UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________ to __________
Commission File Number 1-13433
-------------------------------------------------------
EXCEL COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
-------------------------------------------------------
Delaware 75-2720091
{State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
8750 North Central Expressway, Suite 2000, Dallas, Texas 75231
(Address of principal executive offices) (Zip Code)
(214) 863-8000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each Class on which registered
Common Stock, $.001 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any adjustment to
this Form 10-K. [x]
The aggregate market value of the voting stock (which consists solely of shares
of Common Stock) held by non-affiliates of the registrant as of March 23, 1998,
computed by reference to the closing sales price of the registrant's Common
Stock on the New York Stock Exchange on such date, was approximately
$1,170,430,530.
As of March 23, 1998, the registrant had outstanding 131,946,080 shares of $.001
par value common stock.
The following documents are incorporated by reference into the part of this
annual report on Form 10-K as indicated:
Portions of the registrant's definitive Proxy Statement for the 1998 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
Exhibit Index on Page 50
<PAGE>
EXCEL COMMUNICATIONS, INC.
1997 ANNUAL REPORT ON FORM 10-K
Table of Contents
Page
PART I No.
Item 1. Business........................................... 5
Item 2. Properties......................................... 13
Item 3. Legal Proceedings.................................. 13
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters...................... 15
Item 6. Selected Financial Data............................ 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 18
Item 8. Financial Statements and Supplementary Data........ 27
Item 9. Changes in and Disagreements With Accountant
on Accounting and Financial Disclosures.......... 45
PART III
Item 10. Directors and Executive Officers of the Registrant. 45
Item 11. Executive Compensation............................. 45
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................... 45
Item 13. Certain Relationships and Related Transactions..... 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.............................. 45
Signatures...................................................... 46
Index to Exhibits............................................... 49
<PAGE>
PART I
Item 1. Business
EXCEL Communications, Inc. is a Delaware corporation and the parent company
of Excelcom, Inc. ("Excelcom"), previously EXCEL Communications, Inc., which was
formed in 1988 and commenced operations in 1989. On October 14, 1997, EXCEL
Communications, Inc. succeeded to the businesses of Excelcom and Telco
Communications Group, Inc. ("Telco"), a facilities-based provider of long
distance telecommunications services, pursuant to the Agreement and Plan of
Merger dated as of June 5, 1997 (the "Merger"). The Merger creates the fifth
largest long distance company in the United States based on the number of
presubscribed lines, with pro forma consolidated annualized revenues of
approximately $2 billion, 11 billion annualized long distance minutes of usage,
6.0 million customers, and approximately 100,000 network miles of DS-3 capacity.
All references to the "Company" or "EXCEL" refer to EXCEL Communications, Inc.
and include its subsidiaries and predecessors.
EXCEL provides long distance telecommunications and paging services to both
residential and commercial customers in the United States. The Company has
developed several marketing channels which include direct sales to residential,
commercial and wholesale customers through independent representatives ("IRs"),
dealers and direct sales personnel in addition to direct mail marketing of
several dial around products. These multiple distribution channels which target
both residential and commercial customers are a key element of the Company's
business strategy as they allow the Company to balance its network traffic
capacity and provide multiple avenues for growth.
The Company's presubscribed residential services are marketed primarily
through a network marketing system of IRs, whereby the IRs are encouraged to
recruit subscribers with whom they have an ongoing relationship. This network
marketing system has been selected by the Company because the Company believes
it reduces net marketing costs, subscriber acquisition costs, and subscriber
attrition. Historically, IRs have predominantly sold residential and small
business products, although the Company has recently introduced enhanced
commercial products to be sold by the IRs. The Company believes that its
commercial revenues as a percentage of total revenues will increase during 1998.
EXCEL markets its residential dial around products and services through Dial &
SaveSM, Long Distance Wholesale ClubSM, and Telco ChoiceSM programs. Dial around
customers access the network by dialing a unique five-digit Carrier
Identification Code ("CIC Code") before dialing the number they are calling.
Dial around customers can use EXCEL's services at any time without changing
their existing presubscribed long distance carrier. EXCEL also sells
presubscribed telecommunications services to wholesale and commercial customers
using a direct sales force and an independent dealer organization through its
Commercial Sales Division ("CSD"). As of December 31, 1997, CSD had opened 27
sales offices and employed or contracted with approximately 311 direct sales
personnel, 117 sales management personnel, 275 active dealers and 19 telesales
agents. For the fourth quarter of 1997, CSD's revenues were $56.4 million.
EXCEL has approximately 3,000 employees who support the corporate, network
management, billing, teleservices and marketing functions of the Company. The
Company's revenues were $506.7 million for 1995, $1.4 billion for 1996, and $1.5
billion for the year ended December 31, 1997. The Company's pricing structure is
regularly reviewed so that subscribers of the Company's long distance service
generally pay less than they would for long distance service from other major
carriers.
The Company bills the majority of its presubscribed residential customers
and its dial around customers primarily through local exchange carrier ("LEC")
billing and collection agreements which enable the Company to place its charges
on the monthly local phone bills of its customers. The Company has agreements
with LECs, including all of the Regional Bell Operating Companies ("RBOCs"),
that cover substantially all of the switched access lines in the United States.
Commercial customers are billed directly by the Company. The Company plans to
directly bill a larger percentage of its residential customers in future
periods.
The Company's Telco subsidiary operates a nationwide telecommunications
network consisting of seven switches, leased transmission lines and
sophisticated network management systems designed to optimize traffic routing.
This switch-based network currently consists of DSC DEX 600S, 600 and 600E
switches located in Washington, D.C.; Fort Lauderdale, Florida; Davenport, Iowa;
Chattanooga, Tennessee; Austin, Texas; Las Vegas, Nevada and New York, New York.
An additional two switches in Los Angeles, California and Cleveland, Ohio are
being deployed in the first half of 1998. During 1998, the Company intends to
migrate onto this network a substantial portion of its traffic currently being
carried by third parties.
In February 1998, the Company received its charter for a federal savings
bank to be located in Dallas, Texas ("FirstEXCEL, F.S.B." or "FirstEXCEL").
FirstEXCEL will offer banking services to EXCEL's IRs and employees, as well as
the community at large. The Company expects FirstEXCEL to be fully operational
and open to the public in the second half of 1998.
<PAGE>
Industry Background
The present long distance telecommunications marketplace was principally
shaped by the 1984 divestiture by AT&T Corp. ("AT&T") of its 22 Bell Operating
Companies (''BOCs''). As part of the AT&T Divestiture Decree (''the AT&T
Decree''), the United States was divided into geographic areas known as Local
Access Transport Areas (''LATAs''). The LECs, which include the Bell Operating
Companies and independent LECs, provide local telephone service, local access
services and short-haul toll service. Interexchange carriers (''IXCs''),
including the Company, and certain independent local exchange carriers provide
long distance service between LATAs (interLATA traffic) and within LATAs. The
current structure of the industry is subject to change as the impacts of the
recently enacted Telecommunications Act of 1996 are realized. See
''Regulation,'' and ''Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Impact of New Telecommunications
Legislation.''
According to a recent Federal Communications Commission (''FCC'') report,
revenues of the U.S. long distance telecommunications industry were
approximately $82 billion in 1996. The industry is highly competitive and is
dominated by four carriers, AT&T, MCI Telecommunications Corp. ("MCI"), Sprint
Corporation ("Sprint"), and WorldCom, Inc. (''WorldCom'') which together in 1996
accounted for approximately 83% of the overall market according to a recent FCC
report. The remainder of the market share is held by several large regional long
distance companies, some with national capabilities such as the Company,
Frontier Communications Services, Inc. (''Frontier''), Cable & Wireless
Communications, Inc., and LCI International, Inc., and by several hundred
smaller companies. According to this FCC report, while industry revenues grew at
a compound annual rate of over 7% during the period from 1989 through 1996, the
revenues of all carriers other than AT&T, MCI, Sprint, and WorldCom grew in the
aggregate at an annual compound rate of over 20% during the same period.
Products and Services
Presubscribed Residential Services
The Company currently offers several discounted residential products to its
presubscribed residential customers. Its primary "1-plus" product offers
residential customers a flat rate service which the Company believes competes
favorably against flat rate programs offered by other major long distance
service providers. In addition, the Company offers several residential products
which provide discounts based on time-of-day. The Company also offers an 800/888
service product to its residential subscribers, which allows subscribers to call
home on an 800/888 number or provide a toll-free number for family members to
call home, in addition to calling card services, international service and
directory assistance.
Dial Around Residential Service
In addition to presubscribed residential service, the Company also offers
residential dial around services. Customers access the Company's network by
dialing a five-digit code before the number they are calling, and, therefore,
are not required to permanently change or cancel their existing long distance
carrier in order to use the Company's service. The Company's dial around rates
offer customers savings off of the basic direct dialed "1-plus" rates and the
competitive flat rates charged by AT&T, MCI, and Sprint.
Commercial Services
Current products include long distance, calling card, call accounting,
enhanced billing services, and 800/888 services. In addition to competitive
rates and a wide variety of products, the Company is able to offer business
customers a highly specialized direct bill summary package that includes call
summaries by service type, call type, originating number, account code, area
code, country code, time-of-day and most frequently called numbers.
CSD also sells dedicated circuits to commercial customers and wholesale
transmission capacity and services to other long distance carriers. The Company
believes that the combination of a nationwide network and data processing
resources provides an opportunity for continuing growth through the wholesaling
of one-stop telecommunications services to long distance resellers. The Company
offers a complete package of networking, billing and customer service,
eliminating the need for resellers to coordinate with multiple vendors and
giving them the ability to obtain all of their long distance services from a
single source. Additionally, the Company provides reseller clients with a
customized version of its customer account database software, the TelePhone
Maintenance system. While revenue per minute from wholesale service sales is
generally lower than the Company's average sales to end users, the cost of sales
and overhead involved in servicing carrier customers is also lower. Moreover,
the Company has used the wholesale market to more fully utilize its network
during the daytime hours, the busiest time of day for many of the Company's
carrier and reseller customers.
<PAGE>
Paging
In March 1996, the Company entered into a Reseller Agreement (the
''Reseller Agreement'') with PageMart, Inc. (''PageMart''), which is in the
business of providing paging and wireless communications products and services.
Under the Reseller Agreement, PageMart is required to provide, on a
non-exclusive basis, paging products and services to the Company, including
Narrowband PCS products when they become available to PageMart's customers,
which may be resold nationwide by the Company to its paging subscribers under
the common law service mark ''EXCELPaging.''
In October 1996, the Company began offering both alphanumeric and numeric
pagers to its subscribers through the IRs. The paging services range from local
to national, and the Company offers a range of value-added paging services,
including voice mail, universal 800, and personal assistant greetings.
Billing and Data Processing
Since its inception, the Company has billed a majority of its residential
traffic through LECs. The Company has entered into billing and collection
agreements with LECs, including all of the RBOCs, that cover substantially all
of the switched access lines in the U.S. These agreements permit the Company to
place its customers' call detail records on the customers' regular monthly local
phone bill. The Company also provides billing clearinghouse services to other
unaffiliated long distance carriers.
Tel Labs, Inc. ("Tel Labs"), a wholly-owned subsidiary offering billing
services, processes raw switch data into a format that can be used to produce
end-user billing invoices. This data processing is executed on specially
designed personal computers operating a proprietary software program. Tel Labs
receives certain raw call records directly from the switches, and prepares them
for rating by determining the answer status, originating location, terminating
location and mileage. The calls are then rated according to standard rates or
according to customer specific rates, if applicable. Rated calls are then sorted
depending on which LEC will actually bill the end-user and placed in an industry
standard format ("EMI"). Tel Labs then prepares management reports which provide
the Company with the total number of calls, minutes and dollars billed during
that billing cycle.
Marketing
Presubscribed Residential Products and Services
The Company markets presubscribed residential services through a nationwide
network of IRs. The Company encourages IRs to enroll subscribers with whom the
IRs have an ongoing relationship as a result of being a family member, friend,
business associate, neighbor, or other acquaintance. The Company also
encourages, but does not require, the IRs to use the Company's products and
services and to communicate the results of their use of such products and
services to their subscribers. This network marketing system has been selected
by the Company because the Company believes it reduces net marketing costs,
subscriber acquisition costs, and subscriber attrition. The Company believes
that subscribers will be more likely to remain with the Company because they
have been enrolled with the Company by someone with whom they have an ongoing
relationship. The Company also believes that its network marketing system will
continue to build a base of potential subscribers for additional services and
products. The Company does not require a person to be an IR in order to be a
subscriber. The Company's network marketing system is particularly attractive to
prospective IRs because of the potential for supplemental income and because the
IRs are not required to purchase any inventory, have no monthly sales quotas or
account collection issues, have minimal paperwork, and have a flexible work
schedule. The sales efforts of IRs are supported through various means,
including Company-sponsored training held periodically throughout the year and
motivational satellite broadcast television shows broadcast four times a week.
IRs are compensated based on the acquisition of subscribers and their long
distance usage and paging air time usage. IRs receive subscriber acquisition
commissions only after, among other things, subscribers sign up for the
Company's long distance service or paging service. IRs receive commissions on
the long distance usage and paging air time usage of subscribers who they have
personally signed up. In addition, while the Company does not pay a commission
to IRs for introducing new IRs to the Company, IRs do receive subscriber
acquisition commissions and long distance and paging air time usage commissions
for subscribers signed up by certain other IRs they have recruited directly
themselves or indirectly, as in the case of subscribers recruited by other IRs
in their downline. Certain performance criteria must be maintained in order to
qualify to receive all such commissions.
The Company provides training to all IRs who have purchased the optional
management services program. The training includes a detailed explanation of the
Company's products, the IR compensation plan, and the use of the various
marketing tools available to the IR. The Company publishes a monthly newsletter
for the IRs providing informative and motivational articles (the
''Communicator''), as well as recognizing IR achievements. The Communicator
allows the Company to keep the IRs up to date on new promotions, products,
developments, and changes to the Company's policies and procedures. The Company
also offers for sale through its catalogs a wide variety of marketing tools,
audio and videotapes, visual aids, desk accessories, and clothing and novelty
items designed to assist IRs in their marketing efforts and to promote name
recognition of the Company. The Company regularly updates its marketing
materials to reflect the Company's available services and products and timely
information about the Company. The Company holds an annual convention, known as
''ExcelebrationTM,'' for IRs each year. This event provides recognition to the
top performers, direct access to senior management, and a chance for IRs to
share experiences and develop support systems. The Company also participates
throughout the country in rallies that current IRs and potential new IRs attend
to learn more about the Company.
To service its IR base, the Company is currently operating a service center
staffed by service agents who have automated systems to answer IR questions and
provide IR support. This system includes a current database of all IRs, their
downlines, and their subscribers. The Company also maintains an interactive
voice recognition system that allows IRs 24-hour access to information through
their touch-tone phones. In addition, the Company has developed a proprietary
commission processing system to process the high volumes of data necessary to
calculate commissions on long distance and paging usage, commissions on the
acquisition of long distance and paging subscribers, and commissions on IR
training. This system incorporates the provisions of the Company's marketing
program to prepare monthly downline reports and commission payment details to
IRs.
Residential Dial Around Products and Services
The Company's residential dial around products are marketed through
marketing subsidiaries under the Dial & SaveSM, Telco ChoiceSM, and Long
Distance Wholesale ClubSM brand names. The brands are differentiated by rate
structure and marketing approach, and the Company believes that its multi-brand
strategy heightens market penetration by broadening customer exposure to dial
around and appealing to different segments of the population.
The Company markets these products and services primarily through direct
mail pieces that seek to educate potential customers regarding dial around and
its benefits. Direct mail is targeted towards residential customers within a
specified geographic region and includes a service explanation and dialing
instructions, a general pricing comparison and a set of reminder stickers
highlighting the Company's CIC Codes for customers to keep near their telephone.
Prospective customers do not need to sign-up or call the Company to take
advantage of its discounted service offerings upon receiving a Company mail
solicitation. The Company works with various outside advertising agencies to
design the copy and creative components of the direct mail marketing pieces and
contracts with various vendors of mail shop and printing services in an effort
to ensure that mail is sent out in a timely and cost-effective manner. The
Company's data processing resources allow for prompt monitoring of customer long
distance usage and permit the Company to carefully measure response rates to its
direct mail campaigns. The Company constantly strives to improve response rates
by varying the design and components of its direct mail marketing packages, and
seeks to engineer the timing of its initial and follow-on direct mail campaigns
to maximize response rate and grow overall market penetration. In addition, the
Company also utilizes other media to supplement direct mail.
Commercial Products and Services
The Company markets its commercial products and services through a direct
commercial sales force of approximately 311 sales representatives, 117 sales
management personnel and an independent dealer organization consisting of
approximately 275 active dealers. These sales representatives and dealers office
out of regional sales offices which are located in major metropolitan areas
throughout the United States. In addition, IRs who have historically sold
residential and small business products, recently began marketing the Company's
commercial products and services with the help of trained commercial sales
representatives. The Company's sales representatives and IRs target a full range
of small and large business owners and market the Company's services through
personal contacts which emphasize customer service, term plans, network quality,
value-added services, reporting, rating and promotional discounts. Sales
representatives are compensated in the form of salary plus commission while IRs
are paid commissions based upon the acquisition of customers and the customers'
long distance usage.
Subscriber Care
The Company strives to provide high quality subscriber care and support and
believes that personal contact with its subscribers through IRs, sales
representatives, and customer service representatives is a significant factor in
subscriber acquisition and retention. The Company encourages IRs and sales
representatives to contact each of their subscribers on a monthly basis to keep
the subscriber satisfied with the Company's long distance and paging service.
The Company operates four customer service centers staffed by the Company's
customer service employees, who have completed a certification and training
program provided by the Company. To enhance the effectiveness of the customer
service representatives, the Company, in addition to the initial training
program, provides ongoing training to all customer service representatives. The
Company's customer service department uses on-line, real-time automated systems
that provide notes from all prior contacts with the subscriber, and provide a
complete account and payment history for subscribers directly billed by the
Company. Through this proprietary contact management software, the Company is
able to provide a high level of subscriber care. The Company also provides
subscriber support on a multilingual basis.
Network and Operations
The Company's Telco subsidiary operates a nationwide telecommunications
network consisting of seven switches, leased transmission lines and
sophisticated network management systems designed to optimize traffic routing.
This network currently originates traffic in all or some part of 48 states and
the District of Columbia and operates as an "open network", meaning that any
individual within the Company's originating service area whose LEC provides
equal access can access the Company's long distance network by dialing either of
the Company's CIC codes, or by presubscribing to the Company as their long
distance service provider.
The network provides high quality, reliable transmission and switching. The
Company's network surveillance capabilities, including self-diagnostic software,
generally enable the Company to anticipate and correct problems before they
result in service interruption. The Company's technicians remotely monitor the
Company's entire network 24 hours a day, 7 days a week, from its Network Control
Centers. To reduce the potential impact of any equipment or transmission
failure, the Company can reroute or restore transmissions through the Company's
standby transmission facilities or reroute traffic over the networks of other
carriers. The Company's technicians also monitor the network for fraud on a
real-time basis, using computer systems that detect unusual or high volume
calling patterns.
Switching Facilities
The Company's Telco subsidiary currently operates seven DSC Communications
Corporation ("DSC") DEX 600S, 600 and 600E digital telecommunications switches
in Fort Lauderdale, Florida; Davenport, Iowa; Chattanooga, Tennessee; Austin,
Texas; Washington, D.C.; Las Vegas, Nevada and New York, New York. An additional
two switches in Los Angeles, California and Cleveland, Ohio are being deployed
in the first half of 1998. Switches are digital computerized routing facilities
that receive calls, route calls through transmission lines to their destination
and record information about the source, destination and duration of the calls.
In order for a call to be completed through a switch, there must be two ports
available -- an incoming port and an outgoing port. For example, if a switch is
equipped with 30,000 ports, the switch can accommodate up to 15,000 simultaneous
telephone calls. The Company's switches are currently configured with 13,824 to
51,840 equipped ports. The Company's DEX 600 switches can be expanded to a
configuration with 30,720 equipped ports while the Company's DEX 600E switches
can be expanded to a configuration with 107,520 equipped ports.
The Company continually evaluates the capacity and location of the switches
based on current and projected customer traffic. In order to maximize the
efficiency of the network, the Company has recently entered into an agreement
for the purchase and installation of multiple DSC advanced switching platforms.
These technologically advanced switches will increase network capacity and
broaden service offerings. Specifically, the DSC products include the MegaHubR
600E tandem switching systems as well as the elements from its intelligent
network ("IN") product line such as the DSC INfusionSM Signal Transfer Point
(STP) W/2 systems, along with other network applications.
Transmission Lines
The Company owns approximately 100,000 network miles of DS-3 capacity
(under a long-term right to use agreement) and also leases additional
transmission lines from a variety of facilities-based and resale long distance
carriers. The Company's contracts with these entities typically have terms
ranging from 12 to 60 months. The Company supplements its leased "on-network"
capacity with "off-net" services from a variety of resale and facilities-based
long distance carriers. In addition, the Company does not have any on-network
international network arrangements and exclusively resells the network capacity
of other resale and facilities-based long distance carriers to international
destinations.
Network Management Systems
Once calls are originated and routed over leased digital, transmission
facilities to the Company's nearest switch location and then routed on a
least-cost basis to either the Company's leased network or to an off-net
supplier for termination. The Company utilizes Digital Access Cross Connect
Systems ("DACS") to electronically cross-connect circuits thereby increasing
call routing and circuit provisioning efficiency and providing better network
monitoring capabilities. The Company has installed Tellabs ABS Titan 5500 3/1
and 530 1/0 DACS equipment on all switches. In addition, the Company has
configured a large portion of the network with Signaling System 7 Common Channel
Signaling ("SS7"). This network protocol reduces connect time delays and
provides additional technical capabilities and efficiencies for call routing.
The Company is currently in the process of deploying SS7 in additional portions
of the network.
Carrier Agreements
The Company currently has agreements with Frontier, IXC Long Distance, Inc.
("IXC Long Distance"), MCI, and WorldCom to provide switching services and
network transmission of its long distance traffic. The agreements with IXC Long
Distance, MCI, and WorldCom each contain minimum usage commitments, while the
agreement with Frontier provides for Frontier to be the exclusive carrier for
certain calling card calls and personal 800 service. The Company is currently
meeting all minimum commitments under these contracts.
Competition
The long distance telecommunications market is highly competitive. The
principal competitive factors affecting the Company's market share are pricing,
customer service, and diversity of products, services and features. The
Company's ability to compete effectively will depend on its continued ability to
maintain high quality, market-driven services at prices generally equal to or
below those charged by its competitors.
Several of the Company's competitors are substantially larger and have
substantially greater financial and technical resources. As the Company grows,
it expects to face increased competition, particularly from AT&T, MCI, and
Sprint. The Company also competes with regional IXCs and resellers for interLATA
long distance services and with local exchange carriers for interLATA and
intraLATA long distance services. The Company's pricing strategy is to keep its
rates generally below those of AT&T, MCI, and Sprint. Competition within the
industry is expected to increase as a result of LECs being permitted to provide
long distance service as a result of the passage of the Telecommunications Act
of 1996. See ''Regulation.''
Legislative, judicial, and technological factors have helped to create the
foundation for smaller long distance providers to emerge as viable competitive
alternatives to AT&T, MCI, and Sprint for long distance telecommunication
services. The FCC has required that all IXCs allow the resale of their services,
and the AT&T Decree substantially eliminated different access arrangements as
distinguishing features among long distance carriers. In recent years, national
and regional network providers have substantially upgraded the quality and
capacity of their domestic long distance networks, resulting in significant
excess transmission capacity for voice and data communications. Due to
anticipated advances in telecommunications transmission technology, the Company
expects the resale of excess transmission capacity to continue to be an
important factor in long distance telecommunications.
Regulatory Developments
The 1996 Telecommunications Act opens the local phone services market to
competition by requiring LECs to permit interconnection to their networks and
establishing, among other things, LEC obligations with respect to unbundled
access to network elements, resale, number portability, dialing parity, access
to rights-of-way, and mutual compensation. The legislation also codifies the
LECs' equal access and nondiscrimination obligations and preempts inconsistent
state regulation. In addition, the legislation contains special provisions that
eliminate the AT&T Decree and the GTE Decree, thereby eliminating certain
restrictions on the BOCs and GTE Operating Companies (''GTOCs'') from providing
long distance services and engaging in telecommunications equipment
manufacturing. These new statutory provisions permit the BOCs to enter the long
distance market under certain circumstances. As of the date of enactment of the
legislation, a BOC is no longer restricted from providing interLATA long
distance service outside of those markets in which it provides local exchange
service (referred to as ''out-of-region'' long distance service). A BOC may
provide long distance service within the regions in which it also provides local
exchange service (referred to as ''in-region'' service) if it satisfies certain
procedural and substantive requirements and upon obtaining FCC approval on a
state-by-state basis. The GTOCs are permitted to enter the long distance market
as of the date of enactment without regard to limitations by region, although
the necessary state and/or federal regulatory approvals that are otherwise
applicable to the provision of intrastate and/or interstate long distance
service will need to be obtained, and the GTOCs are subject to the provisions of
the 1996 Telecommunications Act that impose interconnection and other
requirements on LECs.
The Company expects that some or all of the BOCs will seek to provide
out-of-region long distance service. Certain of them have already taken steps to
provide out-of-region service in multiple states. It is not known when, and
under what specific condition, other applications will be granted by the state
regulatory commissions in those states. Several of the BOCs have unsuccessfully
sought authority from the FCC to provide in-region long distance service in
various states. While no application has yet been granted by the FCC, it is
expected that most or all of the BOCs will eventually be granted authority to
provide in-region long distance service in many or all states.
As required by the 1996 Telecommunications Act, in August 1996, the FCC
adopted new rules implementing certain provisions of the 1996 Telecommunications
Act (the ''Interconnection Orders''). These rules are designed to implement the
pro-competitive, deregulatory national policy framework of the new statute by
removing or minimizing the regulatory, economic, and operational impediments to
competition for facilities-based and resold local services, including switched
local exchange service. Although setting minimum, uniform, national rules, the
Interconnection Orders also rely heavily on states to apply these rules and to
exercise their own discretion in implementing a pro-competitive regime in their
local telephone markets. The Interconnection Orders are primarily important to
the Company at this time insofar as they establish the basis for the cost to the
Company of providing resold local services. Consistent with the 1996
Telecommunications Act, the Interconnection Orders require incumbent LECs to
offer their telecommunications services at retail prices minus avoided costs.
The Interconnection Orders also require, among other things, that intraLATA
presubscription (pursuant to which LECs must allow customers to choose different
carriers for intraLATA toll service without having to dial extra digits) be
implemented no later than February 1999. Portions of the Interconnection Orders
were struck down by the U.S. Eighth Circuit Court of Appeals in 1997, but the
United States Supreme Court has agreed to review the lower court decision. The
Supreme Court is expected to issue a decision in the first half of 1999. In the
meantime, certain of the rules adopted in the Interconnection Orders, including
rules that concern the wholesale pricing of local services, cannot be
implemented. Nevertheless, the Company generally believes the trend toward
increased competition and deregulation of the telecommunications industry will
be accelerated by the 1996 Telecommunications Act and subsequent developments.
The 1996 Telecommunications Act also addresses a wide range of other
telecommunications issues that will potentially impact the Company's operations,
including provisions pertaining to regulatory forbearance by the FCC; the
imposition of additional liability for the unauthorized switching of
subscribers' long distance carriers; the creation of new opportunities for
competitive local service providers; provisions pertaining to interconnection;
provisions pertaining to universal service and access charge reform; and
requirements pertaining to the treatment and confidentiality of subscriber
network information. The legislation requires the FCC to conduct a large number
of proceedings to adopt rules and regulations to implement the new statutory
provisions and requirements. It is unknown at this time precisely the nature and
extent of the impact that the legislation and regulatory developments will have
on the Company.
The Company has applied for authority to expand its existing state
authorizations to provide resold local exchange service in certain states. As a
result of the opening of this market, the Company is in the process of obtaining
state authority, where necessary, to provide resold local services as a
complement to its long distance services. Resold local exchange service is a new
service development, and there can be no assurance of how local exchange resale
will be implemented or what effect it will have on competition within the
telecommunications industry generally or on the competitive position of the
Company specifically. To the extent that the Company converts from a reseller to
a facilities-based carrier, modification or amendment of the Company's state
certifications may be required. As of December 31, 1997, the Company is
certified to provide resold local exchange services in 31 states.
Regulation
The terms and conditions under which the Company provides communications
services are subject to government regulation. Federal laws and FCC regulations
generally apply to interstate telecommunications, while particular state
regulatory authorities generally have jurisdiction over telecommunications that
originate and terminate within the same state. In addition, the Company's
network marketing system is or may be subject to or affected by extensive
federal and state regulation.
Federal
The Company is classified by the FCC as a non-dominant carrier, and
therefore is subject to minimal federal regulation. After the recent
reclassification of AT&T as a non-dominant carrier in its provision of domestic
services, only the LECs are classified as dominant carriers for the provision of
interstate access services. As a consequence, the FCC regulates many of the
rates, charges, and services of the LECs to a greater degree than the Company.
The FCC has proposed that the BOCs offering out-of-region interstate
interexchange services be regulated as non-dominant carriers, as long as such
services are offered by an affiliate of the BOC that complies with certain
structural separation requirements, which may make it easier for the BOCs to
compete directly with the Company for long distance subscribers.
The FCC generally does not exercise direct oversight over cost
justification and the level of charges for service of non-dominant carriers,
such as the Company, although it has the statutory power to do so. Non-dominant
carriers are required by statute to offer interstate and international services
under rates, terms, and conditions that are just, reasonable, and not unduly
discriminatory. The FCC imposes only minimal reporting requirements on
non-dominant carriers, although the Company is subject to certain reporting,
accounting, and record keeping obligations. A number of these requirements are
imposed, at least in part, on all carriers and others are imposed on carriers,
such as the Company, whose annual operating revenues exceed $100 million.
In addition, informal complaints are lodged from time to time against the
Company before the FCC and various state agencies for various reasons, to which
the Company has timely responded. Although such complaints could result in
additional legal actions or proceedings being brought against the Company, the
Company believes that such matters will be satisfactorily resolved without a
material adverse impact upon the Company's results of operations; however, the
Company can not be assured of such resolution. Should the Company's belief with
respect to any and all complaints pending before the FCC be incorrect, the
Company could be subject to financial penalties and potential revocation of its
operating authority for interstate or intrastate calls, as applicable.
The Company currently has separate tariffs on file with the FCC, covering
its domestic interstate services and international services. Although the
tariffs of non-dominant carriers, and the rates and charges they specify, are
subject to FCC review, they are presumed to be lawful and are seldom contested.
Resale carriers, like all other interstate carriers, are also subject to a
variety of miscellaneous FCC regulations that, for instance, govern the
documentation and verifications necessary to change a subscriber's long distance
carrier, limit the use of ''800'' numbers for pay-per-call services, require
disclosure of certain information if operator assisted services are provided,
and govern interlocking directors and management.
On December 31, 1997, the U.S. District Court for the Northern District of
Texas in Wichita Falls found Sections 271-275 of the Telecommunications Act to
be unconstitutional. These provisions require the BOCs to meet certain
requirements as a condition to providing in region long distance services. The
District Court subsequently stayed the December 31, 1997 order pending review by
a federal court of appeals, which is expected to be completed by the end of
1998. This stay restores to the telecommunications industry for the time being
the regulatory status it had before the December 31, 1997 ruling.
