<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 12, 1998.
REGISTRATION NO. 333-49397
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FOCAL COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 4812 36-4167094
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
200 NORTH LASALLE STREET, SUITE 800, CHICAGO, ILLINOIS 60601
(312) 895-8400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JOSEPH A. BEATTY
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER, AND TREASURER
FOCAL COMMUNICATIONS CORPORATION
200 NORTH LASALLE STREET, SUITE 800
CHICAGO, ILLINOIS 60601
(312) 895-8400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
SCOTT HODES, ESQ.
DAVID S. GUIN, ESQ.
ROSS & HARDIES
150 NORTH MICHIGAN AVENUE
CHICAGO, ILLINOIS 60601
(312) 558-1000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, please check the following box. [_]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION--DATED JUNE 12, 1998
PROSPECTUS
$270,000,000
FOCAL COMMUNICATIONS CORPORATION
OFFER TO EXCHANGE ITS 12.125% SENIOR DISCOUNT NOTES DUE 2008, SERIES B FOR ANY
AND ALL OF ITS OUTSTANDING 12.125% SENIOR DISCOUNT NOTES DUE 2008
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1998, UNLESS EXTENDED.
Focal Communications Corporation, a Delaware corporation ("Focal" or the
"Company"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus (as the same may be amended or supplemented from time
to time) and in the accompanying Letter of Transmittal (the "Letter of
Transmittal") (which together constitute the "Exchange Offer"), to exchange
$1,000 stated principal amount at maturity of its 12.125% Senior Discount
Notes due February 15, 2008, Series B (the "Exchange Notes") which have been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), for each $1,000 principal amount at maturity of its outstanding
unregistered 12.125% Senior Discount Notes due February 15, 2008, of which
$270,000,000 in aggregate principal amount at maturity is outstanding as of
the date hereof (the "Senior Notes" and, together with the Exchange Notes, the
"Notes").
The form and terms of the Exchange Notes will be identical in all material
respects to the form and terms of the Senior Notes, except that (i) the
Exchange Notes will have been registered under the Securities Act and
therefore will not be subject to certain restrictions on transfer applicable
to the Senior Notes and (ii) holders of the Exchange Notes will not be
entitled to certain rights of holders of the Senior Notes under the
Registration Agreement dated February 15, 1998 (the "Registration Agreement")
among the Company and Salomon Brothers Inc, Morgan Stanley & Co. Incorporated
and NationsBanc Montgomery Securities LLC (the "Initial Purchasers"). The
Exchange Notes will evidence the same indebtedness as the Senior Notes (which
they replace) and will be issued pursuant to, and entitled to the benefits of,
an indenture dated as of February 18, 1998 between the Company and the Harris
Trust and Savings Bank, as trustee (the "Trustee"), governing the Senior Notes
and the Exchange Notes (the "Indenture").
The Exchange Notes will mature on February 15, 2008. In the period prior to
February 15, 2003, interest at a rate of 12.125% per annum will accrue on the
Exchange Notes but will not be payable in cash ("Deferred Interest"). From
February 15, 2003, interest at a rate of 12.125% per annum ("Current
Interest") on the stated principal amount at maturity of the Exchange Notes
will be payable in cash semiannually on August 15 and February 15 of each
year, beginning on August 15, 2003. For U.S. federal income tax purposes, the
Exchange Notes will be considered to bear original issue discount.
Accordingly, holders of the Notes will be required to report income for tax
purposes in advance of the receipt of current payments to which such income is
attributable. See "Description of the Exchange Notes" and "Certain United
States Federal Income Tax Considerations."
The Exchange Notes will be redeemable, at the option of the Company at any
time, in whole or in part, on or after February 15, 2003, at the redemption
prices set forth herein plus accrued and unpaid Current Interest, if any, to
the redemption date. In the event of one or more Public Equity Offerings (as
defined herein), following which there is a Public Market (as defined herein),
on or before February 15, 2001, the Company may, at its option, use all or a
portion of the net cash proceeds therefrom to redeem up to 35% of the
aggregate stated principal amount at maturity of the Exchange Notes at a
redemption price equal to 112.125% of the Accreted Value (as defined herein)
thereof plus accrued and unpaid Current Interest, if any, and Additional
Interest (as defined herein), if any, to the redemption date. See "Description
of the Exchange Notes--Optional Redemption." In the event of a Change of
Control (as defined herein) each holder of Exchange Notes will have the right
to require the Company to repurchase all or any part of such holder's Exchange
Notes at a purchase price equal to 101% of the Accreted Value thereof plus
accrued and unpaid Current Interest, if any, to the repurchase date (the
"Change of Control Purchase Price"). If after giving effect to a Change of
Control Offer (as defined herein) at least 95% of the original aggregate
stated principal amount at maturity of the Exchange Notes has been redeemed or
repurchased, the Company shall have the right to redeem the balance of the
Exchange Notes at a redemption price equal to 101% of the Accreted Value
thereof plus accrued and unpaid Current Interest, if any, and Additional
Interest, if any, to the redemption date. See "Description of the Exchange
Notes--Repurchase at the Option of Holders upon a Change of Control." There
can be no assurance that the Company will have the financial resources
necessary to repurchase the Exchange Notes in such circumstances.
(continued on next page)
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SEE "RISK FACTORS" COMMENCING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1998.
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(continued from previous page)
The Exchange Notes will be senior unsecured obligations of the Company
ranking pari passu in right of payment with the Senior Notes and all other
existing and future senior unsecured indebtedness of the Company, if any, and
will rank senior in right of payment to all existing and future subordinated
indebtedness of the Company, if any. Holders of secured indebtedness of the
Company, however, will have claims that are prior to the claims of the holders
of the Exchange Notes with respect to the assets securing such indebtedness.
The Company is a holding company that conducts all of its operations through
its subsidiaries. The Notes will therefore be effectively subordinated to the
claims of creditors and holders of preferred stock of the Company's
subsidiaries. See "Risk Factors--Holding Company Structure; Effective
Subordination of the Exchange Notes" and "Description of the Exchange Notes--
Ranking." As of December 31, 1997, on a pro forma basis after giving effect to
the Offering (as defined herein) and the application of the net proceeds
therefrom, the Company would have had no outstanding indebtedness other than
the Notes.
The Senior Notes were originally issued and sold on February 18, 1998 in a
transaction not registered under the Securities Act (the "Offering").
Accordingly, the Senior Notes may not be offered for resale, resold or
otherwise transferred unless so registered or unless an applicable exemption
from the registration requirements of the Securities Act is available. Based
on interpretations by the staff of the Securities and Exchange Commission (the
"Commission"), as set forth in no-action letters issued to third parties
unrelated to the Company, the Company believes that the Exchange Notes issued
pursuant to the Exchange Offer may be offered for resale, resold or otherwise
transferred by holders thereof (other than any holder that is (i) a broker-
dealer that acquired Senior Notes as a result of market-making activities or
other trading activities, or (ii) a broker-dealer that acquired Senior Notes
directly from the Company for resale pursuant to Rule 144A under the
Securities Act ("Rule 144A") or another available exemption under the
Securities Act) without compliance with the registration or prospectus
delivery provisions of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such holders' business, such holders
have no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes and such holders are not "affiliates" of
the Company (within the meaning of Rule 405 under the Securities Act).
However, the staff of the Commission has not considered the Exchange Offer in
the context of a no-action letter, and there can be no assurance that the
staff of the Commission would make a similar determination with respect to the
Exchange Offer as in such other circumstances.
By tendering Senior Notes in exchange for Exchange Notes, each holder will
represent to the Company, among other things, that: (i) any Exchange Notes to
be received by such holder will be acquired in the ordinary course of such
holder's business; (ii) at the time of the commencement of the Exchange Offer,
such holder has no arrangement or understanding with any person to participate
in the distribution (within the meaning of the Securities Act) of the Exchange
Notes; and (iii) such holder is not an "affiliate" of the Company (within the
meaning of Rule 405 under the Securities Act). Each broker-dealer that
receives Exchange Notes for its own account in exchange for Senior Notes,
where such Senior Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in
exchange for Senior Notes where such Senior Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, starting on the Expiration Date (as
defined herein) and ending on the close of business 90 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution."
The Company does not intend to apply for listing of the Exchange Notes for
trading on any securities exchange or for inclusion of the Exchange Notes in
any automated quotation system. The Senior Notes, however, have been
designated for trading in the Private Offerings, Resales and Trading through
Automatic Linkages ("PORTAL") Market of the National Association of Securities
Dealers, Inc. Any Senior Notes not tendered and
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accepted in the Exchange Offer will remain outstanding. To the extent that
Senior Notes remain outstanding, a holder's ability to sell such Senior Notes
could be adversely affected. Following consummation of the Exchange Offer, the
holders of Senior Notes will continue to be subject to the existing
restrictions on transfer thereof and the Company will have no further
obligation to such holders to provide for the registration under the
Securities Act of the Senior Notes, except under limited circumstances. See
"Description of the Exchange Notes--Exchange Offer; Registration Rights." No
assurance can be given as to the liquidity of either the Senior Notes or the
Exchange Notes.
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF SENIOR NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER
THEIR SENIOR NOTES PURSUANT TO THE EXCHANGE OFFER.
Senior Notes may be tendered for exchange prior to 5:00 p.m., New York City
time, on , 1998 (such time on such date being hereinafter called the
"Expiration Date"), unless the Exchange Offer is extended by the Company (in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended). See "The Exchange Offer--Expiration
Date; Extensions; Amendments." Tenders of Senior Notes may be withdrawn at any
time prior to the Expiration Date. The Exchange Offer is not conditioned upon
any minimum aggregate principal amount of Senior Notes being tendered for
exchange. The Exchange Offer is, however, subject to certain events and
conditions and to the terms of the Registration Agreement. Senior Notes may be
tendered only in integral multiples of aggregate stated principal amount at
maturity of $1,000. The Company has agreed to pay all expenses of the Exchange
Offer. This Prospectus, together with the Letter of Transmittal, is being sent
to all registered holders of Senior Notes as of , 1998.
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. No underwriter is being used in connection with
the Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
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The Company has registered or applied to register the following trademarks
which may appear in this Prospectus: Focal(TM) and its logo, Focal
Communications Corporation(TM), Focused on Local Communications(TM),
Functionally Equivalent, Technically Superior, Low Cost(TM), The Third
Generation CLEC(TM), and Multi-Exchange Service(TM).
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
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PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in this
Prospectus. Reference is made to, and this Summary is qualified in its entirety
by, the more detailed information, including the Company's Consolidated
Financial Statements and notes thereto, contained herein. Unless otherwise
indicated, references to "Focal" or the "Company" include Focal Communications
Corporation, a Delaware corporation, and its consolidated subsidiaries.
THE COMPANY
Focal began operations during 1996 and has operated in Chicago since May 1997
and New York since January 1998, currently serving a total of 6 MSAs
(metropolitan statistical areas). The Company plans to offer services in 37
additional MSAs by the end of 1999, reaching a total of 43 MSAs in ten
metropolitan markets. As of March 31, 1998, the Company had 21,082 access lines
sold, of which 14,528 were installed and in service. This compares to 13,411
lines sold and 7,394 lines installed as of December 31, 1997.
FOCAL'S NETWORK
The Company has chosen to pursue a network design approach which involves
purchasing and maintaining its own switches while leasing fiber optic
transmission facilities on an incremental basis as demand dictates. This
approach is made possible by the availability of fiber optic transmission
facilities from multiple vendors in each of the markets it serves or intends to
serve. The Company's network design allows it to (i) reduce the capital
investments necessary to provide services to its customers by focusing capital
expenditures on switches and related technology (the most critical component of
its network), (ii) avoid the construction of fiber optic facilities and the
"stranded" capital sometimes associated with such construction, (iii) better
match the commitment of capital to the acquisition of revenue generating
customers and (iv) generate revenue and cash flow more quickly than if the
Company constructed its own fiber optic transmission facilities. The Company
leases transmission facilities from at least three vendors in each market in
which it conducts business, providing the Company with added negotiating
leverage and allowing the Company to offer its customers enhanced redundancy
and diversity. To satisfy the needs of its high-volume corporate customer base
the Company has engineered its network to be virtually non-blocking, thereby
maximizing call completion.
FOCAL'S MARKETS
Focal selects its target geographical markets based on several primary
criteria: sufficient market size; favorable state regulatory environment; the
pre-existence of well-developed interconnection agreements and processes with
the incumbent local exchange carrier ("ILEC"); and the existence of multiple
fiber providers with extensive networks. Based primarily on these factors, the
Company began offering service in Chicago and New York and intends to expand
into eight additional Tier I metropolitan markets by the end of 1999,
including: Los Angeles, San Francisco, Washington, D.C., Philadelphia, Boston,
Detroit, Miami and Seattle. Focal expects to generate incremental business from
its existing customer base as it expands into new markets. Many of the
Company's existing customers have operations in Focal's targeted cities and the
Company believes the opportunity to leverage its relationships with these
customers is significant. Management estimates total expenditures for local
telecommunications service in the business segment for its ten target markets
to be approximately $12.2 billion per year.
The Company believes a significant demand for its services exists because the
telecommunications-intensive users in Tier I markets are inadequately served
with regard to highly reliable, local switched telecommunications services. The
Company believes that large telecommunications-intensive users will
increasingly demand diversity in providers of local telecommunications service
as they have already done in long distance and private-
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line telecommunications services. Most second generation CLECs initially chose
to compete in Tier II and Tier III markets, effectively ceding the Tier I
markets to the first generation CLECs (i.e., MFS Communications Company, Inc.
("MFS") and Teleport Communications Group ("TCG")). Moreover, the vast majority
of CLECs, both first and second generation, have more expertise in providing
leased transport facilities, as opposed to switched services, and provide
bundled communications services to small and medium sized business customers.
Focal is The Third Generation CLEC(TM) that focuses on providing value-added,
switched local services to large telecommunications-intensive users in Tier I
markets. Management believes that the Company's focus on providing a limited
number of services to a defined market allows it to outperform its competitors
in terms of service quality, reliability, and responsiveness.
MANAGEMENT AND SPONSORSHIP
Focal believes that its management and operations team is a critical
component of its initial success and will continue to be a key element of
differentiation. The Company has built a skilled and experienced management
team headed by the Company's Chief Executive Officer, Robert C. Taylor, Jr.,
and Chief Operating Officer, John R. Barnicle, who were most recently senior
executives at MFS. Overall, the founding management team has extensive prior
work experience at well known ILECs, CLECs and other telecommunications
companies. See "Management." Furthermore, Madison Dearborn Capital Partners,
L.P. ("MDCP"), Frontenac VI, L.P. ("Frontenac") and Battery Ventures III, L.P.
("Battery," with MDCP, Frontenac and Battery being hereinafter sometimes
individually referred to as an "Equity Investor" and collectively referred to
as the "Equity Investors") have invested, together with management and certain
other investors, an aggregate of $26.1 million of equity in the Company. As a
result of such investments, the Equity Investors own, in the aggregate,
approximately 80% of the Company's outstanding equity and each Equity Investor
has appointed one or more representatives to the Company's board of directors.
See "Security Ownership of Certain Beneficial Owners and Management."
STRATEGY
The Company's objective is to become the local provider of choice to
telecommunications-intensive customers in Tier I markets. Key strategies in the
development and fulfillment of the Company's objective are discussed below.
BUSINESS STRATEGY
Principal Focus on Local Service. The Company offers a focused set of value-
added local switched services to its customers, which management believes
differentiates the Company from a majority of competitors who are seeking to
provide "one-stop" telecommunications services. See "Business--Business
Strategy."
Design and Install a Highly Capital-Efficient Network. Management believes
the Company can generate a substantially greater return on invested capital by
concentrating its investment in switching, information, billing and support
systems, while leasing its transport facilities. See "Business--Business
Strategy."
Build a More Robust Network than ILECs or CLECs. The Company has designed and
built its network to meet the demanding traffic and reliability requirements of
its target customers. Focal utilizes Nortel, DMS-500 SuperNode central office
switches that have been engineered by the Company to be virtually non-blocking,
thereby maximizing call completion. Focal also designs its leased fiber
facilities to avoid blocking. See "Business--Business Strategy."
Minimize Dependence on Deregulation. While the Telecommunications Act of 1996
(the "Telecom Act") is likely to benefit CLECs in the long-term, Focal believes
the tangible benefits from the Telecom Act are limited in the short-term.
Accordingly, Focal's business strategy allows it to minimize its reliance on
provisions of the Telecom Act to achieve its objectives. See "Business--
Business Strategy."
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MARKETING STRATEGY
Penetrate Corporate Accounts. The Company emphasizes the diversity,
reliability and sophistication of its network and services in order to earn its
selection as the local provider of choice for its customers. Focal has
developed a number of products and services which it believes provide it with a
competitive advantage when attempting to penetrate new corporate accounts,
including Focal Virtual Office and 800 service. See "Business--Products and
Services." See "Business--Business Strategy."
Take Advantage of the Significant and Growing ISP Opportunity. The dramatic
increase in dial-up access to the Internet has created a particularly strong
demand for local access lines by ISPs. CLECs are generally well-positioned to
satisfy this demand as the only alternative source of access lines. Focal
offers advantages to ISPs that certain of its competitors are currently unable
to provide, such as environmentally conditioned colocation space, virtually
non-blocking switching and transport facilities, guaranteed installation times
and modified foreign exchange service (which allows certain calls which would
otherwise be toll calls to be made as local calls). See "Business--Business
Strategy."
Maximize Network Utilization through VAR and Other Wholesale Arrangements. To
further maximize network utilization while minimizing cost of sales, Focal
distributes service to other customer segments through VARs and other wholesale
arrangements. See "Business--Business Strategy."
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The Company's principal executive offices are located at 200 North LaSalle
Street, Suite 800, Chicago, Illinois 60601 and its phone number is (312) 895-
8400.
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THE EXCHANGE OFFER
The Exchange Offer........
Up to $270,000,000 aggregate stated principal
amount at maturity of Exchange Notes are being
offered in exchange for a like aggregate principal
amount at maturity of Senior Notes. Senior Notes
may be tendered for exchange in whole or in part in
integral multiples of $1,000 stated principal
amount at maturity. The Company is making the
Exchange Offer in order to satisfy its obligations
under the Registration Agreement relating to the
Senior Notes. For a description of the procedures
for tendering Senior Notes, see "The Exchange
Offer--Procedures for Tendering Senior Notes."
Expiration Date........... 5:00 p.m., New York City time, on , 1998 unless
the Exchange Offer is extended by the Company (in
which case the term "Expiration Date" shall mean
the latest date and time to which the Exchange
Offer is extended). See "The Exchange Offer--
Expiration Date; Extensions; Amendments."
Conditions to the
Exchange Offer........... The Exchange Offer is subject to certain
conditions, which may be waived by the Company in
its sole discretion. The Exchange Offer is not
conditioned upon any minimum aggregate principal
amount at maturity of Senior Notes being tendered.
See "The Exchange Offer--Conditions to the Exchange
Offer."
The Company reserves the right in its sole and
absolute discretion, subject to applicable law, at
any time and from time to time: (i) to delay the
acceptance of the Senior Notes; (ii) to terminate
the Exchange Offer if certain specified conditions
have not been satisfied; (iii) to extend the
Expiration Date of the Exchange Offer and retain
all Senior Notes tendered pursuant to the Exchange
Offer, subject, however, to the right of holders of
Senior Notes to withdraw their tendered Senior
Notes; and (iv) to waive any condition or otherwise
amend the terms of the Exchange Offer in any
respect. See "The Exchange Offer--Expiration Date;
Extensions; Amendments."
Withdrawal Rights......... Tenders of Senior Notes may be withdrawn at any
time prior to the Expiration Date by delivering a
written notice of such withdrawal to the Exchange
Agent (as defined herein) in conformity with
certain procedures as set forth below under "The
Exchange Offer--Withdrawal Rights."
Procedures for Tendering
Senior Notes............. Tendering holders of Senior Notes must complete and
sign a Letter of Transmittal in accordance with the
instructions contained therein and forward the same
by mail, facsimile transmission or hand delivery,
together with any other required documents, to the
Exchange Agent, either with the Senior Notes to be
tendered or in compliance with the specified
procedures for guaranteed delivery of Senior Notes.
Certain brokers, dealers, commercial banks, trust
companies and other nominees may also effect
tenders by book-entry transfer. Holders of Senior
Notes registered in the name of a broker, dealer,
commercial
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<PAGE>
bank, trust company or other nominee are urged to
contact such person promptly if they wish to tender
Senior Notes pursuant to the Exchange Offer. See
"The Exchange Offer--Procedures for Tendering
Senior Notes."
Letters of Transmittal and certificates
representing Senior Notes should not be sent to the
Company. Such documents should only be sent to the
Exchange Agent. Questions regarding how to tender
and requests for information should be directed to
the Exchange Agent. See "The Exchange Offer--
Exchange Agent."
Resales of Exchange
Notes.................... The Company believes that holders of Senior Notes
(other than any holder that is (i) a broker-dealer
that acquired Senior Notes as a result of market-
making activities or other trading activities, or
(ii) a broker-dealer that acquired Senior Notes
directly from the Company for resale pursuant to
Rule 144A or another available exemption under the
Securities Act) who exchange their Senior Notes for
Exchange Notes pursuant to the Exchange Offer may
offer for resale, resell and otherwise transfer
such Exchange Notes without compliance with the
registration and prospectus delivery provisions of
the Securities Act, provided that such Exchange
Notes are acquired in the ordinary course of such
holders' business, such holders have no arrangement
or understanding with any person to participate in
the distribution of such Exchange Notes and such
holders are not "affiliates" of the Company (within
the meaning of Rule 405 under the Securities Act).
However, the staff of the Commission has not
considered the Exchange Offer in the context of a
no-action letter, and there can be no assurance
that the staff of the Commission would make a
similar determination with respect to the Exchange
Offer. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Senior
Notes, where such Senior Notes were acquired by
such broker-dealer as a result of market-making
activities or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
See "Plan of Distribution."
Exchange Agent............ The exchange agent with respect to the Exchange
Offer is Harris Trust and Savings Bank (the
"Exchange Agent"). The address, telephone number
and facsimile number of the Exchange Agent are set
forth in "The Exchange Offer--Exchange Agent" and
in the Letter of Transmittal.
Use of Proceeds........... The Company will not receive any cash proceeds from
the issuance of the Exchange Notes offered hereby.
See "Use of Proceeds."
Certain United States
Federal Income Tax The exchange of the Exchange Notes for the Senior
Considerations........... Notes will not be a taxable exchange for U.S.
federal income tax purposes, and holders of Senior
Notes should not recognize any taxable gain or loss
of any interest income as a result of such
exchange. See "Certain United States Federal Income
Tax Considerations--The Exchange."
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THE EXCHANGE NOTES
Securities Offered........ $270,000,000 aggregate stated principal amount at
maturity of 12.125% Senior Discount Notes due
February 15, 2008. The terms of the Exchange Notes
will be identical in all material respects to the
terms of the Senior Notes, except that (i) the
Exchange Notes will have been registered under the
Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the
Senior Notes and (ii) holders of the Exchange Notes
will not be entitled to certain rights of holders
of the Senior Notes under the Registration
Agreement. The Exchange Notes will evidence the
same debt as the Senior Notes and will be issued
pursuant to and entitled to the benefits of the
Indenture.
Issue Price............... $555.6578 per $1,000 stated principal amount at
maturity.
Maturity.................. February 15, 2008.
Yield and Interest........ 12.125% per annum (computed on a semiannual bond
equivalent basis). In the period prior to February
15, 2003, interest will accrue but will not be
payable in cash. From February 15, 2003, interest
on the stated principal amount at maturity of the
Notes will be payable in cash semiannually on
August 15 and February 15 of each year, beginning
on August 15, 2003. See "Description of the
Exchange Notes."
Original Issue Discount... For U.S. federal income tax purposes, the Exchange
Notes will be considered to bear original issue
discount ("OID"). Although Current Interest on the
Notes will not be payable prior to August 15, 2003,
a U.S. Holder (as defined herein) of Exchange Notes
will be required to include OID in such holder's
gross income for U.S. federal income tax purposes
in advance of receipt of the cash payments to which
the income is attributable. See "Certain United
States Federal Income Tax Considerations."
Ranking...................
The Exchange Notes will be senior unsecured
obligations of the Company ranking pari passu in
right of payment with the Senior Notes and all
other existing and future senior indebtedness of
the Company, if any, and will rank senior in right
of payment to all existing and future subordinated
indebtedness of the Company, if any. Holders of
secured indebtedness of the Company, however, will
have claims that are prior to the claims of the
holders of the Exchange Notes with respect to the
assets securing such other indebtedness. As of
March 31, 1998, the Company had no outstanding
indebtedness other than the Notes. The Exchange
Notes will be effectively subordinated to all
existing and future indebtedness and other
liabilities of the Company's subsidiaries
(including trade payables). See "Description of the
Exchange Notes--Ranking."
Optional Redemption....... The Exchange Notes will be redeemable, at the
Company's option, in whole or in part, at any time
or from time to time, on or after February
6
<PAGE>
15, 2003, at 106.063% of their stated principal
amount at maturity, plus accrued and unpaid Current
Interest, declining ratably to 100% of their stated
principal amount at maturity, plus accrued and
unpaid Current Interest, on or after 2006. In
addition, at any time and from time to time, prior
to February 15, 2001, the Company may redeem in the
aggregate up to 35% of the original aggregate
stated principal amount at maturity of the Exchange
Notes with the proceeds from one or more Public
Equity Offerings following which there is a Public
Market, at a redemption price (expressed as a
percentage of Accreted Value on the redemption
date) of 112.125%, plus Additional Interest, if
any; provided that at least 65% of the original
aggregate stated principal amount at maturity of
the Exchange Notes remains outstanding after each
such redemption. See "Description of the Exchange
Notes--Optional Redemption."
Change of Control......... Upon the occurrence of a Change of Control (as
defined herein), each holder of Exchange Notes will
have the right to require the Company to repurchase
all or any part of such holder's Exchange Notes
pursuant to a Change of Control Offer (as defined
herein) at a purchase price equal to 101% of the
Accreted Value thereof plus accrued and unpaid
Current Interest, if any, to but excluding the
repurchase date. If a Change of Control Offer is
made, there can be no assurance that the Company
will have sufficient funds to pay the Change of
Control Purchase Price for all Exchange Notes
tendered by holders seeking to accept the Change of
Control Offer. Upon the occurrence of a Change of
Control, if after giving effect to a Change of
Control Offer at least 95% of the original
aggregate stated principal amount at maturity of
the Exchange Notes has been redeemed or
repurchased, the Company shall have the right to
redeem the balance of the Exchange Notes at a
redemption price equal to 101% of the Accreted
Value thereof plus accrued and unpaid Current
Interest, if any, to but excluding the Change of
Control Redemption Date (as defined herein). See
"Description of the Exchange Notes--Repurchase at
the Option of Holders upon a Change of Control."
Certain Covenants......... The Indenture contains certain covenants which,
among other things, restrict the ability of the
Company and certain of its subsidiaries to incur
additional indebtedness (and, in the case of
certain subsidiaries, issue preferred stock), pay
dividends or make distributions in respect of the
Company's or such subsidiaries' capital stock, make
other restricted payments, enter into sale and
leaseback transactions, incur liens, cause
encumbrances or restrictions to exist on the
ability of certain subsidiaries to pay dividends or
make distributions in respect of their capital
stock, issue and sell capital stock of certain
subsidiaries, enter into transactions with
affiliates, sell assets, or amalgamate,
consolidate, merge or sell or otherwise dispose of
all or substantially all of their property and
assets. These covenants are subject to important
exceptions and qualifications. See "Description of
the Exchange Notes--Certain Covenants."
For additional information regarding the Exchange Notes, see "Description of
the Exchange Notes."
7
<PAGE>
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. However, upon the original issuance of the
Senior Notes, the net proceeds received by the Company, after deducting the
discount to the Initial Purchasers and other expenses payable by the Company,
was approximately $144 million. The Company used or will use the net proceeds
(i) to fund the cost of acquiring and installing telecommunications switches
and related infrastructure, (ii) to fund operating losses, (iii) to repay
approximately $3.5 million principal amount of outstanding indebtedness of a
subsidiary, (iv) for potential, selected acquisitions (although none have been
negotiated or contemplated), and (v) for general corporate purposes. Prior to
using the net proceeds for such purposes, the Company has invested the net
proceeds in short-term money market and other market-rate, investment-grade
instruments. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Use of
Proceeds."
RISK FACTORS
POTENTIAL PARTICIPANTS IN THE EXCHANGE OFFER SHOULD CONSIDER CAREFULLY
CERTAIN FACTORS SET FORTH UNDER THE CAPTION "RISK FACTORS." SEE "RISK FACTORS."
These risk factors are generally applicable to the Senior Notes as well as the
Exchange Notes.
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary consolidated financial data presented below as of and for the
seven month period ended December 31, 1996, and the year ended December 31,
1997, have been derived from the Consolidated Financial Statements of the
Company, and the notes related thereto, included elsewhere in this Prospectus.
The Financial Statements of the Company for the seven month period ended
December 31, 1996 and for the year ended December 31, 1997 have been audited by
Arthur Andersen LLP, independent auditors. The summary financial data for the
three month periods ended March 31, 1997 and 1998 have been derived from the
unaudited financial statements of the Company which, in the opinion of
management, include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial condition and
results of operations for the Company for such periods. The results of
operations for interim periods are not necessarily indicative of a full year's
operations. The following information should be read in conjunction with
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and the Consolidated Financial
Statements of the Company and the notes related thereto, and the other
financial data appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
COMMENCEMENT
OF OPERATIONS THREE MONTHS ENDED
(MAY 31, 1996) TO YEAR ENDED -------------------------
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1997 1998
----------------- ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ -- $ 4,023,690 $ -- $ 5,102,448
Expenses:
Customer service and
network operations.... -- 2,154,980 8,697 1,826,893
Selling, general
and administrative.... 421,777 2,887,372 416,492 1,307,625
Depreciation and
amortization.......... 1,150 615,817 7,337 890,871
---------- ------------ ----------- ------------
Operating income
(loss)................. (422,927) (1,634,479) (432,526) 1,077,059
Interest income
(expense), net......... 17,626 67,626 42,925 (1,093,250)
---------- ------------ ----------- ------------
Net income (loss)....... $ (405,301) $ (1,566,853) $ (389,601) $ (16,191)
========== ============ =========== ============
<CAPTION>
DECEMBER 31, MARCH 31, MARCH 31,
DECEMBER 31, 1996 1997 1997 1998
----------------- ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current Assets.......... $3,807,004 $ 4,737,808 $ 5,069,167 $158,404,803
Fixed Assets, net....... 81,153 11,176,774 2,318,202 18,125,851
Total Assets............ 3,888,157 15,914,582 7,387,369 182,228,022
Long-term debt.......... -- 3,536,886 -- 152,093,513
Redeemable Class A Com-
mon Stock(1)........... 4,024,653 12,403,218 8,024,653 --
Total stockholders' eq-
uity (deficit)......... (404,954) (2,075,372) 7,230,097 24,111,655
OTHER FINANCIAL DATA:
EBITDA(2)............... $ (421,777) $ (1,018,662) $ (425,189) $ 1,967,930
Capital expenditures.... 82,303 11,655,524 2,244,385 7,593,061
Ratio of earnings to
fixed charges(3)....... -- -- -- --
SUMMARY CASH FLOW DATA:
Net cash provided by
(used in) operating
activities............. $ (152,576) $ (1,634,017) $ (522,595) $ 3,745,255
Net cash used in
investing activities... (82,303) (11,655,524) (2,244,385) (13,537,316)
Net cash provided by
financing activities... 4,025,000 11,755,972 3,999,514 160,294,453
OPERATING DATA:
Access lines in
service(4)............. -- 7,394 -- 14,528
Minutes of use
(millions)............. -- 281.7 -- 401.6
</TABLE>
9
<PAGE>
- --------
(1) See "Capitalization" and "Description of Capital Stock."
(2) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. EBITDA is not a measurement of financial performance under
generally accepted accounting principles, is not intended to represent cash
flow from operations, and should not be considered as an alternative to net
loss as an indicator of the Company's operating performance or to cash
flows as a measure of liquidity. The Company believes that EBITDA is widely
used by analysts, investors and other interested parties in the
telecommunications industry. EBITDA is not necessarily comparable with
similarly titled measures for other companies. See "Consolidated Statements
of Cash Flows."
(3) The ratio of earnings to fixed charges is calculated by dividing (i) income
(loss) before provision for income taxes, plus fixed charges by (ii) fixed
charges. Fixed charges consist of interest on indebtedness, plus the
estimated component of rental expense deemed by the Company to be
representative of the interest factor. For the seven-month period ended
December 31, 1996 and for the year ended December 31, 1997, and the three
months ended March 31, 1997 and 1998, earnings were insufficient to cover
fixed charges by $405,301, $1,566,853, $389,601 and $16,191, respectively.
(4) Represents the number of access lines in service (at a DSO level) and
excludes the signaling channel of primary rate ISDN-based connections.
10
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, holders
of Senior Notes should carefully consider the risk factors set forth below
before tendering their Senior Notes for Exchange Notes.
LIMITED HISTORY OF OPERATIONS; NEGATIVE CASH FLOW
The Company began operations in May 1996. Accordingly, prospective
participants in the Exchange Offer have limited historical financial
information about the Company upon which to base an evaluation of the
Company's performance. Given the Company's limited operating history, there is
no assurance that it will be able to generate sufficient cash flow to service
its debt obligations (including the Senior Notes and the Exchange Notes) or to
compete successfully in the telecommunications business.
The development of the Company's businesses and the acquisition,
installation and expansion of its networks require significant expenditures, a
portion of which are made before any revenues may be realized. Such capital
expenditures are expected to increase as the Company grows its customer base
in existing markets and expands into additional markets. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Business--Market Potential." These
expenditures, together with the associated early service costs, will result in
negative cash flow and operating losses until an adequate revenue base may be
established. There can be no assurance that an adequate revenue base will be
established. Management believes the Company may produce negative consolidated
cash flow for a period of at least 18 months from the date of this Prospectus.
The Company will continue to make expenditures in connection with the
acquisition, development and expansion of its networks, services and customer
base. There can be no assurance that the Company will achieve or sustain
profitability or generate sufficient cash flow to service its debt obligations
(including the Senior Notes and the Exchange Notes), to meet working capital
requirements or to compete successfully in the telecommunications business.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
The Company is highly leveraged following the issuance of the Notes. As of
March 31, 1998, the Company had no outstanding indebtedness other than the
Notes. The Indenture permits, subject to certain conditions, the incurrence of
additional indebtedness. The Company may incur substantial additional
indebtedness (including secured indebtedness) following the issuance of the
Senior Notes and Exchange Notes for the construction or acquisition and
expansion of networks, the purchase of transmission and switching equipment,
and the introduction of new service offerings. See "--Future Capital
Requirements," and "--Holding Company Structure; Effective Subordination of
the Exchange Notes."
The Company's ability to make principal and interest payments on the Notes
will be dependent upon, among other things, the Company's future operating
performance and anticipated cash flow and its ability to obtain additional
debt or equity financing. Factors affecting the ability of the Company to
achieve the foregoing include prevailing economic, financial, competitive and
regulatory conditions and other factors affecting the Company's business and
operations, including the Company's ability to implement its business strategy
in new markets on a timely and cost-effective basis. There can be no assurance
that the Company will have adequate sources of liquidity to make required
payments of principal and interest on its indebtedness (including the Notes),
whether at or prior to maturity, finance anticipated capital expenditures and
fund working capital requirements. If the Company does not have sufficient
available resources to repay its outstanding indebtedness when it becomes due
and payable, the Company may find it necessary to refinance such indebtedness;
there can be no assurance however that refinancing will be available, or if
available, that it will be available on reasonable terms. Any failure by the
Company to satisfy its obligations with respect to its indebtedness at
maturity or prior thereto would constitute a default under such indebtedness
and could cause a default under agreements governing other
11
<PAGE>
indebtedness, if any, of the Company. Such defaults could result in a default
under the Indenture and could delay or preclude payment of interest or
principal on the Notes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." If the
Company were unable to obtain adequate financing or refinancing on
satisfactory terms, it would have to consider various other options such as
the sale of certain assets or additional equity to meet its debt service
requirements or other options available to it under law. There can be no
assurance that such options would be permitted under the terms of the
Company's indebtedness or other agreements or that such options would be
available on terms acceptable to the Company, if at all. See "Description of
the Exchange Notes--Certain Covenants."
The Company's high degree of leverage could have important consequences,
including: (i) a substantial portion of the Company's sources of capital and
cash flow from operations must be dedicated to debt service payments, thereby
reducing the funds available to the Company for other purposes; (ii) the
Company's ability to obtain additional debt financing in the future for
working capital, capital expenditures, acquisitions, repayment of indebtedness
or other purposes may be impaired, whether as a result of the covenants and
other terms of its debt instruments or otherwise; (iii) the Company is
substantially more leveraged than certain of its competitors, which may place
the Company at a competitive disadvantage; (iv) the Company's high degree of
leverage may limit its ability to expand capacity and otherwise meet its
growth objectives; and (v) the Company's high degree of leverage may hinder
its ability to adjust rapidly to changing market conditions and could make it
more vulnerable in the event of a downturn in general economic conditions or
its business. In addition, the Company's operating and financial flexibility
is limited by the Indenture and may be limited by covenants contained in
agreements governing future indebtedness of the Company and its subsidiaries.
