
the consummation of the transaction contemplated by this Agreement.
4.19. No Brokerage Fees. Other than as described in this Agreement, no
brokerage or other fee, commission or compensation is to be paid by Borrower to
any Person in connection with the loans to be made hereunder. Borrower hereby
indemnifies Lender against any claims brought against Lender for brokerage fees
or commissions of any Person based on a written agreement with Borrower and
agrees to pay all reasonable expenses actually incurred by Lender in connection
with the defense of any action or proceeding brought to collect any such
brokerage fees or commissions.
4.20. Margin Stock; Regulations U and X. Borrower is not engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock. The making of the
Advances and the use of the proceeds thereof will not violate Regulations U or X
of the Board of Governors of the Federal Reserve System.
4.21. Intentionally Deleted.
4.22. Intentionally Deleted.
4.23. Security Interests. The provisions of Article 3 hereof are
effective to create in favor of Lender a legal, valid and enforceable Lien on or
security interest in all of the Collateral, and, when the recordings and filings
described on Schedule 4.23 hereto have been effected in the public offices
listed on said Schedule 4.23, this Agreement and the Security Documents will
create a perfected first-priority security interest in all right, title, estate
and interest of Borrower in the Collateral, and subject to no other Liens except
for Permitted Encumbrances. All action necessary or desirable to protect and
perfect such security interest in each item of the Collateral will have been
duly taken prior to or on the First Borrowing Date. The recordings and filings
shown on said Schedule 4.23 are all the actions necessary or advisable in order
to establish, protect and perfect the interest of Lender in the Collateral.
4.24. Place of Business. The chief executive offices of Borrower are
identified on Schedule 4.24 hereto. Borrower's principal place of business in
the state(s) where the Equipment is located is identified on Schedule 4.24
hereto. Borrower's records concerning the Collateral are kept at one or both of
these addresses.
4.25. Location of Collateral. The Collateral is and will be kept at the
locations identified on Schedule 4.24 hereto or such other locations as may be
permitted under Section 8.12.
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4.26. Clear Title To Equipment. Borrower is the sole owner of each item
of the Equipment, having good and marketable title thereto, free and clear of
any and all Liens, claims, or rights of others, except for the security interest
granted herein to Lender and the other Permitted Encumbrances.
4.27. Assumed Names. Except as set forth on Schedule 4.27 hereto,
Borrower does not conduct business under any assumed names or trade names, and
has not, during the five (5) years preceding the date of this Agreement,
conducted business under any other names, or any assumed names or trade names.
4.28. Intentionally Deleted.
4.29. Nortel Purchase Agreement. The Nortel Purchase Agreement for
Nortel Equipment already acquired has been duly executed and delivered by
Borrower, is in full force and effect, and a true, correct and complete copy
thereof (including all annexes, attachments and amendments thereto) has been
delivered to Lender, and there are no other side letters, waivers or other
agreements known to Borrower affecting the terms thereof.
4.30. Subsidiaries of Borrower. A true and correct list of all direct
and indirect Subsidiaries of the Borrower, together with the jurisdiction of
incorporation of each Subsidiary, appears on Schedule 4.30 to this Agreement.
ARTICLE 5: CONDITIONS OF CLOSING
--------------------------------
On or before the Closing Date, the following conditions shall have been
satisfied:
5.01 Borrower's Certificate. A certificate of Borrower signed by a duly
authorized Responsible Officer, certifying as to (i) true copies of
Organizational Documents of Borrower in effect on such date; (ii) evidence of
all corporate action taken by Borrower relative to this Agreement, the Note and
the other Loan Documents; (iii) the names, true signatures and incumbency of the
Responsible Officers of Borrower authorized to execute and deliver this
Agreement, the Note and the other Loan Documents; (iv) a Certificate of Good
Standing (or equivalent certificate) for Borrower duly issued by the Secretary
of State of Maryland and each state in which Borrower intends to locate the
Equipment; and (v) such other matters as Lender shall request.
5.02 Opinion of Counsel. Lender shall have received dated as of the
Closing Date and in form and substance satisfactory to Lender a written opinion
of counsel to Borrower, substantially in the Form of Exhibit C hereto.
5.03. Closing Documents. Lender shall have received the following
documents, all in form and substance satisfactory to Lender:
(a) Agreement. This Agreement, duly executed by Borrower;
(b) Note. The Note, duly executed by Borrower;
(c) Financing Statements. All UCC-1 financing statements
necessary to perfect the Liens granted hereby, each duly executed by
Borrower, and duly recorded in all the jurisdictions identified on
Schedule 4.24 hereto;
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(d) Guaranty Agreements. A Guaranty Agreement, duly executed
by all of the existing Subsidiaries of the Borrower, in the form
attached as Exhibit G to this Agreement.
(e) Insurance. Policies and certificates of insurance required
by Section 7.06, accompanied by evidence of the payment of the premiums
therefor;
(f) Financial Statements. The financial statements described
in Section 4.08 hereof;
(g) Certificate of Financial Condition. A Certificate of
Financial Condition, duly executed by a Responsible Officer of
Borrower.
(h) Pre-Closing Lien Searches. Lien searches from all
jurisdictions reasonably determined by Lender to be appropriate,
effective as of a date reasonably close to the Closing Date, reflecting
no other Liens (other than Permitted Encumbrances) on any of the
Collateral.
ARTICLE 6: CONDITIONS OF LENDING
--------------------------------
6.01. Conditions for Initial Advance. On or before the First Borrowing
Date, the following conditions shall have been met to Lender's satisfaction:
(a) Post-Closing Lien Searches. Lender shall have received
satisfactory results of Lien searches in all jurisdictions reasonably
determined by Lender to be appropriate, reflecting the filing of
financing statements in favor of Lender pursuant hereto and no other
Liens other than Permitted Encumbrances.
(b) Required Consents. Lender shall have received satisfactory
evidence of Borrower's obtaining the Required Consents.
6.02. Conditions for All Advances. The obligation of Lender to make any
Advance hereunder is subject to Borrower's performance of its obligations
hereunder on or before the Borrowing Date of such Advance, and to the
satisfaction of the following further conditions on or before the Borrowing Date
for any Advance, including the first Advance:
(a) Filings, Registrations and Recordings. Any financing
statements or other recordings required hereunder shall have been
properly filed, registered or recorded in each office in each
jurisdiction required in order to create in favor of Lender a perfected
first-priority Lien on the Collateral, subject to no other Lien except
Permitted Encumbrances; Lender shall have received acknowledgment
copies of all such filings, registrations and recordations stamped by
the appropriate filing officer; and Lender shall have received results
of searches of such filing offices, and satisfactory evidence that any
other Liens (other than Permitted Encumbrances) on the Collateral have
been duly released, that all necessary filing fees, recording fees,
taxes and other expenses related to such filings, registrations and
recordings have been paid in full.
(b) Borrowing Certificate. Lender shall have received a duly
executed Borrowing Certificate in the form of Exhibit B, including a
detailed itemization of all costs of goods and services to be paid with
the proceeds of the Advance and accompanied by supporting documentation
satisfactory to Lender.
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(c) Reporting Requirements. Borrower shall have provided
Lender with all relevant reports and information required under Article
7 hereof.
(d) No Regulatory Event. No Regulatory Event (in either
Borrower's or Lender's reasonable determination) shall have occurred
and be continuing or would exist upon the consummation of transactions
to occur on such Borrowing Date.
(e) No Default or Event of Default. No Default or Event of
Default shall have occurred and be continuing or would exist upon the
consummation of transactions to occur on such Borrowing Date.
(f) No Material Adverse Change. No Material Adverse Change
shall have occurred, or would occur after giving effect to such
Advance, since the date of the last financial statements delivered to
Lender pursuant to Section 4.08 or 7.01 hereof.
(g) Representations and Warranties. The representations and
warranties contained in Article 4 hereof shall be true on and as of the
date of each such Advance hereunder.
(h) Lender's Expenses. All closing costs, and other Lender's
Expenses shall have been paid in full (or shall be paid first from such
Advance as provided in Section 2.03 hereof).
(i) Opinion. Lender shall have received from Borrower such
opinion of counsel for Borrower as may be reasonably acceptable to
Lender in form and substance with respect to the perfection and
priority of the Liens created by the Security Documents in each such
jurisdictional location.
(j) Details, Proceedings and Documents. All legal details and
proceedings in connection with the transactions contemplated by this
Agreement shall be reasonably satisfactory to Lender and Lender shall
have received all such counterpart originals or certified or other
copies of such documents and proceedings in connection with such
transactions, in form and substance reasonably satisfactory to Lender,
as Lender may from time to time request.
(k) Consents. Lender shall have received Consents duly
executed by all parties and in form satisfactory to Lender.
(l) Fees. Lender shall have received the fee(s) described in
Section 2.09 hereof.
(m) Purchase Agreement. Lender shall have received a copy of
the executed Nortel Purchase Agreement or any Vendor Purchase Agreement
with respect to which proceeds of an Advance shall be used to acquire
Nortel Equipment or other Vendor Equipment, and Lender shall have
reviewed and approved the Equipment to be acquired with proceeds of an
Advance.
6.03. Affirmation of Representations and Warranties. Any Borrowing
Certificate or other request for any Advance hereunder shall constitute a
representation and warranty that (a) the representations and warranties
contained in Article 4 hereof are true and correct on and as of the date of such
request with the same effect as though made on and as of the date of such
request and (b) on the date of such request, no Default or Event of Default has
occurred and is continuing or exists or will occur or exist after giving effect
to such Advance (for this purpose such Advance being deemed to have been made on
the date of such request). Failure of Lender to receive notice from Borrower to
the contrary before such Advance is made shall constitute a further
representation and warranty by Borrower that (x) the representations and
warranties of Borrower contained in the first sentence of this Section 6.03 are
true and correct on and as of the date of such Advance with the same effect as
though made on and as of the date of such Advance and (y) on the date of the
Advance no Default or Event of Default has occurred and is continuing or exists
or will occur or exist after giving effect to such Advance.
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6.04. Deadline for Funding Conditions. Lender shall have no obligation
to make any Advances hereunder if all of the conditions set forth in Article 5
and in Sections 6.01 and 6.02 hereof have not been fully satisfied or waived,
and the first Advance made hereunder, within the period of twelve (12) calendar
months following the Closing Date.
ARTICLE 7: AFFIRMATIVE COVENANTS
--------------------------------
Borrower hereby agrees that as long as the Commitment remains in
effect, the Note remains outstanding or unpaid or any other amount is owing to
Lender hereunder or under any of the Loan Documents, Borrower shall keep and
perform fully each and all of the following covenants:
7.01. Reporting and Information Requirements.
(a) Annual Audit Reports. As soon as practicable within ninety
(90) days after the close of each fiscal year of Borrower, but in no
event earlier than the date on which the appropriate filing is made
with the SEC, Borrower shall furnish or cause to be furnished to Lender
audited statements of income, statements of cash flow and retained
earnings for such fiscal year and Borrower's balance sheet as of the
close of such fiscal year, and notes to each, all in reasonable detail,
and beginning with Borrower's second full fiscal year setting forth in
comparative form the corresponding figures for the preceding fiscal
year, with such statements and balance sheet to be certified by
independent certified public accountants selected by Borrower and
reasonably satisfactory to Lender.
(b) Quarterly Reports. Within forty-five (45) days after the
end of each fiscal quarter, Borrower shall furnish to Lender (i)
unaudited consolidated statements of income, statements of cash flow
and retained earnings for Borrower for such quarter and for the period
from the beginning of Borrower's then current fiscal year to the end of
such quarter, and an unaudited consolidated balance sheet of Borrower
as of the end of the quarter, all in reasonable detail and certified by
a Responsible Officer of Borrower as presenting fairly the financial
position of Borrower as of the end of such quarter and the results of
its operations and the changes in its financial position for such
quarter, in conformity with GAAP (except for accompanying notes
thereto), subject to year-end audit adjustments; provided, however,
that such information shall be furnished only on or after the date on
which the appropriate filing is made with the SEC, and (ii) upon
Lender's request, an aging of accounts payable and accounts receivable.
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(c) Compliance Certificates. Within thirty (30) days after the
end of each Calendar Quarter, Borrower shall deliver to Lender a
certificate dated as of the end of such Calendar Quarter, signed on
behalf of Borrower by a Responsible Officer of Borrower (i) stating
that, as of the date thereof, no Event of Default has occurred and is
continuing or exists, or if an Event of Default has occurred and is
continuing or exists, specifying in detail the nature and period of
existence thereof and any action with respect thereto taken or
contemplated to be taken by Borrower; (ii) stating that such
Responsible Officer has reviewed this Agreement and that such
certificate is based on an examination made by or under the supervision
of the Responsible Officer sufficient to assure that such certificate
is accurate; and (iii) calculating and certifying Borrower's compliance
with the financial covenants set forth in Section 7.15 hereof.
(d) Other Reports and Information. Promptly upon their
becoming available to Borrower and otherwise in accordance with
applicable Law (including the Exchange Act and the rules and
regulations of the SEC), Borrower shall deliver to Lender copies of (i)
all regular or special reports or effective registration statements
which Borrower shall file with the SEC and (ii) all press releases
issued by or concerning Borrower.
(e) Further Information. Borrower will promptly furnish to
Lender, in accordance with applicable Law, such other information
(including any report by independent auditors) in such form as Lender
may reasonably request.
7.02 Other Notices. Promptly upon a Responsible Officer of Borrower
becoming aware of any of the following, Borrower shall give Lender notice
thereof, together with a written statement of a Responsible Officer of Borrower
setting forth the details thereof and any action with respect thereto taken or
contemplated to be taken by Borrower:
(a) a Default or Event of Default;
(b) any Material Adverse Change;
(c) a material default or breach by Borrower under any other
material contractual obligation to which it is a party or by which it
or its material properties is bound, if the consequences of such breach
or default are material to the business, operations or financial
condition of Borrower;
(d) any event that Borrower reasonably determines would
constitute a Regulatory Event;
(e) the commencement, existence or threat of any proceeding by
or before any Governmental Authority against Borrower which, if
adversely decided, would have a Material Adverse Effect; or
(f) any Change in Control or any material change in the
management of Borrower.
7.03. Inspection Rights. Borrower shall, upon reasonable notice, permit
such Persons as Lender may designate, at Lender's sole expense (unless there is
continuing an Event of Default) to visit and inspect the Collateral or any other
properties of Borrower, to examine its books and records and discuss its affairs
with its officers, employees and independent engineers at such times and as
often as Lender may reasonably request. Borrower hereby authorizes such
officers, employees, and independent engineers to discuss with Lender the
affairs of Borrower in a manner consistent with applicable Law.
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7.04. Preservation of Corporate Existence and Qualification. Other than
as contemplated in connection with the Borrower's pending corporate
reorganization (as further described in the Borrower's filings with the SEC
pursuant to the Exchange Act), the Borrower shall maintain its existence, good
standing and rights in full force and effect in its jurisdiction of
organization. Borrower shall qualify to do business and remain qualified and in
good standing and shall obtain all necessary authorizations to do business in
each jurisdiction in which failure to receive or retain such would have a
Material Adverse Effect.
7.05. Continuation of Business. Borrower shall continue to engage
solely in the business described on Schedule 1 hereto, and shall acquire and
maintain in full force and effect all rights, privileges, franchises and
licenses necessary for the operation and maintenance of its business (including,
without limitation any license or authorization required by the FCC or any PUC).
7.06. Insurance.
(a) With respect to the Equipment, Borrower shall provide and
maintain or cause to be maintained at all times insurance in such forms
and covering such risks and hazards and in such amounts and with an
insurance carrier with a Best rating of "A" or above, licensed to do
business in the states where Borrower and the Equipment are located, as
may be satisfactory to Lender, as shown on Schedule 7.06 hereto, and
otherwise as may be required by the Security Documents.
(b) Borrower shall cause (i) all liability insurance policies
referred to in Section 7.06(a), above, to name Lender as an additional
insured, (ii) all physical damage insurance policies referred to in
Section 7.06(a), above, to contain a lender's or mortgagee's loss
payable provision reasonably acceptable to Lender with respect to the
Collateral, (iii) all insurance policies to provide that no assignment,
cancellation, modification, reduction in amount or adverse change in
coverage thereof shall be effective until at least thirty (30) days
after receipt by Lender of written notice thereof, (iv) all insurance
policies to insure the interests of Lender with respect to the
Collateral regardless of any breach of or violation by Borrower of any
warranties, declarations or conditions contained therein and (v) such
action to ensure that Lender shall have no obligation or liability for
premiums, commissions, assessments or calls in connection with such
insurance. Lender shall be under no obligation to verify the adequacy
or existence of any insurance coverage. Borrower shall furnish Lender
copies of, or acceptable certificates with respect to, all such
policies prior to the Closing Date, and shall provide to Lender, at
least thirty days prior to each policy expiration date, evidence of the
insurance being maintained by Borrower in compliance with this Section
7.06(b). Certificates for insurance required under subsection (i) above
shall be in ACORD Form 27 (attached hereto at Schedule 7.06), and all
certificates shall be satisfactory in form and substance to Lender.
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(c) If the Collateral is partially or totally damaged or
destroyed, Borrower shall give prompt notice to Lender, and all
insurance proceeds, less the costs of collection thereof, shall be paid
to or retained by Lender. Settlements, adjustments or compromises of
any claims for loss, damage or destruction to the Collateral shall be
made by Borrower and Lender as long as no Event of Default has occurred
and is continuing, and otherwise shall be made solely by Lender.
Borrower hereby authorizes and directs any affected insurance company
to pay such proceeds directly to Lender, and to rely on Lender's
statement as to whether an Event of Default has occurred. Borrower
shall pay all costs of collection of insurance proceeds payable on
account of such damage or destruction. If no Default or Event of
Default has occurred and is continuing on the date the Collateral is
partially or totally damaged or destroyed, Lender shall make available
to Borrower the proceeds of any physical damage insurance actually paid
to Lender in respect of such damage or destruction of the Collateral to
pay the cost of restoration, and Borrower shall proceed promptly with
the work of restoration of the Collateral and shall pursue the work of
restoration diligently to completion. If any Default or Event of
Default has occurred and is continuing either on the date of such
damage or destruction or on the date such insurance proceeds are paid,
or if any Default or Event of Default shall occur prior to completion
of such work of restoration, then Lender, at its option, may apply such
insurance proceeds in payment of any of the Obligations, in such order
as Lender may elect in its sole discretion. Any insurance proceeds
remaining after completion of work or restoration shall, at Lender's
election, be applied in accordance with Section 2.04(c) hereof (but
without prepayment premium), or paid over to Borrower. Upon completion
of any restoration, Borrower shall deliver to Lender a certificate
stating that the restoration has been duly completed and accounting for
the use of any insurance proceeds in such restoration.
7.07. Payment of Taxes, Charges, Claims and Current Liabilities.
Borrower shall pay or discharge:
(a) on or prior to the date on which penalties thereto accrue,
all taxes, assessments and other government charges or levies imposed
upon it or any of its properties or income;
(b) on or prior to the date when due, all lawful and
uncontested claims of materialmen, mechanics, carriers, warehousemen,
and other like persons which could result in creation of a Lien upon
any such property;
(c) on or prior to the date when due, all other lawful and
uncontested claims which, if unpaid, might result in the creation of a
Lien upon any such property (other than Permitted Encumbrances) or
which, if unpaid, would give rise to a claim entitled to priority over
general creditors of Borrower in a case under Title 11 (Bankruptcy) of
the United States Code, as amended, or in any insolvency proceeding or
dissolution or winding-up involving Borrower; and
(d) all other current liabilities so that none is overdue more
than ninety (90) days.
Notwithstanding the foregoing, Borrower shall be entitled to contest or
appeal the requirements of any Law or Governmental Authority or the payment of
any tax, assessment, charge, levy or claim, or any judgment entered against
Borrower (collectively, in this Section 7.07, the "requirements"), as long as
(i) such requirements are being contested in good faith by appropriate
proceedings diligently conducted; (ii) Borrower has given Lender written notice
of such requirements and its intent to contest them, with supporting reasons for
such contest, before the addition of any interest or penalties that may accrue
on such requirements; (iii) Borrower maintains adequate cash reserves and makes
other appropriate provisions as may be required by GAAP to provide for any
liability arising from such requirements; (iv) the contesting of, or failure to
comply with, such requirements does not in any way impair Borrower's ability or
authority to operate all or any part of the Collateral or the continuing
priority of Lender's security interests in the Collateral; (vi) the contesting
of, or failure to comply with, such requirements does not have a Material
Adverse Effect; and (vii) any foreclosure, attachment, execution, sale or
similar proceeding against Borrower or any of its properties in connection with
any such requirements is duly stayed by posting of a bond or security deposit or
by other action sufficient under applicable law to stay such foreclosure,
attachment, execution, sale or other proceedings.
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7.08. Financial Accounting Practices. Borrower shall make and keep
books, records and accounts which, in reasonable detail, accurately and fairly
reflect its transactions and dispositions of its assets and maintain a system of
internal accounting controls sufficient to provide reasonable assurances that
(a) transactions are executed in accordance with management's general or
specific authorization, (b) transactions are recorded as necessary (i) to permit
preparation of financial statements in conformity with GAAP and (ii) to maintain
accountability for assets, (c) access to assets is permitted only in accordance
with management's general or specific authorization and (d) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
7.09. Compliance with Laws. Borrower shall comply in all material
respects with all Laws applicable to Borrower, provided that Borrower shall not
be deemed to be in violation of this Section 7.09 as a result of any failure to
comply which would not result in any liability or exposure to Lender or any
fines, penalties, injunctive relief or other civil or criminal liabilities
which, in the aggregate, would have a Material Adverse Effect.
7.10. Use of Proceeds. Borrower shall use the proceeds of Advances
hereunder only as set forth in Section 2.01 hereof.
7.11. Government Authorizations; Regulatory Authorizations, Etc.
Borrower shall at all times obtain and maintain in force all Regulatory
Authorizations and all other authorizations, permits, consents, approvals,
licenses, exemptions and other actions by, and all registrations,
qualifications, designations, declarations and other filings with, any
Governmental Authority necessary in connection with the execution and delivery
of this Agreement or the Note, consummation of the transactions herein or
therein contemplated, performance of or compliance with the terms and conditions
hereof or thereof or to ensure the legality, validity and enforceability hereof
or thereof.
7.12. Contracts and Franchises. Borrower shall comply in all material
respects with all material agreements or instruments to which it is a party or
by which it or any of its material properties (now owned or hereafter acquired)
may be subject or bound and shall maintain any and all franchises it may have or
hereafter acquire, provided that Borrower shall not be deemed to be in violation
of this Section 7.12 as a result of any failure to comply with any agreement if
one reasonably would expect such failure not to have a Material Adverse Effect.
7.13. Consents. Borrower shall obtain such Landlord's Consents,
Mortgagee's Consents and other third party consents as Lender shall reasonably
request after the Closing to protect its Liens and its access to the Collateral.
7.14. Financial Covenants. Borrower shall comply with the financial
covenants set forth on Schedule 7.14 hereto.
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7.15. Construction and Storage. The Collateral shall be installed in
material compliance with the Requirements of Law affecting the Collateral except
to the extent a failure to so comply would not have a Material Adverse Effect on
the construction or operation of the Collateral. All Equipment financed with the
proceeds of the Loan shall be safeguarded and stored until installed in
appropriate storage facilities owned or leased by Borrower. In the event of any
cessation of construction for more than fifteen (15) successive calendar days,
Borrower shall make adequate provision, reasonably acceptable to Lender, for the
protection of all materials stored on site against deterioration, loss or
damage.
7.16. Upgrade Equipment. Borrower shall update the Software used in the
Equipment within two releases of the most current batch change supplement
release. Borrower shall maintain the Equipment in good working order in
accordance with established maintenance procedures such that the Equipment
performs to published specifications and shall upgrade its functionality to
include batch change supplements releases generally available to customers of
Nortel or the applicable Vendor, as the case may be, and batch change
supplements upgrades included in the original purchase price of the Purchase
Agreement in the form in effect on the date of the Closing Date.
ARTICLE 8: NEGATIVE COVENANTS
-----------------------------
Borrower hereby agrees that so long as the Commitment hereunder remains
in effect or the Note remains outstanding and unpaid or any other amount is
owing to Lender hereunder or under any of the Loan Documents, Borrower shall
not, directly or indirectly, without the prior written consent of Lender, do or
permit to exist any of the following:
8.01. Additional Indebtedness. Create, incur, assume or suffer to exist
at any one time any Indebtedness that would cause Borrower not to comply with
the ratios set forth in Schedule 7.14 hereto; provided, however, that the
Borrower may create, incur, assume or suffer to exist any Indebtedness (or
portion thereof) secured by the Borrower's accounts receivable without
application of the ratios set forth in Schedule 7.14 hereto and without the
Lender's written consent. As long as the Borrower would continue to comply with
the ratios set forth in Schedule 7.14 hereto, the Borrower shall have the right
to incur (a) Subordinated Indebtedness; (b) unsecured, unsubordinated
Indebtedness with the Lender's prior written consent, which consent the Lender
shall not withhold unreasonably; or (c) without the Lender's consent, unsecured,
unsubordinated Indebtedness with interest only payable prior to the Maturity
Date and with covenants, terms and conditions no less favorable from the
Lender's perspective as the covenants, terms and conditions contained in the
Senior Notes and the Indenture, including (without limitation) conditions
prohibiting or restricting Subsidiaries from loaning or distributing cash
dividends to Borrower or limiting redemptions prior to maturity.
8.02. Restrictions on Liens and Sale of Collateral. Create or suffer to
exist any Lien on the Collateral, or any part thereof, whether superior or
subordinate to the Lien of the Security Documents, or assign, convey, sell or
otherwise dispose of or encumber its interest in the Collateral, or any part
thereof (including, without limitation, execution of any lease), nor permit any
such action to be taken, except for the following permitted dispositions and
encumbrances (the "Permitted Encumbrances"): (i) the Lien created hereby; (ii)
Liens for taxes not yet due, or which are being contested in good faith and by
appropriate proceedings in accordance with Section 7.07 hereof; (iii) carriers',
warehousemen's, mechanics', materialmen's, repairmen's or other like Liens
arising in the ordinary course of business which are overdue for a period not
longer than thirty (30) days or which are being contested in good faith and by
appropriate proceedings in accordance with Section 7.07 hereof; (iv) pledges or
liens in connection with workers' compensation, unemployment insurance and other
social security legislation; (v) deposits to secure the performance of bids,
trade contracts (other than for borrowed money), leases, statutory obligations,
surety and appeal bonds, performance bonds and other obligations of a like
nature incurred in the ordinary course of business; (vi) easements,
rights-of-way, restrictions and other similar encumbrances that are not
substantial in amount, and which do not in any case materially detract from the
value of the property subject thereto or interfere with the ordinary conduct of
the business of Borrower; (vii) judgment liens with respect to which execution
has been stayed within ten (10) days by appropriate judicial proceedings and the
posting of adequate security which may not be any of the Collateral; and (viii)
specific liens, if any, identified on Schedule 8.02 hereto. Any of the foregoing
Liens shall remain "Permitted Encumbrances" as long as they are being contested
by Borrower in compliance with Section 7.07 hereof.
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8.03. Intentionally Deleted.
8.04. Prohibition of Mergers, Acquisitions, Name, Office or Business
Changes, Etc.
(a) Enter into or become the subject of any merger,
acquisition or consolidation which would result in a Change in Control;
liquidate, wind up or dissolve itself (or suffer any liquidation or
dissolution); or convey, sell, lease, transfer or otherwise dispose of,
in one transaction or a series of transactions, all or substantially
all of Borrower's assets, whether now owned or hereafter acquired.
(b) Change its name or corporate structure without giving
Lender at least thirty (30) days advance written notice of such change,
and ensuring that any steps that Lender may reasonably deem necessary
to continue the perfection and priority of Lender's security interests
in the Collateral shall have been taken.
(c) Change the fiscal year end of Borrower from December 31,
except with the prior written consent of Lender, which consent shall
not be unreasonably withheld.
(d) Amend, restate or otherwise modify, or violate any terms
of, its Organizational Documents without the prior written consent of
Lender, which consent shall not be unreasonably withheld.
(e) Enter into any new business other than the
telecommunications business or other similar businesses or make any
material change in any of Borrower's business objectives, purposes and
operations from those currently undertaken which would have a Material
Adverse Effect.
8.05. Limitation on Equity Payments. Make any Equity Payment, except
that, as long as no Default or Event of Default is continuing, or would be
caused thereby, and if no other provision contained herein will be violated by
the disbursement of such Equity Payment, Borrower may make Equity Payments
described on Schedule 8.05 hereto. Before making any Equity Payment in
accordance with this Section 8.05, Borrower shall deliver to Lender a
certificate of a Responsible Officer of Borrower, setting forth in detail the
calculation supporting Borrower's compliance with the financial covenants,
stating that no Material Adverse Change has occurred since the date of the
latest financial statement delivered pursuant to Section 7.01(a), and stating
that no Default or Event of Default has occurred and is continuing or will be
caused by such Equity Payment.
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8.06. Limitation on Investments, Advances and Loans. Except in
connection with the Borrower's pending corporate organization, without the
Lender's prior written consent, organize, create, acquire, capitalize or own any
Subsidiaries engaged in any business other than the telecommunications business
or similar businesses, or make or commit to make any advance, loan, guarantee of
any Indebtedness, extension of credit or capital contribution to, or hold or
invest in or purchase or otherwise acquire any stock, bonds, notes, debentures
or other securities of, or make any other investment in, any Person not engaged
in the telecommunications business or similar businesses.
8.07. Intentionally Deleted.
8.08. Intentionally Deleted.
8.09. Removal of Collateral. Remove or permit the removal of any
material part of the Equipment from the locations identified on Schedule 4.24,
without giving Lender thirty (30) days prior written notice of such removal and
ensuring that any steps Lender may deem necessary to continue the perfection and
priority of Lender's security interest in the Collateral shall have been taken.
8.10. Assumed Names. Transact or engage in business under any assumed
name, fictitious name, tradestyle or "d/b/a" except those identified on Schedule
4.27.
ARTICLE 9: EVENTS OF DEFAULT AND REMEDIES
-----------------------------------------
9.01. Events of Default. An Event of Default shall mean the occurrence
or existence of one or more of the following events or conditions (whatever the
reason for such Event of Default and whether voluntary, involuntary or effected
by operation of Law):
(a) Payment Default. If Borrower fails to pay any sum, whether
of principal or interest on the Note or any prepayment premiums, or any
other amount due hereunder or under the Note within 10 calendar days
after such amount becomes due; or
(b) False Statement. If any statement, representation or
warranty made by Borrower in any Loan Document or made in any financial
statement, certificate, report, exhibit or document furnished to Lender
pursuant to any Loan Document, proves to have been untrue, incomplete,
false or misleading in any material respect as of the time when made
(including by omission of material information necessary to make such
representation, warranty or statement not misleading) and such untruth,
falsity, misleading statement or omission shall not have been corrected
or remedied to the satisfaction of Lender within thirty (30) calendar
days after the earlier of Borrower's knowledge thereof or receipt of
written notice thereof from Lender; or
(c) Covenant Defaults. If Borrower defaults in the performance
or observance of any covenant or agreement in this Agreement, and such
default continues for a period of 30 calendar days after the earlier of
Borrower's knowledge thereof or receipt of written notice from Lender
thereof, except for violations of Section 7.14, which shall become an
Event of Default at the end of 10 days; except for violations of
Section 7.07(d), which shall become an Event of Default at the end of
the sixty (60) day period stated therein; and except for specific
Defaults listed elsewhere in this Section 9.01, as to which no notice
or cure period shall apply unless specified; or
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(d) Failure of Conditions. If Borrower fails to meet any
condition of lending under Article 6 hereof, and such condition is not
waived by Lender;
(e) Undischarged Judgments. If one or more judgments for the
payment of money has been entered against Borrower in an amount in
excess of $500,000, and such judgment or judgments have remained
undischarged and unstayed for a period of thirty (30) calendar days,
unless the validity thereof is contested in compliance with Section
7.07 hereof; or
(f) Attachments, etc. If a writ or warrant of attachment,
garnishment, execution, distraint or similar process has been issued
against Borrower or any of its properties which has remained
undischarged and unstayed for a period of thirty (30) consecutive days
and is not being contested in compliance with Section 7.07 hereof; or
(g) Default Under Third Party Agreements. If a default, or
event or condition which with notice or lapse of time or both would
become a default, occurs that gives the creditor the right to
accelerate in respect of any other obligation of Borrower for borrowed
money (including lease obligations) in the amount of $500,000 in the
aggregate, or under any two or more such other obligations of any
amount; or
(h) Dissolution; Etc. If Borrower dissolves, has its
Organizational Document revoked, winds up or liquidates itself or its
business; or
(i) Involuntary Bankruptcy or Receivership Proceedings. If a
receiver, custodian, liquidator, or trustee of Borrower, or of any of
its property is appointed by the order or decree of any court or agency
or supervisory authority having jurisdiction; or an order is entered
adjudicating Borrower as bankrupt or insolvent; or any of the property
of Borrower is sequestered by court order; or a petition is filed
against Borrower under any state or federal bankruptcy, reorganization,
arrangement, insolvency, readjustment of debt, dissolution,
liquidation, or receivership law of any jurisdiction, whether now or
hereafter in effect; or
(j) Voluntary Bankruptcy. If Borrower takes affirmative steps
to prepare to file, or files, a petition in voluntary bankruptcy or to
seek relief under any provision of any bankruptcy, reorganization,
arrangement, insolvency, readjustment of debt, dissolution, or
liquidation Law of any jurisdiction, whether now or hereafter in
effect, or consents to the filing of any petition against it under any
such Law; or
(k) Assignments for Benefit of Creditors, Etc. If Borrower
makes an assignment for the benefit of creditors, or admits in writing
its inability to pay its debts generally as they become due, or
consents to the appointment of a receiver, trustee, or liquidator of
itself or of all or any part of its properties; or
(l) Non-compliance with Governmental Requirements. If Borrower
fails to comply with any requirement of any Governmental Authority
within thirty (30) calendar days after notice in writing of such
requirement shall have been given to Borrower by such Governmental
Authority, or such longer period of time permitted Borrower by such
Governmental Authority; or
(m) Regulatory Authorizations. If any Regulatory Authorization
in connection with this Agreement or any other Loan Document or any
such Regulatory Authorization now or hereafter necessary or advisable
to make this Agreement or the other Loan Documents legal, valid,
enforceable and admissible in evidence or to permit Borrower to conduct
its business is not obtained or has ceased to be in full force and
effect or has been modified or amended or has been held to be illegal
or invalid or is revoked or terminated, and is not being contested by
Borrower in compliance with Section 7.07 hereof and Lender has
reasonably determined in good faith (which determination shall be
conclusive) that such event or occurrence may have a Material Adverse
Effect or a material adverse effect on Lender's rights under this
Agreement or any other Loan Documents; or
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(n) Damage or Destruction. If the proceeds of any physical
damage insurance actually paid in respect of the partial or total
damage or destruction of the Collateral are insufficient to cover the
cost of the restoration thereof or if Lender determines that such
damage or destruction is so extensive that repair or restoration cannot
be expected within a time period short enough to prevent a Material
Adverse Effect;
(o) Consents. If Borrower fails to provide any Consent
required hereunder and Lender determines in its reasonable discretion
that such failure results in a material impairment of Lender's security
for the Loan; or
(p) Defaults Under Other Loan Documents. If any default,
misrepresentation or breach should occur under any Security Document or
other Loan Document and is not cured or waived within the time
permitted therein, or any such Loan Documents should cease to be in
full force and effect, or any party thereto should assert any
unenforceability of, or deny liability on, or admit inability to
perform under, any such Loan Document.
9.02. Consequences of an Event of Default. If any Event of Default
shall occur and be continuing or shall exist, Lender shall be under no further
obligation to make Advances hereunder, any remaining commitment hereunder shall
immediately terminate, with no further notice, and Lender may, by notice to
Borrower, declare the unpaid principal amount of the Note, interest accrued
thereon and all other amounts owing by Borrower hereunder or under the Note to
be immediately due and payable without presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived, and an action
therefor shall immediately accrue. Such consequences shall occur automatically
upon the occurrence of an Event of Default under Section 9.01 (h), (i), (j) or
(k), without any notice or demand. Upon the occurrence of an Event of Default,
Lender may, in its sole discretion, exercise any and all remedies available to
it under this Article 9 or under any of the Loan Documents or under applicable
Law without further notice or period of grace or opportunity to cure.
9.03. Exercise of Rights. Subject to any requirements for FCC or other
Governmental Authority upon the occurrence of any Event of Default, the rights,
powers and privileges provided in this Section and all other remedies available
to Lender under this Agreement or by statute or by rule of law may be exercised
by Lender at any time from time to time whether or not the Obligations shall be
due and payable, and whether or not Lender shall have instituted any foreclosure
or other action for the enforcement of this Agreement or the Note. No failure to
exercise nor any delay in exercising on the part of Lender, any right, remedy,
power or privilege hereunder or under any of the other Loan Documents shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power or privilege hereunder or thereunder preclude any other or future
exercise thereof or the exercise of any other right, remedy, power or privilege.
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9.04. Rights of Secured Party; Possession or Sale of Collateral.
Without limiting the generality of the foregoing, Lender shall have all the
rights and remedies of a secured party under the UCC, and Lender may, without
demand and without advertisement or notice, all of which Borrower waives, at any
time or times, sell and deliver any or all Collateral held by or for it at
public or private sale, for cash, upon credit or otherwise, at such prices and
upon such terms as Lender deems advisable, in its sole discretion, and/or
collect, or enforce the collection of, the Collateral. Lender may be the
purchaser at any such sale. Upon the occurrence of an Event of Default and upon
Lender's request, Borrower shall assemble, at its own expense, any or all
Equipment and other Collateral at a convenient place acceptable to Lender and
shall pay to Lender or reimburse Lender for, on demand, all costs of collection
of all amounts due, and enforcement of all rights hereunder, including
reasonable attorneys' fees and legal expenses, and expenses of any repairs to
any realty or other property to which any of such Collateral may be affixed.
Upon an Event of Default Lender may, to the full extent permitted by applicable
law, without notice, advertisement, hearing or process of law of any kind, enter
upon any premises where any of the Collateral may be located and take possession
of and remove such Collateral.