State
The Company is subject to varying levels of regulation in the states in
which it is currently authorized to provide intrastate telecommunications
services. The vast majority of the states require the Company to apply for
certification to provide intrastate telecommunications services, or to register
or to be found exempt from regulation, before commencing intrastate service. The
vast majority of states also require the Company to file and maintain detailed
tariffs listing their rates for intrastate service. Many states also impose
various reporting requirements and/or require prior approval for transfers of
control of certified carriers, and/or for corporate reorganizations;
acquisitions of telecommunications operations; assignments of carrier assets,
including subscriber bases; carrier stock offerings; and incurrence by carriers
of significant debt obligations. Certificates of authority can generally be
conditioned, modified, canceled, terminated, or revoked by state regulatory
authorities for failure to comply with state law and/or the rules, regulations,
and policies of the state regulatory authorities. Fines and other penalties,
including the return of all monies received for intrastate traffic from
residents of a state, may be imposed for such violations. If state regulatory
agencies conclude that the Company has taken steps without obtaining the
required authority, they may impose one or more of the sanctions listed above.
Network Marketing
The Company's network marketing system is or may be subject to or affected
by extensive government regulation, including, without limitation, state
regulation of marketing practices and federal and state regulation of the offer
and sale of business franchises, business opportunities, and securities. In
addition, the Internal Revenue Service and state taxing authorities in any of
the 50 states where the Company has IRs could classify the IRs as employees of
the Company (as opposed to independent contractors). The Company believes that
it is in compliance with the requirements of federal and state regulatory
authorities and maintains communications regularly with the various regulatory
authorities in each jurisdiction. A final determination by any other
jurisdiction that the IRs are employees could cause the Company to be subject to
penalties and interest for taxes not withheld, require the Company to withhold
taxes in the future, and require the Company to pay unemployment insurance.
Additionally, an adverse determination by any one state could influence the
decisions of regulatory authorities in other jurisdictions. Any or all of such
factors could adversely affect the way the Company does business and could
affect the Company's ability to attract potential IRs. While the regulations
governing network marketing are complex and vary from state to state, the
Company believes that it is in compliance with and has from time to time
modified its network marketing system to comply with interpretations of various
regulatory authorities.
Various governmental agencies monitor direct selling activities, and the
Company has occasionally been requested to supply information regarding its
marketing plan to certain of such agencies. Although the Company believes that
its network marketing system is in substantial compliance with laws and
regulations of each state relating to direct selling activities, there is no
assurance that legislation and regulations adopted in particular jurisdictions
in the future will not adversely affect the Company's operations.
Employees
As of December 31, 1997, the Company employed approximately 3,000 people.
This number does not include IRs, who are classified by the Company as
independent contractors rather than employees of the Company. The Company's
employees are not unionized, and the Company believes its relationship with its
employees is good.
<PAGE>
Item 2. Properties
The Company is headquartered in Dallas, Texas and operates out of several
leased and owned facilities consisting of an aggregate of 1,138,900 square feet.
The following table provides summary information regarding these facilities as
of March 1, 1998:
<TABLE>
<CAPTION>
Approximate Leased or
Function Location Square Footage Owned
------------------------------- ------------------------ ------------------ -----------
<S> <C> <C> <C>
General & Administrative Dallas, TX 344,500 Leased
General & Administrative Chantilly, VA 40,200 Leased
General & Administrative Chicago, IL 14,700 Leased
FirstExcel, F.S.B. Dallas, TX 12,500 Leased
Commercial Sales Division (1) 193,500 Leased
Service & Distribution Center Addison, TX 289,000 Owned
Service Center Houston, TX 57,900 Leased
Service Center Reno, NV 48,000 Leased
Service Center Chantilly, VA 80,000 Owned
Service Center Arlington, VA 14,500 Leased
Switch Site Los Angeles, CA 6,200 Leased
Switch Site Washington, D.C. 3,600 Leased
Switch Site Fort Lauderdale, FL 4,100 Leased
Switch Site Davenport, IA 3,500 Leased
Switch Site Las Vegas, NV 5,000 Leased
Switch Site New York, NY 6,500 Leased
Switch Site Cleveland, OH 5,000 Leased
Switch Site Chattanooga, TN 5,400 Leased
Switch Site Austin, TX 4,800 Leased
(1) At December 31, 1997, the Company had 27 leased CSD offices located
throughout the United States.
</TABLE>
Item 3. Legal Proceedings
On August 30, 1996, AT&T filed suit in the United States District Court for
the District of Delaware against the Company, its subsidiary, EXCEL
Communications Marketing, Inc., and EXCEL Telecommunications, Inc. alleging past
and continued infringement of a single patent without specifying the amount of
damages. The Court granted summary judgment in favor of Excel on March 27, 1998.
The Court held that the claims being asserted against Excel were unpatentable
under U.S. patent laws. The Company expects AT&T to appeal this decision.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
Excelcom held a special meeting of Stockholders on October 11, 1997 in
connection with the business combination with Telco. Holders of common stock
voted at the special meeting on the following four matters which were set forth
in the Joint Proxy Statement of Excelcom and Telco dated September 15, 1997.
(a) To approve the Merger Agreement and the transactions
contemplated thereby.
Votes:
------
For: ..................... 97,934,860
Against: ................. 31,019
Abstain: ................. 54,289
Broker non-votes*: ....... 1,208,663
(b) To approve the Excel Communications, Inc. 1997 Stock
Option Plan.
Votes:
------
For: ..................... 94,006,322
Against: ................. 3,886,219
Abstain: ................. 127,627
Broker non-votes*: ....... 1,208,663
(c) To approve the Excel Communications, Inc. 1997 Director
Stock Option Plan.
Votes:
------
For: ..................... 98,117,856
Against: ................. 300,008
Abstain: ................. 170,512
Broker non-votes*: ....... 640,455
(d) To authorize proxies to vote upon any other business
that may properly come before the meeting or any
adjournment thereof.
Votes:
------
For: ..................... 98,540,160
Against: ................. 366,314
Abstain: ................. 322,357
Broker non-votes*: ....... None
* Broker non-votes occur when a broker holding stock
in street name does not vote these shares.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
In May 1996, EXCEL's common stock, par value $.001 per share, began trading
on the New York Stock Exchange under the symbol ''ECI.'' The following table
sets forth, on a per share basis, the range of the high and low sale price
information of shares of common stock as reported by the New York Stock
Exchange, for the periods indicated during the fiscal years ended December 31,
1997 and 1996.
<TABLE>
<CAPTION>
Market Price Per Share
--------------------------------------------
1997 1996
------ ------
High Low High Low
-------- -------- ------ ------
<S> <C> <C> <C> <C>
First Quarter........ 21 5/8 13 N/A N/A
Second Quarter....... 29 3/8 12 3/8 47 25 1/2
Third Quarter........ 28 7/8 20 11/16 31 7/8 19 1/2
Fourth Quarter....... 28 15/16 14 1/8 35 1/2 20
As of March 23, 1998 there were approximately 3,491 registered holders of
EXCEL's common stock.
</TABLE>
The Company has in the past declared dividends, including a dividend in the
amount of $20.0 million declared by the Company's predecessor on December 31,
1995 to its then existing shareholders, which the Company paid during the second
quarter of 1996. However, the Company does not intend to pay any cash dividends
with respect to its common stock in the foreseeable future. The Company's Board
of Directors will determine the Company's dividend policy in the future based
upon, among other things, the Company's results of operations, financial
condition, business opportunities, capital requirements, contractual
restrictions, and other factors deemed relevant at the time.
<PAGE>
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data for the
Company as of the dates and for the periods indicated. The data set forth below
in this table should be read in conjunction with ''Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations'' and
the Consolidated Financial Statements of the Company.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------
1993 1994 1995 1996 1997 (1)
-------- --------- --------- --------- ----------
(In thousands, except per share
and per minute data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Communication services................................ $ 24,198 $ 108,819 $ 363,301 $1,090,649 $1,333,101
Marketing services(2)................................. 6,650 43,339 143,397 260,653 121,251
-------- --------- --------- ---------- ----------
Total revenues........................................... 30,848 152,158 506,698 1,351,302 1,454,352
-------- --------- --------- ---------- ----------
Operating expenses:
Communication......................................... 13,761 58,925 209,995 596,598 716,781
Depreciation and amortization......................... 190 346 1,239 6,880 23,676
Selling, general and administrative................... 13,351 66,157 217,751 530,295 504,421
Non-recurring charges (3)............................. -- -- -- -- 64,637
-------- --------- --------- ---------- ----------
Total operating expenses................................. 27,302 125,428 428,985 1,133,773 1,309,515
-------- --------- --------- ---------- ----------
Operating income......................................... 3,546 26,730 77,713 217,529 144,837
-------- --------- --------- ---------- ----------
Interest expense......................................... (75) (295) (593) (261) (8,551)
Other income (expense)................................... 24 83 (5,781) 12,647 7,301
-------- --------- --------- ---------- ----------
Income before income taxes............................... 3,495 26,518 71,339 229,915 143,587
Provision for income taxes............................... 1,126 10,648 26,893 85,488 55,661
-------- --------- --------- ---------- ----------
Income before cumulative effect of change
accounting principle.................................. 2,369 15,870 44,446 144,427 87,926
Cumulative effect of change in accounting principle,
net of income taxes (4)............................... -- -- -- -- 65,214
-------- --------- --------- ---------- ----------
Net income............................................... $ 2,369 $ 15,870 $ 44,446 $ 144,427 $ 22,712
======== ========= ========= ========== ==========
Diluted earnings per common and equivalent share:
Income per share before cumulative effect of change in
accounting principles, net of income taxes (5)........ $ 0.03 $ 0.18 $ 0.46 $ 1.35 $ 0.76
Cumulative effect of change in accounting principle,
net of income taxes on earnings per share (5)......... -- -- -- -- (0.56)
-------- --------- --------- ---------- ----------
Diluted earnings per share (5) .......................... $ 0.03 $ 0.18 $ 0.46 $ 1.35 $ 0.20
======== ========= ========= ========== ==========
Cash dividends declared per share........................ $ -- $ 0.046 $ 0.202 $ -- $ --
======== ========= ========= ========== ==========
Supplemental Operating Data:
Long distance minutes of usage (in 000's)(6)............. 118,357 544,552 2,101,240 6,271,203 7,902,190
Weighted average long distance revenue per minute
of usage(7)........................................... $ 0.204 $ 0.200 $ 0.173 $ 0.175 $ 0.166
Weighted average communication charges per minute
of usage(8)........................................... $ 0.116 $ 0.108 $ 0.100 $ 0.095 $ 0.089
Balance Sheet Data:
Working capital, net..................................... $ (186) $ 7,134 $ 1,071 $ 209,227 $ 31,599
Property and equipment, net.............................. 662 2,476 8,560 76,912 281,847
Total assets............................................. 9,058 59,412 203,581 579,164 1,637,016
Long-term obligations, net of current maturities......... 313 3,369 345 100 477,292
Stockholders' equity..................................... 1,995 13,635 37,708 322,281 752,707
(1) On October 14, 1997, the Company completed its merger with Telco. The
Merger was accounted for as a purchase; accordingly, the operating
results for Telco are included in the Company's operating results
after October 14, 1997, the effective date of the Merger. See Note 3
to the Consolidated Financial Statements.
(2) Revenues from marketing services include the effect of deferring a
portion of the cash received during each period and amortizing the
deferred revenues over 12 months. See Note 1 to the Consolidated
Financial Statements.
(3) Results for 1997 include $64.6 million in non-recurring charges
primarily related to the consolidation and integration of Telco. See
Note 4 to the Consolidated Financial Statements.
(4) Effective January 1,1997, the Company changed its method of accounting
for subscriber acquisition costs. See Note 1, "Marketing Activities",
to the Consolidated Financial Statements.
(5) See Note 8 to the Consolidated Financial Statements for an explanation
of the number of shares used in computing earnings per share.
(6) Long distance minutes of usage represent minutes billable to
subscribers during the period.
(7) Weighted average long distance revenue per minute of usage equals
revenues for all long distance phone services divided by the aggregate
minutes of usage.
(8) Weighted average communication charges per minute of usage equals the
cost of all long distance phone services sold to the Company's
subscribers divided by the aggregate minutes of usage.
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements set forth in this report are forward looking statements
that involve a number of risks and uncertainties. Among many factors that could
cause actual results to differ materially are the following: the Company's
ability to manage rapid growth; the Company's ability to attract, maintain, and
motivate a large base of IRs; litigation including that with independent
representatives ("IRs"), regulation and management of IRs; competition in the
long distance telecommunications and paging industries; the Company's ongoing
relationship with its long distance carriers; dependence upon key personnel;
subscriber attrition; the adoption of new, or changes in, accounting policies,
practices, and estimates and the application of such policies, practices, and
estimates; federal and state governmental regulation of the long distance
telecommunications or direct selling industry; the Company's ability to develop
and manage its own long distance network; the Company's ability to maintain,
operate, and upgrade its information systems; and the Company's success in the
offering of paging and other additional communications products and services.
General
EXCEL provides long distance telecommunications and paging services to both
residential and commercial customers in the United States. The Company has
developed several marketing channels which include direct sales to residential,
commercial and wholesale customers through IRs, dealers and direct sales
personnel in addition to direct mail marketing of several dial around products.
These multiple distribution channels which target both residential and
commercial customers are a key element of the Company's business strategy as
they allow the Company to balance capacity of network traffic and provide
multiple avenues for growth.
The Company's Telco subsidiary operates a nationwide telecommunications
network consisting of seven switches, leased transmission lines and
sophisticated network management systems designed to optimize traffic routing.
This network currently originates traffic in all or some part of 48 states and
the District of Columbia and operates as an "open network", meaning that any
individual within the Company's originating service area, whose LEC provides
equal access, can access the Company's long distance network by dialing either
of the Company's CIC codes, or by presubscribing to the Company as their long
distance service provider.
The Company owns approximately 100,000 network miles of DS-3 capacity
(under a long term right to use agreement) and also leases additional
transmission lines from a variety of facilities-based and resale long distance
carriers. The Company's contracts with these entities typically have terms
ranging from 12 to 60 months. The Company supplements its leased "on-network"
capacity with "off-net" services from a variety of resale and facilities-based
long distance carriers. In addition, the Company does not have any on-network
international network arrangements and exclusively resells the network capacity
of other resale and facilities-based long distance carriers to international
destinations.
The Company currently has agreements with Frontier Communications Services,
Inc. ("Frontier"), IXC Long Distance, Inc. ("IXC Long Distance"), MCI
Telecommunications Corp. ("MCI"), and WorldCom, Inc. ("WorldCom") to provide
switching services and network transmission of its long distance subscribers'
traffic. The agreements with IXC Long Distance, MCI, and WorldCom each contain
minimum usage commitments, while the agreement with Frontier provides that
Frontier is to be the exclusive carrier for certain calling card calls and
personal 800 service. The Company is currently meeting all minimum commitments
under these contracts. During 1998, the Company intends to migrate a substantial
portion of its traffic currently being carried by third parties onto its own
network and to continue to meet its minimum commitments.
The Company's revenues primarily consist of revenues for communication
services and marketing services. Revenues for communication services, as
reflected in the Company's Consolidated Financial Statements, are net of the
effect of certain adjustments, including those for unbillable call records. The
Company's long distance subscribers are located throughout the United States,
and the Company completes subscriber calls to all directly dialable locations
worldwide. The Company bills its subscribers for long distance usage based on
the type of calls, time of calls, duration of calls, the terminating phone
numbers, and each subscriber's rate plan in effect at the time of the call.
Marketing services revenues are primarily comprised of receipts for
materials and services rendered by EXCEL to IRs and area coordinators ("ACs").
Except in certain states, IRs are required to make an initial refundable
application deposit with EXCEL as an expression of commitment. There is no
additional cost to participate. IRs have an option to purchase a start-up
package, which includes a training class and training materials, business forms,
promotional and presentation materials, ongoing technical and administrative
support services, and monthly reports. If the start-up package is purchased, the
application deposit requirement is waived. In addition, EXCEL offers training
positions whereby ACs, certified by the Company, provide training to new IRs.
The portions of the marketing services revenues received that relate to ongoing
technical and administrative support services are deferred and amortized over
the period in which the services are used in order to match those revenues with
the costs of providing the related support services.
Operating expenses include communication charges, depreciation and
amortization, and selling, general and administrative expenses. Communication
charges include the costs of operating the Company's network and amounts paid by
the Company based on the Company's subscribers' long distance and paging usage.
The Company pays its carriers based on the type of calls, time of certain calls,
duration of calls, the terminating phone numbers, and the terms of the Company's
contract in effect at the time of the calls.
Selling, general and administrative expenses consist of marketing costs and
the costs of providing teleservices and other support services for subscribers,
billing and collecting long distance and paging revenues, and the costs of the
information systems and personnel required to support the Company's operations.
Marketing costs include commissions paid to IRs and sales representatives, the
costs of providing training, business forms, promotional and presentation
materials, technical and administrative support services, and monthly reports to
IRs, salaries and commissions paid to CSD sales representatives, and direct mail
advertising expenses. Commissions paid to IRs are based upon the acquisition of
new long distance and paging subscribers ("subscriber acquisition costs") and
long distance telephone and paging usage by subscribers. The Company also pays
commissions for the training of IRs and certain ACs. Effective January 1, 1997,
the Company changed its method of accounting for subscriber acquisition costs.
Previously, the Company had deferred the portions of commissions paid to IRs
that directly relate to the acquisition of long distance and paging subscribers.
Beginning January 1, 1997, the Company began fully expensing subscriber
acquisition costs in the period incurred in order to present its operating
results in a manner more consistent with other telecommunications companies
against which its results are now compared.
EXCEL and Telco Merger
On October 14, 1997, EXCEL succeeded to the businesses of Excelcom and
Telco as a result of mergers of wholly-owned subsidiaries with and into Excelcom
and Telco, pursuant to the Agreement and Plan of Merger dated as of June 5, 1997
(the "Merger"). The Merger creates the fifth largest long distance company in
the United States based on the number of presubscribed lines, with pro forma
consolidated annualized revenues of approximately $2 billion, 11 billion
annualized long distance minutes of usage, 6.0 million customers, and
approximately 100,000 network miles of DS-3 capacity. (See Note 3-"EXCEL and
Telco Merger".)
At the closing of the Merger on October 14, 1997: (i) Excelcom and Telco
became wholly-owned subsidiaries of EXCEL; (ii) each outstanding share of
Excelcom common stock converted into the right to receive one share of common
stock of EXCEL; (iii) each outstanding share of Telco common stock converted
into the right to receive 0.7595 shares of common stock of EXCEL and $15.00 in
cash; (iv) except for certain options, each then outstanding and unexercised
option to acquire one share of Telco common stock was assumed by EXCEL and
converted into an option to acquire 1.5190 shares of EXCEL common stock, and the
exercise price per share with respect to each such assumed option was adjusted
to equal the exercise price under the original option divided by 1.5190; (v)
each then outstanding and unexercised option to acquire one share of Excelcom
common stock was assumed by EXCEL and converted into an option to acquire one
share of EXCEL common stock, and the exercise price per share was unchanged.
Consideration for the Merger consisted of $666.2 million in cash (including
$164.5 million of Telco debt paid by EXCEL) and 25,376,506 shares of common
stock, $.001 par value, of the Company ("Company Common Stock").
On October 14, 1997, EXCEL made an initial borrowing of approximately $544
million under the new credit facility to fund the cash purchase price of the
Merger and related costs and expenses and to refinance existing indebtedness of
Telco. The initial LIBOR spread and Prime spread were 1.0% and 0%, respectively.
(See Note 5 - "Long-Term Debt and Capital Lease Obligations".)
The merger of Telco into EXCEL has been accounted for under the "purchase"
method of accounting, with EXCEL as the acquirer in accordance with generally
accepted accounting principles. The results of operations for the year ended
December 31, 1997 include Telco's financial results after October 14, 1997, the
effective date of the Merger. The merger with Telco resulted in goodwill of
$906.6 million which is being amortized straight-line over a period of 40 years.
Non-Recurring Charges
During the fourth quarter of 1997, primarily as a result of the Merger, the
Company initiated plans to reorganize and restructure its management and
operational organization and facilities to eliminate duplicate facilities,
abandon certain projects and activities, and to take further advantage of the
synergies available to the combined entities. Accordingly, the Company charged
to operations the estimated costs of such reorganization and restructuring
activities in addition to certain legal expenses, vendor disputes, and other
charges. These costs amount to $64.6 million and are included in non-recurring
charges in the Company's Consolidated Statement of Operations.
<PAGE>
The following table reflects the components of the significant items
included in non-recurring charges for the year ended December 31, 1997 (amounts
in thousands):
Year Ended
December 31, 1997
-----------------
Reduction in carrying value of certain assets.......... $ 47,678
Costs to exit unfavorable contracts.................... 5,559
Legal expenses, vendor disputes, and other charges..... 11,400
--------
Non-recurring charges............................. $ 64,637
========
Current and future issues affecting the Company's operations for 1998 and
beyond include the following:
Ability of the Company to Migrate Traffic. The Company's realization of
operating cost savings from the Merger will be affected by the Company's ability
to direct traffic to its network from EXCEL's existing third party carriers in a
timely manner, which is expected to result in an overall lower cost per minute.
The Company's ability to migrate this traffic in a timely manner will be limited
by operational and network infrastructure limitations as well as by the
continuing purchase commitment requirements under EXCEL's agreements with third
party carriers.
Regulatory Changes. The operations of the Company will continue to be
affected by the ongoing events associated with the 1996 Telecommunications Act.
Such events include access charge reform which could change existing
transmission costs for both the Company and other long distance companies, the
entry by the Regional Bell Operating Companies into the long distance
marketplace, and the ability of long distance companies like the Company to
begin marketing local telephone services.
In conjunction with upcoming local competition, incumbent local phone
companies are not likely to provide billing services for customers presubscribed
to competitive local phone companies. This would force the Company to either
bill the customer directly, enter into a billing and collection agreement with
new local phone companies or seek other alternatives.
Additionally, the Federal Communications Commission has mandated that by
June 30, 1998, all telecommunications companies must migrate from their existing
five-digit CIC codes (10 + XXX) to seven-digit CIC codes (10 + 10 + XXX). This
will require a change in the dialing patterns of the Telco Consumer Division
customers in order to utilize the Company's services, and the Company is
required to integrate re-education materials into its future marketing
activities.
Competitive Factors. The Company has observed increased competition in all
of its distribution channels as well as an increase in the number of
promotional, discounted calling plans available to all long distance consumers,
particularly relating to residential customers. The impact to the Company has
included (i) a decline in the Company's residential revenue per minute as the
Company has responded to competitive pressures with lower priced products, and
(ii) a sequential decline in dial around revenues.
Network Costs. The Company is in the process of expanding its network in
order to facilitate the on-net migration of traffic that is currently being
carried by third parties. This will result in an increase in recurring fixed
costs associated with the network which the Company anticipates will be offset
by reductions in third party costs for switch services. However, the Company may
experience a temporary increase in overall network costs as additional fixed
costs are incurred in anticipation of the migration of traffic.
Integration of the Companies. The Merger involves the integration of two
companies that have previously operated independently and there can be no
assurance that the Company will not encounter significant difficulties in
integrating the respective operations of EXCEL and Telco including, but not
limited to, integrating, documenting, and operating certain software systems;
retaining key employees; and integrating other operational functions, or that
the benefits expected from such integration will be realized. These benefits
include the migration of EXCEL traffic from third parties to the Telco network,
the expansion of commercial products to be sold by the IRs with the assistance
of Telco's commercial sales force, reduced capital spending and reductions in
various general and administrative expenses.
Increased Customer Acquisitions. During the fourth quarter of 1997, the
Company observed an increase in its acquisition of new customers through its
network marketing channel. In connection with the Company's IR marketing plan,
an upfront customer acquisition commission is typically paid before a customer
has generated material usage revenue. In a period of customer growth,
commissions paid for new customers can exceed the corresponding profit generated
by the additional revenue in the current period and thus reduce net income.
Expansion of Commercial Sales. The Company intends to continue to grow its
level of commercial sales. As a result, the Company expects to see an increase
in its commercial revenues as a percentage of total revenues. Since commercial
products tend to generally yield a lower rate per minute, the Company could
experience a decrease in its overall revenue per minute and a decline in
operating margins.
Year 2000 Issue. The Year 2000 issue is the risk that computer programs
using two-digit date fields will fail to properly recognize the Year 2000, with
the result being business interruptions due to computer system failures by the
Company's software and hardware or that of government entities, service
providers, vendors and customers. In response to the Year 2000 issue, the
Company has developed a plan to assess the Company's Year 2000 risk and is in
the process of performing its review. The Company anticipates that certain
software will require replacement or modification. Based on the Company's review
to date, it does not expect the cost of software replacement or modification to
be material to its financial position or results of operations.
Results of Operations
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Revenues. Total revenues increased 7.1% to $1.5 billion for the year ended
December 31, 1997 from $1.4 billion for the year ended December 31, 1996.
Communication services revenues increased 18.2% to $1.3 billion for the year
ended December 31, 1997 from $1.1 billion for the year ended December 31, 1996
primarily due to an increase in long distance minutes of usage by subscribers.
Long distance minutes of usage increased 25.4% to 7.9 billion minutes for the
year ended December 31, 1997 from 6.3 billion minutes for the year ended
December 31, 1996 primarily due to the inclusion of Telco's minutes beginning
October 15, 1997. Long distance revenues per minute of usage decreased by 5.1%
to 16.6 cents per minute for the year ended December 31, 1997 from 17.5 cents
per minute for the year ended December 31, 1996. This decrease in revenue per
minute of usage is due primarily to the inclusion of Telco's commercial and
wholesale minutes which yield a lower revenue per minute than residential
minutes. Included in communication services revenue for the year ended December
31, 1997 is net paging revenue of $24.6 million.
Marketing services revenues, which include revenues recognized from IRs for
training, business forms, promotional and presentation materials, ongoing
technical and administrative support services, and monthly reports, decreased
53.5% to $121.3 million for the year ended December 31, 1997 from $260.7 million
for the year ended December 31, 1996, primarily due to a decrease in the number
of applications received from new IRs.
Operating Expenses. Communication charges increased 20.1% to $716.8 million
for the year ended December 31, 1997 from $596.6 million for the year ended
December 31, 1996. Communication charges were 8.9 cents per minute for the year
ended December 31, 1997 compared to 9.5 cents per minute for the year ended
December 31, 1996. As a percentage of communication services revenues,
communication charges were 53.8% for the year ended December 31, 1997 compared
to 54.7% for the year ended December 31, 1996. This decrease in communication
charges as a percentage of communication services revenues primarily relates to
the reduction in per minute rates from the Company's long distance carriers,
resulting from migrating long distance traffic from Frontier to WorldCom, MCI
and IXC Long Distance.
Depreciation and amortization increased from $6.9 million for the year
ended December 31, 1996 to $23.7 million for the year ended December 31, 1997
primarily due to amortization of goodwill resulting from the Merger and an
increase in depreciation resulting from assets acquired in the Merger.
Selling, general and administrative expenses decreased 4.9% to $504.4
million for the year ended December 31, 1997 from $530.3 million for the year
ended December 31, 1996. Selling expenses, which include commissions paid to
IRs, the costs of providing training, and other administrative support services
to IRs, and since the Merger, salaries and commissions paid to CSD sales
representatives in addition to direct mail advertising costs, decreased from
$362.4 million for the year ended December 31, 1996 to $278.0 million for the
year ended December 31, 1997, primarily due to a decrease in the number of IRs.
General and administrative expenses increased from $167.9 million for the year
ended December 31, 1996 to $226.4 million for the year ended December 31, 1997.
This increase primarily relates to the inclusion of Telco's operating results
after October 14, 1997. As a percentage of communication services revenues,
selling, general and administrative expenses were 37.8% for the year ended
December 31, 1997 compared to 48.6% for the year ended December 31, 1996.
Included in the Company's operating expenses for the year ended December
31, 1997 is $64.6 million in non-recurring charges primarily related to the
consolidation and integration of Telco. (See "Non-Recurring Charges" and Note 4
to the Consolidated Financial Statements.)
Operating income before non-recurring charges decreased 3.7% to $209.5
million for the year ended December 31, 1997 from $217.5 million for the year
ended December 31, 1996. As a percentage of communication services revenues,
operating income before non-recurring charges was 15.7% and 19.9% for the years
ended December 31, 1997 and 1996, respectively.
The Company's interest expense increased to $8.6 million for the year ended
December 31, 1997 from $261,000 for the year ended December 31, 1996. The
increase in interest expense results primarily from the payment of interest on
debt incurred to fund the acquisition of Telco on October 14, 1997.
Other income (expense) decreased to $7.3 million for the year ended
December 31, 1997 from $12.6 million for the year ended December 31, 1996.
Included in other income (expense) for the year ended December 31, 1996 is
approximately $6.2 million of income related to the sale of the Company's 49%
investment in a joint venture. In addition, interest income increased from $6.5
million for the year ended December 31, 1996 to $7.3 million for the year ended
December 31, 1997. The increase in interest income was primarily due to
additional interest income generated by the investment of cash received from
operations and the net proceeds received from the sale of the Company's common
stock in the IPO in May 1996 offset by cash used to fund the repurchase of the
Company's common stock.
Included in the Company's net income of $22.7 million for the year ended
December 31, 1997 is a one-time charge of $65.2 million, net of income taxes,
($0.56 per share) in the first quarter to reflect the change in accounting for
subscriber acquisition costs. The Company had net income of $144.4 million for
the year ended December 31, 1996. On a pro forma basis, the Company's net income
for the year ended December 31, 1996 would have been $121.8 million ($1.14 per
share) if this accounting change had been retroactively applied.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Revenues. Total revenues increased 176% to $1.4 billion for the year ended
December 31, 1996 from $506.7 million for the year ended December 31, 1995. The
increase in revenues was primarily due to increases in long distance minutes of
usage by subscribers and in the number of applications from new IRs and ACs.
Communication services revenues increased 203% to $1.1 billion for the year
ended December 31, 1996 from $363.3 million for the year ended December 31,
1995. Long distance minutes of usage increased 200% to 6.3 billion minutes for
the year ended December 31, 1996 from 2.1 billion minutes for the year ended
December 31, 1995.
Marketing services revenues, which include revenues recognized from IRs for
training, business forms, promotional and presentation materials, ongoing
technical and administrative support services, and monthly reports, increased
82% to $260.7 million for the year ended December 31, 1996 from $143.4 million
for the year ended December 31, 1995. These revenues increased primarily due to
the growth in applications from new IRs.
The Company experienced operational difficulties late in the second quarter
of 1996 due to the failure of Frontier to add the network capacity needed to
handle the Company's growth in its subscriber base and related long distance
traffic. The Company believes that the blockage experienced in several states as
a result of the network capacity problems resulted in a slowdown in marketing
activities, the loss of subscribers, and reduced calling activity during the
third quarter. By the end of the third quarter, 90% of the 1-plus traffic had
been migrated to the networks of new carriers. However, the magnitude of
migrating more than 4 million subscribers across approximately 900 LECs to three
new networks created some disruption in the flow of data between the LECs, the
underlying carriers, and EXCEL. These migration difficulties continued to impact
subscriber attrition and call volume in the fourth quarter of 1996.
Additionally, the amount of time and management resources required to meet the
aggressive schedule for the network migration conflicted with programming
requirements related to new marketing positions which were introduced in
September 1996 at the Company's annual IR convention. The extensive amount of
programming resources needed for the new marketing positions caused some delay
in the processing of transactions involving the IRs which in turn negatively
affected IR morale. As a result, the number of applications received from IRs
decreased in the fourth quarter of 1996 from the third quarter of 1996.
Operating Expenses. Communication charges increased 184% to $596.6 million
for the year ended December 31, 1996 from $210.0 million for the year ended
December 31, 1995. Communication charges were 9.5 cents per minute for the year
ended December 31, 1996 compared to 10.0 cents per minute for the year ended
December 31, 1995. As a percentage of communication services revenues,
communication charges were 54.7% for the year ended December 31, 1996 compared
to 57.8% for the year ended December 31, 1995. This decrease in communication
charges as a percentage of communication services revenues reflects the
reduction in rates from Frontier that were implemented from April 1995 through
February 1996, and the lower rates associated with migrating long distance
traffic to WorldCom, MCI and IXC Long Distance.