Such covenants will impose significant operating and financial restrictions on
the Company and its subsidiaries and will restrict, limit or prohibit, among
other things, the ability of the Company and its subsidiaries to incur
additional indebtedness, pay dividends, repay indebtedness prior to its stated
maturity, sell assets, make investments, engage in transactions with
affiliates, create liens or engage in mergers or acquisitions. There can be no
assurance that such covenants will not adversely affect the Company's ability
to finance its future operations or capital needs or to engage in other
business activities which may be in the interest of the Company. See
"Description of the Exchange Notes."
FUTURE CAPITAL REQUIREMENTS
Expansion of the Company's existing networks and services, the acquisition
and development of new networks and services and the funding of initial
operating losses will require significant capital expenditures. The Company
plans to have operations in ten cities by the end of 1999. The Company
currently intends to fund the expansion of its networks and the deployment of
switches in all of such networks with full capabilities for local dial tone
and switched access termination and origination services with its existing
cash balances and the net proceeds of additional financings, if required. See
"Use of Proceeds." If the Company requires additional capital to complete the
planned build out of its networks, or if customer demand in such markets
exceeds current expectations, the Company's funding needs may increase. In
addition, the Company will continue to evaluate additional revenue
opportunities in each of its markets and, as attractive additional
opportunities may develop, the Company plans to make additional capital
investments in its networks that might be required to pursue such
opportunities. The Company expects to meet such additional capital needs with
additional borrowings under credit facilities, proceeds from the sale of
additional debt or equity securities and joint ventures. The Company's network
design strategy of leasing its transmission facilities may result in EBITDA
(as defined in footnote 2 on page 10) levels lower than other CLECs that own
their transport facilities. Such differences may, in the absence of other
factors that management believes should increase its EBITDA (as defined in
footnote 2 on page 10) relative to its competitors, make it more difficult for
the Company to obtain debt financing relative to other CLECs of similar size.
There can be no assurance, however, that the Company will be successful in
raising sufficient additional debt or equity capital on terms that it will
consider acceptable or that the Company's operations will produce cash flow in
sufficient amounts. Failure to raise and generate sufficient funds may require
the Company to delay or abandon some of its planned future expansion or
expenditures, which could have a material adverse effect on the Company's
growth and its ability to compete in the telecommunications industry.
12
<PAGE>
The Company's expectations of required future capital expenditures are based
on the Company's current estimates. There can be no assurance that actual
expenditures will not be significantly higher or lower.
HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION OF THE EXCHANGE NOTES
The Company is a holding company which derives all of its revenues from the
operation of its subsidiaries. The holders of the Exchange Notes will have no
direct claim against the subsidiaries for payment under the Exchange Notes. As
such, the Company is dependent upon dividends and other payments from its
subsidiaries to generate the funds necessary to meet its cash obligations,
including the payment of principal and interest on the Exchange Notes. The
ability of the Company to obtain such dividend payments from its subsidiaries
may be limited or restricted by, among other things, the profitability and
cash flow of such subsidiaries, the terms of such subsidiaries' indebtedness
and applicable laws, including state corporate laws which in certain
circumstances limit the ability of a corporation to pay dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Claims of creditors of the Company's subsidiaries and holders of preferred
stock of such subsidiaries will have priority as to the assets of such
subsidiaries over the claims of the Company and the holders of the Company's
indebtedness, including the Exchange Notes, except to the extent that such
subsidiaries have provided guarantees of the Company's indebtedness and except
to the extent that loans made by the Company to its subsidiaries are
recognized as indebtedness. Therefore, the Exchange Notes will be effectively
subordinated in right of payment to all existing and future indebtedness and
other liabilities of the Company's subsidiaries, including trade payables. See
"Use of Proceeds" and "Description of the Exchange Notes--Ranking."
The Exchange Notes will be effectively subordinated to any secured
indebtedness of the Company because holders of such indebtedness will have
claims that are prior to the claims of the holders of the Exchange Notes with
respect to the assets securing such indebtedness except to the extent the
Exchange Notes are equally and ratably secured by such assets. As of March 31,
1998, the Company had no outstanding indebtedness other than the Notes. The
Indenture limits, but does not prohibit, the incurrence of certain other
secured and unsecured indebtedness by the Company and its subsidiaries. See
"Description of the Exchange Notes--Certain Covenants--Limitation on
Consolidated Indebtedness." See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
IMPLEMENTATION OF GROWTH STRATEGY
The expansion and development of the Company's operations will depend, among
other things, on the Company's ability to assess markets, install and operate
switches, recruit and hire personnel, install facilities, implement and
improve its operating and administrative systems and obtain any required
government authorizations, franchises and permits, all in a timely manner, at
reasonable costs and on satisfactory terms and conditions. As a result, there
can be no assurance that the Company will be able successfully to expand its
existing networks or acquire or develop new networks in a timely manner in
accordance with its strategic objectives. As a result of the Company's
strategy to achieve rapid growth, the operating complexity of the Company may
increase. The Company's ability to manage its expansion effectively will
depend on, among other things, the expansion, training and management of the
Company's employee base and the Company's successful development of
operational, financial and management plans, systems and controls. Given the
Company's limited operating history, there can be no assurance that the
Company will be able to satisfy these requirements or otherwise manage its
growth effectively. Such failures could have a material adverse effect on the
Company's financial condition. See "Business."
An essential element of the Company's strategy is the provision of switched
local service. There can be no assurance that the installation of the required
switches and associated electronics necessary to implement the Company's
business plan will continue to be completed on time or that, during the
testing of these switches and related equipment, the Company will not
experience technological problems that cannot be resolved. The failure of the
Company to install and operate successfully additional switches and other
network equipment could have a material adverse effect upon the Company's
ability to enter additional markets.
13
<PAGE>
The Company has agreements for the interconnection of its networks with the
networks of the ILEC covering each market in which it is currently operating.
The U.S. Court of Appeals for the Eighth Circuit vacated Federal
Communications Commission ("FCC") rules governing, among other things, pricing
in interconnection agreements and providing "most favored nation" treatment.
This decision has been appealed to the Supreme Court, and the Supreme Court
has granted certiorari. The outcome of those appeals cannot be predicted at
this time. The Eighth Circuit decision creates uncertainty about the rules
governing pricing, terms and conditions of interconnection agreements, and
could make negotiation and enforcement of such agreements more difficult and
protracted, and may require renegotiation of existing agreements. There can be
no assurance that the Company will successfully negotiate such other
agreements for interconnection with the ILEC or renewals of existing
interconnection agreements. The failure to negotiate required interconnection
agreements could have a material adverse effect upon the Company's ability to
enter additional markets. See "--Regulation."
The Company has developed processes and procedures in the implementation of
customer orders for services, the provisioning, installation and delivery of
such services and monthly billing for those services. In connection with its
development of a comprehensive information technology platform, the Company is
developing automated internal systems for processing customer orders,
provisioning and billing. The failure to develop effective internal processes
and systems for these service elements could have a material adverse effect
upon the Company's ability to achieve its growth strategy.
COMPETITION
In each of the cities anticipated to be served by the Company's networks,
the services offered by the Company compete or will compete principally with
the services offered by the ILEC serving that area. ILECs have long-standing
relationships with their customers, have the potential to subsidize
competitive services from monopoly service revenues and benefit from favorable
state and federal regulations. While the FCC's interconnection decisions and
the Telecom Act provide increased business opportunities to CLECs such as the
Company, they also provide the ILECs with increased pricing flexibility for
their services and other regulatory relief, which could have a material
adverse effect on CLECs, including the Company. If the ILECs are allowed by
regulators to lower their rates for their services, engage in substantial
volume and term discount pricing practices for their customers, or seek to
charge CLECs substantial fees for interconnection to the ILECs' networks, the
income of CLECs, including the Company, could be materially adversely
affected.
ILECs can also adversely affect the pace at which CLECs add new customers by
prolonging the process of providing unbundled network elements, colocations,
intercompany trunks, and operations support system ("OSS") interfaces, which
allow the electronic transfer between ILECs and CLECs of needed information
about customer accounts, service orders and repairs. Although the Telecom Act
requires ILECs to provide the unbundled network elements, interconnections and
OSS interfaces needed to allow the customers of CLECs and other new entrants
to the local exchange market to obtain service comparable to that provided by
the ILECs in terms of installation time, repair response time, billing and
other administrative functions, in many cases the ILECs may not have fully
complied with the mandates of the Telecom Act. In addition, the
interconnection regulations may be affected by the outcome of the pending
Supreme Court review of the Eighth Circuit's decision. See "--Regulation."
The Company also faces, and expects to continue to face, competition from
other current and potential market entrants, including other CLECs,
interexchange carriers ("IXCs"), cable television companies, electric
utilities, microwave carriers, wireless telephone system operators and private
networks built by large end users. A continuing trend toward combinations and
strategic alliances in the telecommunications industry, including potential
consolidation among existing telecommunications providers in the same or
different market segments, or among telephone companies and other types of
companies not currently providing telecommunications services, could give rise
to significant new competition.
The Company believes that various legislative initiatives, including the
Telecom Act, as well as a recent series of completed and proposed transactions
between ILECs, IXCs and cable companies, increase the
14
<PAGE>
likelihood that barriers to local exchange competition will be removed more
quickly than had earlier been anticipated. The introduction of such
competition, however, also means that the Company may face new or increased
competition from entities who do not currently compete with the Company in any
significant way.
Many of the Company's current and potential competitors have financial,
personnel and other resources substantially greater than those of the Company,
as well as other competitive advantages over the Company. See "Business--
Competition" for more detailed information on the competitive environment
faced by the Company.
REGULATION
The Company is subject to varying degrees of federal, state and local
regulation. The Company is not currently subject to price cap or rate of
return regulation, nor is it currently required to obtain FCC authorization
for the installation, acquisition or operation of its network facilities.
While the FCC has determined that non-dominant carriers, such as the Company
and its subsidiaries, should no longer be required to file interstate tariffs,
that decision has been stayed. Thus, carriers currently are required to
continue filing such tariffs for long-distance service. The Company's
subsidiaries that provide intrastate services are also generally subject to
certification and tariff filing requirements by state regulators. Challenges
to these tariffs by third parties could cause the Company to incur substantial
legal and administrative expenses. Although the trend in federal and state
regulation appears to favor increased competition, no assurance can be given
that changes in current or future regulations adopted by the FCC or state
regulators or other legislative or judicial initiatives relating to the
telecommunications industry would not have a material adverse effect on the
Company. In particular, the Company's ability to compete in the segments of
the local exchange market recently opened to CLEC competition depends upon
continued favorable pro-competitive regulatory changes and may be adversely
affected by the greater pricing flexibility and other regulatory relief
granted to ILECs under the Telecom Act. The Company's ability to compete also
may be affected by the recent decision of a U.S. District Court in Texas
(which has been stayed pending appeal) invalidating certain provisions of the
Telecom Act which prohibit the Regional Bell Operating Companies ("RBOCs")
from providing certain services or engaging in other activity until such time
as they have demonstrated that their local market has been opened to
competition. In addition, the Eighth Circuit's decision vacating the FCC's
interconnection pricing rules (which will be reviewed by the United States
Supreme Court during its 1998-99 term) may slow the pace of open competition
initiatives and result in individual states having a more prominent role in
the opening of local exchange markets to competition. Notwithstanding the
uncertainty of the interconnection pricing rules, the Company has in effect or
expects to have in effect interconnection agreements with the ILECs for all of
its operating networks. These agreements are subject to review and approval by
the respective states. While the Company believes its agreements will be
approved, there can be no assurance that the agreements will be approved. In
addition, one or both parties to the agreements may seek to have the
agreements modified based upon the outcome of regulatory and judicial rulings
occurring subsequent to the date of the agreements. There can be no assurances
that the outcome, or any resultant modified agreements, will not adversely
affect the Company. See "Business--Regulation."
RELIANCE ON LEASED TRANSPORT FACILITIES AND ILEC INTERCONNECTION
Because the Company has elected to lease transport capacity, it is dependent
upon the availability of fiber optic transmission facilities owned by ILECs,
CLECs and other fiber optic transport providers whose fiber optic networks are
being leased by the Company. The risks inherent in this approach include, but
are not limited to, negotiating and renewing favorable supply agreements, and
timeliness of the ILECs, CLECs or other fiber optic transport providers in
processing the Company's orders for customers who seek to utilize the
Company's service. The Company currently leases a majority of its transport
facilities from WorldCom and, although the Company believes that adequate
alternative sources of transport facilities exist, should WorldCom's
facilities become unavailable it could prove disruptive to the Company's
business. In addition, although the Company believes it has adequate
protection against unexpected increases in the cost of leased transport
facilities, should there be an unexpected material increase in such costs, it
could have a material adverse impact on the Company's results of operations.
15
<PAGE>
In addition to transport providers, the Company is reliant on executing
interconnection agreements with the ILECs operating in its target markets. The
Company's interconnection agreements currently provide that the Company's
connection and maintenance orders will receive attention at parity with the
ILECs' customers and the ILEC will provide adequate trunking capacity to keep
blockage within industry standards. Accordingly, the Company and its customers
are dependent on the ILECs to assure uninterrupted service. Blocked calls
result in customer dissatisfaction and risk the loss of Company business.
There can be no assurance ILECs will comply with their network provisioning
requirements. Furthermore, there can be no assurance the rates to be charged
to the Company under the interconnection agreements will allow the Company to
offer low enough usage rates to attract a sufficient number of customers and
to operate the business profitably.
RECIPROCAL COMPENSATION FOR INTERNET ACCESS
The Company expects to receive a majority of its initial revenue in a given
market from the ILEC in the form of reciprocal compensation payments. This is
a result of the Company's ISP and corporate customers receiving more calls
than they make due to the initial mix of applications typically sold. Certain
ILECs have refused to pay that portion of reciprocal compensation that they
estimate is the result of inbound ISP traffic since they believe such traffic
to be interstate in nature and not covered under the interconnection
agreements. For example, Illinois Bell Telephone Company ("Ameritech") has
disputed that portion of the reciprocal compensation charges billed to it by
Focal which it believes are related to Internet access services. The Company
has recorded revenues and related accounts receivable totaling $3.2 million
from inception to March 31, 1998 which are the subject of such dispute. On
March 11, 1998, the ICC issued an order stating that Ameritech is required to
pay reciprocal compensation with respect to calls made to ISPs. On March 15,
1998, Ameritech filed a motion with the ICC to stay the order pending an
appeal, which was denied by the ICC on March 23, 1998. On March 27, 1998,
Ameritech filed suit in the United States District Court for the Northern
District of Illinois seeking reversal of the ICC order. Oral arguments in this
matter are scheduled for June 25, 1998, and a ruling is expected shortly
thereafter. The Company anticipates that, regardless of the decision reached
by the District Court, such decision will be appealed. This dispute may take
an extended time to resolve in the federal court system. Reciprocal
compensation payments from Ameritech currently comprise a majority of the
Company's revenues. As such, the ultimate resolution of this matter in
Ameritech's favor would have a material adverse effect on the Company.
While some states in which the Company is providing, or proposes to provide,
service have ordered ILECs to pay reciprocal compensation for such calls,
other states have not considered the issue. States which have not considered
the issue could determine that no reciprocal compensation is due with respect
to calls made to ISPs. In addition, the FCC also is considering this matter in
response to a request for a declaratory ruling. There can be no assurance that
the payment of reciprocal compensation for ISP or other traffic types will be
maintained. A change in the type of traffic eligible for reciprocal
compensation payments would have a material adverse effect on the Company. See
"Business--Legal and Administrative Proceedings."
CONTROL BY LIMITED NUMBER OF STOCKHOLDERS; POTENTIAL CONFLICT OF INTEREST
The Equity Investors control approximately 80% of the total voting power in
the Company. As a result of such control and pursuant to the terms of certain
agreements among the Company's stockholders, the Equity Investors and the
Company's management will continue to have the ability to effectively control
the future operations of the Company. See "Security Ownership of Certain
Beneficial Owners and Management." Certain decisions concerning the operations
or financial structure of the Company may present a conflict of interest
between the Company's stockholders and the holders of the Exchange Notes. For
example, if the Company encounters financial difficulties or is unable to pay
its debts as they mature, the interest of the Company's stockholders may
conflict with those of the holders of Exchange Notes. In addition, these
investors may have an interest in pursuing acquisitions, divestitures,
financings or other transactions that, in their judgment could enhance their
equity investment in the Company, even though such transactions might involve
increased risk to
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the holders of the Exchange Notes. In addition to their investment in the
Company, the Equity Investors or their affiliates currently have significant
investments in other telecommunications companies and may in the future invest
in other entities engaged in the telecommunications business or in related
businesses (including entities engaged in business in areas in which the
Company operates). As a result, the Equity Investors have, and may develop,
relationships with businesses that are or may be competitive with the Company.
In addition, the Company and these investors have agreed that such investors
are under no obligation to bring the Company any investment or business
opportunities of which they become aware, even if such opportunities are
within the primary objectives of the Company. See "Certain Transactions."
Finally, Mr. Crawford, Mr. Finnegan, Mr. Frisbie and Mr. Perry, each of whom
are principals of the Equity Investors and directors of the Company, also
serve as directors of other telecommunications companies and other private
companies. As a result of these additional directorships, Mr. Crawford, Mr.
Finnegan, Mr. Frisbie and Mr. Perry may be subject to conflicts of interest
during their tenure as directors of the Company. Because of these potential
conflicts, Mr. Crawford, Mr. Finnegan, Mr. Frisbie and Mr. Perry may be
required, from time to time, to disclose certain financial or business
opportunities to the Company and to the other companies to which they owe
fiduciary duties. However, the Company does not believe these conflicts of
interest will be a detriment to the Company's growth or ability to operate its
business.
POTENTIAL NEED TO OBTAIN AND MAINTAIN PERMITS AND RIGHTS-OF-WAY
If the Company decides at a later date to acquire and develop its own fiber
optic transmission facilities, the Company may be required to obtain local
franchises and other permits, as well as rights to utilize underground conduit
and pole space and other rights-of-way from entities such as ILECs and other
utilities, railroads, long distance providers, state highway authorities,
local governments and transit authorities. The Telecom Act requires that local
governmental authorities treat telecommunications carriers in a competitively
neutral, non-discriminatory manner, and that most utilities, including most
ILECs and electric companies, afford CLECs access to their poles and conduits
and rights-of-way at reasonable rates on nondiscriminatory terms and
conditions. The failure to enter into and maintain any such required
arrangements for a particular network, including a network which is already
under construction, may affect the Company's ability to develop that network.
See "Business--Network."
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS
A portion of the Company's future growth may come from acquisitions of other
companies. The acquisition of additional businesses will depend on the
Company's ability to identify suitable acquisition candidates, to negotiate
acceptable terms for their acquisition and to finance any such acquisitions.
The Company will also be subject to competition for suitable acquisition
candidates. Any acquisitions, if made, could divert the resources and
management time of the Company and would require integration with the
Company's existing networks and services. As a result, there can be no
assurance that any such acquisitions will occur or that any such acquisitions,
if made, would be made in a timely manner or on terms favorable to the Company
or would be successfully integrated into the Company's operations.
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology. While the Company believes that for the foreseeable future
these changes will neither materially affect the continued use of the
Company's time-division multiplexed, circuit switching systems nor materially
hinder the Company's ability to acquire necessary technologies, the effect of
technological changes on the businesses of the Company cannot be predicted.
Thus, there can be no assurance that technological developments will not have
a material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's businesses are managed by a relatively small number of senior
management and operating personnel, the loss of certain of whom could have a
material adverse effect on the Company. The Company
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believes that its ability to manage its planned growth successfully will
depend in large part on its continued ability to attract and retain highly
skilled and qualified personnel. See "Management" for detailed information on
the Company's management and directors. There can be no assurances that the
Company will be able to retain its key employees or that the Company can
attract or retain other skilled personnel in the future.
ABSENCE OF A PUBLIC MARKET FOR THE NOTES; POSSIBLE VOLATILITY OF NOTE PRICE
The Senior Notes have been designated for trading by qualified buyers in the
PORTAL Market. The Senior Notes have not been registered under the Securities
Act or any state securities laws, however, and will continue to be subject to
restrictions on transferability to the extent that they are not exchanged for
Exchange Notes. Furthermore, the Exchange Offer will not be conditioned upon
any minimum or maximum aggregate principal amount of Senior Notes being
tendered for exchange. No assurance can be given as to the liquidity of the
trading market of the Senior Notes following the Exchange Offer.
Although the Exchange Notes will generally be permitted to be resold or
otherwise transferred by the holders thereof (other than any holder that is:
(i) an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act; (ii) a broker-dealer that acquired Senior Notes as a result of
market-making activities or other trading activities; or (iii) a broker-dealer
that acquired Senior Notes directly from the Company for resale pursuant to
Rule 144A or another available exemption under the Securities Act) without
compliance with the registration requirements under the Securities Act, they
will constitute a new issue of securities for which there is currently no
established trading market. If the Exchange Notes are traded after their
initial issuance, they may trade at a discount, depending upon prevailing
interest rates, the market for similar securities, the financial condition of
the Company and other factors beyond the control of the Company, including
general economic conditions. The Company does not intend to apply for a
listing or quotation of the Exchange Notes. The Initial Purchasers have
informed the Company that they currently intend to make a market in the
Exchange Notes. However, the Initial Purchasers are not obligated to do so,
and any such market making may be discontinued at any time without notice. No
assurance can be given as to the development or liquidity of any trading
market for the Exchange Notes.
Notwithstanding the registration of the Exchange Notes in the Exchange
Offer, holders who are "affiliates" of the Company (within the meaning of Rule
405 under the Securities Act) may publicly offer for sale or resell the
Exchange Notes only in compliance with the provisions of Rule 144 under the
Securities Act or any other available exemptions under the Securities Act.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Senior Notes, where such Senior Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
ORIGINAL ISSUE DISCOUNT; POSSIBLE UNFAVORABLE TAX AND OTHER LEGAL CONSEQUENCES
FOR HOLDERS OF NOTES
The Senior Notes were issued at a substantial discount from the stated
principal amount at maturity. Consequently, potential participants in the
Exchange Offer should be aware that there will be no periodic payments of cash
interest on the Exchange Notes prior to August 15, 2003 for U.S. federal
income tax purposes; however, OID (that is, the difference between the stated
redemption price at maturity and the issue price of the Senior Notes) will
accrue from February 18, 1998 and will be includible as interest income
periodically (including for periods ending prior to February 15, 2003) in a
holder's gross income in advance of receipt of the cash payments to which the
income is attributable. Similar results may apply under state and other tax
laws. The Notes constitute "applicable high yield discount obligations"
("AHYDOs"). As a result, for U.S. federal income tax purposes, a small portion
of the OID (the "Disqualified Portion") will not be deductible by the Company
and the balance of OID will not be deductible by the Company until payments
are made with respect thereto. Accordingly, during the term of the Notes, the
Company's after-tax cash flow (or its net operating loss carryforward, as the
case may be) will be less than it would be if the OID on the Notes was
deductible when accrued. For certain corporate holders of the Notes, the
Disqualified Portion may be treated for some U.S. federal
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income tax purposes, as dividends to the holders (to the extent that such
amounts would have been treated as dividends to the holders of the Notes if
they had been distributions with respect to shares of stock of the Company)
and thereby may be subject to a dividends received deduction. See "Certain
United States Federal Income Tax Considerations" for a more detailed
discussion of the U.S. federal income tax consequences to the holders
regarding the purchase, ownership and disposition of the Exchange Notes.
If a bankruptcy case is commenced by or against the Company under U.S.
federal bankruptcy laws after the issuance of the Notes, the claim of a holder
of Exchange Notes with respect to the stated principal amount at maturity
thereof may be limited to an amount equal to the sum of (i) the initial
offering price of the Senior Notes and (ii) that portion of the OID which is
not deemed to constitute "unmatured interest" for purposes of U.S. federal
bankruptcy law. Any OID that was not amortized as of any such bankruptcy
filing would constitute "unmatured interest." To the extent the U.S. federal
bankruptcy law differs from the Internal Revenue Code of 1986, as amended, in
determining the method of amortization of OID, a holder of Notes may realize
taxable gain or loss upon payment of such holder's claim in bankruptcy. See
"Certain United States Federal Income Tax Considerations."
CONSEQUENCES OF A FAILURE TO EXCHANGE SENIOR NOTES
The Senior Notes have not been registered under the Securities Act or any
state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case
in compliance with certain other conditions and restrictions. Senior Notes
which remain outstanding after consummation of the Exchange Offer will
continue to bear a legend reflecting such restrictions on transfer. In
addition, upon consummation of the Exchange Offer, holders of Senior Notes
which remain outstanding will not be entitled to any right to have such Senior
Notes registered under the Securities Act, except under certain limited
circumstances. The Company does not intend to register under the Securities
Act any Senior Notes which remain outstanding after consummation of the
Exchange Offer. See "The Exchange Offer."
To the extent that Senior Notes are tendered and accepted in the Exchange
Offer, the aggregate stated principal amount at maturity of outstanding Senior
Notes will decrease, which will result in a decrease in the liquidity of the
Senior Notes. Any trading market for Senior Notes which remain outstanding
after the Exchange Offer could be adversely affected.
FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for Senior Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Exchange Agent
of: (i) such Senior Notes or a book-entry confirmation of a book-entry
transfer of the Senior Notes into the Exchange Agent's account at The
Depository Trust Company ("DTC"); (ii) the Letter of Transmittal (or a
facsimile thereof), properly completed and duly executed, with any required
signature guarantees; and (iii) any other documents required by the Letter of
Transmittal. Holders of the Senior Notes desiring to tender such Senior Notes
in exchange for Exchange Notes should allow sufficient time to ensure timely
delivery. The Company and the Exchange Agent are under no duty to give
notification of defects or irregularities with respect to the tenders of
Senior Notes for exchange. See "The Exchange Offer."
VARIABILITY OF QUARTERLY OPERATING RESULTS
As a result of the significant expenses associated with the expansion and
development of its networks and services and the variability of the level of
revenues generated through sales of its services, the Company anticipates that
its operating results could vary significantly from period to period. Such
variability could have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
LIMITATIONS ON REPURCHASE OF NOTES
Upon a Change of Control, each holder of Exchange Notes will have the right,
at the holder's option, to require the Company to repurchase all or a portion
of such holder's Exchange Notes. If a Change of Control
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were to occur, there can be no assurance that the Company would have
sufficient funds to pay the repurchase price for all Exchange Notes tendered
by the holders thereof. In addition, the Company's repurchase of Exchange
Notes as a result of the occurrence of a Change of Control may be prohibited
or limited by, or create an event of default under, the terms of agreements
related to borrowings which the Company may enter into from time to time,
including senior indebtedness. See "Description of the Exchange Notes--
Repurchase at the Option of Holders upon a Change of Control."
INVESTOR RIGHTS
In the event that the Company has not consummated a public offering of its
common stock prior to November 27, 2003, the Equity Investors will each have
the right to require the Company to liquidate and distribute the proceeds of
the liquidation to the Company's creditors and stockholders in the priority of
their claims and as required by applicable law. In the event that the Equity
Investors were to exercise such right, the Company would be forced to cease
operations and liquidate, and there can be no assurance that the Company would
have sufficient cash to pay all or any portion of the principal of or other
amounts due with respect to the Notes.
IMPACT OF THE YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company has assessed its systems and believes them to be year 2000
compliant. In addition, the Company has received assurance from its major
software vendors that the products used by the Company are year 2000 compliant
and will function adequately. If the systems of other companies on whose
services the Company depends or with whom the Company's systems interface are
not year 2000 compliant, it could have a material adverse effect on the
Company.
The Company will continue its year 2000 issue assessment and, if it comes to
the attention of the Company's management that any of its systems, or the
systems of those on whom the Company relies, are not year 2000 compliant, the
Company intends to develop an action plan, and assess the resources it would
be required to devote, to address such problem. There can be no assurance that
devoting further resources of the Company to the year 2000 issue, if one were
to occur, would not have a material adverse effect on the Company.
RISKS REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus which are not historical facts
are "forward-looking statements", which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks
and uncertainties. Management wishes to caution the reader that these forward-
looking statements, such as its anticipation of revenues from designated
markets, and statements regarding the development of the Company's businesses,
the markets for the Company's services and products, the Company's anticipated
capital expenditures, regulatory reform and other statements contained herein
regarding matters that are not historical facts, are only predictions. No
assurance can be given that the future results will be achieved; actual events
or results may differ materially as a result of risks facing the Company. Such
risks include, but are not limited to, the Company's ability to successfully
market its services to current and new customers, access markets, install
switching electronics, and obtain the use of leased fiber transport facilities
and any required governmental authorizations, franchises and permits, all in a
timely manner, at reasonable costs and on satisfactory terms and conditions,
as well as regulatory, legislative and judicial developments that could cause
actual results to differ materially from the future results indicated,
expressed or implied, in such forward-looking statements.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the sale of the Senior Notes, the Company entered into
the Registration Agreement with the Initial Purchasers, pursuant to which the
Company agreed to file and to use its best efforts to cause to become
effective with the Commission a registration statement with respect to the
exchange of the Senior Notes for Exchange Notes with terms identical in all
material respects to the terms of the Senior Notes. A copy of the Registration
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part (the "Registration Statement"). The Exchange Offer
is being made to satisfy the contractual obligations of the Company under the
Registration Agreement.
By tendering Senior Notes in exchange for Exchange Notes, each holder will
represent to the Company that: (i) any Exchange Notes to be received by such
holder are being acquired in the ordinary course of such holder's business;
(ii) such holder has no arrangement or understanding with any person to
participate in a distribution (within the meaning of the Securities Act) of
Exchange Notes; (iii) such holder is not an "affiliate" of the Company (within
the meaning of Rule 405 under the Securities Act), or if such holder is an
affiliate, that such holder will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable; (iv)
such holder has full power and authority to tender, exchange, sell, assign and
transfer the tendered Senior Notes; (v) the Company will acquire good,
marketable and unencumbered title to the tendered Senior Notes, free and clear
of all liens, restrictions, charges and encumbrances; and (vi) the Senior
Notes tendered for exchange are not subject to any adverse claims or proxies.
Each tendering holder also will warrant and agree that such holder will, upon
request, execute and deliver any additional documents deemed by the Company or
the Exchange Agent to be necessary or desirable to complete the exchange,
sale, assignment, and transfer of the Senior Notes tendered pursuant to the
Exchange Offer. Each broker-dealer that receives Exchange Notes for its own
account in exchange for Senior Notes, where such Senior Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
The Exchange Offer is not being made to, nor will the Company accept tenders
for exchange from, holders of Senior Notes in any jurisdiction in which the
Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect to the
Exchange Offer means any person in whose name the Senior Notes are registered
on the books of the Company or any other person who has obtained a properly
completed bond power from the registered holder, or any participant in DTC
whose name appears on a security position listing as a holder of Senior Notes
(which, for purposes of the Exchange Offer, include beneficial interests in
the Senior Notes held by direct or indirect participants in DTC and Senior
Notes held in definitive form).
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange $1,000 stated principal amount at maturity of Exchange Notes for each
$1,000 stated principal amount at maturity of Senior Notes properly tendered
prior to the Expiration Date and not properly withdrawn in accordance with the
procedures described below. Holders may tender their Senior Notes in whole or
in part in integral multiples of $1,000 stated principal amount at maturity.
The form and terms of the Exchange Notes will be the same as the form and
terms of the Senior Notes except that (i) the Exchange Notes will have been
registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the Senior Notes and (ii)
holders of the Exchange Notes will not be entitled to certain rights of
holders of the Senior Notes under the Registration Agreement. The Exchange
Notes will evidence the same indebtedness as the Senior Notes (which they
replace) and will be issued pursuant to, and entitled to the benefits of, the
Indenture.
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The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Senior Notes being tendered for exchange. The Company reserves the
right in its sole discretion to purchase or make offers for any Senior Notes
that remain outstanding after the Expiration Date or, as set forth under "--
Conditions to the Exchange Offer," to terminate the Exchange Offer and, to the
extent permitted by applicable law, purchase Senior Notes in the open market,
in privately negotiated transactions or otherwise. The terms of any such
purchases or offers could differ from the terms of the Exchange Offer. As of
the date of this Prospectus, $270,000,000 aggregate stated principal amount at
maturity of Senior Notes is outstanding.
Holders of Senior Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer. Senior Notes which are not tendered for,
or are tendered but not accepted in connection with, the Exchange Offer will
remain outstanding. See "Risk Factors--Failure to Exchange Senior Notes."
If any tendered Senior Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Senior Notes will be returned,
without expense, to the tendering holder thereof promptly after the Expiration
Date.
Holders who tender Senior Notes in connection with the Exchange Offer will
not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of Senior Notes in connection with the Exchange Offer. The Company
will pay all charges and expenses, other than certain applicable taxes
described below, in connection with the Exchange Offer. See "--Fees and
Expenses."
THE BOARD OF DIRECTORS OF THE COMPANY MAKES NO RECOMMENDATION TO HOLDERS OF
SENIOR NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY
PORTION OF THEIR SENIOR NOTES PURSUANT TO THE EXCHANGE OFFER. IN ADDITION, NO
ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS OF SENIOR
NOTES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO THE EXCHANGE
OFFER AND, IF SO, THE AGGREGATE AMOUNT OF SENIOR NOTES TO TENDER AFTER READING
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND CONSULTING WITH THEIR
ADVISERS, IF ANY, BASED ON THEIR FINANCIAL POSITION AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" means 5:00 p.m., New York City time, on , 1998
unless the Exchange Offer is extended by the Company (in which case the term
"Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended).
The Company expressly reserves the right in its sole and absolute
discretion, subject to applicable law, at any time and from time to time: (i)
to delay the acceptance of the Senior Notes for exchange; (ii) to terminate
the Exchange Offer (whether or not any Senior Notes have theretofore been
accepted for exchange) if the Company determines, in its sole and absolute
discretion, that any of the events or conditions referred to under "--
Conditions to the Exchange Offer" has occurred or exists or has not been
satisfied; (iii) to extend the Expiration Date of the Exchange Offer and
retain all Senior Notes tendered pursuant to the Exchange Offer, subject,
however, to the right of holders of Senior Notes to withdraw their tendered
Senior Notes as described under "--Withdrawal Rights;" and (iv) to waive any
condition or otherwise amend the terms of the Exchange Offer in any respect.
If the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, or if the Company waives a material condition of
the Exchange Offer, the Company will promptly disclose such amendment by means
of a prospectus supplement that will be distributed to the registered holders
of the Senior Notes, and the Company will extend the Exchange Offer to the
extent required by Rule 14e-1 under the Exchange Act.
Any such delay in acceptance, termination, extension or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent (any
such oral notice to be promptly confirmed in writing) and by
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making a public announcement thereof, and such announcement in the case of an
extension will be made no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date. Without
limiting the manner in which the Company may choose to make any public
announcement, and subject to applicable laws, the Company shall have no
obligation to publish, advertise or otherwise communicate any such public
announcement other than by issuing a release to an appropriate news agency.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will exchange, and will issue to the Exchange Agent, Exchange Notes
for Senior Notes validly tendered and not withdrawn (pursuant to the
withdrawal rights described under "--Withdrawal Rights") promptly after the
Expiration Date.
In all cases, delivery of Exchange Notes in exchange for Senior Notes
tendered and accepted for exchange pursuant to the Exchange Offer will be made
only after timely receipt by the Exchange Agent of: (i) Senior Notes or a
book-entry confirmation of a book-entry transfer of Senior Notes into the
Exchange Agent's account at DTC; (ii) the Letter of Transmittal (or facsimile
thereof), properly completed and duly executed, with any required signature
guarantees; and (iii) any other documents required by the Letter of
Transmittal. Accordingly, the delivery of Exchange Notes might not be made to
all tendering holders at the same time, and will depend upon when Senior
Notes, book-entry confirmations with respect to Senior Notes and other
required documents are received by the Exchange Agent.
The term "book-entry confirmation" means a timely confirmation of a book-
entry transfer of Senior Notes into the Exchange Agent's account at DTC.
Subject to the terms and conditions of the Exchange Offer, the Company will
be deemed to have accepted for exchange, and thereby exchanged, Senior Notes
validly tendered and not withdrawn as, if and when the Company gives oral or
written notice to the Exchange Agent (any such oral notice to be promptly
confirmed in writing) of the Company's acceptance of such Senior Notes for
exchange pursuant to the Exchange Offer. The Company's acceptance for exchange
of Senior Notes tendered pursuant to any of the procedures described above
will constitute a binding agreement between the tendering holder and the
Company upon the terms and subject to the conditions of the Exchange Offer.
The Exchange Agent will act as agent for the Company for the purpose of
receiving tenders of Senior Notes, Letters of Transmittal and related
documents, and as agent for tendering holders for the purpose of receiving
Senior Notes, Letters of Transmittal and related documents and transmitting
Exchange Notes to holders who validly tendered Senior Notes. Such exchange
will be made promptly after the Expiration Date. If for any reason whatsoever
the acceptance for exchange or the exchange of any Senior Notes tendered
pursuant to the Exchange Offer is delayed (whether before or after the
Company's acceptance for exchange of Senior Notes), or the Company extends the
Exchange Offer or is unable to accept for exchange or exchange Senior Notes
tendered pursuant to the Exchange Offer, then, without prejudice to the
Company's rights set forth herein, the Exchange Agent may, nevertheless, on
behalf of the Company and subject to Rule 14e-1(c) under the Exchange Act,
retain tendered Senior Notes and such Senior Notes may not be withdrawn except
to the extent tendering holders are entitled to withdrawal rights as described
under "--Withdrawal Rights."