9.05. Notices, Etc. Waived. Except as expressly provided in this
Article 9, Borrower hereby expressly waives, to the full extent permitted by
applicable law, presentment, demand, protest, any and all notices of any kind,
advertisements, hearing or process of law in connection with the exercise by
Lender of any of its rights and remedies upon the occurrence of an Event of
Default. If any notification of intended disposition of any of the Collateral is
required by law, such notification shall be deemed reasonably and properly given
if given in accordance with Section 10.06 hereto at least ten (10) days before
such disposition.
9.06. Additional Remedies. Lender's remedies upon the occurrence and
during the continuance of an Event of Default shall include, in addition to, and
not in lieu of, such remedies as are available at law or in equity or provided
for in any of the Loan Documents, the following:
(a) Foreclosure; Receivership. Lender shall be entitled to
file one or more suits at law or in equity to collect the Obligations
and/or to foreclose on Lender's Liens on and security interests created
by this Agreement or the Security Documents. Lender may apply or
require Borrower to apply for any necessary transfers, assignments,
orders, consents or licenses in connection with the operation or
abandonment of the Collateral or any part thereof, and Lender shall
also be entitled as a matter of right and without notice and without
requiring bond (notice and bond being hereby waived), without regard to
the solvency or insolvency of Borrower at the time of application and
without regard to the value of the Collateral at that time, to have a
receiver appointed by a court of competent jurisdiction in order to
manage, protect, and preserve the Collateral and to continue the
operation of the business of Borrower, and to collect all revenues and
profits thereof and apply the same to the payment of all expenses and
other charges of such receivership until the sale or other final
disposition of the Collateral. Borrower hereby consents to the
appointment of such receiver.
(b) Right to Cure. If Borrower fails in any material respect
to perform or comply with any of its agreements contained herein or in
any of the other Loan Documents, Lender may take whatever actions it
may deem appropriate to perform or comply or otherwise cause
performance or compliance with such agreement, all at the risk, cost
and expense of Borrower.
(c) Setoff. If the unpaid principal amount of the Note,
interest accrued thereon or any other amount owing by Borrower
hereunder or under the Note shall have become due and payable (by
acceleration or otherwise), Lender shall have the right, in addition to
all other rights and remedies available to it, without notice to
Borrower, to setoff against and to appropriate and apply to such due
and payable amounts any debt owing to, and any other funds held in any
manner for the account of, Borrower by Lender. Such right shall exist
whether or not Lender shall have given notice or made any demand
hereunder or under the Note, whether or not such debt owing to or funds
held for the account of Borrower is or are matured or unmatured, and
regardless of the existence or adequacy of any Collateral, guaranty or
any other security, right or remedy available to Lender. Borrower
hereby consents to and confirms the foregoing arrangements and confirms
Lender's rights of setoff.
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9.07. Application of Proceeds. Any proceeds of any of the Collateral
received by Lender through sale or disposition of the Collateral or otherwise,
may be applied by Lender toward the payment of the Obligations, including
expenses in connection with the Collateral (including reasonable fees and legal
expenses) in such order of application as Lender may from time to time elect.
9.08. Discontinuance of Proceedings. If Lender should proceed to
enforce any right or remedy under this Agreement or any other Loan Document, and
then discontinue or abandon such proceeding for any reason, all rights, powers
and remedies of Lender hereunder shall continue as if no such proceeding had
been taken.
9.09. Power of Attorney. For the purpose of carrying out the provisions
and exercising the rights, powers and privileges granted by the Loan Documents,
including, without limitation, this Article 9, Borrower hereby irrevocably
constitutes and appoints Lender its true and lawful attorney-in-fact to execute,
acknowledge and deliver any instruments and do and perform any acts such as are
referred to in the Loan Documents during the continuance of any Event of
Default, including, without limitation, this Article 9, in the name and on
behalf of Borrower, from time to time in Lender's reasonable discretion after
the occurrence and during the continuance of an Event of Default, in accordance
with the Loan Documents and any statute or rule of law. This power of attorney
is a power coupled with an interest and cannot be revoked. Borrower hereby
ratifies all that said attorney-in-fact shall lawfully do or cause to be done by
virtue and in accordance with the terms hereof.
Without limiting the generality of the foregoing, Lender may, during the
continuance of an Event of Default, do the following without notice to or assent
by Borrower to accomplish the purposes of this Agreement:
(a) upon failure of Borrower to timely pay or discharge taxes or Liens
levied or placed on or threatened against the Collateral, effect any
repairs or any insurance called for by the terms of this Loan Agreement
or any other Loan Document, and pay all or any part of the premiums
therefor and the costs thereof;
(b) (i) direct any party liable for any payment on any Collateral to
make payment of any and all monies due and to become due thereunder
directly to Lender or as Lender shall direct; (ii) in the name of
Borrower or its own name or otherwise, take possession of and endorse
and collect any checks, drafts, notes, acceptances, or other
instruments for the payment of monies due under, or otherwise receive
payment of and receipt for any and all monies, claims and other amounts
due and to become due at any time in respect of or arising out of any
Collateral; (iii) sign and endorse any invoices, freight or express
bills, bills of lading, storage or warehouse receipts, drafts against
debtors, assignments, verifications and notices in connection with the
Collateral; (iv) commence and prosecute any suits, actions or
proceedings at law or in equity in any court of competent jurisdiction
to collect all or any of the Collateral and to enforce any other right
in respect of any Collateral; (v) defend any suit, action or proceeding
brought against Borrower with respect to any Collateral; (vi) settle,
compromise or adjust any suit, action or proceeding described above
upon commercially reasonable terms under the circumstances and, in
connection therewith, give such discharges or releases as Lender may
reasonably deem appropriate; and (vii) generally sell, use, operate,
transfer, pledge, make any agreement with respect to or otherwise deal
with any of the Collateral as fully and completely as though Lender
were the absolute owner thereof for all purposes, and, at Lender's
option and Borrower's expense, at any time or from time to time after
the occurrence and during the continuance of an Event of Default, all
other acts and things that Lender reasonably deems necessary to
protect, preserve or realize upon the Collateral and Lender's security
interest therein, in order to effect the intent of this Agreement and
the other Loan Documents all as fully and effectively as Borrower might
do.
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9.10. Regulatory Matters. Notwithstanding any provision to the contrary
contained herein, Lender will not exercise any right or remedy under this
Agreement that requires prior FCC or PUC approval without first obtaining such
approval. If counsel to Lender reasonably determines that the consent of the FCC
or PUC is required in connection with any of the actions that may be taken by
Lender in the exercise of its rights hereunder or under any of the other Loan
Documents, then Borrower, at its sole cost and expense, agrees to use its best
efforts to secure such consent and to cooperate with Lender in any action
commenced by Lender to secure such consent. Upon the occurrence and during the
continuation of an Event of Default, Borrower shall promptly execute and/or
cause the execution of all applications, certificates, instruments and other
documents and papers that may be required in order to obtain any necessary
governmental consent, approval or authorization, and if Borrower fails or
refuses to execute such documents, the clerk of the court with jurisdiction may
execute such documents on behalf of Borrower.
ARTICLE 10: GENERAL CONDITIONS/MISCELLANEOUS
--------------------------------------------
The following conditions shall be applicable throughout the term of
this Agreement:
10.01. Modifications and Waivers. This Agreement, the other Loan
Documents, or any provision thereof may not be changed, waived or terminated
orally, but only by an instrument in writing signed by the party against whom
enforcement of the change, waiver or termination is sought. No action or course
of dealing on the part of Lender, its officers, employees, consultants, or
agents, nor any failure or delay by Lender with respect to exercising any right,
power, or privilege of Lender under the Note, this Agreement, or any other Loan
Document shall operate as a waiver thereof, except as otherwise provided in this
Agreement. Any waiver shall be effective only to the extent and for the instance
specifically identified in such writing, and shall not be deemed to imply any
future waivers or other waivers. No amendment to the Loan Documents shall be
effective without written agreement signed by both Borrower and Lender.
10.02. Advances Not Implied Waivers. No waiver of the requirements
contained in any Loan Document shall be effective unless in writing duly signed
by Lender. No Advance hereunder shall constitute a waiver of any of the
conditions of Lender's obligation to make further Advances nor, in the event
Borrower is unable to satisfy any such condition, shall any waiver of such
condition have the effect of precluding Lender from thereafter declaring such
inability to be an Event of Default as herein provided. Any Advance made by
Lender and any sums expended by Lender pursuant to the Loan Documents shall be
deemed to have been made pursuant to this Agreement, notwithstanding the
existence of an uncured Default or Event of Default. No Advance at a time when
an Event of Default exists shall constitute a waiver of any right or remedy of
Lender existing by reason of such Event of Default, including, without
limitation, the right to accelerate the maturity of the Indebtedness evidenced
by the Note or to foreclose the Lien on the Collateral or to refuse to make
further advances hereunder.
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10.03. Deviation from Covenants. The procedure to be followed by
Borrower to obtain the consent of Lender to any deviation from the covenants
contained in this Agreement or any other Loan Document shall be as follows:
(a) Borrower shall send a written notice to Lender setting
forth (i) the covenant(s) relevant to the matter, (ii) the requested
deviation from the covenant(s) involved, and (iii) the reason for the
requested deviation from the covenant(s); and
(b) Lender, within a reasonable time, will send a written
notice to Borrower, permitting or refusing the request, but in no event
will any deviation from the covenants of this Agreement or any other
Loan Document be effective without the express prior written consent of
Lender. Lender's failure to provide such written notice shall be deemed
a refusal of such request.
10.04. Holidays. Except as otherwise provided herein, whenever any
payment or action to be made or taken hereunder or under the Note shall be
stated to be due on a day which is not a Business Day, such payment or action
shall be made or taken on the next following Business Day and such extension of
time shall be included in computing interest or fees, if any, in connection with
such payment or action.
10.05. Records. From time to time, Lender may send Borrower statements
of the unpaid principal amount of the Note, the unpaid interest accrued thereon,
the Interest Rate or rates applicable to such unpaid principal amount, the
duration of such applicability, and the amount remaining available on any Loan,
and each statement shall be deemed correct and conclusively binding on Borrower
(absent manifest error) unless Borrower notifies Lender of an error in the
statement in writing within thirty (30) days of the date of any such statement
is provided to Borrower.
10.06. Notices. All notices, requests, demands, directions and other
communications (collectively, "notices") required under the provisions of this
Agreement or any other Loan Document shall be in writing (including
communication by facsimile transmission) unless otherwise expressly permitted
hereunder and shall be sent by hand, by registered or certified mail return
receipt requested, by overnight courier service maintaining records of receipt,
or by facsimile transmission with confirmation in writing mailed first-class, in
all cases with charges prepaid, and any such properly given notice shall be
effective upon the earlier of receipt or (i) when delivered by hand, or (ii) the
third Business Day after being mailed, or (iii) the following Business Day if
sent by overnight courier service, or (iv) when sent by facsimile, answer back
received. All notices shall be addressed as follows:
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If to Borrower, to the Notice Address set forth on Schedule 1,
with copies, if any, as set forth on Schedule 1.
If to Lender: NTFC Capital Corporation
501 Corporate Centre Drive
Franklin, Tennessee 37067
Attention: Manager, Credit
Telecopy: (615) 771-6626
With a copy to: NTFC Capital Corporation
501 Corporate Centre Drive
Franklin, Tennessee 37067
Attention: Legal Department
Telecopy: (615) 771-6187
All notices shall be sent to the applicable party at the address stated
above or in accordance with the last unrevoked written direction from such party
to the other party hereto, given in accordance with the terms hereof.
10.07. FCC and PUC Approval. The exercise of any rights or remedies
hereunder or under any other Loan Document by Lender that may require FCC or PUC
approval shall be subject to obtaining such approval. Pending the receipt of any
PUC or FCC approval, Borrower shall not do anything to delay, hinder, interfere
with or obstruct the exercise of Lender's rights or remedies hereunder or the
obtaining of such approvals.
10.08. Lender Sole Beneficiary. All conditions of the obligation of
Lender to make any Advances hereunder are imposed solely and exclusively for the
benefit of Lender and its assigns and no other Person shall have standing to
require satisfaction of such conditions in accordance with their terms or be
entitled to assume that Lender will refuse to make any Advances in the absence
of strict compliance with any or all such conditions, and no Person shall under
any circumstances be deemed to be a beneficiary of such conditions, any or all
of which may be freely waived in whole or in part by Lender at any time if in
its sole discretion it deems it advisable to do so. Lender's sole obligation
hereunder is to make the Advances if and to the extent required by this
Agreement or the Note.
10.09. Lender's Review of Information. Borrower acknowledges and agrees
that any review or analysis by Lender of financial information, operating
information, marketing data or other information provided to Lender by or on
behalf of Borrower at any time is and shall be conducted solely for Lender's
benefit and internal use and that Lender is under no duty or obligation to make
the results of such review or analysis available to Borrower. Borrower is not
relying, and will not rely, on Lender for financial or business advice.
10.10. No Joint Venture. Nothing in any of the Loan Documents or in
this Agreement shall be deemed to constitute any kind of partnership, joint
venture or fiduciary relationship between Lender and Borrower.
10.11. Severability. The provisions of this Agreement are intended to
be severable. If any provision of this Agreement or the other Loan Documents
shall be held invalid or unenforceable in whole or in part in any jurisdiction
such provision shall, as to such jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without in any manner affecting the validity
or enforceability thereof in any other jurisdiction or the remaining provisions
hereof or thereof in any jurisdiction.
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10.12. Rights Cumulative. All rights, powers and remedies herein given
to Lender are cumulative and not alternative, and are in addition to all
statutes or rules of law.
10.13. Duration; Survival. All representations and warranties of
Borrower contained herein or made in connection herewith shall survive the
making of and shall not be waived by the execution and delivery of this
Agreement and the other Loan Documents, any investigation by Lender, or the
making of any Advances hereunder. All covenants and agreements of Borrower
contained herein shall continue in full force and effect from and after the date
hereof so long as it may borrow hereunder and until payment in full of the Note,
interest thereon, all fees and all other Obligations of Borrower. Without
limitation, it is understood that all obligations of Borrower to make payments
to or indemnify Lender shall survive the payment in full of the Notes and of all
other Obligations.
10.14. Governing Law. This Agreement, the Note and each of the other
Loan Documents shall be governed by and construed and enforced in accordance
with the internal laws of the State of New York (i.e., notwithstanding any
conflict of law principles), except to the extent, if any, set forth on Schedule
2.02 hereto, and except to the extent that the laws of jurisdictions where the
Collateral is located may be required to apply to the Collateral.
10.15. Counterparts. This Agreement may be executed in any number of
counterparts (by facsimile transmission or otherwise) and by the different
parties hereto on separate counterparts, each of which, when so executed, shall
be deemed an original, but all such counterparts shall constitute but one and
the same instrument.
10.16. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of Lender and Borrower and their respective successors and
assigns; provided, however, that Borrower may not assign or transfer any of its
rights or obligations hereunder or under the other Loan Documents (in whole or
in part) without the prior written consent of Lender. Lender may assign,
transfer or pledge any of its respective rights or obligations hereunder or
under the other Loan Documents without notice to or the prior written consent of
Borrower. Upon receipt of written notice from Lender of such assignment,
Borrower shall promptly acknowledge receipt thereof in writing. If Borrower is
given written notice of any assignment, it shall perform its obligations with
respect to this Agreement for the ratable benefit of the applicable assignee(s),
and, if so directed, shall pay all amounts due or to become due hereunder
directly to the applicable assignee(s) or to any other party designated by such
assignee(s). Borrower shall not assert against any such assignee any set-off,
defense or counterclaim that Borrower may have against Lender or any person
other than such assignee. Borrower shall also execute and deliver to Lender such
documentation as any such assignee may reasonably require, including but not
limited to amended promissory notes and acknowledgment of or consent to the
assignment which may require Borrower to make certain representations or
reaffirmations as to some of the basic terms and covenants contained herein.
Lender shall not be relieved of its obligations hereunder as a result of any
such sale, assignment, transfer, grant or pledge, unless such assignee
specifically assumes all or part of Lender's future obligations hereunder in a
writing, a copy of which shall be delivered to Borrower, in which event after
the date of such assignment, Borrower's obligations to any such assignee shall
be proportionately as set forth herein with respect to Lender, and Borrower
shall not look to Lender to perform any of such assignee's obligations hereunder
which arise after the date thereof. Any assignee shall be entitled to rely on
Borrower's agreements as stated herein, as applicable, and shall be considered a
third party beneficiary thereof. Except to the extent otherwise required by the
context of this Agreement, the word "Lender" where used in this Agreement shall
mean and include any holder of any Note originally issued to Lender hereunder,
and any such holder of the Note shall be bound by and have the benefits of this
Agreement the same as if such holder had been a signatory hereto.
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10.17. Participation. Lender shall have the right to enter into one or
more participation agreements, syndication agreements or similar agreements with
one or more participating lenders or other parties approved by Lender on such
terms and conditions as Lender shall deem advisable. Borrower shall furnish a
sufficient number of copies of reports and certificates to Lender so that Lender
and each participating lender shall receive a copy of each such document.
10.18. Time of Essence. Time is of the essence of this Agreement and
the Note and the other Loan Documents.
10.19. Disclosures and Confidentiality.
(a) Except as required by applicable Law, the Exchange Act, or
the rules and regulations of the SEC, Borrower agrees that it will
obtain Lender's written consent before using or generating any press
release, advertisement, publicity materials or other publication in
which the name or logo of Lender or any of its Affiliates is used or
may be reasonably inferred, and will not distribute any such materials
in the absence of such prior written approval.
(b) Except as required by applicable Law, the Exchange Act, or
the rules and regulations of the SEC, Borrower agrees that it will not,
directly or indirectly, disclose to any third party the terms of this
Agreement or the other Loan Documents or prior or future correspondence
relating thereto, or the transactions contemplated hereby, or any other
information regarding Lender or its Affiliates learned by Borrower
during the course of negotiation thereof. The term "third party" shall
exclude only Borrower, its Affiliates and their respective attorney(s)
and certified public accountant(s). This Section 10.19(b) shall not
restrict the disclosure of information if such disclosure is required
by law, by order of any court or by the order, rule or regulation of
any Governmental Authority, including without limitation any
requirements of the SEC, FCC, any PUC, or any state or federal
securities commissions (the "Commissions"); provided, however, that,
except for disclosures required by the SEC, FCC, PUC or Commissions,
Borrower shall provide Lender with advance notice of any such required
disclosure of information so that Lender may seek an appropriate
protective order and/or waive compliance with this Section. Borrower
shall not oppose any action taken by Lender to obtain an appropriate
protective order or other reliable assurance that the information will
be accorded confidential treatment. The obligations set forth in this
Section 10.19(b) shall survive the termination of this Agreement.
(c) The disclosure of information by either Lender or Borrower
will not be restricted under this Agreement if such information (i) has
been or becomes published or is now, or in the future, in the public
domain through (A) no fault of the parties, (B) disclosure other than
unauthorized disclosure by the party to whom the information is
disclosed, or (C) disclosure to third parties by the disclosing party
without similar restriction; (ii) is properly (other than proposal
letters, commitment letters or other correspondence between Lender and
Borrower) within the legitimate possession of the receiving party prior
to disclosure hereunder; (iii) subsequent to disclosure hereunder, is
lawfully received from a third party having rights therein without
restriction of the third party's or receiving party's rights to
disseminate the information and without notice of any restriction
against its further disclosure; (iv) is disclosed with the written
approval of the other party; (v) is or becomes publicly available free
of any obligation to keep it confidential.
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(d) Borrower authorizes Lender to discuss with and furnish to
any Affiliate of Lender, to any Governmental Authority with
jurisdiction over Lender, to any other Governmental Authority or to any
assignee, successor, participant, successor, or prospective assignee,
successor or participant, all publicly-disclosed financial statements,
audit reports and other information pertaining to Borrower and/or its
Subsidiaries whether such information was provided by Borrower or
prepared or obtained by Lender or third parties. Neither Lender nor any
of its employees, officers, directors or agents make any representation
or warranty to any existing or prospective assignee, successor or
participant regarding any audit reports or other analyses of Borrower
that Lender may distribute, whether such information was provided by
Borrower or prepared or obtained by Lender or third parties, nor shall
Lender or any of its employees, officers, directors or agents be liable
to any Person receiving a copy of such reports or analyses for any
inaccuracy or omission contained in such reports or analyses or
relating thereto.
(e) Every reference in this Agreement to disclosures of
Borrower to Lender (except the financial statements), to the extent
that such references refer or are intended to refer to disclosures at
or prior to the execution of this Agreement, shall be deemed strictly
to refer only to written disclosures delivered to Lender concurrently
with the execution of this Agreement and referred to specifically in
the Loan Documents. The parties intend that such disclosures are to be
limited to those presented in an orderly manner at the time of
executing this Agreement and are not to be deemed to include expressly
or impliedly any disclosures that previously may have been delivered
from time to time to Lender, except to the extent that such previous
disclosures are again presented to Lender in writing concurrently with
the execution of this Agreement.
10.20. Jurisdiction and Venue. BORROWER HEREBY IRREVOCABLY CONSENTS TO
THE JURISDICTION OF THE COURTS LOCATED IN DAVIDSON COUNTY, TENNESSEE, INCLUDING
WITHOUT LIMITATION FEDERAL COURTS SITTING IN THE MIDDLE DISTRICT OF TENNESSEE
AND THE CHANCERY COURT FOR DAVIDSON COUNTY, TENNESSEE, FOR ANY SUIT BROUGHT OR
ACTION COMMENCED IN CONNECTION WITH THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR
THE OBLIGATIONS, AND AGREES NOT TO CONTEST VENUE OR JURISDICTION IN ANY SUCH
COURTS. In any such litigation, Borrower waives personal service of any summons,
complaint or other process, and agrees that the service thereof may be made by
certified or registered mail direct to Borrower at its address set forth in
Section 10.06 hereof. Within thirty (30) days after such mailing, Borrower shall
appear and answer to such summons, complaint or other process. Should Borrower
fail to appear or answer within the said 30-day period, then such party shall be
deemed in default and judgment may be entered against Borrower for the amount or
other relief as demanded in any summons, complaint or other process so served.
In the alternative, in its sole discretion, Lender may effect service upon
Borrower in any other form or manner permitted by law. The choice of forum set
forth herein shall not be deemed to preclude the enforcement of any judgment
obtained in such forum or the taking of any action under this Agreement to
enforce the same in any appropriate jurisdiction.
10.21. Jury Waiver. BORROWER AND LENDER HEREBY KNOWINGLY AND WILLINGLY
WAIVE THEIR RIGHTS TO DEMAND A JURY TRIAL IN ANY ACTION OR PROCEEDING INVOLVING
THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, THE OBLIGATIONS, OR ANY RELATIONSHIP
BETWEEN LENDER AND BORROWER. BORROWER WARRANTS AND REPRESENTS THAT IT HAS
REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND
VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN
CONSENT TO A TRIAL BY THE COURT.
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10.22. Limitation on Liability. LENDER SHALL HAVE NO LIABILITY UNDER OR
IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS FOR
SPECIAL, EXEMPLARY, PUNITIVE, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF
ANY SORT IN ANY SUIT BROUGHT OR ACTION COMMENCED IN CONNECTION WITH THIS
AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE OBLIGATIONS, AND, EXCEPT TO THE
EXTENT PROHIBITED BY LAW, EACH PARTY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR
RECOVER IN ANY SUCH ACTION ANY SPECIAL, EXEMPLARY, PUNITIVE, INCIDENTAL,
INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY SORT OTHER THAN ACTUAL DAMAGES.
10.23. Borrower Waivers. To the full extent permitted by law, Borrower
hereby waives (i) presentment, demand and protest and notice of presentment,
protest, default, non payment, maturity, release, compromise, settlement,
extension or renewal of any or all commercial paper, accounts, contract rights,
documents, instruments, chattel paper and guaranties at any time held by Lender
on which Borrower may in any way be liable and hereby ratifies and confirms
whatever Lender may do in this regard; (ii) notice prior to taking possession or
control of the Collateral or any bond or security which might be required by any
court prior to allowing Lender to exercise any of Lender's remedies, including
the issuance of an immediate writ of possession, except as expressly required in
any of the Loan Documents; (iii) any marshalling of assets, or any right to
compel Lender to resort first to any Collateral or other Persons before pursuing
Borrower for payment of the Obligations and any defenses based on suretyship or
impairment of Collateral; (iv) the benefit of all valuation, appraisement and
exemption laws; (v) any right to require Lender to terminate its security
interest in the Collateral or in any other property of Borrower until
termination of this Agreement and the execution by Borrower and by any person
whose loans to Borrower are used in whole or in part to satisfy the Obligations,
of an agreement indemnifying Lender from any loss or damage Lender may incur as
the result of dishonored or unsatisfied items of any account debtor applied to
the Obligations; and (vi) notice of acceptance hereof. Borrower acknowledges
that the foregoing waivers are a material inducement to Lender's entering into
this Agreement and that Lender is relying upon the foregoing waivers in its
future dealings with Borrower.
10.24. Schedules. The Schedules and Exhibits attached to this Agreement
are an integral part hereof, and are hereby made a part of this Agreement.
10.25. Agreement to Govern. In case of any conflict between the terms
of this Agreement and any of the other Loan Documents, the terms of this
Agreement (including all exhibits and schedules hereto) shall govern.
10.26. Entire Agreement. This Agreement, the other Loan Documents and
other documents, agreements and certificates executed by the parties
contemporaneously herewith or subsequent hereto constitute the entire agreement
of the parties and supersede all prior understandings and agreements, written or
oral, between the parties hereto relating to the subject matter hereof. Borrower
is not entering into this Agreement in reliance on statements or representations
made by any Person other than as set forth herein.
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10.27. Construction. The parties acknowledge that each party and/or its
legal counsel have reviewed and made revisions to this Agreement. The rule of
construction requiring the resolution of any ambiguities in this Agreement
against the drafting party shall not apply to the construction of this Agreement
or any schedules or exhibits to this Agreement.
[END OF GENERAL TERMS AND CONDITIONS. NEXT PAGE IS SCHEDULE 1.]
[SIGNATURES ARE ON COVER PAGE. ]
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EXHIBIT 10.40
LOAN AND SECURITY AGREEMENT
BY AND BETWEEN
RAM MUKUNDA
("BORROWER")
AND
STARTEC GLOBAL COMMUNICATIONS CORPORATION
("LENDER")
8 OCTOBER 1998
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (the "Agreement") is made as of October 8,
1998 by and between Ram Mukunda ("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.
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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.
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 the final, executed Escrow 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
loaned by Lender to Borrower hereunder (the "Loan") will be Four Hundred
Thousand Dollars ($400,000.00).
(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, 1999; or (ii) the termination of this Agreement pursuant to Section
2.3(b) hereof. Interest shall be due and payable at the time that principal
amounts are fully paid. Pursuant to Section 2.3(b), the Loan may be prepaid in
whole or in part at any time or from time to time without premium or penalty.
SECTION 2.3. TERM.
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(a) This Agreement shall be in effect from the Closing Date until
December 31, 1999 ("the Term"), unless terminated as provided in subsection (b)
of 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 the
full amount of any outstanding principal and interest then due and owning on the
Loan.
SECTION 2.4. SECURITY.
Borrower and Lender agree that this Loan shall be secured by, and Lender
shall have legal recourse to, all of the 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.
SECTION 2.5. ESTABLISHMENT OF ESCROW SECURITY.
As additional security for payments hereunder the Borrower shall place in
escrow certain securities of Startec Global Communications Corporation (the
"Stock") owned by Borrower, valued at an amount equal to five hundred thousand
dollars ($500,000) as determined by a Fair Market Valuation as of the date the
Escrow Agreement is executed by and among the parties. For the purpose of this
paragraph, a Fair Market Valuation on any given day shall be equal to the
closing price reported for the Stock on the National Association of Securities
Dealers Automated Quotation System (NASDAQ) two days earlier.
The Stock shall be placed in a segregated account to be held by an escrow
agent for the purpose of securing payment of the Loan. Following the execution
and delivery of this Agreement, the parties shall enter into an Escrow Agreement
with an appropriate institution (the "Escrow Agent"), substantially in the form
of the Escrow Agreement attached hereto as Exhibit A. Simultaneously with the
execution and delivery of the Escrow Agreement, the Borrower shall deliver the
Stock to the Escrow Agent.
SECTION 2.6. ENTITLEMENT TO ESCROW SECURITY. In the event that Borrower
fails to satisfy his obligations hereunder in accordance with the payment terms
of Section 2.2 and fails to make interest and principal payments required
hereunder by December 31, 1999, Lender shall, in addition to all other legal and
equitable remedies, have recourse to the Stock but only in amounts equal to the
principal and interest amounts remaining due and unpaid. Within thirty days
following the last day of the Term, Lender shall provide Borrower and Escrow
Agent with notice ("Notice to Recover")
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of its intention to recover amounts due and outstanding out of the escrowed
Stock. If Borrower fails to satisfy his obligations under Section 2.2 within 15
days of his receipt of Notice to Recover, the Escrow Agent shall release and
provide to Lender escrowed Stock equal to the amount due and outstanding from
Borrower to Lender. The value of the Stock at the time that Lender shall be
entitled to recourse thereto (i.e., in the event borrower fails to satisfy his
obligations hereunder), shall be determined by a Fair Market Valuation. For the
purpose of this paragraph, a Fair Market Valuation on any given day shall be
equal to the closing price reported for the Stock on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) two days earlier.
SECTION 2.7. RELEASE OF ESCROW SECURITIES TO BORROWER. Upon the earlier of
(1) notice jointly provided to the Escrow Agent that the interest and principal
amounts due hereunder have been paid; or (2) February 28, 2000, all Stock
remaining in escrow shall be released and returned to Borrower.
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 nor 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:
(a) If to Lender, at:
Startec Global Communications Corporation
10411 Motor City Drive
Bethesda, MD 20817
Attention: Subhash Pai, Vice President and Controller
Telephone: (301) 365-8969
(b) If to Borrower, at:
Mr. Ram Mukunda
8906 Durham Drive
4
<PAGE>
Potomac, MD 20854
(301) 469-8906
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 the 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.
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.
5
<PAGE>
LENDER:
ATTEST: STARTEC GLOBAL COMMUNICATIONS,
CORPORATION
By: /s/ Subhash Pai a Maryland corporation
---------------------------------
Name: Subhash Pai By: /s/ Prabhav Maniyar
Title: Vice President and Controller -------------------------------
Name: Prabhav Maniyar
Title: Senior Vice President and
C.F.O.
BORROWER:
ATTEST: RAM MUKUNDA
By:/s/ Subhash Pai By: /s/ Ram Mukunda
--------------------------------- --------------------------------
Name: Subhash Pai Ram Mukunda
Title: Vice President and Controller
6
EXHIBIT 10.41
LOAN AND SECURITY AGREEMENT
By and Between
PRABHAV V. MANIYAR
("Borrower")
STARTEC GLOBAL COMMUNICATIONS CORPORATION
("Lender")
December 31, 1998
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (the "Agreement") is made as of December 31,
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 to define the terms and conditions of their
relationship and to reduce their agreements to writing.
NOW, THEREFORE, in consideration of the promises and convents 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 and Borrower and the Lender.
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).
<PAGE>
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 December 31, 1999. Interest shall be due and
payable on the last Business Day of each calendar quarter and upon the maturity
of this Loan.
Section 2.3. Term.
(a) This Agreement shall be in effect from the Closing Date until June 30,
1999 ("the Term").
Section 2.4. Security
(a) Borrower and Lender agree that this Loan and accrued interest
thereunder shall be secured by, and Lender shall have full 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 recourses to the security described herein shall be secondary to
any pre-existing security interests in such property held by any other
Persons. Borrower and Lender further agree that all accrued interest
is non-refundable.
<PAGE>
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 priors written or oral agreements,
understandings, representations and warranties made with respect thereto. No
amendment, supplement or modification of this Agreement nor 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:
(a) If to Lender, at:
Startec Global Communications Corporation
10411 Motor City Drive
Bethesda, MD 20817
Attention: Subhash Pai, Vice President and Controller
Telephone: (301) 365-8969
(b) If to Borrower , at:
Prabhav V. Maniyar
303 Ainstree Court
Vienna, VA 22180
Attention: Prabhav V. 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 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 the
fullest extent permitted by law. Upon determination that any such term,
convenant or condition is invalid, illegal or unenforceable, the parties
<PAGE>
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. 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.
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.
<PAGE>
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: By:
------------------------------------ -------------------------------
Name: Subhash Pai Name: Ram Mukunda
Title: Vice President and Controller Title: President and CEO
BORROWER:
ATTEST: PRABHAV V. MANIYAR
By: By:
------------------------------------ -------------------------------
Name: Subhash Pai Name: Prabhav V. Maniyar
Title: Vice President and Controller
EXHIBIT 10.42
IRU AGREEMENT
BETWEEN
COMPANHIA PORTUGUESA RADIO MARCONI, SA
AND
STARTEC GLOBAL COMMUNICATIONS CORPORATION
<PAGE>
TPC-5 CABLE NETWORK IRU AGREEMENT
THIS AGREEMENT, made and entered into this Dec 15 day of December, 1998,
between:
COMPANHIA PORTUGUESA RADIO MARCONI, S.A., a corporation organized and existing
under the laws of Portugal, with the capital stock of PTE 15,600,000,000$00,
corporte body 500069131, registered in the Commercial Registry of Lisbon under
the number 10844 and having its main office at Av. Alvaro Pais, 2, 1699 Lisboa
Codex, Portugal (hereinafter called "MARCONI" which expression shall include
its successors and assigns), and
STARTEC GLOBAL COMMUNICATIONS CORPORATION, a Maryland corporation having its
principal office at 10411 Motor City Drive, Suite 301, Bethesda, MD 20817,
U.S.A., (hereinafter called "STARTEC", which expression shall include its
successors and assigns).
WITNESSETH
WHEREAS, an Agreement (hereinafter called "TPC-5 C&MA") was entered into
effective 29 October 1992 and amended on 16 May 1995, amended on 31 October
1995, amended on 17 June, 1996 and amended 3 December 1996, to provide,
construct, maintain and operate the TPC-5 Cable Network (hereinafter called
"TPC-5" or "the Cable Network"), connecting the United States Mainland, on the
west, and points in or reached via the United Kingdom and France on the east;
and
WHEREAS, MARCONI is a Party to the TPC-5 C&MA; and
WHEREAS, TPC-5 shall be regarded as consisting of the following Segments:
Segment A: a cable station at Coos Bay, Oregon, U.S.A.
Segment B: a cable station at San Luis Obispo, California, U.S.A.
Segment C: a cable station at Keawaula, Hawaii, U.S.A.
Segment D: a cable station at Tumon Bay, Guam.
Segment E: a cable station at Miyazaki, Japan.
Segment F: a cable station at Ninomiya, Japan.
Segments A, B, C, D, E and F shall consist of:
2
<PAGE>
(i) an appropriate share of land and buildings at the specified locations for
the cable landing and for the cable route including cable rights-of-way and
ducts or conduits between the cable station and its respective Cable
Landing Point, and an appropriate share of common services and equipment at
each of the locations; and
(ii) cable station equipment including multiplex equipment down to the primary
level, as required, in each of the cable stations associated solely and
directly with the TPC-5.
Segment G: The whole of the submarine cable provided between and including the
Network Interface at the cable station at San Luis Obispo, California, on the
U.S. Mainland, and the Network Interface at the cable station at Keawaula,
Hawaii, and containing two optical fiber pairs, each such fiber pair capable of
operating at 4.8 Gigabits per second (Gbit/s), one of which is the Service Fiber
Pair and the other of which is the Restoration Fiber Pair.
Segment H: The whole of the submarine cable provided between and including the
Network Interface at the cable station at Keawaula, Hawaii, and the Network
Interface at the cable station at Tumon Bay, Guam, and containing two optical
fiber pairs, each such fiber pair capable of operating at 4.8 Gigabits per
second (Gbit/s), one of which is the Service Fiber Pair and the other of which
is the Restoration Fiber Pair.
Segment I: The whole of the submarine cable provided between and including the
Network Interface at the cable station at Tumon Bay, Guam, and the Network
Interface at the cable station at Miyazaki, Japan, and containing two optical
fiber pairs, each such fiber pair capable of operating at 4.8 Gigabits per
second (Gbit/s), one of which is the Service Fiber Pair and the other of which
is the Restoration Fiber Pair.
Segment J: The whole of the submarine cable provided between and including the
Network Interface at the cable station at Miyazaki, Japan, and the Network
Interface at the cable station at Coos Bay, Oregon, on the U.S. Mainland, and
containing two optical fiber pairs, each such fiber pair capable of operating at
4.8 Gigabits per second (Gbit/s), one of which is the Service Fiber Pair and the
other of which is the Restoration Fiber Pair.
Segment T1: The whole of the submarine cable provided between and including the
Network Interface at the cable station at Coos Bay, Oregon, on the U.S.
Mainland, and the Network Interface at the cable station at San Luis Obispo,
also on the U.S. Mainland, and containing two optical fiber pairs, each such
fiber pair capable of operating at 4.8 Gigabits per second (Gbit/s), one of
which is the Service Fiber Pair and the other of which is the Restoration Fiber
Pair.
Segment T2: The whole of the submarine cable provided between and including the
Network Interface at the cable station at Miyazaki, Japan, and the Network
Interface at the cable station at Ninomyia, also in Japan, and containing two
optical fiber pairs, each such fiber pair capable of operating at 4.8 Gigabits
per second (Gbit/s), one of which is the Service Fiber Pair and the other of
which is the Restoration Fiber Pair.
3
<PAGE>
Segment G, H, I, J, T1 and T2 shall include:
(i) all transmission, power feeding and special test equipment specifically
associated with, and required to operate and maintain the submersible
plant;
(ii) the power equipment provided wholly for use with the equipment listed in
(i) above;
(iii) the transmission cable equipped with appropriate repeaters and joint
housings between the cable stations; and
(iii) the sea earth cable and electrode system and/or the land earth system, or
an appropriate share thereof, associated with the terminal power feeding
equipment.