Depreciation and amortization increased 475% from $1.2 million for the year
ended December 31, 1995 to $6.9 million for the year ended December 31, 1996.
This increase was primarily due to an increase in depreciation on information
systems and other assets acquired to support the growth in the business and
enhance service to subscribers.
Selling, general and administrative expenses increased 143% to $530.2
million for the year ended December 31, 1996 from $217.8 million for the year
ended December 31, 1995. Selling expenses, which directly relate to the
Company's marketing activities and which include commissions and the costs of
providing training, business forms, promotional and presentation materials,
technical and administrative support services, and monthly reports, increased
147% to $362.4 million for the year ended December 31, 1996 from $146.7 million
for the year ended December 31, 1995. This increase is primarily due to growth
in new IRs. General and administrative expenses increased 136% to $167.9 million
for the year ended December 31, 1996 from $71.1 million for the year ended
December 31, 1995. This increase was primarily driven by the growth in the
Company's communication operations and was due in part to the cost of building
the Company's management team and information systems necessary to support the
growth in the business and enhance service to subscribers. As a percentage of
communication services revenues, selling, general and administrative expenses
were 48.6% for the year ended December 31, 1996 compared to 59.9% for the year
ended December 31, 1995.
Operating income increased 180% to $217.5 million for the year ended
December 31, 1996 from $77.7 million for the year ended December 31, 1995. As a
percentage of communication services revenues, operating income was 19.9% for
the year ended December 31, 1996 compared to 21.4% for the year ended December
31, 1995.
Included in other income (expense) for the year ended December 31, 1996 is
approximately $6.2 million of income related to the Company's 49% investment in
a joint venture. For the year ended December 31, 1995, the Company recognized a
loss of $6.2 million related to start-up costs incurred by the joint venture. In
addition, the Company's interest income increased to $6.5 million for the year
ended December 31, 1996 from $467,000 for the year ended December 31, 1995. The
increase in interest income was primarily due to additional interest income
generated by the investment of cash.
Income Taxes. The provision for income taxes as a percentage of income
before income taxes decreased to 37.2% in 1996 from 37.7% in 1995. The decrease
is primarily attributable to lower overall state income tax rates applicable to
1996 consolidated earnings.
Inflation
Management believes that inflation has not had a material effect on the
Company's results of operations.
Liquidity and Capital Resources
As of December 31, 1997, the Company had cash and cash equivalents of $16.2
million and working capital of $31.6 million. The Company's operating activities
provided cash of approximately $130.2 million for the year ended December 31,
1997 and $101.5 million for the year ended December 31, 1996.
The Company's investing activities have consisted primarily of cash paid in
connection with the Telco Merger of $475.6 million, the purchase of franchise
agreements of $3.5 million, and property and equipment purchases of $63.7
million for the year ended December 31, 1997. The Company purchased property and
equipment totaling $75.5 million for the year ended December 31, 1996.
Total cash generated from financing activities was $258.8 million and
$113.4 million for the years ended December 31, 1997 and 1996, respectively. The
increase in cash generated from financing activities for the year ended December
31, 1997 was primarily due to net proceeds received from the issuance of
long-term debt in connection with the Merger and net proceeds received from the
issuance of additional common stock due to the exercise of stock options. For
the year ended December 31, 1996, the Company received net proceeds of
approximately $133.9 million for the sale of its common stock in its initial
public offering. In addition, other financing activities have consisted of
payments of debt and capital lease obligations and the repurchase of the
Company's common stock. During the year ended December 31, 1997, the Company
made payments on debt and capital lease obligations of $297.7 million and
repurchased the Company's common stock for $56.7 million. The Company made
payments on debt and capital lease obligations of $479,000 and payments of
dividends of approximately $20.0 million during the year ended 1996.
On October 10, 1997, the Company entered into a new credit facility for
borrowings up to $1 billion (the "New Credit Facility"). Borrowings under the
New Credit Facility are available for general corporate purposes including
acquisitions and are subject to various financial covenants. The interest rate
on the New Credit Facility is based on the Company's prevailing debt ratio and
ranges on a Eurodollar (LIBOR) option from a spread of 0.625% to 1.75%, and on a
Base (Prime) Rate option from a spread of 0% to 0.50%. Total borrowing
availability under the New Credit Facility reduces to $800 million on September
30, 2000, and to $500 million on September 30, 2001, and the New Credit Facility
expires on September 30, 2002.
On October 14, 1997, approximately $135.2 million of the Company's cash and
cash equivalents was used to fund a portion of the Telco Merger and related
costs. Also, on October 14, 1997, the Company made an initial borrowing of
approximately $544 million under the New Credit Facility to fund the cash
purchase price of the Merger and related costs and expenses and to refinance
existing indebtedness of Telco. The initial LIBOR spread and Prime spread were
1.0% and 0%, respectively.
The Company believes that its existing sources of liquidity and anticipated
funds from operations, will be sufficient to fund its capital expenditures,
working capital, and other cash requirements through the end of 1998.
Various legal proceedings have arisen against the Company in the ordinary
course of business. Information with respect to legal proceedings is set forth
in Part I, Item 3. of this Form 10-K.
Regulatory Issues
On February 8, 1996, the 1996 Telecommunications Act was enacted into law.
This comprehensive federal legislation will affect every sector of the
telecommunications industry. Included in the new statutory provisions is the
opening up of local telephone markets to competition from facilities-based and
resale carriers and, subject to certain requirements and safeguards, the
elimination of restrictions on Bell Operating Company ("BOC") and GTE Operating
Company ("GTOC") entrance into the long distance telecommunications market. The
FCC adopted rules to govern the introduction of new forms of competition in its
August 8, 1996 Interconnection Orders, significant aspects of which, including
provisions governing the wholesale pricing of local service, were overturned by
the U.S. Eighth Circuit Court of Appeals. The U.S. Supreme Court has agreed to
hear appeals of this decision, but it is not expected to render a final decision
until early 1999. Therefore, it is unknown at this time whether this Eighth
Circuit decision will be upheld or what impact the 1996 Telecommunications Act
or the Interconnection Orders will have on the Company. Depending on the nature
and timing of BOC and GTOC entry into the long distance market, the Company may
face significant additional competition in the provision of long distance
services. However, the 1996 Telecommunications Act opens the local telephone
market to competition, which, depending on the nature of such opening, the
Company believes may allow it to provide resold local exchange services in
several states. As of December 31, 1997, the Company is authorized to provide
resold local exchange services in 31 states.
Various governmental agencies monitor direct selling activities, and the
Company has occasionally been requested to supply information regarding its
marketing plan to certain of such agencies. Although the Company believes that
its network marketing system is in substantial compliance with laws and
regulations of each state relating to direct selling activities, there is no
assurance that legislation and regulations adopted in particular jurisdictions
in the future will not adversely affect the Company's operations.
<PAGE>
Quarterly Results of Operations
The following table includes summarized quarterly financial data for each
of the four quarters of 1996 and 1997. This quarterly information is unaudited,
has been prepared on the same basis as the annual financial statements, and, in
the opinion of the Company's management, reflects all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
information for the periods presented. Operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
1996 1997
-------------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter (1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except per share and per minute data)
Statement of Operations Data:
Revenues:
Communication services.............. $ 205,274 $ 271,926 $ 299,623 $ 313,826 $ 303,673 $ 292,926 $ 294,430 $ 442,072
Marketing services(2)............... 75,516 73,439 67,036 44,662 27,694 37,648 30,892 25,017
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenues........................ 280,790 345,365 366,659 358,488 331,367 330,574 325,322 467,089
--------- --------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Communication....................... 113,514 151,421 162,299 169,364 165,246 157,239 153,061 241,235
Depreciation and amortization....... 607 1,179 1,911 3,183 3,561 4,369 4,710 11,036
Selling, general and administrative. 113,274 136,123 142,295 138,603 108,790 111,712 116,345 167,574
Non-recurring charges (3)........... -- -- -- -- -- -- -- 64,637
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses.............. 227,395 288,723 306,505 311,150 277,597 273,320 274,116 484,482
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income (loss)............... 53,395 56,642 60,154 47,338 53,770 57,254 51,206 (17,393)
Interest expense...................... (52) (79) (117) (13) (21) (11) (11) (8,508)
Other income (expense)................ 1,544 4,683 4,291 2,129 2,136 2,050 2,153 962
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes..... 54,887 61,246 64,328 49,454 55,885 59,293 53,348 (24,939)
Provision (benefit) for income taxes.. 20,901 22,826 23,401 18,360 20,789 22,294 20,059 (7,481)
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before cumulative effect
of change in accounting principle.... 33,986 38,420 40,927 31,094 35,096 36,999 33,289 (17,458)
Cumulative effect of change in
accounting principle, net of
income taxes (4)..................... -- -- -- -- 65,214 -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss)..................... $ 33,986 $ 38,420 $ 40,927 $ 31,094 $ (30,118) $ 36,999 $ 33,289 $ (17,458)
========= ========= ========= ========= ========= ========= ========= =========
Diluted net income (loss) per common
and equivalent share:
Income (loss) per share before
cumulative effect of change in
accounting principle (5)............ $ 0.34 $ 0.36 $ 0.37 $ 0.28 $ (0.32) $ 0.34 $ 0.31 $ (0.14)
Cumulative effect of change in
accounting principle, net of
income taxes (5)..................... -- -- -- -- (0.59) -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Diluted net income (loss) per share(5) $ 0.34 $ 0.36 $ 0.37 $ 0.28 $ (0.27) $ 0.34 $ 0.31 $ (0.14)
========= ========= ========= ========= ========= ========= ========= =========
Supplemental Operating Data:
Long distance minutes of usage
(in 000's)(6)........................ 1,227,713 1,554,057 1,679,957 1,809,476 1,718,485 1,584,816 1,694,600 2,904,289
Weighted average long distance revenue
per minute of usage(7)............... $ 0.167 $ 0.175 $ 0.178 $ 0.174 $ 0.176 $ 0.182 $ 0.172 $ 0.149
Weighted average communication charges
per minute of usage(8).............. $ 0.092 $ 0.097 $ 0.097 $ 0.094 $ 0.096 $ 0.096 $ 0.089 $ 0.082
(1) On October 14, 1997, the Company completed its merger with Telco. The
Merger was accounted for as a purchase; accordingly, the operating results
for Telco are included in the Company's operating results after October 14,
1997, the effective date of the Merger. See Note 3 to the Consolidated
Financial Statements.
(2) Revenues from marketing services include the effect of deferring a portion
of the cash received during each period and amortizing the deferred
revenues over 12 months. See Note 1 to the Consolidated
Financial Statements.
(3) Results for 1997 include $64.6 million in non-recurring charges primarily
related to the consolidation and integration of Telco. See Note 4 to the
Consolidated Financial Statements.
(4) Effective January 1, 1997, the Company changed its method of accounting for
subscriber acquisition costs. See Note 1, "Marketing Activities," to the
Consolidated Financial Statements.
(5) See Note 8 to the Consolidated Financial Statements for an explanation of
the number of shares used in computing net income per share.
(6) Long distance minutes of usage represent minutes billable to subscribers
during the period.
(7) Weighted average long distance revenue per minute of usage equals revenues
for all long distance phone services divided by the aggregate minutes of
usage.
(8) Weighted average communication charges per minute of usage equals the cost
of all long distance phone services sold to the Company's subscribers
divided by the aggregate minutes of usage.
</TABLE>
<PAGE>
EXCEL COMMUNICATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Item 8. Financial Statements and Supplementary Data
Report of Independent Public Accountants........................... 28
Consolidated Balance Sheets........................................ 29
Consolidated Statements of Operations.............................. 30
Consolidated Statements of Stockholders' Equity.................... 31
Consolidated Statements of Cash Flows.............................. 32
Notes to Consolidated Financial Statements......................... 33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of EXCEL Communications, Inc.:
We have audited the accompanying consolidated balance sheets of EXCEL
Communications, Inc. (a Delaware corporation) and subsidiaries (the ''Company'')
as of December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. These consolidated 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 the Company as of December
31, 1996 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
As explained in Note 1 to the consolidated financial statements, effective
January 1, 1997, the Company changed its method of accounting for subscriber
acquisition costs.
Dallas, Texas
January 26, 1998 ARTHUR ANDERSEN LLP
<PAGE>
<TABLE>
<CAPTION>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
---------------------------
1996 1997
ASSETS ---------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................................... $ 169,846 $ 16,161
Accounts receivable, net....................................................... 206,309 328,309
Inventories.................................................................... 16,263 3,651
Deferred income tax asset...................................................... 1,897 34,128
Other current assets........................................................... 2,517 14,217
---------- ------------
396,832 396,466
---------- ------------
Property and equipment, net......................................................... 76,912 281,847
---------- ------------
Deferred subscriber acquisition costs............................................... 104,765 --
---------- ------------
Goodwill............................................................................ -- 943,682
---------- ------------
Deferred income tax asset........................................................... -- 3,684
---------- ------------
Other assets........................................................................ 655 11,337
---------- ------------
$ 579,164 $ 1,637,016
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 132,770 $ 199,853
Commissions payable............................................................ 22,484 22,265
Accrued liabilities............................................................ 32,112 137,777
Other current liabilities...................................................... -- 4,296
Current maturities of long-term debt and capital lease obligations............. 239 676
---------- ------------
187,605 364,867
Long-term debt and capital lease obligations........................................ 100 477,292
---------- ------------
Deferred management services fees and other long-term liabilities................... 25,279 42,150
---------- ------------
Deferred income taxes payable....................................................... 43,899 --
---------- ------------
Commitments and contingencies....................................................... -- --
---------- ------------
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000,000 shares authorized, none
outstanding................................................................. -- --
Common stock, $0.001 par value, 500,000,000 shares authorized, 108,800,000 and
132,679,709 issued; 108,800,000 and 132,613,909 outstanding.................. 109 133
Additional paid-in capital..................................................... 139,880 548,519
Unrealized gain on securities available for sale............................... -- 21
Treasury stock, 65,800 shares at cost.......................................... -- (970)
Retained earnings.............................................................. 182,292 205,004
---------- ------------
Total stockholders' equity................................................ 322,281 752,707
---------- ------------
$ 579,164 $ 1,637,016
========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
-------------------------------------
<S> <C> <C> <C>
1995 1996 1997
Revenues: ---------- ----------- -----------
Communication services..................... $ 363,301 $ 1,090,649 $ 1,333,101
Marketing services......................... 143,397 260,653 121,251
---------- ----------- -----------
Total revenues........................ 506,698 1,351,302 1,454,352
---------- ----------- -----------
Operating expenses:
Communication.............................. 209,995 596,598 716,781
Depreciation and amortization.............. 1,239 6,880 23,676
Selling, general and administrative........ 217,751 530,295 504,421
Non-recurring charges...................... -- -- 64,637
---------- ----------- -----------
Total operating expenses.............. 428,985 1,133,773 1,309,515
---------- ----------- -----------
Operating income...................... 77,713 217,529 144,837
Interest expense........................... (593) (261) (8,551)
Other income (expense)..................... (5,781) 12,647 7,301
---------- ----------- -----------
Income before income taxes...................... 71,339 229,915 143,587
---------- ----------- -----------
Provision for income taxes................. 26,893 85,488 55,661
---------- ----------- -----------
Income before cumulative effect of change in
accounting principle....................... 44,446 144,427 87,926
Cumulative effect of change in accounting
principle net of income taxes.............. -- -- 65,214
---------- ----------- -----------
Net income...................................... $ 44,446 $ 144,427 $ 22,712
========== =========== ===========
Basic earnings per share..................... $ 0.46 $ 1.38 $ 0.20
========== =========== ===========
Diluted earnings per common and equivalent share:
Weighted average number of shares and share
equivalents outstanding.................... 97,321 107,247 115,547
========== =========== ===========
Income before cumulative effect of change in
accounting principle....................... $ 0.46 $ 1.35 $ 0.76
Cumulative effect of change in accounting
principle net of income taxes.............. -- -- (0.56)
---------- ----------- -----------
Diluted earnings per share................... $ 0.46 $ 1.35 $ 0.20
========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)
Unrealized
Gain on
Additional Securities
Common Paid-in Unearned Available Treasury Retained Total
Shares Stock Capital Compensation for Sale Shares Stock Earnings Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995... 100,000 $ 100 $ 345 $ -- $ -- (1,000) $ (13) $ 13,203 $ 13,635
Net income................ -- -- -- -- -- -- -- 44,446 44,446
Dividends declared
($.202 per share)........ -- -- -- -- -- -- -- (19,784) (19,784)
Advances to employee
stock ownership
plan..................... -- -- -- (6,000) -- -- -- -- (6,000)
Allocation of common
stock to employees....... -- -- 1,569 3,842 -- -- -- -- 5,411
Cancellation of
treasury stock........... (1,000) (1) (12) -- -- 1,000 13 -- --
-------- ------ -------- ------- ----- ----- ------ -------- --------
Balance, December 31, 1995. 99,000 99 1,902 (2,158) -- -- -- 37,865 37,708
Net income.............. -- -- -- -- -- -- -- 144,427 144,427
Issuance of common
shares in public
offering............... 9,800 10 133,860 -- -- -- -- -- 133,870
Allocation of common
stock to employees...... -- -- 4,118 2,158 -- -- -- -- 6,276
-------- ------ -------- ------- ----- ----- ------ -------- --------
Balance, December 31, 1996. 108,800 109 139,880 -- -- -- -- 182,292 322,281
Net income................ -- -- -- -- -- -- -- 22,712 22,712
Issuance of common
stock.................... 26,633 27 464,351 -- -- -- -- -- 464,378
Unrealized gain on
securities available
for sale................. -- -- -- -- 21 -- -- -- 21
Purchase of treasury
stock.................... -- -- -- -- -- (2,819)(56,685) -- (56,685)
Cancellation of
treasury stock........... (2,753) (3) (55,712) -- -- 2,753 55,715 -- --
-------- ------ -------- ------- ----- ----- ------ -------- --------
Balance, December 31, 1997. 132,680 $ 133 $548,519 $ -- $ 21 (66) $ (970) $205,004 $752,707
======== ====== ======== ======= ===== ===== ====== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income....................................................... $ 44,446 $ 144,427 $ 22,712
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of change in accounting principle......... -- -- 65,214
Depreciation and amortization............................... 1,239 6,880 23,676
Non-recurring charges....................................... -- -- 64,637
ESOP compensation........................................... 5,627 6,276 --
Loss on disposal of assets.................................. -- 224 152
(Income) losses from joint venture.......................... 6,248 (6,248) --
Deferred income taxes....................................... 12,759 25,136 (5,063)
Changes in assets and liabilities:
Accounts receivable, net................................. (61,836) (115,882) 2,616
Deferred subscriber acquisition costs.................... (51,413) (36,399) --
Accounts payable......................................... 48,813 67,654 47,568
Commissions payable...................................... 16,169 1,598 (219)
Deferred management services fees and other long-term
liabilities............................................ 15,802 3,988 (23,214)
Accrued liabilities...................................... 8,932 18,290 (68,503)
Income taxes payable..................................... 2,171 (4,974) (5,566)
Inventories and other.................................... (1,996) (9,446) 6,216
--------- --------- ---------
Net cash provided by operating activities................... 46,961 101,524 130,226
--------- --------- ---------
Investing activities:
Proceeds from sale of assets .................................... -- -- 47
Purchase of property and equipment............................... (7,323) (75,456) (63,720)
Acquisition of Telco, net of cash acquired ...................... -- -- (475,566)
Purchase of franchise agreement.................................. -- -- (3,514)
Investment in joint venture...................................... (6,003) -- --
--------- --------- ---------
Net cash used in investing activities....................... (13,326) (75,456) (542,753)
--------- --------- ---------
Financing activities:
Payments of debt and capital lease obligations................... (3,069) (479) (297,734)
Proceeds from issuance of long-term debt......................... -- -- 615,000
Debt issuance costs.............................................. -- -- (6,330)
Purchase of treasury stock....................................... -- -- (56,685)
Payments of dividends............................................ (3,000) (20,000) --
Advances to employee stock ownership plan........................ (6,000) -- --
Equity issuance costs............................................ -- -- (4,644)
Net proceeds from issuance of common stock....................... -- 133,870 9,235
--------- --------- ---------
Net cash (used in) provided by financing activities......... (12,069) 113,391 258,842
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.................. 21,566 139,459 (153,685)
Cash and cash equivalents, beginning of period................... 8,821 30,387 169,846
--------- --------- ---------
Cash and cash equivalents, end of period......................... $ 30,387 $ 169,846 $ 16,161
========= ========= =========
Supplemental disclosure:
Interest paid during the period.................................. $ 593 $ 261 $ 2,987
Income taxes paid during the period.............................. 13,046 76,323 43,264
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Presentation
Description of Business and Operations
EXCEL Communications, Inc., previously New RES, Inc., was incorporated in
the state of Delaware in May 1997. EXCEL Communications, Inc. is the parent
company of Excelcom, Inc. ("Excelcom"), previously EXCEL Communications, Inc.,
which was incorporated in the state of Delaware in December 1995. Excelcom's
predecessor, EXCEL Telecommunications, Inc., was incorporated in the state of
Texas in December 1988. All references to the ''Company'' or ''EXCEL'' refer to
EXCEL Communications, Inc. and include its subsidiaries and predecessors. EXCEL
is a provider of a variety of communications products and services which include
residential long distance service, commercial long distance service, and paging
service. The Company's presubscribed residential services are marketed
exclusively through a network marketing system of independent representatives
("IRs"). EXCEL markets residential dial around products and services through
Dial & SaveSM, Long Distance Wholesale ClubSM and Telco ChoiceSM programs and
markets its commercial products and services through IRs and approximately 311
direct sales personnel, 117 sales management personnel, 275 active dealers and
19 telesales agents. The Company completes subscriber calls to all directly
dialable locations worldwide.
On October 14, 1997, EXCEL Communications, Inc., succeeded to the
businesses of Excelcom and Telco Communications Group, Inc. ("Telco"), a
facilities-based provider of telecommunications services, pursuant to the
Agreement and Plan of Merger dated as of June 5, 1997 (the "Merger"). The Merger
creates the fifth largest long distance company in the United States based on
the number of presubscribed lines, with pro forma consolidated annualized
revenues of approximately $2 billion, 11 billion annualized long distance
minutes of usage, 6.0 million customers, and approximately 100,000 network miles
of DS-3 capacity. The results of operations for the year ended December 31, 1997
include Telco's financial results after October 14, 1997, the effective date of
the Merger. (See Note 3 - "EXCEL and Telco Merger".)
The Company leases transmission lines from a variety of facilities-based
and resale long distance carriers. The Company's contracts with these entities
typically have terms ranging from 12 to 60 months. The Company supplements its
leased "on-network" capacity with "off-net" services from a variety of resale
and facilities-based long distance carriers. In addition, the Company does not
have any on-network international network arrangements and exclusively resells
the network capacity of other resale and facilities-based long distance carriers
to international destinations.
The Company currently has agreements with Frontier Communications Services,
Inc. ("Frontier"), IXC Long Distance, Inc. ("IXC Long Distance"), MCI
Telecommunications Corp. ("MCI"), and WorldCom, Inc. ("WorldCom") to provide
switching services and network transmission of its long distance subscribers'
traffic. The agreements with IXC Long Distance, MCI, and WorldCom each contain
minimum usage commitments, while the agreement with Frontier provides that
Frontier is to be the exclusive carrier for certain calling card calls and
personal 800 service. The Company is currently meeting all minimum commitments
under these contracts.
Marketing Activities
Marketing services revenues are primarily comprised of receipts for
materials and services rendered by EXCEL to IRs and area coordinators ("ACs").
Except in certain states, IRs are required to make an initial refundable
application deposit with EXCEL as an expression of commitment. There is no
additional cost to participate. IRs have an option to purchase a start-up
package, which includes a training class and training materials, business forms,
promotional and presentation materials, ongoing technical and administrative
support services, and monthly reports. If the start-up package is purchased, the
application deposit requirement is waived. In addition, EXCEL offers training
positions whereby ACs, certified by the Company, provide training to new IRs.
<PAGE>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Selling, general and administrative expenses consist of marketing costs and
the costs of providing teleservices and other support services for subscribers,
billing and collecting long distance and paging revenues, and the costs of the
information systems and personnel required to support the Company's operations.
Marketing costs include commissions paid to IRs and sales representatives, the
costs of providing training, business forms, promotional and presentation
materials, technical and administrative support services, and monthly reports to
IRs, salaries and commissions paid to the Commercial Sales Division ("CSD")
sales representatives, and direct mail advertising expenses. Commissions paid to
IRs are based upon the acquisition of new long distance and paging subscribers
("subscriber acquisition costs") and long distance telephone and paging usage by
subscribers. The Company also pays commissions for the training of IRs and
certain ACs. Effective January 1, 1997, the Company changed its method of
accounting for subscriber acquisition costs. Previously, the Company had
deferred the portions of commissions paid to IRs that directly relate to the
acquisition of long distance and paging subscribers. Beginning January 1, 1997,
the Company began fully expensing subscriber acquisition costs in the period
incurred in order to present its operating results in a manner more consistent
with other telecommunications companies against which its results are now
compared. The Company recognized a one-time charge of $65.2 million, net of
income taxes, ($0.56 per share) in the first quarter of 1997 to reflect the
change in accounting principle. On a pro forma basis, the Company's net income
would have been $121.8 million ($1.14 per share) and $12.4 million ($0.13 per
share) for the years ended December 31, 1996 and 1995, respectively, if this
accounting change had been retroactively applied.
Costs incurred in connection with direct mail advertising and marketing
commercial long distance products are recognized as expense in the period in
which they are incurred.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable are net of allowance for doubtful accounts and
anticipated revenue adjustments of approximately $9.0 million and $23.1 million
as of December 31, 1996 and 1997, respectively. The Company establishes an
allowance for doubtful accounts and anticipated revenue adjustments based upon
factors surrounding the credit risk of specific subscribers, historical trends,
and other information. During 1997, the Company recorded bad debt expense of
approximately 3% of communication services revenues based on current trends and
information.
Long Distance Revenue Recognition
Revenue is recorded when service is rendered, which is measured when a long
distance call is completed and is recorded net of an allowance for certain
revenues which the Company estimates will ultimately be refunded, rebated,
uncollectible or unbillable.
Concentrations of Credit Risk
The Company's subscribers are primarily residential subscribers and are not
concentrated in any specific geographic region of the United States. The Company
has agreements with local exchange carriers (''LECs''), which provide billing
and collection services to the majority of the Company's subscribers. As of
December 31, 1996 and 1997, approximately 92% and 70% respectively, of the
Company's accounts receivable were due from LECs.
<PAGE>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Inventories
Inventory consists primarily of pagers held for resale and sales aids,
which include marketing materials and promotional items and is valued at the
lower of cost (determined on a first-in, first-out basis) or market.
Property and Equipment
Property and equipment, including items financed through capital leases,
are stated at cost and depreciated using the straight-line method over the
estimated useful lives of the assets, as follows:
Estimated
Asset Classification Useful Life
--------------------- -----------
Buildings....................... 30 years
Furniture and equipment......... 3-5 years
Information systems software.... 5 years
Information systems hardware.... 5 years
Network equipment............... 5-35 years
Leasehold improvements.......... Life of lease
Long-Lived Assets, Identifiable Intangibles and Goodwill
The Company has recorded goodwill and certain identifiable intangibles in
connection with the Merger. These assets are amortized over periods ranging from
5 to 40 years. The Company reviews long-lived assets, certain identifiable
intangibles, and goodwill pertaining to those assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, the Company
estimates the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected cash flows is less than the
carrying amount of the asset, an impairment loss is recognized. No impairment
loss has been recorded in 1995, 1996 or 1997.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
''Accounting for Income Taxes'' which requires that deferred income tax expenses
be provided based upon estimated future tax effects of differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes calculated based upon provisions of
enacted tax laws.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
<PAGE>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Prior Year Reclassification
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Stock Based Compensation
The Company, as permitted by the Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
has chosen to continue to account for stock based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of grant over the amount an employee must pay to
acquire the stock. The Company has adopted the disclosure requirements of SFAS
No. 123.
3. EXCEL and Telco Merger
On October 14, 1997, New RES, Inc., a Delaware corporation and newly formed
holding company, now EXCEL Communications, Inc., ("Holdings"), succeeded to the
businesses of Excelcom, previously EXCEL Communications, Inc., and Telco, as a
result of mergers of wholly-owned subsidiaries with and into Excelcom and Telco,
pursuant to the Agreement and Plan of Merger dated as of June 5, 1997. At the
closing of the Merger on October 14, 1997: (i) Excelcom and Telco became
wholly-owned subsidiaries of Holdings; (ii) each outstanding share of Excelcom
common stock converted into the right to receive one share of common stock of
Holdings; (iii) each outstanding share of Telco common stock converted into the
right to receive 0.7595 shares of common stock of Holdings and $15.00 in cash;
(iv) except for certain options, each then outstanding and unexercised option to
acquire one share of Telco common stock was assumed by Holdings and converted
into an option to acquire 1.5190 shares of Holdings common stock, and the
exercise price per share with respect to each such assumed option was adjusted
to equal the exercise price under the original option divided by 1.5190; (v)
each then outstanding and unexercised option to acquire one share of Excelcom
common stock was assumed by Holdings and converted into an option to acquire one
share of Holdings common stock, and the exercise price per share was unchanged;
(vi) the name of EXCEL Communications, Inc. was changed to Excelcom, Inc.; and
(vii) the name of Holdings was changed to EXCEL Communications, Inc.
Consideration for the Merger consisted of $666.2 million in cash (including
$164.5 million of Telco debt assumed and paid by EXCEL) and 25,376,506 shares of
common stock, $.001 par value, of the Company ("Company Common Stock").
On October 14, 1997, Holdings made an initial borrowing of approximately
$544 million under the New Credit Facility to fund the cash purchase price of
the Merger and related costs and expenses and to refinance existing indebtedness
of Telco. The initial LIBOR spread and Prime spread were 1.0% and 0%,
respectively. (See Note 5 - "Long-Term Debt and Capital Lease Obligations".)
The merger of Telco into Holdings has been accounted for under the
"purchase" method of accounting, with EXCEL as the acquirer in accordance with
generally accepted accounting principles, and the merger of EXCEL into Holdings
has been accounted for as a reorganization. The results of operations for the
year ended December 31, 1997 include Telco's financial results after October 14,
1997, the effective date of the Merger. In connection with the purchase
accounting, EXCEL recorded certain known liabilities related to costs required
to exit activities of Telco and payments to be made under a severance plan.
These included exit costs of $36.8 million and severance payments of $2.8
million. Management is currently integrating the two organizations and expects
to complete the process by the end of the second quarter of 1998.
<PAGE>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The merger with Telco resulted in the recognition of goodwill of $906.6
million which is being amortized straight-line over a period of 40 years. The
following unaudited financial information represents the Company's results of
operations on a pro forma basis as if the Merger had occurred on January 1, 1996
(dollars in thousands, except per share data):
<TABLE>
<CAPTION>
Pro Forma
Years Ended December 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Total revenues...................................... $ 1,802,900 $ 1,897,540
=========== ===========
Net income before cumulative effect of change in
accounting principle (1)......................... $ 120,691 $ 94,067
=========== ===========
Net income (1)...................................... $ 120,691 $ 28,853
=========== ===========
Net income per share before cumulative effect of
change in accounting principle (1)............... $ 0.90 $ 0.69
=========== ===========
Net income per share (1)............................ $ 0.90 $ 0.21
=========== ===========
(1) Excludes non-recurring charges of $64.6 million in 1997. See Note 4 to
the Consolidated Financial Statements.