PROCEDURES FOR TENDERING SENIOR NOTES
Valid Tender. Except as set forth below, in order for Senior Notes to be
validly tendered pursuant to the Exchange Offer, either: (i) (a) a properly
completed and duly executed Letter of Transmittal (or facsimile thereof), with
any required signature guarantees and any other required documents, must be
received by the Exchange Agent at the address set forth under "--Exchange
Agent" prior to the Expiration Date and (b) tendered Senior Notes must be
received by the Exchange Agent, or such Senior Notes must be tendered pursuant
to the procedures for book-entry transfer set forth below and a book-entry
confirmation must be received by the Exchange Agent, in each case prior to the
Expiration Date; or (ii) the guaranteed delivery procedures set forth below
must be complied with.
23
<PAGE>
If less than all of the Senior Notes are tendered, a tendering holder should
fill in the amount of Senior Notes being tendered in the appropriate box on
the Letter of Transmittal. The entire amount of Senior Notes delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise
indicated.
If any Letter of Transmittal, endorsement, bond power, power of attorney, or
any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company, in its sole discretion, of such person's
authority to so act must be submitted.
Any beneficial owner of Senior Notes that are held by or registered in the
name of a broker, dealer, commercial bank, trust company or other nominee or
custodian is urged to contact such entity promptly if such beneficial holder
wishes to participate in the Exchange Offer.
THE METHOD OF DELIVERY OF SENIOR NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS
USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY AND PROPER INSURANCE SHOULD BE
OBTAINED. NO LETTER OF TRANSMITTAL OR SENIOR NOTES SHOULD BE SENT TO THE
COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH
HOLDERS.
Book-Entry Transfer. The Exchange Agent will make a request to establish an
account with respect to the Senior Notes at DTC for purposes of the Exchange
Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in DTC's book-entry transfer
facility system may make a book-entry delivery of the Senior Notes by causing
DTC to transfer such Senior Notes into the Exchange Agent's account at DTC in
accordance with DTC's procedures for transfers. However, although delivery of
Senior Notes may be effected through book-entry transfer into the Exchange
Agent's account at DTC, the Letter of Transmittal (or facsimile thereof),
properly completed and duly executed, with any required signature guarantees
and any other required documents, must in any case be delivered to and
received by the Exchange Agent at its address set forth under "--Exchange
Agent" prior to the Expiration Date, or the guaranteed delivery procedure set
forth below must be complied with.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE
EXCHANGE AGENT.
Signature Guarantees. Certificates for Senior Notes need not be endorsed and
signature guarantees on a Letter of Transmittal or a notice of withdrawal, as
the case may be, are unnecessary unless (a) a certificate for Senior Notes is
registered in a name other than that of the person surrendering the
certificate or (b) a registered holder completes the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" in the Letter of
Transmittal. In the case of (a) or (b) above, such certificates for Senior
Notes must be duly endorsed or accompanied by a properly executed bond power,
with the endorsement or signature on the bond power and on the Letter of
Transmittal or the notice of withdrawal, as the case may be, guaranteed by a
firm or other entity identified in Rule 17Ad-15 under the Exchange Act as an
"eligible guarantor institution," including (as such terms are defined
therein): (i) a bank; (ii) a broker, dealer, municipal securities broker or
dealer or government securities broker or dealer; (iii) a credit union; (iv) a
national securities exchange, registered securities association or clearing
agency; or (v) a savings association that is a participant in a Securities
Transfer Association (each an "Eligible Institution"), unless surrendered on
behalf of such Eligible Institution. See Instruction 1 to the Letter of
Transmittal.
Guaranteed Delivery. If a holder desires to tender Senior Notes pursuant to
the Exchange Offer and the certificates for such Senior Notes are not
immediately available or time will not permit all required documents to
24
<PAGE>
reach the Exchange Agent before the Expiration Date, or the procedures for
book-entry transfer cannot be completed on a timely basis, such Senior Notes
may nevertheless be tendered, provided that all of the following guaranteed
delivery procedures are complied with:
(i) such tenders are made by or through an Eligible Institution;
(ii) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form accompanying the Letter of
Transmittal, setting forth the name and address of the holder of Senior
Notes and the amount of Senior Notes tendered, stating that the tender is
being made thereby and guaranteeing that within three New York Stock
Exchange trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered Senior
Notes, in proper form for transfer, or a book-entry confirmation, as the
case may be, and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent. The
Notice of Guaranteed Delivery may be delivered by hand, or transmitted by
facsimile or mail to the Exchange Agent and must include a guarantee by an
Eligible Institution in the form set forth in the Notice of Guaranteed
Delivery; and
(iii) the certificates (or book-entry confirmation) representing all
tendered Senior Notes, in proper form for transfer, together with a
properly completed and duly executed Letter of Transmittal, with any
required signature guarantees and any other documents required by the
Letter of Transmittal, are received by the Exchange Agent within three New
York Stock Exchange trading days after the date of execution of the Notice
of Guaranteed Delivery.
Determination of Validity. All questions as to the form of documents,
validity, eligibility (including time of receipt) and acceptance for exchange
of any tendered Senior Notes will be determined by the Company, in its sole
discretion, which determination shall be final and binding on all parties. The
Company reserves the absolute right, in its sole and absolute discretion, to
reject any and all tenders determined by it not to be in proper form or the
acceptance for exchange of which may, in the view of counsel to the Company,
be unlawful. The Company also reserves the absolute right, subject to
applicable law, to waive any of the conditions of the Exchange Offer as set
forth under "--Conditions to the Exchange Offer" or any defect or irregularity
in any tender of Senior Notes of any particular holder whether or not similar
defects or irregularities are waived in the case of other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including the Letter of Transmittal and the instructions thereto) will
be final and binding on all parties. No tender of Senior Notes will be deemed
to have been validly made until all defects or irregularities with respect to
such tender have been cured or waived. Neither the Company, any affiliates of
the Company, the Exchange Agent or any other person shall be under any duty to
give any notification of any defects or irregularities in tenders or incur any
liability for failure to give any such notification.
RESALES OF EXCHANGE NOTES
Based on interpretations by the staff of the Commission, as set forth in no-
action letters issued to third parties unrelated to the Company, the Company
believes that holders of Senior Notes (other than any holder that is (i) a
broker-dealer that acquired Senior Notes as a result of market-making
activities or other trading activities, or (ii) a broker-dealer that acquired
Senior Notes directly from the Company for resale pursuant to Rule 144A or
another available exemption under the Securities Act) who exchange their
Senior Notes for Exchange Notes pursuant to the Exchange Offer may offer for
resale, resell and otherwise transfer such Exchange Notes without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such Exchange Notes are acquired in the ordinary course of
such holders' business, such holders have no arrangement or understanding with
any person to participate in the distribution of such Exchange Notes and such
holders are not "affiliates" of the Company (within the meaning of Rule 405 of
the Securities Act). However, the staff of the Commission has not considered
the Exchange Offer in the context of a no-action letter, and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Senior Notes, where
25
<PAGE>
such Senior Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. See
"Plan of Distribution."
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of Senior Notes may be
withdrawn at any time prior to the Expiration Date.
In order for a withdrawal to be effective, a written, telegraphic or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at its address set forth under "--Exchange Agent" prior to
the Expiration Date. Any such notice of withdrawal must specify the name of
the person who tendered the Senior Notes to be withdrawn, the aggregate
principal amount of Senior Notes to be withdrawn, and (if certificates for
such Senior Notes have been tendered) the name of the registered holder of the
Senior Notes as set forth on the Senior Notes, if different from that of the
person who tendered such Senior Notes. If certificates for Senior Notes have
been delivered or otherwise identified to the Exchange Agent, the notice of
withdrawal must specify the serial numbers on the particular certificates for
the Senior Notes to be withdrawn and the signature on the notice of withdrawal
must be guaranteed by an Eligible Institution, except in the case of Senior
Notes tendered for the account of an Eligible Institution. If Senior Notes
have been tendered pursuant to the procedures for book-entry transfer set
forth in "--Procedures for Tendering Senior Notes," the notice of withdrawal
must specify the name and number of the account at DTC to be credited with the
withdrawal of Senior Notes and must otherwise comply with the procedures of
DTC. Withdrawals of tenders of Senior Notes may not be rescinded. Senior Notes
properly withdrawn will not be deemed validly tendered for purposes of the
Exchange Offer, but may be retendered at any subsequent time prior to the
Expiration Date by following any of the procedures described above under "--
Procedures for Tendering Senior Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, which determination shall be final and binding on all
parties. Neither the Company, any affiliates of the Company, the Exchange
Agent or any other person shall be under any duty to give any notification of
any defects or irregularities in any notice of withdrawal or incur any
liability for failure to give any such notification. Any Senior Notes which
have been tendered but which are withdrawn will be returned to the holder
thereof promptly after withdrawal.
INTEREST ON THE EXCHANGE NOTES
The Senior Notes and the Exchange Notes will accrete from February 18, 1998
at a rate of 12.125% per annum, compounded semiannually, to an aggregate
stated principal amount of $270,000,000 by February 15, 2003. Interest will
not be payable on the Exchange Notes prior to February 15, 2003. Thereafter,
interest on the Exchange Notes will accrue at the rate of 12.125% per annum
and will be payable in cash semiannually on August 15 and February 15,
commencing August 15, 2003.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer or any extension
of the Exchange Offer, the Company will not be required to accept for
exchange, or to exchange, any Senior Notes for any Exchange Notes, and, as
described below, may terminate the Exchange Offer (whether or not any Senior
Notes have theretofore been accepted for exchange) or may waive any conditions
to or amend the Exchange Offer, if any of the following conditions have
occurred or exists or have not been satisfied:
(a) there shall occur a change in the current interpretation by the staff
of the Commission which permits the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Senior Notes to be offered for resale,
resold and otherwise transferred by holders thereof (other than (i) broker-
dealers that acquired Senior Notes as a result of market-making activities
or other trading activities or (ii) broker-dealers that acquired Senior
Notes directly from the Company for resale pursuant to Rule 144A or another
available
26
<PAGE>
exemption under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of
such holders' business, such holders have no arrangement or understanding
with any person to participate in the distribution of such Exchange Notes
and such holders are not "affiliates" of the Company (within the meaning of
Rule 405 under the Securities Act);
(b) any action or proceeding shall have been instituted or threatened in
any court or by or before any governmental agency or body with respect to
the Exchange Offer which, in the Company's judgment, would reasonably be
expected to impair the ability of the Company to proceed with the Exchange
Offer;
(c) any law, statute, rule or regulation shall have been adopted or
enacted which, in the Company's judgment, would reasonably be expected to
impair the ability of the Company to proceed with the Exchange Offer;
(d) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration
Statement, or proceedings shall have been initiated or, to the knowledge of
the Company, threatened for that purpose;
(e) any governmental approval has not been obtained, which approval the
Company shall, in its sole discretion, deem necessary for the consummation
of the Exchange Offer as contemplated hereby; or
(f) any change, or any development involving a prospective change, in the
business or financial affairs of the Company has occurred which, in the
sole judgment of the Company, might materially impair the ability of the
Company to proceed with the Exchange Offer.
If the Company determines in its sole and absolute discretion that any of
the foregoing events or conditions has occurred or exists or has not been
satisfied, the Company may, subject to applicable law, terminate the Exchange
Offer (whether or not any Senior Notes have theretofore been accepted for
exchange) or may waive any such condition or otherwise amend the terms of the
Exchange Offer in any respect. If such waiver or amendment constitutes a
material change to the Exchange Offer, the Company will promptly disclose such
waiver by means of a prospectus supplement that will be distributed to the
registered holders of the Senior Notes, and the Company will extend the
Exchange Offer to the extent required by Rule 14e-1 under the Exchange Act.
EXCHANGE AGENT
Harris Trust and Savings Bank has been appointed as Exchange Agent for the
Exchange Offer. Delivery of the Letters of Transmittal and any other required
documents, questions, requests for assistance, and requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notice of Guaranteed Delivery should be directed to the Exchange Agent as
follows:
By Mail
Harris Trust and Savings Bank
c/o Harris Trust Company of New York
Wall Street Station
P.O. Box 1010
New York, New York 10268-1010
Attention: Reorganization Dept.
By Overnight Courier or Hand
Harris Trust and Savings Bank
c/o Harris Trust Company of New York
Wall Street Plaza
88 Pine Street, 19th Floor
New York, New York 10005
Attention: Reorganization Dept.
27
<PAGE>
By Facsimile (for Eligible Institutions only)
(212) 701-7636
(212) 701-7637
Confirm by telephone: (212) 701-7624
DELIVERY TO OTHER THAN THE ABOVE ADDRESSES OR FACSIMILE NUMBER WILL NOT
CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail. Additional solicitation may be
made personally or by telephone or other means by officers, directors or
employees of the Company.
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the Exchange Offer. The Company
has agreed to pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith. The Company will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus and related documents
to the beneficial owners of Senior Notes, and in handling or tendering for
their customers.
Holders who tender their Senior Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that if Exchange Notes
are to be delivered to, or are to be issued in the name of, any person other
than the registered holder of the Senior Notes tendered, or if a transfer tax
is imposed for any reason other than the exchange of Senior Notes in
connection with the Exchange Offer, then the amount of any such transfer tax
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
transfer tax or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer tax will be billed directly to such
tendering holder.
28
<PAGE>
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain obligations of the Company
under the Registration Agreement. The Company will not receive any proceeds
from the issuance of the Exchange Notes offered hereby. However, upon the
original issuance of the Senior Notes, the net proceeds received by the
Company, after deducting the discount to the Initial Purchasers and other
expenses payable by the Company, was approximately $144 million. The Company
used or will use the net proceeds (i) to fund the cost of acquiring and
installing telecommunications switches and related infrastructure, (ii) to
fund operating losses, (iii) to repay approximately $3.5 million principal
amount of outstanding indebtedness of a subsidiary, (iv) for potential,
selected acquisitions (although none have been negotiated or contemplated),
and (v) for general corporate purposes. Prior to using the net proceeds for
such purposes, the Company has invested the net proceeds in short-term money
market and other market-rate, investment-grade instruments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
In consideration for issuing the Exchange Notes as contemplated in this
Prospectus, the Company will receive, in exchange, an equal number of Senior
Notes in like principal amount. The form and terms of the Exchange Notes will
be identical in all material respects to the form and terms of the Senior
Notes, except as otherwise described herein under "The Exchange Offer--Terms
of the Exchange Offer." The Senior Notes surrendered in exchange for Exchange
Notes will be retired and cancelled and cannot be reissued. As such, no effect
has been given to the Exchange Offer in the pro forma statements or
capitalization tables.
CAPITALIZATION
The following table sets forth the total capitalization of the Company as of
March 31, 1998, and the total capitalization of the Company as of December 31,
1997. Because the Company will not receive any proceeds for the issuance of
the Exchange Notes offered hereby, no effect has been given to the Exchange
Offer in the pro forma statements or capitalization tables which was not
previously accounted for in the Offering. The information set forth below
should be read in conjunction with the Company's Consolidated Financial
Statements and notes related thereto included elsewhere in this Prospectus.
See "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources," and
"Description of Capital Stock."
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents........................ $ 2,256,552 $152,758,944
=========== ============
Long-term debt................................... 3,536,886 152,093,513
Redeemable Common Stock Class A, $.01 par value,
85,567 Shares authorized and 80,307 issued and
outstanding at December 31, 1997................ 12,403,218 --
Stockholders' equity (deficit):
Common stock, Class A.......................... -- 803
Common stock, Class B, par value $0.01; 35,000
shares authorized; 20,000 shares issued and
outstanding................................... 200 200
Common stock, Class C, par value $0.01; 15,000
shares authorized; 14,711 shares issued and
outstanding................................... 147 147
Additional paid-in capital..................... (103,565) 26,098,850
Accumulated deficit............................ (1,972,154) (1,988,345)
----------- ------------
Total stockholders' equity (deficit)......... (2,075,372) 24,111,655
----------- ------------
Total capitalization......................... $13,864,732 $176,205,168
=========== ============
</TABLE>
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated financial data presented below as of and for the
seven month period ended December 31, 1996, and the year ended December 31,
1997, have been derived from the Consolidated Financial Statements of the
Company, included elsewhere in this Prospectus. The Consolidated Financial
Statements of the Company as of and for the seven month period ended December
31, 1996 and for the year ended December 31, 1997 have been audited by Arthur
Andersen LLP, independent auditors. The selected financial data as of and for
the three month periods ended March 31, 1997 and 1998, have been derived from
the unaudited consolidated financial statements of the Company which, in the
opinion of management, include all adjustments necessary for a fair
presentation of the financial condition and results of operations for the
Company for such periods. The results of operations for interim periods are
not necessarily indicative of a full year's operations. The following
information should be read in conjunction with "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and the Consolidated Financial Statements of the Company and the
notes related thereto, and the other financial data appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
COMMENCEMENT
OF OPERATIONS THREE MONTHS ENDED
(MAY 31, 1996) TO YEAR ENDED -------------------------
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1997 1998
----------------- ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ -- $ 4,023,690 $ -- $ 5,102,448
Expenses:
Customer service and
network operations.... -- 2,154,980 8,697 1,826,893
Selling, general
and administrative.... 421,777 2,887,372 416,492 1,307,625
Depreciation and
amortization.......... 1,150 615,817 7,337 890,871
---------- ------------ ----------- ------------
Operating Income
(loss)................. (422,927) (1,634,479) (432,526) 1,077,059
Interest income
(expense), net......... 17,626 67,626 42,925 (1,093,250)
---------- ------------ ----------- ------------
Net Income (loss)....... $ (405,301) $ (1,566,853) $ (389,601) $ (16,191)
========== ============ =========== ============
<CAPTION>
DECEMBER 31, MARCH 31, MARCH 31,
DECEMBER 31, 1996 1997 1997 1998
----------------- ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current Assets.......... $3,807,004 $ 4,737,808 $ 5,069,167 $158,404,803
Fixed Assets, net....... 81,153 11,176,774 2,318,202 18,125,851
Total Assets............ 3,888,157 15,914,582 7,387,369 182,228,022
Long-term debt.......... -- 3,536,886 -- 152,093,513
Redeemable Class A Com-
mon Stock(1)........... 4,024,653 12,403,218 8,024,653 --
Total stockholders' eq-
uity (deficit)......... (404,954) (2,075,372) 7,230,097 24,111,655
OTHER FINANCIAL DATA:
EBITDA(2)............... $ (421,777) $ (1,018,662) $ (425,189) $ 1,967,930
Capital expenditures.... 82,303 11,655,524 2,244,385 7,593,061
Ratio of earnings to
fixed charges(3)....... -- -- -- --
SUMMARY CASH FLOW DATA:
Net cash provided by
(used in) operating
activities............. $ (152,576) $ (1,634,017) $ (522,595) $ 3,745,255
Net cash used in
investing activities... (82,303) (11,655,524) (2,244,385) (13,537,316)
Net cash provided by
financing activities... 4,025,000 11,755,972 3,999,514 160,294,453
OPERATING DATA:
Access lines in
service(4)............. -- 7,394 -- 14,528
Minutes of use
(millions)............. -- 281.7 -- 401.6
</TABLE>
30
<PAGE>
- --------
(1) See "Capitalization" and "Description of Capital Stock."
(2) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. EBITDA is not a measurement of financial performance under
generally accepted accounting principles, is not intended to represent
cash flow from operations, and should not be considered as an alternative
to net loss as an indicator of the Company's operating performance or to
cash flows as a measure of liquidity. The Company believes that EBITDA is
widely used by analysts, investors and other interested parties in the
telecommunications industry. EBITDA is not necessarily comparable with
similarly titled measures for other companies. See "Consolidated
Statements of Cash Flows."
(3) The ratio of earnings to fixed charges is calculated by dividing (i)
income (loss) before provision for income taxes, plus fixed charges by
(ii) fixed charges. Fixed charges consist of interest on indebtedness,
plus the estimated component of rental expense deemed by the Company to be
representative of the interest factor. For the seven-month period ended
December 31, 1996 and for the year ended December 31, 1997, and the three
months ended March 31, 1997 and 1998, earnings were insufficient to cover
fixed charges by $405,301, $1,566,853, $389,601 and $16,191, respectively.
(4) Represents the number of access lines in service (at a DSO level) and
excludes the signaling channel of primary rate ISDN-based connections.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
General: The Company began operations during 1996 and has operated in
Chicago since May 1997 and New York since January 1998, currently serving a
total of 6 MSAs (metropolitan statistical areas). The Company plans to offer
services in 37 additional MSAs by the end of 1999, reaching a total of 43 MSAs
in ten metropolitan markets. As of March 31, 1998, the Company had 21,082
access lines sold, of which 14,528 were installed and in service. This
compares to 13,411 lines sold and 7,394 lines installed as of December 31,
1997.
The Company's plan to expand into 37 additional MSAs requires significant
expenditures to fund operating losses and the purchase of capital equipment.
The Company believes it can lower its initial capital requirements and
generate a substantially greater return on invested capital by concentrating
its investment in switching and information, billing, and support systems,
while leasing transport facilities. This network investment strategy differs
from many other competitive local exchange carries (CLECs) who build and
maintain their own transport facilities.
The Company targets its services to telecommunications-intensive customers
and, as a result, expects to generate revenue per line in excess of the
industry average. In addition, the Company's cost structure is anticipated to
be below the industry average. Consequently, the Company expects to more
rapidly generate positive operating cash flow from its new networks as
compared to other CLECs. Nevertheless, the simultaneous development of a
number of new networks may result in negative consolidated operating cash
flow.
Revenues: The Company's revenue is comprised of monthly recurring charges,
usage charges, and initial, non-recurring charges. Monthly recurring charges
include the fees paid by customers for lines in service, additional features
on those lines, and colocation space. Monthly recurring charges are derived
only from end user customers. Usage charges consist of fees paid by end users
for each call made, fees paid by the incumbent local exchange carrier (ILEC)
and other CLECs as reciprocal compensation (which results from the Company
terminating calls made by ILEC customers or other CLEC customers to Focal's
customers), and access charges paid by the interexchange carriers (IXCs) for
long distance traffic originated and terminated by the Company. Usage charges
are derived from both end user customers and from other carriers. Initial non-
recurring charges are paid by end users, if applicable, for the installation
of service by the Company.
A majority of the Company's revenue currently consists of reciprocal
compensation. This is the result of an imbalance of inbound and outbound
traffic due to the preponderance of inbound applications utilized by the
Company's customers. Such inbound applications include Focal Virtual Office
service which is used by Focal's corporate customers and Focal Multi-Exchange
Service which is used by Focal's Information Service Provider (ISP) customers.
The Company expects the proportion of revenue represented by reciprocal
compensation to decline over time as the percentage of lines sold for outbound
applications increases as each given market matures.
End user invoices are sent monthly with recurring charges being billed in
advance and usage charges being billed in arrears. Reciprocal compensation and
carrier access invoices are sent monthly to the appropriate ILECs and IXCs
according to industry standard practices and in industry standard formats.
Operating Expenses: The Company's operating expenses are categorized as
customer service and network operations; selling, general and administrative;
and depreciation and amortization expense. Settlement costs are a significant
portion of customer service and network operations expense and are comprised
of leased transport charges and reciprocal compensation payments. Leased
transport charges are the lease payments incurred by Focal for the fiber optic
transmission facilities used to connect the Company's customers to its switch
and to connect to the ILEC and other CLEC networks. The Company's strategy of
leasing rather than building its own fiber transport facilities results in the
Company's cost of service being a significant component of total costs.
32
<PAGE>
The Company has to date been successful in negotiating lease agreements which
match the duration of its customer contracts, thereby allowing the Company to
avoid the risk of continuing expenses associated with transmission facilities
that are not being used by revenue generating customers. The Company pays
reciprocal compensation to ILECs and other CLECs for terminating calls made by
Focal's customers to customers of the ILEC or CLEC.
Other customer service and network operations expense consists of the costs
to operate the Company's network and the costs of providing customer care
activities. Major components include: wages, rent, power, equipment
maintenance, supplies, and contract employees.
Selling, general and administrative expenses consist of sales force
compensation and promotional expenses as well as the cost of corporate
activities related to regulatory, finance, human resources, legal, executive,
and other administrative activities.
The Company's strategy of leasing, rather than building, its transport
network results in capital expenditures which are proportionately lower than
most fiber-based CLECs. In addition, the proportion of capital expenditures
which are "success-based" are higher than most fiber-based CLECs. In contrast,
the Company incurs operating expenses for leased facilities, which are
proportionately higher than fiber-based CLECs. The margin impact of these
higher, anticipated operating expenses is expected to be mitigated, in part,
by a higher revenue per line, which the Company anticipates as a result of its
focus on telecommunications-intensive users.
RESULTS OF OPERATIONS
Although the Company began operations on May 31, 1996, the Company did not
generate any revenue until May of 1997, therefore, any comparison of operating
results between three months ended March 31, 1997 and three months ended March
31, 1998 would not be meaningful.
Three Months Ended March 31, 1998
During the three months ended March 31, 1998, the Company generated
$5,102,448 in operating revenues. Customer service and network operations
expense totaled $1,826,893, and selling, general and administrative expense
during the period was $1,307,625. Customer service and network operations
expenses consisted primarily of leased transport charges, payroll and rent
costs. Selling, general and administrative expenses were largely comprised of
payroll and legal and accounting costs.
Depreciation and amortization expense during the period was $890,871,
resulting primarily from network assets placed in service in the Company's
operational markets. In addition, a portion of the amount is attributable to
the amortization of expenses incurred from the Company's offering of
$270,000,000 stated principal amount at maturity of 12.125% senior discount
notes due 2008. The offering was consummated on February 18, 1998 and the
Company received $150,027,606 in gross proceeds.
Interest income for the three months ended March 31, 1998 was $1,015,902 and
interest expense was $2,109,152. The Company's net loss for the period totaled
$16,191. This loss was largely due to increased interest expense accrued by
the Company as a result of the completion of its senior discount note
offering.
For the three months ended March 31, 1998, the Company's Chicago operating
subsidiary had 11,535 access lines in service and generated revenues of
$4,781,132. The subsidiary recorded positive EBITDA, (earnings before
interest, taxes, depreciation and amortization) or $2,834,462, which includes
a pro-rata allocation of central operations and corporate expenses. EBITDA is
not a substitute for net income or cash flow as determined in accordance with
generally accepted accounting principles. The Company believes EBITDA is
commonly used by investors to analyze and compare companies in the
telecommunications industry.
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Three Months Ended March 31, 1997
During the three months ended March 31, 1997, the Company did not generate
operating revenue due to the fact that service did not commence until May
1997. Customer service and network operations expenses were $8,692. Selling,
general and administrative expenses were $416,492, resulting primarily from
payroll costs. Depreciation and amortization expense was $7,337 for the three
months ended March 31, 1997. The Company earned $43,055 in interest income and
paid a negligible amount of interest expense. For the three months ended March
31, 1997, the Company had a net loss of $389,601, resulting from the
incurrence of operating expenses for the initial development of the Company's
business.
LIQUIDITY AND CAPITAL RESOURCES
The Company's existing operations have required, and its planned operations
will require, significant capital to fund the purchase and installation of
telecommunications switches, equipment, infrastructure, and the operating
losses expected during the start-up phase of each new market. Capital
expenditures were $7,593,061 for the three months ended March 31, 1998 and
$2,244,385 for the three months ended March 31, 1997. The Company expects
total capital expenditures for the year ended December 31, 1998 to be
approximately $50 million. Total capital expenditures for the buildout of the
ten city plan are currently estimated to be $110 million. Prior to the
completion of the senior discount note offering, the Company funded a
substantial portion of its capital expenditures through the private sale of
equity securities. In November 1996, the Company entered into a stock purchase
agreement which provided for the contribution over time of approximately $26.1
million of equity funding by a group of investors. As of February 13, 1998,
the equity investors have contributed the entire $26.1 million to the Company.
In addition, in 1997, the Company's Illinois subsidiary borrowed approximately
$3.5 million under a bank credit facility. The Company used a portion of the
net proceeds from the senior discount note offering to prepay this
indebtedness and cancel the facility.
On February 18, 1998, the Company received gross proceeds of $150,027,606
from the completion of its 12.125% senior discount note offering. The notes
will accrete to an aggregate stated principal amount of $270,000,000 by
February 15, 2003. No interest will be payable on the Notes prior to August
15, 2003. Thereafter, interest will be payable semiannually on August 15 and
February 15 of each year.
With the exception of the fourth quarter of 1997, the Company has incurred
net losses. A portion of the prior equity investments and debt proceeds have
been used to fund the Company's negative cash flow and net losses. Management
believes the Company may produce negative operating cash flow on a
consolidated basis as it completes the buildout of its ten city plan. There
can be no assurance the Company will realize positive consolidated operating
cash flow in subsequent periods. Until sufficient cash flow is generated, the
Company will continue to rely on cash on hand and outside capital to meet its
cash requirements.
The Company expects its available cash, including the net proceeds from the
sale of its senior discount notes, will be sufficient to fund its capital
requirements through 1999. However, if the Company's expansion occurs more
rapidly than currently anticipated or if its operating results are below
expectations, the Company may require additional capital. The Company may
decide to raise additional capital before such time. The Company may secure
additional funding through the sale of public or private debt and/or equity
securities or enter into a future bank credit facility. There can be no
assurance, however, that the Company will be successful in raising sufficient
additional capital on terms that it will consider acceptable or that the
Company's operations will produce positive consolidated cash flow in
sufficient amounts to meet its debt obligations. Failure to raise and generate
sufficient funds may require the Company to delay or abandon some of its
planned future expansion or expenditures, which could have a material adverse
effect on the Company's growth and its ability to compete in the
telecommunications industry.
The foregoing discussion contains forward-looking statements. The Company's
future performance is subject to numerous risks and uncertainties that could
cause actual results to deviate substantially from those discussed in these
forward-looking statements. Factors that could impact the variability of
future results include:
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the outcome of legal and regulatory proceedings regarding reciprocal
compensation for Internet-related calls; successful execution of the Company's
expansion activities into new geographic markets on a timely and cost-
effective basis; the pace at which new competitors enter the Company's
existing and planned markets; competitive responses of the incumbent local
exchange carriers; execution of interconnection agreements with incumbent
local exchange carriers on terms satisfactory to the Company; maintenance of
the Company's supply agreements for transmission facilities; continued
acceptance of the Company's services by new and existing customers; and the
ability to attract and retain talented employees. Investors are encouraged to
examine the Company's SEC filing on form S-4, which more fully describes the
risks and uncertainties associated with the Company's business.
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BUSINESS
INTRODUCTION
Focal began operations during 1996 and has operated in Chicago since May
1997 and New York since January 1998, currently serving a total of 6 MSAs
(metropolitan statistical areas.) The Company plans to offer services in 37
additional MSAs by the end of 1999, reaching a total of 43 MSAs in ten
metropolitan markets. As of March 31, 1998, the Company had 21,082 access
lines sold, of which 14,528 were installed and in service. This compares to
13,411 lines sold and 7,394 lines installed as of December 31, 1997.
MARKET POTENTIAL
The Company believes the telecommunications-intensive users in Tier I
markets are inadequately served for highly reliable, local switched
telecommunications services. Historically, the emergence of competition in the
telecommunications industry has created demand where none previously existed.
The Company believes that large telecommunications-intensive users will
increasingly demand diversity in local telecommunications providers as they
have already done in long distance and private-line telecommunications
services. The market potential for CLECs is large and growing. According to
data published by the FCC, total revenue from local telecommunications
services in 1996 was $101 billion. While this revenue figure represents total
local usage from residential and all business customers, the Company has
estimated that approximately $45.5 billion of the total $101 billion
represents local usage by businesses. Using further statistical data, the
Company has estimated that the total local usage revenues from the business
segment in the ten Tier I markets in which the Company intends to offer
service is approximately $12.2 billion per year.
The Company believes that its primary competitor in each of its target
markets is the ILEC. Most second generation CLECs initially chose to compete
in Tier II and Tier III markets, effectively ceding the Tier I markets to the
first generation CLECs (i.e., MFS and TCG). Moreover, the vast majority of
CLECs, both first and second generation, provide bundled communications
services to small and medium sized business customers. The Company's
experience to date has supported its belief that, unlike residential and small
to medium sized businesses who may prefer "one-stop" telecommunications
providers, large telecommunications-intensive users will purchase different
types of telecommunications services from different providers. As such, Focal
believes that there are few competitors offering telecommunications-intensive
users a stand-alone alternative to ILEC switched local services. Focal
represents The Third Generation CLEC(TM) that focuses on the provision of
value-added, switched local services to large telecommunications-intensive
users in Tier I markets. Management believes that it has a competitive
advantage over other local service providers as a result of its decision to
provide primarily local service to this significant and underserved market
segment.
BUSINESS STRATEGY
Principal Focus on Local Service. The Company offers a focused set of value-
added local switched services to its customers, which management believes
differentiates the Company from a majority of competitors who are seeking to
provide "one-stop" telecommunications services. This focus allows the Company
to outperform its competitors in the areas of network provisioning,
maintenance and customer care. For example, Focal guarantees its customers
that service will be turned-up within a specified period (typically less than
20 calendar days) or the first month fixed line charge is waived. To date, the
Company has met all of its installation commitments on time. Focal believes
its target customers prefer to purchase local telecommunications services from
multiple vendors, as they typically do with equipment, long distance and
private-line services. Management believes that the Company's customers will
seek to distribute an increasing portion of their switched local traffic to
one or more CLECs to secure redundancy and competitive pricing.
Design and Install a Highly Capital-Efficient Network. Management believes
the Company can generate a substantially greater return on invested capital by
concentrating its investment in switching, information, billing
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and support systems, while leasing its transport facilities. Management also
believes that excess fiber capacity and multiple vendors in its target markets
will satisfy the Company's leasing needs and permit Focal to obtain such
facilities at competitive prices for the foreseeable future. Moreover, Focal's
network investment strategy results in a substantially lower, less risky
initial capital requirement than CLECs who build their own fiber facilities
due to a greater proportion of Focal's ultimate capital requirement being
"success-based." Utilizing existing fiber networks allows the Company to enter
markets more quickly, generate revenue and positive cash flows faster, avoid
the need for franchise and right-of-way agreements, and focus on providing
switched services.
Build a More Robust Network than ILECs or CLECs. The Company has designed
and built its network to meet the demanding traffic and reliability
requirements of its target customers. Focal utilizes Nortel, DMS-500 SuperNode
central office switches that have been engineered by the Company to be
virtually non-blocking, thereby maximizing call completion. Focal also designs
its leased fiber facilities to avoid blocking. The Company typically connects
to every local tandem switch in operation by the ILEC and directly connects to
numerous high-use end offices. By connecting to so many points in the ILEC's
network, the Company can improve call completion even if blockage occurs in
portions of the ILEC trunking network. To optimize the entire configuration,
Focal implements overflow routing among the various trunk connections between
itself and the ILEC. Management believes this design is unique among ILECs and
CLECs and is attractive to its telecommunications-intensive customer base.
Moreover, the Company's transport-neutral design allows it to deliver service
from its switch to customers over the fiber transport systems maintained by
each of its several fiber optic transport facility providers.
Minimize Dependence on Deregulation. While the Telecom Act is likely to
benefit CLECs in the long-term, Focal believes the tangible benefits from the
Telecom Act are limited in the short-term. Accordingly, Focal's business
strategy is focused on customers and markets which allow it to minimize its
reliance on provisions of the Telecom Act to achieve its objectives. For
example, while the unbundling of network elements is mandated by the Telecom
Act, the Company believes the ability of a CLEC to obtain unbundled loops of
acceptable transmission quality and in reasonable volumes is not yet
practicable in most ILEC jurisdictions. However, due to its target customer
base and the existence of high capacity transmission facilities to such
customers in the major markets, Focal is able to limit its leased transport
network to facilities of T-1 capacity or greater. Similarly, while number
portability is mandated by the Telecom Act, Focal believes the interim number
portability methods utilized today are unreliable and perform poorly.
Consequently, Focal has concentrated on providing outbound and incremental
inbound (i.e., inbound traffic using new numbers) calling applications rather
than expose its customers to the potential loss of inbound calls on existing
numbers due to the poor performance of remote call forwarding applications
currently used to achieve number portability.
Penetrate Corporate Accounts. The Company emphasizes the diversity,
reliability and sophistication of its network and services in order to earn
its selection as the local provider of choice for its customers. Focal has
developed a number of products and services which it believes provide it with
a competitive advantage when attempting to penetrate new corporate accounts,
including Focal Virtual Office and 800 service. See "Business--Products and
Services." Focal's initial sale to a corporate account typically involves
installing incremental lines for specialized inbound applications or
supplanting only a limited number of outbound lines. Management believes that
the Company will thereafter be able to increase its overall penetration of
local service from the customer based on the quality of its service.