In this Agreement, references to any Segment, however expressed, shall be
deemed to include, unless the context otherwise requires, additional property
incorporated therein by agreement of the Parties. Each Segment shall be
regarded as including its related spare and standby units and components,
including, but not limited to, submersible repeaters, cable lengths and
terminal equipment; and
WHEREAS, a MIU is defined in the TPC-5 C&MA as a unit designated as the minimum
unit of investment in the Cable Network allowing the use of 2.048 Mbits/s and
the additional 420,571.43 bits per second required for multiplexing in each
direction.
WHEREAS, MARCONI and STARTEC have agreed that a portion of the capacity in the
Cable Network currently wholly assigned to MARCONI shall be offered to STARTEC
for purchase on an Indefeasible Right of Use basis (hereinafter called "IRU")
for the use of STARTEC; and
WHEREAS, STARTEC, as an IRU interest holder, will possess an exclusive and
irrevocable right to use, but not the right to control the facility; and
WHEREAS, it is now desired to define the terms and conditions upon which
STARTEC will be granted the IRU in that capacity.
NOW, THEREFORE, the Parties hereto, in consideration of the mutual covenants
herein expressed, covenant and agree with each other as follows:
1. MARCONI grants to STARTEC, on an IRU basis, for the term of this Agreement,
an interest in one (1) Minimum Investment Unit (hereinafter called "MIU")
in TPC-5, between Japan and U.S. Mainland. This MIU will be used for
supplying communications services between points in or reached via Ninomiya
(Japan) and points in or reached via San Luis Obispo (U.S. Mainland).
4
<PAGE>
2. For the IRU interest in one MIU granted to STARTEC pursuant to this
Agreement, STARTEC shall pay to MARCONI the following:
(i) A lump sum amount of two hundred thousand ($200,000) Dollars equal to
its share of the capital costs incurred for Segments between Japan and
U.S. Mainland, on the date in which this Agreement becomes effective.
(ii) A quarterly amount equal to the portion of the costs of operating,
maintaining and repairing the Cable Network (as defined in the TPC-5
C&MA) allocable to the MIU granted to STARTEC hereunder on a pro-rata
basis.
(iii)STARTEC shall pay all bills rendered to it by MARCONI pursuant to
this Agreement by the end of the month following the month in which
the bills are rendered. All bills will be payable in United States
dollars.
(iv) Bills not paid by the due date will incur a quarterly compounded
financing charge at a rate ten (10) percent per year, effective during
the period that the payment is overdue.
(v) If STARTEC is unable to make payments when required by this Agreement
on the day it is due, or otherwise is in breach of this Agreement, and
such default continues for a period of at least one (1) month, MARCONI
may notify STARTEC in writing of its intent to terminate this
Agreement. Upon receipt of such notification from MARCONI, STARTEC
will have thirty (30) calendar days to remedy such breach or make such
payment. If at the end of the thirty (30) day period, STARTEC has not
paid in full the amounts due hereunder or remedied such breach,
MARCONI may proceed to terminate this Agreement by giving STARTEC
written notice thereof effective upon the date of mailing or such
later date as may be specified in the notice, and MARCONI shall be
relieved of any liability to STARTEC arising out of such termination.
The rights and obligations of STARTEC under this Agreement shall
terminate as of the date of termination, except that the termination
shall not relieve STARTEC of its obligation to make full payment of
all amounts incurred under this Agreement up to and including the day
of termination.
3. In the event that the total number of equivalent MIUs which the Cable
Network involved is capable of providing is reduced as a result of physical
deterioration, or for other reasons beyond the control of Parties to the
TPC-5 C&MA, and if such reduction shall extend to fractions of MIUs, the
number of circuits sold to STARTEC hereunder may be reduced in the same
proportion as the total number of circuits is reduced.
5
<PAGE>
4. Neither Party shall be liable to the other for any loss or damage sustained
by reason of any failure in or breakdown of, or of the facilities
associated with the Cable Network, or for any interruption of service
whatsoever shall be the cause of such failure, breakdown or interruption
and however long it shall last.
5. The operation by STARTEC of the IRU interest granted to it hereunder and
any equipment associated herewith with the previous written consent of
MARCONI shall be such as not to interrupt, interfere with or impair service
over any of the facilities comprising the Cable Network, any other circuits
of MARCONI or any circuits of MARCONI's associated, affiliated or
connecting companies or of other right of user grantees, impair privacy of
any communications over such facilities or circuits, cause damage to plant,
or create hazards to the employees of any of the aforementioned companies,
or of any owner of the aforementioned facilities or circuits or to the
publlc. STARTEC shall hold harmless MARCONI and bear the cost of any
additional protective apparatus reasonably required to be installed because
of the use of facilities by STARTEC, any lessee of STARTEC, or any customer
or customers of STARTEC or of any such lessee, and the cost of any possible
damage thereto related.
A consent granted under this clause may be revoked at anytime by MARCONI if
the provisions of the clause are not fulfilled. Such equipment, if used,
shall not constitute a part of TPC-5. Similar obligations will be included
in any such agreements made with users of TPC-5.
6. The capacity in the Cable Network made available to STARTEC hereunder shall
be maintained, or caused to be maintained, in efficient working order in
accordance with the TPC-5 C&MA.
In this regard, at a time agreeable to MARCONI, the MIU sold to STARTEC
hereunder shall be made available to MARCONI to make such tests and
adjustments as may be necessary for such circuits to be maintained in
efficient working order.
7. In the event of liquidation of the Cable Network, or any part thereof, by
sale or other disposition, during the term in which this Agreement is in
force, MARCONI shall share with STARTEC the net Proceeds or cost of such
sale or disposition, STARTEC's share of such proceeds or cost being
proportionate to its contribution to the capital cost of the subject of
said liquidation or disposition.
8. No license under patents is granted by MARCONI or shall be implied or arise
by estoppel in STARTEC's favour with respect to any apparatus, system or
method used by STARTEC in connection with the use of the MIU sold to it
hereunder. With respect to claims of patent infringement made by third
persons, (i)
6
<PAGE>
MARCONI will save STARTEC harmless against claims arising out of the use by
STARTEC of such half circuits in accordance with the provision of this
Agreement, and (ii) STARTEC will save MARCONI harmless against claims
arising out of combining such half circuits or using such half circuits in
connection with any apparatus, system or method provided by STARTEC.
9. MARCONI shall keep and maintain for a period of not less than three (3)
years such books, records, vouchers and accounts of all its costs with
respect to the provision and maintenance of the Cable Network as may be
appropriate to support the billing of any such costs to STARTEC and shall
at all reasonable times make them available for inspection by STARTEC.
10. The performance of this Agreement by the Parties is contingent upon:
(i) The provision and continued operation of the Cable Network; and
(ii) the obtaining and continuance of such approvals, consents,
governmental authorizations, licenses and permits as may be required
or be deemed necessary by the Parties hereto. The Parties shall use
their best efforts to obtain and continue such approvals, consents,
authorizations, licenses and permits.
11. Unless otherwise stipulated, no transfer of the rights granted under this
Agreement or of any right resulting from it by either of the Parties to
this Agreement shall be considered valid without the written consent of the
other Party to this Agreement, except to a successor or assign or
subsidiary of such Party, or corporation controlling, or under the same
control as such Party, in which case written notice shall be given in a
timely manner by the Party making said transfer.
12. This Agreement and any of the provisions hereof may be altered or added to
by any other agreement in writing signed by both Parties by a duly
authorized person on behalf of each Party.
13. The relationship between the Parties hereto shall not be that of partners,
and nothing contained herein shall be deemed to constitute a partnership
between them.
14. This Agreement shall be binding upon, and inure to the benefit of, the
Parties, their successors, administrators and permitted assigns.
7
<PAGE>
15. This Agreement shall become effective on the date and year first above
written and shall continue in effect for the duration of the TPC-5 C&MA.
MARCONI shall give STARTEC notice in writing of the termination of the
TPC-5 C&MA by not less than three (3) months before such termination.
16. For all purposes, the addresses of the Parties to this Agreement shall be
as follows, unless otherwise designated in writing by the respective
Parties:
Vendor
------
COMPANHIA PORTUGUESA RADIO MARCONI, SA
Av. Alvaro Pais, no 2
1699 LISBOA CODEX
PORTUGAL
Purchaser
---------
STARTEC GLOBAL COMMUNICATIONS CORPORATION
10411 Motor City Drive
Suite 301, Bethesda
MD 20817, U.S.A.
17. All information, except such information in the public domain, exchanged
between the Parties under this Agreement or during the negotiations
preceding this Agreement and relating either to the existence or terms and
conditions of this Agreement or any activities contemplated by this
Agreement is confidential to them, their employees, legal advisers and
other consultants and may not be disclosed to any third Party, Not
withstanding anything to the contrary or contained herein, a Party shall be
allowed to disclose confidential information pursuant to judicial or
governmental order or if otherwise required to do so by law.
18. a) All disputes arising in connection with the present Agreement shall be
finally settled under the rules of Conciliation and Arbitration of the
International Chamber of Commerce by one or more arbitrators appointed
in accordance of said rules.
b) The arbitrator or arbitrators are authorized to act as amiable
mediators (ex aequo et bono) in reaching a conclusion as to the rights
and obligations of the parties in dispute, under the English Law.
8
<PAGE>
c) The arbitration shall take place in London, at a venue to be fixed by
arbitrator or arbitrators, and the Language of arbitration shall be
the English.
19. This Agreement shall be executed in two counterparts in the English
language. Each counterpart, when executed and delivered, shall be an
original, and such counterparts shall together (as well as separately)
constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties hereto have severally subscribed these presents
or caused them to be subscribed in their names and behalf by their respective
officers thereunto duly authorized.
COMPANHIA PORTUGUESA RADIO MARCONI, SA
by:
Lisbon, 23 November 1998
STARTEC GLOBAL COMMUNICATIONS CORPORATION
by:
Bethesda, /s/ RY 1998
------------
9
EXHIBIT 10.43
TPC-5 CABLE NETWORK
INDEFEASIBLE RIGHT OF USE AGREEMENT
BETWEEN
KDD CORPORATION
AND
STARTEC GLOBAL COMMUNICATIONS CORPORATION
THIS AGREEMENT, made and entered into the last day of December, 1998, by and
between KDD Corporation, a corporation organized and existing under the laws of
Japan and having its principal office at No.3-2, Nishi-Shinjuku 2-Chorric,
Shinjuku-ku, in the city of Tokyo 163-8003, Japan (hereinafter referred to as
"KDD" which expression shall include its successors and assigns) and Startec
Global Communications Corporation, a corporation organized and existing under
the laws of State of Maryland and having its principal office at 10411 Motor
City Drive, Bethesda MD 20817, United States of America (hereinafter referred to
as "Startec" which expression shall include its successors and assigns) and;
WITNESSETH:
WHEREAS, pursuant to an agreement entitled "TPC-5 Cable Network Construction and
Maintenance Agreement" dated October 29. 1992 and "TPC-5 Cable Network
Amendatory Agreement No.1" dated May 16. 199, "TPC-5 Cable Network Amendatory
Agreement No.2" dated October 31, 1995, "TPC-5 Cable Network Amendatory
Agreement No-3" dated June 17, 1996, "TPC-5 Cable Network Amendatory Agreement
No.4" dated December 3, 1996, (hereinafter collectively referred to as the
"C&MA" inclusive of any future Amendatory Agreements), KDD and other signatories
thereto agreed, on the terms and conditions contained therein, to provide,
construct, maintain and operate a submarine cable network linking North America
and Japan, known as the "TPC-5 Cable Network" (hereinafter referred to as the
"TPC-5 CN"); and
WHEREAS, referring the C&MA, hereinafter the Path between the Nodes of Japan -
U.S. Mainland shall be referred to as the "JA-US Path", which shall consist of
Segment A, Segment B, Segment C, Segment D, Segment E, Segment F, Segment G,
Segment H, Segment I, Segment, J, Segment T1 and Segment T2; and
WHEREAS, pursuant to the current C&MA, the TPC-5 CN consisting of two fiber
pairs,
1
<PAGE>
one Service Fiber Pair and one Restoration Fiber Pair, each providing 64 Basic
System Modules has a total design capacity of four thousand and thirty-two
(4032) Minimum Investment Units (hereinafter referred to as "MIUs"), each of
which allows the use of 2.048 Mbits per second and an additional 420,571.43 bits
per second required for multiplexing purposes, in each direction; and
WHEREAS, pursuant to the C&MA, KDD have been wholly assigned a certain number of
MIUs in the number JA-US Path; and
WHEREAS, KDD, pursuant to the C&MA as wholly assigned MIUs of a Path Assignment
shall be considered as consisting of two half-interests in a MIU assigned to one
Party, may make half interests in the said MIUs available to other Parties to
the C&MA or telecommunications entities not Parties to the C&MA; and
WHEREAS, Startec desires to use KDD's half interests, in a certain number of
MIUs assigned to KDD in the JA-US Path; and
WHEREAS, KDD and Startec desire to define the terms and conditions under which
the said interest in the JA-US Path will be granted to Startec:
NOW THEREFORE, KDD and Startec, in consideration of the natural covenants herein
cxpressed, covenant and agree with each other as follows:
1. (a) KDD hereby grants to Startec on an indefeasible right of use
(hereinafter referred to as "IRU") basis, one (1) half MIU wholly assigned to
KDD in the JA-US Path owned by KDD. Actual route assignment for the granted IRU
half interest(s) shall be subject to the C&MA.
(b) The IRU half interest(s) shall he utilized by Startec in furnishing
jointly with KDD communication services between points in the United States and
points in Japan.
2. For the IRU half interest(s), Startec shall pay a lump sum amount of twenty
million (20,000,000) Japanese Yen.
3. Even if any kind of adjustment in the portion of capital cost (excluding
the
2
<PAGE>
incremental cost on the relevant cubic stations) incurrcd by KDD is made, as
changes occur in the capital cost of the JA-US Path for any reason, including.
but not limited to the replacement, addition or removal of property, or change
in the capacity of the JA-US Path, no financial adjustment shall be made
regarding the lump sum payment described in Clause 2.
4. For the IRU half interest(s), Startec shall also pay the following costs to
KDD on the MIU proportionate share of the half intcrest(s) granted to Startec in
the KDD's MIU in the JA-US Path at the time of such cost occurrence.
(i) the operating and maintenance costs which KDD incurs and receives
bills, on JA-US Path and the relevant cable stations,
(ii) the costs associated with restoration incurred by KDD, if restoration
is required by Startec on the granted half interest(s), in case of
restoration not via self-healing function of the TPC-5 CN, including the
bills of the terrestrial link charges in Japan, based on the certain terms
and conditions established by KDD.
5. Even if any kind of increase or decrease on the design capacity of the
TPC-5 CN beyond its initial capacity in the Service Fiber Pair should occur, no
adjustment in the capacity of the IRU half interest(s) shall be made hereunder
nor shall financial adjustment be made.
6. (a) KDD shall render bills due under this Agreement in Japanese yen.
Startec shall make payments of such amounts in Japanese yen to the designated
office of KDD within one (1) calendar month after the end of the calendar month
in which such bill was rendered.
(b) Regarding the operation and maintenance costs described in Clause 4
(i), KDD shall render bills quarterly to Startec. Regarding the costs associated
with restoration, KDD shall render bills on cost occurrence.
(c) All bills rendered by KDD hereunder may include financial charges
computed at a rate equal to the lowest publicly announced prime rate or
commercial lending rate, however described; for ninety (90)-day loans in the
currency of Japan by the Industrial Bank of Japan, Limited. Tokvo; The Dai -
Ichi Kangyo Bank, Limited, Tokyo; and The Bank of Tokyo-Mitsubishi, Limited,
Tokyo, on the fifteenth (15th) day of the middle
3
<PAGE>
month of the quarter in which the costs were incurred by KDD from such date to
the due date of the bills. If the fifteenth (15th) day of the month is not a
business day, the interest rate prevailing, on the succeeding business day shall
be used.
(d) Bills not fully paid when due shall accrue late payment interest on
the unpaid portion at the per annum simple interest rate equal to the lowest
standard penalty interest rate of the Industrial Bank of Japan, Limited, Tokyo;
The Dai - Ichi Kangyo Bank, Limited, Tokyo; and The Bank of Tokyo-Mitsubishi,
Limited, Tokyo, applicable on the day following the date payment of the bill
was due. In the event that applicable law does not allow the imposition of late
payment interest at the rate provided in this sub-clause, interest rate shall
be at the highest rate permitted by applicable law. The late payment interest
shall accrue on a daily basis from and including the day following the day on
which payment is due until payment is received by KDD.
7. KDD shall keep and maintain or caused to be kept and maintained such books,
records, vouchers, and accounts as may be appropriate to support its billing
under this Agreement as referred in Clause 2, 4 and 6, and shall at all
reasonable times make them available for the inspection of Startec, for a period
of not less than three (3) years from the date the applicable bill is rendered.
8. The half interest(s) granted to Startec hereunder shall be maintained or
caused to be maintained by KDD in efficient working order in accordance with the
C&MA.
9. The operation by Startec of the IRU half interest(s) granted to it
hereunder and any equipment associated therewith shall be such as not to
interfere with or impair service over any of the facilities comprising the TPC-5
CN; nor cause damage to plant; nor create hazards to the employees of any of the
owners of the aforementioned facilities or the publc. Startec shall bear the
costs of any additional protective apparatus reasonably required to be installed
because of the use of such half interest(s) in MIUs by Startec, any lessee of
Startec, or any customer or customers of Startec or of any such lessee.
10. Neither KDD nor Startec shall be liable to any other party for any loss or
damage sustained by reason of any failure in or breakdown of facilities
associated with the TPC-5 CN or any interruption or degradation of service,
whatsoever shall be the cause of such failure, breakdown, interruption or
degradation and however long it shall last.
11. This Agreement shall become effective on the day and year first above
written
4
<PAGE>
and shall continue in effect for the duration of the C&MA, subject to the right
of either KDD or Startec to terminate this Agreement at the end of the initial
period of the C&MA or at any time thereafter upon one (1) year's notice in
writing to the other party. KDD shall give Startec prompt notice in writing of
termination of the C&MA.
12. (a) This Agreement may be terminated forthwith by KDD and KDD shall reclaim
the IRU half interest(s) granted hereunder if:
(i) Startec fails to make any payment required by this Agreement on the day
it is due or otherwise is in breach of this Agreement and fails to remedy
such beach within thirty (30) days (except in case of emergency when KDD
may specify in that notice such shorter period as may be reasonable) after
receipt of a notice specifying the breach and requiring it to be remedied,
or;
(ii) Startec shall become insolvent or have a receiver, administrative
receiver, or manager, appointed over the whole or any part of its assets or
go into liquidation (whether compulsorily or voluntarily) otherwise than
for the purpose of amalgamation or reconstruction or make any arrangement
with its creditors or have any form of execution or distress levied upon
its assets or cease to carry on business.
(b) The rights and obligations of Startec under this Agreement shall
terminate as of the date of reclamation, except the reclamation shall not
relieve Startec of its obligation to make full payment of all amounts incurred
under this Agreement up to and including the day of termination.
13. (a) In the event of lquidation of the JA-US Path or any portion thereof, by
sale or other disposition, KDD shall share with Startec any net proceeds or
costs of such liquidation, sale or disposition received or incurred by KDD.
Startec's share of such proceeds or costs shall be proportionate as making the
payments of the operation and maintenance costs, as referred in Clause 4.
(b) Liquidation of the JA-US Path or any portion thereof, or termination of
the CM&A shall not relieve Startec from any liability arising on account of
claims made by third parties in respect of the JA-US Path or any part thereof
and damages or compensation payable on account of such claims, or obligations
which may arise in relation to the JA-US Path, due to any law, order or
regulation made by any government
5
<PAGE>
or supranational legal authority pursuant to any international convention,
treaty or agreement. Startec's share of any such liabilities or costs incurred
or benefits accruing in satisfying such obligations shall he proportionate as
referred in Sub-Clause 13(a).
14. KDD shall exercise its rights pertaining to the half interest(s) which are
the subject of this Agrreement in a manner which will not diminish the IRU half
interest(s) grantcd to Startec under this Agreement.
15. (a) KDD and Startec shall treat as confidential and shall not disclose to
any third party nor use for any purpose other than the performance of this
Agreement any information in this Agreement including, but not limited to,
terms, conditions, prices, forms and format with regard to KDD and Startec,
excluding;
(i) what is allowed to disclose to any third parties with written approval
of the other party;
(ii) what is generally available to the public other than by reason of a
breach of this Agreement; and
(iii) what is subsequently acquired by KDD and/or Startec from a third
party who is lawfully entitled to disclose.
(b) Notwithstanding Sub-Clause 15 (a), KDD and/or Startec may disclose such
information to its contractors or sub-contractors or to any of its respective
employees or agents only in the case of necessity of such information for the
purpose of enabling KDD and/or Startec to perform any of its obligations or to
exercise any of its rights under this Agreement.
16. The relationship between KDD and Startec under this Agreement shall not be
that of partners and nothing herein contained shall be deemed to constitute a
partnership between them.
17. No license under patents is granted by KDD or shall be implied or arise by
estoppel in Startec's favor in respect to any apparatus, svstem or method used
by Startec in connection with the use of the IRU half interest(s).
18. Startec shall not, without the written consent of KDD, sell, assign,
transfer or
6
<PAGE>
dispose of its rights or obligations under this Agreement except to a legal
successor of Startec.
19. (a) This Agreement contains the entire agreement between KDD and Startec
relating to the subject matter of this Agreement and merges all prior
discussions, agreements and understandings of written or oral express or implied
between them.
(b) Any oral attempt to modify and/or add to this Agreement not reduced to
writing and signed by KDD and Startec and each successor and permitted assigns
shall be totally without effect and will not be binding upon them.
20. For all purposes (e.g. billing and making payments) under this Agreement,
the contacts and addresses of KDD and Startec respectively shall be confirmed as
set forth in Attachment 1. KDD and Startec shall provide and receive the revised
information to the other, whenever necessary, accompanied with this Agreement.
21. (a) All disputes, controversies, claims or differences which may arise
between KDD and Startec hereto, out of or in relation to or in connection with
this Agreement, KDD and Startec shall make every reasonable effort to resolve
such disputes in reference with the C&MA.
(b) In the event that such disputes shall not be resolved under the
interpretation of the C&MA, this Agreement shall be governed by and construed in
accordance with Japanese law.
(c) The place of arbitration shall be Tokyo. Japan.
22. This Agreement shall be executed in two (2) counterparts in English, and
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.
7
<PAGE>
IN WITNESS WHEREOF, KDD and Startec have severally subscribed these presents or
caused them to be subscribed in their names and behalf by their respective
representatives thereunto duly authorized.
KDD CORPORATION
By /s/ Y. Shimatani
----------------------------
Yoshiharu Shimatani
Director
Network Planning Department
STARTEC GLOBAL COMMUNICATIONS CORPORATION
By /s/
----------------------------
8
EXHIBIT 10.44
IRU AGREEMENT
BETWEEN
COMPANHIA PORTUGUESA RADIO MARCONI, SA
AND
STARTEC GLOBAL COMMUNICATIONS CORPORATION
<PAGE>
TAT-12/13 CABLE NETWORK IRU AGREEMENT
THIS AGREEMENT, made and entered into this 15 day of December, 1998, between:
COMPANHIA PORTUGUESA RADIO MARCONI, S.A., a corporation organized and existing
under the laws of Portugal, with the capital stock of PTE 15,600,000,000$00,
corporate body 500069131, registered in the Commercial Registry of Lisbon under
the number 10844 and having its main office at Av. Alvaro Pais, 2, 1699 Lisboa
Codex, Portugal (hereinafter called "MARCONI" which expression shall include its
successors and assigns), and
STARTEC GLOBAL COMMUNICATIONS CORPORATION, a Maryland corporation having its
principal office at 10411 Motor City Drive, Suite 301, Bethesda, MD 20817,
U.S.A., (hereinafter called "STARTEC", which expression shall include its
successors and assigns).
WITNESSETH
WHEREAS, an Agreement (hereinafter called "TAT-12/13 C&MA") was entered into
effective 16 December 1992 and amended on 28 September 1993, amended on 27
September 1994, amended on 17 October 1995, amended on 12 April 1996, amended on
31 August 1996 and amended 21 April 1997, to provide, construct, maintain and
operate the TAT-12/13 Cable Network (hereinafter called "TAT-12/13" or "the
Cable Network"), connecting the United States Mainland, on the west, and points
in or reached via the United Kingdom and France on the east; and
WHEREAS, MARCONI is a Party to the TAT-12/13 C&MA; and
WHEREAS, TAT-12/13 shall be regarded as consisting of the following Segments:
Segment A: a cable station in Greenhill, Rhode Island, United States.
Segment B: a cable station in Lands End, the United Kingdom.
Segment C: a cable station in Penmarch, France.
Segment D: a cable station in Shirley, New York, United States.
Segments E, F, G and H: a submarine cable network linking Segments A, B, C and
D.
2
<PAGE>
Segments A, B, C and D shall each consist of an appropriate share of land and
buildings at the specified locations for the cable landing and for the cable
right-of-way and ducts between a cable station and its respective Cable Landing
Point, and an appropriate share of common services and equipment (other than
services and equipment associated solely with the Cable Network) at each of
those locations together with equipment in each of those cable stations solely
associated with the TAT-12/13, but which is not part of Segments E, F, G and H.
Segments E, F, G and H: The whole of the Submarine cable network provided
between and among and including the System Interfaces at the cable stations in
the United States, the United Kingdom and France, and shall be comprised of two
fiber pairs between each of the cable stations. Unless otherwise agreed by the
TAT-12/13 General Committee, each fiber pair in Segments E, F, G and H shall be
capable of operating at 4.8 Gigabits per second (Gb/s), and shall consist of 32
Basic System Modules.
Segment E, F, G and H shall also include:
(i) all transmission, power feeding and special test equipment directly
associated with the submersible plant;
(ii) the power equipment provided wholly for use with the equipment listed in
(i) above;
(iii) the transmission cable equipped with appropriate repeaters, and joint
housings between the cable stations; and
(iv) the sea earth cable and electrode system and/or the land earth system, or
an appropriate share thereof, associated with the terminal power feeding
equipment, including that of Segment H; and
WHEREAS, a MIU is defined in the TAT-12/13 C&MA as a unit designated as the
minimum unit of investment in the Cable Network allowing the use of 2,048,000
bits per second and the additional 162,539 bits per second required for
multiplexing in each direction.
WHEREAS, MARCONI and STARTEC have agreed that a portion of the capacity in the
Cable Network currently wholly assigned to MARCONI shall be offered to STARTEC
for purchase on an Indefeasible Right of Use basis (hereinafter called "IRU")
for the use of STARTEC; and
WHEREAS, STARTEC, as an IRU interest holder, will possess an exclusive and
irrevocable right to use, but not the right to control the facility; and
3
<PAGE>
WHEREAS, it is now desired to define the terms and conditions upon which
STARTEC will be granted the IRU in that capacity.
NOW, THEREFORE, the Parties hereto, in consideration of the mutual covenants
herein expressed, covenant and agree with each other as follows:
1. MARCONI grants to STARTEC, on an IRU basis, for the term of this Agreement,
an interest in one (1) Minimum Investment Unit (hereinafter called "MIU"),
in Segments between Greenhill (U.S.) and Penmarch (France).
2. For the IRU interest in one MIU granted to STARTEC pursuant to this
Agreement, STARTEC shall pay to MARCONI the following:
(i) A lump sum amount of one hundred seventy thousand ($170,000) Dollars
equal to its share of the capital costs incurred for Segments between
Greenhill (U.S.) and Penmarch (France), on the date in which this
Agreement becomes effective.
(ii) A quarterly amount equal to the portion of the costs of operating,
maintaining and repairing the Cable Network allocable to the MIU
granted to STARTEC hereunder on a pro-rata basis.
(iii)STARTEC shall pay all bills rendered to it by MARCONI pursuant to
this Agreement by the end of the month following the month in which
the bills are rendered. All bills will be payable in United States
dollars.
(iv) Bills not paid by the due date will incur a quarterly compounded
financing charge at a rate ten (10) percent per year, effective during
the period that the payment is overdue.
(v) If STARTEC is unable to make payments when required by this Agreement
on the day it is due, or otherwise is in breach of this Agreement, and
such default continues for a period of at least one (1) month, MARCONI
may notify STARTEC in writing of its intent to terminate this
Agreement. Upon receipt of such notification from MARCONI, STARTEC
will have thirty (30) calendar days to remedy such breach or make such
payment. If at the end of the thirty (30) day period, STARTEC has not
paid in full the amounts due hereunder or remedied such breach,
MARCONI may proceed to terminate this Agreement by giving STARTEC
written notice thereof effective upon the date of mailing or such
later date as may be specified in the notice, and
4
<PAGE>
MARCONI shall be relieved of any liability to STARTEC arising out of
such termination. The rights and obligations of STARTEC under this
Agreement shall terminate as of the date of termination, except that
the termination shall not relieve STARTEC of its obligation to make
full payment of all amounts incurred under this Agreement up to and
including the day of termination.
3. In the event that the total number of equivalent MIUs which the Cable
Network involved is capable of providing is reduced as a result of physical
deterioration, or for other reasons beyond the control of Parties to the
TAT-12/13 C&MA, and if such reduction shall extend to fractions of MIUs,
the number of circuits sold to STARTEC hereunder may be reduced in the same
proportion as the total number of circuits is reduced.
4. Neither Party shall be liable to the other for any loss or damage sustained
by reason of any failure in or breakdown of, or of the facilities
associated with the Cable Network, or for any interruption of service
whatsoever shall be the cause of such failure, breakdown or interruption
and however long it shall last.
5. The operation by STARTEC of the IRU interest granted to it hereunder and
any equipment associated herewith with the previous written consent of
MARCONI shall be such as not to interrupt, interfere with or impair service
over any of the facilities comprising the Cable Network, any other circuits
of MARCONI or any circuits of MARCONI's associated, affiliated or
connecting companies or of other right of user grantees, impair privacy of
any communications over such facilities or circuits, cause damage to plant,
or create hazards to the employees of any of the aforementioned companies,
or of any owner of the aforementioned facilities or circuits or to the
publlc. STARTEC shall hold harmless MARCONI and bear the cost of any
additional protective apparatus reasonably required to be installed because
of the use of facilities by STARTEC, any lessee of STARTEC, or any customer
or customers of STARTEC or of any such lessee, and the cost of any possible
damage thereto related.
A consent granted under this clause may be revoked at anytime by MARCONI if
the provisions of the clause are not fulfilled. Such equipment, if used,
shall not constitute a part of TAT-12/13. Similar obligations will be
included in any such agreements made with users of TAT-12/13.
5
<PAGE>
6. The capacity in the Cable Network made available to STARTEC hereunder shall
be maintained, or caused to be maintained, in efficient working order in
accordance with the TAT-12/13 C&MA.
In this regard, at a time agreeable to MARCONI, the MIU sold to STARTEC
hereunder shall be made available to MARCONI to make such tests and
adjustments as may be necessary for such circuits to be maintained in
efficient working order.
7. In the event of liquidation of the Cable Network, or any part thereof, by
sale or other disposition, during the term in which this Agreement is in
force, MARCONI shall share with STARTEC the net Proceeds or cost of such
sale or disposition, STARTEC's share of such proceeds or cost being
proportionate to its contribution to the capital cost of the subject of
said liquidation or disposition.
8. No license under patents is granted by MARCONI or shall be implied or arise
by estoppel in STARTEC's favour with respect to any apparatus, system or
method used by STARTEC in connection with the use of the MIU sold to it
hereunder. With respect to claims of patent infringement made by third
persons, (i) MARCONI will save STARTEC harmless against claims arising out
of the use by STARTEC of such half circuits in accordance with the
provision of this Agreement, and (ii) STARTEC will save MARCONI harmless
against claims arising out of combining such half circuits or using such
half circuits in connection with any apparatus, system or method provided
by STARTEC.
9. MARCONI shall keep and maintain for a period of not less than three (3)
years such books, records, vouchers and accounts of all its costs with
respect to the provision and maintenance of the Cable Network as may be
appropriate to support the billing of any such costs to STARTEC and shall
at all reasonable times make them available for inspection by STARTEC.
10. The performance of this Agreement by the Parties is contingent upon:
(i) The provision and continued operation of the Cable Network; and
(ii) the obtaining and continuance of such approvals, consents,
governmental authorizations, licenses and permits as may be required
or be deemed necessary by the Parties hereto. The Parties shall use
their best efforts to
6
<PAGE>
obtain and continue such approvals, consents, authorizations, licenses
and permits.
11. Unless otherwise stipulated, no transfer of the rights granted under this
Agreement or of any right resulting from it by either of the Parties to
this Agreement shall be considered valid without the written consent of the
other Party to this Agreement, except to a successor or assign or
subsidiary of such Party, or corporation controlling, or under the same
control as such Party, in which case written notice shall be given in a
timely manner by the Party making said transfer.
12. This Agreement and any of the provisions hereof may be altered or added to
by any other agreement in writing signed by both Parties by a duly
authorized person on behalf of each Party.
13. The relationship between the Parties hereto shall not be that of partners,
and nothing contained herein shall be deemed to constitute a partnership
between them.
14. This Agreement shall be binding upon, and inure to the benefit of, the
Parties, their successors, administrators and permitted assigns.
15. This Agreement shall become effective on the date and year first above
written and shall continue in effect for the duration of the TAT-12/13
C&MA. MARCONI shall give STARTEC notice in writing of the termination of
the TAT-12/13 C&MA by not less than three (3) months before such
termination.
16. For all purposes, the addresses of the Par-ties to this Agreement shall be
as follows, unless otherwise designated in writing by the respective
Parties:
Vendor
------
COMPANHIA PORTUGUESA RADIO MARCONI, SA
Av. Alvaro Pais, no 2
1699 LISBOA CODEX
PORTUGAL
7
<PAGE>
Purchaser
---------
STARTEC GLOBAL COMMUNICATIONS CORPORATION
10411 Motor City Drive
Suite 301, Bethesda
MD 20817, U.S.A.
17. All information, except such information in the public domain, exchanged
between the Parties under this Agreement or during the negotiations
preceding this Agreement and relating either to the existence or terms and
conditions of this Agreement or any activities contemplated by this
Agreement is confidential to them, their employees, legal advisers and
other consultants and may not be disclosed to any third Party.
Notwithstanding anything to the contrary or contained herein, a Party shall
be allowed to disclose confidential information pursuant to judicial or
governmental order or if otherwise required to do so by law.
18. a) All disputes arising in connection with the present Agreement shall be
finally settled under the rules of Conciliation and Arbitration of the
International Chamber of Commerce by one or more arbitrators appointed
in accordance of said rules.
b) The arbitrator or arbitrators are authorized to act as amiable
mediators (ex aequo et bono) in reaching a conclusion as to the rights
and obligations of the parties in dispute, under the English Law.
c) The arbitration shall take place in London, at a venue to be fixed by
arbitrator or arbitrators, and the Language of arbitration shall be
the English.
19. This Agreement shall be executed in two counterparts in the English
language. Each counterpart, when executed and delivered, shall be an
original, and such counterparts shall together (as well as separately)
constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties hereto have severally subscribed these presents
or caused them to be subscribed in their names and behalf by their respective
officers thereunto duly authorized.
8
<PAGE>
COMPANHIA PORTUGUESA RADIO MARCONI, SA
By:
Lisbon, 23 November 1998
(SEAL) (SEAL) (SEAL) (SEAL)
STARTEC GLOBAL COMMUNICATIONS CORPORATION
By:
Bethesda, /s/ RY 1998
9
EXHIBIT 10.45
LEASE
36 NORTH EAST SECOND STREET, L.L.C.
LANDLORD
STARTEC GLOBAL COMMUNICATIONS CORPORATION
TENANT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE PAGE
<S> <C>
1. USE, RESTRICTIONS ON USE AND COMPLIANCE WITH LAWS .......... 1
2. TERM ....................................................... 2
3. RENT ....................................................... 3
4. RENT ADJUSTMENTS ........................................... 3
5. SECURITY DEPOSIT ........................................... 5
6. ALTERATIONS ................................................ 5
7. REPAIR ..................................................... 6
8. LIENS ...................................................... 7
9. ASSIGNMENT AND SUBLETTING .................................. 7
10. INDEMNIFICATION ........................................... 8
11. INSURANCE ................................................. 9
12. WAIVER OF SUBROGATION ..................................... 9
13. SERVICES AND UTILITIES .................................... 9
14. HOLDING OVER .............................................. 10
15. SUBORDINATION ............................................. 10
16. RULES AND REGULATIONS ..................................... 10
17. REENTRY BY LANDLORD ....................................... 10
18. DEFAULT ................................................... 11
19. REMEDIES .................................................. 11
20. TENANT'S BANKRUPTCY FOR INSOLVENCY ........................ 13
21. QUIET ENJOYMENT ........................................... 13
22. DAMAGE BY FIRE, ETC. ...................................... 14
23. EMINENT DOMAIN ............................................ 14
24. SALE BY LANDLORD .......................................... 15
25. ESTOPPEL CERTIFICATES ..................................... 15
26. SURRENDER OF PREMISES ..................................... 15
27. NOTICES ................................................... 15
28. TAXES PAYABLE BY TENANT ................................... 15
29. DEFINED TERMS AND HEADINGS ................................ 16
30. TENANT'S AUTHORITY ........................................ 16
</TABLE>
<PAGE>
<TABLE>
<S> <C>
31. COMMISSIONS ............................................... 16
32. TIME AND APPLICABLE LAW ................................... 16
33. SUCCESSORS AND ASSIGNS .................................... 16
34. ENTIRE AGREEMENT .......................................... 16
35. EXAMINATION NOT OPTION .................................... 16
36. RECORDATION ............................................... 16
37. LIMITATION OF LANDLORD'S LIABILITY ........................ 17
38. MISCELLANEOUS ............................................. 17
</TABLE>
EXHIBIT A -- PREMISES
EXHIBIT B -- INITIAL ALTERATIONS
EXHIBIT C -- RULES AND REGULATIONS
EXHIBIT D -- LIST OF APPROVED CONTRACTORS
EXHIBIT E -- LOCATION OF DESIGNATED AREAS
<PAGE>
LEASE
By this Lease Landlord leases to Tenant and Tenant leases from Landlord the
Premises in the Building as set forth and described on the Reference Page. The
Reference Page, including all terms defined thereon, is incorporated as part of
this Lease.