</TABLE>
These pro forma amounts represent the historical operating results of EXCEL
and Telco combined with appropriate adjustments which give effect to incremental
goodwill amortization and interest expense incurred in connection with the
Merger. These pro forma amounts do not give effect to any potential cost savings
or synergies that could result from the Merger. The pro forma data are not
intended to be indicative of actual results had the Merger occurred on January
1, 1996 nor do they indicate results which may be achieved in the future.
In conjunction with the Merger on October 14, 1997, net cash paid was as
follows (dollars in thousands):
Assets acquired............................ $ 1,332,102
Liabilities assumed........................ (365,405)
Common stock issued........................ (465,515)
-----------
Cash paid............................... 501,182
Less cash acquired......................... (25,616)
-----------
Net cash paid........................... $ 475,566
===========
<PAGE>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4. Non-Recurring Charges
During the fourth quarter of 1997, primarily as a result of the Merger, the
Company initiated plans to reorganize and restructure its management and
operational organization and facilities to eliminate duplicate facilities,
abandon certain projects and activities, and to take further advantage of the
synergies available to the combined entities. Accordingly, the Company charged
to operations the estimated costs of such reorganization and restructuring
activities in addition to certain legal expenses, vendor disputes, and other
charges. These costs amount to $64.6 million and are included in non-recurring
charges in the Company's Consolidated Statement of Operations.
The following table reflects the components of the significant items
included in non-recurring charges for the year ended December 31, 1997 (amounts
in thousands):
Year Ended
December 31, 1997
-------------------
Reduction in carrying value of certain assets.......... $ 47,678
Costs to exit unfavorable contracts.................... 5,559
Legal expenses, vendor disputes and other charges...... 11,400
--------
Non-recurring charges............................. $ 64,637
========
5. Long-Term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations consisted of the following at
December 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997
----------- ------------
<S> <C> <C>
Capital lease obligations............. $ 339 $ 2,968
Revolving credit facility............. -- 475,000
Less current maturities............... (239) (676)
----- ---------
$ 100 $ 477,292
===== =========
</TABLE>
On October 10, 1997, Holdings entered into a new credit facility for
borrowings up to $1 billion (the "New Credit Facility"). Borrowings under the
New Credit Facility are available for general corporate purposes including
acquisitions and are subject to various financial covenants. The interest rate
on the New Credit Facility is based on Holdings' prevailing debt ratio and
ranges on a Eurodollar (LIBOR) option from a spread of 0.625% to 1.75%, and on a
Base (Prime) Rate option from a spread of 0% to 0.50%. Total borrowing
availability under the New Credit Facility reduces to $800 million on September
30, 2000, and to $500 million on September 30, 2001, and the New Credit Facility
expires on September 30, 2002.
On October 14, 1997, Holdings made an initial borrowing of approximately
$544 million under the New Credit Facility to fund the cash purchase price of
the Merger and related costs and expenses and to refinance existing indebtedness
of Telco. The initial LIBOR spread and Prime spread were 1.0% and 0%,
respectively.
<PAGE>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6. Property and Equipment
Property and equipment consisted of the following at December 31, 1996 and
1997 (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
-------- ---------
<S> <C> <C>
Land............................................. $ 5,067 $ 5,067
Buildings........................................ 16,506 18,465
Furniture and equipment.......................... 28,074 42,781
Information systems software..................... 17,585 11,977
Information systems hardware..................... 15,480 19,815
Leasehold improvements........................... 2,871 8,491
Network equipment................................ -- 185,423
Network facilities under development............. -- 25,195
-------- ---------
Total......................................... 85,583 317,214
Less-Accumulated depreciation and amortization... (8,671) (35,367)
-------- ---------
Net property and equipment....................... $ 76,912 $ 281,847
======== =========
</TABLE>
7. Income Taxes
The components of the provision for income taxes are as follows for the
years ended December 31, 1995, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Current income tax expense:
Federal......................... $ 13,322 $ 56,731 $ 54,106
State........................... 812 3,621 6,618
--------- --------- ---------
$ 14,134 $ 60,352 $ 60,724
--------- --------- ---------
Deferred income tax expense:
Federal......................... $ 12,110 $ 23,650 $ (4,606)
State........................... 649 1,486 (457)
--------- --------- ---------
$ 12,759 $ 25,136 $ (5,063)
--------- --------- ---------
Provision for income taxes......... $ 26,893 $ 85,488 $ 55,661
========= ========= =========
</TABLE>
<PAGE>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Temporary differences which give rise to the net deferred income tax
(liability) asset at December 31, 1996 and 1997 are as follows (in thousands):
December 31,
----------------------
1996 1997
-------- ---------
Deferred income tax assets:
Accounts receivable................................. $ 1,558 $ --
Inventory........................................... -- 205
Deferred management services fees................... -- 5,314
Accrued liabilities................................. -- 44,948
Other............................................... 624 2,695
-------- ---------
2,182 53,162
Deferred income tax liabilities:
Accounts receivable................................. -- (2,729)
Depreciation........................................ (4,193) (2,249)
Deferred subscriber acquisition costs .............. (38,144) --
Other............................................... (1,847) (10,372)
-------- ---------
(44,184) (15,350)
-------- ---------
Net deferred tax (liability) asset..................... (42,002) 37,812
Less-Net current deferred income tax asset............. (1,897) (34,128)
-------- ---------
Net long-term deferred income tax (liability) asset.... $(43,899) $ 3,684
======== =========
The recognition of the deferred tax asset related to deferred management
service fees reflects the cumulative effect of a change in accounting method for
income tax purposes for management service fees. The cumulative effect of the
change from the cash method to the accrual method is being taken into account
over six years beginning in 1996 for income tax return purposes.
The provision for income taxes was different than the amount computed using
the statutory income tax rate for the reasons set forth in the following table
(in thousands):
Years Ended December 31,
-------------------------------
1995 1996 1997
-------- -------- --------
Tax computed at statutory rate..... $ 24,969 $ 80,470 $ 50,255
State income taxes and other....... 1,924 5,018 5,406
-------- -------- --------
Provision for income taxes...... $ 26,893 $ 85,488 $ 55,661
======== ======== ========
<PAGE>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
8. Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("SFAS No. 128"), effective December 15, 1997. SFAS
No. 128 requires the calculation of basic earnings per common share, which is
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period, and diluted earnings per common
share, which is computed using the weighted average number of shares of common
stock and common stock equivalents. Basic earnings per share are computed as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Basic:
Net income...........................................$ 44,446 $144,427 $ 22,712
Weighted average shares of common stock outstanding.. 99,000 105,346 113,376
Unallocated employee stock plan shares............... (2,040) (540) --
-------- -------- --------
Adjusted weighted average shares of common stock
outstanding....................................... 96,960 104,806 113,376
-------- -------- --------
Basic earnings per share.............................$ 0.46 $ 1.38 $ 0.20
======== ======== ========
</TABLE>
Diluted earnings per share is based on the weighted average number of
shares of common stock outstanding. The weighted average shares outstanding
include common stock equivalents which represent the effect, using the treasury
stock method, of options granted under the Company's stock option plan. Diluted
earnings per share are computed as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1995 1996 1997
------- --------- --------
<S> <C> <C> <C>
Diluted:
Net income...........................................$44,446 $ 144,427 $ 22,712
Adjustment of shares outstanding:
Weighted average shares of common stock outstanding.. 99,000 105,346 113,376
Unallocated employee stock plan shares............... (2,040) (540) --
------- --------- --------
Adjusted weighted average shares of common stock
outstanding....................................... 96,960 104,806 113,376
Shares of common stock issuable upon the assumed
exercise of stock options......................... 361 2,441 2,171
------- --------- --------
Adjusted shares of common stock and common stock
equivalents for computation...................... 97,321 107,247 115,547
------- --------- --------
Diluted earnings per share...........................$ 0.46 $ 1.35 $ 0.20
======= ========= ========
</TABLE>
In 1995 and 1996, the weighted average shares outstanding excluded employee
stock ownership plan shares that had not been released to employees at the end
of the period.
9. Stockholders' Equity
Effective January 1, 1996, the Company issued 99,000,000 shares of its
common stock to stockholders at a conversion rate of 1,000 shares of newly
issued common stock for each share of common stock previously held. These new
shares were issued pursuant to a reorganization, which included a statutory
merger whereby the Company was formed as a holding company. In addition,
500,000,000 shares were authorized. All common stock and per share amounts in
the Company's Consolidated Financial Statements have been adjusted retroactively
to give effect to the stock conversion and the change in authorized shares. In
May 1996, the Company sold 9,800,000 shares of its common stock at $15.00 per
share, which resulted in 108,800,000 shares outstanding and net proceeds of
approximately $133.9 million to the Company after deducting the expenses of the
offering. In connection with the Merger, the company issued 25,376,506 shares of
common stock, $.001 par value, to Telco stockholders.
<PAGE>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Company also has 10,000,000 shares of preferred stock authorized, which
can be issued in one or more series with fixed designations, relative powers,
preferences, rights, qualifications, limitations, and restrictions of all shares
of each series, including without limitation, dividend rates, preemptive rights,
conversion rights, voting rights, redemption and sinking fund provisions,
liquidation preferences, and the number of shares constituting each such series,
without any further vote or action by the stockholders.
In June 1997, the Company's Board of Directors approved a plan to
repurchase up to 10,000,000 shares of its common stock in the open market or
through privately negotiated transactions. This plan was terminated upon
effectiveness of the Merger and the treasury stock was retired. Repurchases
under this plan totaled 2,752,672 shares at a cost of $55.7 million. In December
1997, the Company's Board of Directors approved a new plan to repurchase up to
10,000,000 shares of its common stock in the open market or through privately
negotiated transactions. Repurchases under this plan totaled 65,800 shares at a
cost of approximately $970,000 through December 31, 1997.
10. Commitments and Contingencies
The Company leases certain office equipment and office space under
operating leases. Total expense for the years ended December 31, 1995, 1996 and
1997 was approximately $1.1 million, $6.6 million, and $11.1 million,
respectively.
Future minimum rents due under operating leases with initial or remaining
terms greater than 12 months as of December 31, 1997 are as follows (in
thousands):
1998......................... $ 14,362
1999......................... 12,216
2000......................... 11,683
2001......................... 9,518
2002......................... 6,665
Thereafter................... 6,981
Litigation, Claims and Assessments
On August 30, 1996, AT&T filed suit in the United States District Court for
the District of Delaware against the Company, its subsidiary, EXCEL
Communications Marketing, Inc., and EXCEL Telecommunications, Inc. alleging past
and continued infringement of a single patent without specifying the amount of
damages. The Court granted summary judgment in favor of Excel on March 27, 1998.
The Court held that the claims being asserted against Excel were unpatentable
under U.S. patent laws. The Company expects AT&T to appeal this decision.
Legislative and Regulatory Matters
On February 8, 1996, the 1996 Telecommunications Act was enacted into law.
This comprehensive federal legislation will affect every sector of the
telecommunications industry. Included in the new statutory provisions is the
opening up of local telephone markets to competition from facilities-based and
resale carriers and, subject to certain preconditions and safeguards for the
BOCs, the elimination of restrictions on Bell Operating Company ("BOC") and GTE
Operating Company ("GTOC") entrance into the long distance telecommunications
market. The FCC adopted rules to govern the introduction of new forms of
competition in its August 8, 1996 Interconnection Orders, significant aspects of
which, including provisions governing the wholesale pricing of local service,
were overturned by the U.S. Eighth Circuit Court of Appeals. The U.S. Supreme
Court has agreed to hear appeals of this decision, but it is not expected by the
Company to render a final decision until early 1999. Therefore, it is unknown at
this time whether this Eighth Circuit decision will be upheld or what impact the
1996 Telecommunications Act or the Interconnection Orders will have on the
Company. Depending on the nature and timing of BOC and GTOC entry into the long
distance market, the Company may face significant additional competition in the
provision of long distance services. However, the 1996 Telecommunications Act
opens the local telephone market to competition, which, depending on the nature
of such opening, the Company believes may provide opportunities to compete in
the provision of local services. The Company is currently seeking certification
to provide resold local exchange services in several states. As of December 31,
1997, the Company is authorized to provide resold local exchange services in 31
states.
<PAGE>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Various governmental agencies monitor direct selling activities, and the
Company has occasionally been requested to supply information regarding its
marketing plan to certain of such agencies. Although the Company believes that
its network marketing system is in substantial compliance with laws and
regulations of each state relating to direct selling activities, there is no
assurance that legislation and regulations adopted in particular jurisdictions
in the future will not adversely affect the Company's operations.
11. Employee Benefit Plans
The Company and its subsidiaries offer its qualified employees the
opportunity to participate in one of its defined contribution retirement plans
qualifying under the provisions of Section 401 (k) of the Internal Revenue Code.
Generally each employee may contribute on a tax deferred basis up to 15% of
their gross salary into the plan. The Company's contribution is to be determined
annually by the Board of Directors. Company contributions to the plan for the
years ended December 31, 1995, 1996, and 1997 were not significant.
Effective January 1, 1995, the Company amended the 401(k) plan to
incorporate an Employee Stock Ownership Plan ("ESOP") for substantially all
employees of EXCEL. On November 1, 1995, the ESOP borrowed $6.0 million from the
Company to purchase 3,000,000 shares of common stock. The shares were held in a
trust and were allocated to employees' accounts in the ESOP during the same
calendar year in which debt repayments were made. The Company recognized
compensation expense related to the ESOP of $5.6 million and $6.3 million for
the years ended December 31, 1995 and 1996, respectively. During 1995, 1,707,000
shares were released and allocated to ESOP participants. The remaining 1,293,000
shares were allocated to ESOP participants in 1996.
The Company has various stock option plans which permit the issuance of
either incentive stock options or non-statutory options to selected employees,
directors, and consultants to the Company and its affiliates. The plan reserves
4,400,000 shares of common stock for grant. These options vest over a three to
six year period and expire ten years from the date of grant. As of December 31,
1997, 3,270,000 shares remain available for future option grants and 2,279,731
outstanding options are vested or exercisable.
As permitted by SFAS No. 123, the Company has chosen to continue to account
for stock based compensation using the intrinsic value method prescribed in APB
Opinion No. 25. Accordingly, no compensation cost has been recognized for the
Company's stock option plans. Had compensation cost for the Company's stock
based compensation plans been determined using the alternative accounting method
based on the fair value prescribed by SFAS No. 123, the Company's pro forma net
income for the year ended December 31, 1997 would have been $22.1 million and
diluted and basic earnings per share would have been $0.19 and $0.20,
respectively, for the same period. The reduction in the Company's 1996 and 1995
net income and earnings per share would have been insignificant.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model. The weighted average fair value of the
options granted under this model was $7.75 per option for the year ended
December 31, 1997 based on the following assumptions: no expected dividends,
risk free interest rate of 6.39%, expected life of six years, and the expected
volatility of 28.96%.
<PAGE>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
A summary of stock option activity for the three years ended December 31,
1997 is as follows:
Weighted Average
Number of Exercise Price
Options per Share
---------- -------
Outstanding, December 31, 1994....... -- N/A
Granted........................... 4,893,075 $ 4.50
Exercised......................... -- N/A
Canceled.......................... -- N/A
----------
Outstanding, December 31, 1995....... 4,893,075 $ 4.50
Granted........................... 332,750 $15.33
Exercised......................... -- N/A
Canceled.......................... (133,850) $ 5.33
----------
Outstanding, December 31, 1996....... 5,091,975 $ 5.19
Granted........................... 1,946,070 $19.97
Granted in connection with the
merger.......................... 4,911,606 $ 9.27
Exercised......................... (1,255,909) $ 4.18
Canceled.......................... (646,290) $ 7.72
----------
Outstanding, December 31, 1997....... 10,047,452 $10.08
==========
The following table summarizes information about fixed stock options
outstanding and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------- -----------------------------
Weighted Weighted Weighted
Exercise Number Average Average Number Average
Price Ranges Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- ------------- ----------- -------------- -------------- ----------- -------
<S> <C> <C> <C> <C> <C>
$ 0.44-4.96 5,335,083 7.8 $ 4.19 1,933,443 $ 3.57
$ 9.22-10.95 941,926 8.6 $ 9.73 222,946 $ 9.32
$ 11.03-15.00 1,509,792 9.1 $ 13.18 115,875 $ 11.73
$ 17.94-24.00 2,260,651 9.6 $ 22.04 7,467 $ 21.25
---------- ---------
$ 0.44-24.00 10,047,452 8.5 $ 10.08 2,279,731 $ 4.60
========== =========
</TABLE>
<PAGE>
EXCEL COMMUNICATIONS, INC. 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 of the Registrant
The information required by Item 10 appears in and is incorporated by
reference herein from the Company's Proxy Statement for its 1998 Annual Meeting
of Stockholders (the ''Proxy Statement'').
Item 11. Executive Compensation
The information required by Item 11 appears in and is incorporated by
reference herein from the Company's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 appears in and is incorporated by
reference herein from the Company's Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 appears in and is incorporated by
reference herein from the Company's Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this Annual Report on
Form 10-K:
(1) The consolidated financial statements of EXCEL and supplementary
financial information filed as part of this report are included in
Part II, Item 8. of this Annual Report on Form 10-K.
(2) All Financial Statement Schedules other than those listed below have
been omitted because they are not required under the instructions to
the applicable accounting regulations of the Securities and Exchange
Commission or the information to be set forth therein is included in
the financial statements or in the notes thereto. The following
additional financial data should be read in conjunction with the
financial statements included in Part II, Item 8. of this Annual
Report on Form 10-K:
Report of Independent Public Accountants on Financial Schedule
Schedule II-Valuation and Qualifying Accounts
(3) Exhibits
The exhibits filed or incorporated by reference as part of this report are
set forth in the Index of Exhibits on page E-1 of this Annual Report on
Form 10-K.
(b) Reports on Form 8-K
(1) Current report on Form 8-K dated October 14, 1997, regarding the
completion of the acquisition of Telco Communications Group, Inc.
(2) Current report on Form 8-K dated October 24, 1997, regarding the
settlement of the Wood Litigation.
(3) Current report on Form 8-K dated December 17, 1997, regarding the
resignation of Donald A. Burns and Henry G. Luken, III from the board
of directors.
(c) Exhibits
Refer to Item 14(a)(3) above.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
EXCEL Communications, Inc.
/s/ Kenny A. Troutt
By:----------------------------
Kenny A. Troutt
Chief Executive Officer
Date: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on March 27, 1998 on
behalf of the registrant and in the capacities indicated.
/s/ Kenny A. Troutt
- ------------------------------------
Kenny A. Troutt
Chief Executive Officer, Chairman of
the Board and Director
(Principal Executive Officer)
/s/ John J. McLaine
- ------------------------------------
John J. McLaine
President, Chief Operating Officer,
and Director
/s/ Nicholas A. Merrick
- ------------------------------------
Nicholas A. Merrick
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
(from October 15, 1997 - present)
/s/ Craig E. Holmes
- ------------------------------------
Craig E. Holmes
Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
/s/ Stephen R. Smith
- ------------------------------------
Stephen R. Smith
Executive Vice President
of Marketing-Emeritus and Director
/s/ Ronald A. McDougall
- ------------------------------------
Ronald A. McDougall
Director
/s/ T. Allan McArtor
- ------------------------------------
T. Allan McArtor
Director
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of EXCEL Communications, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of EXCEL Communications, Inc. (a Delaware
corporation) and subsidiaries (the ''Company'') included in this Form 10-K and
have issued our report thereon dated January 26, 1998. Our audit was made for
the purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. Schedule II, which is the responsibility of the Company's
management, is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated 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 consolidated financial statements taken
as a whole.
Dallas, Texas
January 26, 1998 ARTHUR ANDERSEN LLP
<PAGE>
<TABLE>
<CAPTION>
EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions(a) Period
- -------------------------------------------- --------- ---------- ------------ ----------
Allowance for doubtful accounts and revenue
adjustments:
<S> <C> <C> <C> <C>
December 31, 1995....................... 1,700 13,871 9,690 5,881
December 31, 1996....................... 5,881 38,798 35,728 8,951
December 31, 1997....................... 8,951 70,360 56,183 23,128
(a) Represents amount written off as uncollectible and recoveries of
previously reserved amounts.
</TABLE>
<PAGE>
INDEX TO EXHIBITS
(ITEM 14(a))
Exhibit
No. DESCRIPTION
------- -----------
2.1 Agreement and Plan of Merger, dated June 5, 1997, by and among EXCEL
Communications, Inc., New RES, Inc., T-Sub, Inc., E-Sub, Inc. and
Telco Communications Group, Inc. The schedules to the Agreement and
Plan of Merger and the appendices thereto have been omitted. Holdings
will furnish supplementally to the Commission any of the schedules or
appendices upon request (incorporated by reference to Exhibit 2.1 to
the Company's Registration Statement on Form S-4, as amended, File No.
333-35377)
3.1 Certificate of Incorporation of the Company (incorporated herein by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997 filed with the
Commission).
3.2 Amended and Restated Bylaws of the Company (incorporated by reference
to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 filed with the Commission).
4.1 Specimen Certificate for Common Stock of the Company (incorporated by
reference to Exhibit 4.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997 filed with the
Commission).
10.1 Excelcom, Inc. 1995 Stock Option Plan (incorporated by reference to
Exhibit 4.4. to Excelcom Inc.'s ("Excelcom") Registration Statement on
Form S-8, as amended, File No. 333-20061).
10.2 Excelcom, Inc. 1997 Director Stock Option Plan (incorporated by
reference to Exhibit 4.5 to Excelcom's Registration Statement on Form
S-8, as amended, File No. 333-20061).
10.3 Excelcom, Inc. Director Stock Option Agreement with Ronald A.
McDougall (incorporated by reference to Exhibit 4.6 to Excelcom's
Registration Statement on Form S-8, as amended, File No. 333-20061).
10.4 Telco Communications Group, Inc. Amended and Restated 1994 Stock
Option Plan (incorporated by reference to Exhibit 10.22 to Telco
Communications Group Inc.'s ("Telco") Registration Statement on Form
S-1, as amended, File No. 333-05857).
10.5 EXCEL Communications, Inc. 1997 Stock Option Plan (incorporated by
reference to Exhibit 4.4 to the Company's Registration Statement on
Form S-8, File No. 333-38149).
10.6 EXCEL Communications, Inc. 1997 Director Stock Option Plan
(incorporated by reference to Exhibit 4.5 to the Company's
Registration Statement on Form S-8, File No. 333-38149).
10.7 EXCEL Telecommunications, Inc. Employee Ownership Plan Trust Agreement
dated October 1, 1995 (the ''Trust Agreement'') between EXCEL
Telecommunications, Inc. and Bank One Texas, N.A. (''Bank One'') as
Trustee of the EXCEL Telecommunications, Inc. Employee Ownership Plan
(incorporated by reference to Exhibit 10.3 to Excelcom's Registration
Statement on Form S-1, as amended, File No. 333-1076).
10.8 Amendment to the Trust Agreement dated December 29, 1995 among the
Registrant, EXCEL Telecommunications, Inc., and Bank One (incorporated
by reference to Exhibit 10.4 to Excelcom's Registration Statement on
Form S-1, as amended, File No. 333-1076).
<PAGE>
Exhibit
No. DESCRIPTION
------- -----------
10.9 ESOP Loan Agreement dated as of October 1, 1995 by and between EXCEL
Telecommunications, Inc. and Bank One (incorporated by reference to
Exhibit 10.5 to Excelcom's Registration Statement on Form S-1, as
amended, File No. 333-1076).
10.10 Non-Recourse Promissory Note dated October 1, 1995 payable to EXCEL
Telecommunications, Inc. by Bank One in the original principal amount
of $6,000,000 (incorporated by reference to Exhibit 10.6 to Excelcom's
Registration Statement on Form S-1, as amended, File No. 333-1076).
10.11 ESOP Pledge Agreement dated October 1, 1995 by and between EXCEL
Telecommunications, Inc. and Bank One (incorporated by reference to
Exhibit 10.7 to Excelcom's Registration Statement on Form S-1, as
amended, File No. 333-1076).
10.12 Stock Purchase Agreement dated as of October 1, 1995 among EXCEL
Telecommunications, Inc., Bank One, Kenny A. Troutt, and Thomas P.
Wittmann (incorporated by reference to Exhibit 10.8 to Excelcom's
Registration Statement on Form S-1, as amended, File No. 333-1076).
10.13 Second Amended and Restated Service Agreement dated as of January 1,
1996 by and between Switched Services Communications, L.L.C. (''SSC'')
and EXCEL Telecommunications, Inc. (incorporated by reference to
Exhibit 10.9 to Excelcom's Registration Statement on Form S-1, as
amended, File No. 333-1076)##.
10.14 Purchase and Sale Agreement dated as of January 1, 1996 by and among
EXCEL Telecommunications, Inc., the Registrant, IXC Long Distance,
Inc., SSC, and IXC Carrier, Inc. (incorporated by reference to Exhibit
10.10 to Excelcom's Registration Statement on Form S-1, as amended,
File No. 333-1076).
10.15 Pledge Agreement dated January 1, 1996 between IXC Long Distance,
Inc. and the Registrant (incorporated by reference to Exhibit 10.11 to
Excelcom's Registration Statement on Form S-1, as amended, File No.
333-1076).
10.16 Promissory Note dated January 1, 1996 payable to the Registrant by
IXC Long Distance, Inc. in the original principal amount of $6,247,500
(incorporated by reference to Exhibit 10.12 to Excelcom's Registration
Statement on Form S-1, as amended, File No. 333-1076).
10.17 EXCEL Reseller Services Agreement dated February 20, 1995 between
Allnet Communication Services, Inc. (''Allnet'') and EXCEL
Telecommunications, Inc. (incorporated by reference to Exhibit 10.13
to Excelcom's Registration Statement on Form S-1, as amended, File No.
333-1076)##.
10.18 Amendment No. 1 to EXCEL Reseller Services Agreement dated October
31, 1995 between Allnet and EXCEL Telecommunications, Inc.
(incorporated by reference to Exhibit 10.14 to Excelcom's Registration
Statement on Form S-1, as amended, File No. 333-1076)##.
10.19 Addendum for Dedicated Services to the EXCEL Reseller Services
Agreement between Allnet and EXCEL Telecommunications, Inc.
(incorporated by reference to Exhibit 10.15 to Excelcom's Registration
Statement on Form S-1, as amended, File No. 333-1076)##.
10.20 Agreement dated May 1, 1989 between EXCEL Telecommunications, Inc.
and Stephen R. Smith (incorporated by reference to Exhibit 10.16 to
Excelcom's Registration Statement on Form S-1, as amended, File No.
333-1076).
<PAGE>
Exhibit
No. DESCRIPTION
------- -----------
10.21 First Amendment of Agreement dated January 8, 1996 between EXCEL
Telecommunications, Inc. and Stephen R. Smith (incorporated by
reference to Exhibit 10.17 to Excelcom's Registration Statement on
Form S-1, as amended, File No. 333-1076).
10.22 Commercial Property Contract of Sale dated August 8, 1995 between FM
Properties Operating Co. and EXCEL Telecommunications, Inc., as
amended (incorporated by reference to Exhibit 10.18 to Excelcom's
Registration Statement on Form S-1, as amended, File No. 333-1076).
10.23 Standard Form of Agreement between Owner and Contractor/Developer
dated November 17, 1995, between EXCEL Telecommunications, Inc. and
Wilcox/CMC Addison, Inc. (incorporated by reference to Exhibit 10.19
to Excelcom's Registration Statement on Form S-1, as amended, File No.
333-1076).
10.24 Assignment and Assumption of Construction Contract dated December 28,
1995 between EXCEL Telecommunications, Inc. and Registrant
(incorporated by reference to Exhibit 10.20 to Excelcom's Registration
Statement on Form S-1, as amended, File No. 333-1076).
10.25 Office Lease dated October 3, 1991 between State of California Public
Employees' Retirement System and EXCEL Telecommunications, Inc.
(incorporated by reference to Exhibit 10.21 to Excelcom's Registration
Statement on Form S-1, as amended, File No. 333-1076).
10.26 Lease Amendment dated May 17, 1994 between Stewart Interchange I,
Inc., as successor in interest to State of California Public
Employees' Retirement System and EXCEL Telecommunications, Inc.
(incorporated by reference to Exhibit 10.22 to Excelcom's Registration
Statement on Form S-1, as amended, File No. 333-1076).
10.27 Promissory Note dated April 20, 1995 payable to EXCEL
Telecommunications, Inc. by Kenny A. Troutt in the original principal
amount of $4,920,000 (incorporated by reference to Exhibit 10.27 to
Excelcom's Registration Statement on Form S-1, as amended, File No.
333-1076).
10.28 Promissory Note dated April 21, 1995 payable to EXCEL
Telecommunications, Inc. by Thomas P. Wittmann in the original
principal amount of $360,000 (incorporated by reference to Exhibit 10.
28 to Excelcom's Registration Statement on Form S-1, as amended, File
No. 333-1076).
10.29 Promissory Note dated September 29, 1995 payable to EXCEL
Telecommunications, Inc. by Kenny A. Troutt in the original principal
amount of $720,000 (incorporated by reference to Exhibit 10.29 to
Excelcom's Registration Statement on Form S-1, as amended, File No.
333-1076).
10.30 EXCEL Communications, Inc. Employee Ownership Plan, as amended and
restated effective October 1, 1995 (incorporated by reference to
Exhibit 10.30 to Excelcom's Registration Statement on Form S-1, as
amended, File No. 333-1076).
10.31 Employment Agreement, dated January 1, 1996, between the Registrant
and Kenny A. Troutt (incorporated by reference to Exhibit 10.31 to
Excelcom's Registration Statement on Form S-1, as amended, File No.
333-1076).
10.32 EXCEL Telecommunications, Inc. 1996 Management Incentive Plan
(incorporated by reference to Exhibit 10.32 to Excelcom's Registration
Statement on Form S-1, as amended, File No. 333-1076).
10.33 Form of agreement with independent representatives (form represents
front and back of agreement).
<PAGE>
Exhibit
No. DESCRIPTION
------- -----------
10.34 Form of agreement with area coordinators (form represents front and
back of agreement).
10.35 Reseller Agreement, dated as of March 8, 1996, between EXCEL
Telecommunications, Inc. and Page Mart, Inc. (incorporated by
reference to Exhibit 10.1 to Excelcom's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.).##
10.36 Preferred Vendor Status Agreement dated as of January 1, 1996 by and
among EXCEL Telecommunications, Inc., IXC Long Distance, Inc.,
Switched Services Communications, L.L.C., and IXC Carrier, Inc.
(incorporated by reference to Exhibit 10.37 to Excelcom's Registration
Statement on Form S-1, as amended, File No. 333-1076).
10.37 Office Lease Agreement dated February 1, 1996 between Connecticut
General Life Insurance Company and EXCEL Telecommunications, Inc.
(incorporated by reference to Exhibit 10.38 to Excelcom's Registration
Statement on Form S-1, as amended, File No. 333-1076).
10.38 Amendment No. 2 to EXCEL Reseller Services Agreement dated April 27,
1996 between Allnet and EXCEL Telecommunications, Inc. (incorporated
by reference to Exhibit 10.39 to Excelcom's Registration Statement on
Form S-1, as amended, File No. 333-1076).
10.39 Telecommunications Services Agreement, dated May 31, 1996, between
WorldCom Network Services, Inc. d/b/a WilTel (''WilTel'') and EXCEL
Telecommunications, Inc. (incorporated by reference to Exhibit 10.1 to
Excelcom's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996).
10.40 Program Enrollment Terms, dated May 31, 1996, between WilTel and
EXCEL Telecommunications, Inc. (incorporated by reference to Exhibit
10.2 to Excelcom's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996).##
10.41 Amended and Restated Program Enrollment Terms, dated November 24,
1997 between WilTel and EXCEL Telecommunications, Inc.#
10.42 Service Schedule, dated May 31, 1996, between WilTel and EXCEL
Telecommunications, Inc. (incorporated by reference to Exhibit 10.3 to
Excelcom's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996).##
10.43 Amendment No. 3 to EXCEL Reseller Services Agreement, dated February
20, 1995 and effective April 1, 1995, between Frontier Communications
Services, Inc. and EXCEL Telecommunications, Inc. (incorporated by
reference to Exhibit 10.4 to Excelcom's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996).