Take Advantage of the Significant and Growing ISP Opportunity. The dramatic
increase in dial-up access to the Internet has created a particularly strong
demand for local access lines by ISPs. CLECs are generally well-positioned to
satisfy this demand as the only alternative source of access lines. Focal
offers advantages to ISPs that certain of its competitors are currently unable
to provide, such as environmentally conditioned colocation space, virtually
non-blocking switching and transport facilities, guaranteed installation times
and modified foreign exchange service (which allows certain calls which would
otherwise be toll calls to be made as local calls). Focal does not offer its
own Internet access service and is, therefore, not viewed as a direct
competitor of the ISPs which it serves. ISP traffic also helps maximize
network utilization by bringing traffic onto the network typically during off-
peak periods, such as evenings and weekends.
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Maximize Network Utilization through VAR and Other Wholesale
Arrangements. To further maximize network utilization while minimizing cost of
sales, Focal distributes service to other customer segments through VARs and
other wholesale arrangements. Management believes that many telecommunications
service providers, including long distance companies and wireless
licenseholders, will seek to provide bundled telecommunications services in
Tier I markets. The Company does not currently intend to offer bundled
telecommunications services or directly distribute its services to residential
or small to medium sized business customers--the most attractive segment to
bundled service providers. Because the Company does not intend to offer
bundled services or offer services to customers these entities are likely to
serve, Management believes that entities intending to offer bundled services
are more likely to purchase local service from Focal than its ILEC or CLEC
competitors who may compete with these entities.
NETWORK
The Company has chosen to pursue a network design approach which involves
purchasing and maintaining its own switches while leasing fiber optic
transmission facilities on an incremental basis as demand dictates. This
approach is made possible by the availability of fiber optic transmission
facilities from multiple vendors in each of the markets it intends to serve.
This switch-based, leased transport network architecture allows the Company to
(i) reduce the capital investments necessary to provide services to its
customers by focusing its capital expenditures on its switches, the most
critical component of its network, (ii) avoid the construction of speculative
fiber optic facilities and the "stranded" capital sometimes associated with
such construction, (iii) better match the commitment of capital to the
acquisition of revenue generating customers and (iv) generate revenue and cash
flow more quickly than if the Company constructed its own fiber optic
facilities. The Company leases transmission facilities from at least three
vendors in each market in which it conducts business, providing the Company
with negotiating leverage and allowing the Company to offer its customers
added redundancy and diversity. In addition, the Company's network has been
specifically designed to satisfy the needs of its high-volume corporate
customer base and has been engineered to be virtually non-blocking, thereby
maximizing call completion.
The Company believes the implementation of its network architecture
represents a lower risk, demand-driven approach requiring less capital
deployment than that required for the build out of a fiber optic
infrastructure. The Company concludes that it can generate a substantially
greater return on invested capital by concentrating its investment in
switching, information, billing, and support systems, while leasing the
transport facilities necessary to complete its full service offering. Focal's
network investment strategy results in a substantially lower, less risky
initial capital requirement than CLECs who build their own fiber facilities
due to a greater proportion of Focal's ultimate capital requirement being
"success-based."
Focal has the flexibility to add or subtract transport capacity on an
incremental basis with the addition or loss of customers. The Company believes
that the quantity of existing and planned fiber transport facilities and its
distribution among numerous owners will be sufficient to satisfy the Company's
need for leased transport facilities and permit Focal to obtain such
facilities at competitive prices for the foreseeable future. The ability of
the Company to consider the option of leasing its transport is the result of
the relative maturity of the competitive access market and the high operating
leverage associated with such networks. For these reasons, the fiber transport
providers which own and operate such fiber networks in the major metropolitan
markets compete for the Company's transport business in order to maximize the
return on their fixed-asset fiber networks. In many cases, this occurs despite
the fiber transport provider marketing its own switched services in
competition with Focal.
While the Company expects the fiber transport providers will continue to
find it in their best interest to compete for Focal's transport business, the
fact that they are common carriers requires that they make their transport
services available to Focal on terms no worse than those provided to any
similarly situated customer. In each market, Focal has or anticipates having
multiple fiber transport providers available for transport including the ILEC
and at least two CLECs. The Company expects that over time it may become
optimal to construct a portion of its own transport facilities as the traffic
volume in certain geographic areas reaches critical mass.
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PRODUCTS AND SERVICES
Focal primarily offers local services to its customers. These services can
generally be segmented into inbound and outbound calling services.
Inbound Services. The Company's basic, inbound service allows for the
completion of calls to a new phone number supplied to the customer by the
Company. Focal believes the interim number portability methods utilized today
are unreliable and perform poorly. In addition, Focal has no control over such
number portability methods. Rather than migrating a customer's existing
telephone number to the Focal network, Focal has concentrated on providing
incremental inbound (i.e., inbound traffic using new numbers) calling
applications. In this way, its customers are not exposed to the potential loss
of inbound calls on existing numbers due to the poor performance of remote
call forwarding applications which are currently used to achieve number
portability.
The Company offers a number of inbound calling applications. Direct inward
dial ("DID") service allows inbound calls to reach a particular station on a
customer's telephone system without operator intervention. Focal markets DID
service to corporations as both a primary service and as a backup service. As
a primary service, the customer uses Focal numbers in instances where a new
line and number are necessary such as when a customer hires a new employee. As
a backup service, Focal can implement an alternative numbering plan for the
customer should the customer's primary service from the ILEC be interrupted.
Focal Virtual Office is designed to allow a company's employees to dial-in
to the company's local area network ("LAN") via a telephone number within that
employee's untimed local calling area. As such, the employee can access the
LAN without incurring time sensitive charges and the company avoids
maintaining relatively expensive, region-wide 800 service for LAN access.
Future enhancements to these inbound services are planned which will increase
the screening capabilities and provide an added layer of security to a
company's LAN, remote access functionality.
Focal Multi-Exchange Service, a variant of the Focal Virtual Office service,
is sold to ISPs and allows the ISPs' customers to cost-effectively access the
ISPs' remote access servers. The combination of the multi-exchange service
capability, a single point of exchange of the traffic, and Focal's high level
of customer care has resulted in strong demand for such services by the ISPs.
Outbound Services. The Company's basic outbound services allow for the
completion of local and toll calls within a metropolitan region. Such direct
outward dial ("DOD") service is utilized by end users in several ways. As a
primary service, a customer uses Focal as a replacement for the ILEC in
originating calls bound for destinations within the region. In the least cost
routing ("LCR") application, a customer can utilize Focal service in
conjunction with its existing ILEC service to route calls using whichever
carrier is least expensive for that given call type. LCR has been implemented
for long distance calling by large corporate users for a number of years.
Other outbound applications in which Focal service is utilized include
outbound 800 calling and long distance overflow service. In the 800 calling
application, Focal de-loads a customer's outbound, local lines and provides an
incentive to the customer to handle that customer's outbound 800 calls. In the
case of long distance overflow service, Focal acts as a backup to the
customer's existing long distance carrier in order to optimize the number of
direct, special access lines installed from the customer's premises to the
long distance carrier's point of presence.
All of the services described above are commonly provisioned over a T-1
facility and interface the customer's private branch exchange equipment
("PBX") directly, thereby averting the need for Focal to provision premises-
based multiplexing equipment. This is possible due to the high traffic volume
characteristic of the large telecommunications-intensive accounts which the
Company targets. The ability to directly interface existing customer premises
equipment ("CPE") further minimizes the Company's capital investment
requirements and maximizes overall return on capital.
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Focal also offers its customers the ability to colocate equipment in the
Company's switching and operations center. Equipment colocation benefits the
customer by allowing it to inexpensively deploy its equipment without having
to maintain environmentally controlled space. In addition, customers that
colocate qualify for special discounts on the monthly line rates for Focal's
switched services. From the Company's perspective, it is less costly to
deliver service within its own space since no leased transport is required to
reach the customer. This service is particularly well suited to Focal's ISP
customers, who frequently operate remote access servers and routers in
conjunction with the Company's switched services.
SALES AND MARKETING
Focal's objective is to satisfy the need for highly reliable, local switched
telecommunications services for telecommunications-intensive users in Tier I
markets by providing diverse, reliable and sophisticated service. Focal
believes it has a competitive advantage in satisfying this need since the
Company, from network architecture to customer service, is focused on
delivering a limited number of value-added services to its target customers.
Diversity. Focal provides diversity to telecommunications-intensive users by
delivering highly reliable, local switched telecommunications services as an
alternative to the ILEC in a multi-vendor environment. Such diversity already
exists with respect to other telecommunications services. Telecommunications-
intensive users clearly embrace the benefits that diversity brings;
principally, that redundancy minimizes the effects of facilities failures and
maximizes competitive pricing. As a result, the majority of Focal's target
customers typically have multiple long distance vendors, multiple equipment
providers, and multiple local private-line vendors. Because of its focused
strategy, the Company is uniquely positioned to become the preferred provider
of choice for local switched telecommunications services for large corporate
accounts, ISPs and VARs. The Company's focused strategy is predicated on its
ability to deliver the superior level of reliable, sophisticated and
competitive services that its customers require.
Reliability. Focal provides reliable service to telecommunications-intensive
users, who are highly sensitive to the potential effects of facilities
failures, by designing its own network around the same theme of diversity that
it advocates for its customers. Although local switched services are perceived
as simple, basic services, the delivery of highly reliable local switched
services requires sophisticated systems. Focal has designed and built its
switching and transport network to meet the demanding traffic and reliability
requirements of its target customers. The Company's network strategy is based
on developing and operating a highly robust, reliable, and high-throughput,
local network relative to the ILECs and other CLECs. Because Focal is a new
entrant to the market, the Company acknowledges that it must meet or exceed
the performance characteristics of the existing local networks in order to
attract telecommunications-intensive users to its service. Unlike smaller
users which tend to pre-qualify vendors based on price, the Company believes
that telecommunications-intensive users qualify potential vendors based on the
performance characteristics of their networks, particularly noting the
reliability aspects. Therefore, the design and operation of the network is a
key success factor in the business development process.
From an equipment standpoint, the Company conducted an exhaustive research
effort to identify the best hardware for the high-volume users that Focal
intends to serve. The result of such research led Focal to select Nortel, DMS-
500 SuperNode central office switches which the Company has engineered to be
virtually non-blocking. As such, customers are unlikely to find themselves
unable to complete or receive calls due to limitations inherent in Focal's
switches. In addition to engineering its switches to avoid blocking, Focal
also designs its leased fiber facilities to avoid blocking. The Company
typically connects to every local tandem switch in operation by the ILEC and
directly connects to numerous high-use end offices. By increasing the number
of connections to the ILEC's network, the Company can improve call completion
even if blockage occurs in portions of the ILEC trunking network. In order to
optimize the entire configuration, Focal implements overflow routing among the
various trunk connections between itself and the ILEC. Focal specifically
engineered its entire network to accommodate a volume per customer far in
excess of that which the ILECs or other CLECs would anticipate given the much
broader range of user volumes they serve. The Company believes its design is
unique
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among ILECs and CLECs and is attractive to its telecommunications-intensive
customer base. Moreover, reliability is further enhanced by the Company's
transport-neutral design which allows it to deliver service from its switch to
customers over the multiple fiber transport systems maintained by each of its
several fiber optic transport facility providers.
In every aspect of network design, Focal has implemented safeguards to
maximize reliability. Because of its distributed architecture, the DMS-500
switch allows the Company to automatically migrate customer traffic across
multiple bays of equipment, protecting against a line card failure. In
addition, the switch was engineered by Nortel with fully redundant processors
and memory in the event of a temporary failure. Focal's disaster prevention
strategy includes service from multiple power grids, on-site battery backup,
and diesel generator power at each switching facility to protect against
failures in its electrical service.
Sophistication. The Company recognizes that its target customers are
knowledgeable, sophisticated buyers that demand a high level of
professionalism throughout a vendor's organization. Focal believes that the
technical sophistication of its management and operations team is a critical
factor for its initial success and will continue to be a key element of
differentiation for the Company among its target customers. Focal requires a
well-experienced team of sales professionals to execute its strategy of
penetrating the telecommunications-intensive accounts. Therefore, attracting
and retaining experienced sales professionals is important to the Company's
overall success. The compensation of the Company's sales professionals is
structured to retain these valuable employees (through stock ownership) and
provides cash compensation incentives which bind the success of the sales team
members to the Company's revenue and operating cash flow objectives.
The Company has divided its direct sales force into three groups: (i) the
Corporate Services Group ("CSG"), responsible for selling to large, corporate
users; (ii) the Internet Services Group ("ISG"), responsible for selling to
Internet service providers; and (iii) the Telecom Services Group ("TSG"),
responsible for selling services on a wholesale basis to VARs and other
carriers. This segmentation permits each sales group to develop the particular
knowledge base and product focus necessary to gain credibility in each market
niche.
Focal's sales strategy for a corporate account sold through the CSG is to
complement the customer's existing service from the ILEC. Unlike other CLECs,
the Company does not offer a comprehensive bundle of telecommunications
services to corporate customers. Rather, the Company believes that there is a
specific demand for high quality, cost effective local switched service as a
stand-alone product. Focal's initial sale to a corporate account typically
involves installing incremental lines for specialized inbound applications or
supplanting only a limited number of outbound lines. After building the
service relationship, Focal anticipates increasing its overall penetration of
local service from the customer such that over a period of time, the Company
expects to dominate a corporate customer's local switched traffic. The Company
emphasizes its diversity, reliability and sophistication of service in order
to earn its selection as the local provider of choice for its customers.
Focal's ISG is able to offer several value-added services to ISPs, such as
environmentally conditioned colocation space, virtually non-blocking switching
and transport facilities, guaranteed rapid installation times and modified
foreign exchange service, which allows certain calls that would otherwise be
toll calls to be made as local calls. In addition, Focal's ISG can highlight
to the ISPs that the Company does not offer its own Internet access service
and is, therefore, an attractive, non-threatening service provider. Serving
the ISP segment also maximizes Focal's network utilization by bringing traffic
onto the network during periods, such as during evenings or on weekends, in
which the network would be otherwise underutilized.
Focal's TSG direct markets to other carriers and VARs by positioning the
Company as a highly reliable, responsive, and cost-effective source of
wholesale local switched telecommunications services. The Company believes a
wide array of telecommunications service providers, including long distance
companies and wireless licenseholders, will seek to provide bundled
telecommunications services in Tier I markets. Focal is well positioned to be
the provider of choice for re-bundled local service. The Company does not
intend to offer bundled telecommunications services or directly distribute its
services to residential or small to medium sized
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business customers--the segment which is most attractive to the "bundled"
service providers. Consequently, the Company believes that entities which
might wish to "purchase" the local service portion of their bundled offering
on a wholesale basis are more likely to purchase that service from Focal than
its ILEC or CLEC competitors.
Superior customer service is critical to achieving Focal's goal of capturing
market share. The Company is continually enhancing its service approach which
utilizes a trained team of customer sales and service representatives to
coordinate customer installation, billing and service. A comprehensive support
system is also a critical component of the Company's service delivery. The
Company has installed an integrated system which is designed to provide
comprehensive features addressing all aspects of its business, including
service order, provisioning, end user and carrier billing, and trouble
reporting. The efficiency of Focal's operating processes contributes to the
Company's ability to rapidly initiate service to new accounts. The
installation desk follows the customer's order, ensuring the installation date
is met. Additionally, customer sales representatives respond to all other
customer service inquiries, including billing questions or repair calls. The
Company believes automation of internal processes contributes greatly to the
overall success of a service provider and billing is a critical element of any
telephone company's operation. The Company expects to be able to deliver
billing information in a number of media besides paper including electronic
files, Internet inquiry or on-line inquiry. The Company believes this system
is readily adaptable to changing circumstances and is scaleable to support the
Company's operations throughout its expected growth.
COMPETITION
The primary competitor to the Company in each of its target markets is the
ILEC, most often an RBOC and/or GTE Corporation. The ILECs are generally
required to file their prices in tariffs with the public utilities commission
in each state. Any price changes must be reflected in the tariffs. Generally,
the ILECs have been given the flexibility to respond with lower pricing in
competitive situations. In most cases, these proposals must also be filed as
individual case basis tariffs and the pricing must be made available to other
similarly situated customers. Thus, while the ILECs in many states have some
pricing flexibility for local services, they must usually file any special
pricing plans offered and make such plans available to other customers. Focal
believes this provides a disincentive for the ILEC to significantly vary or
discount prices even in competitive situations.
The ILECs have substantially more resources than the Company and offer a
wider array of services and in a broader geographic area than the Company. As
a result, the ILECs may have an incentive to subsidize the pricing for
services in which Focal competes with the profits from other services in which
the ILEC remains the monopoly provider. Focal believes competition from
various providers has limited the number of ILEC monopoly services and state
regulators have exercised their enforcement powers such that it is unlikely
the ILEC would be able to successfully pursue such a protective strategy for
an extended period.
A number of IXCs have introduced local telecommunications services in
competition with the ILEC and Focal. These services include toll calling and
other local calling services; often packaged with the company's long distance
service. While Focal does not believe the packaging aspect of the service is
particularly attractive to the telecommunications-intensive users which the
Company targets, large IXCs enjoy certain competitive advantages over the
Company due to their vast financial resources. In addition, the Company
believes there is a risk that IXCs may subsidize the pricing of their local
services with profits from long distance services. Focal anticipates the entry
of the RBOCs into the long distance market will reduce the risk of such cross-
subsidization by reducing the profitability of the IXCs' long distance
minutes. Further, to the extent an IXC purchases Focal's service on a
wholesale basis and rebundles it at a subsidized rate, Focal may benefit as
the subsidized, wholesale service could result in a higher penetration than
would otherwise have occurred. In addition, Focal has successfully displaced
IXCs in customer accounts where the customer was dissatisfied with the quality
of the IXCs' local service. Focal expects its reputation for exceptional
service quality and customer care will continue to result in it displacing
IXCs as the primary alternative to the ILEC in competitive situations.
In addition to competition with the ILEC and IXCs, there are several CLECs
with switching facilities in each city in which Focal intends to operate. In
most cases, the stated target customer base for other CLECs is
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the small and medium size business customer. This differs from Focal's target
customer base of telecommunications-intensive users. Despite the current
difference in customer focus, the Company, at times, has competed against
other CLECs for customer business in the telecommunications-intensive customer
segment. The ongoing consolidation in the CLEC industry could change the
nature of the Company's competitive environment. Although there can be no
assurance, the Company does not expect that such consolidation will be
detrimental to its business.
REGULATION
The following summary of regulatory developments and legislation does not
purport to describe all present and proposed federal, state, and local
regulation and legislation affecting the telecommunications industry. Existing
federal and state regulations are currently the subject of judicial
proceedings, legislative hearings and administrative proposals which could
change, in varying degrees, the manner in which this industry operates.
Neither the outcome of these proceedings, nor their impact upon the
telecommunications industry or the Company, can be predicted at this time.
Overview. The Company's services are subject to varying degrees of federal,
state and local regulation. The FCC exercises jurisdiction over all facilities
of, and services offered by, telecommunications common carriers such as the
Company, to the extent those facilities are used to provide, originate or
terminate interstate or international communications. State regulatory
commissions retain jurisdiction over most of the same facilities and services
to the extent they are used to originate or terminate intrastate
communications. In addition, many of the regulations issued by these
regulatory bodies may be subject to judicial review, the result of which
review the Company is unable to predict.
Federal Regulation. The Company must comply with the requirements of common
carriage under the Communications Act of 1934, as amended (the "Communications
Act"). Comprehensive amendments to the Communications Act were made by the
Telecom Act, which was signed into law on February 8, 1996. The Telecom Act
effected plenary changes in regulation at both the federal and state levels
that affect virtually every segment of the telecommunications industry. The
stated purpose of the Telecom Act is to promote competition in all areas of
telecommunications and to reduce unnecessary regulation to the greatest extent
possible. While management believes it will take years for the industry to
feel the full impact of the Telecom Act, it is already clear the legislation
provides the Company with both opportunities and challenges.
The Telecom Act gives the FCC the authority to forebear from regulating
companies if it finds such regulation does not serve the public interest, and
directs the FCC to review its regulations for continued relevance on a regular
basis. As a result of this directive, a number of the regulations that apply
to CLECs have been and may continue to be eliminated in the future. While it
is therefore expected that a number of regulations that were developed prior
to the Telecom Act will be eliminated in time, those which apply to the
Company at present are discussed below.
The Telecom Act greatly expands the FCC's interconnection requirements on
the ILECs. The Telecom Act requires the ILECs to: (i) provide physical
colocation, which allows companies such as Focal and other interconnectors to
install and maintain their own network termination equipment in ILEC central
offices, and virtual colocation only if required or if physical colocation is
impractical due to space limitations or due to technical infeasibility; (ii)
unbundle and provide access to components of their local service networks to
other providers of local service; and (iii) establish "wholesale" rates for
the services they offer at retail to subscribers who are not telecommuications
carriers to promote resale by CLECs and other competitors; and requires ILECs
and CLECs, such as the Company, to: (i) establish number portability, which
will allow a customer to retain its existing phone number if it switches
service providers; (ii) establish dialing parity, which is intended to ensure
customers will not detect a quality difference in dialing telephone numbers or
accessing operators or emergency services; and (iii) provide nondiscriminatory
access to telephone poles, ducts, conduits and rights-of-way. In addition, the
Telecom Act requires ILECs and CLECs to compensate each other for traffic
originated by one and terminated on the network of the other.
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ILECs are required to negotiate in good faith with carriers requesting any
or all of the above arrangements. If a requesting carrier cannot reach an
agreement within the prescribed time, either carrier may request binding
arbitration by the state commission. Where an agreement cannot be reached,
carriers remain subject to the interconnection obligations established by the
FCC and state telecommunications regulatory commission.
The Company has successfully negotiated interconnection agreements with
Ameritech in Illinois and Indiana and with Bell Atlantic Corporation ("Bell
Atlantic") in New York and has commenced negotiations with Bell Atlantic in
New Jersey, Pennsylvania and Delaware and Pacific Bell Corporation ("Pacific
Bell") in California. The Company also has been granted global authority by
the FCC to provide facilities-based and resold international
telecommunications services.
The FCC is charged with establishing national guidelines to implement the
Telecom Act. The FCC issued its Interconnection Orders on August 8, 1996,
which established detailed rules regarding rates, terms and conditions for
interconnection between CLECs and ILECs and for the implementation of dialing
parity. The Interconnection Orders were appealed to the U.S. Court of Appeals
for the Eighth Circuit. On July 18, 1997, the Court issued a final decision
vacating the interconnection pricing rules and "most favored nation" rules as
well as certain other interconnection rules. On October 14, 1997, the U.S.
Court of Appeals for the Eighth Circuit ruled that ILECs are under no
obligation to provide competing carriers, which would include the Company,
with a rebundled package of individual network elements. The Eighth Circuit
decision creates uncertainty about the rules governing pricing, terms and
conditions of interconnection agreements, and could make negotiation and
enforcement of such agreements more difficult and protracted, and may require
renegotiation of existing agreements. Several parties have appealed the Eighth
Circuit decisions to the United States Supreme Court. The Supreme Court
granted certiorari in several of those appeals. It is not possible at this
time to determine how or when the Supreme Court will respond to these appeals.
Since the Telecom Act's interconnection requirements also apply to IXCs and
all other providers of telecommunications services, including the Company, it
may provide the Company with the ability to reduce its own access costs by
interconnecting directly with non-ILECs, but may also cause the Company to
incur additional administrative and regulatory expenses in responding to
interconnection requests. At the same time, the Telecom Act also makes
competitive entry into other services or geographic markets more attractive to
RBOCs, other ILECs and IXCs and other companies, and likely will increase the
level of competition the Company faces.
While the Telecom Act reduces regulation to which non-dominant local
exchange carriers are subject, it also reduces the level of regulation that
applies to the ILECs, and increases their ability to respond quickly to
competition from the Company and others. For example, in accordance with the
Telecom Act, the FCC has applied "streamlined" tariff regulation to the ILECs,
which greatly accelerates the time prior to which changes to tariffed service
rates may take effect, and eliminates the requirement that ILECs obtain FCC
authorization before constructing new domestic facilities. These actions will
allow ILECs to change service rates more quickly in response to competition.
Similarly, the FCC has proposed affording significant new pricing flexibility
to ILECs subject to price cap regulation. To the extent such increased pricing
flexibility is provided, the Company's ability to compete with ILECs for
certain service may be adversely affected. In addition, a U.S. District Court
in Texas recently invalidated certain provisions of the Telecom Act which
prohibited RBOC engagement in certain manufacturing and marketing activities
and conditioned RBOC provision of in-region long distance service upon a
demonstration that the local market had been opened to competition. The
decision only directly applies to the RBOC parties to the proceeding. The
decision has been stayed pending appeal. The outcome of any such appeals
cannot be predicted at this time. There can be no assurances that the District
Court's decision will be reversed and, if not reversed, that the decision will
not have an adverse effect on the Company. While BellSouth Corp. ("BellSouth")
is not a party to that proceeding, BellSouth has appealed the FCC's previous
order denying BellSouth's request to provide in-region long distance service
in South Carolina. BellSouth has challenged the order on the same grounds as
Southwestern Bell Telephone Company challenged Sections 271 through 275 of the
Telecom Act.
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The Company expects to receive a significant portion of its initial revenue
in a given market from the ILEC in the form of reciprocal compensation
payments. This is a result of the Company's ISP and corporate customers
receiving more calls than they make due to the initial mix of applications
typically sold. Certain ILECs have refused to pay that portion of reciprocal
compensation that they estimate is the result of inbound ISP traffic since
they believe such traffic to be interstate in nature and not covered under the
interconnection agreements. While ILECs in all 19 states in which this issue
has been decided, including states in which the Company operates or proposes
to operate, have been ordered to pay reciprocal compensation for such calls,
there can be no assurance that the payment of reciprocal compensation for ISP
traffic will be maintained. The FCC is also considering this matter in
response to a request for a declaratory ruling. A final determination that
such traffic is not eligible for reciprocal compensation would have a material
adverse effect on the Company. See "--Legal and Administrative Proceedings."
On May 8, 1997, in compliance with the requirements of the Telecom Act, the
FCC released an order establishing a new federal universal service support
fund, which provides subsidies to carriers that provide service to under-
served individuals and customers in high-cost or low-income areas, and to
companies that provide telecommunications services and wiring for schools and
libraries and to rural health care providers. The Company is required to
contribute into the universal service fund and also is required to contribute
to state universal service funds. The Company may also obtain subsidies from
the universal service fund for certain services it provides. The new universal
service rules will be administered jointly by the FCC, the fund administrator,
and state regulatory authorities, many of which are still in the process of
establishing their administrative rules. The net revenue effect of these
regulations on the Company cannot be determined at this time.
Non-dominant carriers, including the Company, must file tariffs with the FCC
listing the rates, terms and conditions of interstate and international
services provided by the carrier. On October 29, 1996, the FCC adopted an
order in which it eliminated the requirement that non-dominant interstate
carriers maintain tariffs on file with the FCC for domestic interstate
services. The FCC's order was issued pursuant to authority granted in the
Telecom Act to "forbear" from regulating any telecommunications services
provider if certain statutory analyses are satisfied. The FCC's order,
however, has been stayed by a federal court and thus, non-dominant interstate
carriers currently must continue to file interstate tariffs with the FCC.
In addition, periodic reports concerning carriers' interstate circuits and
deployment of network facilities also are required to be filed. The FCC
generally does not exercise direct oversight over cost justification and the
level of charges for services of non--dominant carriers, although it has the
power to do so. The FCC also imposes prior approval requirements on transfers
of control and assignments of operating authorizations. Fines or other
penalties also may be imposed for violations of FCC rules or regulations.
State Regulation. Most states regulate entry into the local exchange and
other intrastate services, and states' regulation of CLECs vary in their
regulatory intensity. The majority of states mandate that companies seeking to
provide local exchange and other intrastate services apply for and obtain the
requisite authorization from a state regulatory body, such as a state public
utility commission or a state public service commission. This authorization
process generally requires the carrier to demonstrate that it has sufficient
financial, technical, and managerial capabilities and that granting the
authorization will serve the public interest. As of June 1, 1998, the Company
had obtained local certification or was otherwise authorized to provide local
service in California, Delaware, Florida, Illinois, Indiana, Maryland,
Massachusetts, New York, Pennsylvania, and Virginia and had applications
pending for local certification or other authorization in the District of
Columbia, New Jersey, Michigan, Virginia, and Washington. The Company also has
authority to provide intrastate long distance (i.e. interexchange services) in
California, Florida, Illinois, Indiana, Maryland, Massachusetts, New York, and
Pennsylvania. In addition, the Company has successfully negotiated
interconnection agreements with Ameritech in Illinois and Indiana and with
Bell Atlantic in New York, New Jersey, Pennsylvania and Delaware and Pacific
Bell in California.
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As a CLEC, the Company is (and will be) subject to the regulatory directives
of each state in which the Company is (and will be) certified. Most states
require that CLECs charge just and reasonable rates and not discriminate among
similarly situated customers. Some states also require the filing of periodic
reports, the payment of various regulatory fees and surcharges, and compliance
with service standards and consumer protection rules. States also often
require prior approvals or notifications for certain transfers of assets,
customers, or ownership of a CLEC. States generally retain the right to
sanction a carrier or to revoke certifications if a carrier violates relevant-
laws and/or regulations.
In most states, certificated carriers such as the Company are required to
file tariffs setting forth the terms, conditions, and prices for services
which are classified as intrastate. In some states, the required tariff may
list a range of prices for particular services, and in others, such prices can
be set on an individual customer basis. The Company, however, may be required
to file tariff addenda of the contract terms.
Under the Telecom Act, implementation of the Company's plans to compete in
local markets is and will continue to be, to a certain extent, controlled by
the individual states. The states in which the Company operates or intends to
operate have taken regulatory and legislative action to open local
communications markets to various degrees of local exchange competition.
Local Regulation. The Company is also subject to numerous local regulations,
such as building code requirements. These regulations may vary greatly from
state to state and from city to city.
EMPLOYEES
As of May 28, 1998, the Company employed a total of 105 full-time employees,
none of whom were unionized. The Company believes that its future success will
depend on its continued ability to attract and retain the most highly skilled
and qualified employees in the industry. The Company believes that its
relations with its employees are good.
PROPERTY
The Company leases office space in a number of locations, primarily for
network equipment installations and sales and administrative space. The
Company's headquarters is housed in approximately 22,300 square feet of
rentable space in downtown Chicago, Illinois, under a lease expiring in May
2003. The Company's Chicago switching and network operations center is located
in the same building as its headquarters and occupies approximately 10,500
square feet of rentable space. It is utilized under a ten-year lease that
expires in 2007 and includes two five-year options for renewal. The Company's
New York switching and network operations center occupies approximately 15,200
square feet of rentable space and is located in a commercial office building
in the downtown business district. It is utilized under a fifteen-year lease
that expires in 2012 and includes a five-year option for renewal. On January
26, 1998 the Company entered into a ten-year lease for an approximately 17,500
square foot space in a San Francisco, California office building. The space
will be used to house the Company's San Francisco switching and network
operations center. On March 10, 1998 the Company entered into a ten-year lease
and includes two five-year options for renewal for an approximately 17,600
square foot rentable space in a Philadelphia, Pennsylvania office building.
The space will be used to house the Company's Philadelphia switching and
network operations center. On May 4, 1998, the Company entered into a fifteen-
year lease for an approximately 19,500 square foot space in a Washington, D.C.
office building. The space will be used to house the Company's Washington,
D.C. switching and network operations center. On May 19, 1998, the Company
entered into a nine and one-half year lease for an approximately 19,200 square
foot space in a Los Angeles, California office building. The space will be
used to house the Company's Los Angeles switching and network operations
center.
LEGAL AND ADMINISTRATIVE PROCEEDINGS
With the exception of the matters discussed below, the Company is not aware
of any litigation against the Company. The Company is involved in a number of
regulatory proceedings before various public utilities commissions and the
FCC.
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On September 16, 1997, Focal Communications Corporation of Illinois filed a
complaint and request for temporary injunction against Illinois Bell Telephone
Company d/b/a Ameritech Illinois with the ICC. The complaint was for breach of
the terms of the interconnection agreement between the parties as Ameritech
refused to pay compensation for the transport and termination of calls to
Focal end users that it believed to be ISPs. The Company has recorded revenues
and related accounts receivable totaling $3.2 million from inception to March
31, 1998 in relation to the disputed compensation. In the interests of a more
timely judgment, Focal withdrew its complaint without prejudice on October 17,
1997, and filed to intervene in a consolidated docket which included similar
complaints from several other CLECs. On March 11, 1998, the ICC issued an
order stating that Ameritech is required to pay reciprocal compensation with
respect to calls made to ISPs. On March 15, 1998, Ameritech filed a motion
with the ICC to stay the order pending an appeal, which was denied by the ICC
on March 23, 1998. On March 27, 1998, Ameritech filed suit in the United
States District Court for the Northern District of Illinois seeking reversal
of the ICC Order. Oral arguments in this matter are scheduled for June 25,
1998 and a ruling is expected shortly thereafter. The Company anticipates
that, regardless of the decision reached by the District Court, such decision
will be appealed. Ameritech has obtained a stay of the ICC Order during the
pendency of the proceeding. The Company believes that Ameritech will
ultimately be required to pay such charges after exhausting the appeal
process. However, there can be no assurance of this. Approximately eighteen
other states which have previously considered this issue have ruled in favor
of the Company's position. While the Company does not believe the long-term
effects of an adverse decision would be material, an adverse decision would
have a material adverse effect on the Company's near-term earnings. See "Risk
Factors--Reciprocal Compensation for Internet Access" and "--Regulation." The
Company's interconnection agreement with Ameritech has not been, and is not
expected to be, amended as a result of this dispute.
The Company was named as a defendant, along with other parties, in a case
involving the wrongful death of an electrician who was killed while working on
the building premises in New York (Paula Falkowski v. Signature Construction,
Inc., Focal Communications Corporation of New York, and Hugh O'Kane Electric
Company, Inc.; Index No. 122037/97, Supreme Court of the State of New York,
County of New York, amended complaint filed 4/3/98). The decedent was not
under contract with Focal, nor was he working at the request of Focal. The
Company has tendered the defense of this claim, and it has been accepted by
the insurance carrier. The Company believes that it was not the cause of the
injuries and subsequent death which gave rise to this lawsuit, and that any
liability it may have in this case would be covered by insurance and not be
material.
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MANAGEMENT
The following table sets forth certain information with respect to certain
officers, key employees and directors of the Company as of March 31, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION SERVED SINCE
- ---- --- -------- ------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS:
Robert C. Taylor, Jr.... 38 Director, President, and Chief Executive 8/96
Officer
John R. Barnicle........ 33 Director, Executive Vice President, Chief 6/96
Operating Officer, and Assistant Secretary
Joseph A. Beatty........ 34 Executive Vice President, Chief Financial 11/96
Officer, Treasurer, and Assistant Secretary
Brian F. Addy........... 33 Executive Vice President--Market Development 5/96
Renee M. Martin......... 43 Senior Vice President, General Counsel, and 3/98
Secretary
Robert M. Junkroski..... 34 Controller 1/97
KEY EMPLOYEES:
Anthony J. Leggio....... 40 Vice President and General Manager, Focal 10/97
Communications Corporation of New York
Tony T. Lou............. 51 Vice President and General Manager, Focal 2/98
Communications Corporation of Illinois
Andrew K. Robitshek..... 30 Vice President and General Manager, Focal 1/97
Communications Corporation of California
Richard F. Knight....... 35 Director of Sales--Telecom Services Group 11/97
Patrick K. Kuchevar..... 33 Director of Data Product Development 1/97
Daniel Montgomery, Jr... 41 Director of Network Operations 3/97
Gary D. Sloan........... 36 Director of Information Services 2/97
Jeffrey C. Wells........ 40 Director of Network Planning 2/97
David M. Cushing........ 31 Director of Product Development and 6/97
Business Analysis
DIRECTORS:
James E. Crawford, III.. 52 Director 11/96
Paul T. Finnegan........ 44 Director 11/96
Richard D. Frisbie...... 48 Director 11/96
James N. Perry, Jr...... 37 Director 11/96
Paul G. Yovovich........ 44 Director 3/97
</TABLE>
Robert C. Taylor, Jr. Mr. Taylor has been President, Chief Executive
Officer, and Director since August 1996. Mr. Taylor is a co-founder of the
Company. From 1994 to 1996, Mr. Taylor was the Vice President of Global
Accounts for MFS Communications Company, where he was responsible for the
operations and management of the Global Services Group, which included MFS'
fifty largest customers, and where he focused on developing all activities in
Mexico and Canada. From 1993 to 1994, Mr. Taylor was one of the original
senior executives at McLeod Telecommunications Group, a Cedar Rapids, Iowa
based CLEC. Mr. Taylor has also held management positions with MCI (1990-
1993), and Ameritech (1985-1990). Mr. Taylor also serves on the Executive
Board of the Association for Local Telecommunications Services. Mr. Taylor
received his M.B.A. from the University of Chicago Graduate School of Business
and holds a Bachelor of Science degree in Mechanical Engineering.
John R. Barnicle. Mr. Barnicle has been Executive Vice President, Chief
Operating Officer, Assistant Secretary and Director since June 1996. Mr.
Barnicle is a co-founder of the Company and is responsible for day-to-day
operations, engineering, marketing and long term planning. In 1996, Mr.
Barnicle was Vice President of Marketing for MFS Telecom Companies. From 1994
to 1996, Mr. Barnicle was a Vice President of Duff &
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Phelps Credit Rating Company and prior thereto held various marketing,
operations and engineering positions with MFS Telecom (1992-1994) and Centel
Corporation (1986-1992). Mr. Barnicle received his M.B.A. with Distinction
from DePaul University and holds a Bachelor of Science degree in Electrical
Engineering.