1. USE, RESTRICTIONS ON USE AND COMPLIANCE WITH LAWS.
1.1 The Premises are to be used solely for the operation, installation,
maintenance, repair and replacement of telecommunications equipment and its
related facilities and for general office use. Tenant shall not do or permit
anything to be done in or about the Premises or the Building which will in any
way obstruct or interfere with the rights of other tenants or occupants of the
Building or injure, annoy, or disturb them or allow the Premises to be used for
any improper or unlawful or objectionable purpose. Tenant shall not do, permit
or suffer in, on, or about the Premises the sale of any alcoholic liquor without
the written consent of Landlord first obtained, or the commission of any waste.
Tenants shall comply with all government laws, ordinances and regulations
applicable to the use of the Premises and its occupancy and shall promptly
comply with all governmental orders and directions for the correction,
prevention and abatement of any violations in or upon, or in connection with,
the Premises, related to Tenant's use of the Premises, all at Tenant's sole
expense. Tenant shall not do or permit anything to be done on or about the
Premises or the Building or bring or keep anything into the Premises which will
in any way increase the rate of, invalidate or prevent the procuring of any
insurance protecting against loss or damage to the Building or any of its
contents by fire or other casualty or against liability for damage to property
or injury to persons in or about the Building or any part thereof, provided,
however, that Landlord represents and warrants that Tenant's intended use as a
telecommunications center as provided for in this Lease shall not cause any
increase in the rate of, invalidate or prevent the procuring of any such
protections. Landlord acknowledges and agrees that Tenant may enter into
agreements with its customers and/or end users ("Collocation Agreements")
providing for physical location of telecommunication equipment and facilities
within the Premises, maintained and serviced by Tenant and placed in the
Premises and Tenant's sole cost, expenses and risk, provided that such
Collocation Agreements shall be subordinate to the Lease and to any mortgages,
deeds of trust, or land sale contracts now or in the future, against the
Building. Tenant may enter into Collocation Agreements with third parties, for
the use of the Premises at the sole discretion of Tenant, and any provision of
the subletting and assignment provisions of this Lease to the contrary
notwithstanding, such Collocation Agreements shall not be construed as an
assignment or sublet.
1.2 Tenant shall not, and shall not direct, suffer or permit any of its
agents, contractors, employees, licensees or invitees to at any time handle,
use, manufacture, store or dispose of in or about the Premises or the Building
any (collectively "Hazardous Materials") flammables, explosives, radioactive
materials, hazardous wastes or materials, toxic wastes or materials, or other
similar substances, petroleum products or derivatives or any substance subject
to regulation by or under any Environmental Laws, except if handled, used,
stored and disposed of in accordance with applicable Environmental Laws. Tenants
shall protect, defend, indemnify and hold each and all of the Landlord Entities
(as defined in Article 29) harmless from and against any and all loss, claims,
liability or costs (including court costs and attorney's fees) incurred by
reason of any actual or asserted failure of Tenant to fully comply with all
applicable Environmental Laws, or the presence, handling, use or disposition in
or from the Premises of any Hazardous Materials (even though permissible under
all applicable Environmental Laws or the provisions of this Lease), or by reason
of any actual or asserted failure of Tenant to keep, observe, or perform any
provision of this Section 1.2. Tenant's use of batteries, generator and fuel
tank are acceptable, provided such items comply with all applicable
Environmental Laws and provided further Tenant removes all such items on or
prior to the termination or expiration of this Lease. Tenant agrees to indemnify
Landlord from and against any loss, cost, damage, lawsuit, claim or liability
arising from the presence of these items in the Premises, except if caused by
Landlord's negligence or willful misconduct. Landlord represents that prior to
November 4, 1998, any known friable asbestos shall be removed from the Premises,
ground floor and all risers of the Building and all known non-friable asbestos
in such locations shall be removed or encapsulated, all at Landlord's cost by a
party licensed to remove asbestos. No other Hazardous Materials are known by
Landlord to exist in the Building. Landlord shall, prior to the Commencement
Date, deliver to Tenant a Certificate of Environmental Compliance, if available,
or other similar document.
Landlord shall comply with and shall cause the Building to be in compliance
with all applicable Laws (as hereinafter defined) as of the date of this Lease.
Subject to the preceding sentence, Tenant shall comply with all applicable Laws
with respect to its use and occupancy of the Premises and in its construction of
Tenant's Improvements; provided, however, Tenant shall only be responsible for
making improvements to the Premises (capital or otherwise) required by
applicable Laws if the necessity arises from Tenant's use of the Premises. As
used herein, "Laws" shall mean all federal, state, county and local governmental
laws, statutes, codes, ordinances, rules, regulations, decrees, orders and other
such requirements now or hereafter imposed, including but not limited to, the
ADA and any and all Environmental Law. As used herein, "ADA" means the Americans
With Disabilities Act of 1990 (42 U.S.C. '1201 et seq.) and the regulations and
guidelines promulgated or published thereunder, as any of the foregoing may from
time to time be amended. As used herein, "Environmental Law" means all legal
requirements relating to (a) the protection
<PAGE>
of the environment, the safety and health of persons (including employees) or
the public welfare from actual or potential exposure (or effects of exposure) to
any actual or potential release, discharge, disposal or omission (whether past
or present) of any Hazardous Materials (as hereinafter defined) or (b) the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of any Hazardous Materials, including, but not limited to,
the Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), as amended by the Superfund Amendments and Reauthorization Act of
1986, 42 U.S.C. '9601 et seq., the Solid Waste Disposal Act, as amended by the
Resource Conversation and Recovery Act of 1976, as amended by the Solid and
Hazardous Waste Amendments of 1984, 42 U.S.C. '6901 et seq., the Federal Water
Pollution Control Act, as amended by the Clean Water Act of 1977, 33 U.S.C.
'1251 et seq., the Toxic Substances Control Act of 1976, 15 U.S.C. '2601 et
seq., the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C.
'1101 et seq., the Clean Air Act of 1966, as amended, 42 U.S.C. '7401 et seq.,
the National Environmental Policy Act of 1975, 42 U.S.C. '4321, the Rivers and
Harbors Act of 1899, 33 U.S.C. '401 et seq., the Endangered Species Act of
1973, as amended, 16 U.S.C. '1531 et seq., the Occupational Safety and Health
Act of 1970, as amended, 29 U.S.C. '651 et seq., and the Safe Drinking Water
Act of 1974, as amended, 42 U.S.C. '300(f) et seq., and all rules, regulations
and guidance promulgated or published thereunder, as any of the foregoing may
from time to time be amended.
2.1. TERM.
2.1 The Term of this Lease shall begin on the date ("Commencement Date")
which shall be February 1, 1999, provided the Commencement Date shall be
extended one (1) day for each day after November 4, 1998 that Landlord's Work is
not substantially completed unless delayed because of Tenant's act or omission.
Landlord shall tender possession of the Premises on the Commencement Date with
all the work, if any, to be performed by Landlord pursuant to Exhibit B to this
Lease ("Landlord's Work") substantially completed. Unless Tenant advises
Landlord in writing to the contrary within ten (10) days of the Commencement
Date, it shall be assumed that Landlord's Work is substantially complete upon
delivery of the Premises to Tenant. Tenant may commence any work to be performed
by Tenant while Landlord is performing Landlord's work, provided Tenant does not
cause any delay in Landlord's work and Tenant indemnifies Landlord from and
against any loss, cost, claim, lawsuit, damage or liability incurred by Landlord
as a result of Tenant's entry onto the Premises prior to the Commencement Date,
or the entry of Tenant's agents, employees or contractors. On or before the date
that Landlord substantially completes Landlord's Work and deliver possession of
the Premises to Tenant, Landlord shall provide Tenant with temporary power to
enable Tenant to complete its tenant finish in the Premises. Prior to performing
any actual construction work in the Premises, Tenant must procure any necessary
building permits. Landlord and Tenant shall execute a memorandum setting forth
the actual Commencement Date and Termination Date. Subject to delays caused by
Tenant, or its agents or employees, in the event that Landlord is unable to
deliver the Premises with Landlord's Work substantially completed before
November 4, 1998, the Commencement Date specified above shall be extended as
provided in the first sentence of this Section 2.1. After twenty-one (21) days
of delay, Tenant shall have the right to terminate the lease upon written notice
to Landlord within ten (10) days of the accrual of such right and Landlord shall
reimburse Tenant for any third-party architectural/engineering fees and legal
expenses, up to a maximum of $50,000.00, incurred by Tenant after September 15,
1998 through the termination date.
2.2 Landlord shall permit Tenant to occupy the Premises prior to the
Commencement Date to complete Tenant Improvements. Such occupancy shall be
subject to all the provisions of this Lease. Said early possession shall not
advance the Commencement Date or Termination Date.
2.3 Landlord grants Tenant the right and option to extend the Term for the
option periods indicated in the Renewal Option Section of the Reference Pages
(each a "Renewal Term"). Tenant shall notify Landlord in writing of its election
to extend this Lease for each Renewal Term not less than nine (9) months nor
more than twelve (12) months prior to the expiration date of the then existing
Term. Tenant's failure to timely exercise any option hereunder shall cause the
automatic extinguishment thereof, time being of the essence. Each Renewal Term
shall be upon all of the terms, covenants, and conditions of this Lease except
that the Annual Rent payable during the Renewal Term shall be ninety five
percent (95%) of the then current fair market rental ("Market Rate") for
comparable space in the Building and in other telecommunication buildings in the
downtown Miami, Florida area at the time of the exercise of the renewal option.
Landlord shall advise Tenant of the fair market rental within fifteen (15) days
after receipt of written request therefor. Thereafter, Landlord and Tenant shall
agree as to fair market value. Said request shall be made no earlier than thirty
(30) days prior to the first date on which Tenant may exercise its option under
this paragraph. Notwithstanding the above, Tenant shall have no right to extend
or renew this Lease if (i) it is in default beyond the curative period at the
time of giving its notice of renewal; (ii) Tenant is in default and beyond any
applicable cure period as of the first day of the extended Term which was the
subject of such notice; or (iii) neither Tenant nor any of Tenant's Permitted
Assignees is not occupying the Premises.
2.4 Within thirty (30) days after Landlord's receipt of Tenant's renewal
notice, Landlord shall provide to Tenant its determination of the Market Rate
("Landlord's Determination"). Within fifteen (15) days of Tenant's receipt of
Landlord's Determination, Tenant shall either accept Landlord's Determination or
propose a different Market Rate to Landlord. If Landlord and Tenant are unable
to agree upon a Market Rate within thirty (30) days after Tenant's receipt of
Landlord's Determination, then Landlord and Tenant shall, within fifteen (15)
days of Tenant's receipt of Landlord's Determination, each simultaneously submit
to the other in writing its good faith estimate of the Market Rate.
2
If the higher of said estimates is not more than one hundred and five
percent (105%) of the lower of such estimates, the Market Rate in question shall
be deemed to be the average of the submitted rates. If otherwise, within fifteen
(15) days thereafter, Tenant may either terminate this Lease effective as of the
Expiration Date or establish the rate by an arbitration to be held in Miami,
Florida in accordance with the Real Estate Valuation Arbitration Rules of the
American Arbitration Association, except that the arbitration shall be conducted
by a single arbitrator, selected jointly by Landlord and Tenant, and shall be on
the basis that the arbitrator shall pick one of the two rates submitted, being
the rate which is closer to the Market Rate as determined by the arbitrator. The
parties agree to be bound by the decision of the Arbitrator, which shall be
final in this and non-appealable, and shall share equally the costs of
arbitration, and judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. During each of the Renewal
Terms (if applicable), Tenant shall pay Direct Expenses and Taxes in accordance
with the provision of Paragraph 4.
3. RENT.
3.1 Commencing on the Rent Commencement Date, Tenant agrees to pay to
Landlord the Annual Rent in effect from time to time by paying the Monthly
Installment of Rent then in effect on or before the first day of each full
calendar month during the Term. The Monthly Installment of Rent in effect at any
time shall be one-twelfth of the Annual Rent in effect at such time. Rent for
any period during the Term which is less than a full month shall be a prorated
portion of the Monthly Installment of Rent based upon a thirty (30) day month.
Said rent shall be paid to Landlord, without deduction or offset and without
notice or demand, at the Landlord's address, as set forth on the Reference Page,
or to such other person or at such other place as Landlord may from time to time
designate in writing. Notwithstanding the above and subject to Section 2.1
above, Tenant's rent commencement date shall begin sixty (60) days after the
Commencement Date ("Rent Commencement Date"). Landlord and Tenant shall execute
an amendment to the Lease setting forth the final Rent Commencement Date.
Commencing on the first anniversary of the Rent Commencement Date and on each
anniversary thereafter, including during any Renewal Term, the Annual Rent shall
increase Fifty Cents ($0.50) per rentable square foot.
3.2 Tenant recognizes that the late payment of any rent or other sum due
under this Lease will result in administrative expense to Landlord, the extent
of which additional expense is extremely difficult and economically impractical
to ascertain. Tenant therefore agrees that if rent or any other sum is not paid
by the tenth (10th) day of each month, a late charge shall be imposed in an
amount equal to a sum equal to five percent (5%) of the unpaid rent or other
payment. The amount of the late charge to be paid by Tenant shall be reassessed
and added to Tenant's obligation for each successive monthly period until paid.
The provisions of this Section 3.2 in no way relieve Tenant of the obligation to
pay rent or other payments on or before the date on which they are due, nor do
the terms of this Section 3.2 in any way affect Landlord's remedies pursuant to
Article 19 of this Lease in the event said rent or other payment is unpaid after
date due.
4. RENT ADJUSTMENTS.
4.1 For the purpose of this Article 4, the following terms are defined as
follows:
4.1.1 LEASE YEAR: Each calendar year falling partly or wholly within
the Term.
4.1.2 DIRECT EXPENSES : All direct costs of operation, maintenance,
repair and management of the Building (including the amount of any credits which
Landlord may grant to particular tenants of the Building in lieu of providing
any standard services or paying any standard costs described in this Section
4.1.2 for similar tenants), as determined in accordance with generally accepted
accounting principles, including the following costs by way of illustration, but
not limitation: water and sewer charges; insurance charges of or relating to all
insurance policies and endorsements deemed by Landlord to be reasonably
necessary or desirable and relating in any manner to the protection,
preservation, or operation of the Building or any part thereof; utility costs,
including, but not limited to, the cost of heat, light, electricity, power,
steam, gas, and waste disposal; the cost of janitorial services; the cost of
security and alarm services; window cleaning costs; labor costs; costs and
expenses of managing the Building including management fees (not to exceed
normal and customary management fees for similar buildings); air conditioning
maintenance costs; elevator maintenance fees and supplies; material costs; the
cost of maintenance, repair and service agreements; purchase costs of equipment
other than capital items; tool costs; licenses, permits and inspection fees;
wages and salaries of on-site Building personnel; employee benefits and payroll
taxes; accounting and legal fees (except legal fees in connection with specific
tenant leases); any sales, use or service taxes incurred in connection
therewith. Notwithstanding the above, Direct Expenses shall not include:
(a) commissions payable to any real estate broker(s) for the
leasing of space in the Building;
(b) the cost of any work done by Landlord for and at the
expense of any particular tenant(s) in the Building which do not benefit Tenant;
3
<PAGE>
(c) interest or penalties for overdue payments of Taxes;
(d) the cost to Landlord of repairs made, or other work done,
by Landlord as a result of fire, windstorm or other insurable casualty to the
extent for which Landlord has received insurance proceeds, or by the exercise of
eminent domain, provided, however, that this exclusion for eminent domain is
limited to the amount of the condemnation award received by landlord in
compensation for such repairs or other work;
(e) attorney's fees and court costs and other such expenses
incurred by Landlord in connection with the negotiation of disputes with
existing or prospective tenants of the Building;
(f) the costs to landlord of renovating, decorating, painting
or redecorating interior space for the actual premises of tenants of the
Building;
(g) amounts for which reimbursement has been made to Landlord
by tenants of the Building for "extra hours" services rendered to them by
Landlord for which Tenant does not benefit;
(h) interest on debt or amortization payments on any mortgages
and/or rental under any ground or underlying leases covering Landlord's
Property;
(i) compensation paid by Landlord to persons engaged in
commercial concessions operated by Landlord (and not by a third party) on
Landlord's Property (e.g., a newspaper stand or shoeshine service or valet
parking);
(j) expenses paid by Landlord for the advertising and
promotion of rental space in the Building;
(k) fines, penalties or other costs incurred by Landlord due
to its violation of any governmental laws;
(l) costs incurred by Landlord for the purchase of sculptures,
paintings or other objects of art for Landlord's Property, if any;
(m) depreciation expense on the Building;
(n) the overtime hours charges for electricity used and paid
for by other tenants;
(o) salaries, wages and benefits of Landlord's employees above
the level of "Building Manager".
4.1.3 TAXES: Real estate taxes and any other taxes, charges and
assessments which are levied with respect to the Building or the land
appurtenant to the Building, or with respect to any improvements, fixtures and
equipment or other property of Landlord, real or personal, located in the
Building and used in connection with the operation of the Building and said
land, any payments to any ground lessor in reimbursement of tax payments made by
such lessor; and all fees, expenses and costs incurred by Landlord in
investigating, protesting, contesting or in any way seeking to reduce or avoid
increase in any assessments, levies or the tax rate pertaining to any Taxes to
be paid by Landlord in any Lease Year. Taxes shall not include any corporate
franchise, or estate, inheritance or federal or state income tax, or tax imposed
upon any transfer by Landlord of its interest in this Lease or the Building. In
the event that during the Base year, as hereafter defined, the Building is not
fully rented and occupied Landlord shall make an appropriate adjustment in Taxes
for such year for the purpose of avoiding distortion of the amount of such
Taxes, and the adjustment so determined shall be deemed to have been Taxes for
such year. Base Year, as used in this Lease shall mean the calendar year 1999
for the original Term; the calendar year 2009 for the first Renewal Option; and
the calendar year 2014 for the second Renewal Option.
4.2 Tenant shall pay as additional rent for each calendar year Tenant's
Proportionate Share of any increase in Direct Expenses and Taxes incurred for
such calendar year, above the amount of such Direct Expenses and Taxes for the
Base Year. Notwithstanding anything herein to the contrary, Tenant's
Proportionate Share of Direct Expenses (excluding common area utilities and
insurance) for any calendar year after the Base Year shall not exceed 105% of
Tenant's Proportionate Share of Direct Expenses (excluding common area utilities
and insurance) for the immediately preceding calendar year ("CAM Cap");
provided, however, if the Tenant's Proportionate Share of Direct Expenses
(excluding common area utilities and insurance) in any calendar year as
calculated as if there were no CAM Cap ("Uncapped CAM Costs") is greater than
Tenant's Proportionate Share of Direct Expenses (excluding common are utilities
and insurance) as calculated pursuant to the CAM Cap ("Capped CAM Costs"), the
difference between the Uncapped CAM Costs and the Capped CAM Costs may be
accumulated and applied toward Tenant's Proportionate Share of Direct Expenses
(excluding utilities and insurance) in any future calendar year in which
Tenant;'s Uncapped CAM Costs are less than the Capped CAM Costs. However,
Tenant's Proportionate Share of Direct Expenses
4
<PAGE>
4.3 The annual determination of Direct Expenses shall be made by Landlord
and if certified by a nationally recognized firm of public accountants selected
by Landlord. In the event that during the Base Year, the Building is not fully
rented and occupied Landlord shall make any appropriate adjustment in occupancy
related Direct Expenses to be attributed to Tenant by such year for the purpose
of avoiding distortion of the amount of such Direct Expenses to be attributed to
Tenant by reason of variation in total occupancy of the Building, by employing
sound accounting and management principals to determine Direct Expenses that
would have been paid or incurred by Landlord had the Building been fully rented
and occupied, and the amount so determined shall be deemed to have been Direct
Expenses for such calendar year.
4.4 Prior to the actual determination thereof for a Lease Year, Landlord
may once a year estimate Tenant's liability for Direct Expenses and/or Taxes
under Section 4.2 and Article 28 for the Lease Year or portion thereof. Landlord
will give Tenant written notification of the amount of such estimate and Tenant
agrees that it will pay, by increase of its Monthly Installments of Rent due in
such Lease Year, additional rent in the amount of such estimate. Any such
increased rate of Monthly Installments of Rent pursuant to this Section 4.4
shall remain in effect until further written notification to Tenant pursuant
hereto.
4.5 When the above mentioned actual determination of Tenant's liability for
Direct Expenses and/or Taxes is made for any Lease Year and when Tenant is so
notified in writing, then:
4.5.1 If the total additional rent Tenant actually paid pursuant to
Section 4.4 on account of Direct Expenses and/or Taxes for the Lease Year is
less than Tenant's liability for Direct Expenses and/or Taxes, then Tenant shall
pay such deficiency to Landlord as additional rent in one lump sum within (30)
days of receipt of Landlord's bill therefor; and
4.5.2 If the total additional rent Tenant actually paid pursuant to
Section 4.4 on account of Direct Expenses and/ or Taxes for the Lease Year is
more than Tenant's liability for Direct Expenses and/or Taxes, then Landlord
shall credit the difference against the then next due payments of Rent and
Direct Expenses and Taxes, if the Term has ended, shall be paid to Tenant within
thirty (30) days after the date Landlord makes any such determination.
4.6 If Commencement Date is other than January 1 or if the Termination Date
is other than December 31, Tenant's liability for Direct Expenses and Taxes for
the Lease Year in which said Date occurs shall be prorated based upon a three
hundred sixty-five (365) day year.
5. SECURITY DEPOSIT. Intentionally Omitted.
6. ALTERATIONS.
6.1 Except for those, if any, specifically provided for in Exhibit B to
this Lease, Tenant shall not make or suffer to be made any alterations,
additions, or improvements, including, the attachment of any fixtures or
equipment in, on, or to the Premises or any part thereof or the making of any
improvements as required by Article 7 ("Alterations"), without the prior written
consent of Landlord. When applying for such consent, Tenant shall, if requested
by landlord furnish complete plans and specifications for such alterations,
additions and improvements, if applicable.
6.2 In the event Landlord consents to the making of any such alteration,
addition or improvement by Tenant, the same shall be made by a licensed, bonded
and insured contractor approved by Landlord, such approval not to be
unreasonably withheld, conditioned or delayed, at Tenant's sole cost and
expense. If Tenant shall employ any contractor other than Landlord's
pre-approved contractor, and such other contractor or any subcontractor of such
other contractor shall employ labor and/or suppliers, then Tenant shall be
responsible for and hold Landlord harmless from any and all delays, damages and
extra costs suffered by Landlord as a result of any dispute with any labor
concerning the wage, hours, terms or conditions of the employment of any such
labor.
6.3 All alterations, additions, and improvements proposed by Tenant shall
be constructed in accordance with all government laws, ordinances, rules and
regulations and Tenant shall, prior to construction, provide the additional
insurance required under Article 11 in such case, and also all such assurances
to Landlord, including but not limited to, waivers of lien, as Landlord shall
require to assure payment of the costs thereof and to protect Landlord and the
Building and appurtenant land against any loss from any mechanic's,
materialmen's or other liens. Tenant shall pay in addition to any sums due
pursuant to Article 4, any increase in real estate taxes attributable to any
such alteration, addition or improvement for so long, during the Term, as such
increase is ascertainable; at Landlord's election said sums shall be paid in the
same way as sums due under Article 4.
5
<PAGE>
6.4 All alterations, additions, and improvements, in, on , or to the
Premises or in, on or to the Building made or installed by Tenant, including
carpeting, shall be and remain the property of Tenant during the Term but,
excepting furniture, furnishings, telecommunication switch equipment, batteries,
generators, condensers, dry coolers, conduits, cabling, pull boxes, and other
telecommunication related facilities, movable partitions of less than full
height from floor to ceiling and other trade fixtures, all of which shall be
removed from the Premises and the Building at Tenant's expense if required to be
removed by Landlord in a written document delivered to Tenant at the time
Landlord approves Tenant's plans and specifications and the Premises restored to
its original condition, and any remaining improvements, shall become a part of
the realty and belong to Landlord without compensation to Tenant upon the
expiration or sooner termination of the Term, at which time title shall pass to
Landlord under this Lease as by a bill of sale, unless Landlord elects
otherwise. Upon such election by Landlord, Tenant shall upon demand by Landlord,
at Tenant's sole cost and expense, forthwith and with all due diligence remove
any such alterations, additions or improvements, including any which are
designated by Landlord to be removed, and Tenant shall forthwith and with all
due diligence, at its sole costs and expense, repair and restore the Premises
and the Building to their original condition, reasonable wear and tear and
damage by fire or other casualty excepted.
7. REPAIR.
7.1 Landlord shall have no obligation to alter, remodel, improve, repair,
decorate or paint the Premises or the Building, except as specified in Exhibit B
if attached to this Lease and except that Landlord shall repair and maintain the
structural portions of the Building, including the roof and the basic plumbing,
common area air conditioning, heating and electrical systems installed or
furnished by Landlord and all common areas of the Building in working order and
condition. By taking possession of the Premises, Tenant accepts them as being in
good order condition and repair and in the condition in which Landlord is
obligated to deliver them subject to the items set forth on the punchlist
prepared in accordance with Section 2.1. It is hereby understood and agreed that
no representations respecting the condition of the Premises or the Building have
been made by Landlord to Tenant, expect as specifically set forth in this Lease.
7.2 Tenant shall at its own cost and expense keep and maintain all parts of
the Premises and improvements therein in good condition, promptly making all
necessary repairs and replacements, whether ordinary or extraordinary, with
materials and workmanship of the same character, kind and quality as the
original (including, but not limited to, repair and replacement of all fixtures
installed by Tenant, windows, glass and plate glass, doors, any special office
entries, interior walls and finish work, floors and floor coverings, heating and
air conditioning systems serving the Premises, electrical systems and fixtures
and sprinkler systems), if applicable. Tenant as part of its obligations
hereunder shall keep the Premises in a clean and sanitary condition. Tenant
will, as far as possible keep all such parts of the Premises from deterioration
due to ordinary wear and from falling temporarily out of repair, and upon
termination of this Lease in any way Tenant will deliver the Premises to
Landlord in good condition and repair, loss by fire or other casualty excepted
and ordinary wear and tear excepted. Tenant shall, at its own cost and expense,
repair any damage to the Premises or the Building resulting from and/or caused
in whole or in part by Tenant, its agents, employees, invitees, or any other
person entering upon the Premises as a result of Tenant's business activities or
caused by Tenant's default hereunder.
7.3 Landlord shall not be liable for any failure to make any repairs or to
perform any maintenance unless such failure shall persist for an unreasonable
time which shall be determined in Landlord's reasonable discretion after written
notice of the need of such repairs or maintenance is given to Landlord by
Tenant.
7.4 Except as provided in Articles 22, there shall be no abatement of rent
and no liability of Landlord by reason of any injury to or interference with
Tenant's business arising from the making of any repairs, alterations or
improvements in or to any portion of the Building or the Premises or to
fixtures, appurtenances and equipment in the Building unless due to Landlord's
negligence or willful misconduct, in which event, after three (3) days, Tenant
shall receive one (1) day of Rent abatement for each day Tenant is unable to
operate in the Premises until Tenant can again operate in the Premises. Except
to the extent, if any, prohibited by law, Tenant waives the right to make
repairs at Landlord's expense under any law, statute or ordinance now or
hereafter in effect.
7.5 Tenant shall, at its own cost and expense, enter into a regularly
scheduled preventive maintenance/service contract with a maintenance contractor
and/or an employee certified by manufacturer, selected by Tenant and approved by
Landlord for servicing all heating and air conditioning systems and batteries,
generators and fuel tanks serving the Premises (and a copy thereof shall be
furnished to Landlord). The service contract must include all services suggested
by the equipment manufacturer in the operation/maintenance manual and must
become effective within thirty (30) days after the Commencement Date.
7.6 In recognition of Tenant's use, Landlord shall use good-faith efforts
to provide Tenant (except in the case of emergency, in which event Landlord
shall use reasonable efforts, but shall not be required, to provide Tenant with
prior notice) not less than twenty four (24) hours prior written notice of
Landlord's intent to enter the Premises provided such entry shall not disrupt
Tenant's service to its clients, and not less than forty eight (48) hours prior
written notice of Landlord's intention to enter the Premises to effect planned
repairs (including, but not limited to electrical, mechanical or plumbing work)
if such work will materially disrupt and/or interfere with the business of
Tenant within the Premises or Building in a manner which will, in Landlord's
reasonable opinion, affect Tenant's use. In such circumstances Tenant
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and Landlord will cooperate to determine an appropriate time. Further, in
emergency situations Landlord shall use reasonable care and precaution in order
to minimize the disruptions in Tenant's business.
8. LIENS.
Tenant shall keep the Premises, the Building and appurtenant land and
Tenant's leasehold interest in the Premises free from any liens arising out of
any services, work or materials performed, furnished, or contracted for by
Tenant, or obligations incurred by Tenant. Notice is hereby given that Landlord
shall not be liable for any work performed or to be performed on the Premises,
or for any materials furnished or to be furnished at or to the Premises, or any
building or improvements thereon, for Tenant or any subtenant, and that no
mechanic's or other lien for such work or materials shall attach to the interest
of Landlord. This Lease specifically prohibits the subjecting of the Premises,
or any part of it, to any liens for improvements Tenant makes or causes to be
made or for which Tenant is directly or indirectly responsible for payment.
Pursuant to Section 713.10, Florida Statutes, all persons dealing with Tenant
are hereby given notice of this provision, and Tenant hereby covenants and
agrees to provide all persons dealing with Tenant with a copy of this Section 8.
If, in connection with any work being performed by Tenant or any subtenant or in
connection with any materials being furnished to Tenant or any subtenant, any
mechanic's lien or other lien or charge shall be filed or made against the
Premises or any building or improvements thereon or any part thereof, or if any
such lien or charge shall be filed or made against Landlord as owner, then
Tenant, at Tenant's cost and expense, within thirty (30) days after such lien or
charge shall have been filed or made (but in any event prior to foreclosure),
shall cause the same to be cancelled and discharged of record by payment thereof
or filing a bond or otherwise, and shall also defend any action, suit or
proceeding which may be brought for the enforcement of such lien or charge, and
shall pay any damages, costs and expenses, including attorneys' fees, suffered
or incurred therein by Landlord, and shall satisfy and discharge any judgment
entered therein within thirty (30) days from the entering of such judgment by
payment thereof or filing of a bond, or otherwise. In the event of the failure
of Tenant to discharge within the above-mentioned thirty (30)-day period, any
lien, charge or judgment herein required to be paid or discharged by Tenant,
Landlord may pay such items or discharge such liability by payment or bond or
both, and Tenant will repay to Landlord, upon demand, any and all amounts paid
by Landlord therefor, or by reason of any liability on any such bond, and also
any and all incidental expenses, including attorneys' fees and costs, incurred
by Landlord in connection therewith.
9. ASSIGNMENT AND SUBLETTING.
9.1 Tenant shall not have the right to assign or pledge this Lease or to
sublet the whole or any part of the Premises whether voluntarily or by operation
of law, or permit the use or occupancy of the Premises by anyone other than
Tenant, and shall not make, suffer or permit such assignment, subleasing or
occupancy without the prior written consent of Landlord not to be unreasonably
withheld or delayed and said restrictions shall be binding upon any and all
assignees of the Lease and subtenants of the Premises. In the event Tenant
desires to sublet, or permit such occupancy of, the Premises, or any portion
thereof, or assign this Lease, Tenant shall give written notice thereof to
Landlord at least thirty (30) days prior to the proposed commencement date of
such subletting or assignment, which notice shall set forth the name of the
proposed subtenant or assignee, the relevant terms of any sublease or assignment
and copies of financial reports and other relevant financial reports and other
relevant financial information of the proposed subtenant or assignee.
9.2 Notwithstanding any assignment or subletting, permitted or otherwise,
Tenant shall at all times remain directly, primarily and fully responsible and
liable for the payment of the rent specified in this Lease and for compliance
with all of its other obligations under the terms, provisions and covenants of
this Lease. Upon the occurrence of an Event of Default, if the Premises or any
part of them are then assigned or sublet, Landlord, in addition to any other
remedies provided in this Lease or provided by law, may, at its option, collect
directly from such assignee or subtenant all rents due and becoming due to
Tenant under such assignment or sublease and apply such rent against any sums
due to Landlord from Tenant under this Lease, and no such collection shall be
construed to constitute a novation or release of Tenant from the further
performance of Tenant's obligations under this Lease.
9.3 In the event that Tenant sells, sublets, assigns or transfers this
Lease, Tenant shall pay to Landlord as additional rent an amount equal to fifty
percent (50%) of any Increased Rent (as defined below) when and as such
Increased Rent is received by tenant. As used in this Section, "Increased Rent"
shall mean the excess of (i) all rent and other consideration which Tenant is
entitled to receive by reason of any sale, sublease, assignment or other
transfer of this Lease, over (ii) the rent otherwise payable by Tenant under
this Lease at such time. For purposes of the foregoing, any consideration
received by Tenant in form other than cash shall be valued at its fair market
value as determined by Landlord in good faith.
9.4 Notwithstanding any other provision hereof, Tenant shall have no right
to make any assignment of this Lease or sublease of any portion of the Premises
if at the time of either Tenant's notice of the proposed assignment or sublease
or the proposed commencement date thereof, there shall exist any Event of
Default of Tenant or matter which will become a default of Tenant with passage
of time unless cured, or if the proposed assignee or sublessee is an entity: (a)
with which Landlord is already in negotiation as evidenced by the issuance of a
written proposal; (b) is already an occupant of the Building; (c) is a
governmental agency; (d) is incompatible with the character or occupancy of the
Building; or (e) would subject the Premises to a use which would: (i) violate
any exclusive right granted to another
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tenant of the Building; (ii) require any addition to or modification of the
Premises or the Building in order to comply with building code or other
governmental requirements; or, (iii) involve a violation of Section 1.2.
9.5 The assignment or other transfer of Tenant's interest under this Lease
or the sublease of the Premises to an affiliate, subsidiary or successor of
Tenant shall not be deemed an assignment or subletting of the Premises as to
which Tenant must obtain Landlord's consent (however, Tenant must provide thirty
(30) days prior written notice to Landlord). The terms affiliate and subsidiary
and successor shall have the following meaning:
(a) any corporation which directly or indirectly controls or is
controlled by or is under common control with Tenant.
(b) any subsidiary, meaning any corporation not less than 50% of whose
outstanding stock shall, at the time, be owned directly or indirectly by Tenant.
(c) any successor, meaning:
(i) A corporation into which or with which Tenant, its corporate
successors or assigns, is merged or consolidated in accordance with applicable,
statutory provisions for merger or consolidation of corporations, but only if,
by operation of law or by effective provisions contained in the instruments of
merger or consolidation, the liabilities of the corporations participating in
such merger or consolidation are assumed by the corporation surviving such
merger or created by such consolidation; or,
(ii) Any corporation acquiring this Lease and the Premises hereby
demised and a substantial portion of the property and assets of Tenant, its
corporate successors or assigns; or
(iii) Any corporation or successor corporation becoming such by
either of the methods described in Subsections (a) or (b) above, but only if, on
the completion of such merger, consolidation, acquisition, or assumption, the
successor has a net worth in excess of Tenant's immediately prior to such
merger, consolidation, acquisition or assumption. Acquisition by Tenant, its
corporate successors or assigns, of a substantial portion of the assets,
together with the assumption of all or substantially all the obligations and
liabilities of any corporation, shall be deemed a merger of such corporation
into Tenant for purposes of this Section.
10. INDEMNIFICATION. None of the Landlord Entities shall be liable and Tenant
hereby waives all claims against them for any damage to any property or any
injury to any person in or about the Premises or the Building by or from any
cause whatsoever (including without limiting the foregoing, rain or water
leakage of any character from the roof, windows, walls, basement, pipes,
plumbing works or appliances, the Building not being in good condition or
repair, gas, fire, oil, electricity or theft), except to the extent caused by or
arising from the negligence or willful misconduct of Landlord or its agents,
employees or contractors. Tenant shall protect, indemnify and hold the Landlord
Entities harmless from and against any and all loss, claims, liability or costs
(including court costs and attorney's fees) incurred by reason of (a) any damage
to any property (including but not limited to property of any Landlord Entity)
or any injury (including but not limited to death) to any person occurring in,
on or about the Premises or the Building to the extent that such injury or
damage shall be caused by or arise from any act or omission of Tenant, its
agents, servants, employees, invitees, or visitors; (b) the conduct or
management of any work or thing whatsoever done by the Tenant in or about the
Premises; or (c) Tenant's failure to comply with any and all governmental laws,
ordinances and regulations applicable to the condition or use of the Premises or
its occupancy which are Tenant's responsibility under the Lease. The provisions
of this Article shall survive the termination of this Lease with respect to any
claims or liability accruing prior to such termination. Tenant shall not be
liable and Landlord hereby waives all claims against Tenant for any damage to
any property or any injury to any person in or about the Premises or the
Building by or from any cause whatsoever (including without limiting the
foregoing, rain or water leakage of any character from the roof, windows, walls,
basement, pipes, plumbing works or appliances, the Building not being in good
condition or repair, gas, fire, oil, electricity or theft), except to the extent
caused by or arising from the negligence or willful misconduct of Tenant or its
agents, employees or contractors. Landlord shall protect, indemnify and hold
Tenant harmless from and against any and all loss, claims, liability or costs
(including court costs and attorney's fees) incurred by reason of (a) any damage
to any property or any injury (including but not limited to death) to any person
occurring in, on or about the Premises or the Building to the extent that such
injury or damage shall be caused by or arise from any act or omission of
Landlord, its agents, servants, employees, invitees, or visitors; or (b) the
conduct or management of any work or thing whatsoever done by the Landlord in or
about the Premises. The provisions of this Article shall survive the termination
of this Lease with respect to any claims or liability accruing prior to such
termination.
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11.0 INSURANCE.