10.44 Carrier Agreement, dated June 26, 1996, between MCI
Telecommunications Corporation and EXCEL Telecommunications, Inc.
(incorporated by reference to Exhibit 10.5 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, filed with
the Commission).##
10.45 Underwriting Agreement, dated May 9, 1996, between the Company and
Donaldson, Lufkin & Jenrette Securities Corporation, as representative
of the several U.S. underwriters and the several international
managers for the Company's initial public offering (incorporated by
reference to Exhibit 1.1 to Excelcom's Registration Statement on Form
S-1, as amended, File No. 333-1076).
<PAGE>
Exhibit
No. DESCRIPTION
------- -----------
10.46 Form of Employment Agreement between Donald A. Burns and Telco
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-4, as amended, File No. 333-35377).
10.47 Form of Employment Agreement between Stephen G. Canton and Telco
(incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-4, as amended, File No. 333-35377).
10.48 Form of Employment Agreement between Henry G. Luken, III and EXCEL
(incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-4, as amended, File No. 333-35377).
10.49 Form of Employment Agreement between Nicholas A. Merrick and Telco
(incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-4, as amended, File No. 333-35377).
10.50 Form of Employment Agreement between Bryan K. Rachlin and Telco
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-4, as amended, File No. 333-35377).
10.51 Form of Non-Competition Agreement between Donald A. Burns and EXCEL
(incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-4, as amended, File No. 333-35377).
10.52 Form of Non-Competition Agreement between Stephen G. Canton and
EXCEL(incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-4, as amended, File No. 333-35377).
10.53 Form of Non-Competition Agreement between Henry G. Luken, III and
EXCEL (incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-4, as amended, File No. 333-35377).
10.54 Form of Non-Competition Agreement between Nicholas A. Merrick and
EXCEL (incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-4, as amended, File No. 333-35377).
10.55 Form of Employment Agreement between Bryan K. Rachlin and EXCEL
(incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-4, as amended, File No. 333-35377) .
10.56 EXCEL Shareholders Agreement, dated as of June 5, 1997, by and among
Telco Communications Group, Inc. and each of the shareholders party
thereto (incorporated by reference to Excelcom's Form 8-K, dated June
5, 1997, as filed with the Commission on June 10, 1997).
10.57 Telco Shareholders Agreement, dated June 5, 1997, by and among EXCEL
Communications, Inc. and each of the shareholders party thereto
(incorporated by reference to Form 8-K of Telco Communications Group,
Inc., dated June 5, 1997, as filed with the Commission on June 10,
1997).
10.58 Agreement for Billing Services by Tel Labs, Inc. and Esprit Telecom
dated December 29, 1995 (incorporated by reference to Exhibit 10.4 to
Telco's Registration Statement on Form S-1, as amended, File No.
333-05857).
<PAGE>
Exhibit
No. DESCRIPTION
------- -----------
10.59 Service Agreement between IXC Carrier, Inc. and Telco Communications
Group, Inc. dated December15, 1995 (incorporated by reference to
Exhibit 10.17 to Telco's Registration Statement on Form S-1, as
amended, File No. 333-05857).
10.60 Telco Communications Group, Inc. Wholesale Customer Agreement for
Special International Pricing with Esprit Telecom dated February 21,
1996 (incorporated by reference to Exhibit 10.18 to Telco's
Registration Statement on Form S-1, as amended, File No. 333-05857).
10.61 Equipment leases between DSC Finance Corporation and Telco
Communications Group, Inc. (Master Lease dated January 1, 1994 and
Schedules A-P1) (incorporated by reference to Exhibit 10.29 to Telco's
Registration Statement on Form S-1, as amended, File No. 333-05857).
10.62 Carrier Agreement between AT&T Corp. and Telco Communications Group,
Inc., dated December 23, 1996 (incorporated by reference to Exhibit
10.44 to Telco's Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 0-28668).
10.63 Network Purchase Agreement between Advantis and Telco Network
Services, Inc., dated March 11, 1997 (incorporated by reference to
Exhibit 10.45 to Telco's Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 0-28668).
10.64 Credit Agreement, dated as of October 10, 1997, by and among EXCEL
Communications, Inc., the lenders party thereto, Lehman Commercial
Paper Inc., as Arranger and Syndication Agent, Bank of America
National Trust and Savings Association and Nationsbank of Texas, N.A.,
as Documentation Agents, and First Union National Bank, as
Administrative Agent (incorporated by reference to Exhibit 99.2 to the
Company's Form 8-K, dated October 14, 1997, File No. 001-13433).
10.65 Deed of Lease Agreement between Bricks in the Stock, Ltd. And Tel
Labs, Inc. effective July 1, 1994 (Corporate Office) (incorporated by
reference to Exhibit 10.25 to Telco's Registration Statement on Form
S-1, as amended, File No. 333-05857).
10.66 Deed of Lease Agreement between Bricks in the Stock, Ltd. And Tel
Labs, Inc. effective March 1, 1995 (Corporate Office) (incorporated by
reference to Exhibit 10.26 to Telco's Registration Statement on Form
S-1, as amended, File No. 333-05857).
10.67 Credit Agreement between Telco and Nationsbank of Texas, N.A. as
Administrative Lender and Lenders dated December 20, 1996
(incorporated by reference to Exhibit 10.43 to Telco's Annual Report
on Form 10-K for the year ended December 31, 1996, File No. 0-28668).
10.68 Form Indemnification Agreement by and among the Company and the
Company's officers and directors.
10.69 Amendment to the EXCEL Communications, Inc. Employee Ownership Plan,
dated December 3, 1997.
18.1 Change of Accounting Letter from Arthur Andersen LLP
22.1 Subsidiaries of Excel Communications, Inc.
23.1 Consent of Independent Public Accountants
27.1 Financial Data Schedule as of December 31, 1997.
- ------------------------------------------------
# Confidential Treatment has been requested.
## Confidential Treatment has been granted.
<PAGE>
(FRONT) INDEPENDENT REPRESENTATIVE
APPLICATION AND AGREEMENT
COMPLETION INSTRUCTIONS:
PLEASE FILL OUT BOXED AREA NEATLY MAKING SURE NOT TO WRITE OUTSIDE OF BOXES AS
SHOWN TO INSURE PROPER PROCESSING OF YOUR INFORMATION COMPLETE AS SHOWN IN BLACK
OR BLUE INK AND PRINT IN CAPITAL LETTERS
- -------------------------
HOME TELEPHONE NUMBER
- -------------------------
BUSINESS TELEPHONE NUMBER
- -------------------------
APPLICANT'S EXCEL ID#
THIS NUMBER WILL SERVE AS YOUR EXCEL IDENTIFICATION NUMBER ON ALL DOCUMENTATION.
If you are joining Excel as an Individual Representative, fill in your SOCIAL
SECURITY NUMBER. If you are joining Excel as a business, fill in your FEDERAL
EMPLOYER'S IDENTIFICATION NUMBER.
- -------------------------
LAST NAME
- -------------------------
FIRST NAME
- -------------------------
BUSINESS NAME
- -------------------------
MAILING ADDRESS (This will be your shipping address for all correspondence and
kits. P.O. Boxes cannot be used)
- -------------------------
CITY
- -------------------------
STATE
- -------------------------
ZIP CODE
OPTION: The MR Excelerator Kit may be sent to the Sponsor.
The newly sponsored MR must approve by initialing this box.
- -------------------------
SPONSOR'S EXCEL ID#
- -------------------------
SPONSOR'S LAST NAME
- -------------------------
SPONSOR'S FIRST NAME
INDEPENDENT REPRESENTATIVE ENROLLMENT (Please initial only one box.)
My sponsor has informed me that I may become an Excel Independent
- ---- Representative by placing a fully refundable $75.00 deposit and that
payment of the $75.00 refundable deposit is waived if I enroll in Excel's
optional Management Services Program. (This refundable deposit is not
applicable to residents of Alabama, Georgia, Kentucky, Louisiana,
Minnesota, Nebraska, North Dakota, Pennsylvania, South Dakota, West
Virginia or where prohibited by law.) I understand if I elect not to
purchase the optional Management Services Program, Excel will supply, at no
cost, a starter kit with necessary literature and sales aids to start my
Excel business. Upon termination of my distributorship and for a period of
90 days thereafter, and upon my written request, Excel will unconditionally
refund this application deposit within 30 days from the date requested.
Please waive the fully-refundable $75 deposit. I elect to enroll in Excel's
- ---- Optional Management Services Program for $245. I understand this program
includes the Managing Representative Package, the Excel Managing
Representative Training Program and Corporate Office Support Services. In
addition, I will receive downline reports and the company newsletter for
the entire year. I understand that it is my responsibility to locate and
attend an MR training class and that I may call 972-930-0695 for
assistance. The training is of 2-3 hours duration regarding Excel customer
services and IR procedures and techniques and is conducted by trainers
equipped, certified and paid by Excel.
I UNDERSTAND THAT MY PURCHASE OF THE OPTIONAL MANAGEMENT SERVICES PROGRAM
IS NON-REFUNDABLE AFTER 10 DAYS FROM THE DATE OF THIS AGREEMENT.
I hereby apply to become an Independent Representative for Excel Communications
Marketing, Inc. (Excel). I have read carefully and agree to be bound by all
provisions of the Terms and Conditions which are printed on this application and
all published Policies and Procedures of Excel. My sponsor has explained to me
that purchase of the Management Services Program is optional, is not required
and is non-refundable after 10 days from the date of this Agreement and that
becoming an Excel customer is not required to participate as an Independent
Representative.
- ----------------------
APPLICANT'S SIGNATURE
- ----------------------
DATE
- ----------------------
SPOUSE'S SIGNATURE (IF BUSINESS IS CO-OWNED)
- ----------------------
DATE
PLEASE INDICATE KIT OPTION CHOSEN ABOVE
$75 OPTION $245 OPTION
- ------------------ -----------------
PLEASE CHECK PAYMENT METHOD
CHECK CASHIER'S CHECK MONEY ORDER
- ------------ ------------- --------------
MAKE PAYABLE TO:EXCEL COMMUNICATIONS MARKETING, INC.
CHECK NUMBER MONEY ORDER
- ------------ -------
- ----------------------------
RECEIVED BY
WHITE - EXCEL YELLOW - SPONSOR PINK - REPRESENTATIVE
<PAGE>
(BACK)
REPRESENTATIVE TERMS
l. I understand that the Excel Independent Representative (IR) must be at
least 18 years of age and therefore of legal age of consent in the state in
which he/she resides.
2. If an enrollee in Excel's optional Management Services Program, I will
receive a Managing Representative Package of literature and sales aids,
downline reports and Company newsletters for a twelve month period and be
provided training. I understand and agree that the annual renewal fee for
the Management Services Program is $180.00. I also understand and agree
that if I am not enrolled in Excel's optional Management Services Program,
I will be charged for these services when and if they are provided.
3. I understand and agree that I am an independent contractor responsible for
determining my own business activities and time spent and not an agent,
employee or legal representative of the Company. I will not represent in
any manner that I am an agent, employee, or legal representative of the
Company. I am responsible for the payment of all federal and state
self-employment taxes and any other tax required under any federal, state
or regulatory or taxing agency. I will not be treated as an employee for
federal or state purposes. If a Texas resident, I will remit applicable
sales taxes with each literature and sales aids order.
4. Excel may provide Policies and Procedures and Rules and Regulations for IRs
as well as modify its IR Compensation Program and customer services and
charges. Such Policies and Procedures and Rules and Regulations and
Compensation Plan modifications and customer services and charges, and all
changes thereto, shall upon notice to IR become a binding part of this
Agreement. Publication or such changes in the Excel Communicator shall be
deemed notice to all IRs.
5. Excel provides the following fulfillment to its IRs: A new IR packet of
sales literature whether or not the optional Management Services Package is
purchased; shipment of ordered sales aids within ten days of receipt of the
order and clearance of funds subject to availability of items ordered;
calculation and payment of IR commission. Payment terms on IR purchases:
cash, check, money order or credit card with order. No credit purchases or
C.O.D.s available. IR commissions are paid pursuant to the Excel
Compensation Plan, which is incorporated herein by reference.
6. This Agreement shall be deemed in effect upon its receipt and acceptance by
Excel at its Corporate Office location at 8750 N. Central Expwy., Suite
1500, Dallas, Texas, 75231.
7. This Agreement is governed under the laws of the State of Texas. The
parties agree that any claim, dispute or other difference between them
shall be exclusively resolved by binding arbitration pursuant to the
Commercial Arbitration Rules of the American Arbitration Association with
arbitration to occur at Dallas, Texas. (For Louisiana resident
Representatives, arbitration is held in New Orleans, Louisiana.) For more
information, please see Compliance Section in the Excel Concept Book.
8. As an Excel IR, I shall place primary emphasis upon and shall obtain long
distance Service Request Forms from non-IR consumers as a condition of my
receipt of commissions. IRs residing in the states of Georgia, North
Dakota, Indiana, Michigan and West Virginia are limited to $495.00 in IR
purchases of all types from the Company during the first six months of
being an IR. Permissible IR purchases shall be automatically modified to
comply with the exemption requirements set forth in any states' laws
regulating business opportunities.
9. I am responsible for supporting IRs I sponsor. I agree to maintain monthly
support to those IRs in my commissionable downline by way of any of the
following, or combination thereof: Personal contact, telephone
communication, written communication and attendance at IR meetings.
10. This Agreement, including the Excel Policies and Procedures incorporated
herein by reference, constitute the entire agreement between the parties
hereto, and no other additional promises, representations, guarantees, or
agreements of any kind shall be valid unless in writing.
11. Slamming is the unauthorized conversion of long distance service from a
customer's current carrier to a new long distance carrier. If it is
determined that the IR is guilty of slamming, immediate termination as an
Excel Representative will occur and such IR shall indemnify and hold
harmless Excel from any liability resulting therefrom.
12. I hereby acknowledge and agree to fully explain the three (3) day
cancellation policy to each potential ExcelPaging customer prior to selling
paging equipment and/or services to such customer.
13. I understand that the purchase of Excel's optional Management Services
Program is not mandatory and that the Program includes an Independent
Representative's current training materials and tools. I UNDERSTAND THAT NO
PORTION OF THE PURCHASE PRICE OF THIS PACKAGE IS REFUNDABLE AFTER TEN (10)
DAYS FROM THE DATE OF THIS AGREEMENT. CANCELLATION MUST BE
POSTMARKED/RECEIVED BY EXCEL NO LATER THAN MIDNIGHT OF THE TENTH DAY
SUBSEQUENT TO THE DATE OF THIS AGREEMENT. CANCELLATION MAY BE REQUESTED BY
CERTIFIED LETTER OR TELEGRAM TO: EXCEL COMMUNICATIONS MARKETING, INC.,
CUSTOMER RELATIONS, P.O. BOX 650582, DALLAS, TEXAS 75265-0582. CANCELLATION
REQUEST MAY ALSO BE SENT BY OVERNIGHT DELIVERY SERVICE TO: EXCEL
COMMUNICATIONS MARKETING, INC., 16675 ADDISON ROAD, ADDISON, TX 75248.
CANCELLATION REQUESTS MADE TO AN EXCEL IR WILL NOT BE ACCEPTED.
FACTS THAT
EVERY EXCEL REPRESENTATIVE SHOULD KNOW
In order to help you understand and adhere to Excel's Policies and Procedures
and to help you present the Excel Business Opportunity fairly and accurately to
your prospects, we have compiled a listing of important facts that every Excel
Independent Representative should know and by signing this agreement you hereby
agree and acknowledge that you shall comply with the following policies. The
listing is as follows:
1. The Area Coordinator position is a paid for business opportunity to earn
$40 each time an Excel Managing Representative is trained by the Area
Coordinator. There is no other commission structure for an Area
Coordinator, and it is not necessary to be a Representative in order to be
an Area Coordinator.
2. The Excel Sales Representative position has no initial fee, cost or
investment, only a $75 refundable deposit. In some states, as listed in the
Independent Representative's Application and Agreement, the deposit is not
required.
3. All Representatives may purchase the optional Management Services Program
consisting of training and various important administrative services.
Representatives, whether or not they have purchased the optional Management
Services Program, receive the same commissions and bonuses.
4. A new Representative's consideration of making the optional purchase of the
Management Services Program is strongly recommended. Earning statistics
consistently demonstrate that Excel Representatives who have purchased the
optional Management Services Program earn on average three times the
monthly income of those Representatives who have not received the training
available only through the Management Services Program.
5. Providing prospective Representatives with copies of checks or statements
of income earned by another Excel Representative, and the use of any charts
or income projections is strictly prohibited by Excel's Policies and
Procedures binding upon all Excel Representatives. Only Excel published,
actual commission payout figures included with every Excelerator Kit may be
utilized in discussions with prospective Excel Representatives.
6. Excel offers long distance telephone services throughout the United States
(only 800/8XX service available in Alaska). Excel has licensed as a
corporation and with various state public utilities commissions in all
states where required to do so. Not every state requires Excel to maintain
a corporate license or to be licensed to provide long distance telephone
services.
7. Excel has filed and maintains with the United States Federal Communications
Commission (FCC) the necessary filings and tariffs as regards to its
interstate long distance telephone services. Excel has received and
maintains an FCC license for its international long distance telephone
services.
8. As an Excel Representative you may only utilize literature and sales aids
provided by Excel. You should presume that any other literature and sales
aids that you have obtained or which may become available to you are not
approved for your use. To utilize non-Excel literature and sales aids is a
violation of Excel's Policies and Procedures and may result in your
termination as an Excel Representative.
9. With the exception of some states which approve our intrastate rates to
their state residents, no attorney general or other regulatory authority
ever reviews, endorses or approves the products or compensation plans of
Excel or any other company, and you should make no claim that such
approvals have occurred.
10. Slamming is the unauthorized conversion of a customer's long distance phone
service from their current carrier to a new long distance carrier. The
slamming of a customer to Excel Telecommunications long distance service is
prohibited by Excel's Policies and Procedures as set forth in every Excel
Representative's agreement, and will result in the immediate termination of
Representative status and forfeiture of all commissions. Slamming is
illegal under Federal law and in every state and may carry criminal
penalties. Excel will refer Representatives who slam customers for criminal
prosecution.
11. There are only two commissionable events for Excel Representatives, the
obtaining of new long distance customers and customer long distance usage.
Neither the sponsoring of a new Excel Representative nor the purchase of
the optional Management Services Program results in commissions or bonuses
being paid.
REF CONTROL NO.
AREA COORDINATOR APPLICATION AND AGREEMENT
COMPLETION INSTRUCTIONS
PLEASE FILL OUT BOXED AREA NEATLY MAKING SURE NOT TO WRITE OUTSIDE OF BOXES AS
SHOWN TO ENSURE PROPER PROCESSING OF YOUR INFORMATION COMPLETE AS SHOWN IN BLACK
OR BLUE INK AND PRINT IN CAPITAL LETTERS
PLEASE 3 CHECK TO INDICATE AREA:
COORDINATOR TYPE
- -----------
EXCEL REPRESENTATIVE
- -----------
INDEPENDENT
- -----------
- ---------------------------
HOME TELEPHONE NUMBER
- ---------------------------
BUSINESS TELEPHONE NUMBER
- ---------------------------
APPLICANT'S EXCEL ID#
The following number will serve as your Excel identification number on all
documentation. If you are joining Excel as an individual Area Coordinator, fill
in your Social Security Number. If you are joining Excel as a business, fill in
your FEDERAL EMPLOYER'S IDENTIFICATION NUMBER.
- ---------------------------
LAST NAME
- ---------------------------
FIRST NAME
- ---------------------------
COMPANY NAME (Enter company name only if company is to receive fee)
- ---------------------------
MAILING ADDRESS (This will be your shipping address for all correspondence and
kits. P.O. Boxes cannot be used)
- ---------------------------
CITY
- ---------------------------
STATE
- ---------------------------
ZIP CODE
- ---------------------------
SPONSOR'S EXCEL ID#
- ---------------------------
SPONSOR'S LAST NAME
- ---------------------------
SPONSOR'S FIRST NAME
AREA COORDINATOR MATERIAL/TRAINING PACKAGE
I am purchasing the Area Coordinator Training Opportunity for $345
- ---- (Residents of Louisiana, Utah and Washington pay $295; and residents of
Oklahoma and South Dakota pay $249.)
- ---------------------------
SIGNATURE
- ---------------------------
DATE
I hereby submit my application to become an Excel Communications Marketing, Inc.
("Excel") Area Coordinator, in accordance with the terms and conditions
contained in this Agreement, the Excel Policies and Procedures which are
incorporated herein, and all guidelines which may be established by Excel and
provided in writing to the Area Coordinator. I understand that I may cancel the
purchase of this training opportunity within 10 days of the date of this
agreement by sending written notice to Excel of such cancellation.
- -----------------------
APPLICANT'S SIGNATURE
- -----------------------
DATE
PLEASE INDICATE KIT OPTION CHOSEN ABOVE
$345 (Residents of Louisiana, Utah and Washington pay $295; and residents
---- of Oklahoma and South Dakota pay $249.)
PLEASE CHECK PAYMENT METHOD
CHECK CASHIER'S CHECK MONEY ORDER
- --------------- --------------- ---------------
MAKE PAYABLE TO:EXCEL COMMUNICATIONS MARKETING, INC.
CHECK NUMBER MONEY ORDER
- --------------- --------
- ------------------------
RECEIVED BY
WHITE - EXCEL YELLOW - SPONSOR PINK - REPRESENTATIVE
<PAGE>
(BACK)
TERMS
1. I, the undersigned applicant, am at least 18 years of age and therefore of
legal age in the state in which this Agreement has been executed by me and
understand that this Agreement is not binding until receipt and acceptance
by Excel at its home office in Dallas, Texas. I agree that my relationship
with Excel as an AC is that of a contracting independent contractor and
that I alone determine the nature and extent of my hours, activities and
training to be conducted by me. I am not an agent, legal representative, or
employee of Excel and I will not represent that I am otherwise to any third
party. I am responsible for the payment of all federal and state
self-employment taxes and any other tax required under any federal, state,
or regulatory or taxing agency. If a Texas resident, I will remit
applicable sales taxes with each literature and sales aids order.
2. I understand that in order to become an Area Coordinator (sometimes
referred to herein as "AC"), I do not have to also be an Excel Independent
Representative.
3. I agree to abide by and act in accordance with the Excel Policies and
Procedures which are incorporated into and made a part of this Agreement,
together with all changes thereto.
4. I understand that I may not make purchases, or enter into any agreements
that will bind Excel or its suppliers in any way whatsoever.
5. I agree, in carrying out the duties and responsibilities set forth in this
Agreement, that I will use only materials provided to me by Excel unless I
receive prior written approval from Excel. I agree that all expenses
incurred arising out of the performance of this Agreement will be my sole
responsibility.
6. I understand that without prior approval in writing from Excel, I may not
create audio or video recordings, develop materials, or place
advertisements of any kind, for use in soliciting or attracting customers
and/or Independent Representative and/or Area Coordinators. Area
Coordinators may not make purchases from Excel, of all types whatsoever, in
excess of $495.00 during the first six (6) months of this Agreement if the
Area Coordinator is a resident of the states of North Dakota, Indiana,
Michigan or West Virginia.
7. I agree that I will not divulge the business secrets of Excel
Communications, Inc., Excel Telecommunications, Inc. or any of their
subsidiaries, collectively "Excel" to third persons, in whole or in part
nor shall I utilize such business secrets for any business or commercial
purpose, alone or in conjunction with others. The term "business secrets"
as utilized in this agreement shall mean, but not by way of limitation, the
names and addresses of Excel Independent Representatives and Area
Coordinators and all lists associated therewith; the present and planned
products, services, and pricing thereof of Excel; the present and future
organizational, compensation and sales programs of Excel; and financial
information and data concerning Excel, its officers, directors, employees
and shareholders.
8. I understand this Agreement is non-transferable and that I will not
authorize any person to act on my behalf or in my place without prior
written consent from Excel.
9. I agree to train Excel Independent Representatives in accordance with the
guidelines established by Excel using only the training presentation that
has been developed by Excel.
10. Excel hereby licenses Area Coordinator to utilize the registered trademark
of "EXCEL" during the term of and in the performance of Area Coordinator's
activities pursuant to this Agreement, subject to the terms and conditions
of this Agreement and the Excel Policies and Procedures.
11. I agree to file reports as may be required by Excel.
12. I understand that I have authorization from Excel to function as an Area
Coordinator. I also understand that Excel reserves the right to appoint
more than one Area Coordinator within the same area.
13. I agree that I will refer IRs who live outside my geographic area to the
nearest local Area Coordinator in whose area the IR resides.
14. I UNDERSTAND THAT NO PORTION OF THE PURCHASE PRICE OF THIS AC PACKAGE IS
REFUNDABLE AFTER TEN (10) DAYS FROM DATE OF THIS AGREEMENT. CANCELLATION
MUST BE POSTMARKED/RECEIVED BY EXCEL NO LATER THAN MIDNIGHT OF THE TENTH
DAY SUBSEQUENT TO THE DATE OF OVERNIGHT DELIVERY SERVICE OR WESTERN UNION
TELEGRAM TO: EXCEL COMMUNICATIONS MARKETING, INC., CUSTOMER RELATIONS, P.O.
BOX 650582, TXCR0012, DALLAS, TEXAS 75265-0582. VERBAL CANCELLATION
REQUESTS AND CANCELLATION REQUESTS MADE TO AN EXCEL INDEPENDENT
REPRESENTATIVE WILL NOT BE ACCEPTED. Special refund provisions apply to
Georgia residents who are also Excel Independent Representatives. Please
call Excel Representative Services for details.
15. AC understands and agrees that it is the policy of Excel that all ACs shall
attend an AC training seminar at least once during each annual term of this
Agreement commencing with the second annual term hereof. ACs shall attend a
regional training seminar at least once during each annual term of this
Agreement unless excused therefrom for good cause by Excel. At or prior to
the commencement of each annual term of this Agreement, AC shall be
required to pay a fee to Excel of $100. Failure to attend a requested
training seminar without excuse shall entitle Excel, at its option, to
terminate this AC Agreement.
16. I understand that I will receive compensation from Excel as follows:
A. I will receive a one-time forty ($40.00) dollar Training Fee for each
new IR (who purchases Management Services) I personally train, subject to
the following restrictions:
(1) For me to receive credit for a given Management Services Training
Bonus, no later than 7 days following the training date, Excel must
receive the fully completed MR Training Invoice and Verification
Report. Excel must also have received payment for the Management
Services under which training was provided.
(2) I agree that I will receive no compensation for training an IR who has
previously attended a training class, or for training an IR who
resides outside my geographic area, unless I do his/her initial
training.
17. I may terminate this Agreement for any reason, at any time by giving Excel
not less than (30) days written notice at its address listed on the front
of this form. Excel may withdraw my Area Coordinator status or terminate
this Agreement pursuant to its Policies and Procedures or in the event that
I breach any part of this Agreement.
18. This Agreement is governed under the laws of the State of Texas. The
parties agree that any claim, dispute, or other difference between them
shall be exclusively resolved by binding arbitration pursuant to the
Commercial Arbitration Rules of the American Arbitration Association with
arbitration to occur at Dallas, Texas. (For Louisiana resident
Representatives, arbitration is held in New Orleans, Louisiana.)
19. All correspondence should be sent to Excel Communications Marketing, Inc.,
P.O. Box 650582, Dallas, Texas, 75265-0582. Any overnight packages or
certified mail should be addressed to: EXCEL COMMUNICATIONS MARKETING,
INC., 16675 ADDISON ROAD, ADDISON, TX 75248.
20. Area Coordinator represents and affirms to Excel that he has not received
any representation or statement from Excel or any other person, upon which
he has relied in entering into this Agreement, to the effect that:
I. the Area Coordinator's business may, can, or will generate income, or be
profitable.
II. any investment in training, product and/or sales aids or otherwise or
any portion thereof may be earned back to Area Coordinator through the
operation of the Area Coordinator position.
III.any present market exists for Excel training which is the subject
matter of this Area Coordinator Application and Agreement or that a
guaranteed market exists for Excel training.
IV. Excel will buy back any purchased inventory, or otherwise make up any
financial losses which the Area Coordinator may incur.
V. Excel or any person acting on behalf of Excel has outlets or sales for
Excel training or will assist an Area Coordinator in obtaining outlets or
sales for Excel training.
VI. any person acting on behalf of Excel will provide in whole or in part
any marketing programs or systems to be followed in the provision of Excel
training by an Area Coordinator.
VII.an Area Coordinator and/or this Agreement have been filed with,
registered with, or otherwise accepted or approved by any state or federal
office, department or authority.
VIII.to have knowledge of the market and that the market demand will enable
the Area Coordinator to earn a profit from the business opportunity.
IX. locations will be provided or assistance be given in the finding of
locations for the use or operations of the Area Coordinator position.
X. becoming or remaining an Independent Representative of Excel is required
to become or remain an Area Coordinator. (The Sales Representative position
is unrelated and is available separately at no cost.)
(*****) Confidential Treatment Requested
The redacted material, separately filed with the Commission.
CONFIDENTIAL
--------------
TRANSCENDTM
AMENDED AND RESTATED
PROGRAM ENROLLMENT TERMS
These Amended and Restated Program Enrollment Terms (the "Amended PET") are
made by and between WorldCom Network Services, Inc. d/b/a WilTel ("WilTel") and
Excel Telecommunications, Inc. ("Customer") and are a part of their agreement
for switched services, more particularly identified as TSA #EXC-960415 (the
"TSA"). In accordance with the TSA, charges to Customer for Service obtained
thereunder shall be subject to the charges and discounts set forth below and the
TSA shall be deemed to include all of the terms and conditions set forth herein.
The TSA, this Amended PET and the Service Schedule are collectively referred to
as the "Agreement".
1. PRIOR AGREEMENTS:
(A) The parties acknowledge that they previously executed those certain
TRANSCEND Program Enrollment Terms dated as of May 31, 1996 (the
"Prior PET"). As of the Effective Date (as defined in Section 2
below), the parties agree that the Prior PET shall be canceled in its
entirety and of no further force or effect with the exception of
certain accrued obligations arising under the Prior PET such as the
payment of money or application of credits accruing prior to the
Effective Date. Further, as of the Effective Date, all Service
currently being provided Customer under the Agreement will be
provisioned and maintained by WilTel taking into account the terms and
conditions of this Amended PET.
(B) The parties further acknowledge that there exists that certain
TRANSCEND Telecommunications Services Agreement between WilTel and
Telco Communications Group, Inc. (processor-in-interest to Customer;
"Telco") including those certain Program Enrollment Terms, Service
Schedule, Amendment No. 1 and Amendment No. 2 (collectively, the
"Prior Telco Agreement"). As of December 1, 1997, the parties agree
that the Prior Telco Agreement shall be canceled in its entirety and
of no further force or effect with the exception of certain accrued
obligations arising under the Prior Telco Agreement such as the
payment of money or application of credits accruing prior to December
1, 1997. Further, as of December 1, 1997, all Service currently being
provided Customer under the Prior Telco Agreement will be provisioned
and maintained by WilTel under this Agreement taking into account the
terms and conditions of this Amended PET, including without
limitation, the rates and charges set forth herein.
2. SERVICE TERM: The parties agree to substitute Subsection 1(a) of the TSA to
read in its entirety as follows:
(A) Effective Date:This Agreement shall commence as of October 16, 1997
(the "Effective Date") and shall continue through and include May 30,
2000 (the "Initial Service Term"). Upon expiration of the Initial
Service Term, this Agreement shall automatically renew for successive
one (1) year terms ("Extension Periods"), unless either party gives
ninety (90) days' written notice prior to the expiration of the
Initial Service Term or any Extension Period. Customer shall be liable
for all charges associated with actual usage of the Services in
question during the Service Term and any extension thereof.