Joseph A. Beatty. Mr. Beatty has been Executive Vice President, Chief
Financial Officer, Treasurer, and Assistant Secretary since November 1996. Mr.
Beatty is a co-founder of the Company and is responsible for all financial
operations and information systems. From 1994 to 1996, Mr. Beatty was a Vice
President with NationsBanc Capital Markets where he was responsible for
investment research coverage of the telecommunications industry. From 1992 to
1994, Mr. Beatty was a Vice President of Duff & Phelps Credit Rating Company
with responsibility for credit ratings in the telecommunications and electric
utility sectors. From 1985 to 1992, Mr. Beatty held various technical
management positions with Centel Corporation's local exchange carrier
division. Mr. Beatty received his M.B.A. with a concentration in Finance from
the University of Chicago Graduate School of Business and is a Chartered
Financial Analyst (CFA). In addition, Mr. Beatty holds a Bachelor of Science
degree in Electrical Engineering.
Brian F. Addy. Mr. Addy has been Executive Vice President of Market
Development since May 1996. Mr. Addy is a co-founder of the Company and is
responsible for national accounts sales and market development activities.
From 1993 to 1996, Mr. Addy was a Vice President and Officer of Security
Capital Industrial Trust, where he was responsible for acquisitions,
development and national marketing. From 1986 to 1993, Mr. Addy held various
management positions with Centel Corporation's cellular, paging, telephone and
telephone systems operating units. Mr. Addy holds a Bachelor of Science degree
in Electrical Engineering.
Renee M. Martin. Ms. Martin has been Senior Vice President, General Counsel
and Secretary since March 1998. Ms. Martin is responsible for legal,
regulatory, and human resources functions within the Company. From 1984 to
1998, Ms. Martin held various executive positions at Ameritech, most recently
as Vice President and General Counsel Small Business Services where she
directed corporate legal resources to address contract negotiations,
employment issues, regulatory affairs and litigation, as well as managing
outside legal counsel. From 1982 to 1984, Ms. Martin was an attorney at Cook
and Franke, S.C. where she concentrated on general business and corporate law.
Ms. Martin received her J.D. from the University of Wisconsin and holds a
Bachelor of Arts degree in Journalism.
Robert M. Junkroski. Mr. Junkroski has been Controller since January 1997.
Mr. Junkroski is responsible for all internal accounting operations. From 1995
to 1997, Mr. Junkroski was Controller for Brambles Equipment Services, Inc.,
where he was responsible for establishing and maintaining the divisional
accounting, financial reporting, and budgeting function. From 1987 to 1994,
Mr. Junkroski was Controller for Focus Group, Ltd., where he was responsible
for the development and implementation of the accounting and financial
reporting functions of several emerging companies. Mr. Junkroski is a
Certified Public Accountant, received his M.B.A. with honors from Roosevelt
University concentrating in Finance and Accounting and holds a Bachelor of
Business Administration degree.
Anthony J. Leggio. Mr. Leggio has been Vice President and General Manager,
Focal Communications Corporation of New York since October 1997. Mr. Leggio is
responsible for sales and customer service activities in the Company's New
York operation. From 1996 to 1997, Mr. Leggio was Vice President Sales,
Eastern Region for Sprint PCS where he was responsible for planning,
development, organization and implementation of the Fortune 1000 sales and
support organization. From 1988 to 1996, Mr. Leggio held various management
positions with Sprint Corporation; most recently as Regional Director of
national accounts for Sprint's long distance division in the New York area.
Mr. Leggio received his M.B.A. from St. Joseph's University and holds a
Bachelor of Science degree in Marketing.
Tony T. Lou. Mr. Lou has been Vice President and General Manager, Focal
Communications Corporation of Illinois since February, 1998. Mr. Lou is
responsible for sales and customer service activities in the Company's Chicago
operation. From 1996 to 1997, Mr. Lou was Vice President, Corporate Accounts
for Safety-Kleen Corporation where he was responsible for developing a
national accounts strategy, quotas, account plans
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and increasing sales throughout all product lines. From 1990 to 1996, Mr. Lou
held various management positions with Sprint Corporation, most recently as
Regional Director of national accounts for Sprint's long distance division in
the Chicago area. Mr. Lou received his Masters in Management from the Kellogg
Graduate School of Business at Northwestern University and holds a Bachelor of
Commerce degree.
Andrew K. Robitshek. Mr. Robitshek has been with the Company since January
1997 and has been Vice President and General Manager, Focal Communications
Corporation of California since April 1998. Mr. Robitshek is responsible for
sales and customer service activities in the Company's San Francisco
operation. From 1994 to 1996, Mr. Robitshek was Director of Business Analysis
for MFS Communications Company where he was responsible for determining the
economics of local telephone service. From 1991 to 1993, Mr. Robitshek was
with MCI where he was responsible for business analysis and VNET Marketing.
Mr. Robitshek received his Masters in Management from the Kellogg Graduate
School of Business at Northwestern University, a Masters of Science in
Telecommunications from George Washington University and holds a Bachelor of
Science degree in Industrial Management.
Richard F. Knight. Mr. Knight has been Director of Sales-Telecom Services
Group since November 1997. Mr. Knight is responsible for managing sales and
service activities to other carriers on a nationwide basis. From 1988 to 1997,
Mr. Knight held various management positions at MCI Telecommunications, most
recently as Senior Manager-Carrier Product Marketing and Development. Mr.
Knight received his M.B.A. from DePaul University and holds a Bachelor of
Business Administration degree.
Patrick K. Kuchevar. Mr. Kuchevar has been with the Company since January
1997, and has served as Director of Data Product Development since March 1998.
Mr. Kuchevar is responsible for managing sales and service activities to large
Internet service providers on a nationwide basis and for data product
development across all customer groups. From 1992 to 1997, Mr. Kuchevar held
various management positions at Sprint, most recently as Global Account
Manager in the long-distance division. From 1988 to 1992, Mr. Kuchevar was
responsible for the marketing of X.25-based data switching services for
Sprint's local telecom division in Illinois. Mr. Kuchevar holds a Bachelor of
Business Administration degree.
Daniel Montgomery, Jr. Mr. Montgomery has been Director of Network
Operations since March 1997. Mr. Montgomery is responsible for coordinating
the implementation of Focal's transmission network. From 1988 to 1997, Mr.
Montgomery held several management positions with MFS Communications Company
including Director--Client Network Engineering and Senior Manager--Network
Services. From 1987 to 1988, Mr. Montgomery was Senior Communications Analyst
for Sears Communications Network, Inc. Mr. Montgomery received his Masters of
Science in Computer Science with Distinction from DePaul University and holds
a Bachelor of Arts degree in Economics.
Gary D. Sloan. Mr. Sloan has been Director of Information Services since
February 1997. Mr. Sloan is responsible for managing all aspects of the
Company's information systems. From 1995 to 1997, Mr. Sloan was Director of
Software Development, Billing Division, MIS for MFS Communications Company
where he was responsible for implementing a new corporate billing platform.
From 1988 to 1995, Mr. Sloan was Director of System Development, MIS for MFS
Telecom where he was responsible for the implementation and operation of
management information systems. From 1984 to 1988, Mr. Sloan was a consultant
for Andersen Consulting. Mr. Sloan holds a Bachelor of Science degree in
Computer Science.
Jeffrey C. Wells. Mr. Wells has been Director of Network Planning since
February 1997. Mr. Wells is responsible for implementing Focal's network
interconnection with the ILECs and engineering the Company's switches for
local network facilities. From 1995 to 1997, Mr. Wells was Senior Manager--
Local Network Planning/Implementation for MFS Communications Company where he
was responsible for designing and implementing all phases of the local
networks as well as overseeing interconnections with the ILECs. From 1985 to
1995, Mr. Wells held various technical management positions with
Sprint/Centel, including Manager of Central Offices for Sprint's local
telephone operations in Chicago. Mr. Wells holds an Associate in Electronic
Technology degree.
50
<PAGE>
David M. Cushing. Mr. Cushing has been Director of Product Development and
Business Analysis since June 1997. Mr. Cushing is responsible for all aspects
of developing and implementing new products as well as the pricing and
financial analysis of new services. From 1995 to 1997, Mr. Cushing held
various management positions at WorldCom (MFS Communications Company) most
recently as Senior Manager, Business Analysis. From 1988 to 1995, Mr. Cushing
held several positions at GTE/Contel most recently as Budget and Performance
Analyst where he initiated performance analyses and designed reports to
monitor customer service performance. Mr. Cushing received his M.B.A. from the
University of Chicago and holds a Bachelor of Science degree in General
Engineering.
James E. Crawford, III. Mr. Crawford is a Director. Mr. Crawford has served
as a Director of the Company since November, 1996. He is a general partner of
Frontenac Company, a venture capital firm that he joined in August, 1992. From
February, 1984 to August, 1992, Mr. Crawford was a general partner of William
Blair Venture Management Co., the general partner of William Blair Venture
Partners III, a venture capital fund. He was also a general partner of William
Blair & Company, an investment bank and brokerage affiliated with William
Blair Venture Management Co., from January, 1987 to August, 1992. Mr. Crawford
serves as a director of Optika Imaging Systems, Inc., Cornerstone Imaging,
Inc., Allegiance Telecom, Inc. and several other private companies.
Paul J. Finnegan. Mr. Finnegan is a Director. Mr. Finnegan has served as a
Director of the Company since November, 1996. Since January, 1993, Mr.
Finnegan has been Vice President of Madison Dearborn Partners, Inc., the
general partner of Madison Dearborn Capital Partners, L.P. Previously, he
served in various positions at First Capital Corporation of Chicago and its
affiliates. Mr. Finnegan currently serves on the Board of Trustees of The
Skyline Fund, the Board of Advisors of Falcon Cable Holding Group, L.P., the
Board of Directors of Omnipoint Corporation, and the Board of Directors of
Allegiance Telecom Inc.
Richard D. Frisbie. Mr. Frisbie is a Director. Mr. Frisbie has served as a
Director of the Company since November, 1996. Mr. Frisbie is a founder and
Managing Partner of Battery Ventures. He is responsible for management of the
Battery Funds and focuses principally on communications and software
opportunities. From 1976 to 1983, Mr. Frisbie was a principal at UNC Ventures
("UNC"), where he was instrumental in developing and implementing its high
technology investment strategy. Prior to joining UNC, Mr. Frisbie was employed
at Hutchins & Wheeler (1974-1976), a Boston law firm. Mr. Frisbie serves as a
director of Allegiance Telecom, PCS Development, Phoenix Wireless and UniSite
and is a member of the Board of Directors of the National Venture Capital
Association.
James N. Perry, Jr. Mr. Perry is a Director. Mr. Perry has been a Director
of the Company since November, 1996. In January, 1993, he became Vice
President of Madison Dearborn Partners, Inc. Previously, Mr. Perry served in
various positions at First Capital Corporation of Chicago and its affiliates.
Mr. Perry currently serves as a director of Clearnet Communications, Inc.,
Omnipoint Corporation, and Allegiance Telecom Inc.
Paul G. Yovovich. Mr. Yovovich is a Director. Mr. Yovovich has served as a
Director of the Company since March 1997. Mr. Yovovich served as President of
Advance Ross Corporation from 1993 to 1996. He served in several executive
positions with Centel Corporation from 1982 to 1992, where his last position
was that of President of its Central Telephone Company unit. Before joining
Centel, he was a Vice President in the investment banking unit of Dean Witter.
Mr. Yovovich also serves as a director of 3Com Corporation, APAC TeleServices,
Inc., May & Speh, Inc., Comarco, Inc., and Mastering, Inc.
POTENTIAL CONFLICTS OF INTEREST
In addition to serving as members of the Board of the Company, Messrs.
Crawford, Finnegan, Frisbie and Perry each serve as directors of other
telecommunications companies and other private companies. As a result of these
additional directorships, Messrs. Crawford, Finnegan, Frisbie and Perry may be
subject to conflicts of interest during their tenure as directors of the
Company. Because of these potential conflicts, Messrs. Crawford, Finnegan,
Frisbie and Perry may be required, from time to time, to disclose certain
financial or business opportunities to the Company and to the other companies
to which they owe fiduciary duties. However, the Company does not believe
these conflicts of interest will be a detriment to the Company's growth or
ability to operate its business.
51
<PAGE>
BOARD COMMITTEES
The Board has established a Compensation Committee and an Audit Committee.
The Compensation Committee establishes salaries, incentives and other forms of
compensation for directors, executive officers and key employees of the
Company and administers the Company's 1997 Non-Qualified Stock Option Plan
(the "Stock Option Plan") and other incentive and benefit plans. Members of
the Compensation Committee are Messrs. Taylor, Perry, Finnegan, Crawford,
Frisbie, and Yovovich. The Audit Committee oversees the work performed by the
Company's independent auditors, and reviews internal audit controls. Members
of the Audit Committee are Messrs. Perry, Finnegan, Crawford, and Frisbie. The
Nominating Committee has been charged with the responsibility of identifying
nominees to stand for election to the Company's Board of Directors. Members of
the Nominating Committee are Messrs. Barnicle, Perry, Crawford and Yovovich.
COMPENSATION OF DIRECTORS
Except for Mr. Yovovich, outside directors do not currently receive cash
fees or option grants for serving as directors or for attending meetings. On
April 1, 1997, Mr. Yovovich was awarded an option to purchase 260 shares of
the Company's Class A Common (as defined herein), with such option to
immediately vest as to 10% of such shares and to vest as to an additional 15%
of such shares each six months thereafter. The Company reimburses directors
for out-of-pocket expenses incurred in connection with attendance at meetings.
EXECUTIVE COMPENSATION
The Summary Compensation Table below sets forth certain information
concerning compensation paid or accrued for services rendered to the Company
in all capacities for the seven months ended December 31, 1996 and the year
ended December 31, 1997 by the Chief Executive Officer and each of the four
other most highly compensated officers or key employees of the Company whose
combined salary and bonus exceeded $100,000 (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------- ------------
NUMBER OF
OTHER SECURITIES
NAME AND ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- ------------------ ---- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert C. Taylor, Jr. .. 1997 $120,000 $50,000(2) $ -- -- $ --
Chief Executive Officer 1996 20,000 -- -- -- --
and President
John R. Barnicle........ 1997 120,000 47,000(2) -- -- --
Executive Vice 1996 20,000 -- -- -- --
President and Chief
Operating Officer
Joseph A. Beatty........ 1997 120,000 45,000(2) 25,000(1) -- --
Executive Vice 1996 20,000 -- -- -- --
President, Chief
Financial Officer,
Treasurer, and
Secretary
Brian F. Addy........... 1997 120,000 38,000(2) -- -- --
Executive Vice 1996 20,000 -- -- -- --
President of Market
Development
Patrick K. Kuchevar..... 1997 63,333 87,000(3) -- 80(4) --
Director of Data 1996 -- -- -- -- --
Product Development
</TABLE>
- --------
(1) Reimbursement for moving expenses.
(2) Discretionary bonuses are granted by the Board of Directors.
(3) Performance Based Sales Compensation Plan.
(4) Granted pursuant to the Company's Stock Option Plan.
52
<PAGE>
Mr. Kuchevar is not an officer of the Company. Except for Mr. Kuchevar, none
of the Named Executive Officers (as defined) owns any options to purchase
shares of the Company's Common Stock.
STOCK OPTION PLAN
The Company's Stock Option Plan was adopted on February 27, 1997 by Focal
Communications Corporation of Illinois and pursuant to a Plan of
Reorganization and an Assignment of Interest Agreement, dated August 18, 1997,
such plan was adopted by the Company. The Stock Option Plan provides for the
grant of options to purchase up to an aggregate of 5,260 shares of Common
Stock. The Plan is administered by the Board of Directors which makes
discretionary grants ("discretionary grants") of options to employees
(including employees who are officers and directors of the Company) and
directors.
Options granted pursuant to the plan are to be non-qualified options and are
not intended to be "incentive stock options" within the meaning of Section
422A of the Internal Revenue Code of 1986, as amended.
The selection of participants, allotment of shares, determination of price
and other conditions of purchase of such options are determined by the Board,
in its sole discretion. Options are exercisable for a period of up to ten
years. The per share exercise price of options must be no less than 100% of
the fair market value of the Common Stock on the date of grant. As of June 1,
1998, the Board had granted options to purchase a net total of 2,926 shares of
the Company's Class A Common to 77 employees and directors pursuant to the
Stock Option Plan, after taking into account forfeited option grants. As of
December 31, 1997, the Board had granted options to purchase 1,222 shares of
Class A Common at prices ranging from $290 to $320 per share. On January 1,
1998, the Board granted additional options to purchase 677 shares of Class A
Common at $333 per share. On April 1, 1998, the Board granted additional
options to purchase 1,057 shares of Class A Common at $1,050 per share.
Options granted under the Stock Option Plan are nontransferable, other than
by will or by the laws of descent and distribution, and during the lifetime of
the optionee, may be exercised only by the optionee, or in the event of
optionee's legal incapacity to do so, by the optionee's guardian or legal
representative.
The following table sets forth certain information with respect to options
granted to the Named Executive Officers during 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE GRANT
OPTIONS TO EMPLOYEES PRICE EXPIRATION DATE
NAME GRANTED (#) IN 1997 ($/SH)(1) DATE VALUE(2)
- ---- ----------- ---------------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Robert C. Taylor, Jr.... -- 0% $-- -- $ --
John R. Barnicle........ -- 0% -- -- --
Joseph A. Beatty........ -- 0% -- -- --
Brian F. Addy........... -- 0% -- -- --
Patrick Kuchevar........ 80 6.55% 290 04/01/07 13,600
</TABLE>
- --------
(1) Options were granted under the Stock Option Plan at an exercise price
equal to the fair market value of the Company's Class A Common on the date
of grant, as determined by the Board.
(2)Calculation based on the Black-Scholes model.
53
<PAGE>
The following table sets forth certain information with respect to the
unexercised options held by the Named Executive Officers as of December 31,
1997. No options were exercised by the Named Executive Officers during 1997.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-
UNEXERCISED THE-MONEY
OPTIONS AT YEAR- OPTIONS AT YEAR-
END 1997(#) END 1997($)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED UNEXERCISABLE UNEXERCISABLE (1)
- ---- --------------- -------- ---------------- -----------------
<S> <C> <C> <C> <C>
Robert C. Taylor, Jr.... -- $-- -- $ --
John R. Barnicle........ -- -- -- --
Joseph A. Beatty........ -- -- -- --
Brian F. Addy........... -- -- -- --
Patrick Kuchevar........ 0 0 0/80 0/3,600
</TABLE>
- --------
(1) As of the end of fiscal year 1997, none of the options held by the Named
Executive Officers had been exercised.
EMPLOYMENT AGREEMENTS
The Company entered into continuing Executive Stock Agreement and Employment
Agreements (the "Employment Agreements") with each of the Executive Investors
(as defined herein) on of November 27, 1996 upon the same terms and
conditions. The Employment Agreements provide that each Executive Investor
shall receive a minimum base salary of $120,000 and bonuses based upon the
Company achieving certain performance goals set in advance of each year in the
sole discretion of the Board of Directors. Each Executive Investor is entitled
to severance payments if he is terminated other than for cause. In addition to
provisions relating to each Executive Investor's duties and compensation, the
Employment Agreements require each Executive Investor to assign all inventions
he develops in the course of his employment with the Company to the Company,
maintain the confidentiality of the Company's proprietary information and
refrain from competing with and soliciting employees from the Company during
his employment with the Company and for a period of up to eighteen months
thereafter. Each Executive Investor is entitled to certain Noncompete
Compensation. The Company entered into an employment agreement with Ms. Martin
on March 20, 1998 on substantially the same employment terms as the Executive
Investors.
54
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership of
the Company's Common Stock as of June 1, 1998 for (i) each of the Company's
Officers and others included within the Named Executive Officers, (ii) each
director of the Company, (iii) all of the persons named in (i) or (ii) as a
group, and (iv) each stockholder of the Company who beneficially owns 5% or
more of the Company's Common Stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
BENEFICIALLY OUTSTANDING
NAME OWNED(1) SHARES
- ---- ---------------- -----------
<S> <C> <C>
OFFICERS OR KEY EMPLOYEES:
Robert C. Taylor, Jr.(2)......................... 5,230.77 4.54%
John R. Barnicle(3).............................. 5,230.77 4.54%
Joseph A. Beatty(4).............................. 5,230.77 4.54%
Brian F. Addy(5)................................. 5,230.77 4.54%
Robert M. Junkroski(6)........................... 17.50 *
Renee M. Martin.................................. 0.00 *
Patrick Kuchevar(7).............................. 20.00 *
DIRECTORS:
James N. Perry Jr.(8)............................ 54,807.70 47.55%
Paul Finnegan(9)................................. 54,807.70 47.55%
James Crawford(10)............................... 25,576.92 22.19%
Richard Frisbie(11).............................. 12,788.46 11.10%
Paul G. Yovovich(12)............................. 334.77 *
ALL OFFICERS AND DIRECTORS AS A GROUP (10 STOCK-
HOLDERS)........................................ 114,450.93 99.30%
5% STOCKHOLDERS:
Madison Dearborn Capital Partnership, L.P.(13)... 54,807.70 47.55%
Frontenac VI, L.P.(14)........................... 25,576.92 22.19%
Battery Ventures III, L.P.(15)................... 12,788.46 11.10%
</TABLE>
- --------
* Less than 1% of the issued and outstanding shares of the Common Stock of the
Company.
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all
shares beneficially owned by them, subject to community property laws
where applicable. The percentage of beneficial ownership is based on
115,260.983 shares of Common Stock outstanding as of June 1, 1998,
including 241.75 shares of Common Stock subject to options that are
currently exercisable or are exercisable within 60 days, which are deemed
to be outstanding and to be beneficially owned by the person holding such
options.
(2) Includes 230.77 shares of Class A Common and 5,000 shares of Class B
Common, but excludes 3,677.885 shares of Class C Common owned of record
by Mr. Taylor. The voting rights with respect to the Class C Common have
been transferred to the Equity Investors pursuant to the Vesting
Agreements (as hereinafter defined). The Class C Common and 3,000 shares
of Class B Common are subject to forfeiture. See "Description of Capital
Stock."
(3) Includes 230.77 shares of Class A Common and 5,000 shares of Class B
Common, but excludes 3,677.885 shares of Class C Common owned of record
by Mr. Barnicle. The voting rights with respect to the Class C Common
have been transferred to the Equity Investors pursuant to the Vesting
Agreements. The Class C Common and 3,000 shares of Class B Common are
subject to forfeiture. See "Description of Capital Stock."
(4) Includes 230.77 shares of Class A Common and 5,000 shares of Class B
Common, but excludes 3,677.885 shares of Class C Common owned of record
by Mr. Beatty. The voting rights with respect to the Class C Common have
been transferred to the Equity Investors pursuant to the Vesting
Agreements. The Class C Common and 3,000 shares of Class B Common are
subject to forfeiture. See "Description of Capital Stock."
55
<PAGE>
(5) Includes 230.77 shares of Class A Common and 5,000 shares of Class B
Common, but excludes 3,677.885 shares of Class C Common owned of record
by Mr. Addy. The voting rights with respect to the Class C Common have
been transferred to the Equity Investors pursuant to the Vesting
Agreements. The Class C Common and 3,000 shares of Class B Common are
subject to forfeiture. See "Description of Capital Stock."
(6) Includes 17.5 shares of Class A Common subject to options which are
exercisable within 60 days of June 1, 1998. Excludes 96.5 shares of Class
A Common subject to options which are not exercisable within 60 days of
June 1, 1998.
(7) Includes 20 shares of Class A Common subject to options which are
exercisable within 60 days of June 1, 1998. Excludes 100 shares of Class
A Common subject to options which are not exercisable within 60 days of
June 1, 1998. Mr. Kuchevar is not an officer of the Company. He is
included in the table because he is part of the group defined as Named
Executive Officers in the Summary Compensation Table.
(8) Mr. Perry, a director of the Company, owns no shares in his own name.
Includes 46,153.85 shares of Class A Common owned by MDCP and 8,653.85
shares of Class C Common, the voting rights with respect to which have
been transferred to MDCP pursuant to the Vesting Agreements. See
"Description of Capital Stock." Mr. Perry's address is c/o Madison
Dearborn Partners, Inc., Three First National Plaza, Suite 3800, Chicago,
IL 60602.
(9) Mr. Finnegan, a director of the Company, owns no shares in his own name.
Includes 46,153.85 shares of Class A Common owned by MDCP and 8,653.85
shares of Class C Common, the voting rights with respect to which have
been transferred to MDCP pursuant to the Vesting Agreements. See
"Description of Capital Stock." Mr. Finnegan's address is c/o Madison
Dearborn Partners, Inc., Three First National Plaza, Suite 3800, Chicago,
IL 60602.
(10) Mr. Crawford, a director of the Company, owns no shares in his own name.
Includes 21,538.46 shares of Class A Common owned by Frontenac and
4,038.46 shares of Class C Common, the voting rights with respect to
which have been transferred to Frontenac pursuant to the Vesting
Agreements. See "Description of Capital Stock." Mr. Crawford's address
is c/o Frontenac Company, 135 S. LaSalle Street, Suite 3800, Chicago, IL
60603.
(11) Mr. Frisbie, a director of the Company, owns no shares in his own name.
Includes 10,769.23 shares of Class A Common owned by Battery and
2,019.23 shares of Class C Common, the voting rights with respect to
which have been transferred to Battery pursuant to the Vesting
Agreements. See "Description of Capital Stock." Mr. Frisbie's address is
c/o Battery Ventures, 20 William Street, Wellesley, MA 02181.
(12) Includes 230.77 shares of Class A Common and an additional 104 shares of
Class A Common subject to options which are exercisable within 60 days
of June 1, 1998. Excludes 156 shares of Class A Common subject to
options which are not exercisable within 60 days of June 1, 1998.
(13) Includes 46,153.85 shares of Class A Common owned by MDCP and 8,653.85
shares of Class C Common, the voting rights with respect to which have
been transferred to MDCP pursuant to the Vesting Agreements. See
"Description of Capital Stock." Mr. Perry and Mr. Finnegan, directors of
the Company, sit on the Board as designees of MDCP. See "Management--
Potential Conflicts of Interest."
(14) Includes 21,538.46 shares of Class A Common owned by Frontenac and
4,038.46 shares of Class C Common, the voting rights with respect to
which have been transferred to Frontenac pursuant to the Vesting
Agreements. See "Description of Capital Stock." Mr. Crawford, a director
of the Company, sits on the Board as a designee of Frontenac. See
"Management--Potential Conflicts of Interest."
(15) Includes 10,769.23 shares of Class A Common owned by Battery and
2,019.23 shares of Class C Common, the voting rights with respect to
which have been transferred to Battery pursuant to the Vesting
Agreements. See "Description of Capital Stock." Mr. Frisbie, a director
of the Company, sits on the Board as a designee of Battery. See
"Management--Potential Conflicts of Interest."
56
<PAGE>
CERTAIN TRANSACTIONS
THE STOCK PURCHASE AGREEMENT
The Company and certain of its stockholders entered into a Stock Purchase
Agreement (as defined herein). Pursuant to such agreement and additional
agreements related thereto the Investors were granted certain put rights,
voting rights, and registration rights. See "Description of Capital Stock" for
a detailed discussion of the various rights and restrictions affecting the
Common Stock of the Company and its stockholders. Concurrent with the
consummation of the Offering, the Equity Investors relinquished certain Put
Rights (as defined herein) in exchange for certain liquidation rights. See
"Description of Capital Stock."
DIRECTOR/STOCKHOLDER RELATIONSHIPS
Several directors of the Company, who serve as designees of the Equity
Investors, also serve on the boards of companies with which the Company may
compete or enter into agreements. Specifically, Messrs. Crawford, Finnegan,
Frisbie, and Perry are directors of Allegiance Telecom, Inc., a Dallas-based
CLEC which competes with the Company. See "Management--Potential Conflicts of
Interest."
DESCRIPTION OF CAPITAL STOCK
As of December 31, 1997, there were a total of (i) 85,567.693 shares of
Class A Common authorized and 80,307.693 shares outstanding, (ii) 35,000
shares of Class B Common authorized and 20,000 shares outstanding, and (iii)
15,000 shares of Class C Common authorized and 14,711.54 shares outstanding.
Pursuant to a Stock Purchase Agreement (the "Stock Purchase Agreement") and
related documents, each dated November 27, 1996, the Company sold 79,384.62
shares of its Class A Common Stock, $0.01 par value per share (the "Class A
Common"), to MDCP, Frontenac, Battery, Brian F. Addy ("Addy"), John R.
Barnicle ("Barnicle"), Joseph A. Beatty ("Beatty"), and Robert C. Taylor, Jr.
("Taylor," with Addy, Barnicle, Beatty and Taylor being hereinafter
individually referred to as an "Executive Investor" and collectively as the
"Executive Investors," and the Equity Investors and the Executive Investors
being hereinafter collectively referred to as the "Investors") and converted
1,500 shares of its then outstanding common stock into 20,000 shares of Class
B Common Stock, $0.01 par value per share (the "Class B Common"), and
14,711.54 shares of Class C Common Stock, $0.01 par value per share (the
"Class C Common," the Class A Common, Class B Common and Class C Common are
hereinafter collectively referred to as the "Common Stock"). The Company
issued 923.073 shares of Class A Common to stockholders who were designated by
the Equity Investors and other investors concurrent with the Stock Purchase
Agreement.
In connection with the Stock Purchase Agreement, the Company and the
Investors entered into a number of additional agreements which affect their
relative rights as Stockholders of the Company. Following is a description of
the relative rights and obligations of the Company's Class A Common, Class B
Common and Class C Common.
Certain Voting Requirements
Pursuant to the Stock Purchase Agreement, the Company can not take certain
enumerated actions without obtaining the prior written consent of the holders
of at least 67% of the shares of Class A Common issued to Equity Investors
pursuant to the Stock Purchase Agreement. Until such consent is obtained the
Company may not, among other things: declare or pay dividends; redeem or
purchase the Company's stock or the stock of any of its subsidiaries; issue or
agree to issue any securities containing equity features; sell more than 10%
of the Company's assets; acquire or invest in another entity; enter into the
operation of any business other than the provision of local exchange
telecommunications services or other businesses identified in an approved
business plan; become subject to any agreement which would restrict the
Company's right to perform under the Stock Purchase Agreement or related
documents; incur indebtedness exceeding $100,000 (excluding the Notes and any
57
<PAGE>
refinancing thereof); make capital expenditures or enter into lease agreements
exceeding $100,000 in any twelve-month period unless provided for in an
approved business plan; or use proceeds of Class A Common contributions made
pursuant to the Stock Purchase Agreement for purposes other than for working
capital and budgeted general corporate purposes or as contemplated by an
approved business plan. The requirement for such consent terminates upon the
consummation of the Company's Initial Public Offering.
Voting
Pursuant to the Company's Certificate of Incorporation (the "Certificate"),
each share of Common Stock is entitled to one vote per share with the holders
of Class A Common, Class B Common and Class C Common voting together as a
single class.
Pursuant to the Vesting Agreement, the Executives have named the Equity
Investors as their proxies to vote all shares of Unvested Class C Common from
time-to-time outstanding. In addition, pursuant to the Stockholders Agreement,
the Stockholders have agreed, among other things, that the authorized number
of directors shall be established by the bylaws and remain at seven directors.
The Stockholders Agreement provides that the seven directors will include (i)
two directors designated by MDCP, so long as MDCP holds at least 50% of the
shares of Common Stock initially purchased by MDCP under the Stock Purchase
Agreement and thereafter one director designated by MDCP so long as MDCP holds
at least 10% of such Common Stock and at least 3% of the Company's outstanding
Common Stock, (ii) one director designated by Frontenac so long as Frontenac
holds at least 20% of the shares of Common Stock initially purchased by
Frontenac under the Stock Purchase Agreement and at least 3% of the Company's
outstanding Common Stock, (iii) one director designated by Battery so long as
Battery holds at least 50% of the shares of Common Stock initially purchased
by Battery under the Stock Purchase Agreement and at least 3% of the Company's
outstanding Common Stock, (iv) two Executive Investors employed by the Company
designated by a majority of the outstanding shares of Common Stock issued to
the Executive Investors pursuant to the Stock Purchase Agreement, and (v) one
outside director designated by the Equity Investors and reasonably acceptable
to the Executive Investors. The rights and requirements under the Stockholders
Agreements as to directors shall terminate at the earlier of the closing of
the Company's Initial Public Offering or the sale of the Company.
Investors' Liquidation Right
Pursuant to the Stock Purchase Agreement, Equity Investors had the right
(the "Put Right"), beginning after November 27, 2003, to require the Company
to repurchase all, but not less than all, of the Equity Investors' Class A
Common purchased pursuant to the Stock Purchase Agreement. Pursuant to a
January 1998 amendment to the Stock Purchase Agreement the Investors have
agreed to relinquish such Put Right in exchange for certain rights to require
liquidation of the Company if the Company has not completed a public offering
of its Common Stock prior to November 27, 2003. If a demand for liquidation is
made, at the option of the Company, in lieu of liquidation, the Company may
repurchase all, but not less than all, the shares of the Company's capital
stock then held by the Investors exercising such liquidation right. The
Indenture limits the ability of the Company to liquidate itself or to
repurchase shares of its Common Stock. In connection with the Offering, the
Equity Investors have acknowledged that the Indenture could restrict the
Company from liquidating or repurchasing Shares of its Common Stock and agreed
in writing that any claim for such payments would be subordinated in right of
payment to the Notes.
Forfeiture, Conversion and Repurchase of Common Stock
Pursuant to the terms of four separate Vesting Agreements (the "Vesting
Agreements"), each dated November 27, 1996, by and among the Executive
Investors and each of the Equity Investors, the shares of Class C Common owned
by each of the Executive Investors are subject to certain forfeiture
provisions.
Upon the vesting of the Class C Common, such shares of Class C Common are
convertible into Class B Common. Pursuant to the Vesting Agreements, upon the
vesting of any shares of Class C Common an equal number of shares of Class A
Common held by the Equity Investors shall be forfeited by such Equity
Investors.
58
<PAGE>
Pursuant to the terms of the Employment Agreements by and between the
Company and each of the Executive Investors, the shares of Class B Common
owned by each of the Executive Investors (including any shares of Class B
Common received upon conversion of the Class C Common as to which the vesting
provisions of the Vesting Agreement have lapsed) are subject to certain
forfeiture provisions.
Pursuant to the Employment Agreements, the Company has the option to
purchase (the "Repurchase Option") all Class A Common, Class B Common and
Class C Common then owned by each Executive Investor upon the termination of
such Executive Investors' employment by the Company for any reason. In certain
circumstances, the Company may be required to assign the Repurchase Option, or
a portion thereof, to the Equity Investors and/or the other Executive
Investors. The purchase price for shares of Unvested Class B and Unvested
Class C shall be the par value thereof. The purchase price for the vested
shares of Common Stock shall be the fair market value of such shares as
determined by the formula set forth in the Employment Agreements.
Registration Rights
Pursuant to the terms of a Registration Agreement (the "Registration
Agreement") dated November 27, 1996, the Company granted certain holders of
the Company's Class A Common and Class B Common Registration Rights. The
holders of approximately 78,461.54 shares of Class A Common have the benefit
of demand registration rights. Holders of Class A Common which have the
benefit of demand registration rights are hereinafter referred to as "Demand
Rights Holders." In order for the Demand Rights Holders to effect a demand for
registration prior to an Initial Public Offering, the Registration Agreement
requires that at least 67% of the Demand Rights Holders request such
registration. Prior to an Initial Public Offering, an unlimited number of
demands may be made for registration on Form S-1 or any similar long-form
registration ("Long-Form Registrations"). After an Initial Public Offering and
subject to minimum dollar limits, each Demand Rights Holder is subject to
certain limitations on demands which can be made for Long-Form Registrations,
while the Demand Rights Holders may make an unlimited number of demands for
registration on Form S-2 or S-3 or any similar short-form registration, if
available. In addition to demand registration rights, the Demand Rights
Holders and the holders of approximately 20,000 shares of Class B Common have
unlimited "piggyback" registration rights (hereinafter the Demand Rights
Holders and the holders of Class B Common to which such piggyback registration
rights have attached will be collectively called the "Piggyback Rights
Holders") pursuant to which the Piggyback Rights Holders have the right to
request that the Company register their registrable Class A Common and Class B
Common whenever the Company registers any of its securities under the
Securities Act (other than pursuant to a demand registration) and the
registration form to be used may be used for the registration of the
registrable Class A Common or Class B Common; unless the piggyback
registration is in connection with an underwritten registration and the
managing underwriter is of the opinion that inclusion of all or any portion of
the shares of Class A Common or Class B Common with respect to which the
Piggyback Rights Holders request registration would have an adverse impact on
the marketing of the securities to be sold in such underwritten offering.