11.1 Tenant shall keep in force throughout the Term: (a) a Commercial
General Liability insurance policy or policies to protect the Landlord Entities
against any liability to the public or to any invitee of Tenant or a Landlord
Entity incidental to the use of or resulting from any accident occurring in or
upon the Premises with a limit of not less than $2,000,000.00 per occurrence and
not less than $4,000,000.00 in the annual aggregate (part of which may come from
an umbrella insurance policy), or such larger amount as Landlord may prudently
require from time to time, covering bodily injury and property damage liability
and $1,000,000 products/completed operations aggregate; (b) Business Auto
Liability covering owned, non-owned and hired vehicles with a limit of not less
than $1,000,000 per accident; (c) insurance protecting against liability under
Worker's Compensation Laws with Limits at lease as required by statute; (d)
Employers Liability with limits of $500,000 each accident, $500,000 disease
policy limit, $500,000 disease--each employee; (e) All Risk or Special Form
coverage protecting Tenant against loss of or damage to Tenant's alterations,
additions, improvements, carpeting, floor coverings, paneling, decorations,
fixtures, inventory and other business personal property situated in or about
the Premises to the full replacement value of the property so insured; and, (f)
Business Interruption Insurance with limit of liability representing loss of at
least approximately six months of rent.
11.2 Each of the aforesaid policies shall (a) be provided at Tenant's
expense; (b) name the Landlord Entities and building management company, if any,
as additional insureds as their interests may appear; (c) be issued by an
insurance company with a minimum Best's rating of "A:VII" during the Term; and
(d) provide that said insurance shall not be canceled unless thirty (30) days
prior written notice (ten days for non-payment of premium) shall have been given
to the Landlord; and said policy or policies or certificates thereof shall be
delivered to the Landlord by Tenant upon the Commencement Date and at least
thirty (30) days prior to each renewal of said insurance.
11.3 Whenever Tenant shall undertake any Alterations in, to or about the
Premises ("Work") the aforesaid insurance protection must extend to and include
injuries to persons and damage to property arising in connection with such Work,
without limitation including liability under any applicable structural work act,
and such other insurance as Landlord shall require; and the policies of or
certificates evidencing such insurance must be delivered to Landlord prior to
the commencement of any such Work.
12.0 WAIVER OF SUBROGATION. So long as their respective insurers so permit,
Tenant and Landlord hereby mutually waive their respective rights of recovery
against each other for any loss insured by fire, extended coverage, All Risks or
other insurance now or hereafter existing for the benefit of the respective
party but only to the extent of the net insurance proceeds payable under such
policies. Each party shall obtain any special endorsements required by their
insurer to evidence compliance with the aforementioned waiver.
13.0 SERVICES AND UTILITIES.
13.1 Subject to the other provisions of this Lease, Landlord agrees to
furnish to the common areas of the Building, the following services and
utilities subject to the rules and regulations of the Building prescribed from
time to time: (a) water suitable for normal office use of the Premises; (b) heat
and air conditioning required in Landlord's judgment for the use and occupation
of the common areas of the Building; (c) cleaning and janitorial service for
common areas; (d) elevator service by nonattended automatic elevators; (e) such
window washing as may from time to time in Landlord's judgment by reasonably
required; and, (f) provisions to bring electricity to the floor of the Premises
an amount equal to no less than 800 amps @ 480V on or before the Commencement
Date with ultimate requirement of 1,250 amps @ 480V on or before one hundred
eighty (180) days after the Rent Commencement Date. To the extent that Tenant is
not billled directly by a public utility, Tenant shall pay, upon demand, as
additional rent, for all electricity used by Tenant in the Premises, including
the usage of any temporary power supplied to Tenant prior to the Commencement
Date. The charge shall be at the pro rata rates charged for such services by the
local public utility. Landlord shall not be liable for, and Tenant shall not be
entitled to, any abatement or reduction of rental by reason of Landlord's
failure to furnish any of the foregoing, unless such failure shall persist for
an unreasonable time after written notice of such failure is given to Landlord
by Tenant and provided further that Landlord shall not be liable when such
failure is caused by accident, breakage, repairs, labor disputes of any
character, energy usage restrictions or by any other cause, similar or
dissimilar, beyond the reasonable control of Landlord. If the disruption of
services is due to Landlord's negligence or willful misconduct and, as a result
thereof, Tenant is unable to operate in the Premises more than five (5) days,
then Tenant shall receive an abatement of Rent after the fifth (5th) day until
Tenant is again able to operate in the Premises. Landlord shall use reasonable
efforts to remedy any interruption in the furnishing of services and utilities.
Landlord shall not (except in the event of an emergency or a force majeure
event) exercise any right of Landlord to reduce, interrupt or cease service of
the heating, air conditioning, ventilation, elevator, plumbing, electrical
systems, telephone systems and/or utilities services of the Premises, the
Building or the Property, without advising Tenant in advance of Landlord's
requirements so that Landlord and Tenant may arrange procedures for
accomplishing Landlord's goals and minimize the interruption to Tenant's use,
possession and occupancy of the Premises for the purpose of conducting its
business on a continuing basis.
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13.2 Should Tenant require any additional work or service, as described
above and in Paragraph 38, Landlord may, on terms to be agreed, upon reasonable
advance notice by Tenant, furnish such additional service and Tenant agrees to
pay Landlord such charges as may be agreed upon, including any tax imposed
thereon, but in no event at a charge less than Landlord's actual cost for such
additional service and, where appropriate, a reasonable allowance for
depreciation of any systems being used to provide such service.
13.3 If Tenant shall require water or electric current in excess of that
required to be furnished or supplied for use in the Premises as set forth in the
Lease, Landlord may cause a water meter or electric current meter to be
installed so as to measure the amount of such excess water and electric current.
The cost of any such meters and any additional installations or expense required
or incurred as a result of the increased capacity shall be paid for by Tenant.
Tenant agrees to pay as additional rent to Landlord promptly upon demand
therefor, the cost of all such excess water and electric current consumed (as
shown by said meters, if any, or, if none, as reasonably estimated by Landlord)
at the rates charged for such services by the local public utility or agency, as
the case may be, furnishing the same, plus any additional expense incurred in
keeping account of the water and electric current so consumed.
14.0 HOLDING OVER. Tenant shall pay Landlord for each day Tenant retains
possession of the Premises or part of them after termination of this Lease by
lapse of time or otherwise at the rate ("Holdover Rate") which shall be (a) 150%
of the amount of the Annual Rent for the last period prior to the date of such
termination plus (b) 150% of all Rent Adjustments under Article 4. If Landlord
gives notice to Tenant of Landlord's election to that effect, such holding over
shall constitute renewal of this Lease for a period from month to month. In any
event, no provision of this Article 14 shall be deemed to waive Landlord's right
of reentry or any other right under this Lease or at law.
15. SUBORDINATION.
Without the necessity of any additional document being executed by Tenant
for the purpose of effecting a subordination, this Lease shall be subject and
subordinate at all times to ground or underlying leases and to the lien of any
mortgages or deeds of trust now or hereafter placed on, against or affecting the
Building, Landlord's interest or estate in the Building, or any ground or
underlying lease; provided, however, that f the lessor, mortgagee, trustee, or
holder of any such mortgage or deed of trust elects to have Tenant's interest in
this Lease be superior to any such instrument, then, by notice to Tenant, this
Lease shall be deemed superior, whether this Lease was executed before or after
said instrument. Notwithstanding the foregoing, Tenant covenants and agrees to
execute and deliver upon demand such further instruments evidencing such
subordination or superiority of this Lease as may be required by Landlord. As a
condition precedent to the effectiveness of any such subordination of this Lease
to any future ground or underlying lease or the lien of any future mortgages,
deeds of trust, or like encumbrances. Landlord shall provide to tenant within
thirty (30) days of the recording of the lien, a commercially reasonable
non-disturbance and attornment agreement in favor of Tenant executed by such
future ground lessor, master lessor, mortgagee or deed of trust beneficiary, as
the case may be, which shall provide that Tenant's quiet possession of the
premises shall not be disturbed on account of such subordination to such future
lease or lien so long as Tenant is not in default following the expiration of
any applicable cure period under any provisions of this Lease. In addition,
within thirty (30) days of execution of this Lease, Landlord shall provide to
Tenant a commercially reasonable non-disturbance and attornment agreement in
favor of Tenant executed by any existing ground lessor, master lessor, mortgagee
or deed of trust beneficiary, as the case may be, which shall provide that
Tenant's quiet possession of the Premises shall not be disturbed on account of
such subordination to such existing lease or lien so long as Tenant is not in
default following the expiration of any applicable cure period under any
provisions of this Lease.
16.0 RULES AND REGULATIONS Tenant shall faithfully observe and comply with all
the rules and regulations as set forth in Exhibit C to this Lease and all
reasonable modifications of and additions to them from time to time put into
effect by Landlord. Landlord shall not be responsible to Tenant for the
non-performance by any other tenant or occupant of the Building of any such
rules and regulations.
17.0 REENTRY BY LANDLORD.
17.1 Landlord reserves and shall at all times have the right upon
reasonable notice to re-enter the Premises to inspect the same, to supply
janitorial service and any other service to be provided by Landlord to Tenant
under this Lease, to show said Premises to prospective purchasers, mortgagees or
tenants, and to alter, improve or repair the Premises and any portion of the
Building, without abatement of rent, and may for that purpose erect, use and
maintain scaffolding, pipes, conduits and other necessary structures and open
any wall, ceiling or floor in and through the Building and Premises where
reasonably required by the character of the work to be performed, provided
entrance to the Premises shall not be blocked thereby, and further provided that
the business of Tenant shall not be interfered with unreasonably.
17.2 Landlord shall have the right at any time to change the arrangement
and/or location of entrances, or passageways, doors and doorways, and corridors,
windows, elevators, stairs, toilets or other public parts of the Building and to
change the name, number or designation by which the Building is commonly known.
In the event that Landlord damages any portion of any wall or wall covering,
ceiling, or floor or floor covering within the Premises, Landlord shall repair
or replace the damaged portion to match the original as nearly as commercially
reasonable but shall not be required to repair or replace more than the portion
actually damaged.
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17.3 For each of the aforesaid purposes, Landlord shall at all times have
and retain a key with which to unlock all of the doors in the Premises,
excluding Tenant's vaults and safes or special security areas (designated in
advance), except as required by law, and Landlord shall have the right to use
any and all means which landlord may deem proper to open said doors in an
emergency to obtain entry to any portion of the Premises. As to any portion to
which access cannot be had by means of a key or keys in Landlord's possession,
Landlord is authorized to gain access by such means as Landlord shall elect and
the cost of repairing any damage occurring in doing so shall be borne by Tenant
and paid to Landlord as additional rent upon demand.
18.0 DEFAULT.
18.1 Except as otherwise provided in Article 20, the following events shall
be deemed to be Events of Default under this Lease:
18.1.1 Tenant shall fail to pay within ten (10) days any sum of money
becoming due to be paid to Landlord under this Lease, whether such sum be any
installment of the rent reserved by this Lease, any other amount treated as
additional rent under this Lease, or any other payment or reimbursement to
Landlord required by this Lease, whether or not treated as additional rent under
this Lease, and such failure shall continue for a period of five days after
written notice that such payment was not made when due, but if any such notice
shall be given, for the twelve month period commencing with the date of such
notice, the failure to pay within five days after due any additional sum of
money becoming due to be paid to Landlord under this Lease during such period
shall be an Event of Default, without notice.
18.1.2 Tenant shall fail to comply with any term, provision or
covenant of this Lease which is not provided for in another Section of this
Article and shall not cure such failure within twenty (20) days (forthwith, if
the failure involves a hazardous condition) after written notice of such failure
to Tenant.
18.1.3 Tenant shall fail to vacate the Premises immediately upon
termination of this Lease, by lapse of time or otherwise, or upon termination of
Tenant's right to possession only.
18.1.4 Tenant shall become insolvent, admit in writing its
inability to pay its debts generally as they become due, file a petition in
bankruptcy or a petition to take advantage of any insolvency statute, make an
assignment for the benefit of creditors, make a transfer in fraud of creditors,
apply for or consent to the appointment of a receiver of itself or of the whole
or any substantial part of its property, or file a petition or answer seeking
reorganization or arrangement under the federal bankruptcy laws, as now in
effect or hereafter amended, or any other applicable law or statute of the
United States or any state thereof.
18.1.5 A court of competent jurisdiction shall enter an order,
judgment or decree adjudicating Tenant bankrupt, or appointing a receiver of
Tenant, or of the whole or any substantial part of its property, without the
consent of Tenant, or approving a petition filed against Tenant seeking
reorganization or arrangement of Tenant under the bankruptcy laws of the United
States, as now in effect or hereafter amended, or any state thereof, and such
order, judgment or decree shall not be vacated or set aside or stayed within
thirty (30) days from the date of entry thereof.
19.0 REMEDIES.
19.1 Except as otherwise provided in Article 20, upon the occurrence of any
of the Events of Default described or referred to in Article 18, Landlord shall
have the option to pursue any one or more of the following remedies without any
notice or demand whatsoever, concurrently or consecutively and not
alternatively:
19.1.1 Landlord may, at its election, terminate this Lease or
terminate Tenant's right to possession only, without terminating the Lease.
19.1.2 Upon any termination of this Lease, whether by lapse of
time or otherwise, or upon any termination of Tenant's right to possession
without termination of the Lease, Tenant shall surrender possession and vacate
the Premises immediately, and deliver possession thereof to Landlord, and Tenant
hereby grants to Landlord full and free license to enter into and upon the
Premises in such event and to repossess Landlord of the Premises as of
Landlord's former estate and to expel or remove Tenant and any others who may be
occupying or be within the Premises and to remove Tenant's signs and other
evidence of tenancy and all other property of Tenant therefrom without being
deemed in any manner guilty of trespass, eviction or forcible entry or detainer,
and without incurring any liability for any damage resulting therefrom, Tenant
waiving any right to claim damages for such re-entry and expulsion, and without
relinquishing Landlord's right to rent or any other right given to Landlord
under this Lease or by operation of law.
19.1.3 Upon any termination of this Lease, whether by lapse of
time or otherwise, Landlord shall be entitled to recover as damages, all rent,
including any amounts treated as additional rent under this Lease, and other
sums due and payable by Tenant on the date of termination, plus as liquidated
damages and not as a penalty, an amount equal to the sum of: (a) an amount equal
to the then present value of the rent reserved in this Lease for the residue of
the
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stated Term of this Lease including any amounts treated as additional rent under
this Lease and all other sums provided in this Lease to be paid by Tenant, minus
the fair rental value of the Premises for such residue; (b) the value of the
time and expense necessary to obtain a replacement tenant or tenants, and the
estimated expenses described in Section 19.1.4 relating to recovery of the
Premises, preparation for reletting and for reletting itself; and (c) the cost
of performing any other covenants which would have otherwise been performed by
Tenant.
19.1.4 Upon any termination of Tenant's right to possession only
without termination of the Lease:
19.1.4.1 Neither such termination of Tenant's right to
possession nor Landlord's taking and holding possession thereof as provided in
Section 19.1.2 shall terminate the Lease or release Tenant, in whole or in part,
from any obligation, including Tenant's obligation to pay the rent, including
any amounts treated as additional rent, under this Lease for the full Term, and
if Landlord so elects Tenant shall pay forthwith to Landlord the sum equal to
the entire amount of the rent, including any amounts treated as additional rent
under this Lease, for the remainder of the Term plus any other sums provided in
this Lease to be paid by Tenant for the remainder of the Term.
19.1.4.2 Landlord may, but need not, relet the Premises or
any part thereof for such rent and upon such terms as Landlord, in its sole
discretion, shall determine (including the right to relet the premises for a
greater or lesser term than that remaining under this Lease, the right to relet
the Premises as a part of a larger area, and the right to change the character
or use made of the Premises). In connection with or in preparation for any
reletting, Landlord may, but shall not be required to, make repairs, alterations
and additions in or to the Premises and redecorate the same to the extent
Landlord deems necessary or desirable, and Tenant shall, upon demand, pay the
cost thereof, together with Landlord's expenses of reletting, including, without
limitation, any commission incurred by Landlord. If Landlord decides to relet
the Premises or a duty to relet is imposed upon Landlord by law, Landlord and
Tenant agree that nevertheless Landlord shall at most be required to use only
the same efforts Landlord then uses to lease premises in the Building generally
and that in any case that Landlord shall not be required to give any preference
or priority to the showing or leasing of the Premises over any other space that
Landlord may be leasing or have available and may place a suitable prospective
tenant in any such other space regardless of when such other space becomes
available. Landlord shall not be required to observe any instruction given by
Tenant about any reletting or accept any tenant offered by Tenant unless such
offered tenant has a creditworthiness acceptable to Landlord and leases the
entire Premises upon terms and conditions including a rate of rent (after giving
effect to all expenditures by Landlord for tenant improvements, broker's
commissions and other leasing costs) all no less favorable to Landlord than as
called for in this Lease, nor shall Landlord be required to make or permit any
assignment or sublease for more than the current term or which Landlord would
not be required to permit under the provisions of Article 9.
19.1.4.3 Until such time as Landlord shall elect to
terminate the Lease and shall thereupon be entitled to recover the amounts
specified in such case in Section 19.1.3, Tenant shall pay to Landlord upon
demand the full amount of all rent, including any amounts as additional rent
under this Lease and other sums reserved in this Lease for the remaining Term,
together with the costs of repairs, alterations, additions, redecorating and
Landlord's expenses of reletting and the collection of the rent accruing
therefrom (including attorney's fees and broker's commissions), as the same
shall then be due or become due from time to time, less only such consideration
as Landlord may have received from any reletting of the Premises; and Tenant
agrees that Landlord may file suits from time to time to recover any sums
falling due under this Article 19 as they become due. Any proceeds of reletting
by Landlord in excess of the amount then owed by Tenant to Landlord from time to
time shall be credited against Tenant's future obligations under this Lease but
shall not otherwise be refunded to tenant or inure to Tenant's benefit.
19.2 Landlord may, at Landlord's option, enter into and upon the Premises
if Landlord determines in its sole discretion that Tenant is not acting within a
commercially reasonable time to maintain, repair or replace anything for which
Tenant is not acting within a commercially reasonable time to maintain, repair
or replace anything for which Tenant is responsible under this Lease and correct
the same, without being deemed in any manner guilty of trespass, eviction or
forcible entry and detainer and without incurring any liability for any damage
or interruption of Tenant's business resulting therefrom. If Tenant shall have
vacated the Premises, Landlord may at Landlord's option re-enter the Premises at
any time and make any and all such changes, alterations, revisions, additions
and tenant and other improvements in or about the Premises as Landlord shall
elect, all without any abatement of any of the rent otherwise to be paid by
Tenant under this Lease.
19.3 If, on account of any breach or default by Tenant in Tenant's
obligations under the terms and conditions of this Lease, it shall become
necessary or appropriate for Landlord to employ or consult with an attorney
concerning or to enforce or defend any of Landlord's rights or remedies arising
under this Lease, Tenant agrees to pay all Landlord's attorney's fees and costs
so incurred. Tenant expressly waives any right: (a) trial by jury; and (b)
service of any notice required by any present or future law or ordinance
applicable to landlords or tenants but not required by the terms of this Lease.
19.4 Pursuit of any of the foregoing remedies shall not preclude pursuit of
any of the other remedies provided in this Lease or any other remedies provided
by law or equity (all such remedies being cumulative), nor shall pursuit of any
remedy provided in this Lease constitute a forfeiture or waiver of any rent due
to Landlord under this Lease or
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of any damages accruing to Landlord by reason of the violation of any of the
terms, provisions and covenants contained in this Lease.
19.5 No act or thing done by Landlord or its agents during the Term shall
be deemed a termination of this Lease or any acceptance of the surrender of the
Premises, and except as expressly provided for in this Lease, no agreement to
terminate this Lease or accept a surrender of said Premises shall be valid,
unless in writing signed by Landlord. No waiver by Landlord or Tenant of any
violation or breach of any of the terms, provisions and covenants contained in
this Lease shall be deemed or construed to constitute a waiver of any other
violation or breach of any of the terms, provisions and covenants contained in
this Lease. Landlord's acceptance of the payment of rental or other payments
after the occurrent of an Event of Default shall not be construed as a waiver of
such Default, unless Landlord so notifies Tenant in writing. Forbearance by
Landlord in enforcing one or more of the remedies provided in this Lease upon an
Event of Default shall not be deemed or construed to constitute a waiver of such
Default or of Landlord's right to enforce any such remedies with respect to such
Default or any subsequent Default.
19.6 Any and all property which may be removed from the Premises by
Landlord pursuant to the authority of this Lease or of law, to which Tenant is
or may be entitled, may be handled, removed and/or stored, as the case may be,
by or at the direction of Landlord but at the risk, cost and expense of Tenant,
and Landlord shall in no event be responsible for the value, preservation or
safekeeping thereof. Tenant shall pay to Landlord, upon demand, any and all
expenses incurred in such removal and all storage charges against such property
so long as the same shall be in Landlord's possession or under Landlord's
control. Any such property of Tenant not retaken by Tenant from storage within
thirty (30) days after removal from the Premises shall, at Landlord's option, be
deemed conveyed by Tenant to Landlord under this Lease as by a bill of sale
without further payment or credit by Landlord to Tenant.
20.0 TENANT'S BANKRUPTCY OR INSOLVENCY.
20.1 If at any time and for so long as Tenant shall be subjected to the
provisions of the United States Bankruptcy Code or other law of the United
States or any state thereof for the protection of debtors as in effect at such
time (each a "Debtor's Law"):
20.1.1 Tenant, Tenant as debtor-in-possession, and any trustee or
receiver of Tenant's assets (each a "Tenant's Representative") shall have no
greater right to assume or assign this Lease or any interest in this Lease, or
to sublease any of the Premises than accorded to Tenant in Article 9, except to
the extent Landlord shall be required to permit such assumption, assignment or
sublease by the provisions of such Debtor's Law. Without limitation of the
generality of the foregoing, any right of any Tenant's Representative to assume
or assign this Lease or to sublease any of the Premises shall be subject to the
conditions that:
20.1.1.1 Such Debtor's Law shall provide to Tenant's
Representative a right of assumption of this Lease which Tenant's Representative
shall have timely exercised and Tenant's Representative shall have fully cured
any default of Tenant under this Lease.
20.1.1.2 Tenant's Representative or the proposed assignee,
as the case shall be, shall have deposited with Landlord as security for the
timely payment of rent an amount equal to the larger of: (a) three months' rent
and other monetary charges accruing under this Lease; and (b) any sum specified
in Article 5; and shall have provided Landlord with adequate other assurance of
the future performance of the obligations of the Tenant under this Lease.
Without limitation, such assurances shall include, at least, in the case of
assumption of this Lease, demonstration to the satisfaction of the Landlord that
Tenant's Representative has and will continue to have sufficient unencumbered
assets after the payment of all secured obligations and administrative expenses
to assure Landlord that Tenant's Representative will have sufficient funds to
fulfill the obligations of Tenant under this Lease; and, in the case of
assignment, submission of current financial statements of the proposed assignee,
audited by an independent certified public accountant reasonably acceptable to
Landlord and showing a net worth and working capital in amounts determined by
Landlord to be sufficient to assure the future performance by such assignee of
all of the Tenant's obligations under this Lease.
20.1.1.3 The assumption or any contemplated assignment of
this Lease or subleasing any part of the Premises, as shall be the case, will
not breach any provision in any other lease, mortgage, financing agreement or
other agreement by which Landlord is bound.
20.1.1.4 Landlord shall have, or would have had absent the
Debtor's Law, no right under Article 9 to refuse consent to the proposed
assignment or sublease by reason of the identity or nature of the proposed
assignee or sublessee or the proposed use of the Premises concerned.
21.0 QUIET ENJOYMENT. Landlord represents and warrants that it has full right
and authority to enter into this Lease and that Tenant, while paying the rental
and performing its other covenants and agreements contained in this Lease, shall
peaceably and quietly have, hold and enjoy the Premises for the Term without
hindrance or molestation
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from Landlord subject to the terms and provisions of this Lease. Landlord shall
not be liable for any interference or disturbance by other tenants or third
persons, unless resulting from Landlord's negligence or wrongful misconduct.
22.0 DAMAGE BY FIRE, ETC.
22.1 In the event the Premises or the Building are damaged by fire or other
cause and in Landlord's reasonable estimation such damage can be materially
restored within one hundred twenty (120) days of the casualty, Landlord shall
forthwith repair the same and this Lease shall remain in full force and effect,
except that Tenant shall be entitled to a proportionate abatement in rent from
the date of such damage. Such abatement of rent shall be made pro rata in
accordance with the extent to which the damage and the making of such repairs
shall interfere with the use and occupancy by Tenant of the Premises from time
to time. Within sixty (60) days from the date of such damage, Landlord shall
notify Tenant, in writing, of Landlords's reasonable estimation of the length of
time within which material restoration can be made, and Landlord's determination
shall be binding on Tenant. For purposes of this Lease, the Building or Premises
shall be deemed "materially restored" if they are in such condition as would
allow Tenant to use the Premises for the purpose for which it was being used
immediately before such damage.
22.2 If such repairs cannot, in Landlord's architects or engineers
reasonable estimation, be made within one hundred twenty (120) days from the
date of the casualty, Landlord and Tenant shall each have the option of giving
the other, at any time within sixty (60) days after such damage, notice
terminating this Lease as of the date of such damage. In the event of the giving
of such notice, this Lease shall expire and all interest of the Tenant in the
Premises shall terminate as of the date of such damage as if such date had been
originally fixed in this Lease for the expiration of the Term. In the event that
neither Landlord nor Tenant exercises its option to terminate this Lease, then
Landlord shall repair or restore such damage, this Lease continuing in full
force and effect, and the rent and additional payments due hereunder shall be
proportionately abated as provided in Section 22.1.
22.3 Landlord shall not be required to repair or replace any damage or loss
by or from fire or other cause to any paneling, decorations, partitions,
additions, railings, ceilings, floor coverings, office fixtures or any other
property or improvements installed on the Premises or belonging to Tenant. Any
insurance which may be carried by Landlord or Tenant against loss or damage to
the Building or Premises shall be for the sole benefit of the party carrying
such insurance and under its sole control.
22.4 In the event that Landlord does not commence such repairs and material
restoration within forty five (45) days after the date estimated by Landlord
therefor as extended by this Section 22.4, and, diligently complete within forty
five (45) days of such estimation, Tenant may at its option and as its sole
remedy terminate this Lease by delivering written notice to Landlord, within
fifteen (15) days after the expiration of said period of time, whereupon the
Lease shall end on the date of such notice or such later date fixed in such
notice as if the date of such notice was the date originally fixed in this Lease
for the expiration of the Term; provided, however, that if construction is
delayed because of changes, deletions or additions in construction requested by
Tenant, strikes, lockouts, casualties, Acts of God, war, material or labor
shortages, government regulation or control or other causes beyond the
reasonable control of Landlord, the period for restoration, repair or rebuilding
shall be extended for the amount of time Landlord is so delayed.
22.5 Notwithstanding anything to the contrary contained in this Article:
(a) Landlord shall not have any obligation whatsoever to repair, reconstruct, or
restore the Premises when the damages resulting from any casualty covered by the
provisions of this Article 22 occur during the last twelve (12) months of the
Term or any extension thereof, but if Landlord determines not to repair such
damages Landlord shall notify Tenant and if such damages shall render any
material portion of the Premises untenantable Tenant shall have the right to
terminate this Lease by notice to Landlord within fifteen (15) days after
receipt of Landlord's notice; and (b) in the event the holder of any
indebtedness secured by a mortgage or deed of trust covering the Premises or
Building requires that any insurance proceeds be applied to such indebtedness,
then Landlord shall have the right to terminate this Lease by delivering written
notice of termination to Tenant within fifteen (15) days after such requirement
is made by any such holder, whereupon this Lease shall end on the date of such
damage as if the date of such damage were the date originally fixed in this
Lease for the expiration of the Term.
22.6 In the event of any damage or destruction to the Building or Premises
by any peril covered by the provisions of this Article 22, it shall be Tenant's
responsibility to properly secure the Premises and upon notice from Landlord to
remove forthwith, at its sole cost and expense, such portion or all of the
property belonging to Tenant or its licensees from such portion or all of the
Building or Premises as Landlord shall request.
23.0 EMINENT DOMAIN. If all or any substantial part of the Premises shall be
taken or appropriated by any public or quasi-public authority under the power of
eminent domain, or conveyance in lieu of such appropriation, either party to
this Lease shall have the right, at its option, of giving the other, at any time
within thirty (30) days after such taking, notice terminating this Lease, except
that Tenant may only terminate this Lease by reason of taking or appropriation,
if such taking or appropriation shall be so substantial as to materially
interfere with Tenant's use and occupancy of the Premises. If neither party to
this Lease shall so elect to terminate this Lease, the rental thereafter to be
paid shall be adjusted on a fair and equitable basis under the circumstances. In
addition to the rights of Landlord
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above, if any substantial part of the Building shall be taken or appropriated by
any public or quasi-public authority under the power of eminent domain or
conveyance in lieu thereof, and regardless of whether the Premises or any part
thereof are so taken or appropriated, Landlord shall have the right, at its sole
option, to terminate this Lease. Landlord shall be entitled to any and all
income, rent, award, or any interest whatsoever in or upon any such sum, which
may be paid or made in connection with any such public or quasi-public use or
purpose, and Tenant hereby assigns to Landlord any interest it may have in or
claim to all or any part of such sums, other than any separate award which may
be made with respect to Tenant's trade fixtures and moving expenses and which
does not reduce Landlord's award; Tenant shall make no claim for the value of
any unexpired Term.
24.0 SALE BY LANDLORD. In event of a sale or conveyance by Landlord of the
Building, the same shall operate to release Landlord from any future liability
upon any of the covenants or conditions, expressed or implied, contained in this
Lease, and in such event Tenant agrees to look solely to the successor in
interest of Landlord in and to this Lease. Except as set forth in this Article
24, this Lease shall not be affected by any such sale and Tenant agrees to
attorn to the purchaser or assignee. If any security has been given by Tenant to
secure the faithful performance of any of the covenants of this Lease. Landlord
shall transfer or deliver said security, as such, to Landlord's successor in
interest and thereupon Landlord shall be discharged from any further liability
with regard to said security.
25.0 ESTOPPEL CERTIFICATES. Within ten (10) days following any written request
which Landlord may make from time to time, in connection with the sale,
financing or refinancing of the Building, Tenant shall execute and deliver to
Landlord or its mortgagee or prospective mortgagee a sworn statement certifying:
(a) the date of commencement of this Lease; (b) the fact that this Lease is
unmodified and in full force and effect (or, if there have been modifications to
this Lease, that this lease is in full force and effect, as modified, and
stating the date and nature of such modifications); (c) the date to which the
rent and other sums payable under this Lease have been paid; (d) the fact that
there are no current defaults under this Lease by either Landlord or Tenant
except as specified in Tenant's statement; and (e) such other matters as may be
requested by Landlord. Landlord and Tenant intend that any statement delivered
pursuant to this Article 25 may be relied upon by any mortgagee, beneficiary or
purchaser and Tenant shall be liable for all loss, cost or expense resulting
from the failure of any sale or funding of any loan caused by any material
misstatement contained in such estoppel certificate.
26.0 SURRENDER OF PREMISES.
26.1 Landlord shall, at least thirty (30) days before the last day of the
Term, arrange to meet Tenant for a joint inspection of the Premises.
26.2 At the end of the Term or any renewal of the Term or other sooner
termination of this Lease, Tenant will peaceably deliver up to Landlord
possession of the Premises, together with all improvements or additions upon or
belonging to the same, by whomsoever made, whether in the Premises or in, on or
to the Building, in the same conditions received or first installed, broom clean
and free of all debris, excepting only ordinary wear and tear and damage by fire
or other casualty. Tenant may, and at Landlord's request shall, at Tenant's sole
cost, remove upon termination of this Lease, any and all furniture, furnishings,
movable partitions of less than full height from floor to ceiling, trade
fixtures and other property installed by Tenant, including, but not limited to,
raised flooring, conduits, cabling, condensers, dry coolers, generators, pull
boxes, junction boxes, supplemental HVAC units, electrical equipment, fire
suppression systems, etc., title to which shall not be in or pass automatically
to Landlord upon such termination, repairing all damage caused by such removal.
Property not so removed shall, unless requested to be removed, be deemed
abandoned by the Tenant and title to the same shall thereupon pass to Landlord
under this Lease as by a bill of sale. All other alterations, additions and
improvements in, on or to the Premises shall be dealt with and disposed of as
provided in Article 6 hereof.
26.3 All obligations of Landlord and Tenant under this Lease not fully
performed as of the expiration or earlier termination of the Term shall survive
the expiration or earlier termination of the Term.
27.0 NOTICES. Any notice or document required or permitted to be delivered under
this Lease shall be addressed to the intended recipient, shall be transmitted
personally, by fully prepaid registered or certified United States Mail return
receipt requested by facsimile transmission, or by reputable independent
contract delivery service furnishing a written record of attempted or actual
delivery, and shall be deemed to be delivered when tendered for delivery to the
addressee at its address set forth on the Reference Page, or at such other
address as it has then last specified by written notice delivered in accordance
with this Article 27, or if to Tenant at either its aforesaid address or its
last known registered office or home of a general partner or individual owner,
whether or not actually accepted or received by the addressee.
28.0 TAXES PAYABLE BY TENANT. In addition to rent and other charges to be paid
by Tenant under this Lease, Tenant shall reimburse to Landlord, upon demand, any
and all taxes payable by landlord (other than net income taxes) whether or not
now customary or within the contemplation of the parties to this Lease: (a)
upon, allocable to, or measured by or on the gross or net rent payable under
this Lease, including without limitation any rental tax or excise tax levied by
the State, any political subdivision thereof, or the Federal Government with
respect to the receipt of such
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rent; (b) upon or with respect to the possession, leasing, operation,
management, maintenance, alteration, repair, use or occupancy of the Premises or
any portion thereof, including any sales, use or service tax imposed as a result
thereof; (c) upon or measured by the Tenant's gross receipts or payroll or the
value of Tenant's equipment, furniture, fixtures and other personal property of
Tenant or leasehold improvements, alterations or additions located in the
Premises; or (d) upon this transaction or any document to which Tenant is a
party creating or transferring any interest of Tenant in this Lease or the
Premises. In addition to the foregoing, Tenant agrees to pay, before
delinquency, any and all taxes levied or assessed against Tenant and which
become payable during the term hereof upon Tenant's equipment, furniture,
fixtures and other personal property of Tenant located in the Premises.
29.0 DEFINED TERMS AND HEADINGS. The Article headings shown in this Lease are
for convenience of reference and shall in no way define, increase, limit or
describe the scope or intent of any provision of this Lease. Any indemnification
or insurance of Landlord shall apply to and inure to the benefit of all the
following "Landlord Entities", being Landlord, and the trustees, boards of
directors, officers, general partners, beneficiaries, stockholders, employees
and agents of each of them. In any case where this Lease is signed by more than
one person, the obligations under this Lease shall be joint and several. The
terms "Tenant" and "Landlord" or any pronoun used in place thereof shall
indicate and include the masculine or feminine, the singular or plural number,
individuals, firms or corporations, and their and each of their respective
successors, executors, administrators and permitted assigns, according to the
context hereof. The term "rentable area" shall mean the rentable area of the
Premises or the Building as calculated by the Landlord on the basis of the plans
and specifications of the Building including a proportionate share of any common
areas. Tenant hereby accepts and agrees to be bound by the figures for the
rentable space footage of the Premises and Tenant's Proportionate Share shown on
the Reference Page.
30.0 TENANT'S AUTHORITY. If Tenant signs as a corporation each of the persons
executing this Lease on behalf of Tenant represents and warrants that Tenant has
been and is qualified to do business in the state in which the Building is
located, that the corporation has full right and authority to enter into this
Lease, and that all persons signing on behalf of the corporation were authorized
to do so by appropriate corporate actions. If Tenant signs as a partnership,
trust or other legal entity, each of the persons executing this Lease on behalf
of Tenant represents and warrants that Tenant has complied with all applicable
laws, rules and governmental regulations relative to its right to do business in
the state and that such entity on behalf of the Tenant was authorized to do so
by any and all appropriate partnership, trust or other actions. Tenant agrees to
furnish promptly upon request a corporate resolution, proof of due authorization
by partners, or other appropriate documentation evidencing the due authorization
of Tenant to enter into this Lease.
31.0 COMMISSIONS. Each of the parties represents and warrants to the other that
it has not dealt with any broker or finder in connection with this Lease, except
as described on the Reference Page. Tenant represents and warrants that it has
not dealt with a real estate broker, agent or finder in connection with this
Lease with the exception of the broker named in the Reference Pages to this
Lease whose commission Landlord agrees to pay. Landlord shall not pay a
commission or fee due any other brokers, agents or finders as a result of this
Lease. Tenant and Landlord agree to indemnify, defend and hold harmless the
other party hereto against and from all liabilities claims and damages arising
from any claim by any broker (other than said named broker), finder or agent
claiming to have dealt with Tenant in connection with this Lease.
32.0 TIME AND APPLICABLE LAW. Time is of the essence of this Lease and all of
its provisions. This Lease shall in all respects be governed by the laws of the
state in which the Building is located.
33.0 SUCCESSORS AND ASSIGNS. Subject to the provisions of Article 9, the terms,
covenants and conditions contained in this Lease shall be binding upon and inure
to the benefit of the heirs, successors, executors, administrators and assigns
of the parties to this Lease.
34.0 ENTIRE AGREEMENT. This Lease, together with its exhibits, contains all
agreements of the parties to this Lease and supersedes any previous
negotiations. There have been no representations made <PAGE>
by the Landlord or understandings made between the parties other than those set
forth in this Lease and its exhibits. This Lease may not be modified except by a
written instrument duly executed by the parties to this Lease.
35.0 EXAMINATION NOT OPTION. Submission of this Lease shall not be deemed to be
a reservation of the Premises. Neither Tenant nor Landlord shall be bound by
this Lease until each has received a copy of this Lease duly executed by Tenant
and has delivered to Tenant a copy of this Lease duly executed by Landlord, and
until such delivery Landlord reserves the right to exhibit and lease the
Premises to other prospective tenants. Notwithstanding anything to the contrary,
Landlord may withhold delivery of possession of the Premises from Tenant until
such time as Tenant has paid to landlord any security deposit required by
Article 5, the first month's rent as set forth in Article 3 and any sum owed
pursuant to this Lease.
36.0 RECORDATION. Tenant may not record or register this lease or a short form
memorandum of this Lease without the prior written consent of Landlord.