3. RATES: Rates for Services hereunder will be generally comprised of the
following charges, if applicable: (i) local exchange company ("LEC")
charges (including without limitation, access charges, egress charges, SMS
800 queries, etc.), (ii) domestic transport charges (i.e., transport within
the continental United States), (iii) if applicable, Non-Mainland transport
charges or International transport charges, and (iv) applicable surcharges
(e.g., directory assistance). For illustration purposes only, attached
hereto are examples of how the various charges are applied based solely on
the assumptions and information shown therein.
(A) DOMESTIC TRANSPORT CHARGES.
(1) "Domestic Transport Charges" are based on the location (i.e., Tier
A, Tier B or Tier C) of the originating and terminating local access
transport areas ("LATAs") (excluding TRAVEL CARD Service). A list of
the LATAs comprising Tier A, Tier B and Tier C LATAs is shown on
Schedule "1" attached hereto and incorporated herein by reference
which Schedule "1" may be amended from time to time by WilTel. The
Domestic Transport Charge will be assessed on all completed or
answered calls and will be based upon the number of originating
seconds. Transport Charges will be billed in six-second increments and
will be subject to a six-second minimum charge. The Transport Charge
for each Tier (the "Tier Charge") relative to each Service is shown
below:
(2) The Tier Charges for interstate SWITCHED ACCESS Service and both
interstate and intrastate DEDICATED ACCESS Service calls (regardless
of time of day) within the continental United States are shown below.
With respect to interstate SWITCHED ACCESSS Service and both
interstate and intrastate DEDICATED ACCESS Service calls within the
continental United States, the Domestic Transport Charge will be
comprised of an originating tier Charge and a terminating Tier Charge.
Example: Assume a call originates in a Tier A LATA and terminates in a
Tier B LATA. The Transport Charge will be (*****) comprised of the
originating Tier Charge (*****) and the terminating Tier Charge
(*****).
(i) BASE RATES - Day
Tier A (*****)
Tier B (*****)
Tier C (*****)
(ii) BASE RATES - Nonday
Tier A (*****)
Tier B (*****)
Tier C (*****)
The Table below shows the total Tier Charges for SWITCHED ACCESS
Service and DEDICATED ACCESS Service calls taking into account the
various originating tiers and terminating tiers.
(iii) BASE RATES - Day
Tier A Tier B Tier C
Tier A (*****) (*****) (*****)
Tier B (*****) (*****) (*****)
Tier C (*****) (*****) (*****)
(iv) BASE RATES - Nonday
Tier A Tier B Tier C
Tier A (*****) (*****) (*****)
Tier B (*****) (*****) (*****)
Tier C (*****) (*****) (*****)
With respect to calls from the continental United States to Alaska,
Hawaii, Puerto Rico, the United States Virgin Islands and Canada
("Non-Mainland"), or to an International locations, the Domestic
Transport Charge will be comprised of the applicable originating Tier
Charge and the terminating Tier Charge which will be deemed to be Tier
A. With respect to 800 calls (and 1+ calls from Hawaii only) from a
Non-Mainland location to the continental United States, the Domestic
Transport Charge will be comprised of the originating Tier Charge
which will be deemed to be Tier A and the applicable terminating Tier
Charge.
(3) The Tier Charges for Intrastate SWITCHED ACCESS Service calls
regardless of time of day) are shown on Schedule "2" attached hereto
and incorporated herein by reference ("Special Intrastate Charges")
which Special Intrastate Charges are subject to the Discount shown in
subsections 4(F) and 4(G), whichever is applicable. At any time during
the Service Term, Customer may elect to modify all of its intrastate
SWITCHED ACCESS Service Tier Charges to the Tier Charges shown in
Subpart (2) above all of which charges will be subject to the Discount
shown in Subsection 4(E) below. In such cases the effective date for
the change in all such charges will be the first day of the month
following at least thirty (30) days' prior written notice to WilTel.
(4) The Tier Charges for Carrier TERMINATION Service calls (regardless
of jurisdiction or time of day) within the continental United States
or from the continental United States to an International location are
shown below. The Domestic Transport Charge will be comprised of the
applicable Tier Charge based on the Tier to which the call is
terminated.
Tier A (*****)
Tier B (*****)
Tier C (*****)
<PAGE>
(5) The Tier Charges for Carrier 800 ORIGINATION Service calls
(regardless of jurisdiction or time of day) within the continental
United States are shown below. The Domestic Transport Charge will be
comprised of the applicable Tier Charge based on the Tier from which
the call is originated.
Tier A (*****)
Tier B (*****)
Tier C (*****)
(6) With respect to Directory Assistance calls within the continental
United States and to Canada, the domestic Transport Charge will be
comprised of the applicable originating Tier Charge and the
terminating Tier Charge which will be deemed to be Tier A.
(B) NON-MAINLAND TRANSPORT CHARGES.
(1) With respect to calls originating in the continental United States
and terminating to a Non-Mainland location (including directory
assistance calls to Canada), the following "Non-Mainland Transport
Charges" will apply in additional to any applicable Domestic Transport
Charge as described in Subsection 3(A) above:
Non-Mainland Location Non-Mainland Transport Charge
Alaska (*****)
Hawaii (*****)
Puerto Rico (*****)
US Virgin Islands (*****)
Canada (*****)
(2) With respect to 800 calls ( and 1+ calls from Hawaii only)
originating from a Non-Mainland location and terminating to the
continental United States, the following Non-Mainland Transport
Charges will apply in addition to any applicable domestic Transport
Charge as described in Subsection 3(A) above:
Non-Mainland Location Non-Mainland Transport Charge
Alaska (*****)
Hawaii (*****)
Puerto Rico (*****)
US Virgin Islands (*****)
Canada (*****)
(C) INTERNATIONAL TRANSPORT CHARGES.
Commencing as of December 1, 1997, with respect to calls
originating in the continental United States and terminating to
an International location (i.e., other than a Non-Mainland
location), Customer's "International Transport Charge" will be
those charges shown on Schedule "3" attached hereto and
incorporated herein by reference. Prior to December 1, 1997,
Customer's International Transport Charge shall be those charges
in effect as of the Effective Date described in Section 2 of this
amended PET.
(D) LEC CHARGES.
(1) "LEC Charges" include Access Charges, Egress Charges and SMS 800
queries. "Access Charges" and "Egress Charges" are per minute costs
reasonably calculated by WilTel in accordance with this Agreement
between the applicable WilTel point of presence and the terminating or
originating point, and rated at the applicable end office (NPA-NXX)
level using switched tandem access rates and charges (excluding TRAVEL
CARD Service). Director Assistance calls will only be assessed the
applicable Access Charge. Customer will also pay WilTel a (*****)
administrative charge which is assessed on the total of Customer's
monthly LEC Charges (the "Administrative Fee"). The NPA-NXX is
generally identified by the end user's automated number identification
("ANI"); provided, however, in the event there is not an identified
originating ANI, the NPA-NXX will be assigned based on WilTel's
originating trunk group. The terminating NPA-NXX will be identified by
the dialed number; provided, however, in the event there is not an
identified dialed number, the NPA-NXX will be assigned based on
WilTel's terminating trunk group.
(2) The per minute rates utilized by WilTel in determining the
applicable Access Charges and Egress Charges are described in the
local exchange carrier's ("LECs") applicable tariffs and are exclusive
of any discounts based on minute or term commitments. In the event the
LECs provide discounts which Customer would receive based solely on
its own traffic, and such discounts have a material effect on
Customer's total charges for Services provided hereunder, WilTel and
Customer agree to negotiate in good faith concerning the calculation
of all LEC charges to reflect the charges Customer would pay based
solely on Customer's usage. The Access Charges and Egress Charges may
include, without limitation, the components and elements described
below; provided, however, the terminology with respect to these
components and elements may vary among LECs. The Access Charges and
Egress Charges will be calculated taking into effect whether the call
is interstate, intrastate or intraLATA, the direction of the call
(i.e., whether originating or termination), whether the call is
premium or non premium (if applicable), the mileage, the meet point
(if applicable) and the call type (i.e., 1+ or 800). WilTel may also
apply any other rating elements which are assessed by the LECs or
third parties (e.g., regulatory fee assessments or non-standard LEC
access components) whether such charges are based per access line, per
business line, per market share, per call, etc. (e.g., the Arkansas
Carrier Common Line charge which is assessed by a regulatory body and
allocated to the LECs) (collectively, the "Other Charges"). Upon
reasonable request by Customer, WilTel agrees to substantiate how
WilTel calculated the cost per minute with respect to the Other
Charges. With respect to those LECs utilizing a "time of day"
differential (i.e., Day/Nonday, Day/Evening/Night, etc.), WilTel will
only use the "Day" rate provided by the LECs.
Component Elements
---------- ---------
Carrier Common Line Originating
Terminating
End Office Local Switching
Equal Access Recovery
Information Surcharge
Local Transport Termination
Tandem Switching
Facility
Interconnection
Entrance Facility DS-3 (month-to-month electrical)
Multiplexer (3/1 month-to-month)
(3) The Access Charges and Egress Charges are generally applied on a
per minute basis except for (i) the Local Transport Facility charge
which is based on minutes and mileage, and (ii) the Entrance Facility
rate and Multiplexer rate which are flat monthly rates which are
converted by WilTel to a cost per minute basis by dividing the
applicable DS-3 flat rate or the Multiplexer rate as found in the
applicable LEC tariff by (****). WilTel reserves the right to convert
any other flat rates assessed by the LECs into per minute charges. Any
per minute charges determined hereunder will be added to the
applicable Access Charges and Egress Charges. Upon thirty (30) days'
prior written notice, WilTel may also charge Customer for other
charges it is assessed by any LEC or the SMS 800 database
administrator for 800 number service (e.g., National Exchange Carrier
Association (NECA) charges, etc.), excluding any charges incurred by
WilTel solely for the purpose of maintaining its network.
Example: Assume the applicable LEC tariffed rate (i)
for entrance facility charges is (*****) per DS-3, and (ii)
for muxing is (*****) per 3/1 mux. The Entrance Facility
rate will be (********), (********), and the Multiplexer
rate will be (*****).
(4) Access Charges will commence when the call is originated and will
end when the call is disconnected. Customer will be assessed Access
Charges even if a call is not completed. Egress Charges will commence
when the call is answered and will end when the call is disconnected.
Access Charges and Egress Charges will not apply with respect to
dedicated access originations or terminations, respectively.
(E) TRANSCENDTM MANAGER.
WilTel agrees to provide Customer, at no cost to Customer, a windows-based
software program entitled "TranscendTM Manager" which will include, among
other things, the Transcend Database (as described herein) and various
management reports. The "TranscendTM Database" will contain the applicable
Access Charges and Egress Charges reasonably calculated by WilTel at each
LEC end office. The Database will be updated periodically to take into
account any tariff changes by the various LECs ("Tariff Changes"). Tariff
Changes received by WilTel on or before the fifteenth (15th) day of a month
and effective as of the first day of the following month or thereafter,
will be incorporated into the TranscendTM Database by the first day of the
month following WilTel's receipt thereof or the date such Tariff Changes
are effective, whichever is later.
(F) DIRECTORY ASSISTANCE SURCHARGE.
Directory assistance calls in the continental United States will be
assessed a surcharge of (*****) in addition to any applicable Domestic
Transport Charge as described in Subsection 3(A) above. Directory
assistance calls to Canada will be assessed a surcharge of (*****) in
addition to any applicable Domestic Transport Charge as described in
Subsection 3(A) above and the applicable Non-Mainland Transport Charge as
described in Subsection 3(B) above.
(G) TRAVEL CARD SERVICE RATES.
(1) Basic Interstate TRAVEL CARD Service Rates Per Minute: (*****)
Day, (*****) Nonday.
(2) Basic Intrastate TRAVEL CARD Service Rates Per Minute [NOT SUBJECT
TO DISCOUNT]: SEE ATTACHED INTRASTATE SWITCHED ACCESS RATE SCHEDULE
FOR BASIC TRAVEL CARD SERVICE.
(3) International TRAVEL CARD Service Rates Per Minute [NOT SUBJECT TO
DISCOUNT]: SEE ATTACHED INTERNATIONAL SWITCHED ACCESS RATE SCHEDULE
FOR BASIC TRAVEL CARD SERVICE. International TRAVEL CARD Service calls
from the domestic United States to International locations (other than
Canada) are subject to a surcharge of (*****) per call.
(4) TRAVEL CARD Service Rates Per Minute from the domestic United
States to Canada [NOT SUBJECT TO DISCOUNT]: (*****) Day, (*****)
Nonday. TRAVEL CARD Service calls from the domestic United States to
Canada are subject to a surcharge of (*****) per call.
(5) TRAVEL CARD Service Rates Per Minute from Canada to the domestic
United States [NOT SUBJECT TO DISCOUNT]: (****) Day, (*****) Nonday.
TRAVEL CARD Service calls from Canada to the domestic United States
are subject to a surcharge of (*****) per call.
(6) Enhanced TRAVEL CARD Service Pricing [NOT SUBJECT TO DISCOUNT]:
Enhanced features to the TRAVEL CARD Service are available as
described in the attached schedule for Enhanced TRAVEL CARD Service
Pricing.
(7) TRAVEL CARD Service Discount: (*****).
4. DISCOUNTS:
(A) For purposes of this Agreement, Customer's "Monthly Revenue Level":
will be comprised of Customer"s gross (i.e., prior to the application of
any discounts) (i) Transport Charges (i.e., Domestic, Non-Mainland and
International); (ii) LEC charges (including Other Charges); (iii) Director
Assistance surcharges; (iv) TRAVEL CARD Service charges; (v) the
Administrative Fee described in Subsection 3(D) (1) above; (vi) (*****)
times Customer's first (*****) of monthly recurring private line
interexchange service charges (including both domestic and international)
from WilTel; (vii) (*****) times Customer's second (*****) of monthly
recurring private line interexchange service charges (including both
domestic and international) from WilTel; and, (viii) Customer's monthly
recurring private line interexchange service charges (including both
domestic and international) from WilTel in excess of (*****) Customer's
Monthly Revenue Level will not include any pro rata charges, ancillary or
special feature charges, such as, Authorization codes or CDR Tapes, or any
other charges other than those identified by the relevant WilTel invoice as
monthly recurring private line interexchange service charges or the
switched service charges specifically mentioned in this Subsection (A).
(B) Commencing with the Effective Date and continuing through the end of
the Initial Service Term, Customer will receive the applicable discount
percentages (the "Discount") shown in subsections (C), (D), (E), (F) (if
applicable) and (G)(if applicable) below. The discount will only be applied
to Customer's Domestic Transport Charges as described in Subsection 3(A)
above and Customer's Non-Mainland Transport Charges to Non-Mainland
locations (excluding Canada).
(C) TERMINATION Service: (*****).
(D) 800 ORIGINATION Service: (*****).
(E) SWITCHED ACCESS Service and DEDICATED ACCESS Service (1+ and 800)
within the continental United States: (*****).
(F) Intrastate SWITCHED ACCESS Service excluding California, Florida, New
York and Texas (i.e., if the Special Intrastate Charges described in
Subsection 3 (A)(3) apply: (*****).
(G) Intrastate SWITCHED ACCESS Service in California, Florida, New York and
Texas (i.e., if the Special Intrastate Charges described in Subsection 3
(A)(3) apply): (*****).
(H) SWITCHED ACCESS Service and DEDICATED ACCESS Service to Non-Mainland
locations only (excluding Canada): (*****).
(I) During the Initial Service Term of the Agreement (including any
Extension Periods), accumulated credits derived from the applicable
Discounts will be applied in arrears commencing with the first day of the
month following the Effective Date, that is, the Discount will be applied
to those charges as described in Subsection 4 (B) above for the preceding
month (the "Discount Period"). The initial Discount Period shall include
any partial calendar month following Start of Service, or such other time
basis as may be mutually determined by the parties.
(J) Each Discount will result in the application of a credit obtained
during the Discount Period to the WilTel invoice to Customer relevant to
the billed measured Switched Service for the calendar month next following
the completion of each Discount Period, provided Customer has paid
undisputed charges (including any late fees, if applicable) for that month
and has not otherwise been subject to a Suspension Notice in accordance
with the Agreement. Failure of Customer to comply with the foregoing
provision shall result in no credit for the Discount Period in question.
5. CUSTOMER'S COMMITMENT/DEFICIENCY CHARGE:
(A) Commencing as of May 31, 1996 and continuing through the end of the
Initial Service Term (the "Commitment Period"), Customer agrees to
maintain, on a take-or-pay basis, in the aggregate a Monthly Revenue Level
(as defined in Subsection 4(A) above) of at least the amounts shown below
by the end of the periods shown determined in a cumulative basis
(collectively, "Customer's Cumulative Commitment").
Period Customer's Cumulative Commitment
--------------- --------------------------------
End of Month 12 (*************)
End of Month 18 (*************)
End of Month 24 (*************)
End of Month 30 (*************)
End of Month 36 (*************)
End of Month 42 (*************)
(B) In the event Customer does not achieve Customer's applicable Cumulative
Commitment by the end of the respective Month listed, Customer will pay
WilTel (*****) of the difference between Customer's applicable Cumulative
Commitment and Customer's actual cumulative Monthly Revenue Level (as
described in Subsection 4(A) (the "Deficiency Charge"). Provided, however,
Customer may elect one (1) time during the Commitment Period to transfer up
to $15,000,000 of any Deficiency Charge to the immediately following period
in which case the applicable Cumulative Commitment for said period will be
deemed to include the transferred Deficiency Charge amount. The Deficiency
Charge will be due at the same time payment is due for Service provided to
Customer, or immediately in an amount equal to $900,000,000 less Customer's
actual cumulative Monthly Revenue Level if WilTel terminates the Agreement
based on Customer's default.
(C) Commencing as of October 16, 1997, in determining if Customer has
satisfied Customer's Cumulative Commitments, WilTel agrees to include
Telco's monthly switched service and private line charges from WilTel as
such charges are further defined in Subsection 4 (A) above in calculating
Customer's Cumulative Monthly Revenue Level. Therefore, with respect to
October 1997, WilTel agrees to include (i) (*****) of Telco's monthly
recurring private line interexchange charges from WilTel for October, 1997
Service (i.e., Telco's private line invoice dated September 20, 1997), and
(ii) (*****) of Telco's applicable switched charges from WilTel for
October, 1997 Service (i.e., Telco's switched service invoice dated
November 1, 1997). Thereafter, WilTel will include (*****) of Telco's
applicable invoices.
6. OTHER AGREEMENTS: In consideration of the rates and discounts offered
hereunder to Customer as well as the unique and special pricing elements,
Customer acknowledges and agrees that this Agreement and the Services
described herein may not be combined with any other products or services
offered by WilTel, WilTel's parent company or WilTel's affiliates.
Therefore, Customer acknowledges and agrees that:
(A) As of the Effective Date of this Agreement, (i) all switched
telecommunications services ("Existing Services") offered by WilTel
(formerly WilTel, Inc.), WilTel's parent company, WorldCom, Inc. (formerly
LDDS Communications, Inc.) or any of WilTel's affiliates, including without
limitation, IDB WorldCom Services, Inc. (hereinafter referred to as the
"WilTel Group"), which are currently being provided Customer (which for
purposes of this Section 6 will include Customer's parent company,
Customer's subsidiaries and any other entities under common control with
Customer; hereinafter referred to as the "Customer Group") pursuant to
existing service agreements ("Existing Agreements") will be canceled and no
longer in force or effect except for charges or credits due for Existing
Services rendered as of the Effective Date of this Agreement and provisions
intended to survive termination, such as limitation of liability,
indemnification and confidentiality, and (ii) all Existing Services
provided a member of the Customer Group by a member of the WilTel Group
will be provisioned under the terms and conditions of this Agreement.
Simultaneous with the execution of this Agreement, if applicable, Customer
shall cause all members of the Customer Group to agree to the cancellation
of such Existing Agreements and the provision of Existing Services under
the terms and conditions of this Agreement and Customer agrees to provide
WilTel with reasonable documentation evidencing such agreement.
(B) If Customer acquires a third party after the Effective Date of this
Agreement, and such third part has existing agreement(s) with a member of
the WilTel Group (collectively referred to as the "Existing Agreements")
for the provision of switched telecommunications services ("Existing
Services"), then ninety (90) days following the date of such acquisition
(or such earlier date contained in a written notice from Customer to
WilTel) (the "Transfer Date"), (i) the Existing Agreements will be canceled
and no longer in force or effect except for commitments, if any, contained
in such Existing Agreements and charges and credits due for Services
rendered prior to the Transfer Date, (ii) Existing Services will be
provisioned under this Agreement, and (iii) the aggregate commitment(s)
(e.g., revenue, volume, minute, etc.) remaining under such Existing
Agreements, if any, shall be added on a pro rata basis to the
commitment(s), if any, existing under this Agreement. Simultaneous with the
closing of such acquisition, Customer will cause such third party and all
of its affiliates who are parties to such Existing Agreements, to agree to
the cancellation of such Existing Agreements and the provision of Existing
Services under the terms and conditions of this Agreement and Customer
agrees to provide WilTel with reasonable documentation evidencing such
agreement.
Example: Assume (i) Customer's Commitment as described in Subsection
4(A) above is $500,000, (ii) there are twenty-four (24) months
remaining in the Service Term of this Agreement, and (iii) Customer
acquires a third party who has an existing switched telecommunications
services agreement with a member of the WilTel Group which contains a
minimum monthly revenue commitment of $250,000 and has ten (10) months
remaining in the term of such agreement. Customer's "new" Commitment
as described in Subsection 4(A) will be $604,166 for the remaining
twenty-four (24) months in the Service Term determined as follows:
$500,000 + [($250,000 x 10)/24] = $500,000 +$2,500,000/24 =
$500,000 + 104,166 = $604,166.
(C) If Customer merges or combines with a third party after the Effective
Date of this Agreement, and such third party has existing agreement(s) with
a member of the WilTel Group (collectively referred to as the "Other
Existing Agreements") for the provision of switched telecommunications
services ("Other Existing Services"), then ninety (90) days following the
date of such merger or combination (or such earlier date contained in a
written notice from Customer to WilTel) (the "Other Transfer Date"),
Customer must elect to either (i) cancel this Agreement, or (ii) cancel the
Other Existing Agreements (hereinafter referred to as the "Canceled
Agreement"). In such case, (a) charges and credits due for Services
rendered under the Canceled Agreement prior to the Other Transfer Date will
remain in full force and effect, (b) Other Existing Services under the
Canceled Agreement will be provisioned under the surviving Agreement, and
(c the aggregate commitment(s) (e.g., revenue, volume, minute, etc.)
remaining under the Canceled Agreement, if any, shall be added on a pro
rata basis to the commitment(s), if any, existing under the surviving
Agreement. Simultaneous with the closing of such combination or merger,
Customer will cause such third party and all of its affiliates who are
parties such Other Existing Agreements, to agree to the cancellation of
such Other Existing Agreements and the provision of Other Existing Services
under the terms and conditions of the surviving Agreement and Customer
agrees to provide WilTel with reasonable documentation evidencing such
agreement.
(D) If any member of the WilTel Group acquires, merges or combines with a
carrier with which Customer has a reseller or similar type agreement
("Other Carrier Agreement"), Customer may elect to transition all services
being provided under the Other Carrier Agreement to this Agreement.
Provided, in such case, all remaining commitment(s) under the Other Carrier
Agreement, if any, shall be added on a pro rata basis to the commitment(s),
if any, existing under this Agreement.
7. PIC PROCESS: As long as Customer is directly effecting the charge of its
End Users' primary interexchange carrier ("PIC Process"), all provisions
(or portions thereof) concerning such PIC Process (including without
limitation, Subsections 1(E), 2(C), 3(A), 3(B), 3(C) and 3(D) will not
apply. Provided, however, if at any time during the Initial Service Term or
any Renewal Period Customer requests WilTel to perform such PIC Process, in
whole or in part, such provisions (or portions thereof) shall be
applicable.
8. SERVICE REQUESTS: The parties agree to add Subsection 1(F) to read in its
entirety as follows:
(F) CDRs WilTel is able to collect, partition and duplicate at least
4,000,000 billable call detail records ("CDRs") for Customer per day.
WilTel agrees to archive such CDRs for a period of eighteen (18) months.
WilTel acknowledges that calls associated with ANIs which are not
identified in WilTel's database are identified as "Casual Calls" and are
not billed by WilTel after fourteen (14) days. Upon submission by Customer
of an ANI for processing, WilTel agrees to provide Customer with call
detail record information associated with such ANI which has not been
previously billed by WilTel.
9. CANCELLATION WITHOUT CHARGE: The parties agree to substitution Subsection 2
(C) of the TSA to read in its entirety as follows:
(C) Cancellation Without Charge notwithstanding anything to the contrary
contained in Subsection 2(A) above, Customer may cancel this Agreement
without incurring any cancellation charge if WilTel materially breaches any
of the warranties described below within the time frame described or, if
applicable, fails to cure such breach within any applicable cure period
("WilTel Breaches"). Provided, however, with respect to WilTel Breaches
described in Subparts (i), (iv) or (v), Customer must give WilTel written
notice of such default and an opportunity to cure such default within five
(5) days of such notice. In the event WilTel fails to cure any such default
within the five-day period on more than three (3) occasions within any six
(6) month period, WilTel will be deemed in breach of this Agreement and
Customer may cancel this Agreement without incurring any cancellation
charge.
(i) WilTel agrees to materially provide a long distance network with
transmission quality and availability consistent with
telecommunications common carrier industry standards, government
regulations and sound business practices. In the event of a cable cut
or other incident materially affecting WilTel's network, WilTel agrees
to use reasonable efforts to notify Customer within thirty (30)
minutes; provided, however, WilTel's failure to notify Customer will
not be deemed a breach of this Agreement by WilTel.
(ii) When measured over a thirty (30) day period, WilTel agrees to
materially deliver call detail records within (x) twenty-four (24)
hours of each day's traffic at least seventy-five percent (75%) of the
time, (y) forty-eight (48) hours at least ninety-five percent (95%) of
the time, and (z) seventy-two (72) hours at least ninety-eight percent
(98%) of the time (collectively, the "Delivery Standard"). In the
event WilTel fails to materially deliver call detail records within
the Delivery Standard on more than three (3) occasions within any
twelve (12) month period, WilTel will be deemed to be in breach of
this Agreement and Customer may cancel this Agreement without
incurring any cancellation charge.
(iii)WilTel agrees to materially process (x) SWITCHED ACCESS Service
(1+) Service Requests within twenty-four (24) hours of receipt of such
Service Requests, (y) DEDICATED ACCESS Service (800) Service Requests
within five days (excluding Sundays and nationally recognized
holidays) of receipt of such Service Requests, and (z) within
seventy-two (72) hours of receipt of such Service Requests in cases
where Customer's Responsible Organization (RESPORG) provides the 800
number collectively, the "Process Standard"). In the WilTel fails to
materially process Service Requests within the Process Standard on
more than three (3) occasions within any thirty (30) day period,
WilTel will be deemed to be in breach of this Agreement and Customer
may cancel this Agreement without incurring any cancellation charge.
(iv) WilTel agrees that its network will be engineered to that no more
than one call in one hundred originating calls will be blocked during
any hour. WilTel agrees to relieve blockage conditions by means of
rerouting terminating traffic to an off-network provider within
twenty-four (24) hours from the time such blockage occurs.
(v) WilTel agrees to monitor its network twenty-four (24) hours per
day, seven (7) days a week and agrees to act on problems materially
effecting transmission service within four (4) hours from the time
Customer notifies WilTel of a problem or WilTel identifies a problem.
In the event Customer submits a "trouble ticket" identifying specific
trouble items, Customer will have the ability to ascertain the status
of such trouble ticket and must give approval before said trouble
ticket is closed.
(vi) WilTel agrees that WilTel's administrative systems specifically
related to CDRs and the processing of ANIs under this Agreement will
be available at least ninety-eight percent (98%) of the time when
measured over a thirty (30) day period (excluding downtime every
twenty-four (24) hours between 10:00 p.m. and 7:00 a.m., other
scheduled downtimes mutually agreeable to both parties, and downtime
for new load implementation, backups, maintenance and unplanned
outages) ("WilTel's Systems Availability"). In the event WilTel's
Systems Availability is less than allowed hereunder (hereinafter
referred to as a "Systems Breach"), Customer agrees to notify WilTel
and WilTel agrees to notify Customer within forty-eight (48) hours
after receiving Customer's notice that the underlying problem has been
corrected ("Systems Cure Period"). Following WilTel's notice, WilTel's
Systems Availability will not be lower than ninety-eight percent (98%)
when measured over the following 7, 14, 21 and 30 day periods
thereafter. In the event a Systems Breach is not cured within the
Systems Cure Period (or after such Systems Cure Period occurs again
within the 7, 14, 21 or 30 day period thereafter), on more than three
(3) occasions within any twelve (12) month period, WilTel will be
deemed to be in breach of this Agreement and Customer may cancel this
Agreement without incurring any cancellation charge.
10. FRAUDULENT CALLS: The parties agree to substitute Subsection 4(B) of the
TSA to read in its entirety as follows:
(B) Fraudulent Calls: WilTel agrees to apply the same level of effort and
utilize the same methods and procedures to control long distance fraud for
Customer's long distance traffic carried over the WilTel network that any
member of the WilTel Group (as defined in Section 6 of the PET) does for
its own traffic. WilTel agrees to diligently pursue the detection and
elimination of fraud utilizing, but not limited to, the detection/screening
parameters, and methods listed below. The parties understand that there may
be as much as three (3) hours between a fraud event and WilTel's detection
thereof and that there may be occurrence of fraud which, regardless of
WilTel's diligent efforts, may go undetected. All call records selected for
fraud screening using the parameters stated below are subject to fraud
analyst's review, judgment, and discretion as to a decision whether fraud
is actually occurring. Except to the extent WilTel fails to comply with the
fraud control provisions set forth below through no fault of Customer, (i)
Customer shall indemnify and hold WilTel harmless from all costs, expenses
(including, without limitation, court costs and attorneys' fees), losses,
damages, liabilities, demands, charges, penalties, claims or actions
arising from fraudulent or unauthorized calls of any nature which may
comprise from fraudulent or unauthorized calls of any nature which may
comprise a portion of the Services; and (ii) Customer shall not be excused
from paying WilTel for Services provided to Customer or any portion thereof
on the basis that fraudulent or unauthorized calls comprised a
corresponding portion of the Services. Provided, however, WilTel agrees to
reasonably seek forgiveness of payments to the extent possible from
countries (such as Guyana and the Dominican Republic) where foreign
telephone companies have agreed to forego payments for disputed calls (in
the event WilTel does not reasonable seek for forgiveness, WilTel agrees to
be liable for such disputed calls). In the event WilTel discovers
fraudulent or unauthorized calls being made (or reasonably believes
fraudulent or unauthorized calls are being made), WilTel shall take action
with prompt, subsequent notice that is reasonably necessary to prevent such
fraudulent or unauthorized calls from continuing to take place, including
without limitation, denying Services to particular ANIs or terminating
Services to or from specific locations.
(i) Call records with invalid authorization codes.
(ii) Call records with invalid PIN digits.
(iii)Toll-free call records that are pay phone with a duration greater
than 3600 seconds.
(iv) Toll-free call records with a duration greater than 3600 seconds.
(v) Caribbean call records that are Dominican and have a duration
greater than 3600 seconds.
(vi) Call records that are domestic (not international) and are not
toll-free and have a duration greater than 4000 seconds.
(vii) International call records with a duration greater than 3600
seconds.
(viii)Call records with universal access numbers for travel card
services.
(ix) Calls from ANI or authcode with a duration greater than 4000
seconds.
(x) Calls with non-zero information digits.