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<PAGE>
Distributions
Pursuant to the Company's Certificate of Incorporation, the holders of Class
A Common, Class B Common, and Class C Common have differing rights to
distributions made by the Company depending on the type of distribution
involved. The following table details the relative rights based on the type of
distribution:
<TABLE>
<CAPTION>
DISTRIBUTION
CLASS A, B, C
COMMON CLASS A COMMON CLASS B COMMON CLASS C COMMON
- ------------- -------------- -------------- --------------
<S> <C> <C> <C>
1. Dividends (i) Each share of Class A (ii) Each share of Class (iii) No share of Class C
Common and A Common and Common has a
Class B Common Class B Common right to receive
share equally in any share equally in any any
dividend declared dividend declared portion of any
out of the earnings out of the earnings dividends out of
of the Company of the Company earnings
2. Other Non- (i) First, to the holders (ii) Second, to the (iii) The holders of
Liquidating of Class A holders of Class B Class C Common
Distributions(1) Common (ratably Common (ratably shall have no
among such among such right
holders) until the holders) in an (except such right
total Other amount up to the as may result from
Non-Liquidating product of the their holding
Distributions made quotient obtained by Class A
to each holder dividing the Common or
(since November 27, aggregate number Class B Common)
1996) is equal of Class B Common to receive any
to the sum of the outstanding by the portion of any
initial price paid to aggregate number Other Non-
the Company for of shares of Class A Liquidating
such shares of Common and Distributions
Class A Class B Common
Common plus the outstanding times
aggregate the aggregate of all
contributions to the Other
capital of the Non-Liquidating
Company made Distributions
with respect to such previously made
Class A Common pursuant to these
from November 27, subsections 2(i) and
1996 up to and 2(ii) to the holders
including the date of Class A
of such distribution Common and Class B
Common from
November 27, 1996
</TABLE>
- --------
(1) All distributions other than dividends made out of earnings or
distributions as part of a complete liquidation, dissolution, or winding
up of the Company are defined as "Other Non-Liquidating Distributions."
60
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION
CLASS A, B, C
COMMON CLASS A COMMON CLASS B COMMON CLASS C COMMON
- ------------- -------------- -------------- --------------
<S> <C> <C> <C>
Thereafter, to the holders of Class A Common and
Class B Common (ratably among such holders) based on
the number of shares of Class A Common and Class B
Common held by each such holder.
3. Liquidating (i) First, to the (ii) Second, to the
Distributions(2) holders holders of Class C
of Class A Common (ratably
Common (ratably among such
among such holders) in an
holders) until the amount up to the
total Other Non- product of the
Liquidating quotient obtained
Distributions by
and Liquidating dividing the
Distributions made aggregate
to number of Class C
each holder (since Common out-
November 27, standing by the
1996) is equal to aggregate number
the sum of the of shares of Class
initial price paid B
to Common and Class C
the Company for Common outstanding
such shares of Class times the aggregate
A of all Other Non-
Common plus the Liquidating
aggregate Distributions made
contributions pursuant to
to the capital subsections 2(i)
of the Company made and 2(ii) to the
with respect to such holders of Class B
Class A Common from Common from
November 27, 1996 November 27, 1996
up to and including
the date of such
distribution
Third, to the holders of Class B Common and Class C
Common (ratably among such holders)
Thereafter, to the holders of all classes of Common
Stock (ratably among such holders)
</TABLE>
- --------
(2) All distributions in any complete liquidation, dissolution, or winding up
of the Company are defined as "Liquidating Distributions."
61
<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
GENERAL
The Senior Notes were, and the Exchange Notes will be, issued under the
Indenture between the Company and Harris Trust and Savings Bank, as trustee
under the Indenture. For purposes of this Description of the Exchange Notes
only, the term "Company" refers to Focal Communications Corporation and does
not include its subsidiaries except where specifically noted and for purposes
of financial data determined on a consolidated basis.
The terms of the Exchange Notes will be identical in all material respects
to the Senior Notes, except that (i) the Exchange Notes will have been
registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the Senior Notes and (ii)
Holders of the Exchange Notes will not be entitled to certain rights of
Holders of Senior Notes under the Registration Agreement. The terms of the
Exchange Notes include those stated in the Indenture and those made a part of
the Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Exchange Notes will be subject to all such terms,
and Holders of the Exchange Notes are referred to the Indenture and the Trust
Indenture Act for a complete statement of such terms. A copy of the Indenture
is available from the Company on request. The statements and definitions of
terms under this caption relating to the Exchange Notes and the Indenture are
summaries and do not purport to be complete. Such summaries make use of
certain terms defined in the Indenture but not herein and are qualified in
their entirety by express reference to the Indenture. Certain capitalized
terms used herein and not otherwise defined below under "--Certain
Definitions" are defined in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Exchange Notes mature on February 15, 2008 (the "Stated Maturity"). The
Exchange Notes will be limited to an aggregate stated principal amount at
maturity of $270,000,000. The Senior Notes were issued at an issue price of
$555.6578 per $1,000 stated principal amount at maturity (the "Issue Price")
(55.56578% of the stated principal amount at maturity) to generate gross
proceeds to the Company of $150,027,606. The Exchange Notes are being issued
in substitution for the Senior Notes and are, therefore, deemed to have been
issued at the same discount. The Exchange Notes will bear interest on the
Issue Price at a rate of 12.125% per annum computed on a semiannual bond
equivalent basis from the Issue Date. In the period prior to February 15,
2003, interest at a rate of 12.125% per annum will accrue on the Issue Price
but will not be payable in cash ("Deferred Interest"). For United States
federal income tax purposes, a significant amount of original issue discount,
taxable as ordinary income, will be recognized by a holder of Exchange Notes
as such Deferred Interest accrues from the Issue Date. From February 15, 2003,
interest at a rate of 12.125% per annum ("Current Interest") on the stated
principal amount at maturity of the Exchange Notes will be payable in cash
semiannually on August 15 and February 15 of each year, beginning on August
15, 2003, to the Person in whose name the Exchange Note (or any predecessor
Exchange Note) is registered at the close of business on the preceding August
1, or February 1, as the case may be. The stated principal amount at maturity
is $1,000 per Exchange Note and represents the Issue Price plus Deferred
Interest accrued but unpaid up to February 15, 2003. Interest will be computed
on the basis of a 360-day year comprised of twelve 30-day months. The Company
shall pay interest on overdue principal and premium, if any, of the Exchange
Notes and, to the extent lawful, interest on overdue installments of interest
on the Exchange Notes at a rate per annum equal to the interest rate payable
on the Exchange Notes.
The Exchange Notes will be issued without coupons and in fully registered
form only, in minimum denominations of $1,000 stated principal amount at
maturity and integral multiples thereof. The Exchange Notes will be issued
only against surrender of an equal stated principal amount at maturity of
Senior Notes.
The interest rate on the Exchange Notes is subject to increase if certain
conditions are not satisfied, all as further described under "Description of
the Exchange Notes--Exchange Offer; Registration Rights." All references
herein to Current Interest and Deferred Interest include any such Additional
Interest.
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<PAGE>
RANKING
The Exchange Notes will be senior unsecured obligations of the Company
ranking pari passu in right of payment with the Senior Notes and all other
existing and future senior Indebtedness of the Company, and will rank senior
in right of payment to all existing and future subordinated Indebtedness of
the Company, if any. Holders of secured Indebtedness of the Company, however,
will have claims that are prior to the claims of the Holders with respect to
the assets securing such other Indebtedness except to the extent the Notes are
equally and ratably secured by such assets. The Indenture will permit the
Company to incur secured Indebtedness. As of December 31, 1997, on a pro forma
basis after giving effect to the Offering and the application of the net
proceeds therefrom, the Company would have had no outstanding indebtedness
other than the Notes.
The operations of the Company are conducted through its subsidiaries and,
therefore, the Company is dependent upon cash flow from such entities to meet
its obligations. The Company's subsidiaries will have no direct obligation to
pay amounts due on the Exchange Notes and will not guarantee the Exchange
Notes. As a result, the Exchange Notes will be effectively subordinated to all
existing and future Indebtedness and other liabilities of the Company's
subsidiaries (including trade payables). See "Risk Factors--Holding Company
Structure; Effective Subordination of the Exchange Notes." Except to the
extent that loans made by the Company to its subsidiaries are recognized as
Indebtedness, any rights of the Company and its creditors, including the
Holders, to participate in the assets of any of the Company's subsidiaries
upon any liquidation or reorganization of any such subsidiaries will be
subject to the prior claims of such subsidiary's creditors (including trade
creditors).
BOOK-ENTRY SYSTEM
The Exchange Notes will initially be issued in the form of one or more
Global Notes (as defined in the Indenture) held in book-entry form. The
Exchange Notes will be deposited with the Trustee as custodian for DTC, and
DTC or its nominee will initially be the sole registered Holder of the
Exchange Notes for all purposes under the Indenture. Except as set forth
below, a Global Note may not be transferred except as a whole by DTC to a
nominee of DTC or by a nominee of DTC to DTC.
The Exchange Notes that are issued as described below under "--Certificated
Notes" will be issued in definitive form.
Upon the transfer of an Exchange Note in definitive form, such Exchange Note
will, unless the Global Note has previously been exchanged for Exchanges Notes
in definitive form, be exchanged for an interest in the Global Note
representing the principal amount of the Exchange Notes being transferred.
Upon the issuance of a Global Note, DTC or its nominee will credit, on its
internal system, the accounts of persons holding through it with the
respective principal amount of Exchange Notes of the individual beneficial
interests represented by such Global Note. Ownership of beneficial interests
in a Global Note will be limited to persons that have accounts with DTC
("participants") or persons that may hold interests through participants.
Ownership of beneficial interests by participants in a Global Note will be
shown on, and the transfer of that ownership interest will be effected only
through, records maintained by DTC or its nominee for such Global Note.
Ownership of beneficial interests in such Global Note by persons that hold
through participants will be shown on, and the transfer of that ownership
interest within such participant will be effected only through, records
maintained by such participant. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Note.
Payment of principal of, premium, if any, on and interest on Exchange Notes
represented by any such Global Note will be made to DTC or its nominee, as the
case may be, as the sole registered owner and the sole Holder of the Exchange
Notes represented thereby for all purposes under the Indenture. None of the
Company, the Trustee, or any agent of the Company will have any responsibility
or liability for (i) any aspect of DTC's reports relating to or payment made
on account of beneficial ownership interests in a Global Note representing
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<PAGE>
any Exchange Notes or for maintaining, supervising or reviewing any of DTC's
records relating to such beneficial ownership interests or (ii) any other
matter relating to the actions and practices of DTC or any of its
participants.
The Company has been advised by DTC that upon receipt of any payment of
principal of, premium, if any, on or interest on any Global Note, DTC will
immediately credit, on its book-entry registration and transfer system, the
accounts of participants with payments in amounts proportionate to their
respective beneficial interests in the principal or face amount of such Global
Note, as shown on the records of DTC. The Company expects that payments by
participants to owners of beneficial interests in a Global Note held through
such participants will be governed by standing instructions and customary
practices as is now the case with securities held for customer accounts
registered in "street name" and will be the sole responsibility of such
participants.
So long as DTC or its nominee is the registered owner or Holder of such
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or Holder of the Exchange Notes represented by such Global Note for
the purposes of receiving payment on the Exchange Notes, receiving notices and
for all other purposes under the Indenture and the Exchange Notes. Beneficial
interests in Exchange Notes will be evidenced only by, and transfers thereof
will be effected only through, records maintained by DTC and its participants.
Except as provided above, owners of beneficial interests in a Global Note will
not be entitled to and will not be considered the Holders of such Global Note
for any purposes under the Indenture. Accordingly, each person owning a
beneficial interest in a Global Note must rely on the procedures of DTC and,
if such person is not a participant, on the procedures of the participant
through which such person owns its interest, to exercise any rights of a
Holder under the Indenture. The Company understands that, under existing
industry practices, in the event that the Company requests any action of
Holders or that an owner of a beneficial interest in a Global Note desires to
give or take any action that a Holder is entitled to give or take under the
Indenture, DTC would authorize the participants holding the relevant
beneficial interest to give or take such action, and such participants would
authorize beneficial owners owning through such participants to give or take
such action or would otherwise act upon the instructions of beneficial owners
owning through them.
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of Exchange Notes (including the presentation of Exchange
Notes for exchange as described below) only at the direction of one or more
participants to whose account with DTC interests in the Global Note are
credited and only in respect of such portion of the aggregate principal amount
of the Exchange Notes as to which such participant or participants has or have
given such direction.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the Banking Law of the State of New York, a "banking
organization" within the meaning of New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered under the
Exchange Act. DTC was created to hold the securities of its participants and
to facilitate the clearance and settlement of securities transactions among
its participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical
movement of securities certificates. DTC's participants include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations some of whom (and/or their representatives) own DTC.
Access to DTC's book-entry system is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable, but
the Company takes no responsibility for the accuracy thereof.
CERTIFICATED NOTES
The Exchange Notes represented by a Global Note are exchangeable for
certificated Exchange Notes only if: (i) DTC notifies the Company that it is
unwilling or unable to continue as a depository for such Global Note
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<PAGE>
or if at any time DTC ceases to be a clearing agency registered under the
Exchange Act, and a successor depository is not appointed by the Company
within 90 days; (ii) the Company executes and delivers to the Trustee a notice
that such Global Note shall be so transferable, registrable and exchangeable,
and such transfer shall be registrable; or (iii) there shall have occurred and
be continuing an Event of Default with respect to the Notes represented by
such Global Note. Any Global Note that is exchangeable for certificated
Exchange Notes pursuant to the preceding sentence will be transferred to, and
registered and exchanged for, certificated Exchange Notes in authorized
denominations and registered in such names as DTC or its nominee holding such
Global Note may direct. Subject to the foregoing, a Global Note is not
exchangeable, except for a Global Note of like denomination to be registered
in the name of DTC or its nominee. In the event that a Global Note becomes
exchangeable for certificated Exchange Notes: (i) certificated Exchange Notes
will be issued only in fully registered form in denominations of $1,000 or
integral multiples thereof; (ii) payment of principal, any repurchase price,
and interest on the certificated Exchange Notes will be payable, and the
transfer of the certificated Exchange Notes will be registrable, at the office
or agency of the Company maintained for such purposes; and (iii) no service
charge will be made for any issuance of the certificated Exchange Notes,
although the Company may require payment of a sum sufficient to cover any tax
or governmental charge imposed in connection therewith.
OPTIONAL REDEMPTION
The Exchange Notes will be redeemable, at the Company's option, in whole or
in part, at any time or from time to time, on or after February 15, 2003 and
prior to maturity, upon not less than 30 nor more than 60 days' prior notice
by first class mail to each Holder's last address as it appears in the
Register, at the redemption prices (expressed in percentages of stated
principal amount at maturity) set forth below, plus accrued and unpaid Current
Interest, if any, on the stated principal amount at maturity so redeemed to
the redemption date (subject to the right of Holders of record on the relevant
Record Date that is on or prior to the redemption date to receive Current
Interest, if any, due on an interest payment date), if redeemed during the 12-
month period commencing February 15, of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2003..................................................... 106.063%
2004..................................................... 104.042
2005..................................................... 102.021
2006 and thereafter...................................... 100.000
</TABLE>
In addition, at any time and from time to time prior to February 15, 2001,
the Company may redeem in the aggregate up to 35% of the original aggregate
stated principal amount at maturity of the Exchange Notes with the proceeds
from one or more Public Equity Offerings following which there is a Public
Market at a redemption price (expressed as a percentage of Accreted Value on
the redemption date) of 112.125%, plus Additional Interest, if any; provided,
that at least 65% of the original aggregate stated principal amount at
maturity of the Notes remains outstanding after each such redemption.
If less than all of the Notes are to be redeemed, the Trustee shall select,
in such manner as it shall deem fair and appropriate, the particular Notes to
be redeemed or any portion thereof in stated principal amounts at maturity of
$1,000 or integral multiples thereof.
MANDATORY REDEMPTION
Except as set forth under "--Repurchase at the Option of Holders upon a
Change of Control" and "--Asset Sale," the Company is not required to make
redemption payments or sinking fund payments with respect to the Exchange
Notes.
REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder will have the right
to require the Company to repurchase all or any part (equal to $1,000 stated
principal amount at maturity or an integral multiple thereof) of
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<PAGE>
such Holder's Exchange Notes pursuant to the offer described below (the
"Change of Control Offer") at a purchase price (the "Change of Control
Purchase Price") equal to 101% of the Accreted Value thereof plus accrued and
unpaid Current Interest, if any, to but excluding any Change of Control
Payment Date (as defined below).
Within 30 days following any Change of Control, the Company or the Trustee
(at the expense of the Company) shall mail a notice to each Holder stating:
(i) that a Change of Control Offer is being made pursuant to the covenant
described under "--Repurchase at the Option of Holders upon a Change of
Control" and that all Exchange Notes timely tendered will be accepted for
payment; (ii) the Change of Control Purchase Price and the purchase date (the
"Change of Control Payment Date"), which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed; (iii) any Exchange
Notes or portions thereof not tendered or accepted for payment will continue
to accrue interest; (iv) that unless the Company defaults in the payment of
the Change of Control Purchase Price, all Exchange Notes or portions thereof
accepted for payment pursuant to the Change of Control Offer shall cease to
accrue interest from and after the Change of Control Payment Date; (v) Holders
electing to have any Exchange Notes or portions thereof purchased pursuant to
a Change of Control Offer will be required to surrender their Exchange Notes
to the Paying Agent at the address set forth in the notice prior to the close
of business on the third Business Day preceding the Change of Control Payment
Date; (vi) Holders will be entitled to withdraw their election if the Paying
Agent receives, not later than the close of business on the second Business
Day preceding the Change of Control Payment Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the stated
principal amount at maturity of Exchange Notes delivered for purchase, and a
statement that such Holder is withdrawing such Holder's election to have such
Exchange Notes or portions thereof purchased; (vii) Holders whose Exchange
Notes are being purchased only in part will be issued new Exchange Notes equal
in stated principal amount at maturity to the unpurchased portion of the
Exchange Note or Exchange Notes surrendered, which unpurchased portion must be
equal to $1,000 in stated principal amount at maturity or an integral multiple
thereof; and (viii) if after giving effect to such Change of Control Offer, at
least 95% of the original aggregate stated principal amount at maturity of the
Notes has been redeemed or repurchased, the Company shall have the right to
redeem the balance of the Notes at the Change of Control Redemption Purchase
Price.
On the Change of Control Payment Date, the Company will: (i) accept for
payment Exchange Notes or portions thereof properly tendered pursuant to the
Change of Control Offer; (ii) irrevocably deposit with the Paying Agent in
immediately available funds an amount equal to the Change of Control Purchase
Price in respect of all Exchange Notes or portions thereof so tendered; and
(iii) deliver, or cause to be delivered, to the Trustee the Exchange Notes so
accepted together with an Officers' Certificate listing the Exchange Notes or
portions thereof tendered to the Company and accepted for payment. The Paying
Agent shall promptly mail to each Holder of Exchange Notes so accepted,
payment in an amount equal to the Change of Control Purchase Price for such
Exchange Notes, and the Company shall execute and the Trustee shall promptly
authenticate and mail to each Holder a new Note equal in stated principal
amount at maturity to any unpurchased portion of the Exchange Notes
surrendered, if any; provided that each such new Note shall be in a stated
principal amount at maturity of $1,000 or an integral multiple thereof.
If after giving effect to a Change of Control Offer at least 95% of the
original aggregate stated principal amount at maturity of the Notes has been
repurchased, the Company shall have the right to redeem the balance of the
Notes at a redemption price (the "Change of Control Redemption Purchase
Price") equal to 101% of the Accreted Value thereof plus accrued and unpaid
Current Interest, if any, to but excluding the Change of Control Redemption
Date (as defined below) by giving the Holders notice of such redemption within
30 days following the Change of Control Payment Date with respect to such
Change of Control Offer (the "Change of Control Redemption"). Such notice
shall state that (i) a Change of Control Offer has been consummated and after
giving effect thereto at least 95% of the original aggregate stated principal
amount at maturity of the Notes has been redeemed or repurchased, (ii) the
Company is exercising its right to redeem the balance of the outstanding
Notes, (iii) the redemption date (the "Change of Control Redemption Date")
with respect to such Notes which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed, (iv) unless the Company
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<PAGE>
defaults in the payment of the Change of Control Redemption Purchase Price
with respect to such Notes, all such Notes will cease to accrue interest from
and after such Change of Control Redemption Date and (v) Holders are required
to surrender their Notes to the Paying Agent at the address set forth in the
notice prior to the close of business on the third Business Day preceding such
Change of Control Redemption Date.
On the Change of Control Redemption Date, the Company will: (i) accept for
payment Exchange Notes or portions thereof properly tendered pursuant to the
Change of Control Redemption; (ii) irrevocably deposit with the Paying Agent
in immediately available funds an amount equal to the applicable Change of
Control Redemption Purchase Price in respect of all Exchange Notes so
tendered; and (iii) deliver, or cause to be delivered, to the Trustee the
Exchange Notes so accepted together with an Officers' Certificate listing the
Exchange Notes tendered to the Paying Agent and accepted for payment. The
Paying Agent shall promptly mail to each Holder of Exchange Notes so accepted,
payment in an amount equal to the applicable Change of Control Redemption
Purchase Price for such Exchange Notes.
The existence of the Holders' right to require, subject to certain
conditions, the Company to repurchase Exchange Notes upon a Change of Control
may deter a third party from acquiring the Company in a transaction that
constitutes a Change of Control. Future indebtedness of the Company may
contain provisions which prohibit the purchase by the Company of any Exchange
Notes prior to their stated maturity, require obligations thereunder to be
repurchased upon a Change of Control or limit or prohibit the Company's
ability to comply with its obligations under the Indenture in the event of a
Change of Control. Further, the failure of the Company to pay the Change of
Control Purchase Price would constitute an Event of Default which in turn
could cause an event of default under such other indebtedness of the Company.
Moreover, due to the financial effect of such repurchase on the Company, the
exercise by the Holders of their right to require the Company to repurchase
the Exchange Notes could cause a default under such other indebtedness, even
if the Change of Control itself does not. If a Change of Control Offer is
made, there can be no assurance that the Company will have sufficient funds to
pay the Change of Control Purchase Price for all Exchange Notes tendered by
Holders seeking to accept the Change of Control Offer. In the event that a
Change of Control Offer occurs at a time when the Company does not have
sufficient available funds to pay the Change of Control Purchase Price for all
Exchange Notes tendered pursuant to such offer or at a time when the Company
is prohibited from purchasing the Notes (and the Company is unable either to
obtain the consent of the holders of the relevant indebtedness or to repay
such indebtedness), an Event of Default would occur under the Indenture.
One of the events that constitutes a Change of Control under the Indenture
is a sale, conveyance, transfer or lease of all or substantially all of the
Property of the Company. The Indenture will be governed by New York law, and
there is no established definition under New York law of "substantially all"
of the assets of a corporation. Accordingly, if the Company were to engage in
a transaction in which it disposed of less than all of its assets, a question
of interpretation could arise as to whether such disposition was of
"substantially all" of its assets and whether the Company was required to make
a Change of Control Offer.
To the extent such laws and regulations are applicable, the Company will
comply with the requirements of Section 14(e) under the Exchange Act and any
other securities laws and regulations in connection with the repurchase of
Exchange Notes pursuant to a Change of Control Offer or a Change of Control
Redemption.
Except as described herein with respect to a Change of Control, the
Indenture does not contain any other provisions that permit Holders to require
that the Company repurchase or redeem Exchange Notes in the event of a
takeover, recapitalization or similar restructuring.
ASSET SALE
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, consummate an Asset Sale unless (i) the Company or
such Restricted Subsidiary, as the case may be, receives consideration for
such Asset Sale at least equal to the Fair Market Value (as evidenced by a
Board Resolution delivered to the Trustee) of the Property or other assets
sold or otherwise disposed of, (ii) at least 75% of the consideration
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received by the Company or such Restricted Subsidiary for such Property or
other assets consists of (a) cash, readily-marketable cash equivalents or
Telecommunications Assets, (b) the assumption of Indebtedness of the Company
or such Restricted Subsidiary (other than Indebtedness that is subordinated by
its terms to the Notes) and the release of the Company or the Restricted
Subsidiary, as the case may be, from all liability on the Indebtedness so
assumed or (c) publicly-traded shares of Capital Stock (other than Preferred
Stock and Disqualified Stock) traded in the United States of any Person
engaged in a Telecommunications Business and (iii) the Company or any
Restricted Subsidiary, as the case may be, uses the Net Cash Proceeds from
such Asset Sale in the manner set forth in the next paragraph.
Within 360 days after any Asset Sale, the Company or any Restricted
Subsidiary, as the case may be, may at its option (i) reinvest an amount equal
to the Net Cash Proceeds (or any portion thereof) from such Asset Sale in
Telecommunications Assets or in Capital Stock of any Person engaged in the
Telecommunications Business and/or (ii) apply an amount equal to such Net Cash
Proceeds (or remaining Net Cash Proceeds) (a) to the permanent reduction of
senior secured Indebtedness of the Company (other than Indebtedness to a
Restricted Subsidiary unless the proceeds thereof are used by such Restricted
Subsidiary in a manner contemplated by (i) through (iii) of this sentence) or
other Indebtedness of the Company (other than Indebtedness to a Restricted
Subsidiary unless the proceeds thereof are used by such Restricted Subsidiary
in a manner contemplated by (i) through (iii) of this sentence) that is senior
to the Notes or to the permanent reduction of Indebtedness, or to the
redemption of Preferred Stock, of any Restricted Subsidiary (other than
Indebtedness to, or Preferred Stock owned by, the Company or another
Restricted Subsidiary unless the proceeds thereof are used by the Company or
such Restricted Subsidiary in a manner contemplated by (i) through (iii) of
this sentence) or (b) to the extent none of the Company or any of its
Restricted Subsidiaries has any Indebtedness outstanding of the type referred
to in the immediately preceding clause (a) (other than Indebtedness under
senior secured revolving credit facilities), to the repayment of outstanding
Indebtedness under any such revolving credit facility; provided, however, that
neither the Company nor any Restricted Subsidiary shall be required to
permanently reduce the commitments under any such revolving credit facility by
an amount equal to the outstanding Indebtedness thereunder so repaid or
prepaid and/or (iii) apply an amount equal to such Net Cash Proceeds (or
remaining Net Cash Proceeds) to prepay, whether in whole or in part,
Indebtedness that is pari passu with the Notes and that matures prior to
February 15, 2008. Any Net Cash Proceeds from any Asset Sale that are not used
within 360 days as described in (i) through (iii) above shall constitute
"Excess Proceeds."
If at any time the aggregate amount of Excess Proceeds calculated as of any
date exceeds $5 million, the Company shall, within 30 days of such date, make
an offer to purchase (an "Asset Sale Offer"), on a pro rata basis, (i) Notes
at a purchase price (the "Offer Purchase Price") in cash equal to 100% of the
Accreted Value thereof, plus accrued and unpaid Current Interest thereon, if
any, to but excluding the purchase date, in accordance with the procedures set
forth in the Indenture and (ii) to the extent required by the terms thereof,
any other Indebtedness of the Company that is pari passu with the Notes. The
pro rata amount of such Excess Proceeds to be used to purchase Notes shall be
in an amount equal to the aggregate amount of such Excess Proceeds multiplied
by the quotient obtained by dividing the Accreted Value of the outstanding
Notes by the sum of such Accreted Value and the principal amount of such other
Indebtedness. To the extent that the aggregate Offer Purchase Price of all
Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds relating thereto (such shortfall constituting a "Deficiency"), the
Company may use such Deficiency for general corporate purposes and such
Deficiency shall not thereafter constitute Excess Proceeds for any purpose. In
the event the aggregate Accreted Value of the outstanding Notes tendered
pursuant to an Asset Sale Offer is in excess of the Excess Proceeds to be used
to purchase such Notes, such Excess Proceeds shall be applied to purchase such
Notes on a pro rata basis in stated principal amounts at maturity of $1,000 or
integral multiples thereof. Any amount remaining after giving effect to such
purchase shall constitute a Deficiency and shall be applied as provided in the
immediately preceding sentence. Upon the completion of the purchase of all
Notes tendered pursuant to an Asset Sale Offer, the amount of Excess Proceeds
shall be reset to zero.
To the extent such laws and regulations are applicable, the Company will
comply with the requirements of Section 14(e) under the Exchange Act and any
securities laws and regulations, in connection with the repurchase of Notes
pursuant to an Asset Sale Offer.
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CERTAIN COVENANTS
Set forth below are certain covenants that are contained in the Indenture:
Limitation on Consolidated Indebtedness
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, Incur any Indebtedness after the Issue Date; provided
that the Company may Incur Indebtedness if, after giving effect to the
Incurrence of such Indebtedness and the receipt and application of the net
proceeds therefrom, the ratio of (a) the aggregate consolidated principal
amount of Indebtedness of the Company (including, in the case of the Notes,
only the Accreted Value thereof) outstanding as of the most recent available
quarterly or annual balance sheet, after giving pro forma effect to the
Incurrence of such Indebtedness and any other Indebtedness Incurred since such
balance sheet date and the receipt and application of the proceeds thereof, to
(b) Consolidated Cash Flow Available for Fixed Charges for the four full
fiscal quarters immediately preceding the Incurrence of such Indebtedness for
which consolidated financial statements of the Company are available,
determined on a pro forma basis as if any such Indebtedness had been Incurred
and the proceeds thereof had been applied at the beginning of such four fiscal
quarters, would be less than 6.0 to 1.0 for such four-quarter period.
Notwithstanding the foregoing limitation, the Company and its Restricted
Subsidiaries may Incur the following Indebtedness:
(i) Senior Indebtedness in an aggregate principal amount outstanding at
any one time not to exceed $100,000,000, and any renewal, extension,
refinancing or refunding thereof in an amount which, together with any
principal amount remaining outstanding or available pursuant to this clause
(i) does not exceed the aggregate principal amount outstanding or available
under all such Senior Indebtedness immediately prior to such renewal,
extension, refinancing or refunding, less, in any case, any amount of such
Indebtedness permanently repaid under the covenant described above under
"--Asset Sale";
(ii) Indebtedness (including Guarantees) Incurred to finance the cost
(including the cost of design, development, acquisition, construction,
installation, improvement, transportation or integration) to acquire
equipment, inventory or network assets (including acquisitions by way of
any Capital Lease Obligation and acquisitions of the Capital Stock of a
Person that becomes a Restricted Subsidiary to the extent of the Fair
Market Value of the equipment, inventory or network assets so acquired) by
the Company or a Restricted Subsidiary after the Issue Date;
(iii) Indebtedness owed by the Company to any Significant Restricted
Subsidiary or Indebtedness owed by a Restricted Subsidiary to the Company
or to a Significant Restricted Subsidiary; provided that upon either (a)
the transfer or other disposition by a Significant Restricted Subsidiary or
the Company of any Indebtedness so permitted to a Person other than the
Company or a Significant Restricted Subsidiary or (b) the issuance (other
than directors' qualifying shares), sale, transfer or other disposition of
shares of Capital Stock (including by amalgamation, consolidation or
merger) of a Significant Restricted Subsidiary (such that upon such sale,
transfer or other disposition such Restricted Subsidiary would no longer
meet the definition of a Significant Restricted Subsidiary) to a Person
other than the Company or a Significant Restricted Subsidiary, the
provisions of this clause (iii) shall no longer be applicable to such
Indebtedness and such Indebtedness shall be deemed to have been Incurred at
the time of such transfer or other disposition;
(iv) Indebtedness Incurred to renew, extend, refinance or refund
(including successive extensions, renewals, refinancings and refundings),
whether in whole or in part (each, a "refinancing") (a) the Notes, (b)
Indebtedness outstanding at the date of the Indenture, (c) Indebtedness
Incurred pursuant to clause (ii) of this paragraph or (d) Indebtedness
Incurred pursuant to the first paragraph under the caption "--Limitation on
Consolidated Indebtedness," in an aggregate principal amount not to exceed
the aggregate principal amount of the Indebtedness so refinanced plus the
amount of any premium required to be paid in connection with such
refinancing pursuant to the terms of the Indebtedness so refinanced or the
amount of any premium reasonably determined by the Company as necessary to
accomplish such refinancing by means of a tender offer or privately
negotiated repurchase, plus the expenses of the Company
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and its Restricted Subsidiaries incurred in connection with such
refinancing; provided that Indebtedness the proceeds of which are used to
refinance the Notes or Indebtedness which is pari passu with the Notes or
Indebtedness which is subordinate in right of payment to the Notes shall
only be permitted under this clause (iv) if (y) in the case of any
refinancing of the Notes or Indebtedness which is pari passu with the
Notes, the refinancing Indebtedness is made pari passu to the Notes or
constitutes Subordinated Indebtedness, and, in the case of any refinancing
of Subordinated Indebtedness, the refinancing Indebtedness constitutes
Subordinated Indebtedness and (z) in any case, the refinancing Indebtedness
by its terms, or by the terms of any agreement or instrument pursuant to
which such Indebtedness is issued, (1) does not provide for payments of
principal of such Indebtedness at stated maturity or by way of a sinking
fund applicable thereto or by way of any mandatory redemption, defeasance,
retirement or repurchase thereof by the Company (including any redemption,
retirement or repurchase which is contingent upon events or circumstances,
but excluding any retirement required by virtue of the acceleration of any
payment with respect to such Indebtedness upon any event of default
thereunder), in each case prior to the time the same are required by the
terms of the Indebtedness being refinanced and (2) does not permit
redemption or other retirement (including pursuant to an offer to purchase
made by the Company) of such Indebtedness at the option of the holder
thereof prior to the time the same are required by the terms of the
Indebtedness being refinanced, other than a redemption or other retirement
at the option of the holder of such Indebtedness (including pursuant to an
offer to purchase made by the Company) which is conditioned upon a change
of control pursuant to provisions substantially similar to those described
under "--Repurchase at the Option of Holders upon a Change of Control";
(v) Indebtedness (a) in respect of performance, surety or appeal bonds
provided in the ordinary course of business, (b) in respect of guarantees
or letters of credit Incurred in the ordinary course of business or (c)
arising from customary agreements providing for indemnification, adjustment
of purchase price or similar obligations, or from guarantees or letters of
credit, surety bonds or performance bonds securing any obligations of the
Company or any of its Restricted Subsidiaries pursuant to such agreements,
in the case of this clause (c) Incurred in connection with the disposition
of any business, assets or Restricted Subsidiary (other than Guarantees of
Indebtedness Incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary for the purpose of financing such
acquisition);
(vi) Indebtedness outstanding under the Notes and the Indenture;
(vii) Subordinated Indebtedness in an aggregate principal amount
outstanding at any one time not to exceed $100,000,000, less, in any case,
any amount of such Indebtedness permanently repaid as provided under the
covenant described above under "--Asset Sale";
(viii) Indebtedness of the Company not to exceed, at any one time
outstanding, two times (a) the Net Cash Proceeds received by the Company
after the Issue Date as a capital contribution or from the issuance and
sale of its Capital Stock (other than Disqualified Stock) to a Person that
is not a Subsidiary of the Company, to the extent (x) such capital
contribution or Net Cash Proceeds have not been used pursuant to clause
(iii)(c) of the first paragraph, or clause (ii) or (vi) of the second
paragraph, of the "--Limitation on Restricted Payments" covenant described
below to make a Restricted Payment and (y) if such capital contribution or
Net Cash Proceeds are used to consummate a transaction pursuant to which
the Company Incurs Acquired Indebtedness, the amount of such Net Cash
Proceed exceeds one-half of the amount of Acquired Indebtedness so Incurred
and (b) 80% of the fair market value of property (other than cash and cash
equivalents) received by the Company after the Issue Date from the sale of
its Capital Stock (other than Disqualified Stock) to a Person that is not a
Subsidiary of the Company, to the extent (x) such capital contribution or
Net Cash Proceeds have not been used pursuant to clause (iii)(c) of the
first paragraph, or clause (ii) or (vi) of the second paragraph, of the "--
Limitation on Restricted Payments" covenant described below to make a
Restricted Payment and (y) if such capital contribution or Capital Stock is
used to consummate a transaction pursuant to which the Company Incurs
Acquired Indebtedness, 80% of the fair market value of the property
received exceeds one-half of the amount of Acquired Indebtedness so
Incurred provided, in the case of each of clause (a) and (b), that any such
Indebtedness Incurred pursuant to this clause (viii) does not mature prior
to the Stated Maturity of the Notes and has an Average Life longer than the
Notes;
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(ix) Acquired Indebtedness;
(x) Indebtedness of the Company to the extent the net proceeds thereof
are promptly (a) used to repurchase Notes tendered as a result of a Change
of Control Offer or (b) deposited to defease the Notes as provided under
the covenant described below under "--Satisfaction and Discharge of the
Indenture, Defeasance"; and
(xi) Indebtedness not otherwise permitted to be Incurred pursuant to
clauses (i) through (x) above, which, together with any other outstanding
Indebtedness Incurred pursuant to this clause (xi), will not exceed
$5,000,000 aggregate principal amount at any one time outstanding.
For purposes of determining any particular amount of Indebtedness under this
"--Limitation on Consolidated Indebtedness" covenant, (i) Guarantees, Liens or
obligations with respect to letters of credit supporting Indebtedness
otherwise included in the determination of such particular amount shall not be
included and (ii) any Liens granted pursuant to the equal and ratable
provisions referred to in the "--Limitation on Liens" covenant described below
shall not be treated as Indebtedness. For purposes of determining compliance
with this "--Limitation on Consolidated Indebtedness" covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the types
of Indebtedness described in the above clauses, the Company, in its sole
discretion, shall classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of such clauses;
provided, however, that the Company may allocate portions of such Indebtedness
between or among such clauses.