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37.0 LIMITATION OF LANDLORD'S LIABILITY. Redress for any claim against Landlord
under this Lease shall be limited to and enforceable only against and to the
extent of Landlord's interest in the Building. The obligations of Landlord under
this Lease are not intended to and shall not be personally binding on, nor shall
any resort be had to the private properties of, any of its members, or its or
their trustees or board of directors and officers, as the case may be, its
manager, the general partners thereof, or any beneficiaries, stockholders
employees, or agents of Landlord, the manager or the members.
38.0 MISCELLANEOUS.
38.1 Subject to compliance with all applicable governmental codes,
regulations and ordinances, including approval of Tenant's plans, Landlord
hereby grants Tenant the right to install up to a 500KW diesel fuel emergency
generator in a location deemed feasible by Landlord and Tenant, including an
associated 500 gallon diesel fuel-tank as necessary to support the generator on
the ground floor or roof of the Building. Subject to Landlord's approval of
Tenant's detailed plans as to method of installation and location, Landlord
shall permit Tenant, at its sole cost and expense, to install, use, operate and
maintain electrical and telecommunications conduits, condenser and fuel piping,
in the riser or other locations in, on or to the Building (as noted in Exhibit E
attached hereto (the "Designated Areas"), as necessary to connect to Tenants':
(a) emergency generator and fuel to each other and to the Premises; (b)
generator transfer switch for portable "roll-up" generator; (c)
telecommunication service providers, CLEC's, IXC's, and ILEC, etc.; (d) Telco
and Hogan grounds and; (e) GPS antenna on the roof. Tenant shall have the
ability to test its generator on a reasonable basis as recommended by the
manufacturer. In addition, Landlord may install a diesel fuel tank and/or
emergency generator and/or fuel pump (the "Emergency Facilities") to service
multiple Tenants of the Building. Should Tenant request to utilize Landlord's
Emergency Facilities, Tenant shall pay its proportionate share of the
installation, maintenance, repair and operation of the Emergency Facilities, in
which case Landlord and Tenant shall enter into a separate agreement which
governs its use, rules and regulations. Landlord will permit Tenant to install,
use, operate and maintain condensing units or dry coolers (sized to meet
Tenant's air conditioning requirements for operation of its system in a
designated area of the roof). In addition, Tenant shall have the right to tie
into the Building's existing ground field or, if the existing grid does not meet
Tenant's requirements, to install its own ground system. Nothing permitted in
this paragraph shall permit Tenant to interfere with other occupants' use of
similar facilities in their designated locations. Tenant's preapproved vertical
riser locations are designated on Exhibit E.
38.2 Subject to compliance with all applicable governmental codes,
regulations and ordinances, including approval of Tenant's plans, Tenant shall
have the right to construct a dry pipe, pre-action system for the Premises,
including the right to relocate or encase any water mains or other water pipes
(whether or not related to fire safety) running through the Premises, at
Tenant's sole cost and expense and subject to Landlord's approval, not to be
unreasonably withheld. Landlord agrees that Tenant, at its sole expense, shall
install a fire protection system which is approved by Landlord, such approval
not to be unreasonably withheld. Tenant shall also have the right to install a
FM 200 fire suppression system in the Premises. Tenant shall not penetrate the
floor or ceiling on any floor of the Building with any water or liquid piping,
supply or drains, or install any pull boxes or junction boxes, without the
Landlord's expressed written approval of Tenant's detailed plans.
38.3 Tenant shall be permitted to erect and operate, at its sole cost and
expense, and if Tenant does so erect, Tenant shall be required to maintain,
operate, repair and replace, at its sole cost and expense, one (1) GPS antenna
on the roof of the Building and to run necessary conduit and cabling from the
antenna to the Premises, provided that Tenant installs said antennae at
locations and in a manner reasonably approved by Landlord, and provided further
Tenant installs any screening device requested by Landlord to insure the antenna
cannot be viewed by the public. Tenant shall have access to roof at all times,
subject to Section 38.4, to install, maintain, operate and repair the antenna
and to the risers, floor space and ceiling space to run the necessary cabling
and conduit. Any antenna shall be installed in a good and workmanlike manner and
in compliance with all applicable laws and plans approved by Landlord. Tenant
shall indemnify and hold Landlord harmless from and against any loss, cost,
damage, claim or liability, including loss or diminution of any roof warranties,
that Landlord may suffer as a result of Tenant's actions pursuant to this
section. Landlord's approval shall not be deemed to give Tenant the exclusive
right to use the roof and shall not preclude Landlord from granting similar
rights to others. The rights of other tenants or licensees shall be exercised
without causing unreasonable interference with the antennae and associated
activities being carried on by Tenant. Similarly, the rights of Tenant shall be
exercised without causing interference with antennae and associated activities
being carried on by other tenants or licensees. Tenant shall not change,
substitute or materially alter the antennae or related equipment agreed to
herein without the prior written consent of Landlord.
38.4 Landlord hereby grants Tenant access to the Premises, the roof, the
tunnel and the risers housing Tenant's wiring, conduit and cabling twenty four
(24) hours per day, three hundred sixty-five (365) days per year. However, if
access is needed to areas not otherwise available to Tenant during normal
business hours, Tenant must notify Landlord and Landlord will provide escorted
access, at Tenant's expense (if Landlord incurs any actual expenses). In
addition, Landlord shall give Tenant reasonable access to prearranged and
demised vertical risers exclusively allocated to such purposes to enable Tenant
to provide Tenant's telecommunications services and to interconnect to tenants
and other occupants of the Building in Designated Areas as shown on Exhibit E.
Tenant may install in the aforementioned risers, conduit and other such cabling
as set forth in Section 38.6(b) for its services within the Building. Tenant
shall have the
17
<PAGE>
right to permit its customers to collocate telecommunications equipment in the
Premises that are serviced and maintained by Tenant.
38.5 Tenant may use Landlord's approved contractors in connection with
Tenant's Improvements and may competitively bid to tenant finish contractors
acceptable to Landlord and to select and/or approve the successful contractor.
In the event of a renovation, Tenant shall have the right to use any of the
approved contractors and competitively bid the renovations in the same manner.
Landlord shall not charge any supervision or management fee, however, Tenant
shall be responsible for and reimburse Landlord for any actual and reasonable
out of pocket expenses relating to the approval, or review of Tenant's plans.
38.6 Landlord shall make the following available for Tenant's installation
or use which, if Tenant accepts, shall be installed, performed or used at
Tenant's sole cost and expense:
(a) 480/277 volt three-phase, 4 wire electrical service at the bus duct to
the floor of the Building in which the Premises is located, at
Landlord's costs (however Tenant shall pay all costs associated with
its connection to the electrical service, the disconnect switch, meter,
and associated utility costs. Pursuant to Paragraph 9 of Exhibit B, the
cost to provide 1250 amp service shall be borne by Landlord. Tenant
shall, prior to Landlord providing any electricity for Tenant's use at
the Premises (as described in subparagraph 13.1(f) above), and
installing the disconnect switch, supply Landlord with its certified
electrical load calculations and Landlord shall arrange for the
installation of a multimeter (in the case of a multi-tenant floor) for
the recording of electrical usage, and Tenant agrees to reimburse
Landlord for Tenant's proportionate share of the cost of said
multimeter and disconnect switch if purchased and installed by Landlord
or Landlord's contractor. Notwithstanding the above, should Tenant,
during the term of the Lease, require additional electrical service
over and above its initial electrical load calculations, Landlord shall
cooperate and coordinate with Tenant to provide the increased
requirements, all in the same manner as described above for Tenant's
initial requirements.
(b) Riser capacity, shown on Exhibit E, to enable Tenant to interconnect
with other occupants of the building without any additional cost or
fees from Tenant to Landlord. This does not imply that Landlord is
providing any conduit, cabling or other facilities for Tenant's
interconnection purposes. All of Tenant's conduits and cabling shall be
clearly labeled and tagged with Tenant's name and an emergency contact
phone number at each floor and at a maximum of twenty feet apart.
Tenant shall not allow any cabling or loose wiring to exist in the
Building, outside the Premises, except as otherwise permitted in this
Lease to be field verified and approved by Landlord, such approval not
to be unreasonably withheld. Landlord may also install dedicated pull
boxes (one or more for each tenant) for Tenant's conduits at the floor
of the Premises and at the basement level for the purposes of
coordinating and segregating the telecommunications conduits within the
Building. Tenant shall pay Landlord's actual costs for the pull boxes.
(c) Ability to ventilate supplemental HVAC through louvers to the exterior
of the south side of the Building and Landlord shall provide Tenant
with Tenant's Proportionate Share of available space in the common
areas of the roof of the Building for Tenant's condenser/dry coolers
and generator on the roof of the Building.
(d) Location for A/C grounding for Tenant's main distribution cabinets and
transformers. The ground will be chosen and installed by Tenant in a
grounding area selected by Landlord and feasible for Tenant's use in
accordance with Bellcore standards.
(e) Existing slab to underside of concrete deck above has been measured at
a minimum 13'-0" clearance.
(f) 5000# capacity freight elevator approximately 10'0"w x 6'0" interior.
(g) Loading dock.
(h) Permission for Tenant to have diverse dual entrances into the Premises
for fiber optic cable service. Landlord will permit the use and/or
installation of all conduits reasonably necessary to connect the fiber
optic cable service to the Premises, provided within the permissible
area shown on Exhibit E. Landlord shall not limit Tenant in its choice
of which telecommunication carrier to utilize.
(i) Permission for Tenant to install and maintain on the roof of the
Building (in a location and manner reasonably approved by Landlord)
protection against damage by lightning to Tenant's telecommunications
equipment.
38.7 Landlord's and Tenant's work shall each be performed in compliance
with the ADA.
18
<PAGE>
38.8 Landlord shall provide within the passenger and freight elevators
accommodations to separately lock-out Tenant's floor subject to Landlord's
security and aesthetic requirements. Landlord shall provide a guard twenty-four
(24) hours a day, and a security system for the Building operated seven (7) days
per week 24 hours a day. Tenant shall have the right to install its own security
system in the Premises. Building shall be fully sprinkled, to the extent
required by applicable law.
38.9 Prior to the commencement of Tenant's initial alterations to the
Premises and the Building (collectively, the "Initial Alterations"), Tenant
shall deliver the plans and specifications to Landlord for its written approval,
which approval shall not be unreasonably withheld or delayed. Tenant's plans and
specifications for Tenant's Initial Alterations must comply with all applicable
laws, introduce no hazardous materials into the Building (other than batteries
and diesel fuel to be stored in the tank and generator permitted hereunder),
impose on Landlord no additional ADA compliance requirements within the Building
or the Premises, and be reasonable and compatible with the systems and structure
of the Building. Tenant shall deliver to Landlord a report from a structural
engineer that all of Tenant's Initial Alterations comply with building
structural capacities, applicable laws and codes. Landlord shall respond to
Tenant's request for approval of Tenant's plans and specifications within ten
(10) business days after receipt thereof. In the event Landlord shall not
approve the plans and specifications, Landlord shall notify Tenant of its
objections thereto. Landlord and Tenant shall thereafter work cooperatively and
in good faith to reach agreement upon mutually acceptable plans and
specifications. Tenant shall pay all Landlord's reasonable third party
engineering and out of pocket expenses relating to the review of Tenant's plan
and specifications related to the Initial Alterations. Tenant at its sole cost
and expense shall obtain any permits, license, variances, or other approvals
required with respect to the installation or operation of the improvement,
equipment, cabling or wiring to be installed by Tenant or to be alterations to
be performed by Tenant. Tenant shall deliver true and complete copies thereof to
Landlord prior to permit application and commencing any improvement or
alteration. Tenant, its contractors and/or agents shall not tie into, disrupt,
disengage, terminate, or violate any building systems, fire protection, fire
alarm, security, HVAC, electrical, etc., unless coordinated, scheduled in
advanced and approved with the Buildings' engineer, manager and contractor to
assure integrity with the system and continued applicability of the Buildings'
warranties and guaranties. Any violation of the above is subject to default
under this Lease.
38.10 Provided no Event of Default hereunder has occurred and is
continuing, Tenant shall have continuing rights of first offer to lease the
balance of the 3rd floor, in the Building which is contiguous to the Premises
and which may become available on and after the date of this Lease. At such time
that Landlord has knowledge that such space ("Offered Space") is or will become
available, Landlord will give Tenant notice (the "Offering Notice") of the terms
and conditions Landlord would be willing to accept with respect to the Offered
Space (including, without limitation, the proposed rent, additional rent, scope
of Landlord's proposed tenant improvements, location and floor area), and Tenant
shall have five (5) business days within which to respond to Landlord's offer.
In the event Tenant elects to accept Landlords' offer, then Tenant shall notify
Landlord of such election by giving notice to Landlord during such five (5) days
period and Landlord and Tenant shall thereupon enter into an amendment to this
Lease for the leasing of the Offered Space, which amendment shall contain (i)
the terms and conditions set forth in the Offering Notice, (ii) provide that the
term thereunder shall expire or sooner terminate contemporaneously with the
expiration or sooner termination of the Term hereof, and (iii) contain such
other terms and provisions as either Landlord or Tenant may reasonably require
in order to effectuate the incorporation of the Offered Space into the Premises
and to otherwise effectuate the intent of this Section 38.10. Should Tenant
decline Landlord's offer or fail to respond thereto, then, and in such event,
Tenant shall have been deemed to have waived any prospective rights of first
offer to the Offered Space and Landlord may lease the Offered Space to any other
party on the same terms and conditions set forth in the Offering Notice.
38.11 Thirty (30) days after fulfillment of the requirements set forth
below, Landlord agrees to pay to Tenant $240,000.00 ($20.00/sf) as and for
Landlord's contribution to Tenant's Work ("Construction Allowance").
A) Completion of Tenant's work in accordance with approved plans and
specifications in a manner reasonably satisfactory to Landlord's
Architect.
B) Presentation to Landlord of the following:
i) General Contractor's executed and notarized final waiver of
Lien/affidavit form listing all subcontractors and material
suppliers and the amounts they were paid for work and materials
supplied for the Premises which equal or exceed the Construction
Allowance;
ii) Executed and notarized final Waiver of Lien/Affidavit form from
HVAC, plumbing, electrical, drywall/carpentry subcontractors and
material suppliers;
iii) Waivers/Affidavits must be satisfactory to Landlord.
C) Presentation to Landlord of a Certificate of Occupancy.
D) Tenant shall have paid to Landlord the first monthly installment of
Annual Rent.
E) Tenant shall have not been in default under the terms and conditions of
this Lease.
19
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38.12 Tenant shall have the right to display its signage at the entrance to
its Premises. In addition, Landlord shall provide and pay for all standard
building directory ground floor lobby signage for Tenant.
38.13 Landlord and Tenant acknowledge that Landlord has not yet acquired
title to the Building and therefore this lease and all obligations and Tenant
herein are conditioned upon Landlord's acquisition of such title no later than
November 1, 1998.
38.14 Tenant acknowledges there is no on-site parking, and Landlord shall
arrange for four (4) parking spaces off-site for Tenant at Tenant's sole cost
and expense, within a one (1) block radius of the Premises.
38.15 As required by Section 404.56(6), Florida Statutes, the following
notification is made regarding radon gas: Radon is a naturally occurring
radioactive gas that, when it has accumulated in a building in sufficient
quantities, may present health risks to persons who are exposed to it over time.
Levels of radon that exceed federal and state guidelines have been found in
buildings in Florida. Additional information regarding radon and radon testing
may be obtained from your county public health unit.
<TABLE>
<S> <C>
LANDLORD: TENANT:
36 North East Second Street, L.L.C. Startec Global Communications Corporation
</TABLE>
<TABLE>
<S> <C>
By:
-----------------------------
By: /s/ By: /s/
------------------------------ -------------------------------
Title: Manager Title: Prabhav V. Muniyar
--------------------------- Secretary, Sr. VP & CFO
Dated: 10/29/98 , 19 Dated: 10/28/98 ,19
----------------- ----- --------------- ---------
Witnesses: Witnesses:
/s/ /s/
- --------------------------------- -----------------------------------
- --------------------------------- -----------------------------------
</TABLE>
EXHIBIT 10.46
LEASE
36 NORTH EAST SECOND STREET, L.L.C.
LANDLORD
STARTEC GLOBAL COMMUNICATIONS CORPORATION
TENANT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE PAGE
<S> <C>
1. USE, RESTRICTIONS ON USE AND COMPLIANCE WITH LAWS .......... 1
2. TERM ....................................................... 2
3. RENT ....................................................... 3
4. RENT ADJUSTMENTS ........................................... 3
5. SECURITY DEPOSIT ........................................... 5
6. ALTERATIONS ................................................ 5
7. REPAIR ..................................................... 6
8. LIENS ...................................................... 7
9. ASSIGNMENT AND SUBLETTING .................................. 7
10. INDEMNIFICATION ........................................... 8
11. INSURANCE ................................................. 9
12. WAIVER OF SUBROGATION ..................................... 9
13. SERVICES AND UTILITIES .................................... 9
14. HOLDING OVER .............................................. 10
15. SUBORDINATION ............................................. 10
16. RULES AND REGULATIONS ..................................... 10
17. REENTRY BY LANDLORD ....................................... 10
18. DEFAULT ................................................... 11
19. REMEDIES .................................................. 11
20. TENANT'S BANKRUPTCY FOR INSOLVENCY ........................ 13
21. QUIET ENJOYMENT ........................................... 13
22. DAMAGE BY FIRE, ETC. ...................................... 14
23. EMINENT DOMAIN ............................................ 14
24. SALE BY LANDLORD .......................................... 15
25. ESTOPPEL CERTIFICATES ..................................... 15
26. SURRENDER OF PREMISES ..................................... 15
27. NOTICES ................................................... 15
28. TAXES PAYABLE BY TENANT ................................... 15
29. DEFINED TERMS AND HEADINGS ................................ 16
30. TENANT'S AUTHORITY ........................................ 16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARTICLE PAGE
<S> <C>
31. COMMISSIONS ............................................... 16
32. TIME AND APPLICABLE LAW ................................... 16
33. SUCCESSORS AND ASSIGNS .................................... 16
34. ENTIRE AGREEMENT .......................................... 16
35. EXAMINATION NOT OPTION .................................... 16
36. RECORDATION ............................................... 16
37. LIMITATION OF LANDLORD'S LIABILITY ........................ 17
38. MISCELLANEOUS ............................................. 17
</TABLE>
EXHIBIT A -- PREMISES
EXHIBIT B -- INITIAL ALTERATIONS
EXHIBIT C -- RULES AND REGULATIONS
EXHIBIT D -- LIST OF APPROVED CONTRACTORS
EXHIBIT E -- LOCATION OF DESIGNATED AREAS
<PAGE>
LEASE
By this Lease Landlord leases to Tenant and Tenant leases from Landlord the
Premises in the Building as set forth and described on the Reference Page. The
Reference Page, including all terms defined thereon, is incorporated as part of
this Lease.
1. USE, RESTRICTIONS ON USE AND COMPLIANCE WITH LAWS.
1.1 The Premises are to be used solely for the operation, installation,
maintenance, repair and replacement of telecommunications equipment and its
related facilities and for general office use. Tenant shall not do or permit
anything to be done in or about the Premises or the Building which will in any
way obstruct or interfere with the rights of other tenants or occupants of the
Building or injure, annoy, or disturb them or allow the Premises to be used for
any improper or unlawful or objectionable purpose. Tenant shall not do, permit
or suffer in, on, or about the Premises the sale of any alcoholic liquor without
the written consent of Landlord first obtained, or the commission of any waste.
Tenants shall comply with all government laws, ordinances and regulations
applicable to the use of the Premises and its occupancy and shall promptly
comply with all governmental orders and directions for the correction,
prevention and abatement of any violations in or upon, or in connection with,
the Premises, related to Tenant's use of the Premises, all at Tenant's sole
expense. Tenant shall not do or permit anything to be done on or about the
Premises or the Building or bring or keep anything into the Premises which will
in any way increase the rate of, invalidate or prevent the procuring of any
insurance protecting against loss or damage to the Building or any of its
contents by fire or other casualty or against liability for damage to property
or injury to persons in or about the Building or any part thereof, provided,
however, that Landlord represents and warrants that Tenant's intended use as a
telecommunications center as provided for in this Lease shall not cause any
increase in the rate or, invalidate or prevent the procuring of any such
protections. Landlord acknowledges and agrees that Tenant may enter into
agreements with its customers and/or end users ("Collocation Agreements")
providing for physical location of telecommunication equipment and facilities
within the Premises, maintained and serviced by Tenant and placed in the
Premises and Tenant's sole cost, expenses and risk, provided that such
Collocation Agreements shall be subordinate to the Lease and to any mortgages,
deeds of trust, or land sale contracts now or in the future, against the
Building. Tenant may enter into Collocation Agreements with third parties, for
the use of the Premises at the sole discretion of Tenant, and any provision of
the subletting and assignment provisions of this Lease to the contrary
notwithstanding, such Collocation Agreements shall not be construed as an
assignment or sublet.
1.2 Tenant shall not, and shall not direct, suffer or permit any of its
agents, contractors, employees, licensees or invitees to at any time handle,
use, manufacture, store or dispose of in or about the Premises or the Building
any (collectively "Hazardous Materials") flammables, explosives, radioactive
materials, hazardous wastes or materials, toxic wastes or materials, or other
similar substances, petroleum products or derivatives or any substance subject
to regulation by or under any Environmental Laws, except if handled, used,
stored and disposed of in accordance with applicable Environmental Laws. Tenants
shall protect, defend, indemnify and hold each and all of the Landlord Entities
(as defined in Article 29) harmless from and against any and all loss, claims,
liability or costs (including court costs and attorney's fees) incurred by
reason of any actual or asserted failure of Tenant to fully comply with all
applicable Environmental Laws, or the presence, handling, use or disposition in
or from the Premises of any Hazardous Materials (even though permissible under
all applicable Environmental Laws or the provisions of this Lease), or by reason
of any actual or asserted failure of Tenant to keep, observe, or perform any
provision of this Section 1.2. Tenant's use of batteries, generator and fuel
tank are acceptable, provided such items comply with all applicable
Environmental Laws and provided further Tenant removes all such items on or
prior to the termination or expiration of this Lease. Tenant agrees to indemnify
Landlord from and against any loss, cost, damage, lawsuit, claim or liability
arising from the presence of these items in the Premises, except if caused by
Landlord's negligence or willful misconduct. Landlord represents that prior to
November 4, 1998, any known friable asbestos shall be removed from the Premises,
ground floor and all risers of the Building and all known non-friable asbestos
in such locations shall be removed or encapsulated, all at Landlord's cost by a
party licensed to remove asbestos. No other Hazardous Materials are known by
Landlord to exist in the Building. Landlord shall, prior to the Commencement
Date, deliver to Tenant a Certificate of Environmental Compliance, if available,
or other similar document.
Landlord shall comply with and shall cause the Building to be in
compliance with all applicable Laws (as hereinafter defined) as of the date of
this Lease. Subject to the preceding sentence, Tenant shall comply with all
applicable Laws with respect to its use and occupancy of the Premises and in
its construction of Tenant's Improvements; provided, however, Tenant shall only
be responsible for making improvements to the Premises (capital or otherwise)
required by applicable Laws if the necessity arises from Tenant's use of the
Premises. As used herein, "Laws" shall mean all federal, state, county and
local governmental laws, statutes, codes, ordinances, rules, regulations,
decrees, orders and other such requirements now or hereafter imposed, including
but not limited to, the ADA and any and all Environmental Law. As used herein,
"ADA" means the Americans With Disabilities Act of 1990 (42 U.S.C. '1201 et
seq.) and the regulations and guidelines promulgated or published thereunder,
as any of the foregoing may from time to time be amended. As used herein,
"Environmental Law" means all legal requirements relating to (a) the protection
1
<PAGE>
of the environment, the safety and health of persons (including employees) or
the public welfare from actual or potential exposure (or effects of exposure)
to any actual or potential release, discharge, disposal or omission (whether
past or present) of any Hazardous Materials (as hereinafter defined) or (b) the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of any Hazardous Materials, including, but not limited
to, the Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"), as amended by the Superfund Amendments and Reauthorization Act
of 1986, 42 U.S.C. '9601 et seq., the Solid Waste Disposal Act, as amended by
the Resource Conversation and Recovery Act of 1976, as amended by the Solid and
Hazardous Waste Amendments of 1984, 42 U.S.C. '6901 et seq., the Federal Water
Pollution Control Act, as amended by the Clean Water Act of 1977, 33 U.S.C.
'1251 et seq., the Toxic Substances Control Act of 1976, 15 U.S.C. '2601 et
seq., the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C.
'1101 et seq., the Clean Air Act of 1966, as amended, 42 U.S.C. '7401 et seq.,
the National Environmental Policy Act of 1975, 42 U.S.C. '4321, the Rivers and
Harbors Act of 1899, 33 U.S.C. '401 et seq., the Endangered Species Act of
1973, as amended, 16 U.S.C. '1531 et seq., the Occupational Safety and Health
Act of 1970, as amended, 29 U.S.C. '651 et seq., and the Safe Drinking Water
Act of 1974, as amended, 42 U.S.C. '300(f) et seq., and all rules, regulations
and guidance promulgated or published thereunder, as any of the foregoing may
from time to time be amended.
2. TERM.
2.1 The Term of this Lease shall begin on the date ("Commencement Date")
which shall be February 1, 1999, provided the Commencement Date shall be
extended one (1) day for each day after November 4, 1998 that Landlord's Work is
not substantially completed unless delayed because of Tenant's act or omission.
Landlord shall tender possession of the Premises on the Commencement Date with
all the work, if any, to be performed by Landlord pursuant to Exhibit B to this
Lease ("Landlord's Work") substantially completed. Unless Tenant advises
Landlord in writing to the contrary within ten (10) days of the Commencement
Date, it shall be assumed that Landlord's Work is substantially complete upon
delivery of the Premises to Tenant. Tenant may commence any work to be performed
by Tenant while Landlord is performing Landlord's work, provided Tenant does not
cause any delay in Landlord's work and Tenant indemnifies Landlord from and
against any loss, cost, claim, lawsuit, damage or liability incurred by Landlord
as a result of Tenant's entry onto the Premises prior to the Commencement Date,
or the entry of Tenant's agents, employees or contractors. On or before the date
that Landlord substantially completes Landlord's Work and deliver possession of
the Premises to Tenant, Landlord shall provide Tenant with temporary power to
enable Tenant to complete its tenant finish in the Premises. Prior to performing
any actual construction work in the Premises, Tenant must procure any necessary
building permits. Landlord and Tenant shall execute a memorandum setting forth
the actual Commencement Date and Termination Date. Subject to delays caused by
Tenant, or its agents or employees, in the event that Landlord is unable to
deliver the Premises with Landlord's Work substantially completed before
November 4, 1998, the Commencement Date specified above shall be extended as
provided in the first sentence of this Section 2.1. After twenty-one (21) days
of delay, Tenant shall have the right to terminate the lease upon written notice
to Landlord within ten (10) days of the accrual of such right and Landlord shall
reimburse Tenant for any third-party architectural/engineering fees and legal
expenses, up to a maximum of $50,000.00, incurred by Tenant after September 15,
1998 through the termination date.
2.2 Landlord shall permit Tenant to occupy the Premises prior to the
Commencement Date to complete Tenant Improvements. Such occupancy shall be
subject to all the provisions of this Lease. Said early possession shall not
advance the Commencement Date or Termination Date.
2.3 Landlord grants Tenant the right and option to extend the Term for the
option periods indicated in the Renewal Option Section of the Reference Pages
(each a "Renewal Term"). Tenant shall notify Landlord in writing of its election
to extend this Lease for each Renewal Term not less than nine (9) months nor
more than twelve (12) months prior to the expiration date of the then existing
Term. Tenant's failure to timely exercise any option hereunder shall cause the
automatic extinguishment thereof, time being of the essence. Each Renewal Term
shall be upon all of the terms, covenants, and conditions of this Lease except
that the Annual Rent payable during the Renewal Term shall be ninety five
percent (95%) of the then current fair market rental ("Market Rate") for
comparable space in the Building and in other telecommunication buildings in the
downtown Miami, Florida area at the time of the exercise of the renewal option.
Landlord shall advise Tenant of the fair market rental within fifteen (15) days
after receipt of written request therefor. Thereafter, Landlord and Tenant shall
agree as to fair market value. Said request shall be made no earlier than thirty
(30) days prior to the first date on which Tenant may exercise its option under
this paragraph. Notwithstanding the above, Tenant shall have no right to extend
or renew this Lease if (i) it is in default beyond the curative period at the
time of giving its notice of renewal; (ii) Tenant is in default and beyond any
applicable cure period as of the first day of the extended Term which was the
subject of such notice; or (iii) neither Tenant nor any of Tenant's Permitted
Assignees is not occupying the Premises.
2.4 Within thirty (30) days after Landlord's receipt of Tenant's renewal
notice, Landlord shall provide to Tenant its determination of the Market Rate
("Landlord's Determination"). Within fifteen (15) days of Tenant's receipt of
Landlord's Determination, Tenant shall either accept Landlord's Determination or
propose a different Market Rate to Landlord. If Landlord and Tenant are unable
to agree upon a Market Rate within thirty (30) days after Tenant's receipt of
Landlord's Determination, then Landlord and Tenant shall, within fifteen (15)
days of Tenant's receipt of Landlord's Determination, each simultaneously submit
to the other in writing its good faith estimate of the Market Rate.
2
<PAGE>
If the higher of said estimates is not more than one hundred and five percent
(105%) of the lower of such estimates, the Market Rate in question shall be
deemed to be the average of the submitted rates. If otherwise, within fifteen
(15) days thereafter, Tenant may either terminate this Lease effective as of the
Expiration Date or establish the rate by an arbitration to be held in Miami,
Florida in accordance with the Real Estate Valuation Arbitration Rules of the
American Arbitration Association, except that the arbitration shall be conducted
by a single arbitrator, selected jointly by Landlord and Tenant, and shall be on
the basis that the arbitrator shall pick one of the two rates submitted, being
the rate which is closer to the Market Rate as determined by the arbitrator. The
parties agree to be bound by the decision of the Arbitrator, which shall be
final in this and non-appealable, and shall share equally the costs of
arbitration, and judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. During each of the Renewal
Terms (if applicable), Tenant shall pay Direct Expenses and Taxes in accordance
with the provision of Paragraph 4.
3. RENT.
3.1 Commencing on the Rent Commencement Date, Tenant agrees to pay to
Landlord the Annual Rent in effect from time to time by paying the Monthly
Installment of Rent then in effect on or before the first day of each full
calendar month during the Term. The Monthly Installment of Rent in effect at any
time shall be one-twelfth of the Annual Rent in effect at such time. Rent for
any period during the Term which is less than a full month shall be a prorated
portion of the Monthly Installment of Rent based upon a thirty (30) day month.
Said rent shall be paid to Landlord, without deduction or offset and without
notice or demand, at the Landlord's address, as set forth on the Reference Page,
or to such other person or at such other place as Landlord may from time to time
designate in writing. Notwithstanding the above and subject to Section 2.1
above, Tenant's rent commencement date shall begin sixty (60) days after the
Commencement Date ("Rent Commencement Date"). Landlord and Tenant shall execute
an amendment to the Lease setting forth the final Rent Commencement Date.
Commencing on the first anniversary of the Rent Commencement Date and on each
anniversary thereafter, including during any Renewal Term, the Annual Rent shall
increase Fifty Cents ($0.50) per rentable square foot.
3.2 Tenant recognizes that the late payment of any rent or other sum due
under this Lease will result in administrative expense to Landlord, the extent
of which additional expense is extremely difficult and economically impractical
to ascertain. Tenant therefore agrees that if rent or any other sum is not paid
by the tenth (10th) day of each month, a late charge shall be imposed in an
amount equal to a sum equal to five percent (5%) of the unpaid rent or other
payment. The amount of the late charge to be paid by Tenant shall be reassessed
and added to Tenant's obligation for each successive monthly period until paid.
The provisions of this Section 3.2 in no way relieve Tenant of the obligation to
pay rent or other payments on or before the date on which they are due, nor do
the terms of this Section 3.2 in any way affect Landlord's remedies pursuant to
Article 19 of this Lease in the event said rent or other payment is unpaid after
date due.
4. RENT ADJUSTMENTS.
4.1 For the purpose of this Article 4, the following terms are defined as
follows:
4.1.1 LEASE YEAR: Each calendar year falling partly or wholly within
the Term.
4.1.2 DIRECT EXPENSES : All direct costs of operation, maintenance,
repair and management of the Building (including the amount of any credits which
Landlord may grant to particular tenants of the Building in lieu of providing
any standard services or paying any standard costs described in this Section
4.1.2 for similar tenants), as determined in accordance with generally accepted
accounting principles, including the following costs by way of illustration, but
not limitation: water and sewer charges; insurance charges of or relating to all
insurance policies and endorsements deemed by Landlord to be reasonably
necessary or desirable and relating in any manner to the protection,
preservation, or operation of the Building or any part thereof; utility costs,
including, but not limited to, the cost of heat, light, electricity, power,
steam, gas, and waste disposal; the cost of janitorial services; the cost of
security and alarm services; window cleaning costs; labor costs; costs and
expenses of managing the Building including management fees (not to exceed
normal and customary management fees for similar buildings); air conditioning
maintenance costs; elevator maintenance fees and supplies; material costs; the
cost of maintenance, repair and service agreements; purchase costs of equipment
other than capital items; tool costs; licenses, permits and inspection fees;
wages and salaries of on-site Building personnel; employee benefits and payroll
taxes; accounting and legal fees (except legal fees in connection with specific
tenant leases); any sales, use or service taxes incurred in connection
therewith. Notwithstanding the above, Direct Expenses shall not include:
(a) commission payable to any real estate broker(s) for the
leasing of space in the Building;
(b) the cost of any work done by Landlord for and at the expense
of any particular tenant(s) in the Building which do not benefit Tenant;
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(c) interest or penalties for overdue payments of Taxes;
(d) the cost to Landlord of repairs made, or other work done, by
Landlord as a result of fire, windstorm or other insurable casualty to the
extent for which Landlord has received insurance proceeds, or by the exercise of
eminent domain, provided, however, that this exclusion for eminent domain is
limited to the amount of the condemnation award received by Landlord in
compensation for such repairs or other work;
(e) attorney's fees and court costs and other such expenses
incurred by Landlord in connection with the negotiation of disputes with
existing or prospective tenants of the Building;
(f) the costs to Landlord of renovating, decorating, painting or
redecorating interior space for the actual premises of tenants of the Building;
(g) amounts for which reimbursement has been made to Landlord by
tenants of the Building for "extra hours" services rendered to them by Landlord
for which Tenant does not benefit;
(h) interest on debt or amortization payments on any mortgages
and/or rental under any ground or underlying leases covering Landlord's
Property;
(i) compensation paid by Landlord to persons engaged in
commercial concessions operated by Landlord (and not by a third party) on
Landlord's Property (e.g., a newspaper stand or shoeshine service or valet
parking);
(j) expenses paid by Landlord for the advertising and promotion
of rental space in the Building;
(k) fines, penalties or other costs incurred by Landlord due to
its violation of any governmental laws;
(l) costs incurred by Landlord for the purchase of sculptures,
paintings or other objects of art for Landlord's Property, if any;
(m) depreciation expense on the Building;
(n) the overtime hours charges for electricity used and paid for
by other tenants;
(o) salaries, wages and benefits of Landlord's employees above
the level of "Building Manager".
4.1.3 TAXES: Real estate taxes and any other taxes, charges and
assessments which are levied with respect to the Building or the land
appurtenant to the Building, or with respect to any improvements, fixtures and
equipment or other property of Landlord, real or personal, located in the
Building and used in connection with the operation of the Building and said
land, any payments to any ground lessor in reimbursement of tax payments made by
such lessor; and all fees, expenses and costs incurred by Landlord in
investigating, protesting, contesting or in any way seeking to reduce or avoid
increase in any assessments, levies or the tax rate pertaining to any Taxes to
be paid by Landlord in any Lease Year. Taxes shall not include any corporate
franchise, or estate, inheritance or federal or state income tax, or tax imposed
upon any transfer by Landlord of its interest in this Lease or the Building. In
the event that during the Base Year, as hereafter defined, the Building is not
fully rented and occupied Landlord shall make an appropriate adjustment in Taxes
for such year for the purpose of avoiding distortion of the amount of such
Taxes, and the adjustment so determined shall be deemed to have been Taxes for
such year. Base Year, as used in this Lease shall mean the calendar year 1999
for the original Term; the calendar year 2009 for the first Renewal Option; and
the calendar year 2014 for the second Renewal Option.
4.2 Tenant shall pay as additional rent for each calendar year Tenant's
Proportionate Share of any increase in Direct Expenses and Taxes incurred for
such calendar year, above the amount of such Direct Expenses and Taxes for the
Base Year. Notwithstanding anything herein to the contrary, Tenant's
Proportionate Share of Direct Expenses (excluding common area utilities and
insurance) for any calendar year after the Base Year shall not exceed 105% of
Tenant's Proportionate Share of Direct Expenses (excluding common area utilities
and insurance) for the immediately preceding calendar year ("CAM Cap");
provided, however, if the Tenant's Proportionate Share of Direct Expenses
(excluding common area utilities and insurance) in any calendar year as
calculated as if there were no CAM Cap ("Uncapped CAM Costs") is greater than
Tenant's Proportionate Share of Direct Expenses (excluding common area utilities
and insurance) as calculated pursuant to the CAM Cap ("Capped CAM Costs"), the
difference between the Uncapped CAM Costs and the Capped CAM Costs may be
accumulated and applied toward Tenant's Proportionate Share of Direct Expenses
(excluding utilities and insurance) in any future calendar year in which
Tenant's Uncapped CAM Costs are less than the Capped CAM Costs. However,
Tenant's Proportionate Share of Direct Expenses
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(excluding utilities and insurance) in any given calendar year shall not exceed
the Capped CAM Costs for the given calendar year.