(xi) International calls with an authcode or a FGB, or authcodes on
FGD if there are more than ten (10) calls within one (1) hour or with
a duration greater than 300 minutes.
(xii)Call records made with an authcode on FGB to area code 809, or
authcodes that are on FGD if there are more than ten (10) calls within
one (1) hour or with duration greater than 300 minutes.
(xiii)Originating ANI with more than ten (10) calls totaling more than
600 minutes.
(xiv)WilTel acknowledges that it is capable of providing the following
information upon reasonable request by customer: (w) three (3)
threshold alert levels mutually agreed to by the parties, (x) the
number of calls from a specific originating ANI, destination number,
international country code and billing number, (y) the number of
billable minutes from a specific originating ANI, destination number,
international country code and billing number, and (z) Customer's
capability to block and update the number database with respect to a
specific ANI, destination number, international country code or
billing number.
11. BILLING DISPUTES: The parties agree to substitute Subsections 5(A), 5(D)
and 5(E) of the TSA to read in their entirety as follows:
(A) Payment WilTel billings for Services hereunder are made on a monthly
basis (or such other basis as may be mutually agreed to by the parties)
following Start of Service. WilTel agrees to provide monthly summary
billing and invoicing information with identified originating and
terminating LATAs in order to allow Customer to reconcile its monthly CDR
billing records with CDRs delivered to Customer for such period. Subject to
Subsection 5(D) below, Services shall be billed at the rates set forth in
the PET and Service Requests, as the case may be. Discounts, if any,
applicable to the rates for certain Services are set forth in the PET.
Customer will pay all undisputed charges relative to each WilTel invoice
for Services within forty-five (45) days of the invoice date set forth on
each WilTel invoice to Customer ("Due Date"). If payment is not received by
WilTel on or before the Due Date, Customer shall also pay a late fee in the
amount of the lesser of one and one-half percent (1 1/2%) of the unpaid
balance of the charges for Services rendered per month or the maximum
lawful rate under applicable state law.
(D) Modification of Charges During the Initial Service Term of this
Agreement, the Domestic Transport Charges (as described in Subsection 2(A)
of the PET) and the administrative charge (as described in Subsection 2(D)
of the PET) will not be modified by WilTel. International Transport Charges
may be modified based on WilTel's cost for such service.
(E) Billing Disputes notwithstanding the foregoing, late fees shall apply
(but shall not be due and payable for a period of one hundred twenty (120)
days following the Due Date therefor) for amounts reasonably disputed by
Customer, provided Customer: (i) pays all undisputed charges on or before
the Due Date, (ii) presents a written statement of any billing
discrepancies to WilTel in reasonable detail on or before the Due Date of
the invoice in question, and (iii) negotiates in good faith with WilTel for
the purpose of resolving such dispute within said one hundred and twenty
(120) day period. In the event such dispute is resolved in favor of WilTel,
Customer agrees to pay WilTel the disputed amounts together with any
applicable late fees within ten (10) days of the resolution. In the event
such dispute is resolved in favor of Customer, Customer will receive a
credit for the disputed charges in question and the applicable late fees.
In the event the dispute can not be resolved within such one hundred and
twenty (120) day period (unless WilTel has agreed in writing to extend such
period) all disputed amounts together with late fees shall become due and
payable, and this provision shall not be construed to prevent Customer from
pursuing any available legal remedies. WilTel shall not be obligated to
consider any Customer notice of billing discrepancies which are received by
WilTel more than one hundred and twenty (120) days following the Due Date
of the invoice in question.
12. CREDIT: The parties agree to substitute Section 6 of the TSA to read in its
entirety as follows:
Credit. Customer has received credit approval from WilTel as described in
that certain letter from Mr. Bob Vetera (WilTel's Director of Corporate
Credit) to Mr. Craig Holmes Customer's Vice President and Chief Accounting
Officer), a copy of which is attached hereto as Attachment "1" (the "Credit
Letter"). Provided Customer's accounts receivable balance to WilTel does
not exceed $50,000,000 ("Customer's Credit Line"), WilTel will not require
any further security or assurances from WilTel for payments due hereunder.
WilTel reserves the right, however, to require additional security or other
assurances from Customer with respect to payments due hereunder in the
event Customer's Credit Line exceeds $50,000,000.
13. CREDITWORTHINESS: The parties agree to substitute Section 7 of the TSA to
read in its entirety as follows:
Creditworthiness. During the Initial Service (including any Renewal
Periods) Customer agrees to provide WilTel with quarterly financial
statements. If at any time there is a material adverse change in Customer's
creditworthiness as specifically defined herein, then in addition to any
other remedies available to WilTel, WilTel may elect, in its sole
discretion, to exercise one or more of the following remedies: (i) cause
Start of Service for Services described in a previously executed Service
Request to be withheld; (ii) cease providing Services pursuant to a
Suspension Notice in accordance with Section 5(F); (iii) decline to accept
a Service Request or other requests from Customer to provide Services which
WilTel may otherwise be obligated to accept and/or (iv) condition its
provision of Services or acceptance of a Service Request on Customer's
assurance of payment which shall be a deposit or such other means to
establish reasonable assurance of payment. One or more of the following
shall constitute an material adverse change in Customer's creditworthiness:
(i) Customer's material default of its obligations to WilTel under this or
any other agreement with WilTel which is not cured within any applicable
cure period; (ii) failure of Customer to make full payment of all
undisputed charges due hereunder on or before the Due Date on three (3) or
more occasions during any period of twelve (12) or fewer months; (iii)
acquisition of Customer (whether in whole or by majority or controlling
interest) by an entity which is insolvent, which is subject to bankruptcy
or insolvency proceedings, which owes past due amounts to WilTel or any
entity affiliated with WilTel; or, (iv) Customer's being subject to or
having filed for bankruptcy or insolvency proceedings or the legal
insolvency of Customer.
14. REMEDIES FOR BREACH: The parties agree to substitute Section 8 of the TSA to
read in its entirety as follows:
Remedies for Breach. In the event Customer is in material breach of this
Agreement, including without limitation, failure to pay all undisputed
charges due hereunder by the applicable Due Date or the date stated in the
Suspension Notice described in Subsection 5 (F) above, provided WilTel has
issued Customer at least two (2) 10-day Suspension Notices as described in
Subsection 5(F) above, WilTel shall have the right, after giving Customer
five (5) days prior notice and opportunity to cure, to (i) terminate this
Agreement; (ii) withhold billing information from Customer; and/or (iii)
contact the End Users (for whom calls are originating and terminated solely
over facilities comprising the WilTel network) directly and bill such End
Users directly until such time as WilTel has been paid in full for the
amount owed by Customer. If Customer fails to make payment by the date
stated in the Suspension Notice and WilTel, after giving Customer five (5)
days prior notice, terminates this Agreement as provided in this Section 8,
such termination shall not relieve Customer for payment of applicable
cancellation charges as described in Section 2 above.
15. WARRANTY: The parties agree to substitute Section 9 of the TSA to read in
its entirety as follows:
Warranty. WilTel will provide a long distance network with transmission
quality and availability consistent with telecommunications common carrier
industry standards, government regulations and sound business practices.
WILTEL MAKES NO OTHER WARRANTIES ABOUT THE SERVICES PROVIDED HEREUNDER,
EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.
16. FORCE MAJEURE: The parties agree to substitute Section 11 of the TSA to read
in its entirety as follows:
Force Majeure. If WilTel's performance of this Agreement or any obligation
hereunder is prevented, restricted or interfered with by causes beyond its
reasonable control including, but not limited to, acts of God, fire,
explosion, vandalism, storm or other similar occurrence, any law, order,
regulation, direction, action or request of the United States government,
or state or local governments, or of any department, agency, commission,
court, bureau, corporation or other instrumentality of any one or more such
governments, or of any civil or military authority, or by national
emergency, insurrection, riot, war, strike, lockout or work stoppage or
other labor difficulties (excluding WilTel's labor force and personnel), or
supplier failure, shortage, breach or delay (a "Force Majeure Event"), then
WilTel shall be excused from such performance on a day-to-day basis to the
extent of such restriction or interference. WilTel shall use reasonable
efforts under the circumstances to avoid or remove such causes or
nonperformance and shall proceed to perform with reasonable dispatch
whenever such causes are removed or cease. In the event WilTel is unable to
restore Service within five (5) days after the occurrence of a Force
Majeure Event as described herein, Customer may cancel the affected Service
and WilTel and Customer agree to negotiate in good faith concerning
Customer's minimum monthly commitment, if any, described in the PET.
17. FORUM: The parties agree to substitute Subsection 20(B) of the TSA to read
in its entirety as follows:
(B) Forum. Any legal action or proceeding with respect to this Agreement
may be brought in the Courts of (i) the State of Oklahoma in and for the
County of Tulsa or the United States of America for the Northern District
of Oklahoma, or (ii) the State of Texas in and for the County of Dallas or
the United States of America for the Northern District of Texas. By
execution of this Agreement, both Customer and WilTel hereby submit to such
jurisdiction, hereby expressly waiving whatever rights may correspond to
either of them by reason of their present or future domicile. In
furtherance of the foregoing, Customer and WilTel hereby agree to service
by U.S. Mail at the notice addresses referenced in Section 15. Such service
shall be deemed effective upon the earlier of actual receipt or seven (7)
days following the date of posting.
18. ACCOUNTING CODES: Notwithstanding anything to the contrary contained in
Section 14 of the Service Schedule dated as of May 31, 1996, WilTel agrees to
(**********) for verified or non-verified accounting codes.
IN WITNESS WHEREOF, the parties have executed these Amended and
Restated Program Enrollment Terms on the date first written above.
WORLDCOM NETWORK SERVICES, INC. EXCEL TELECOMMUNICATIONS, INC.
d/b/a WilTel
By: /s/Charles M. Cole III By: /s/Thomas A. Marino
--------------------------------- --------------------------------
(Signature) (Signature)
CHARLES M. COLE III THOMAS A. MARINO
--------------------------------- --------------------------------
(Print Name) (Print Name)
Vice President, Carrier Sales Executive Vice President
--------------------------------- --------------------------------
(Title) {Title}
November 24, 1997 November 21, 1997
--------------------------------- --------------------------------
(Date) (Date)
(*****) Confidential Treatment Requested
The redacted material, separately filed with the Commission.
<PAGE>
WilTel - Proprietary
Not for use or disclosure outside WilTel
except under written agreement
SCHEDULE 1
TRANSCEND
Tier Locations Sorted by Tier
<TABLE>
<CAPTION>
LATA LATA
Tier Number LATA Name Tier Number LATA Name
- ---------- ----------------- --------------------------------- ---------- ----------------- --------------------------------
<S> <C> <C> <C> <C> <C>
(*) 126 West Massachusetts MA (*) 492 Baton Rouge, LA
(*) 128 East Massachusetts MA (*) 520 St. Louis, MO
(*) 132 New York Metro NY (*) 521 Westphalia, MO
(*) 222 Delaware Valley, NJ (*) 522 Springfield, MO
(*) 224 North Jersey, NJ (*) 524 Kansas City, MO
(*) 228 Philadelphia, PA (*) 532 Wichita, KS
(*) 234 Pittsburgh, PA (*) 534 Topeka, KS
(*) 236 Washington DC (*) 536 Oklahoma City, OK
(*) 238 Baltimore, MD (*) 538 Tulsa, OK
(*) 248 Richmond, VA (*) 540 El Paso, TX
(*) 320 Cleveland, OH (*) 542 Midland, TX
(*) 324 Columbus, OH (*) 550 Abilene, TX
(*) 325 Akron, OH (*) 552 Dallas, TX
(*) 326 Toledo, OH (*) 554 Longview, TX
(*) 328 Dayton, OH (*) 560 Houston, TX
(*) 330 Evansville, IN (*) 562 Beaumont, TX
(*) 332 South Bend, IN (*) 628 Minneapolis, MN
(*) 336 Indianapolis, IN (*) 632 Des Moines, IA
(*) 340 Detroit, MI (*) 634 Davenport, IA
(*) 358 Chicago, IL (*) 635 Cedar Rapids, IA
(*) 426 Raleigh, NC (*) 644 Omaha, NE
(*) 434 Columbia, SC (*) 652 Idaho ID
(*) 438 Atlanta, GA (*) 656 Denver, CO
(*) 440 Savannah, GA (*) 658 Colorado Springs, CO
(*) 442 Augusta, GA (*) 660 Utah, UT
(*) 446 Macon, GA (*) 664 New Mexico, NM
(*) 452 Jacksonville, FL (*) 668 Tucson, AZ
(*) 454 Gainesville, FL (*) 672 Portland, OR
(*) 456 Daytona Beach, FL (*) 674 Seattle, WA
(*) 458 Orlando, FL (*) 720 Reno, NV
(*) 460 Southeast, FL (*) 721 Pahrump, NV
(*) 468 Memphis, TN (*) 722 San Francisco, CA
(*) 470 Nashville, TN (*) 726 Sacramento, CA
(*) 472 Chattanooga, TN (*) 730 Los Angeles, CA
(*) 478 Montgomery, AL (*) 920 Hartford, CT
(*) 480 Mobile, AL (*) 922 Cincinnati, OH
(*) 486 Shreveport, LA (*) 952 Gulf Coast, Fl
(*) 488 Lafayette, LA (*) 953 Tallahassee, FL
(*) 490 New Orleans, LA
</TABLE>
<PAGE>
SCHEDULE 1
TRANSCEND
Tier Locations Sorted by Tier
<TABLE>
<CAPTION>
LATA LATA
Tier Number LATA Name Tier Number LATA Name
- ---------- ----------------- --------------------------------- ---------- ----------------- --------------------------------
<S> <C> <C> <C> <C> <C>
(*) 122 New Hampshire, NH (*) 430 Greenville, SC
(*) 133 Poughkepsie, NY (*) 432 Florence, SC
(*) 134 Albany, NY (*) 448 Pensacola, FL
(*) 136 Syracuse, NY (*) 462 Louisville, KY
(*) 140 Buffalo, NY (*) 474 Knoxville, TN
(*) 220 Atlantic Coastal, NJ (*) 476 Birmingham, AL
(*) 246 Culpeper, VA (*) 477 Huntsville, AL
(*) 250 Lynchburg, VA (*) 484 Biloxi, MS
(*) 252 Norfolk, VA (*) 528 Little Rock, AR
(*) 338 Bloomington, IN (*) 558 Austin, TX
(*) 342 Upper Peninsula, MI (*) 564 Corpus Christi, TX
(*) 344 Saginaw, MI (*) 566 San Antonio, TX
(*) 346 Lansing, MI (*) 568 Brownsville, TX
(*) 348 Grand Rapids, MI (*) 640 South Dakota, SD
(*) 350 Northeast, WI (*) 724 Chico, CA
(*) 352 Northwest, WI (*) 732 San Diego, CA
(*) 354 Southwest, WI (*) 736 Monterey, CA
(*) 356 Southeast, WI (*) 738 Stockton, CA
(*) 366 Forrest, IL (*) 740 San Luis Obispo, CA
(*) 368 Peoria, IL (*) 949 Fayetteville, NC
(*) 370 Champaign, IL (*) 951 Rocky Mount, NC
(*) 374 Springfield, IL (*) 973 Palm Springs, CA
(*) 422 Charlotte, NC (*) 974 Rochester, NY
(*) 424 Greensboro, NC (*)
</TABLE>
<PAGE>
SCHEDULE 1
TRANSCEND
Tier Locations Sorted by Tier
<TABLE>
<CAPTION>
LATA LATA
Tier Number LATA Name Tier Number LATA Name
- ---------- ----------------- --------------------------------- ---------- ----------------- --------------------------------
<S> <C> <C> <C> <C> <C>
(*) 120 Maine, ME (*) 624 Duluth, MN
(*) 124 Vermont, VT (*) 626 St. Cloud, MN
(*) 130 Rhode Island, RI (*) 630 Sioux City, IA
(*) 138 Binghampton, NY (*) 636 Fargo, ND
(*) 226 Capital, PA (*) 638 Bismark, ND
(*) 230 Altoona, PA (*) 646 Grand Island, NE
(*) 232 Northeast, PA (*) 648 Great Falls, MT
(*) 240 Hagerstown, MD (*) 650 Billings, MT
(*) 242 Salisbury, MD (*) 654 Wyoming, WY
(*) 244 Roanoke, VA (*) 670 Eugene, OR
(*) 254 Charleston, WV (*) 676 Spokane, WA
(*) 256 Clarksburg, WV (*) 728 Fresno, CA
(*) 322 Youngstown, OH (*) 734 Bakersfield, CA
(*) 334 Auburn/Huntington, IN (*) 921 Fisher's Island, NY
(*) 360 Rockford, IL (*) 923 Mansfield, OH
(*) 62 Cairo, IL (*) 924 Erie, PA
(*) 364 Sterling, IL (*) 927 Harrisonburg, VA
(*) 376 Quincy, IL (*) 928 Charlottesville, VA
(*) 420 Asheville, NC (*) 929 Edinburg, VA
(*) 428 Wilmington, NC (*) 932 Blue Field, WV
(*) 436 Charleston, SC (*) 937 Richmond, IN
(*) 450 Panama City, FL (*) 938 Terre Haute, IN
(*) 464 Owensboro, KY (*) 939 Fort Meyers, FL
(*) 466 Winchester, KY (*) 956 Bristol, TN
(*) 482 Jackson, MS (*) 958 Lincoln, NE
(*) 530 Pine Bluff, AR (*) 961 San Angelo, TX
(*) 544 Lubbock, TX (*) 963 Kalispell, MT
(*) 546 Amarillo, TX (*) 976 Mattoon, IL
(*) 548 Wichita Falls, TX (*) 977 Galesburg, IL
(*) 556 Waco, TX (*) 978 Olney, IL
(*) 570 Hearne, TX (*) 980 Navajo Territory, AZ
(*) 620 Rochester, MN (*) 981 Navajo Territory, UT
</TABLE>
<PAGE>
SCHEDULE 1
TRANSCEND
Tier Locations Sorted by LATA
<TABLE>
<CAPTION>
LATA LATA
Tier Number LATA Name Tier Number LATA Name
- ---------- ----------------- --------------------------------- ---------- ----------------- --------------------------------
<S> <C> <C> <C> <C> <C>
(*) 120 Maine, ME (*) 328 Dayton, OH
(*) 122 New Hampshire, NH (*) 330 Evansville, IN
(*) 124 Vermont, VT (*) 332 South Bend, IN
(*) 126 West Massachusetts, MA (*) 334 Auburn/Huntington, IN
(*) 128 East Massachusetts, MA (*) 336 Indianapolis, IN
(*) 130 Rhode Island,RI (*) 338 Bloomington, IN
(*) 132 New york Metro, NY (*) 340 Detroit, MI
(*) 133 Poughkeepsie, NY (*) 342 Upper Peninsula, MI
(*) 134 Albany, NY (*) 344 Saginaw, MI
(*) 136 Syracuse, NY (*) 346 Lansing, MI
(*) 138 Binghampton, NY (*) 348 Grand Rapids, MI
(*) 140 Buffalo, NY (*) 350 Northeast, WI
(*) 220 Atlantic Coastal, NJ (*) 352 Northwest, WI
(*) 222 Delaware Valley, NJ (*) 354 Southwest, WI
(*) 224 North Jersey, NJ (*) 356 Southeast, WI
(*) 226 Capital, PA (*) 358 Chicago, IL
(*) 228 Philadelphia, PA (*) 360 Rockford, IL
(*) 230 Altoona, PA (*) 362 Cairo, IL
(*) 232 Northeast, PA (*) 364 Sterling, IL
(*) 234 Pittsburgh, PA (*) 366 Forrest, IL
(*) 236 Washington, DC (*) 368 Peoria, IL
(*) 238 Baltimore, MD (*) 370 Champaign, IL
(*) 240 Hagerstown, MD (*) 374 Springfield, IL
(*) 242 Salisbury, MD (*) 376 Quincy, IL
(*) 244 Roanoke, VA (*) 420 Asheville, NC
(*) 246 Culpeper, VA (*) 422 Charlotte, NC
(*) 248 Richmond, VA (*) 424 Greensboro, NC
(*) 250 Lynchburg, VA (*) 426 Raleigh, NC
(*) 252 Norfolk, VA (*) 428 Wilmington, NC
(*) 254 Charleston, WV (*) 430 Greenville, SC
(*) 256 Clarksburg, WV (*) 432 Florence, SC
(*) 320 Cleveland, OH (*) 434 Columbia, SC
(*) 322 Youngstown, OH (*) 436 Charleston, SC
(*) 324 Columbus, OH (*) 438 Atlanta, GA
(*) 325 Akron, OH (*) 440 Savannah, GA
(*) 326 Toledo, OH (*) 442 Augusta, GA
(*) 444 Albany, GA (*) 542 Midland, TX
(*) 446 Macon, GA (*) 544 Lubbock, TX
</TABLE>
<PAGE>
SCHEDULE 1
TRANSCEND
Tier Locations Sorted by LATA
<TABLE>
<CAPTION>
LATA LATA
Tier Number LATA Name Tier Number LATA Name
- ---------- ----------------- --------------------------------- ---------- ----------------- --------------------------------
<S> <C> <C> <C> <C> <C>
(*) 448 Pensacola, FL (*) 546 Amarillo, TX
(*) 450 Panama City, FL (*) 548 Wichita Falls, TX
(*) 452 Jacksonville, FL (*) 550 Abilene, TX
(*) 454 Gainesville, FL (*) 552 Dallas, TX
(*) 456 Daytona Beach, FL (*) 554 Longview, TX
(*) 458 Orlando, FL (*) 556 Waco, TX
(*) 460 Southeast, FL (*) 558 Austin, TX
(*) 462 Louisville, KY (*) 560 Houston, TX
(*) 464 Owensboro, KY (*) 562 Beaumont, TX
(*) 466 Winchester, KY (*) 564 Corpus Christi, TX
(*) 468 Memphis, TN (*) 566 San Antonio, TX
(*) 470 Nashville, TN (*) 568 Brownsville, TX
(*) 472 Chattaooga, TN (*) 570 Hearne, TX
(*) 474 Knoxville, TN (*) 620 Rochester, MN
(*) 476 Birmingham, AL (*) 624 Duluth, MN
(*) 477 Huntsville, AL (*) 626 St. Cloud, MN
(*) 478 Montgomery, AL (*) 628 Minneapolis, MN
(*) 480 Mobile, AL (*) 630 Sioux City, IA
(*) 482 Jackson, MS (*) 632 Des Moines, IA
(*) 484 Biloxi, MS (*) 634 Davenport, IA
(*) 486 Shreveport, LA (*) 635 Cedar Rapids, IA
(*) 488 Lafayette, LA (*) 636 Fargo, ND
(*) 490 New Orleans, LA (*) 638 Bismark, ND
(*) 492 Baton Rouge, LA (*) 640 South Dakota, SD
(*) 520 St. Louis, MO (*) 644 Omaha, NE
(*) 521 Westphalia, MO (*) 646 Grand Island, NE
(*) 522 Springfield, MO (*) 648 Great Falls, MT
(*) 24 Kansas City, MO (*) 650 Billings, MT
(*) 526 Fort Smith, AR (*) 652 Idaho, ID
(*) 528 Little Rock, AR (*) 654 Wyoming, WY
(*) 530 Pine Bluff, AR (*) 656 Denver, CO
(*) 532 Wichita, KS (*) 658 Colorado Springs, CO
(*) 534 Topeka, KS (*) 660 Utah, UT
(*) 536 Oklahoma City, OK (*) 664 New Mexico, NM
(*) 538 Tulsa, OK (*) 666 Phoenix, AZ
(*) 540 El Paso, TX (*) 668 Tucson, AZ
(*) 670 Eugene, OR (*) 928 Charlottesville, VA
(*) 672 Portland, OR (*) 929 Edinburg, VA
(*) 674 Seattle, VA (*) 932 Blue Field, WV
(*) 676 Spokane, WA (*) 937 Richmond, IN
</TABLE>
<PAGE>
SCHEDULE 1
TRANSCEND
Tier Locations Sorted by LATA
<TABLE>
<CAPTION>
LATA LATA
Tier Number LATA Name Tier Number LATA Name
- ---------- ----------------- --------------------------------- ---------- ----------------- --------------------------------
<S> <C> <C> <C> <C> <C>
(*) 720 Reno, NV (*) 938 Terre Haute, IN
(*) 721 Pahrump, NV (*) 939 Fort Meyers, FL
(*) 22 San Francisco, CA (*) 949 Fayetteville, NC
(*) 724 Chico, CA (*) 951 Rocky Mount, NC
(*) 726 Sacramento, CA (*) 952 Gulf Coast, FL
(*) 728 Fresno, CA (*) 953 Tallahassee, Fl
(*) 730 Los Angeles, CA (*) 956 Bristol, TN
(*) 732 San Diego, CA (*) 958 Lincoln, NE
(*) 734 Bakersfield, CA (*) 960 Coeur D'Alene, ID
(*) 736 Monterey, CA (*) 961 San Angelo, TX
(*) 738 Stockton, CA (*) 963 Kalispell, MT
(*) 740 San Luis Obispo, CA (*) 973 Palm Springs, CA
(*) 920 Hartford, CT (*) 974 Rochester, NY
(*) 921 Fisher's Island, NY (*) 976 Mattoon, IL
(*) 922 Cincinnati, OH (*) 977 Galesburg, IL
(*) 923 Mansfield, OH (*) 978 Olney, IL
(*) 924 Erie, PA (*) 980 Navajo Territory, AZ
(*) 927 Harrisonburg, VA (*) 981 Navajo Territory, UT
</TABLE>
<PAGE>
SCHEDULE 2
Transcend Jurisdictional Transport Base Rates (Before Discount)
<TABLE>
<CAPTION>
Base Base
State Transport State Transport
----------------------- -------------- ----------------------- ---------------
<S> <C> <C> <C> <C>
ALABAMA (*) MONTANA (*)
ARIZONA (*) NEBRASKA (*)
ARKANSAS (*) NEVADA (*)
CALIFORNIA (*) NEW HAMPSHIRE (*)
California Intra-lata (*) NEW JERSEY (*)
COLORADO (*) NEW MEXICO (*)
CONNECTICUT (*) NEW YORK (*)
DELAWARE (*) NORTH CAROLINA (*)
FLORIDA (*) NORTH DAKOTA (*)
GEORGIA (*) OHIO (*)
IDAHO (*) OKLAHOMA (*)
ILLINOIS (*) OREGON (*)
INDIANA (*) PENNSYLVANIA (*)
IOWA (*) RHODE ISLAND (*)
KANSAS (*) SOUTH CAROLINA (*)
KENTUCKY (*) SOUTH DAKOTA (*)
Kentucky Intra-lata (*) TENNESSEE (*)
LOUISIANA (*) TEXAS (*)
MAINE (*) UTAH (*)
MARYLAND (*) VERMONT (*)
MASSACHUSETTS (*) VIRGINIA (*)
MICHIGAN (*) WASHINGTON (*)
MINNESOTA (*) WEST VIRGINIA (*)
MISSISSIPPI (*) WISCONSIN (*)
MISSOURI (*) WYOMING (*)
</TABLE>
<PAGE>
Note: Local Access must be added to International Transport for switched calls
and Domestic Transport must be added for all call types.
Excel Transcend
International Transport Pricing
International
Country Transport
-------------------------- -------------
AFGHANISTAN (*)
ALBANIA (*)
ALGERIA (*)
AMERICAN SAMOA (*)
ANDORRA (*)
ANGOLA (*)
ANGUILLA (*)
ANTARCTICA (*)
ANTARCTICA (SCOTT BASE) (*)
ANTIGUA (BARBUDA) (*)
ARGENTINA (*)
ARMENIA (*)
ARUBA (*)
ASCENSION ISLAND (*)
AUSTRALIA (*)
AUSTRIA (*)
AZERBAIJAN (*)
BAHAMAS (*)
BAHRAIN (*)
BANGLADESH (*)
BARBADOS (*)
BELARUS (*)
BELGIUM (*)
BELIZE (*)
BENIN (*)
BERMUDA (*)
BHUTAN (*)
BOLIVIA (*)
BOSNIA & HERZEGOVINA (*)
BROTSWANA (*)
BRAZIL (*)
BRITISH VIRGINIA ISLANDS (*)
BRUNEI (*)
BULGARIA (*)
BURKINA FASO (*)
BURUNDI (*)
CAMBODIA (*)
CAMEROON (*)
CAPE VERDE ISLANDS (*)
<PAGE>
Excel Transcend
International Transport Pricing (Continued)
International
Country Transport
-------------------------- -------------
CAYMAN ISLANDS (*)
CENTRAL AFRICAN REPUBLIC (*)
CHAD (*)
CHILE (*)
CHINA (*)
CHRISTIMAS & COCOS ISLAND (*)
COLUMBIA (*)
COMOROS (*)
CONGO (*)
COOK ISLANDS (*)
COSTA RICA (*)
CROATIA (*)
CUBA (*)
CYPRUS (*)
CZECH REPUBLIC (*)
DENMARK (*)
DIEGO GARCIA (*)
DJIBOUTI (*)
DOMINICA (*)
DOMINICAN REPUBLIC (*)
ECUADOR (*)
EGYPT (*)
EL SALVADOR (*)
EQUATORIAL GUINEA (*)
ERITREA (*)
ESTONIA (*)
ETHIOPIA (*)
FAEROE ISLANDS (*)
FALKLAND ISLANDS (*)
FIJI ISLANDS (*)
FINLAND (*)
FRANCE (*)
FRENCH ANTILLES (*)
FRENCH GUIANA (*)
FRENCH POLYNESIA (*)
GABON (*)
GAMBIA (*)
GEORGIA (*)
GERMANY (*)
GHANA (*)
GIBRALTAR (*)
GREECE (*)
GREENLAND (*)
GRENADA (*)
GUADELOUPE (*)
GUAM (*)
<PAGE>
Excel Transcend
International Transport Pricing (Continued)
International
Country Transport
-------------------------- -------------
GUANTANAMO BAY (*)
GUATEMALA (*)
GUINEA (*)
GUINEA BISSAU (*)
GUYANA (*)
HAITI (*)
HONDURAS (*)
HONG KONG (*)
HUNGARY (*)
ICELAND (*)
INDIA (*)
INDONESIA (*)
IRAN (*)
IRAQ (*)
IRELAND (*)
ISRAEL (*)
ITALY (*)
IVORY COAST (*)
JAMAICA (*)
JAPAN (*)
JORDAN (*)
KAZAKHSTAN (*)
KENYA (*)
KIRIBATI (*)
KUWAIT (*)
KYRGYZXSTAN (*)
LAOS (*)
LATVIA (*)
LEBANON (*)
LESOTHO (*)
LIBERIA (*)
LIBYA (*)
LIECHTENSTEIN (*)
LITHUANIA (*)
LUXEMBOURG (*)
MACAO (*)
MACEDONIA (*)
MADAGASCAR (*)
MALAWI (*)
MALAYSIA (*)
MALDIVES (*)
MALI REPUBLIC (*)
MALTA (*)
MARISAT-ATLANTIC OCEAN (*)
MARISAT-INDIAN OCEAN (*)
MARISAT-PACIFIC OCEAN (*)
<PAGE>
Excel Transcend
International Transport Pricing (Continued)
International
Country Transport
-------------------------- -------------
MARISAT-W. ATLANTIC (*)
MARSHALL ISLANDS (*)
MAURITANIA (*)
MAURITIUS (*)
MAYOTTE ISLAND (*)
MEXICO 1 DAY (*)
MEXICO 1 NON-DAY (*)
MEXICO 2 DAY (*)
MEXICO 2 NON-DAY (*)
MEXICO 3 DAY (*)
MEXICO 3 NON-DAY (*)
MEXICO 4 DAY (*)
MEXICO 4 NON-DAY (*)
MEXICO 5 DAY (*)
MEXICO 5 NON-DAY (*)
MEXICO 6 DAY (*)
MEXICO 6 NON-DAY (*)
MEXICO 7 DAY (*)
MEXICO 7 NON-DAY (*)
MEXICO 8 DAY (*)
MEXICO 8 NON-DAY (*)
MICRONESIA (*)
MOLDOVA (*)
MONACO (*)
MONGOLIA (*)
MONTSERRAT (*)
MOROCCO (*)
MOZAMBIQUE (*)
MYAMAR (BURMA) (*)
NAMIBIA (*)
NAURU (*)
NEPAL (*)
NETHERLANDS (*)
NETHERLANDS ANTILLES (*)
NEW CALEDONIA (*)
NEW ZEALAND (*)
NICARAGUA (*)
NIGER (*)
NIGERIA (*)
NIUE ISLAND (*)
NORFOLK ISLAND (*)
NORTH KOREA (*)
NORWAY (*)
OMAN (*)
PAKISTAN (*)
PALAU (*)
<PAGE>
Excel Transcend
International Transport Pricing (Continued)
International
Country Transport
-------------------------- -------------
PANAMA (*)
PAPUA NEW GUINEA (*)
PARAGUA (*)
PERU (*)
PHILIPPINES (*)
POLAND (*)
PORTUGAL (*)
QATAR (*)
REUNION ISLAND (*)
ROMANIA (*)
RUSSIA (*)
RWANDA (*)
SAIPAN (*)
SAN MARINO (*)
SAO TOME (*)
SAUDI ARABIA (*)
SENEGAL (*)
SEYCHELLES (*)
SIERRA LEONE (*)
SINGAPORE (*)
SIERRA LEONE (*)
SINGAPORE (*)
SLOVENIA (*)
SOLOMON ISLANDS (*)
SOMALIA (*)
SOUTH AFRICA (*)
SOUTH KOREA (*)
SPAIN (*)
SRI LANKA (*)
ST HELENA (*)
ST KITTS (*)
ST LUCIA (*)
ST PIERRE/MIQUELON (*)
ST VINCENT/GRENADINES (*)
SUDAN (*)
SURINAME (*)
SWAZILAND (*)
SWEDEN (*)
SWITZERLAND (*)
SYRIA (*)
TAIWAN (*)
WAJIKISTAN (*)
TANZANIA (*)
THAILAND (*)
TOGO (*)
<PAGE>
Excel Transcend
International Transport Pricing (Continued)
International
Country Transport
-------------------------- -------------
TONGO ISLANDS (*)
TRINIDAD & TOBAGO (*)
TUNISIA (*)
TURKEY (*)
TURKMENISTAN (*)
TURKS AND CAICOS ISLANDS (*)
TUVALU (*)
UGANDA (*)
UKRAINE (*)
UNITED ARAB AMIRATES (*)
UNITED KINGDOM (*)
URUGUAY (*)
UZBEKISTAN (*)
VANUATU (*)
VATICAN CITY (*)
VENEZUELA (*)
VIETNAM (*)
WALLIS & FUTUNA (*)
WESTERN SAMOA (*)
YEMEN (*)
YUGOSLAVIA (*)
ZAIRE (*)
ZAMBIA (*)
ZIMBABE (*)
January 26, 1998
[Name]
[Address]
Re: Indemnification Agreement
Dear :
---------------
This letter reflects the agreement of EXCEL Communications, Inc., a
Delaware corporation (the "Company"), to indemnify you against expenses and
liabilities to which you may become subject in connection with your services to
the Company. In consideration of your providing your services to the Company,
the Company hereby agrees with you as follows:
1. (a) Subject to Sections 3, 7 and 9 below, to the fullest extent
permitted by law, you shall be indemnified and held harmless by the Company from
and against any and all judgments, fines, excise taxes, amounts paid in
settlement, losses, damages, expenses (including, wherever expenses are referred
to in this agreement, legal fees and disbursements and court costs reasonably
incurred) and other liabilities, whether joint or several, arising from any and
all claims, demands, actions, suits or proceedings, civil, criminal,
administrative, regulatory or investigative in nature, in which you may be or
become involved, or threatened to be involved, as a party or otherwise, by
reason of (i) your present or former status as an officer, director, employee,
partner, member, agent or trustee of the Company or any Affiliated Person (as
defined below), or (ii) any action actually or allegedly taken or omitted by you
in any such capacity, if with respect to the matter at issue you acted in a
manner reasonably believed to be in good faith and in a manner you reasonably
believed to be in, or not opposed to, the best interests of the Company or such
Affiliated Person, as the case may be, and, with respect to any criminal
proceeding, had no reasonable cause to believe your conduct was unlawful.