Limitation on Restricted Payments
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, make any Restricted Payment unless, at the time of
and after giving effect to such proposed Restricted Payment (i) no Default or
Event of Default shall have occurred and be continuing or shall occur as a
consequence thereof, (ii) after giving effect, on a pro forma basis, to such
Restricted Payment and the incurrence of any Indebtedness the net proceeds of
which are used to finance such Restricted Payment, the Company could incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of "--
Limitation on Consolidated Indebtedness" and (iii) after giving effect to such
Restricted Payment on a pro forma basis, the aggregate amount expended (the
amount so expended, if other than cash, to be determined in good faith by a
majority of the disinterested members of the Board of Directors, whose
determination shall be conclusive and evidenced by a Board Resolution) or
declared for all Restricted Payments after the Issue Date does not exceed the
sum of (a) 50% of the Consolidated Net Income of the Company (or, if
Consolidated Net Income shall be a deficit, minus 100% of such deficit) for
the period (taken as one accounting period) beginning on the last day of the
fiscal quarter immediately preceding the Issue Date and ending on the last day
of the fiscal quarter for which the Company's financial statements are
available immediately preceding the date of such Restricted Payment, plus (b)
100% of the net reduction in Investments, subsequent to the Issue Date, in any
Person, resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of Property (but only to
the extent such interest, dividends, repayments or other transfers of Property
are not included in the calculation of Consolidated Net Income), in each case
to the Company or any Restricted Subsidiary from any Person (including,
without limitation, from Unrestricted Subsidiaries) or from redesignations of
Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as
provided in the definition of "Investment"), not to exceed in the case of any
Person the amount of Investments previously made subsequent to the Issue Date
by the Company or any Restricted Subsidiary in such Person and which was
treated as a Restricted Payment; plus (c) the aggregate Net Cash Proceeds
received after the Issue Date (x) as capital contributions to the Company, (y)
from the issuance (other than to a Subsidiary of the Company) of Capital Stock
(other than Disqualified Stock) of the Company and warrants, rights or options
on Capital Stock (other than Disqualified Stock) of the Company, or (z) from
the conversion of Indebtedness of the Company into Capital Stock (other than
Disqualified Stock and other than by a Subsidiary of the Company) of the
Company after the date of the Indenture, except, in the case of this clause
(c), to the extent such Net Cash Proceeds are used to Incur Indebtedness
pursuant to clause (viii) under the covenant described above under "--
Limitation on Consolidated Indebtedness" or to make Restricted Payments
pursuant to clauses (ii) or (vi) of the second paragraph of this "Limitation
on Restricted Payments" covenant.
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The foregoing limitations shall not prevent the Company from (i) paying a
dividend on its Capital Stock at any time within 60 days after the declaration
thereof if, on the declaration date, the Company could have paid such dividend
in compliance with the preceding paragraph, (ii) retiring (a) any Capital Stock
of the Company or (b) any Indebtedness of the Company that is subordinate in
right of payment to the Notes, in exchange for, or out of the proceeds of the
substantially concurrent sale of Qualified Stock of the Company, (iii) retiring
any Indebtedness of the Company subordinated in right of payment to the Notes in
exchange for, or out of the proceeds of, the substantially concurrent incurrence
of Indebtedness of the Company (other than Indebtedness to a Subsidiary of the
Company), provided that such new Indebtedness (a) is subordinated in right of
payment to the Notes at least to the same extent as the Indebtedness being
refinanced, (b) has an Average Life longer than the Notes, and (c) has no
scheduled principal payments due in any amount earlier than the equivalent
amount of principal under the Indebtedness so retired, (iv) retiring any Capital
Stock or options to acquire Capital Stock of the Company held by any directors,
officers or employees of the Company or any Restricted Subsidiary upon the
termination of such Person's tenure as a director or employee, as the case may
be; provided that the aggregate price paid for all such retired Capital Stock or
options shall not exceed $5,000,000 in the aggregate, (v) retiring any Capital
Stock of the Company to the extent necessary (as determined in good faith by a
majority of the disinterested members of the Board of Directors, whose
determination shall be conclusive and evidenced by a Board Resolution) to
prevent the loss, or to secure the renewal or reinstatement, of any license or
franchise held by the Company or any Restricted Subsidiary from any governmental
agency, (vi) Investments in any Person the primary business of which is related,
ancillary or complimentary to the business of the Company and its Restricted
Subsidiaries on the date of such Investments; provided that the aggregate amount
of Investments made pursuant to this clause (vi) does not exceed the sum of (a)
$20,000,000 and (b) the amount of Net Cash Proceeds received by the Company
after the Issue Date as a capital contribution or from the sale of its Capital
Stock (other than Disqualified Stock) to a Person who is not a Subsidiary of the
Company, except to the extent such Net Cash Proceeds are used to Incur
Indebtedness pursuant to clause (viii) under the covenant described above under
"--Limitation on Consolidated Indebtedness" or to make Restricted Payments
pursuant to clause (iii)(c) of the first paragraph, or clause (ii) or this
clause (vi) of this paragraph, of this "Limitation on Restricted Payments"
covenant, plus (c) the net reduction in Investments made pursuant to this clause
(vi) resulting from distributions on or repayments of such Investments or from
the Net Cash Proceeds from the sale of any such Investment (except in each case
to the extent any such payment or proceeds are included in the calculation of
Consolidated Net Income) or from such Person becoming a Restricted Subsidiary
(valued in each case as provided in the definition of "Investment"), provided
that the net reduction in any Investment shall not exceed the amount of such
Investment, (vii) the declaration or payment of dividends on the Common Stock of
the Company (so long as such dividends are paid to the holders of all classes of
Common Stock) following a Public Equity Offering of such Common Stock of up to
6% per annum of the Net Cash Proceeds received by the Company in such Public
Equity Offering, (viii) payments or distributions to dissenting stockholders
pursuant to applicable law to the extent required in connection with a
consolidation, merger or transfer of assets that complies with the provisions of
the Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the property and assets of the Company and (ix) making
Investments not otherwise permitted in an aggregate amount not to exceed
$2,000,000 at any one time outstanding.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (ii) and (iii) of the foregoing
paragraph shall not be included as Restricted Payments.
Not later than the date of making any Restricted Payment (including any
Restricted Payment permitted to be made pursuant to the two previous
paragraphs), the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the required calculations were computed, which calculations may be
based upon the Company's latest available financial statements.
Limitation on Liens
The Company may not, and may not permit any Restricted Subsidiary to,
directly or indirectly, Incur or suffer to exist any Lien on or with respect
to any Property or other assets or interests therein now owned or
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hereafter acquired or any income or profits therefrom or any interest thereon
to secure any Indebtedness without making, or causing such Restricted
Subsidiary to make, effective provision for securing the Notes equally and
ratably with such Indebtedness, provided that no Indebtedness of the Company
which is subordinate in right of payment to the Notes may be so secured.
The foregoing restrictions shall not apply to: (i) Liens existing on the
date of the Indenture and securing Indebtedness outstanding on the date of the
Indenture, (ii) Liens Incurred on or after the Issue Date pursuant to clause
(i) of the second paragraph under the covenant "--Limitation on Consolidated
Indebtedness", (iii) Liens in favor of the Company or any Significant
Restricted Subsidiary, (iv) Liens on Property of the Company or a Restricted
Subsidiary acquired, constructed or constituting improvements made after the
Issue Date to secure Indebtedness incurred pursuant to clause (ii) of the
second paragraph under "--Limitation on Consolidated Indebtedness" which is
otherwise permitted under the Indenture, provided that (a) the principal
amount of any Indebtedness secured by any such Lien does not exceed 100% of
such purchase price or cost of construction or improvement of the Property
subject to such Lien, (b) such Lien attaches to such Property prior to, at the
time of, or within 180 days after the engineering, acquisition, installation,
development, improvement, completion of construction or commencement of
operation of such Property and (c) such Lien does not extend to or cover any
Property other than the specific item of Property (or portion thereof)
acquired, engineered, constructed, installed, developed or constituting the
improvements made with the proceeds of such Indebtedness, (v) Liens to secure
Acquired Indebtedness, provided that (a) such Lien attaches to the acquired
asset prior to the time of the acquisition of such asset and (b) such Lien
does not extend to or cover any other Property, (vi) Liens to secure
Indebtedness Incurred to extend, renew, refinance or refund (or successive
extensions, renewals, refinancings or refundings), in whole or in part,
Indebtedness secured by any Lien referred to in the foregoing clauses (i),
(ii), (iv) and (v) so long as such Lien does not extend to any other Property
and the principal amount of Indebtedness so secured is not increased except as
otherwise permitted under clause (iv) of the second paragraph of
"--Limitation on Consolidated Indebtedness," (vii) Liens not otherwise
permitted by the foregoing clauses (i) through (vi) in an aggregate amount not
to exceed 5% of the Company's Consolidated Tangible Assets as of the date on
which any such Lien arises, (viii) Liens granted after the Issue Date pursuant
to the immediately preceding paragraph to secure the Notes and (ix) Permitted
Liens.
Limitation on Sale and Leaseback Transactions
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into, assume, Guarantee or otherwise become
liable with respect to any Sale and Leaseback Transaction (other than a Sale
and Leaseback Transaction between the Company or a Restricted Subsidiary on
the one hand and a Restricted Subsidiary or the Company on the other hand),
unless (i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Sale and Leaseback Transaction at
least equal to the Fair Market Value (as evidenced by a Board Resolution) of
the Property subject to such transaction, (ii) the Attributable Indebtedness
of the Company or such Restricted Subsidiary with respect thereto is included
as Indebtedness and would be permitted under the covenant described under "--
Limitation on Consolidated Indebtedness," (iii) the Company or such Restricted
Subsidiary would be permitted to create a Lien on such Property without
securing the Notes by the covenant described under "--Limitation on Liens" and
(iv) the Net Cash Proceeds from such transaction are applied in accordance
with the covenant described under "--Asset Sale."
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, cause or suffer to exist or become effective, or enter
into, any encumbrance or restriction (other than pursuant to law or
regulation) on the ability of any Restricted Subsidiary (i) to pay dividends
or make any other distributions in respect of its Capital Stock or pay any
Indebtedness or other obligation owed to the Company or any Restricted
Subsidiary, (ii) to make loans or advances to the Company or any Restricted
Subsidiary or (iii) to transfer any of its Property to the Company or any
other Restricted Subsidiary, except: (a) any encumbrance or restriction
existing as of the Issue Date, (b) any encumbrance or restriction pursuant to
an agreement relating to an
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acquisition of Property, so long as the encumbrances or restrictions in any
such agreement relate solely to the Property so acquired, (c) any encumbrance
or restriction relating to any Indebtedness of any Restricted Subsidiary
existing on the date on which such Restricted Subsidiary is acquired by the
Company or another Restricted Subsidiary (other than any such Indebtedness
Incurred by such Restricted Subsidiary in connection with or in anticipation
of such acquisition), (d) any encumbrance or restriction pursuant to an
agreement effecting a permitted refinancing of Indebtedness issued pursuant to
an agreement referred to in the foregoing clauses (a) through (c), so long as
the encumbrances and restrictions contained in any such refinancing agreement
are not materially more restrictive than the encumbrances and restrictions
contained in such agreements, (e) in the case of clause (iii) above only,
customary provisions (x) that restrict the subletting, assignment or transfer
of any Property or other asset that is a lease, license, conveyance or
contract or similar Property or other asset, (y) existing by virtue of any
transfer of, agreement to transfer, option or right with respect to, or Lien
on, any Property or other assets of the Company or any Restricted Subsidiary
not otherwise prohibited by the Indenture or (z) arising or agreed to in the
ordinary course of business, not relating to any Indebtedness, and that do
not, individually or in the aggregate, detract from the value of Property or
other assets of the Company or any Restricted Subsidiary in any manner
material to the Company or any Restricted Subsidiary, (f) in the case of
clause (iii) above only, restrictions contained in any security agreement
(including a Capital Lease Obligation) securing Indebtedness of the Company or
a Restricted Subsidiary otherwise permitted under the Indenture, but only to
the extent such restrictions restrict the transfer of the Property subject to
such security agreement, (g) any encumbrance or restriction pursuant to Senior
Indebtedness which is permitted to be outstanding under clause (i) of the
second paragraph of "--Limitation on Consolidated Indebtedness," (h) in the
case of clause (iii) only, any encumbrance or restriction pursuant to an
agreement for Indebtedness that is permitted to be outstanding under clause
(ii) of the second paragraph of "--Limitation on Consolidated Indebtedness,"
and (i) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement which has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Restricted Subsidiary, provided that the consummation of such transaction
would not result in a Default, that such restriction terminates if such
transaction is not consummated and that the consummation or abandonment of
such transaction occurs within one year of the date such agreement was entered
into.
The foregoing limitations shall not prevent the Company or any Restricted
Subsidiary from (i) creating, incurring, assuming or suffering to exist any
Liens otherwise permitted under the "--Limitation on Liens" covenant or (ii)
restricting the sale or other disposition of Property or other assets of the
Company or any of its Restricted Subsidiaries that secure Indebtedness of the
Company or any of its Restricted Subsidiaries otherwise permitted under "--
Limitation on Consolidated Indebtedness."
Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of directors' qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect to such issuance or sale would have been
permitted to be made under the covenant described above under "--Limitation on
Restricted Payments" if made on the date of such issuance or sale; or (iv)
issuances or sales of Common Stock (other than Disqualified Stock) of a
Restricted Subsidiary, provided that the Company or such Restricted Subsidiary
applies the Net Cash Proceeds, if any, of any such sale in accordance with the
covenant described above under "--Asset Sale."
Transactions with Affiliates
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, sell, lease, transfer, or otherwise dispose of,
any of its Properties or assets to, or purchase any Property or other assets
from, or enter into any contract, agreement, understanding, loan, advance or
Guarantee with, or for the benefit of, any Affiliate (each of the foregoing,
an "Affiliate Transaction"), unless (i) such Affiliate Transaction or series
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of related Affiliate Transactions is on terms that are no less favorable to
the Company or such Restricted Subsidiary than those that could have been
obtained in a comparable arm's-length transaction by the Company or such
Restricted Subsidiary with a Person that is not an Affiliate (or, in the event
that there are no comparable transactions involving Persons who are not
Affiliates of the Company or the relevant Restricted Subsidiary to apply for
comparative purposes, is otherwise on terms that, taken as a whole, the
Company has determined to be fair to the Company or the relevant Restricted
Subsidiary) and (ii) the Company delivers to the Trustee (a) with respect to
any Affiliate Transaction involving aggregate payments or, in the case of
assets or Property, a Fair Market Value in excess of $1,000,000, a certificate
of the chief executive, operating or financial officer of the Company
evidencing such officer's determination that such Affiliate Transaction or
series of related Affiliate Transactions complies with clause (i) above and is
in the best interests of the Company or such Restricted Subsidiary, (b) with
respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate payments or, in the case of assets or
Property, a Fair Market Value in excess of $5,000,000, a Board Resolution
certifying that such Affiliate Transaction or series of related Affiliate
Transactions complies with clause (i) above and that such Affiliate
Transaction or series of related Affiliate Transactions has been approved by a
majority of the disinterested members of the Board of Directors who have
determined that such Affiliate Transaction or series of related Affiliate
Transactions is in the best interest of the Company or such Restricted
Subsidiary and (c) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate payments or, in the case of
any assets or Property, a Fair Market Value in excess of $10,000,000, a
written opinion stating that the transaction complies with clause (i) above
from a financial point of view from an investment banking firm of national
standing in the United States which, in the good faith judgment of the Board
of Directors, is independent with respect to the Company and its Subsidiaries
and qualified to perform such task; provided that the following shall not be
deemed Affiliate Transactions: (1) any employment, noncompetition,
confidentiality or similar agreement entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business, (2) any agreement
or arrangement with respect to the compensation of a director or officer of
the Company or any Restricted Subsidiary approved by a majority of the
disinterested members of the Board of Directors, (3) transactions permitted by
the covenant described under "--Limitation on Restricted Payments," (4)
transactions pursuant to any agreement or arrangement existing on the Issue
Date, including any renewal, replacement, extension, amendment or other
modification thereof, provided such modifications are not materially more
adverse to the Company or the Restricted Subsidiaries, (5) issuances of
Capital Stock of the Company to any Affiliates and (6) the sale of
telecommunications services to any Affiliate on an arm's length basis which is
undertaken in the ordinary course of the Company's business.
Restricted and Unrestricted Subsidiaries
(i) The Company may designate a Subsidiary (including a newly formed or
newly acquired Subsidiary) of the Company or any of its Restricted
Subsidiaries as an Unrestricted Subsidiary if such Subsidiary does not have
any obligations which, if in default, would result in a cross default on
Indebtedness of the Company or a Restricted Subsidiary (other than
Indebtedness to the Company or a Significant Restricted Subsidiary), and
(a) such Subsidiary has total assets of $1,000 or less, (b) such Subsidiary
has assets of more than $1,000 and an Investment in such Subsidiary in an
amount equal to the Fair Market Value of such Subsidiary would then be
permitted under the first paragraph of "--Limitation on Restricted
Payments" or (c) such designation is effective immediately upon such Person
becoming a Subsidiary. Unless so designated as an Unrestricted Subsidiary,
any Person that becomes a Subsidiary of the Company shall be classified as
a Restricted Subsidiary thereof.
(ii) The Company may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that (a) no Default or Event of Default
shall have occurred and be continuing at the time of or after giving effect
to such designation and (b) all Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately after such designation would, if
Incurred at such time, have been permitted to be Incurred (and shall be
deemed to have been Incurred) for all purposes of the Indenture.
(iii) The designation of a Subsidiary as an Unrestricted Subsidiary or
the designation of an Unrestricted Subsidiary as a Restricted Subsidiary in
compliance with clause (ii) shall be made by the Board of Directors
pursuant to a Board Resolution and shall be effective as of the date
specified in such Board Resolution.
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Reports
The Company has agreed that, for so long as any Notes remain outstanding, it
will furnish to the Holders, to securities analysts and to prospective
investors, upon their request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act. The Company will file
with the Trustee within 15 days after it files them with the Commission copies
of the annual reports on Form 10-K and the information, documents, and other
reports that the Company is required to file with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act as well as quarterly reports ("SEC
Reports"). In the event the Company shall cease to be required to file SEC
Reports pursuant to either of such sections of the Exchange Act, the Company
will nevertheless continue to file such reports with the Commission (unless
the Commission will not accept such a filing) and the Trustee. The Company
will furnish copies of the SEC Reports to the Holders of Notes at the time the
Company is required to file the same with the Trustee.
AMALGAMATION, CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
The Company will not, in any transaction or series of related transactions,
amalgamate or consolidate with, or merge with or into, any other Person (other
than a merger of a Restricted Subsidiary into the Company in which the Company
is the surviving corporation), or sell, convey, assign, transfer, lease or
otherwise dispose of all or substantially all of the Property and assets of
the Company and its Restricted Subsidiaries taken as a whole to any other
Person, unless:
(i) either (a) the Company shall be the surviving corporation or (b) the
corporation (if other than the Company) formed by such amalgamation or
consolidation or into which the Company is merged, or the Person which
acquires, by sale, assignment, conveyance, transfer, lease or disposition,
all or substantially all of the Property and assets of the Company and the
Restricted Subsidiaries taken as a whole (such corporation or Person, the
"Surviving Entity"), shall be a corporation organized and validly existing
under the laws of the United States of America, any political subdivision
thereof, any state thereof or the District of Columbia and shall expressly
assume, by a supplemental indenture, the due and punctual payment of the
principal of (and premium, if any) and interest on all the Notes and the
performance of the Company's covenants and obligations under the Indenture;
(ii) immediately after giving effect to such transaction or series of
related transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred in connection with or in respect of such
transaction or series of related transactions), no Default shall have
occurred and be continuing;
(iii) immediately after giving effect to such transaction or series of
related transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred in connection with or in respect of, and any
Indebtedness to be repaid in connection with or as a result of, such
transaction or series of related transactions), the Company (or the
Surviving Entity, if the Company is not the surviving corporation) (A)
shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such transaction
and (B) would be permitted to Incur at least $1 of additional Indebtedness
pursuant to the first paragraph of the covenant "--Limitation on
Consolidated Indebtedness"; provided that this clause (iii)(B) shall not
apply to (x) a consolidation, merger or sale of all (but not less than all)
of the assets of the Company if all Liens and Indebtedness of the Company
or the Surviving Entity, as the case may be, and its Restricted
Subsidiaries outstanding immediately after such transaction would, if
Incurred at such time, have been permitted to be Incurred (and all such
Liens and Indebtedness, other than Liens and Indebtedness of the Company
and its Restricted Subsidiaries outstanding immediately prior to the
transaction, shall be deemed to have been Incurred for all purposes of the
Indenture) or (y) a consolidation, merger or sale of all or substantially
all of the assets of the Company if immediately after giving effect to such
transaction or series of related transactions on a pro forma basis
(including, without limitation, any Indebtedness incurred in connection
with or in respect of, and any Indebtedness to be repaid in connection with
or as a result of, such transaction or series of related transactions) the
Company's (or the Surviving Entity's) leverage ratio computed pursuant to
the first paragraph under "--Limitation on Consolidated Indebtedness" would
be equal to or less than the leverage ratio of the Company immediately
prior to such transaction.
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(iv) if, as a result of any such transaction, Property of the Company
would become subject to a Lien prohibited by the provisions of the
Indenture described under "--Limitation on Liens" above, the Company or the
Surviving Entity to the Company shall have secured the Notes as required
thereby; and
(v) the Company delivers to the Trustee an Officers' Certificate
(attaching the arithmetic computations to demonstrate compliance with
clause (iii)) and Opinion of Counsel, in each case stating that such
consolidation, merger or transfer and such supplemental indenture complies
with this provision and that all conditions precedent provided for herein
relating to such transaction have been complied with.
EVENTS OF DEFAULT
Each of the following is an "Event of Default" under the Indenture:
(i) default in the payment of interest (including Additional Interest, if
any) on any Note when the same becomes due and payable, and the continuance
of such default for a period of 30 days;
(ii) default in the payment of the principal of (or premium, if any, on)
any Note at its maturity, upon optional redemption, including a Change in
Control Redemption Offer, required repurchase (including pursuant to a
Change of Control Offer or an Asset Sale Offer) or otherwise or the failure
to make an offer to purchase any Note as required under the Indenture;
(iii) default in the performance, or breach, of any covenant or warranty
of the Company in the Indenture (other than a covenant or warranty
addressed in clauses (i) or (ii) above) and continuance of such Default or
breach for a period of 60 days after written notice thereof has been given
to the Company by the Trustee or to the Company and the Trustee by Holders
of at least 25% of the aggregate stated principal amount at maturity of the
outstanding Notes;
(iv) (a) any principal payment in excess of $1,000,000 with respect to
Indebtedness of the Company or any Restricted Subsidiary is not paid when
due within the applicable grace period, if any, or (b) Indebtedness of the
Company or any Restricted Subsidiary is accelerated by the Holders thereof
and the principal amount of such accelerated Indebtedness exceeds
$5,000,000;
(v) the entry by a court of competent jurisdiction of one or more final
judgments against the Company or any Restricted Subsidiary in an uninsured
or unindemnified aggregate amount in excess of $10,000,000 which is not
discharged, waived, appealed, stayed, bonded or satisfied for a period of
60 consecutive days; or
(vi) certain events of bankruptcy, insolvency or reorganization affecting
the Company or any Restricted Subsidiary shall occur.
If any Event of Default (other than an Event of Default specified in clause
(vi) above) occurs and is continuing, then and in every such case either the
Trustee or the Holders of not less than 25% of the aggregate stated principal
amount at maturity of the outstanding Notes may declare the Accreted Value of,
and any accrued and unpaid Current Interest on, all Notes then outstanding to
be immediately due and payable by a notice in writing to the Company (and to
the Trustee if given by Holders), and upon any such declaration, such Accreted
Value and any accrued and unpaid Current Interest thereon will become and be
immediately due and payable. If any Event of Default specified in clause (vi)
above occurs, the Accreted Value of, and any accrued and unpaid Current
Interest on, the Notes then outstanding shall become immediately due and
payable without any declaration or other act on the part of either the Trustee
or any Holder. In the event of a declaration of acceleration because an Event
of Default set forth in clause (iv) above has occurred and is continuing, such
declaration of acceleration shall be automatically rescinded and annulled if
the event of default triggering such Event of Default pursuant to clause (iv)
shall be remedied, or cured or waived by the holders of the relevant
Indebtedness, within 60 days after such Event of Default.
The Company will be required to deliver to the Trustee on or before a date
not more than 90 days after the end of each fiscal year a statement regarding
compliance with the Indenture. In addition, the Company is required within 30
days after becoming aware of any Default or Event of Default, to deliver to
the Trustee a statement
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describing such Default or Event of Default, its status and what action the
Company is taking or proposes to take with respect thereto. The Trustee may
withhold from Holders notice of any continuing Default or Event of Default
(other than relating to the payment of principal or interest) if the Trustee
determines that withholding such notice is in the Holders' interest.
AMENDMENT, SUPPLEMENT AND WAIVER
The Company and the Trustee may, at any time and from time to time, without
notice to or consent of any Holder of Notes, enter into one or more indentures
supplemental to the Indenture (i) to evidence the succession of another Person
to the Company in accordance with the terms of the Indenture and the
assumption by such successor of the covenants of the Company in the Indenture
and the Notes, (ii) to add to the covenants of the Company, for the benefit of
the Holders, or to surrender any right or power conferred upon the Company by
the Indenture, (iii) to add any additional Events of Default, (iv) to evidence
and provide for the acceptance of appointment under the Indenture of a
successor Trustee, (v) to secure the Notes, (vi) to cure any ambiguity in the
Indenture, to correct or supplement any provision in the Indenture which may
be inconsistent with any other provision therein or to add any other
provisions with respect to matters or questions arising under the Indenture;
provided such actions shall not adversely affect the interests of the Holders
in any material respect or (vii) to comply with the requirements of the
Commission or any other regulatory authority in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act.
With the consent of the Holders of not less than a majority in stated
principal amount at maturity of the outstanding Notes, the Company and the
Trustee may enter into one or more indentures supplemental to the Indenture
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Indenture or modifying in any manner
the rights of the Holders; provided that no such supplemental indenture shall,
without the consent of the Holder of each outstanding Note: (i) change the
Stated Maturity of the principal of, or the due date of any installment of
interest on, any Note, or alter the redemption provisions thereof, or reduce
the principal amount thereof (or premium, if any), or the interest thereon
that would be due and payable upon Maturity thereof, or change the place of
payment where, or the coin or currency in which, any Note or any premium or
interest thereon is payable, (ii) reduce the percentage in stated principal
amount at maturity of the outstanding Notes, (iii) subordinate in right of
payment, or otherwise subordinate, the Notes to any other Indebtedness, (iv)
impair the right to institute suit for the enforcement of any payment with
respect to the Notes, (v) make any change that would result in the Company
being required to make any deduction or withholding from any payment made
under or with respect to the Notes or modify any provision of this paragraph
(except to increase any percentage set forth herein).
The Holders of not less than a majority in stated principal amount at
maturity of the outstanding Notes may, on behalf of the Holders of all the
Notes, waive any past Default under the Indenture and its consequences, except
a Default (i) in the payment of any amount on any Note, or (ii) in respect of
a covenant or provision hereof which under the proviso to the prior paragraph
cannot be modified or amended without the consent of the Holder of each
outstanding Note affected.
Satisfaction and Discharge of the Indenture, Defeasance
The Company may terminate its obligations under the Indenture when (i)
either (a) all outstanding Notes have been delivered to the Trustee for
cancellation or (b) all such Notes not theretofore delivered to the Trustee
for cancellation have become due and payable, will become due and payable
within one year or are to be called for redemption within one year under
irrevocable arrangements satisfactory to the Trustee for the giving of notice
of redemption by the Trustee in the name and at the expense of the Company,
and the Company has irrevocably deposited or caused to be deposited with the
Trustee funds in an amount sufficient to pay and discharge the entire
indebtedness on the Notes not theretofore delivered to the Trustee for
cancellation, for principal of (or premium, if any, on) and interest to the
date of deposit or maturity or date of redemption, (ii) the Company has paid
or caused to be paid all sums payable by the Company under the Indenture and
(iii) the Company has delivered an Officers' Certificate and an Opinion of
Counsel relating to compliance with the conditions set forth in the Indenture.
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The Company, at its election, shall (i) be deemed to have paid and
discharged its debt on the Notes and the Indenture shall cease to be of
further effect as to all outstanding Notes (except as to (a) rights of
registration of transfer, substitution and exchange of Notes and the Company's
right of optional redemption, (b) rights of Holders to receive payments of
principal of, premium, if any, and interest on the Notes (but not the Change
of Control Purchase Price or the Offer Purchase Price), (c) the rights,
obligations and immunities of the Trustee under the Indenture and (d) certain
other specified provisions in the Indenture) and (ii) cease to be under any
obligation to comply with certain restrictive covenants including those
described under "--Certain Covenants," after the irrevocable deposit by the
Company with the Trustee, in trust for the benefit of the Holders, at any time
prior to the Maturity of the Notes, of (a) United States dollars in an amount,
(b) U.S. Government Obligations which through the payment of interest and
principal will provide, not later than one day before the due date of payment
in respect of the Notes, money in an amount, or (c) a combination thereof,
sufficient to pay and discharge the principal of, and interest on, the Notes
then outstanding on the dates on which any such payments are due in accordance
with the terms of the Indenture and of the Notes. Such defeasance or covenant
defeasance shall be deemed to occur only if certain conditions are satisfied,
including, among other things, delivery by the Company to the Trustee of an
opinion of independent counsel, reasonably acceptable to the Trustee to the
effect that (i) such deposit, defeasance and discharge will not be deemed, or
result in, a taxable event for U.S. federal income tax purposes with respect
to the Holders (and, in the case of defeasance only, such opinion of counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable U.S. federal income tax law), and (ii) the Company's deposit will
not result in the trust created thereby or the Trustee being subject to
regulation under the Investment Company Act of 1940, as amended.
THE TRUSTEE
Harris Trust and Savings Bank will be the Trustee under the Indenture and
its current address is 111 West Monroe Street, Chicago, Illinois 60690-0755.
The Holders of not less than a majority in stated principal amount at
maturity of the outstanding Notes will have the right to direct the time,
method and place of conducting any proceeding for exercising any remedy
available to the Trustee, subject to certain exceptions. Except during the
continuance of an Event of Default, the Trustee will perform only such duties
as are specifically set forth in the Indenture. The Indenture provides that in
case an Event of Default shall occur (which shall not be cured or waived), the
Trustee will be required, in the exercise of its rights and powers under the
Indenture, to use the degree of care of a prudent person in the conduct of
such person's own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request of any of the Holders, unless such Holders shall have
offered to the Trustee indemnity satisfactory to it against any loss,
liability or expense.
No Personal Liability of Controlling Persons, Directors, Officers, Employees
and Stockholders
No controlling Person, director, officer, employee, incorporator or
stockholder of the Company, as such, shall have any liability for any
covenant, agreement or other obligations of the Company under the Notes or the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation, solely by reason of its past, present or future
status as a controlling Person, director, officer, employee, incorporator or
stockholder of the Company. By accepting a Note each Holder waives and
releases all such liability (but only such liability). The waiver and release
are part of the consideration for issuance of the Notes. Nonetheless, such
waiver may not be effective to waive liabilities under the Federal securities
laws and it has been the view of the Commission that such a waiver is against
public policy.
GOVERNING LAW
The Indenture and the Notes will be governed by and construed in accordance
with the laws of the State of New York without giving effect to its conflicts
of laws provisions.
TRANSFER AND EXCHANGE
The Senior Notes will be subject to certain restrictions on transfer. A
Holder may transfer or exchange Notes in accordance with the Indenture. The
Company, the Registrar and the Trustee may require a Holder, among
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other things, to furnish appropriate endorsements and transfer documents and
the Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture.
EXCHANGE OFFER; REGISTRATION RIGHTS
The Company entered into a Registration Agreement with the Initial
Purchasers for the benefit of the holders of Senior Notes, pursuant to which
the Company has filed a Registration Statement (of which this Prospectus
constitutes a part) with the Commission (the "Exchange Offer") registering the
exchange of the Senior Notes for the Exchange Notes having terms substantially
identical in all material respects to the Senior Notes (except that the
Exchange Notes will not contain terms with respect to transfer restrictions
and will not be entitled to certain benefits under the Registration
Agreement). The Company will offer the Exchange Notes in exchange for
surrender of the Senior Notes. Pursuant to the Registration Agreement, the
Company will keep the Exchange Offer open for not less than 30 days (or longer
if required by applicable law) after the date notice of the Exchange Offer is
mailed to the holders of the Senior Notes. For each Senior Note surrendered to
the Company pursuant to the Exchange Offer, the holder of such Senior Note
will receive an Exchange Note having a stated principal amount at maturity
equal to that of the surrendered Senior Note. Under existing Commission
interpretations, the Exchange Notes would be freely transferable by holders
other than affiliates of the Company after the Exchange Offer without further
registration under the Securities Act if the holder of the Exchange Notes
represents that it is acquiring the Exchange Notes in the ordinary course of
its business, that it has no arrangement or understanding with any person to
participate in the distribution of the Exchange Notes and that it is not an
affiliate of the Company, as such terms are interpreted by the Commission;
provided that broker-dealers ("Participating Broker-Dealers") receiving
Exchange Notes in the Exchange Offer will have a prospectus delivery
requirement with respect to resales of such Exchange Notes. The Commission has
taken the position that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to Exchange Notes (other than a
resale of an unsold allotment from the original sale of the Senior Notes) with
the prospectus contained in the Registration Statement. Under the Registration
Agreement, the Company is required to allow Participating Broker-Dealers and
other persons, if any, with similar prospectus delivery requirements to use
this Prospectus in connection with the resale of such Exchange Notes. The
Registration Statement will be kept effective for a period of 90 days after
the Exchange Offer has been consummated in order to permit resales of Exchange
Notes acquired by broker-dealers in after-market transactions.
A holder of Senior Notes (other than certain specified holders) who wishes
to exchange such Senior Notes for Exchange Notes in the Exchange Offer will be
required to represent that any Exchange Notes to be received by it will be
acquired in the ordinary course of its business and that at the time of the
commencement of the Exchange Offer it has no arrangement or understanding with
any person to participate in the distribution (within the meaning of the
Securities Act) of the Exchange Notes and that it is not an "affiliate" of the
Company, as defined in Rule 405 of the Securities Act, or if it is an
affiliate, that it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
The Company has filed the Registration Statement and will commence the
Exchange Offer pursuant to the Registration Agreement. In the event that (i)
applicable interpretations of the staff of the Commission do not permit the
Company to effect the Exchange Offer, (ii) for any other reason the
Registration Statement is not declared effective within 180 days after the
date of original issuance of the Senior Notes, (iii) the Exchange Offer is not
consummated (the term "consummated" as used in this context shall mean that
the Company has offered the Exchange Notes in exchange for surrender of the
Senior Notes, kept such offer open for the period of time required above and
fulfilled all of its other obligations under such offer) within 210 days after
the date of original issuance of the Senior Notes, (iv) the Initial Purchasers
so request with respect to Senior Notes held by such Initial Purchasers and
thus not eligible to be exchanged for Exchange Notes in the Exchange Offer, or
(v) any holder of the Senior Notes (other than an Initial Purchaser or any
affiliate of the Company) does not receive freely tradeable Exchange Notes in
the Exchange Offer (it being understood that, for purposes of this clause (v),
(a) the requirement that a holder deliver a prospectus containing the
information required by Items 507 and/or 508 of Regulation S-K under the
Securities Act in connection with sales of Exchange Notes acquired in exchange
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for the Senior Notes shall result in such Exchange Notes being not "freely
tradeable" but (b) the requirement that a Participating Broker-Dealer deliver
a prospectus in connection with sales of Exchange Notes acquired in the
Exchange Offer in exchange for Senior Notes acquired as a result of market
making activities or other trading activities shall not result in the Exchange
Notes being not "freely tradeable"), the Company will, at its cost, (x) as
promptly as practicable, file a Shelf Registration Statement covering resales
of the Senior Notes or the Exchange Notes, as the case may be, (y) use its
reasonable best efforts to cause the Shelf Registration Statement to be
declared effective under the Securities Act and (z) keep the Shelf
Registration Statement effective until two years (or any shorter period under
Rule 144(k) under the Securities Act) after its effective date (or until one
year after such effective date if such Shelf Registration Statement is filed
at the request of an Initial Purchaser) or such shorter period that will
terminate when all the Senior Notes or Exchange Notes, as applicable, covered
by the Shelf Registration Statement have been sold. The Company will, in the
event a Shelf Registration Statement is filed, among other things, provide to
each holder for whom such Shelf Registration Statement was filed copies of the
prospectus which is a part of the Shelf Registration Statement, notify each
such holder when the Shelf Registration Statement has become effective and
take certain other actions as are required to permit unrestricted resales of
the Senior Notes or the Exchange Notes, as the case may be. A holder selling
such Senior Notes or Exchange Notes pursuant to the Shelf Registration
Statement generally would be required to be named as a selling security holder
in the related prospectus and to deliver a prospectus to purchasers, will be
subject to certain of the civil liability provisions under the Securities Act
in connection with such sales and will be bound by the provisions of the
Registration Agreement which are applicable to such holder (including certain
indemnification obligations).