4.3 The annual determination of Direct Expenses shall be made by Landlord
and if certified by a nationally recognized firm of public accountants selected
by Landlord. In the event that during the Base Year, the Building is not fully
rented and occupied Landlord shall make any appropriate adjustment in occupancy
related Direct Expense for such year for the purpose of avoiding distortion of
the amount of such Direct Expenses to be attributed to Tenant by reason of
variation in total occupancy of the Building, by employing sound accounting and
management principals to determine Direct Expenses that would have been paid or
incurred by Landlord had the Building been fully rented and occupied, and the
amount so determined shall be deemed to have been Direct Expenses for such
calendar year.
4.4 Prior to the actual determination thereof for a Lease Year, Landlord
may once a year estimate Tenant's liability for Direct Expenses and/or Taxes
under Section 4.2 and Article 28 for the Lease Year or portion thereof. Landlord
will give Tenant written notification of the amount of such estimate and Tenant
agrees that it will pay, by increase of its Monthly Installments of Rent due in
such Lease Year, additional rent in the amount of such estimate. Any such
increased rate of Monthly Installments of Rent pursuant to this Section 4.4
shall remain in effect until further written notification to Tenant pursuant
hereto.
4.5 When the above mentioned actual determination of Tenant's liability for
Direct Expenses and/or Taxes is made for any Lease Year and when Tenant is so
notified in writing, then:
4.5.1 If the total additional rent Tenant actually paid pursuant to
Section 4.4 on account of Direct Expenses and/or Taxes for the Lease Year is
less than Tenant's liability for Direct Expenses and/or Taxes, then Tenant shall
pay such deficiency to Landlord as additional rent in one lump sum within (30)
days of receipt of Landlord's bill therefor; and
4.5.2 If the total additional rent Tenant actually paid pursuant to
Section 4.4 on account of Direct Expenses and/or Taxes for the Lease Year is
more than Tenant's liability for Direct Expenses and/or Taxes, then Landlord
shall credit the difference against the then next due payments of Rent and
Direct Expenses and Taxes, if the Term has ended, shall be paid to Tenant within
thirty (30) days after the date Landlord makes any such determination.
4.6 If the Commencement Date is other than January 1 or if the Termination
Date is other than December 31, Tenant's liability for Direct Expenses and Taxes
for the Lease Year in which said Date occurs shall be prorated based upon a
three hundred sixty-five (365) day year.
4.7 In the event any dispute arises between Landlord and Tenant, as to
Direct Expenses, Tenant shall have the right, upon reasonable notice, to inspect
Landlord's records concerning the Direct Expenses of the Building. If, after
such inspection, Tenant continues to dispute Direct Expenses, Tenant shall be
entitled to retain an independent accountant or accountancy frim that has a
specialty in auditing operting expenses to conduct an audit. If Tenant's audit
reveals that Landlord has overchanged Tenant, after Landlord has been afforded
an opportunity to explain any contrary position on the matter to Tenant's
accounting frim (with any disputes being resolved in good faith by the parties),
then Tenant shall receive a credit against the next month's Rent in the amount
of such overcharge. If the audit reveals that Tenant was undercharged, then
within five (5) days after the results of such audit are made available to
Tenant, Tenant shall reimburse Landlord for the amount of such undercharge.
Tenant shall pay the cost of any audits requested by Tenant, unless any audit
reveals that Landlord's determination of the Direct Expenses was in error by
more than five percent (5%), in which case, Landlord shall pay the cost of such
audit. Except in the event of fraud by Landlord, failure on the part of tenant
to object to the Direct Expense Statement within one (1) year after its receipt
thereof shall be conclusively deemed Tenant's approval of such Direct Expense
Statement. All inspections shall be made at Landlord's offices, during normal
business hours, with at least ten (10) days prior written notice.
5. SECURITY DEPOSIT. Intentionally Omitted.
6. ALTERATIONS.
6.1 Except for those, if any, specifically provided for in Exhibit B to
this Lease, Tenant shall not make or suffer to be made any alterations,
additions, or improvements, including, the attachment of any fixtures or
equipment in, on, or to the Premises or any part thereof or the making of any
improvements as required by Article 7 ("Alterations"), without the prior written
consent of Landlord. When applying for such consent, Tenant shall, if requested
by landlord, furnish complete plans and specifications for such alterations,
additions and improvements, if applicable. Landlord's consent shall not be
unreasonably withheld, conditioned or delayed for nonstructural Alterations
which are not visible from the exterior of the Premises.
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6.2 In the event Landlord consents to the making of any such alteration,
addition or improvement by Tenant, the same shall be made by a licensed, bonded
and insured contractor approved by Landlord, such approval not be unreasonably
withheld, conditioned or delayed, at Tenant's sole cost and expense. If Tenant
shall employ any contractor other than Landlord's pre-approved contractor, and
such other contractor or any subcontractor of such other contractor shall employ
labor and/or suppliers, then Tenant shall be responsible for and hold Landlord
harmless from any and all delays, damages and extra costs suffered by Landlord
as a result of any dispute with any labor concerning the wage, hours, terms or
conditions of the employment of any such labor.
6.3 All alterations, additions, and improvements proposed by Tenant shall
be constructed in accordance with all government laws, ordinances, rules and
regulations and Tenant shall, prior to construction, provide the additional
insurance required under Article 11 in such case, and also all such assurances
to Landlord, including but not limited to, waivers of lien, as Landlord shall
require to assure payment of the costs thereof and to protect Landlord and the
Building and appurtenant land against any loss from any mechanic's,
materialmen's or other liens. Tenant shall pay in addition to any sums due
pursuant to Article 4, any increase in real estate taxes attributable to any
such alteration, addition or improvement for so long, during the Term, as such
increase is ascertainable; at Landlord's election said sums shall be paid in the
same way as sums due under Article 4.
6.4 All alterations, additions, and improvements, in, on , or to the
Premises or in, on or to the Building made or installed by Tenant, including
carpeting, shall be and remain the property of Tenant during the Term but,
excepting furniture, furnishings, telecommunication switch equipment, batteries,
generators, condensers, dry coolers, conduits, cabling, pull boxes, and other
telecommunication related facilities, movable partitions of less than full
height from floor to ceiling and other trade fixtures, all of which shall be
removed from the Premises and the Building at Tenant's expense if required to be
removed by Landlord in a written document delivered to Tenant at the time
Landlord approves Tenant's plans and specifications and the Premises restored to
its original condition, and any remaining improvements, shall become a part of
the realty and belong to Landlord without compensation to Tenant upon the
expiration or sooner termination of the Term, at which time title shall pass to
Landlord under this Lease as by a bill of sale, unless Landlord elects
otherwise. Upon such election by Landlord, Tenant shall upon demand by Landlord,
at Tenant's sole cost and expense, forthwith and with all due diligence remove
any such alterations, additions or improvements, including any which are
designated by Landlord to be removed, and Tenant shall forthwith and with all
due diligence, at its sole costs and expense, repair and restore the Premises
and the Building to their original condition, reasonable wear and tear and
damage by fire or other casualty excepted.
7. REPAIR.
7.1 Landlord shall have no obligation to alter, remodel, improve, repair,
decorate or paint the Premises or the Building, except as specified in Exhibit B
if attached to this Lease and except that Landlord shall repair and maintain the
structural portions of the Building, including the roof and the basic plumbing,
common area air conditioning, heating and electrical systems installed or
furnished by Landlord and all common areas of the Building in working order and
condition. By taking possession of the Premises, Tenant accepts them as being in
good order condition and repair and in the condition in which Landlord is
obligated to deliver them subject to the items set forth on the punchlist
prepared in accordance with Section 2.1. It is hereby understood and agreed that
no representations respecting the condition of the Premises or the Building have
been made by Landlord to Tenant, expect as specifically set forth in this Lease.
7.2 Tenant shall at its own cost and expense keep and maintain all parts of
the Premises and improvements therein in good condition, promptly making all
necessary repairs and replacements, whether ordinary or extraordinary, with
materials and workmanship of the same character, kind and quality as the
original (including, but not limited to, repair and replacement of all fixtures
installed by Tenant, windows, glass and plate glass, doors, any special office
entries, interior walls and finish work, floors and floor coverings, heating and
air conditioning systems serving the Premises, electrical systems and fixtures
and sprinkler systems), if applicable. Tenant as part of its obligations
hereunder shall keep the Premises in a clean and sanitary condition. Tenant
will, as far as possible keep all such parts of the Premises from deterioration
due to ordinary wear and from falling temporarily out of repair, and upon
termination of this Lease in any way Tenant will deliver the Premises to
Landlord in good condition and repair, loss by fire or other casualty excepted
and ordinary wear and tear excepted. Tenant shall, at its own cost and expense,
repair any damage to the Premises or the Building resulting from and/or caused
in whole or in part by Tenant, its agents, employees, invitees, or any other
person entering upon the Premises as a result of Tenant's business activities or
caused by Tenant's default hereunder.
7.3 Landlord shall not be liable for any failure to make any repairs or to
perform any maintenance unless such failure shall persist for an unreasonable
time which shall be determined in Landlord's reasonable discretion after written
notice of the need of such repairs or maintenance is given to Landlord by
Tenant.
7.4 Except as provided in Articles 22, there shall be no abatement of rent
and no liability of Landlord by reason of any injury to or interference with
Tenant's business arising from the making of any repairs, alterations or
improvements in or to any portion of the Building or the Premises or to
fixtures, appurtenances and equipment in the Building unless due to Landlord's
negligence or willful misconduct, in which event, after three (3) days, Tenant
shall receive one (1) day of Rent abatement for each day Tenant is unable to
operate in the Premises until Tenant can again
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operate in the Premises. Except to the extent, if any, prohibited by law, Tenant
waives the right to make repairs at Landlord's expense under any law, statute or
ordinance now or hereafter in effect.
7.5 Tenant shall, at its own cost and expense, enter into a regularly
scheduled preventive maintenance/service contract with a maintenance contractor
and/or an employee certified by manufacturer, selected by Tenant and approved by
Landlord for servicing all heating and air conditioning systems and batteries,
generators and fuel tanks serving the Premises (and a copy thereof shall be
furnished to Landlord). The service contract must include all services suggested
by the equipment manufacturer in the operation/maintenance manual and must
become effective within thirty (30) days after the Commencement Date.
7.6 In recognition of Tenant's use, Landlord shall use good-faith efforts
to provide Tenant (except in the case of emergency, in which event Landlord
shall use reasonable efforts, but shall not be required, to provide Tenant with
prior notice) not less than twenty four (24) hours prior written notice of
Landlord's intent to enter the Premises provided such entry shall not disrupt
Tenant's service to its clients, and not less than forty eight (48) hours prior
written notice of Landlord's intention to enter the Premises to effect planned
repairs (including, but not limited to electrical, mechanical or plumbing work)
if such work will materially disrupt and/or interfere with the business of
Tenant within the Premises or Building in a manner which will, in Landlord's
reasonable opinion, affect Tenant's use. In such circumstances Tenant and
Landlord will cooperate to determine an appropriate time. Further, in emergency
situations Landlord shall use reasonable care and precaution in order to
minimize the disruptions in Tenant's business.
8. LIENS. Tenant shall keep the Premises, the Building and appurtenant land
and Tenant's leasehold interest in the Premises free from any liens arising out
of any services, work or materials performed, furnished, or contracted for by
Tenant, or obligations incurred by Tenant. Notice is hereby given that Landlord
shall not be liable for any work performed or to be performed on the Premises,
or for any materials furnished or to be furnished at or to the Premises, or any
building or improvements thereon, for Tenant or any subtenant, and that no
mechanic's or other lien for such work or materials shall attach to the interest
of Landlord. This Lease specifically prohibits the subjecting of the Premises,
or any part of it, to any liens for improvements Tenant makes or causes to be
made or for which Tenant is directly or indirectly responsible for payment.
Pursuant to Section 713.10, Florida Statutes, all persons dealing with Tenant
are hereby given notice of this provision, and Tenant hereby covenants and
agrees to provide all persons dealing with Tenant with a copy of this Section 8.
If, in connection with any work being performed by Tenant or any subtenant or in
connection with any materials being furnished to Tenant or any subtenant, any
mechanic's lien or other lien or charge shall be filed or made against the
Premises or any building or improvements thereon or any part thereof, or if any
such lien or charge shall be filed or made against Landlord as owner, then
Tenant, at Tenant's cost and expense, within thirty (30) days after such lien or
charge shall have been filed or made (but in any event prior to foreclosure),
shall cause the same to be cancelled and discharged of record by payment thereof
or filing a bond or otherwise, and shall also defend any action, suit or
proceeding which may be brought for the enforcement of such lien or charge, and
shall pay any damages, costs and expenses, including attorneys' fees, suffered
or incurred therein by Landlord, and shall satisfy and discharge any judgment
entered therein within thirty (30) days from entering of such judgment by
payment thereof or filing of a bond, or otherwise. In the event of the failure
of Tenant to discharge within the above-mentioned thirty (30)-day period, any
lien, charge or judgment herein required to be paid or discharged by Tenant,
Landlord may pay such items or discharge such liability by payment or bond or
both, and Tenant will repay to Landlord, upon demand, any and all amounts paid
by Landlord therefor, or by reason of any liability on any such bond, and also
any and all incidental expenses, including attorneys' fees and costs, incurred
by Landlord in connection therewith.
9. ASSIGNMENT AND SUBLETTING.
9.1 Tenant shall not have the right to assign or pledge this Lease or to
sublet the whole or any part of the Premises whether voluntarily or by operation
of law, or permit the use or occupancy of the Premises by anyone other than
Tenant, and shall not make, suffer or permit such assignment, subleasing or
occupancy without the prior written consent of Landlord not to be unreasonably
withheld or delayed and said restrictions shall be binding upon any and all
assignees of the Lease and subtenants of the Premises. In the event Tenant
desires to sublet, or permit such occupancy of, the Premises, or any portion
thereof, or assign this Lease, Tenant shall give written notice thereof to
Landlord at least thirty (30) days prior to the proposed commencement date of
such subletting or assignment, which notice shall set forth the name of the
proposed subtenant or assignee, the relevant terms of any sublease or assignment
and copies of financial reports and other relevant financial reports and other
relevant financial information of the proposed subtenant or assignee.
9.2 Notwithstanding any assignment or subletting, permitted or otherwise,
Tenant shall at all times remain directly, primarily and fully responsible and
liable for the payment of the rent specified in this Lease and for compliance
with all of its other obligations under the terms, provisions and covenants of
this Lease. Upon the occurrence of an Event of Default, if the Premises or any
part of them are then assigned or sublet, Landlord, in addition to any other
remedies provided in this Lease or provided by law, may, at its option, collect
directly from such assignee or subtenant all rents due and becoming due to
Tenant under such assignment or sublease and apply such rent against any sums
due
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to Landlord from Tenant under this Lease, and no such collection shall be
construed to constitute a novation or release of Tenant from the further
performance of Tenant's obligations under this Lease.
9.3 In the event that Tenant sells, sublets, assigns or transfers this
Lease, Tenant shall pay to Landlord as additional rent an amount equal to fifty
percent (50%) of any Increased Rent (as defined below) when and as such
Increased Rent is received by tenant. As used in this Section, "Increased Rent"
shall mean the excess of (i) all rent and other consideration which Tenant is
entitled to receive by reason of any sale, sublease, assignment or other
transfer of this Lease, over (ii) the rent otherwise payable by Tenant under
this Lease at such time. For purposes of the foregoing, any consideration
received by Tenant in form other than cash shall be valued at its fair market
value as determined by Landlord in good faith. Tenant's expenses of assigning or
subletting (including brokerage commissions, reasonable legal fees and
reasonable costs of redecorating the space for the assignee or subtenant) shall
also be deducted in determining the "Increased Rent".
9.4 Notwithstanding any other provision hereof, Tenant shall have no right
to make any assignment of this Lease or sublease of any portion of the Premises
if at the time of either Tenant's notice of the proposed assignment or sublease
or the proposed commencement date thereof, there shall exist any Event of
Default of Tenant or matter which will become a default of Tenant with passage
of time unless cured, or if the proposed assignee or sublessee is an entity: (a)
with which Landlord is already in negotiation as evidenced by the issuance of a
written proposal; (b) is already an occupant of the Building; (c) is a
governmental agency; (d) is incompatible with the character or occupancy of the
Building; or (e) would subject the Premises to a use which would: (i) violate
any exclusive right granted to another tenant of the Building; (ii) require any
addition to or modification of the Premises or the Building in order to comply
with building code or other governmental requirements; or, (iii) involve a
violation of Section 1.2.
9.5 The assignment or other transfer of Tenant's interest under this Lease
or the sublease of the Premises of an affiliate, subsidiary or successor of
Tenant shall not be deemed an assignment or subletting of the Premises as to
which Tenant must obtain Landlord's consent (however, Tenant must provide thirty
(30) days prior written notice to Landlord). The terms affiliate and subsidiary
and successor shall have the following meaning:
(a) any corporation which directly or indirectly controls or is
controlled by or is under common control with Tenant.
(b) any subsidiary, meaning any corporation not less than 50% of whose
outstanding stock shall, at the time, be owned directly or indirectly by Tenant.
(c) any successor, meaning:
(i) A corporation into which or with which Tenant, its corporate
successors or assigns, is merged or consolidated in accordance with applicable,
statutory provisions for merger or consolidation of corporations, but only if,
by operation of law or by effective provisions contained in the instruments of
merger or consolidation, the liabilities of the corporations participating in
such merger or consolidation are assumed by the corporation surviving such
merger or created by such consolidation; or,
(ii) Any corporation acquiring this Lease and the Premises hereby
demised and a substantial portion of the property and assets of Tenant, its
corporate successors or assigns; or
(iii) Any corporation or successor corporation becoming such by
either of the methods described in Subsections (a) or (b) above, but only if, on
the completion of such merger, consolidation, acquisition, or assumption, the
successor has a net worth in excess of Tenant's immediately prior to such
merger, consolidation, acquisition or assumption. Acquisition by Tenant, its
corporate successors or assigns, of a substantial portion of the assets,
together with the assumption of all or substantially all the obligations and
liabilities of any corporation, shall be deemed a merger of such corporation
into Tenant for purposes of this Section.
10. INDEMNIFICATION. None of the Landlord Entities shall be liable and Tenant
hereby waives all claims against them for any damage to any property or any
injury to any person in or about the Premises or the Building by or from any
cause whatsoever (including without limiting the foregoing, rain or water
leakage of any character from the roof, windows, walls, basement, pipes,
plumbing works or appliances, the Building not being in good condition or
repair, gas, fire, oil, electricity or theft), except to the extent caused by or
arising from the negligence or willful misconduct of Landlord or its agents,
employees or contractors. Tenant shall protect, indemnify and hold the Landlord
Entities harmless from and against any and all loss, claims, liability or costs
(including court costs and attorney's fees) incurred by reason of (a) any damage
to any property (including but not limited to property of any Landlord Entity)
or any injury (including but not limited to death) to any person occurring in,
on or about the Premises or the Building to the extent that such injury or
damage shall be caused by or arise from any act or omission of Tenant, its
agents, servants, employees, invitees, or visitors; (b) the conduct or
management of any work or thing whatsoever done by the Tenant in or about the
Premises; or (c) Tenant's failure to comply with any and all governmental laws,
ordinances and regulations applicable to the condition or use of the Premises or
its occupancy which are Tenant's responsibility under
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the Lease. The provisions of this Article shall survive the termination of this
Lease with respect to any claims or liability accruing prior to such
termination. Tenant shall not be liable and Landlord hereby waives all claims
against Tenant for any damage to any property or any injury to any person in or
about the Premises or the Building by or from any cause whatsoever (including
without limiting the foregoing, rain or water leakage of any character from the
roof, windows, walls, basement, pipes, plumbing works or appliances, the
Building not being in good condition or repair, gas, fire, oil, electricity or
theft), except to the extent caused by or arising from the negligence or willful
misconduct of Tenant or its agents, employees or contractors. Landlord shall
protect, indemnify and hold Tenant harmless from and against any and all loss,
claims, liability or costs (including court costs and attorney's fees) incurred
by reason of (a) any damage to any property or any injury (including but not
limited to death) to any person occurring in, on or about the Premises or the
Building to the extent that such injury or damage shall be caused by or arise
from any act or omission of Landlord, its agents, servants, employees, invitees,
or visitors; or (b) the conduct or management of any work or thing whatsoever
done by the Landlord in or about the Premises. The provisions of this Article
shall survive the termination of this Lease with respect to any claims or
liability accruing prior to such termination.
11. INSURANCE.
11.1 Tenant shall keep in force throughout the Term: (a) a Commercial
General Liability insurance policy or policies to protect the Landlord Entities
against any liability to the public or to any invitee of Tenant or a Landlord
Entity incidental to the use of or resulting from any accident occurring in or
upon the Premises with a limit of not less than $2,000,000.00 per occurrence and
not less than $4,000,000.00 in the annual aggregate (part of which may come from
an umbrella insurance policy), or such larger amount as Landlord may prudently
require from time to time, covering bodily injury and property damage liability
and $1,000,000 products/completed operations aggregate; (b) Business Auto
Liability covering owned, non-owned and hired vehicles with a limit of not less
than $1,000,000 per accident; (c) insurance protecting against liability under
Worker's Compensation Laws with limits at least as required by statute; (d)
Employers Liability with limits of $500,000 each accident, $500,000 disease
policy limit, $500,000 disease--each employee; (e) All Risk or Special Form
coverage protecting Tenant against loss of or damage to Tenant's alterations,
additions, improvements, carpeting, floor coverings, paneling, decorations,
fixtures, inventory and other business personal property situated in or about
the Premises to the full replacement value of the property so insured; and, (f)
Business Interruption Insurance with limit of liability representing loss of at
least approximately six months of rent.
11.2 Each of the aforesaid policies shall (a) be provided at Tenant's
expense; (b) name the Landlord Entities and building management company, if any,
as additional insureds as their interests may appear; (c) be issued by an
insurance company with a minimum Best's rating of "A:VII" during the Term; and
(d) provide that said insurance shall not be canceled unless thirty (30) days
prior written notice (ten days for non-payment of premium) shall have been given
to the Landlord; and said policy or policies or certificates thereof shall be
delivered to the Landlord by Tenant upon the Commencement Date and at least
thirty (30) days prior to each renewal of said insurance.
11.3 Whenever Tenant shall undertake any Alterations in, to or about the
Premises ("Work") the aforesaid insurance protection must extend to and include
injuries to persons and damage to property arising in connection with such Work,
without limitation including liability under any applicable structural work act,
and such other insurance as Landlord shall require; and the policies of or
certificates evidencing such insurance must be delivered to Landlord prior to
the commencement of any such Work.
12. WAIVER OF SUBROGATION. So long as their respective insurers so permit,
Tenant and Landlord hereby mutually waive their respective rights of recovery
against each other for any loss insured by fire, extended coverage, All Risks or
other insurance now or hereafter existing for the benefit of the respective
party but only to the extent of the net insurance proceeds payable under such
policies. Each party shall obtain any special endorsements required by their
insurer to evidence compliance with the aforementioned waiver.
13. SERVICES AND UTILITIES.
13.1 Subject to the other provisions of this Lease, Landlord agrees to
furnish to the common areas of the Building, the following services and
utilities subject to the rules and regulations of the Building prescribed from
time to time: (a) water suitable for normal office use of the Premises; (b) heat
and air conditioning required in Landlord's judgment for the use and occupation
of the common areas of the Building; (c) cleaning and janitorial service for
common areas; (d) elevator service by nonattended automatic elevators; (e) such
window washing as may from time to time in Landlord's judgment by reasonably
required; and, (f) provisions to bring electricity to the floor of the Premises
an amount equal to no less than 800 amps @ 480V on or before the Commencement
Date with ultimate requirement of 1,250 amps @ 480V on or before one hundred
eighty (180) days after the Rent Commencement Date. To the extent that Tenant is
not billled directly by a public utility, Tenant shall pay, upon demand, as
additional rent, for all electricity used by Tenant in the Premises, including
the usage of any temporary power supplied to Tenant prior to the Commencement
Date. The charge shall be at the pro rata rates charged for such services by the
local public utility. Landlord shall not be liable for, and Tenant shall not be
entitled to, any abatement or reduction of rental by reason of Landlord's
failure to furnish any of the foregoing, unless such failure shall persist for
an unreasonable time after written
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notice of such failure is given to Landlord by Tenant and provided further that
Landlord shall not be liable when such failure is caused by accident, breakage,
repairs, labor disputes of any character, energy usage restrictions or by any
other cause, similar or dissimilar, beyond the reasonable control of Landlord.
If the disruption of services is due to Landlord's negligence or willful
misconduct and, as a result thereof, Tenant is unable to operate in the Premises
more than five (5) days, then Tenant shall receive an abatement of Rent after
the fifth (5th) day until Tenant is again able to operate in the Premises.
Landlord shall use reasonable efforts to remedy any interruption in the
furnishing of services and utilities. Landlord shall not (except in the event of
an emergency or a force majeure event) exercise any right of Landlord to reduce,
interrupt or cease service of the heating, air conditioning, ventilation,
elevator, plumbing, electrical systems, telephone systems and/or utilities
services of the Premises, the Building or the Property, without advising Tenant
in advance of Landlord's requirements so that Landlord and Tenant may arrange
procedures for accomplishing Landlord's goals and minimize the interruption to
Tenant's use, possession and occupancy of the Premises for the purpose of
conducting its business on a continuing basis.
13.2 Should Tenant require any additional work or service, as described
above and in Paragraph 38, Landlord may, on terms to be agreed, upon reasonable
advance notice by Tenant, furnish such additional service and Tenant agrees to
pay Landlord such charges as may be agreed upon, including any tax imposed
thereon, but in no event at a charge less than Landlord's actual cost for such
additional service and, where appropriate, a reasonable allowance for
depreciation of any systems being used to provide such service.
13.3 If Tenant shall require water or electric current in excess of that
required to be furnished or supplied for use in the Premises as set forth in the
Lease, Landlord may cause a water meter or electric current meter to be
installed so as to measure the amount of such excess water and electric current.
The cost of any such meters and any additional installations or expense required
or incurred as a result of the increased capacity shall be paid for by Tenant.
Tenant agrees to pay as additional rent to Landlord promptly upon demand
therefor, the cost of all such excess water and electric current consumed (as
shown by said meters, if any, or, if none, as reasonably estimated by Landlord)
at the rates charged for such services by the local public utility or agency, as
the case may be, furnishing the same, plus any additional expense incurred in
keeping account of the water and electric current so consumed.
14. HOLDING OVER. Tenant shall pay Landlord for each day Tenant retains
possession of the Premises or part of them after termination of this Lease by
lapse of time or otherwise at the rate ("Holdover Rate") which shall be (a) 150%
of the amount of the Annual Rent for the last period prior to the date of such
termination plus (b) 150% of all Rent Adjustments under Article 4. If Landlord
gives notice to Tenant of Landlord's election to that effect, such holding over
shall constitute renewal of this Lease for a period from month to month. In any
event, no provision of this Article 14 shall be deemed to waive Landlord's right
of reentry or any other right under this Lease or at law.
15. SUBORDINATION. Without the necessity of any additional document being
executed by Tenant for the purpose of effecting a subordination, this Lease
shall be subject and subordinate at all times to ground or underlying leases and
to the lien of any mortgages or deeds of trust now or hereafter placed on,
against or affecting the Building, Landlord's interest or estate in the
Building, or any ground or underlying lease; provided, however, that if the
lessor, mortgagee, trustee, or holder of any such mortgage or deed of trust
elects to have Tenant's interest in this Lease be superior to any such
instrument, then, by notice to Tenant, this Lease shall be deemed superior,
whether this Lease was executed before or after said instrument. Notwithstanding
the foregoing, Tenant covenants and agrees to execute and deliver upon demand
such further instruments evidencing such subordination or superiority of this
Lease as may be required by Landlord. As a condition precedent to the
effectiveness of any such subordination of this Lease to any future ground or
underlying lease or the lien of any future mortgages, deeds of trust, or like
encumbrances. Landlord shall provide to Tenant within thirty (30) days of the
recording of the lien, a commercially reasonable non-disturbance and attornment
agreement in favor of Tenant executed by such future ground lessor, master
lessor, mortgagee or deed of trust beneficiary, as the case may be, which shall
provide that Tenant's quiet possession of the premises shall not be disturbed on
account of such subordination to such future lease or lien so long as Tenant is
not in default following the expiration of any applicable cure period under any
provisions of this Lease. In addition, within thirty (30) days of execution of
this Lease, Landlord shall provide to Tenant a commercially reasonable
non-disturbance and attornment agreement in favor of Tenant executed by any
existing ground lessor, master lessor, mortgagee or deed of trust beneficiary,
as the case may be, which shall provide that Tenant's quiet possession of the
Premises shall not be disturbed on account of such subordination to such
existing lease or lien so long as Tenant is not default following the expiration
of any applicable cure period under any provisions of this Lease.
16. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with all
the rules and regulations as set forth in Exhibit C to this Lease and all
reasonable modifications of and additions to them from time to time put into
effect by Landlord. Landlord shall not be responsible to Tenant for the
non-performance by any other tenant or occupant of the Building of any such
rules and regulations.
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17. REENTRY BY LANDLORD.
17.1 Landlord reserves and shall at all times have the right upon
reasonable notice to re-enter the Premises to inspect the same, to supply
janitorial service and any other service to be provided by Landlord to Tenant
under this Lease, to show said Premises to prospective purchasers, mortgagees or
tenants, and to alter, improve or repair the Premises and any portion of the
Building, without abatement of rent, and may for that purpose erect, use and
maintain scaffolding, pipes, conduits and other necessary structures and open
any wall, ceiling or floor in and through the Building and Premises where
reasonably required by the character of the work to be performed, provided
entrance to the Premises shall not be blocked thereby, and further provided that
the business of Tenant shall not be interfered with unreasonably.
17.2 Landlord shall have the right at any time to change the arrangement
and/or location of entrances, or passageways, doors and doorways, and corridors,
windows, elevators, stairs, toilets or other public parts of the Building and to
change the name, number or designation by which the Building is commonly known.
In the event that Landlord damages any portion of any wall or wall covering,
ceiling, or floor or floor covering within the Premises, Landlord shall repair
or replace the damaged portion to match the original as nearly as commercially
reasonable but shall not be required to repair or replace more than the portion
actually damaged.
17.3 For each of the aforesaid purposes, Landlord shall at all times have
and retain a key with which to unlock all of the doors in the Premises,
excluding Tenant's vaults and safes or special security areas (designated in
advance), except as required by law, and Landlord shall have the right to use
any and all means which Landlord may deem proper to open said doors in an
emergency to obtain entry to any portion of the Premises. As to any portion to
which access cannot be had by means of a key or keys in Landlord's possession,
Landlord is authorized to gain access by such means as Landlord shall elect and
the cost of repairing any damage occurring in doing so shall be borne by Tenant
and paid to Landlord as additional rent upon demand.
18. DEFAULT.
18.1 Except as otherwise provided in Article 20, the following events shall
be deemed to be Events of Default under this Lease:
18.1.1 Tenant shall fail to pay within ten (10) days any sum of money
becoming due to be paid to Landlord under this Lease, whether such sum be any
installment of the rent reserved by this Lease, any other amount treated as
additional rent under this Lease, or any other payment or reimbursement to
Landlord required by this Lease, whether or not treated as additional rent under
this Lease, and such failure shall continue for a period of five days after
written notice that such payment was not made when due, but if any such notice
shall be given, for the twelve month period commencing with the date of such
notice, the failure to pay within five days after due any additional sum of
money becoming due to be paid to Landlord under this Lease during such period
shall be an Event of Default, without notice.
18.1.2 Tenant shall fail to comply with any term, provision or
covenant of this Lease which is not provided for in another Section of this
Article and shall not cure such failure within twenty (20) days (forthwith, if
the failure involves a hazardous condition) after written notice of such failure
to Tenant. Any nonmonetary defaults which cannot be cured within twenty (20)
days for reasons beyond Tenant's reasonable control, Tenant will be given such
additional time as is reasonably necessary to cure such default, so long as
Tenant commences such cure within twenty (20) days after receipt of Landlord's
notice and thereafter diligently proceeds withthe same.
18.1.3 Tenant shall fail to vacate the Premises immediately upon
termination of this Lease, by lapse of time or otherwise, or upon termination of
Tenant's right to possession only.
18.1.4 Tenant shall become insolvent, admit in writing its inability
to pay its debts generally as they become due, file a petition in bankruptcy or
a petition to take advantage of any insolvency statute, make an assignment for
the benefit of creditors, make a transfer in fraud of creditors, apply for or
consent to the appointment of a receiver of itself or of the whole or any
substantial part of its property, or file a petition or answer seeking
reorganization or arrangement under the federal bankruptcy laws, as now in
effect or hereafter amended, or any other applicable law or statute of the
United States or any state thereof.
18.1.5 A court of competent jurisdiction shall enter an order,
judgment or decree adjudicating Tenant bankrupt, or appointing a receiver of
Tenant, or of the whole or any substantial part of its property, without the
consent of Tenant, or approving a petition filed against Tenant seeking
reorganization or arrangement of Tenant under the bankruptcy laws of the United
States, as now in effect or hereafter amended, or any state thereof, and such
order, judgment or decree shall not be vacated or set aside or stayed within
thirty (30) days from the date of entry thereof.
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19. REMEDIES.
19.1 Except as otherwise provided in Article 20, upon the occurrence of any
of the Events of Default described or referred to in Article 18, Landlord shall
have the option to pursue any one or more of the following remedies without any
notice or demand whatsoever, concurrently or consecutively and not
alternatively:
19.1.1 Landlord may, at its election, terminate this Lease or
terminate Tenant's right to possession only, without terminating the Lease.
19.1.2 Upon any termination of this Lease, whether by lapse of time or
otherwise, or upon any termination of Tenant's right to possession without
termination of the Lease, Tenant shall surrender possession and vacate the
Premises immediately, and deliver possession thereof to Landlord, and Tenant
hereby grants to Landlord full and free license to enter into and upon the
Premises in such event and to repossess Landlord of the Premises as of
Landlord's former estate and to expel or remove Tenant and any others who may be
occupying or be within the Premises and to remove Tenant's signs and other
evidence of tenancy and all other property of Tenant therefrom without being
deemed in any manner guilty of trespass, eviction or forcible entry or detainer,
and without incurring any liability for any damage resulting therefrom, Tenant
waiving any right to claim damages for such re-entry and expulsion, and without
relinquishing Landlord's right to rent or any other right given to Landlord
under this Lease or by operation of law.
19.1.3 Upon any termination of this Lease, whether by lapse of time or
otherwise, Landlord shall be entitled to recover as damages, all rent, including
any amounts treated as additional rent under this Lease, and other sums due and
payable by Tenant on the date of termination, plus as liquidated damages and not
as a penalty, an amount equal to the sum of: (a) an amount equal to the then
present value of the rent reserved in this Lease for the residue of the stated
Term of this Lease including any amounts treated as additional rent under this
Lease and all other sums provided in this Lease to be paid by Tenant, minus the
fair rental value of the Premises for such residue; (b) the value of the time
and expense necessary to obtain a replacement tenant or tenants, and the
estimated expenses described in Section 19.1.4 relating to recovery of the
Premises, preparation for reletting and for reletting itself; and (c) the cost
of performing any other covenants which would have otherwise been performed by
Tenant.
19.1.4 Upon any termination of Tenant's right to possession only
without termination of the Lease:
19.1.4.1 Neither such termination of Tenant's right to possession
nor Landlord's taking and holding possession thereof as provided in Section
19.1.2 shall terminate the Lease or release Tenant, in whole or in part, from
any obligation, including Tenant's obligation to pay the rent, including any
amounts treated as additional rent, under this Lease for the full Term, and if
Landlord so elects Tenant shall pay forthwith to Landlord the sum equal to the
entire amount of the rent, including any amounts treated as additional rent
under this Lease, for the remainder of the Term plus any other sums provided in
this Lease to be paid by Tenant for the remainder of the Term.
19.1.4.2 Landlord may, but need not, relet the Premises or any
part thereof for such rent and upon such terms as Landlord, in its sole
discretion, shall determine (including the right to relet the premises for a
greater or lesser term than that remaining under this Lease, the right to relet
the Premises as a part of a larger area, and the right to change the character
or use made of the Premises). In connection with or in preparation for any
reletting, Landlord may, but shall not be required to, make repairs, alterations
and additions in or to the Premises and redecorate the same to the extent
Landlord deems necessary or desirable, and Tenant shall, upon demand, pay the
cost thereof, together with Landlord's expenses of reletting, including, without
limitation, any commission incurred by Landlord. If Landlord decides to relet
the Premises or a duty to relet is imposed upon Landlord by law, Landlord and
Tenant agree that nevertheless Landlord shall at most be required to use only
the same efforts Landlord then uses to lease premises in the Building generally
and that in any case that Landlord shall not be required to give any preference
or priority to the showing or leasing of the Premises over any other space that
Landlord may be leasing or have available and may place a suitable prospective
tenant in any such other space regardless of when such other space becomes
available. Landlord shall not be required to observe any instruction given by
Tenant about any reletting or accept any tenant offered by Tenant unless such
offered tenant has a creditworthiness acceptable to Landlord and leases the
entire Premises upon terms and conditions including a rate of rent (after giving
effect to all expenditures by Landlord for tenant improvements, broker's
commissions and other leasing costs) all no less favorable to Landlord than as
called for in this Lease, nor shall Landlord be required to make or permit any
assignment or sublease for more than the current term or which Landlord would
not be required to permit under the provisions of Article 9. Landlord will use
such efforts to relet the Premises as required by law. In the event Tenant is in
default in this Lease and is not occupying the Premises, but tenders a
replacement occupant to Landlord, Landlord must use the same standard for
accepting such replacement occupant as set forth in the assignment and
subletting sections of this Lease, notwithstanding the fact that there is an
Event of Default.
19.1.4.3 Until such time as Landlord shall elect to terminate the
Lease and shall thereupon be entitled to recover the amounts specified in such
case in Section 19.1.3, Tenant shall pay to Landlord upon demand the full amount
of all rent, including any amounts as additional rent under this Lease and other
sums reserved
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in this Lease for the remaining Term, together with the costs of repairs,
alterations, additions, redecorating and Landlord's expenses of reletting and
the collection of the rent accruing therefrom (including attorney's fees and
broker's commissions), as the same shall then be due or become due from time to
time, less only such consideration as Landlord may have received from any
reletting of the Premises; and Tenant agrees that Landlord may file suits from
time to time to recover any sums falling due under this Article 19 as they
become due. Any proceeds of reletting by Landlord in excess of the amount then
owed by Tenant to Landlord from time to time shall be credited against Tenant's
future obligations under this Lease but shall not otherwise be refunded to
tenant or inure to Tenant's benefit.