However, you shall not be entitled to indemnification with respect to any amount
paid in settlement if the settlement was effected without the Company's prior
written consent, which shall not be unreasonably withheld.
(b) Subject to Sections 7 and 9 below, to the extent that you are
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 1(a) hereof, or in defense of any claim, issue
or matter raised therein or resolved thereby, you shall be indemnified by the
Company against expenses reasonably incurred by you in connection therewith.
(c) To the extent you are required to serve or prepare to serve as a
witness in any action, suit or proceeding (whether civil, criminal,
administrative, regulatory or investigative in nature), including any
investigation by any legislative body, by reason of your services as a director,
officer, partner, member, employee, agent or trustee of the Company or any
Affiliated Person, but excluding service as a witness in an action, suit or
proceeding commenced by you, the Company shall indemnify you, subject to
Sections 7 and 9 below, against expenses reasonably incurred by you in
connection therewith on a current basis, upon receipt of statement(s) requesting
such indemnification, averring such service and reasonably evidencing such
expenses.
2. Subject to the last sentence of Section 3 hereof and to Sections 7 and 9
below, to the fullest extent permitted by law, expenses reasonably incurred by
you in investigating, responding to or defending any claim, demand, action, suit
or proceeding in which you may be or become involved, or threatened to be
involved, as a party or otherwise, by reason of your present or former status as
an director, officer, employee, partner, member, agent or trustee of the Company
or any Affiliated Person, or in serving or preparing to serve as a witness in
any action, suit or proceeding referred to in Section 1(b) hereof, shall be
advanced (or promptly reimbursed) by the Company, from time to time, to you as
such expenses are reasonably incurred prior to the final disposition of such
claim, demand, action, suit or proceeding, upon receipt by the Company of an
undertaking by you to repay the amount advanced if it ultimately shall be
determined that you are not entitled to be indemnified against such expenses
hereunder. The Company shall not require any guarantee, surety or other credit
enhancement as a condition to, or as part of, such undertaking on your part.
3. Any indemnification under Section 1(a) above shall be made by the
Company only as authorized in the specific case upon a determination that
indemnification is proper in the circumstances because you have met the
applicable standard of conduct set forth in Section 1(a) above. Such
determination shall be made by the Board of Directors of the Company by a
majority vote of the directors thereof who are not and were not parties to the
action, suit or proceeding (if any) in respect of which you are seeking
indemnity or, if such a quorum is not obtainable or, even if obtainable, a
quorum of directors likewise disinterested directs, by independent legal counsel
in a written opinion or, if the Board of Directors so determines, by the
Company's stockholders (the "Initial Determining Body") and best efforts shall
be used to make any such determination within 10 business days of a request
therefor. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent
shall not, of itself, create a presumption that you did not act in a manner
reasonably believed to be in good faith and in a manner which you reasonably
believed to be in or not opposed to the best interests of the Company or an
Affiliated Person, as the case may be, and, with respect to any criminal action
or proceeding, that you had reasonable cause to believe that your conduct was
unlawful, unless a judicial determination shall have been made in such action,
suit or proceeding specifically to such effect. You shall be conclusively
determined to have met the applicable standard of conduct for entitlement to
indemnification hereunder thirty business days after having made a written
request to the Company for such a determination, unless a negative determination
has been made within such thirty business day period or a determination as to
your compliance with the applicable standard of conduct could not reasonably be
made within such period by reason of the unavailability of information
reasonably required therefor. In the event the Initial Determining Body shall
not be able to timely make a determination as to your entitlement to
indemnification, or if such a determination is made but is negative, you shall
be entitled to a de novo judicial determination thereof by any court of
competent jurisdiction, but the Company shall not be required to advance to you
the expenses incurred by you in connection with any such proceeding and only
shall be required to indemnify you against such expenses reasonably incurred by
you if a court of competent jurisdiction shall have determined that you met the
applicable standard of conduct.
4. The advancement of expenses and indemnification herein provided shall be
in addition to any other rights to which you may be entitled in your capacity as
an officer, director, employee, partner, member, agent or trustee of the Company
or any Affiliated Person or any other person under any provision of the
certificate or articles of incorporation or organization, by-laws, partnership
or trust or operating agreement or other constitutive documents thereof or any
other agreement therewith of which you may be a beneficiary, or as a matter of
law, or otherwise, subject, however, to the provisions of Section 9(b) hereof.
5. You shall be entitled to indemnification as provided in Section 1 hereof
and advancement of expenses as provided in Section 2 hereof with respect to any
liability arising out of any claim, demand, action, suit or proceeding involving
any action actually or allegedly taken or omitted to be taken by you with
respect to any employee benefit plan of the Company or any Affiliated Person, or
any trust thereunder, including any such plan within the meaning of Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended, while you
were serving or acting in any administrative or fiduciary capacity for such plan
or trust, provided that (i) you were requested to so serve or act by the Company
or any Affiliated Person and (ii) in the case of indemnification, you acted with
respect to the matter at issue in a manner reasonably believed to be in good
faith and in a manner you reasonably believed to be in or not opposed to the
best interests of the participants and beneficiaries of such plan.
Notwithstanding any conflict that may exist between the interest of any such
plan (or the participants or beneficiaries thereof) and the Company or any
Affiliated Person in any particular circumstance, any action taken or omitted to
be taken by you in any administrative or fiduciary capacity with respect to any
such plan in a manner you reasonably believed to be in or not opposed to the
best interests of the participants and beneficiaries thereof shall be
conclusively deemed to have been in or not opposed to the best interests of the
Company or such Affiliated Person. Your entitlement to such indemnification in a
specific case shall be determined in accordance with Section 3 hereof.
6. You shall not be denied indemnification or advancement of expenses, in
whole or in part, hereunder solely as a result of any direct or indirect
ownership interest or personal financial interest you have or had in the
Company, any Affiliated Person or any entity directly or indirectly owning any
interest therein which also is involved in the transaction or matter with
respect to which indemnification or advancement of expenses is sought by you
hereunder, unless it shall have been determined that with respect to the matter
at issue you did not act in a manner reasonably believed to be in good faith or
did not act in a manner you reasonably believed to be in or not opposed to the
best interests of the Company or Affiliated Person involved in such matter. No
obligation or liability you may have, or may be asserted to have, to the Company
or any Affiliated Person shall reduce or mitigate the Company's obligation to
make any payment to you hereunder or be offset against any such obligation.
7. Notwithstanding anything contained in this agreement, you shall not be
entitled to the benefits of this agreement with respect to any expense or
liability incurred by you in connection with any action, suit or proceeding that
you at any time commence against the Company or any Affiliated Person or any
officer, director, partner, member, employee, agent or trustee thereof, other
than in respect of any expenses reasonably incurred by you in the successful
enforcement of your rights hereunder against the Company.
8. The rights to indemnification and advancement of expenses provided to
you hereunder is for your benefit and that of your respective heirs,
distributees, executors and administrators and shall not be deemed to create any
right to indemnification or advancement of expenses for the benefit of any other
person. This letter agreement shall be binding upon the successors and assigns
of the Company.
9. (a) The term "Affiliated Person" shall mean (i) each corporation in the
stock or securities of which the Company has directly or indirectly invested,
(ii) each partnership of which the Company is a general or limited partner or in
the partner interests or securities of which the Company has directly or
indirectly invested, (iii) each joint venture of which the Company is a joint
venturer or in the joint venture interests or securities of which the Company
has directly or indirectly invested, (iv) each limited liability company of
which the Company is a member or in the membership interests or securities of
which the Company has directly or indirectly invested, (v) each trust (including
any trust under any employee benefit plan) of which the Company is a beneficiary
(or in the case of a trust under an employee benefit plan of which the Company
is a sponsor) or in the trust interests or securities of which the Company has
directly or indirectly invested or to which the Company has made a loan or the
indebtedness of which the Company has guaranteed, provided, in the case of each
such corporation, partnership, joint venture, limited liability company or
trust, that you served as an officer, director, employee, partner, member, agent
or trustee thereof, or of any corporation, partnership, limited liability
company or trust which is a partner thereof, at the request of or to represent
the interests of the Company or any Affiliated Person thereof (whether or not
you directly or indirectly, had an ownership or personal financial interest
therein). For purposes hereof, the Company shall be deemed to have an investment
in any corporation, partnership, joint venture, limited liability company or
trust in or of which any Affiliated Person has any investment or is a partner,
joint venturer, member or trust beneficiary.
(b) In the event you shall receive a payment from any Affiliated Person, or
from any insurance company that provided coverage with respect to your acts or
omissions on behalf of the Company or any Affiliated Person, or from any other
third party, which payment indemnifies you or holds you harmless from and
against any liability (including expenses) in respect of which you would
otherwise be entitled to indemnity or an advance of expenses hereunder from the
Company, you shall not be entitled hereunder to any duplicative recovery from
the Company to the extent of such payment so received by you. In the event,
after receiving from the Company an indemnity payment or advance of expenses
hereunder in respect of any liability, you shall receive in respect of the same
liability any payment from any Affiliated Person or insurance company or other
third party, which payments from the Company and such Affiliated Person,
insurance company and/or third party total more than the amount of such
liability, you shall promptly refund to the Company, without interest, the
excess amount. For purposes of apportioning the obligation of the Company to
make indemnity payments and to advance expenses to you hereunder in any
circumstance where (i) any Affiliated Person, or any insurance company that
provided coverage with respect to your acts or omissions on behalf of the
Company or any Affiliated Person, or any third party, is at the time also
obligated to indemnify you and hold you harmless from and against any liability
in respect of which you are entitled to indemnity or an advance of expenses
hereunder and (ii) such other party or parties and the Company are at the time
ready, willing and able to make such payment to you (including payment in
respect of part of such liability), the Company shall make payment to you in
accordance with the following priorities (but any such payment shall be subject
to the provisions of the preceding sentences of this Section 9(b)): (A) there
shall first be applied against such liability any payments (if any) then
available from any third party other than an insurance company or Affiliated
Person referred to in clauses (B), (C) or (D) below, (B) there shall then be
applied against any remaining liability any payments (if any) then available
from any insurance company providing coverage with respect to your acts or
omissions on behalf of an Affiliated Person, (C) there shall then be applied
against any remaining liability any payments (if any) then available from any
insurance company providing coverage with respect to your acts or omissions on
behalf of the Company, (D) to the extent such liability arises out of your
activities or capacity in respect of an Affiliated Person, there shall then be
applied against any remaining liability any indemnity payment or advance of
expenses (if any) available from such Affiliated Person and (E) the Company
shall make payment of any remaining liability; provided, however, that (1) a
payment shall not be considered available from any insurance company, Affiliated
Person or third party at any time if such person at such time disputes its
obligation to make such payment to you and such dispute is not promptly (and in
any event within 10 business days of your request for such payment) resolved or
if such person by reason of any insolvency proceeding or judicial or
administrative proceeding or order or any other reason is then unable to make
such payment to you, (2) if there are multiple insurance companies, Affiliated
Persons or third parties who, in addition to the Company, are or may be
obligated to make indemnity payments or advance expenses to you in respect of
the same liability and who are ready, willing and able to make such payments to
you and the foregoing priority provisions do not determine the extent of the
Company's obligation, the relative obligations of all the other parties shall
first be determined in accordance with their relative obligations to you or, if
not so established, as they and you shall agree upon and, if not so established,
as they, you and the Company shall agree upon (in which respect the Company
shall, upon your request, agree to pay a share determined pro rata on the basis
of the value of the Company's assets available for such payment in relation to
the assets of each such other party available for such payment or the limit of
the obligation, as the case may be) and the Company shall be obligated to pay
any remaining liability and (3) notwithstanding the foregoing provisions of this
sentence, the Company, any such Affiliated Person and any such insurance company
may agree to apportion their obligations in any other manner, as long as the
full amount of any such liability to which you may be subject is paid and such
apportionment does not materially prejudice your future rights to indemnity or
advancement of expenses from the Company and all such parties, all as consented
to by you, such consent not to be unreasonably withheld by you.
10. The rights to indemnification and advancement of expenses provided to
you hereunder are in consideration of your past services to the Company and its
Affiliated Persons and as an inducement for you to continue to provide your
services to them.
11. No amendment or waiver of any provision of this letter agreement shall
in any event be effective unless the same shall be in writing and signed by each
of the parties hereto. However, the Company may, by notice to you at any time,
amend this letter agreement to eliminate or limit your right to indemnification
and advancement of expenses hereunder in respect, and only in respect, of your
continued service with the Company or any Affiliated Person, or any action taken
or omitted by you in respect thereof in any capacity, after receipt by you of
such notice.
12. This letter agreement may be executed in two or more counterparts, each
of which when so executed and delivered shall be an original and all of which
shall together constitute one and the same agreement.
13. If any provision of this agreement, or the application of any provision
of this agreement to any particular circumstance, is adjudicated to be unlawful,
invalid or unenforceable, the remaining provisions of this agreement, or the
application of such provision in any other circumstance, shall continue to be
given full force and effect. This letter agreement and the rights and
obligations of the parties hereto shall be construed in accordance with and
governed by the law of the jurisdiction of organization of the Company (without
giving effect to the principles, policies or provisions thereof concerning
choice or conflict of law).
Please acknowledge your acceptance of the above by signing this letter
agreement in the space provided below.
EXCEL COMMUNICATIONS, INC.
By:
-------------------------------------
John J. McLaine
President and Chief Operating Officer
AGREED TO AND ACCEPTED
THIS DAY OF , 1998
-------- ---------
- ---------------------------------
Name
AMENDMENT
TO THE
EXCEL COMMUNICATIONS, INC.
EMPLOYEE OWNERSHIP PLAN
EXCEL Communications, Inc. (the "Company") adopted the EXCEL
Telecommunications, Inc. Savings and Investment Plan (the "Plan"), effective
January 1, 1992. The Plan was amended and restated effective October 1, 1995,
with the resulting Plan denominated as the EXCEL Communications, Inc. Employee
Ownership Plan. Having reserved the right under Section 14.02 to amend the Plan,
the Company does by these presents hereby amend the Plan as follows, effective
January 1, 1997, with respect to amendments 2 through 8, and effective
January 1, 1998, for each other amendment:
1. This Amendment shall amend only those sections of the Plan set forth
herein, and those sections and subsections not expressly amended
hereby shall remain in full force and effect.
2. Section 2.24 is amended by revising the second sentence thereof to
read as follows:
"With respect to a share of Employer Securities that is publicly
traded, the average of the high and low trading prices of shares on
the national securities exchange on which they are registered on the
applicable transaction date, or if such date is not a trading day, on
the most recent trading day."
3. Section 2.26 is amended by revising the term "Affiliated Employer"
each place it appears therein to read "Employer or Affiliated
Employer".
4. Section 3.01 (b) is amended to read as follows:
"(b) Each Employee who is an Employee of EXCEL Telecommunications,
Inc. on December 31, 1995, shall become a Participant in the ESOP
portion of the Plan on December 31, 1995. All other Employees who have
completed six months of continuous Service and attained the age of 21
as of October 1, 1995, shall become Participants in the ESOP portion
of the Plan on such date. Thereafter, each Employee shall become a
Participant in the ESOP portion of the Plan on the Entry Date (if
employed on that date) coincident with or immediately following the
date on which the Employee completes six months of continuous Service
and attains age 21. Notwithstanding anything herein to the contrary,
(i) each Employee who is on an Employer's payroll on September 30,
1996, and who is not already a Participant in the ESOP portion of the
Plan, shall become a Participant in the ESOP portion of the Plan on
December 31, 1996; and (ii) each Employee who is on an Employer's
payroll on September 30, 1997, and December 31, 1997, and who is not
already a Participant in the ESOP portion of the Plan, shall become a
Participant in the ESOP portion of the Plan on December 31, 1997."
5. Section 4.04(a) is amended to read as follows:
"(a) Subject to Section 4.24, Employer Securities attributable to ESOP
Contributions, forfeitures and to any dividends paid on Employer
Securities held in the Suspense Account maintained pursuant to Section
10.06 shall be allocated to the ESOP Contribution Account (1) of each
Participant (A) as of the Accounting Date in 1995, if the Participant
is actively employed on such Accounting Date, (B) as of the Accounting
Date in 1996, if the Participant is actively employed on September 30,
1996, (C) as of the Accounting Date in 1997 if the Participant is
actively employed on both September 30, 1997, and December 31, 1997,
and (D) as of each Accounting Date thereafter if the Participant is
actively employed on such Accounting Date and has not less than 1,000
Hours of Service during the Plan Year ending on such Accounting Date,
and (2) of each Participant who terminated employment as an Employee
during the Plan Year as a result of his Death or Disability or for any
reason after reaching his Early Retirement Date."
6. Section 6.02(a)(7) is restated in its entirety to read as follows:
"If elected by a Participant pursuant to section 6.02(c), the
distribution of the Participant's ESOP Contribution Account shall be
made in the form of a single lump-sum distribution, either in cash or
Employer Securities, as specified by the Participant. The provisions
of section 6.02(b) shall not apply to distributions from ESOP
Contribution Accounts."
7. Section 6.02(c) is restated in its entirety to read as follows:
"(c) ESOP Contribution Accounts. Notwithstanding anything else to the
contrary in this Plan, the following provisions shall be applicable to
distributions of ESOP Contribution Accounts under the Plan (except to
the extent that earlier or more rapid distributions are otherwise
required by law or otherwise permitted under the Plan):
1. At the election of a Participant, the distribution of the
Participant's ESOP Contribution Account shall be made in a single
lump-sum distribution, in the form of cash or Employer Securities
as elected by the participant, as soon as administratively
practicable following the calendar quarter in which the
Participant separates from Service with the Employer. Valuation
of Employer Securities for the purpose of any distribution shall
be made as provided in section 10.04.
2. At the election of a Participant, the distribution of the
Participant's ESOP Contribution Account shall commence not later
than one year after the last day of the Plan Year (A) in which he
terminates employment after his Normal Retirement Age or by
reason of Disability or death or (B) which is the fifth Plan Year
following the Plan Year in which he otherwise terminates
employment (unless he is re-employed by the Employer before such
year); provided, however, that if the Participant is re-employed
by the Employer as of the last day of such fifth Plan Year,
distribution to the Participant prior to any subsequent
termination of employment shall be in accordance with terms of
the Plan other than this paragraph (2). A Participant who has
completed five years of participation in the Plan and who is 100
percent vested in his ESOP Contribution Account may elect to
receive an in-service distribution of all or a portion of his
ESOP Contribution Account. Any such election shall be made on a
form provided by the Administrative Committee.
3. Unless the Participant elects a lump-sum distribution in
accordance with paragraph (1) of this subsection, the
Participant's ESOP Contribution Account shall be distributed in
substantially equal periodic payments (at least annually) over a
period not exceeding the greater of (A) five years, or (B) if the
Fair Market Value of a Participant's ESOP Contribution Account
attributable to Employer Securities is in excess of $500,000 as
of the date distribution is required to begin under this Article
VI, five years plus an additional one year (up to an additional
five years) for each $100,000 increment, or fraction of such
increment, by which the value of the Participant's ESOP
Contribution Account exceeds $500,000. In no event shall such
distribution period exceed the period permitted under Code
401(a)(9). The dollar amounts prescribed in this paragraph shall
be adjusted for increases in the cost of living as prescribed by
the Secretary of the Treasury."
8. Section 10.04 is amended in its entirety to read as follows:
"10.04 Valuation of Employer Securities. Employer Securities held by
the Plan shall be valued each Valuation Date at Fair Market Value, and
each such valuation of Employer Securities shall be made in good faith
and shall be based on all relevant factors for determining Fair Market
Value. Any valuation of Employer Securities at a time when such
Employer Securities are not readily tradeable on an established
securities market shall be made by an independent appraiser, within
the meaning of Code 401(a)(28)(C). For purposes of a transaction
between the Plan and a "disqualified person," as such term is defined
in Code 4975(e)(2), the valuation must be determined as of the date of
the transaction. All distributions of Employer Securities shall be
based on the Fair Market Value of such Employer Securities as of the
Valuation Date next preceding the date of the distribution; provided,
however, that, if Employer Securities are sold to permit the payment
of a cash distribution, the amount of such distribution shall be the
net proceeds of such sale."
9. Section 2.43 is amended to read as follows:
"2.43 Valuation Date. Unless otherwise specified by the Administrative
Committee, each business day on which the major stock exchanges are
open for business."
10. Paragraphs (a) and (b) of Section 3.01 are hereby deleted, effective
January 1, 1998, and the following is substituted therefor.
"Effective for Employees hired on or after January 1, 1998, each
Employee shall become a Participant in the Plan as of the first day of
the first payroll period commencing after the Employee completes six
months of continuous Service."
11. Section 4.02 is amended to read as follows:
"(a) Basic Matching Contributions. Subject to section 4.24, as of each
Accounting Date, a portion of the Basic Matching Contribution for the
Plan Year, if any, shall be allocated to the Employer Basic
Contribution Account of each Participant in the employ of an Employer
on such Accounting Date who is allocated an Elective Contribution for
such Plan Year, and to each Participant who terminated employment as
an Employee during the Plan Year as a result of his death or
Disability, or for any reason after reaching his Early Retirement
Date.
Each such Participant shall be allocated a percentage of the Basic
Matching Contribution to be allocated for such Plan Year which is in
the same ratio that the Participant's Elective Contributions for the
Plan Year bears to the sum of all Elective Contributions made for the
Plan Year (regardless of whether the Participant later withdraws some
portion of his Elective Contribution Account balance).
(b) Basic Profit Sharing Contributions. Subject to section 4.24, as of
each Accounting Date, after the allocation described in subsection
(a), a portion of the Basic Profit Sharing Contribution for the Plan
Year, if any, shall be allocated to the Employer Basic Contribution
Account of each Participant in the employ of an Employer on such
Accounting Date who has not less than 1,000 Hours of Service in the
Plan Year, and to each Participant who terminated employment as an
Employee during the Plan Year as a result of his death or Disability,
or for any reason after reaching his Early Retirement Date.
Each such Participant shall be allocated a percentage of the Basic
Profit Sharing Contribution for such Plan Year which is in the same
ratio that the Participant's Eligible Compensation for the Plan Year
bears to the total Eligible Compensation for the Plan Year of all such
Participants."
12. Section 6.01 through 6.03 are amended by deleting "$3,500" each place
it appears therein and by substituting "$5,000" therefor.
13. Section 6.02(c), as amended in amendment 7 above, is hereby further
amended by revising paragraphs 1 and 2 to read as follows:
"1. At the election of a Participant, the distribution of the
Participant's ESOP Contribution Account shall be made in a single
lump-sum distribution, in the form of cash or Employer Securities as
elected by the participant as soon as administratively practicable in
the calendar quarter following the quarter in which the Participant
separates from Service with the Employer. Valuation of Employer
Securities for the purpose of any distribution shall be made as
provided in section 10.04.
2. At the election of a Participant, the distribution of the
Participant's ESOP Contribution Account shall commence not later than
one year after the last day of the Plan Year (A) in which he
terminates employment after his Normal Retirement Age or by reason of
Disability or death or (B) which is the fifth Plan Year following the
Plan Year in which he otherwise terminates employment (unless he is
re-employed by the Employer before such year); provided, however, that
if the Participant is re-employed by the Employer as of the last day
of such fifth Plan Year, distribution to the Participant prior to any
subsequent termination of employment shall be in accordance with terms
of the Plan other than this paragraph (2). A Participant who has
completed five years of participation in the Plan and who is 100
percent vested in his ESOP Contribution Account may either (i) elect
to have redeemed all or any portion of his ESOP Contribution Account
and to have the proceeds of such redemption transferred to one or more
of the other investment funds maintained for Participants under the
Plan, or (ii) elect to receive an in-service distribution of all or
any portion of his ESOP Contribution Account. Any such elections shall
be made on forms provided by the Administrative Committee."
14. Section 10.04, as amended in amendment 8 above, is hereby further
amended by deleting the words "each Valuation Date" in the first
sentence thereof.
Except as amended hereby, the Company ratifies the Plan as amended and
restated effective October 1, 1995.
Dated: December 3, 1997 EXCEL Communications, Inc.
----------------------------
By: /s/Kenny A. Troutt
-------------------------
Its: Chief Executive Officer
-------------------------
January 26, 1998
Excel Communications, Inc.
8750 North Central Expressway, Suite 2000
Dallas, Texas 75231
Re: Form 10-K Report for the year ended December 31, 1997
Gentlemen/Ladies:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant's independent accountants whenever there has been a
change in accounting principle or practice.
As of January 1, 1997, the Company changed its method of accounting for
subscriber acquisition costs. Previously, the Company had deferred the portions
of commission paid to independent representatives (IRs) that directly relate to
the acquisition of long distance and paging subscribers. Beginning January 1,
1997, the Company began fully expensing subscriber acquisition costs in the
period incurred. According to the management of the Company, this change was
made in order to present its operating results in a manner more consistent with
other telecommunications companies against which its results are now compared.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we have
reviewed the pertinent factors, including those related to financial reporting,
in this particular case on a subjective basis, and our opinion stated below is
based on our determination made in this manner.
We are of the opinion that the Company's change in method of accounting is to an
acceptable alternative method of accounting, which, based upon the reasons
stated for the change in our discussions with you, is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgment and business planning of your management.
Very truly yours,
ARTHUR ANDERSEN LLP
SUBSIDIARIES OF EXCEL COMMUNICATIONS, INC.
The following is a list of the Company's subsidiaries as of March 23, 1998:
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
Excel Communications, Inc. Delaware
ExcelCom, Inc. Delaware
First Excel, FSB Federal Savings Bank
Excel Telephone, Inc. Delaware
Excel Management Service, Inc. Delaware
Excel Communications Marketing, Inc. Delaware
Excel Products, Inc. Delaware
Excel Fulfillment Services, Inc. Delaware
Excel Teleservices, Inc. Delaware
Excel Switch Facility, Inc. Delaware
Excel Telecommunications Inc. Texas
Excel Telecommunications Inc. of Virginia Virginia
Telco Communcations Group, Inc. Virginia
Telco Holdings, Inc. Delaware
Prime Business Communications, Inc. Delaware
Telco Network Services, Inc. Nevada
Telco Billing, Inc. Delaware
Long Distance Wholesale Club, Inc. Delaware
Telco Switch Acquisition Inc. Nevada
Telco Switch Corp. Delaware
Network Control Services, Inc. Delaware
Telco Voice Network Inc. Nevada
Telco Switch Limited Partnership Nevada Limited Partnership
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into this Company's previously filed
Registration Statement File No. 333-3537 on Form S-8. It should be noted that we
have not audited any financial statements of the Company subsequent to December
31, 1997 or performed any audit procedures subsequent to the date of our report.
Dallas, Texas
January 26, 1998 ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 16,161
<SECURITIES> 0
<RECEIVABLES> 351,437
<ALLOWANCES> 23,128
<INVENTORY> 3,651
<CURRENT-ASSETS> 396,466
<PP&E> 317,214
<DEPRECIATION> 35,367
<TOTAL-ASSETS> 1,637,016
<CURRENT-LIABILITIES> 364,867
<BONDS> 0
0
0
<COMMON> 133
<OTHER-SE> 752,574
<TOTAL-LIABILITY-AND-EQUITY> 1,637,016
<SALES> 0
<TOTAL-REVENUES> 1,454,352
<CGS> 0
<TOTAL-COSTS> 1,309,515
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,551
<INCOME-PRETAX> 143,587
<INCOME-TAX> 55,661
<INCOME-CONTINUING> 87,926
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 65,214
<NET-INCOME> 22,712
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