19.2 Landlord may, at Landlord's option, enter into and upon the Premises
if Landlord determines in its sole discretion that Tenant is not acting within a
commercially reasonable time to maintain, repair or replace anything for which
Tenant is not acting within a commercially reasonable time to maintain, repair
or replace anything for which Tenant is responsible under this Lease and correct
the same, without being deemed in any manner guilty of trespass, eviction or
forcible entry and detainer and without incurring any liability for any damage
or interruption of Tenant's business resulting therefrom. If Tenant shall have
vacated the Premises, Landlord may at Landlord's option re-enter the Premises at
any time and make any and all such changes, alterations, revisions, additions
and tenant and other improvements in or about the Premises as Landlord shall
elect, all without any abatement of any of the rent otherwise to be paid by
Tenant under this Lease.
19.3 If, on account of any breach or default by Tenant in Tenant's
obligations under the terms and conditions of this Lease, it shall become
necessary or appropriate for Landlord to employ or consult with an attorney
concerning or to enforce or defend any of Landlord's rights or remedies arising
under this Lease, Tenant agrees to pay all Landlord's attorney's fees and costs
so incurred. Tenant expressly waives any right: (a) trial by jury; and (b)
service of any notice required by any present or future law or ordinance
applicable to Landlords or tenants but not required by the terms of this Lease.
19.4 Pursuit of any of the foregoing remedies shall not preclude pursuit of
any of the other remedies provided in this Lease or any other remedies provided
by law or equity (all such remedies being cumulative), nor shall pursuit of any
remedy provided in this Lease constitute a forfeiture or waiver of any rent due
to Landlord under this Lease or of any damages accruing to Landlord by reason of
the violation of any of the terms, provisions and covenants contained in this
Lease.
19.5 No act or thing done by Landlord or its agents during the Term shall
be deemed a termination of this Lease or any acceptance of the surrender of the
Premises, and except as expressly provided for in this Lease, no agreement to
terminate this Lease or accept a surrender of said Premises shall be valid,
unless in writing signed by Landlord. No waiver by Landlord or Tenant of any
violation or breach of any of the terms, provisions and covenants contained in
this Lease shall be deemed or construed to constitute a waiver of any other
violation or breach of any of the terms, provisions and covenants contained in
this Lease. Landlord's acceptance of the payment of rental or other payments
after the occurrent of an Event of Default shall not be construed as a waiver of
such Default, unless Landlord so notifies Tenant in writing. Forbearance by
Landlord in enforcing one or more of the remedies provided in this Lease upon an
Event of Default shall not be deemed or construed to constitute a waiver of such
Default or of Landlord's right to enforce any such remedies with respect to such
Default or any subsequent Default.
19.6 Any and all property which may be removed from the Premises by
Landlord pursuant to the authority of this Lease or of law, to which Tenant is
or may be entitled, may be handled, removed and/or stored, as the case may be,
by or at the direction of Landlord but at the risk, cost and expense of Tenant,
and Landlord shall in no event be responsible for the value, preservation or
safekeeping thereof. Tenant shall pay to Landlord, upon demand, any and all
expenses incurred in such removal and all storage charges against such property
so long as the same shall be in Landlord's possession or under Landlord's
control. Any such property of Tenant not retaken by Tenant from storage within
thirty (30) days after removal from the Premises shall, at Landlord's option, be
deemed conveyed by Tenant to Landlord under this Lease as by a bill of sale
without further payment or credit by Landlord to Tenant.
20. TENANT'S BANKRUPTCY OR INSOLVENCY.
20.1 If at any time and for so long as Tenant shall be subjected to the
provisions of the United States Bankruptcy Code or other law of the United
States or any state thereof for the protection of debtors as in effect at such
time (each a "Debtor's Law"):
20.1.1 Tenant, Tenant as debtor-in-possession, and any trustee or
receiver of Tenant's assets (each a "Tenant's Representative") shall have no
greater right to assume or assign this Lease or any interest in this Lease, or
to sublease any of the Premises than accorded to Tenant in Article 9, except to
the extent Landlord shall be required to permit such assumption, assignment or
sublease by the provisions of such Debtor's Law. Without limitation of the
generality of the foregoing, any right of any Tenant's Representative to assume
or assign this Lease or to sublease any of the Premises shall be subject to the
conditions that:
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20.1.1.1 Such Debtor's Law shall provide to Tenant's
Representative a right of assumption of this Lease which Tenant's Representative
shall have timely exercised and Tenant's Representative shall have fully cured
any default of Tenant under this Lease.
20.1.1.2 Tenant's Representative or the proposed assignee, as the
case shall be, shall have deposited with Landlord as security for the timely
payment of rent an amount equal to the larger of: (a) three months' rent and
other monetary charges accruing under this Lease; and (b) any sum specified in
Article 5; and shall have provided Landlord with adequate other assurance of the
future performance of the obligations of the Tenant under this Lease. Without
limitation, such assurances shall include, at least, in the case of assumption
of this Lease, demonstration to the satisfaction of the Landlord that Tenant's
Representative has and will continue to have sufficient unencumbered assets
after the payment of all secured obligations and administrative expenses to
assure Landlord that Tenant's Representative will have sufficient funds to
fulfill the obligations of Tenant under this Lease; and, in the case of
assignment, submission of current financial statements of the proposed assignee,
audited by an independent certified public accountant reasonably acceptable to
Landlord and showing a net worth and working capital in amounts determined by
Landlord to be sufficient to assure the future performance by such assignee of
all of the Tenant's obligations under this Lease.
20.1.1.3 The assumption or any contemplated assignment of this
Lease or subleasing any part of the Premises, as shall be the case, will not
breach any provision in any other lease, mortgage, financing agreement or other
agreement by which Landlord is bound.
20.1.1.4 Landlord shall have, or would have had absent the
Debtor's Law, no right under Article 9 to refuse consent to the proposed
assignment or sublease by reason of the identity or nature of the proposed
assignee or sublessee or the proposed use of the Premises concerned.
21. QUIET ENJOYMENT. Landlord represents and warrants that it has full right
and authority to enter into this Lease and that Tenant, while paying the rental
and performing its other covenants and agreements contained in this Lease, shall
peaceably and quietly have, hold and enjoy the Premises for the Term without
hindrance or molestation from Landlord subject to the terms and provisions of
this Lease. Landlord shall not be liable for any interference or disturbance by
other tenants or third persons, unless resulting from Landlord's negligence or
wrongful misconduct.
22. DAMAGE BY FIRE, ETC.
22.1 In the event the Premises or the Building are damaged by fire or other
cause and in Landlord's reasonable estimation such damage can be materially
restored within one hundred twenty (120) days of the casualty, Landlord shall
forthwith repair the same and this Lease shall remain in full force and effect,
except that Tenant shall be entitled to a proportionate abatement in rent from
the date of such damage. Such abatement of rent shall be made pro rata in
accordance with the extent to which the damage and the making of such repairs
shall interfere with the use and occupancy by Tenant of the Premises from time
to time. Within sixty (60) days from the date of such damage, Landlord shall
notify Tenant, in writing, of Landlords's reasonable estimation of the length of
time within which material restoration can be made, and Landlord's determination
shall be binding on Tenant. For purposes of this Lease, the Building or Premises
shall be deemed "materially restored" if they are in such condition as would
allow Tenant to use the Premises for the purpose for which it was being used
immediately before such damage. Rent abatement will also apply during the period
when the Tenant is performing its restoration work to the Premises, not to
exceed ninety (90) days.
22.2 If such repairs cannot, in Landlord's architects or engineers
reasonable estimation, be made within one hundred twenty (120) days from the
date of the casualty, Landlord and Tenant shall each have the option of giving
the other, at any time within sixty (60) days after Landlord's notice of its
estimate of the time within which restoration can be made, notice terminating
this Lease as of the date of such damage. In the event of the giving of such
notice, this Lease shall expire and all interest of the Tenant in the Premises
shall terminate as of the date of such damage as if such date had been
originally fixed in this Lease for the expiration of the Term. In the event that
neither Landlord nor Tenant exercises its option to terminate this Lease, then
Landlord shall repair or restore such damage, this Lease continuing in full
force and effect, and the rent and additional payments due hereunder shall be
proportionately abated as provided in Section 22.1.
22.3 Landlord shall not be required to repair or replace any damage or loss
by or from fire or other cause to any paneling, decorations, partitions,
additions, railings, ceilings, floor coverings, office fixtures or any other
property or improvements installed on the Premises or belonging to Tenant. Any
insurance which may be carried by Landlord or Tenant against loss or damage to
the Building or Premises shall be for the sole benefit of the party carrying
such insurance and under its sole control.
22.4 In the event that Landlord does not commence such repairs and material
restoration within forty five (45) days after the date estimated by Landlord
therefor as extended by this Section 22.4, and, diligently complete within forty
five (45) days of such estimation, Tenant may at its option and as its sole
remedy terminate this Lease by delivering written notice to Landlord, within
fifteen (15) days after the expiration of said period of time, whereupon the
Lease shall
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end on the date of such notice or such later date fixed in such notice as if the
date of such notice was the date originally fixed in this Lease for the
expiration of the Term; provided, however, that if construction is delayed
because of changes, deletions or additions in construction requested by Tenant,
strikes, lockouts, casualties, Acts of God, war, material or labor shortages,
government regulation or control or other causes beyond the reasonable control
of Landlord, the period for restoration, repair or rebuilding shall be extended
for the amount of time Landlord is so delayed.
22.5 Notwithstanding anything to the contrary contained in this Article:
(a) Landlord shall not have any obligation whatsoever to repair, reconstruct, or
restore the Premises when the damages resulting from any casualty covered by the
provisions of this Article 22 occur during the last twelve (12) months of the
Term or any extension thereof, but if Landlord determines not to repair such
damages Landlord shall notify Tenant and if such damages shall render any
material portion of the Premises untenantable Tenant shall have the right to
terminate this Lease by notice to Landlord within fifteen (15) days after
receipt of Landlord's notice; and (b) in the event the holder of any
indebtedness secured by a mortgage or deed of trust covering the Premises or
Building requires that any insurance proceeds be applied to such indebtedness,
then Landlord shall have the right to terminate this Lease by delivering written
notice of termination to Tenant within fifteen (15) days after such requirement
is made by any such holder, whereupon this Lease shall end on the date of such
damage as if the date of such damage were the date originally fixed in this
Lease for the expiration of the Term.
22.6 In the event of any damage or destruction to the Building or Premises
by any peril covered by the provisions of this Article 22, it shall be Tenant's
responsibility to properly secure the Premises and upon notice from Landlord to
remove forthwith, at its sole cost and expense, such portion or all of the
property belonging to Tenant or its licensees from such portion or all of the
Building or Premises as Landlord shall request.
23. EMINENT DOMAIN. If all or any substantial part of the Premises shall be
taken or appropriated by any public or quasi-public authority under the power of
eminent domain, or conveyance in lieu of such appropriation, either party to
this Lease shall have the right, at its option, of giving the other, at any time
within thirty (30) days after such taking, notice terminating this Lease, except
that Tenant may only terminate this Lease by reason of taking or appropriation,
if such taking or appropriation shall be so substantial as to materially
interfere with Tenant's use and occupancy of the Premises. If neither party to
this Lease shall so elect to terminate this Lease, the rental thereafter to be
paid shall be adjusted on a fair and equitable basis under the circumstances. In
addition to the rights of Landlord above, if any substantial part of the
Building shall be taken or appropriated by any public or quasi-public authority
under the power of eminent domain or conveyance in lieu thereof, and regardless
of whether the Premises or any part thereof are so taken or appropriated,
Landlord shall have the right, at its sole option, to terminate this Lease.
Landlord shall be entitled to any and all income, rent, award, or any interest
whatsoever in or upon any such sum, which may be paid or made in connection with
any such public or quasi-public use or purpose, and Tenant hereby assigns to
Landlord any interest it may have in or claim to all or any part of such sums,
other than any separate award which may be made with respect to Tenant's trade
fixtures and moving expenses and which does not reduce Landlord's award; Tenant
shall make no claim for the value of any unexpired Term.
24. SALE BY LANDLORD. In event of a sale or conveyance by Landlord of the
Building, the same shall operate to release Landlord from any future liability
upon any of the covenants or conditions, expressed or implied, contained in this
Lease, and in such event Tenant agrees to look solely to the successor in
interest of Landlord in and to this Lease. Except as set forth in this Article
24, this Lease shall not be affected by any such sale and Tenant agrees to
attorn to the purchaser or assignee. If any security has been given by Tenant to
secure the faithful performance of any of the covenants of this Lease. Landlord
shall transfer or deliver said security, as such, to Landlord's successor in
interest and thereupon Landlord shall be discharged from any further liability
with regard to said security.
25. ESTOPPEL CERTIFICATES. Within ten (10) days following any written request
which Landlord may make from time to time, in connection with the sale,
financing or refinancing of the Building, Tenant shall execute and deliver to
Landlord or its mortgagee or prospective mortgagee a sworn statement certifying:
(a) the date of commencement of this Lease; (b) the fact that this Lease is
unmodified and in full force and effect (or, if there have been modifications to
this Lease, that this lease is in full force and effect, as modified, and
stating the date and nature of such modifications); (c) the date to which the
rent and other sums payable under this Lease have been paid; (d) the fact that
there are no current defaults under this Lease by either Landlord or Tenant
except as specified in Tenant's statement; and (e) such other matters as may be
requested by Landlord. Landlord and Tenant intend that any statement delivered
pursuant to this Article 25 may be relied upon by any mortgagee, beneficiary or
purchaser and Tenant shall be liable for all loss, cost or expense resulting
from the failure of any sale or funding of any loan caused by any material
misstatement contained in such estoppel certificate.
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26. SURRENDER OF PREMISES.
26.1 Landlord shall, at least thirty (30) days before the last day of the
Term, arrange to meet Tenant for a joint inspection of the Premises.
26.2 At the end of the Term or any renewal of the Term or other sooner
termination of this Lease, Tenant will peaceably deliver up to Landlord
possession of the Premises, together with all improvements or additions upon or
belonging to the same, by whomsoever made, whether in the Premises or in, on or
to the Building, in the same conditions received or first installed, broom clean
and free of all debris, excepting only ordinary wear and tear and damage by fire
or other casualty. Tenant may, and at Landlord's request shall, at Tenant's sole
cost, remove upon termination of this Lease, any and all furniture, furnishings,
movable partitions of less than full height from floor to ceiling, trade
fixtures and other property installed by Tenant, including, but not limited to,
raised flooring, conduits, cabling, condensers, dry coolers, generators, pull
boxes, junction boxes, supplemental HVAC units, electrical equipment, fire
suppression systems, etc., title to which shall not be in or pass automatically
to Landlord upon such termination, repairing all damage caused by such removal.
Property not so removed shall, unless requested to be removed, be deemed
abandoned by the Tenant and title to the same shall thereupon pass to Landlord
under this Lease as by a bill of sale. All other alterations, additions and
improvements in, on or to the Premises shall be dealt with and disposed of as
provided in Article 6 hereof.
26.3 All obligations of Landlord and Tenant under this Lease not fully
performed as of the expiration or earlier termination of the Term shall survive
the expiration or earlier termination of the Term.
27. NOTICES. Any notice or document required or permitted to be delivered under
this Lease shall be addressed to the intended recipient, shall be transmitted
personally, by fully prepaid registered or certified United States Mail return
receipt requested by facsimile transmission, or by reputable independent
contract delivery service furnishing a written record of attempted or actual
delivery, and shall be deemed to be delivered when tendered for delivery to the
addressee at its address set forth on the Reference Page, or at such other
address as it has then last specified by written notice delivered in accordance
with this Article 27, or if to Tenant at either its aforesaid address or its
last known registered office or home of a general partner or individual owner,
whether or not actually accepted or received by the addressee.
28. TAXES PAYABLE BY TENANT. In addition to rent and other charges to be paid
by Tenant under this Lease, Tenant shall reimburse to Landlord, upon demand, any
and all taxes payable by landlord (other than net income taxes) whether or not
now customary or within the contemplation of the parties to this Lease: (a)
upon, allocable to, or measured by or on the gross or net rent payable under
this Lease, including without limitation any rental tax or excise tax levied by
the State, any political subdivision thereof, or the Federal Government with
respect to the receipt of such rent; (b) upon or with respect to the possession,
leasing, operation, management, maintenance, alteration, repair, use or
occupancy of the Premises or any portion thereof, including any sales, use or
service tax imposed as a result thereof; (c) upon or measured by the Tenant's
gross receipts or payroll or the value of Tenant's equipment, furniture,
fixtures and other personal property of Tenant or leasehold improvements,
alterations or additions located in the Premises; or (d) upon this transaction
or any document to which Tenant is a party creating or transferring any interest
of Tenant in this Lease or the Premises. In addition to the foregoing, Tenant
agrees to pay, before delinquency, any and all taxes levied or assessed against
Tenant and which become payable during the term hereof upon Tenant's equipment,
furniture, fixtures and other personal property of Tenant located in the
Premises.
29. DEFINED TERMS AND HEADINGS. The Article headings shown in this Lease are
for convenience of reference and shall in no way define, increase, limit or
describe the scope or intent of any provision of this Lease. Any indemnification
or insurance of Landlord shall apply to and inure to the benefit of all the
following "Landlord Entities", being Landlord, and the trustees, boards of
directors, officers, general partners, beneficiaries, stockholders, employees
and agents of each of them. In any case where this Lease is signed by more than
one person, the obligations under this Lease shall be joint and several. The
terms "Tenant" and "Landlord" or any pronoun used in place thereof shall
indicate and include the masculine or feminine, the singular or plural number,
individuals, firms or corporations, and their and each of their respective
successors, executors, administrators and permitted assigns, according to the
context hereof. The term "rentable area" shall mean the rentable area of the
Premises or the Building as calculated by the Landlord on the basis of the plans
and specifications of the Building including a proportionate share of any common
areas.
30. TENANT'S AUTHORITY. If Tenant signs as a corporation each of the persons
executing this Lease on behalf of Tenant represents and warrants that Tenant has
been and is qualified to do business in the state in which the Building is
located, that the corporation has full right and authority to enter into this
Lease, and that all persons signing on behalf of the corporation were authorized
to do so by appropriate corporate actions. If Tenant signs as a partnership,
trust or other legal entity, each of the persons executing this Lease on behalf
of Tenant represents and warrants that Tenant has complied with all applicable
laws, rules and governmental regulations relative to its right to do business in
the state and that such entity on behalf of the Tenant was authorized to do so
by any and all appropriate partnership, trust or other actions. Tenant agrees to
furnish promptly upon request a corporate resolution, proof of due authorization
by partners, or other appropriate documentation evidencing the due authorization
of Tenant to enter into this Lease.
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31. COMMISSIONS. Each of the parties represents and warrants to the other that
it has not dealt with any broker or finder in connection with this Lease, except
as described on the Reference Page. Tenant represents and warrants that it has
not dealt with a real estate broker, agent or finder in connection with this
Lease with the exception of the broker named in the Reference Pages to this
Lease whose commission Landlord agrees to pay. Landlord shall not pay a
commission or fee due any other brokers, agents or finders as a result of this
Lease. Tenant and Landlord agree to indemnify, defend and hold harmless the
other party hereto against and from all liabilities claims and damages arising
from any claim by any broker (other than said named broker), finder or agent
claiming to have dealt with Tenant in connection with this Lease.
32. TIME AND APPLICABLE LAW. Time is of the essence of this Lease and all of
its provisions. This Lease shall in all respects be governed by the laws of the
state in which the Building is located.
33. SUCCESSORS AND ASSIGNS. Subject to the provisions of Article 9, the terms,
covenants and conditions contained in this Lease shall be binding upon and inure
to the benefit of the heirs, successors, executors, administrators and assigns
of the parties to this Lease.
34. ENTIRE AGREEMENT. This Lease, together with its exhibits, contains all
agreements of the parties to this Lease and supersedes any previous
negotiations. There have been no representations made by the Landlord or
understandings made between the parties other than those set forth in this Lease
and its exhibits. This Lease may not be modified except by a written instrument
duly executed by the parties to this Lease.
35. EXAMINATION NOT OPTION. Submission of this Lease shall not be deemed to be
a reservation of the Premises. Neither Tenant nor Landlord shall be bound by
this Lease until each has received a copy of this Lease duly executed by Tenant
and has delivered to Tenant a copy of this Lease duly executed by Landlord, and
until such delivery Landlord reserves the right to exhibit and lease the
Premises to other prospective tenants. Notwithstanding anything to the contrary,
Landlord may withhold delivery of possession of the Premises from Tenant until
such time as Tenant has paid to landlord any security deposit required by
Article 5, the first month's rent as set forth in Article 3 and any sum owed
pursuant to this Lease.
36. RECORDATION. Tenant may not record or register this lease or a short form
memorandum of this Lease without the prior written consent of Landlord.
37. LIMITATION OF LANDLORD'S LIABILITY. Redress for any claim against Landlord
under this Lease shall be limited to and enforceable only against and to the
extent of Landlord's interest in the Building. The obligations of Landlord under
this Lease are not intended to and shall not be personally binding on, nor shall
any resort be had to the private properties of, any of its members, or its or
their trustees or board of directors and officers, as the case may be, its
manager, the general partners thereof, or any beneficiaries, stockholders,
employees, or agents of Landlord, the manager or the members.
38. MISCELLANEOUS.
38.1 Subject to compliance with all applicable governmental codes,
regulations and ordinances, including approval of Tenant's plans, Landlord
hereby grants Tenant the right to install up to a 500KW diesel fuel emergency
generator in a location deemed feasible by Landlord and Tenant, including an
associated 500 gallon diesel fuel-tank as necessary to support the generator on
the ground floor or roof of the Building. Subject to Landlord's approval of
Tenant's detailed plans as to method of installation and location, Landlord
shall permit Tenant, at its sole cost and expense, to install, use, operate and
maintain electrical and telecommunications conduits, condenser and fuel piping,
in the riser or other locations in, on or to the Building (as noted in Exhibit E
attached hereto (the "Designated Areas"), as necessary to connect to Tenants':
(a) emergency generator and fuel to each other and to the Premises; (b)
generator transfer switch for portable "roll-up" generator; (c)
telecommunication service providers, CLEC's, IXC's, and ILEC, etc.; (d) Telco
and Hogan grounds and; (e) GPS antenna on the roof. Tenant shall have the
ability to test its generator on a reasonable basis as recommended by the
manufacturer. In addition, Landlord may install a diesel fuel tank and/or
emergency generator and/or fuel pump (the "Emergency Facilities") to service
multiple Tenants of the Building. Should Tenant request to utilize Landlord's
Emergency Facilities, Tenant shall pay its proportionate share of the
installation, maintenance, repair and operation of the Emergency Facilities, in
which case Landlord and Tenant shall enter into a separate agreement which
governs its use, rules and regulations. Landlord will permit Tenant to install,
use, operate and maintain condensing units or dry coolers (sized to meet
Tenant's air conditioning requirements for operation of its system in a
designated area of the roof). In addition, Tenant shall have the right to tie
into the Building's existing ground field or, if the existing grid does not meet
Tenant's requirement, to install its own ground system. Nothing permitted in
this paragraph shall permit Tenant to interfere with other occupants' use of
similar facilities in their designated locations. Tenant's preapproved vertical
riser locations are designated on Exhibit E.
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38.2 Subject to compliance with all applicable governmental codes,
regulations and ordinances, including approval of Tenant's plans, Tenant shall
have the right to construct a dry pipe, pre-action system for the Premises,
including the right to relocate or encase any water mains or other water pipes
(whether or not related to fire safety) running through the Premises, at
Tenant's sole cost and expense and subject to Landlord's approval, not to be
unreasonably withheld. Tenant shall also have the right to install a FM 200 fire
suppression system in the Premises. Tenant shall not penetrate the floor or
ceiling on any floor of the Building with any water or liquid piping, supply or
drains, or install any pull boxes or junction boxes, without the Landlord's
expressed written approval of Tenant's detailed plans, which consent shall not
be be unreasonably withheld, conditioned or delayed.
38.3 Tenant shall be permitted to erect and operate, at its sole cost and
expense, and if Tenant does so erect, Tenant shall be required to maintain,
operate, repair and replace, at its sole cost and expense, one (1) GPS antenna
on the roof of the Building and to run necessary conduit and cabling from the
antenna to the Premises, provided that Tenant installs any screening device
requested by Landlord to insure the antenna cannot be viewed by the public.
Tenant shall have access to roof at all times, subject to Section 38.4, to
install, maintain, operate and repair the antenna and to the risers, floor space
and ceiling space to run the necessary cabling and conduit. Any antenna shall be
installed in a good and workmanlike manner and in compliance with all applicable
laws and plans approved by Landlord. Tenant shall indemnify and hold Landlord
harmless from and against any loss, cost, damage, claim or liability, including
loss or diminution of any roof warranties, that Landlord may suffer as a result
of Tenant's actions pursuant to this section. Landlord's approval shall not be
deemed to give Tenant the exclusive right to use the roof and shall not preclude
Landlord from granting similar rights to others. The rights of other tenants or
licensees shall be exercised without causing unreasonable interference with the
antennae and associated activities being carried on by Tenant. Similarly, the
rights of Tenant shall be exercised without causing interference with antennae
and associated activities being carried on by other tenants or licensees. Tenant
shall not change, substitute or materially alter the antennae or related
equipment agreed to herein without the prior written consent of Landlord, which
consent shall not be be unreasonably withheld, conditioned or delayed.
38.4 Landlord hereby grants Tenant access to the Premises, the roof, the
tunnel and the risers housing Tenant's wiring, conduit and cabling twenty four
(24) hours per day, three hundred sixty-five (365) days per year. However, if
access is needed to areas not otherwise available to Tenant during normal
business hours, Tenant must notify Landlord and Landlord will provide escorted
access, at Tenant's expense (if Landlord incurs any actual expenses). In
addition, Landlord shall give Tenant reasonable access to prearranged and
demised vertical risers exclusively allocated to such purposes to enable Tenant
to provide Tenant's telecommunications services and to interconnect to tenants
and other occupants of the Building in Designated Areas as shown on Exhibit E.
Tenant may install in the aforementioned risers, conduit and other such cabling
as set forth in Section 38.6(b) for its services within the Building. Tenant
shall have the right to permit its customers to collocate telecommunications
equipment in the Premises that are serviced and maintained by Tenant.
38.5 Tenant may use Landlord's approved contractors in connection with
Tenant's Improvements and may competitively bid to tenant finish contractors
acceptable to Landlord and to select and/or approve the successful contractor.
In the event of a renovation, Tenant shall have the right to use any of the
approved contractors and competitively bid the renovations in the same manner.
Landlord shall not charge any supervision or management fee, however, Tenant
shall be responsible for and reimburse Landlord for any actual and reasonable
out of pocket expenses relating to the approval, or review of Tenant's plans.
38.6 Landlord shall make the following available for Tenant's installation
or use which, if Tenant accepts, shall be installed, performed or used at
Tenant's sole cost and expense:
(a) 480/277 volt three-phase, 4 wire electrical service at the bus duct to
the floor of the Building in which the Premises is located, at
Landlord's costs (however Tenant shall pay all costs associated with
its connection to the electrical service, the disconnect switch,
meter, and associated utility costs. Pursuant to Paragraph 9 of
Exhibit B, the cost to provide 1250 amp service shall be borne by
Landlord. Tenant shall, prior to Landlord providing any electricity
for Tenant's use at the Premises (as described in subparagraph 13.1(f)
above), and installing the disconnect switch, supply Landlord with its
certified electrical load calculations and Landlord shall arrange for
the installation of a multimeter (in the case of a multi-tenant floor)
for the recording of electrical usage, and Tenant agrees to reimburse
Landlord for tenant's proportionate share of the cost of said
multimeter and disconnect switch if purchased and installed by
Landlord or Landlord's contractor. Notwithstanding the above, should
Tenant, during the term of the Lease, require additional electrical
service over and above its initial electrical load calculations,
Landlord shall cooperate and coordinate with Tenant to provide the
increased requirements, all in the same manner as described above for
Tenant's initial requirements.
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(b) Riser capacity, shown on Exhibit E, to enable Tenant to interconnect
with other occupants of the building without any additional cost or
fees from Tenant to Landlord. This does not imply that Landlord is
providing any conduit, cabling or other facilities for Tenant's
interconnection purposes. All of Tenant's conduits and cabling shall
be clearly labeled and tagged with Tenant's name and an emergency
contact phone number at each floor and at a maximum of twenty feet
apart. Tenant shall not allow any cabling or loose wiring to exist in
the Building, outside the Premises, except as otherwise permitted in
this Lease to be field verified and approved by Landlord, such
approval not to be unreasonably withheld. Landlord may also install
dedicated pull boxes (one or more for each tenant) for Tenant's
conduits at the floor of the Premises and at the basement level for
the purposes of coordinating and segregating the telecommunications
conduits within the Building. Tenant shall pay Landlord's actual costs
for the pull boxes.
(c) Ability to ventilate supplemental HVAC through louvers to the exterior
of the south side of the Building and Landlord shall provide Tenant
with Tenant's Proportionate Share of available space in the common
areas on the roof of the Building for Tenant's condenser/dry coolers
and generator on the roof of the Building. There shall be no
additional costs or feees from Tenant to Landlord for this service.
(d) Location for A/C grounding for Tenant's main distribution cabinets and
transformers. The ground will be chosen and installed by Tenant in a
grounding area selected by Landlord and feasible for Tenant's use in
accordance with Bellcore standards. There shall be no additional costs
or feees from Tenant to Landlord for this service.
(e) Existing slab to underside of concrete deck above has been measured at
a minimum 13'-0" clearance. There shall be no additional costs or
feees from Tenant to Landlord for this service.
(f) 5000# capacity freight elevator approximately 10'0"w x 6'0" interior.
There shall be no additional costs or feees from Tenant to Landlord
for this service.
(g) Loading dock. There shall be no additional costs or feees from Tenant
to Landlord for this service.
(h) Permission for Tenant to have diverse dual entrances into the Premises
for fiber optic cable service. Landlord will permit the use of or
installation of all conduits reasonably necessary to connect the fiber
optic cable service to the Premises, provided within the permissible
area shown on Exhibit E. Landlord shall not limit Tenant in its choice
of which telecommunication carrier to utilize. There shall be no
additional costs or feees from Tenant to Landlord for this service.
(i) Permission for Tenant to install and maintain on the roof of the
Building (in a location and manner reasonably approved by Landlord)
protection against damage by lightning to Tenant's telecommunications
equipment. There shall be no additional costs or feees from Tenant to
Landlord for this service.
38.7 Landlord's and Tenant's work shall each be performed in compliance
with the ADA.
38.8 Landlord shall provide within the passenger and freight elevators
accommodations to separately lock-out Tenant's floor subject to Landlord's
security and aesthetic requirements. Landlord shall provide a guard twenty-four
(24) hours a day, and a security system for the Building operated seven (7) days
per week 24 hours a day. Tenant shall have the right to install its own security
system in the Premises. Building shall be fully sprinkled, to the extent
required by applicable law.
38.9 Prior to the commencement of Tenant's initial alterations to the
Premises and the Building (collectively, the "Initial Alterations"), Tenant
shall deliver the plans and specifications to Landlord for its written approval,
which approval shall not be unreasonably withheld or delayed. Tenant's plans and
specifications for Tenant's Initial Alterations must comply with all applicable
laws, introduce no hazardous materials into the Building (other than batteries
and diesel fuel to be stored in the tank and generator permitted hereunder),
impose on Landlord no additional ADA compliance requirements within the Building
or the Premises, and be reasonable and compatible with the systems and structure
of the Building. Tenant shall deliver to Landlord a report from a structural
engineer that all of Tenant's Initial Alterations comply with building
structural capacities, applicable laws and codes. Landlord shall respond to
Tenant's request for approval of Tenant's plans and specifications within ten
(10) business days after receipt thereof. In the event Landlord shall not
approve the plans and specifications, Landlord shall notify Tenant of its
objections thereto. Landlord and Tenant shall thereafter work cooperatively and
in good faith to reach agreement upon mutually acceptable plans and
specifications. Tenant shall pay all Landlord's reasonable third party
engineering and out of pocket expenses relating to the review of Tenant's plans
and specifications related to the Initial Alterations. Tenant at its sole cost
and expense shall obtain any permits, licenses, variances, or other approvals
required with respect to the installation or operation of the improvement,
equipment, cabling or wiring to be installed by Tenant or to the alterations to
be
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performed by Tenant. Tenant shall deliver true and complete copies thereof to
Landlord prior to permit application and commencing any improvement or
alteration. Tenant, its contractors and/or agents shall not tie into, disrupt,
disengage, terminate, or violate any building systems, fire protection, fire
alarm, security, HVAC, electrical, etc., unless coordinated, scheduled in
advanced and approved with the Buildings' engineer, manager and contractor to
assure integrity with the system and continued applicability of the Buildings'
warranties and guaranties. Any violation of the above is subject to default
under this Lease.
38.10 Provided no Event of Default hereunder has occurred and is
continuing, Tenant shall have continuing rights of first offer to lease the
balance of the 3rd floor, in the Building which is contiguous to the Premises
and which may become available on and after the date of this Lease. At such time
that Landlord has knowledge that such space ("Offered Space") is or will become
available, Landlord will give Tenant notice (the "Offering Notice") of the terms
and conditions Landlord would be willing to accept with respect to the Offered
Space (including, without limitation, the proposed rent, additional rent, scope
of Landlord's proposed tenant improvements, location and floor area), and Tenant
shall have five (5) business days within which to respond to Landlord's offer.
In the event Tenant elects to accept Landlords' offer, then Tenant shall notify
Landlord of such election by giving notice to Landlord during such five (5) days
period and Landlord and Tenant shall thereupon enter into an amendment to this
Lease for the leasing of the Offered Space, which amendment shall contain (i)
the terms and conditions set forth in the Offering Notice, (ii) provide that the
term thereunder shall expire or sooner terminate contemporaneously with the
expiration or sooner termination of the Term hereof, and (iii) contain such
other terms and provisions as either Landlord or Tenant may reasonably require
in order to effectuate the incorporation of the Offered Space into the Premises
and to otherwise effectuate the intent of this Section 38.10. Should Tenant
decline Landlord's offer or fail to respond thereto, then, and in such event,
Tenant shall have been deemed to have waived any prospective rights of first
offer to the Offered Space and Landlord may lease the Offered Space to any other
party on the same terms and conditions set forth in the Offering Notice. If
Tenant declines Landlord's offer or fails to respond thereto, Landlord may not
lease the Offered Space to any other party on any terms other than those set
forth in the Offering Notice without first offering it to Tenant on those terms.
38.11 Thirty (30) days after fulfillment of the requirements set forth
below, Landlord agrees to pay to Tenant $240,000.00 ($20.00/sf) as and for
Landlord's contribution to Tenant's Work ("Construction Allowance").
A) Completion of Tenant's work in accordance with approved plans and
specifications in a manner reasonably satisfactory to Landlord or
Landlord's Architect.
B) Presentation to Landlord of the following:
i) General Contractor's executed and notarized final waiver of
Lien/affidavit form listing all subcontractors and material
suppliers and the amounts they were paid for work and materials
supplied for the Premises which equal or exceed the Construction
Allowance;
ii) Executed and notarized final Waiver of Lien/Affidavit form from
HVAC, plumbing, electrical, drywall/carpentry subcontractors and
material suppliers;
iii) Waivers/Affidavits must be satisfactory to Landlord.
C) Presentation to Landlord of a Certificate of Occupancy.
D) Tenant shall have paid to Landlord the first monthly installment of
Annual Rent.
E) Tenant shall have not been in default under the terms and conditions
of this Lease.
38.12 Tenant shall have the right to display its signage at the entrance to
its Premises. In addition, Landlord shall provide and pay for all standard
building directory ground floor lobby signage for Tenant.
38.13 Tenant acknowledge there is no on-site parking, and Landlord shall
arrange for four (4) parking spaces off-site for Tenant at Tenant's sole cost
and expense, within a one (1) block radius of the Premises.
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38.14 As required by Section 404.56(6), Florida Statutes, the following
notification is made regarding radon gas: Radon is a naturally occurring
radioactive gas that, when it has accumulated in a building in sufficient
quantities, may present health risks to persons who are exposed to it over time.
Levels of radon that exceed federal and state guidelines have been found in
buildings in Florida. Additional information regarding radon and radon testing
may be obtained from your county public health unit.
<TABLE>
<S> <C>
LANDLORD: TENANT:
36 North East Second Street, L.L.C. Startec Global Communications Corporation
By:
By: /s/ By: /s/ Prabhav V. Maniyar
Title: Manager Title: Secretary, Sr. VP & CFO
Dated: 10/29/98 Dated: 10/28/98
Witnesses: Witnesses:
/s/ /s/
</TABLE>
21
EXHIBIT 21.1
SUBSIDIARIES
Startec Global Operating Company
Startec Global Licensing Company
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into Startec Global Communications
Corporation's previously filed Registration Statement on Form S-8, File No.
333-44317.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 81,456
<SECURITIES> 0
<RECEIVABLES> 43,029
<ALLOWANCES> (2,659)
<INVENTORY> 0
<CURRENT-ASSETS> 4,600
<PP&E> 47,018
<DEPRECIATION> (3,493)
<TOTAL-ASSETS> 225,982
<CURRENT-LIABILITIES> 45,012
<BONDS> 158,022
0
0
<COMMON> 90
<OTHER-SE> 15,390
<TOTAL-LIABILITY-AND-EQUITY> 225,982
<SALES> 161,169
<TOTAL-REVENUES> 161,169
<CGS> 141,176
<TOTAL-COSTS> 141,176
<OTHER-EXPENSES> 30,649
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (12,830)
<INCOME-PRETAX> (18,060)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,060)
<DISCONTINUED> 0
<EXTRAORDINARY> (514)
<CHANGES> 0
<NET-INCOME> (18,574)
<EPS-PRIMARY> (2.08)
<EPS-DILUTED> (2.08)
</TABLE>