In the event that (i) either the Exchange Offer has not been consummated or
the Shelf Registration Statement has not been declared effective on or prior
to the 210th day following the date of original issuance of the Senior Notes;
or (ii) after the Shelf Registration Statement has been declared effective,
such Registration Statement thereafter ceases to be effective or usable
(subject to certain exceptions) in connection with resales of Senior Notes or
Exchange Notes in accordance with and during the periods specified in the
Registration Agreement without being succeeded promptly by an additional
registration statement filed and declared effective (each such event referred
to in clauses (i) and (ii) a "Registration Default"), interest ("Additional
Interest") will accrue on the Senior Notes and the Exchange Notes (in addition
to the stated interest on the Senior Notes and the Exchange Notes) from and
including the date on which any such Registration Default shall occur to but
excluding the date on which all Registration Defaults have been cured.
Additional Interest will be payable in cash semiannually in arrears on August
15 and February 15 of each year, beginning on the August 15 or February 15
immediately following a Registration Default, at a rate per annum equal to
0.50% of the Accreted Value of the Notes (determined daily) at the end of each
subsequent 90-day period. In no event shall such rate per annum exceed 1.50%
of the Accreted Value of the Notes (determined daily) in the aggregate
regardless of the number of Registration Defaults.
The summary herein of certain provisions of the Registration Agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Registration Agreement, a copy of
which is available upon request to the Company.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any capitalized terms used herein for which no
definition is provided.
"Accreted Value" means, as of any date (the "Specified Date"), with respect
to each $1,000 stated principal amount at maturity of Notes the sum of (i) the
Issue Price of each Note and (ii) the amount of accrued but unpaid Deferred
Interest on such Note to the Specified Date such that:
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(a) If the Specified Date is one of the following dates (each a
"Semiannual Accrual Date") the Accreted Value will be the amount set forth
opposite such date below:
<TABLE>
<CAPTION>
SEMIANNUAL ACCRUAL DATE ACCRETED VALUE
----------------------- --------------
<S> <C>
February 18, 1998.......................................... $ 555.66
August 15, 1998............................................ $ 588.77
February 15, 1999.......................................... $ 624.46
August 15, 1999............................................ $ 662.32
February 15, 2000.......................................... $ 702.47
August 15, 2000............................................ $ 745.06
February 15, 2001.......................................... $ 790.23
August 15, 2001............................................ $ 838.14
February 15, 2002.......................................... $ 888.95
August 15, 2002............................................ $ 942.84
February 15, 2003 and thereafter........................... $1,000.00
</TABLE>
(b) If the Specified Date occurs before February 15, 2003, and between
two Semiannual Accrual Dates, the Accreted Value shall be the sum of (x)
the Accreted Value for the Semiannual Accrual Date immediately preceding
the Specified Date and (y) an amount equal to the Deferred Interest accrued
from such Semiannual Accrual Date to the Specified Date.
"Acquired Indebtedness" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person; provided that
such Indebtedness was not incurred in connection with, or in anticipation or
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, but excluding Indebtedness which is
extinguished, retired or repaid in connection with such other Person merging
with or into or becoming a Subsidiary of such specified Person.
"Affiliate" means, as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by,
such Person; provided that each Unrestricted Subsidiary shall be deemed to be
an Affiliate of the Company and of each other Subsidiary of the Company;
provided further that neither the Company nor any of its Restricted
Subsidiaries shall be deemed to be Affiliates of each other. For purposes of
this definition, "control" (including, with correlative meanings, the terms
"controlling," "under common control with" and "controlled by"), as used with
respect to any Person, shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of
such Person, whether through the ownership of Voting Stock, by agreement or
otherwise.
"Asset Sale" means any transfer, conveyance, sale, lease or other
disposition by the Company or any of its Restricted Subsidiaries (including an
amalgamation, consolidation or merger or other sale of any such Restricted
Subsidiary with, into or to any Person (other than the Company or any other
Restricted Subsidiary) in a transaction in which such Restricted Subsidiary
ceases to be a Restricted Subsidiary of the Company, but excluding a
disposition by a Restricted Subsidiary to the Company or a Significant
Restricted Subsidiary or by the Company to a Significant Restricted
Subsidiary) of (i) shares of Capital Stock or other ownership interests of a
Subsidiary of the Company (other than pursuant to an amalgamation, merger or
consolidation of a Restricted Subsidiary into the Company or any Restricted
Subsidiary), (ii) substantially all of the assets of the Company or any
Restricted Subsidiary representing a division or line of business (other than
as part of a Permitted Investment) or (iii) other assets or rights of the
Company or any of its Restricted Subsidiaries outside of the ordinary course
of business and, in each case, that is not governed by the provisions of the
Indenture applicable to amalgamations, consolidations, mergers, and transfers
of all or substantially all of the assets of the Company; provided that "Asset
Sale" shall not include (a) sales or other dispositions of inventory,
receivables and other current assets in the ordinary course of business or
sales or other dispositions of equipment that has become worn-out, obsolete or
damaged or otherwise unsuitable for use in connection with the business of the
Company or a Restricted Subsidiary, (b) contemporaneous exchanges by the
Company or any Restricted Subsidiary of
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Telecommunications Assets for other Telecommunications Assets in the ordinary
course of business; provided that the applicable Telecommunications Assets
received by the Company or such Restricted Subsidiary have at least
substantially equal Fair Market Value to the Company or such Restricted
Subsidiary (as evidenced by a Board Resolution), or (c) the sale or other
disposition of any assets (x) with a Fair Market Value (as certified in an
Officers' Certificate) not in excess of $1,000,000 or (y) that constitute
Restricted Payments which are permitted under the covenant "--Limitation on
Restricted Payments" above.
"Attributable Indebtedness" means, with respect to any Sale and Leaseback
Transaction of any Person, as at the time of determination, the greater of (i)
the capitalized amount in respect of such transaction that would appear on the
balance sheet of such Person in accordance with GAAP and (ii) the present
value (discounted at a rate consistent with accounting guidelines, as
determined in good faith by the responsible accounting officer of such Person)
of the payments during the remaining term of the lease (including any period
for which such lease has been extended or may, at the option of the lessor, be
extended) or until the earliest date on which the lessee may terminate such
lease without penalty or upon payment of a penalty (in which case the payments
during the remaining term shall include such penalty).
"Average Life" means, as of any date, with respect to any debt security or
Disqualified Stock, the quotient obtained by dividing (i) the sum of the
products of (a) the number of years from such date to the dates of each
scheduled principal payment or redemption payment (including any sinking fund
or mandatory redemption payment requirements) of such debt security or
Disqualified Stock multiplied in each case by (b) the amount of such principal
or redemption payment, by (ii) the sum of all such principal or redemption
payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of the Board of Directors.
"Board Resolution" means a copy of a resolution, certified by the Secretary
of the Company to have been a duly adopted resolution of the Board of
Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee within 60 days of adoption
thereof.
"Capital Lease Obligation" of any Person means the obligation to pay rent or
other payment amounts under a lease of (or other Indebtedness arrangement
conveying the right to use) real or personal Property which is required to be
classified and accounted for as a capital lease or a liability on the face of
a balance sheet of such Person prepared in accordance with GAAP, and the
maturity thereof shall be the date of the last payment of rent or any amount
due under such lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty. The principal amount of
such obligation shall be the capitalized amount that would appear on the face
of a balance sheet of such Person in accordance with GAAP.
"Capital Stock" in any Person means any and all shares, interests,
participation or other equivalents of an equity interest (however designated)
in such Person and any rights (other than Indebtedness convertible into an
equity interest), warrants or options to subscribe for or acquire an equity
interest in such Person.
"Change of Control" shall be deemed to occur if (i) the sale, conveyance,
transfer or lease of all or substantially all of the assets of the Company to
any "Person" or "group" (as such term is used in Sections 13(d)(3) and
14(d)(2) of the Exchange Act, including any group acting for the purpose of
acquiring, holding or disposing of securities within the meaning of Rule 13d-
5(b)(i) under the Exchange Act), other than any Permitted Holder (as defined
below) or any Restricted Subsidiary, shall have occurred, (ii) any "Person" or
"group" (as the term is used in Sections 13(d)(3) and 14(d)(2) of the Exchange
Act, including any group acting for the purpose of acquiring, holding or
disposing of securities within the meaning of Rule 13d-5(b)(i) under the
Exchange Act), other than any Permitted Holder, becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act) of more than 50% of the
total voting power of all classes of the Voting Stock of the Company
(including any warrants, options or rights to acquire such Voting Stock),
calculated on a fully diluted basis, (iii) at any time after a Public Market
shall exist, during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors (together with
(a) any directors whose
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election or appointment by the Board of Directors or whose nomination for
election by the stockholders of the Company was approved by a vote of a
majority of the directors then still in office who were either directors at
the beginning of such period or whose election or nomination for election was
previously so approved and (b) any directors elected pursuant to the terms of
any shareholders' agreement among the Company's shareholders) cease for any
reason to constitute a majority of the Board of Directors then in office or
(iv) the merger, amalgamation or consolidation of the Company with or into
another Person or the merger of another Person with or into the Company shall
have occurred, and the securities of the Company that are outstanding
immediately prior to such transaction and which represent 100% of the
aggregate voting power of the Voting Stock of the Company are changed into or
exchanged for cash, securities or property, unless pursuant to such
transaction such securities are changed into or exchanged for, in addition to
any other consideration, securities of the surviving corporation that
represent immediately after giving effect to such transaction, at least a
majority of the aggregate voting power of the Voting Stock of the surviving
corporation.
"Common Stock" means, with respect to the Company, the Class A Common Stock,
Class B Common Stock, Class C Common Stock or any similar common stock of the
Company.
"Consolidated Cash Flow Available for Fixed Charges" for any period means
the Consolidated Net Income of the Company and its Restricted Subsidiaries for
such period increased, to the extent deducted in arriving at Consolidated Net
Income, by the sum of (i) Consolidated Interest Expense of the Company and its
Restricted Subsidiaries for such period, (ii) Consolidated Income Tax Expense
of the Company and its Restricted Subsidiaries for such period, (iii) the
consolidated depreciation and amortization expense of the Company and its
Restricted Subsidiaries for such period, (iv) any non-cash expense related to
the issuance to employees of the Company or any Restricted Subsidiary of
options to purchase Capital Stock of the Company or such Restricted
Subsidiary, (v) any charge related to any premium or penalty paid in
connection with redeeming or retiring any Indebtedness prior to its stated
maturity and (vi) any non-cash expense related to a purchase accounting
adjustment not requiring an accrual or reserve and separately disclosed in the
Company's consolidated statement of operations and deficit, and decreased by
the amount of any non-cash item that increases such Consolidated Net Income,
all as determined on a consolidated basis in accordance with GAAP; provided
that (a) there shall be excluded therefrom the Consolidated Cash Flow
Available for Fixed Charges (if positive) of any Restricted Subsidiary
(calculated separately for such Restricted Subsidiary in the same manner as
provided above for the Company) that is subject to a restriction which
prevents the payment of dividends or the making of distributions to the
Company or another Restricted Subsidiary to the extent of such restriction and
(b) (1) if, during or after such period, the Company or any of its Restricted
Subsidiaries shall have made any disposition of any Person or business, then
Consolidated Cash Flow Available for Fixed Charges of the Company and its
Restricted Subsidiaries shall be computed so as to give pro forma effect to
such disposition and (2) if, during or after such period, the Company or any
of its Restricted Subsidiaries completes an acquisition of any Person or
business which immediately after such acquisition is a Subsidiary of such
Person or whose assets are held directly by the Company or a Restricted
Subsidiary, then Consolidated Cash Flow Available for Fixed Charges shall be
computed so as to give pro forma effect to the acquisition of such Person or
business.
"Consolidated Income Tax Expense" for any period means the aggregate amount
of the provisions for income taxes of the Company and its Restricted
Subsidiaries for such period calculated on a consolidated basis in accordance
with GAAP.
"Consolidated Interest Expense" means for any period the interest expense
included in a consolidated income statement (excluding interest income) of the
Company and its Restricted Subsidiaries for such period in accordance with
GAAP, including without limitation or duplication (or, to the extent not so
included, with the addition of), (i) the amortization of Indebtedness discount
(including original issue discount), (ii) any payments or fees with respect to
letters of credit, bankers' acceptances or similar facilities, (iii) fees with
respect to interest rate swap or similar agreements or foreign currency hedge,
exchange or similar agreements, (iv) Preferred Stock dividends of the
Company's Restricted Subsidiaries (other than dividends paid in shares of
Preferred Stock that is not Disqualified Stock) declared and paid or payable,
(v) accrued Disqualified Stock dividends of the Company
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and its Restricted Subsidiaries, whether or not declared or paid, (vi)
interest on Indebtedness guaranteed by the Company and its Restricted
Subsidiaries, (vii) the portion of any Capital Lease Obligation accruing
during such period that is allocable to interest expense in accordance with
GAAP, (viii) capitalized interest and (ix) commitment and other fees with
respect to senior credit facilities.
"Consolidated Net Income" of the Company means, for any period, the
aggregate net income (or net loss) of the Company and its Restricted
Subsidiaries for such period on a consolidated basis determined in accordance
with GAAP; provided that there shall be excluded therefrom, without
duplication (i) all items classified as extraordinary or non-recurring, (ii)
any net income (or net loss) of any Person other than the Company and its
Restricted Subsidiaries, except to the extent of the amount of dividends or
other distributions actually paid to the Company or its Restricted
Subsidiaries by such other Person during such period, (iii) the net income (or
net loss) of any Person acquired by the Company or any of its Restricted
Subsidiaries in a pooling-of-interests transaction for any period prior to the
date of the related acquisition, (iv) any gain or loss, net of taxes, realized
on the termination of any employee pension benefit plan, (v) net gains (or net
losses) in respect of Asset Sales by the Company or its Restricted
Subsidiaries, (vi) the net income (or net loss) of any Restricted Subsidiary
to the extent that the payment of dividends or other distributions to the
Company is restricted by the terms of its constituting documents or any
agreement, instrument, contract, judgment, order, decree, statute, rule,
governmental regulation or otherwise, except for any dividends or
distributions actually paid by such Restricted Subsidiary to the Company,
(vii) with regard to a non-wholly owned Restricted Subsidiary, any aggregate
net income (or net loss) in excess of the Company's or such Restricted
Subsidiary's pro rata share of such non-wholly owned Restricted Subsidiary's
net income (or net loss), and (viii) the cumulative effect of changes in
accounting principles.
"Consolidated Tangible Assets" of any Person means the total amount of
assets (less applicable reserves and other properly deductible items) which
under GAAP would be included on a consolidated balance sheet of such Person
and its Restricted Subsidiaries after deducting therefrom all goodwill, trade
names, trademarks, patents, unamortized debt discount and expense and other
like intangibles, which in each case under GAAP would be included on such
consolidated balance sheet.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take account of Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of
the Capital Stock of the Company or any of its Restricted Subsidiaries, each
item to be determined in conformity with GAAP.
"Default" means any event, act or condition, the occurrence of which is, or
after notice or the passage of time or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, or is exchangeable for
Indebtedness by the holder thereof at any time, in whole or in part, on or
prior to the Stated Maturity of the Notes.
"Eligible Cash Equivalents" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof
in each case with a term of not more than one year, (ii) investments in time
deposit accounts, term deposit accounts, certificates of deposit, money-market
deposits, bankers acceptances and obligations maturing within one year of the
date of acquisition thereof issued by a bank or trust company which is
organized under the laws of the United States of America or any state thereof
and which bank or trust company has, or the obligation of which bank or trust
company is guaranteed by a bank or trust company which has, capital, surplus
and undivided profits aggregating in excess of $150,000,000 and has
outstanding debt which is rated "A" (or
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such similar equivalent rating) or higher by at least one "nationally
recognized statistical rating organization" (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker
dealer or mutual fund distributor, (iii) repurchase obligations with a term of
not more than 30 days for underlying securities of the types described in
clause (i) above entered into with a bank meeting the qualifications described
in clause (ii) above, (iv) investments in commercial paper, maturing not more
than 180 days after the date of acquisition, issued by a corporation (other
than an Affiliate of the Company) organized and in existence under the laws of
the United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard & Poor's Corporation
and (v) investments in securities with maturities of six months or less from
the date of acquisition issued or fully guaranteed by any state, commonwealth,
territory or province of the United States of America or by any political
subdivision or taxing authority thereof, and rated at least "A" by Standard &
Poor's Corporation or "A-2" by Moody's Investors Service, Inc.
"Fair Market Value" means, with respect to any asset or Property, the sale
value that would be obtained in an arm's-length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy, as determined in good faith by the
Board of Directors.
"GAAP" means generally accepted accounting principles in the United States,
consistently applied, which are in effect on the date of the Indenture.
"Guarantee" means any direct or indirect obligation, contingent or
otherwise, of a Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner (and
"Guaranteed," "Guaranteeing" and "Guarantor" shall have meanings correlative
to the foregoing); provided that the term "Guaranteed" and any meaning
correlative thereto shall not include endorsements for collection or deposit.
"Holder" means (i) in the case of any Certificated Note, the Person in whose
name such Certificated Note is registered in the Note Register and (ii) in the
case of any Global Note, the Depositary.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise),
assume, Guarantee or otherwise become liable in respect of such Indebtedness
or other obligation including by acquisition of Subsidiaries or the recording,
as required pursuant to GAAP or otherwise, of any such Indebtedness or other
obligation on the balance sheet of such Person (and "Incurrence," "Incurred,"
"Incurrable" and "Incurring" shall have meanings correlative to the
foregoing); provided that a change in GAAP that results in an obligation of
such Person that exists at such time becoming Indebtedness shall not be deemed
an Incurrence of such Indebtedness and that the accrual of interest shall not
be deemed an Incurrence of Indebtedness. Indebtedness otherwise Incurred by a
Person before it becomes a Subsidiary of the Company (whether by merger,
amalgamation, consolidation, acquisition or otherwise) shall be deemed to have
been Incurred by the Company at the time at which such Person becomes a
Subsidiary of the Company.
"Indebtedness" means, at any time (without duplication), with respect to any
Person, whether recourse is to all or a portion of the assets of such Person,
and whether or not contingent, (i) any obligation of such Person for money
borrowed, (ii) any obligation of such Person evidenced by bonds, debentures,
notes, Guarantees or other similar instruments, including, without limitation,
any such obligations incurred in connection with the acquisition of Property,
assets or businesses, excluding trade accounts payable made in the ordinary
course of business, (iii) any reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities
issued for the account of such Person, (iv) any obligation of such Person
issued or assumed as the deferred purchase price of Property or services (but
excluding trade accounts payable or accrued liabilities arising in the
ordinary course of business, which in either case are being contested in good
faith), (v) any Capital Lease Obligation of such Person, (vi) the maximum
fixed redemption or repurchase price of Disqualified Stock of such Person and,
to the extent held by Persons other than such Person or its Restricted
Subsidiaries, the maximum fixed redemption or repurchase price of Preferred
Stock of such Person's Restricted Subsidiaries, at
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the time of determination, (vii) any Attributable Indebtedness with respect to
any Sale and Leaseback Transaction to which such Person is a party, (viii)
Indebtedness of other Persons secured by a Lien to which the Property owned or
held by such first Person is subject, whether or not the obligation or
obligations secured thereby shall have been assumed (the amount of such
Indebtedness being deemed to be the lesser of the value of such property and
assets or the amount of the Indebtedness so secured) and (ix) any obligation
of the type referred to in clauses (i) through (viii) of this definition of
another Person and all dividends and distributions of another Person the
payment of which, in either case, such Person has Guaranteed or is responsible
or liable for, directly or indirectly, as obligor, Guarantor or otherwise. For
purposes of the preceding sentence, the maximum fixed repurchase price of any
Disqualified Stock or Preferred Stock that does not have a fixed repurchase
price shall be calculated in accordance with the terms of such stock as if
such stock were repurchased on any date on which Indebtedness shall be
required to be determined pursuant to the Indenture; provided that, if such
stock is not then permitted to be repurchased, the repurchase price shall be
the book value of such stock. The amount of Indebtedness of any Person at any
date shall be the outstanding balance at such date of all unconditional
obligations as described above and, with respect to contingent obligations,
the maximum liability upon the occurrence of the contingency giving rise to
the obligation; provided that the amount outstanding at any time of any
Indebtedness issued with original issue discount is the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with
GAAP.
"Investment" in any Person means any direct, indirect or contingent (i)
advance or loan to, Guarantee of any Indebtedness of, extension of credit or
capital contribution to such Person, (ii) the acquisition of any shares of
Capital Stock, bonds, notes, debentures or other securities of such Person, or
(iii) the acquisition, by purchase or otherwise, of all or substantially all
of the business, assets or stock or other evidence of beneficial ownership of
such Person; provided that Investments shall exclude extensions of trade
credit in the ordinary course of business. The amount of any Investment shall
be the original cost of such Investment, plus the cost of all additions
thereto and minus the amount of any portion of such Investment repaid to such
Person in cash as a repayment of principal or a return of capital, as the case
may be, but without any other adjustments for increases or decreases in value,
or write-ups, write-downs or write-offs with respect to such Investment. In
determining the amount of any Investment involving a transfer of any Property
other than cash, such Property shall be valued at its Fair Market Value at the
time of such transfer.
"Issue Date" means the date on which the Notes are first authenticated and
delivered under the Indenture.
"Lien" means, with respect to any Property or other asset, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement,
security interest, lien (statutory or other), charge, setoff right, easement,
encumbrance, preference, priority or other security or similar agreement or
preferential arrangement of any kind or nature whatsoever on or with respect
to such Property or other asset (including, without limitation, any
conditional sale or title retention agreement having substantially the same
economic effect as any of the foregoing).
"Maturity" means, when used with respect to a Note, the date on which the
principal of such Note becomes due and payable as provided therein or in the
Indenture, whether on the Stated Maturity, on the Change of Control Payment
Date or purchase date established pursuant to the terms of the Indenture with
regard to an Asset Sale Offer, as applicable, or by declaration of
acceleration, call for redemption or otherwise.
"Net Cash Proceeds" means (i) with respect to the sale of any Property or
other assets by the Company or any of the Restricted Subsidiaries, cash or
readily marketable cash equivalents received net of (a) all reasonable out-of-
pocket expenses of the Company or such Restricted Subsidiary incurred in
connection with such sale, including, without limitation, all legal, title and
recording tax expenses, commissions and other fees and expenses incurred (but
excluding any finder's fee or broker's fee payable to any Affiliate of the
Company) and all U.S. federal, state, provincial, foreign and local taxes
arising in connection with such sale that are paid or required to be accrued
as a liability under GAAP by the Company or its Restricted Subsidiaries, (b)
all payments made or required to be made by the Company or its Restricted
Subsidiaries on any Indebtedness which is secured by
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such Properties or other assets in accordance with the terms of any Lien upon
or with respect to such Properties or other assets or which must, by the terms
of such Lien, or in order to obtain a necessary consent to such transaction or
by applicable law, be repaid in connection with such sale, (c) all
contractually required distributions and other payments made to minority
interest holders (but excluding distributions and payments to Affiliates of
the Company) in Restricted Subsidiaries as a result of such transaction and
(d) appropriate amounts to be provided by the Company or any Restricted
Subsidiary, as the case may be, as a reasonable reserve against any
liabilities associated with such assets and retained by the Company or any
Restricted Subsidiary thereof, as the case may be, after such transaction,
including, without limitation, liabilities under any indemnification
obligations and severance and other employee termination costs associated with
such transaction, in each case as determined by the Board of Directors, in its
reasonable good faith judgment evidenced by a Board Resolution; provided that,
in the event that any consideration for a transaction (which would otherwise
constitute Net Cash Proceeds) is required to be held in escrow pending
determination of whether a purchase price adjustment or indemnification or
other payment or similar adjustment will be made, such consideration (or any
portion thereof) shall become Net Cash Proceeds only at such time as it is
released to the Company or the Restricted Subsidiaries from escrow; and
provided, further, that any noncash consideration received in connection with
any transaction, which is subsequently converted to cash, shall be deemed to
be Net Cash Proceeds at such time, and shall thereafter be applied in
accordance with the Indenture and (ii) with respect to any sale, issuance,
transfer or other disposition of Capital Stock, the proceeds of such sale,
issuance, transfer or other disposition in the form of cash or cash
equivalents, net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees and reasonable out-of-pocket expenses of the Company or any
Subsidiary of the Company incurred in connection with such sale, issuance,
transfer or other disposition and net of taxes paid or payable as a result
thereof.
"Officers' Certificate" means a certificate signed by (i) the President or
the Chief Executive Officer and (ii) the Chief Financial Officer, the Chief
Accounting Officer or the Treasurer, of the Company and delivered to the
Trustee, which shall comply with the Indenture.
"Permitted Holders" means Madison Dearborn Capital Partnership, L.P.,
Frontenac V.I. L.P., and Battery Ventures III, L.P., and Affiliates (other
than the Company and the Restricted Subsidiaries) of each of the foregoing.
"Permitted Investments" means (i) Eligible Cash Equivalents, (ii)
Investments in any Person engaged in a Telecommunications Business as a result
of which such Person becomes a Restricted Subsidiary in compliance with the
Indenture, (iii) Investments pursuant to agreements or obligations of the
Company or a Restricted Subsidiary, in effect on the Issue Date, to make
Investments described in clause (ii) above, (iv) Investments in prepaid
expenses, negotiable instruments held for collection and lease, utility and
workers' compensation, performance and other similar deposits, (v)
Investments, Capital Stock, bonds, notes, debentures or other debt or equity
securities received as a result of Asset Sales permitted under the covenant
described under "--Asset Sale," (vi) Investments in existence at the Issue
Date, (vii) commission, payroll, travel and similar advances made in the
ordinary course of business to cover matters that are expected at the time of
such advances ultimately to be treated as expenses in accordance with GAAP,
(viii) loans or advances to employees and directors made in the ordinary
course of business at any time outstanding not to exceed in the aggregate
$5,000,000 and (ix) stock, obligations or securities received in satisfaction
of judgments.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims which are not yet delinquent or which are being contested in
good faith by appropriate proceedings, if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have
been made therefor, (ii) other Liens incidental to the conduct of the
Company's or a Restricted Subsidiary's business or the ownership of its
Property and assets, and which do not in the aggregate materially detract from
the value of the Company's and its Restricted Subsidiaries' Property or other
assets when taken as a whole, or materially impair the use thereof in the
operation of its business, (iii) Liens with respect to assets of a Restricted
Subsidiary granted by such Restricted Subsidiary to secure Indebtedness owing
to the Company, (iv) Liens incurred or pledges and
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deposits made in the ordinary course of business in connection with workers'
compensation and unemployment insurance and other types of social security,
(v) statutory Liens of landlords, carriers, warehousemen, mechanics,
materialmen, repairmen and other types of statutory obligations, (vi) deposits
made to secure the performance of tenders, bids, leases, surety and appeal
bonds, government contracts, performance and return-of money bonds and other
obligations of like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money), (vii) zoning
restrictions, servitudes, easements, rights-of-way, restrictions and other
similar charges or encumbrances incurred in the ordinary course of business
which, in the aggregate, do not materially detract from the value of the
Property subject thereto or interfere with the ordinary conduct of the
business of the Company or its Restricted Subsidiaries, (viii) Liens arising
out of judgments or awards against the Company or any Restricted Subsidiary
with respect to which the Company or such Restricted Subsidiary is prosecuting
an appeal or proceeding for review and the Company or such Restricted
Subsidiary is maintaining adequate reserves in accordance with GAAP, (ix) any
interest or title of a lessor in the Property subject to any lease other than
a Capital Lease, (x) leases or subleases granted to others that do not
materially interfere with the ordinary course of business of the Company and
its Restricted Subsidiaries, (xi) Liens encumbering Property or other assets
under construction arising from progress or partial payments by a customer of
the Company or its Restricted Subsidiaries relating to such Property or other
assets, (xii) Liens on Property of, or on shares of stock or Indebtedness of,
any corporation existing at the time such corporation becomes, or becomes a
part of, any Restricted Subsidiary, provided that such Liens do not extend to
or cover any Property or other assets of the Company or any Restricted
Subsidiary other than the Property or other assets acquired, (xiii) Liens
securing reimbursement obligations with respect to letters of credit that
encumber documents and other Property relating to such letters of credit and
the products and proceeds thereof, (xiv) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods, (xv) Liens arising out of
conditional sale, title retention, consignment or similar arrangements for the
sale of goods entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business, (xvi) Liens on or sales of
receivables; and (xvii) Liens in favor of the Trustee pursuant to the
Indenture.
"Person" means any individual, corporation, limited liability company,
partnership, limited liability partnership, joint venture, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or
involuntary liquidation, dissolution or winding up of such Person, to shares
of Capital Stock of any other class of such Person.
"Property" means, with respect to any Person, any interest of such Person in
any kind of property or other asset, whether real, personal or mixed, or
tangible or intangible, excluding Capital Stock of any other Person.
"Public Equity Offering" means an underwritten primary public offering of
the Common Stock of the Company pursuant to an effective registration
statement under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) at least 15% of the total issued and outstanding
Common Stock of the Company immediately prior to the consummation of such
Public Equity Offering has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
"Qualified Stock" of any Person means a class of Capital Stock other than
Disqualified Stock.
"Restricted Payment" means (i) a dividend or other distribution declared or
paid on the Capital Stock of the Company or to the Company's stockholders (in
their capacity as such), or declared or paid to any Person other than the
Company or a Restricted Subsidiary on the Capital Stock of any Restricted
Subsidiary, in each case, other than dividends, distributions or payments made
solely in Qualified Stock of the Company or such Restricted Subsidiary and
other than pro rata dividends or other distributions made by a Restricted
Subsidiary
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that is not a Significant Restricted Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Restricted Subsidiary that
is an entity other than a corporation), (ii) a payment made by the Company or
any of its Restricted Subsidiaries (other than to the Company or any
Restricted Subsidiary) to purchase, redeem, acquire or retire any Capital
Stock of the Company or (iii) a payment made by the Company or any of its
Restricted Subsidiaries (other than a payment made solely in Qualified Stock
of the Company) to redeem, repurchase, defease (including an in-substance or
legal defeasance) or otherwise acquire or retire for value (including pursuant
to mandatory repurchase covenants), prior to any scheduled maturity, scheduled
sinking fund or mandatory redemption payment, Indebtedness of the Company
which is subordinate (whether pursuant to its terms or by operation of law) in
right of payment to the Notes and which was scheduled to mature on or after
the maturity of the Notes (other than permitted refinancings thereof) or (iv)
an Investment in any Person, including an Unrestricted Subsidiary or the
designation of a Subsidiary as an Unrestricted Subsidiary, other than (a) a
Permitted Investment, (b) an Investment by the Company in a Restricted
Subsidiary engaged in a Telecommunications Business or (c) an Investment by a
Restricted Subsidiary in the Company or in a Restricted Subsidiary engaged in
a Telecommunications Business.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated as an "Unrestricted Subsidiary."
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or
transferred by such Person or a Restricted Subsidiary of such Person and is
thereafter leased back from the purchaser or transferee thereof by such Person
or one of its Restricted Subsidiaries.
"Senior Indebtedness" means all Indebtedness of the Company which is not,
expressly by its terms, subordinate or junior in right of payment to the
Notes.
"Significant Restricted Subsidiary" means any Restricted Subsidiary of which
the Company owns, directly or indirectly, 80% or more of all of the
outstanding Capital Stock or other ownership interests (other than any
director's qualifying shares).
"Subordinated Indebtedness" means Indebtedness of the Company as to which
the payment of principal of (and premium, if any) and interest and other
payment obligations in respect of such Indebtedness shall be subordinate to
the prior payment in full of the Notes to at least the following extent: (i)
no payments of principal of (or premium, if any) or interest on or otherwise
due in respect of such Indebtedness may be permitted for so long as any
Default in the payment of principal (or premium, if any) or interest on the
Notes exists, (ii) in the event that any other Default exists, upon notice by
Holders of 25% or more of the aggregate stated principal amount at maturity of
the outstanding Notes to the Trustee, the Trustee shall have the right to give
notice to the Company and the holders of such Indebtedness (or trustees or
agents therefor) of a payment blockage, and thereafter no payments of
principal of (or premium, if any) or interest on or otherwise due in respect
of such Indebtedness may be made for a period of 179 days from the date of
such notice, and (iii) such Indebtedness may not (x) provide for payments of
principal of such Indebtedness at the stated maturity thereof or by way of a
sinking fund applicable thereto or by way of any mandatory redemption,
defeasance, retirement or repurchase thereof by the Company (including any
redemption, retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of acceleration
of such Indebtedness upon an event of default thereunder), in each case prior
to the final Stated Maturity of the Notes or (y) permit redemption or other
retirement (including pursuant to an offer to purchase made by the Company) of
such other Indebtedness at the option of the holder thereof prior to the final
Stated Maturity of the Notes, other than a redemption or other retirement at
the option of the holder of such Indebtedness (including pursuant to an offer
to purchase made by the Company) which is conditioned upon a change of control
of the Company pursuant to provisions substantially similar to those described
under "--Repurchase at the Option of Holders upon a Change of Control" (and
which shall provide that such Indebtedness will not be repurchased pursuant to
such provisions prior to the Company's repurchase of the Notes required to be
repurchased by the Company pursuant to the provisions described under "--
Repurchase at the Option of Holders upon a Change of Control").
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"Subsidiary" means, with respect to any Person, (i) any corporation more
than 50% of the outstanding shares of Voting Stock of which is owned, directly
or indirectly, by such Person, or by one or more other Subsidiaries of such
Person, or by such Person and one or more other Subsidiaries of such Person,
(ii) any general partnership, joint venture or similar entity, more than 50%
of the outstanding partnership or similar interests of which are owned,
directly or indirectly, by such Person, or by one or more other Subsidiaries
of such Person, or by such Person and one or more other Subsidiaries of such
Person and (iii) any limited partnership of which such Person or any
Subsidiary of such Person is a general partner.
"Telecommunications Assets" means all assets, rights (contractual or
otherwise) and properties, real or personal, whether tangible or intangible,
used or intended for use in connection with a Telecommunications Business.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data
through owned or leased wireline or wireless transmission facilities, (ii)
creating, developing, constructing, installing, repairing, maintaining or
marketing communications-related systems, network equipment and facilities,
software and other products, or (iii) evaluating, owning, operating,
participating in or pursuing any other business that is primarily related to
those identified in the foregoing clauses (i) or (ii) above (in the case of
this clause (iii), however, in a manner consistent with the Company's manner
of business on the Issue Date), and shall, in any event, include all
businesses in which the Company or any of its Subsidiaries are engaged on the
Issue Date or have entered into agreements to engage in or to acquire a
company to engage in or contemplate engaging in, as expressly set forth in
this Prospectus; provided that the determination of what constitutes a
Telecommunications Business shall be made in good faith by the Board of
Directors.
"Unrestricted Subsidiary" means any Subsidiary of the Company that the
Company has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to the terms of the
Indenture. See "--Restricted and Unrestricted Subsidiaries" for a description
of the conditions in which the Company may designate a Subsidiary of the
Company an "Unrestricted Subsidiary."
"Voting Stock" means, with respect to any Person, securities of any class or
classes of Capital Stock in such Person entitling the holders thereof (whether
at all times or at the times that such class of Capital Stock has voting power
by reason of the happening of any contingency) to vote in the election of
members of the board of directors or comparable body of such Person.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests (other than any director's qualifying shares) of which
shall at the time be owned by such Person or by one or more other Wholly Owned
Restricted Subsidiaries of such Person or by such Person and one or more other
Wholly Owned Restricted Subsidiaries of such Person.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for Senior
Notes where such Senior Notes were acquired as a result of market-making
activities or other trading activities. The Company has agreed that, starting
on the Expiration Date and ending on the close of business 90 days after the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until , 1998, all dealers effecting transactions in the Exchange
Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit of any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of 90 days after the Expiration Date, the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the
Letter of Transmittal. The Company has agreed to pay all expenses incident to
the Exchange Offer (including the expenses of one counsel for the holders of
the Senior Notes), other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the Senior Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR U.S. HOLDERS
The following, subject to the limitations set forth below, are the material
U.S. federal income tax consequences associated with the acquisition,
ownership, and disposition of the Notes. As used herein, a "U.S. Holder" means
a beneficial owner of a Note who purchased a Senior Note pursuant to the
Offering at the Issue Price that is for U.S. federal income tax purposes (i) a
citizen or resident of the United States; (ii) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof; (iii) an estate the income of which is
subject to U.S. federal income taxation regardless of its source; or (iv) a
trust if (A) a court within the United States is able to exercise primary
supervision over the administration of the trust and (B) one or more U.S.
fiduciaries have the authority to control all substantial decisions of the
trust. This summary deals only with Notes held as capital assets and does not
address persons with special tax situations, such as Non-U.S. Holders (as
defined herein), financial institutions, insurance companies, tax-exempt
organizations, dealers in securities or currencies, persons holding Notes as a
hedge against currency risks or that are part of a straddle or a conversion
transaction, or persons whose functional currency is not the U.S. dollar, and
does not discuss any aspect of state, local or foreign tax laws or any estate
or gift tax considerations.
This summary is based upon the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), the Treasury Regulations promulgated thereunder
(the "Regulations"), rulings and judicial decisions issued thereunder, all of
which may be repealed, revoked or modified, possibly with retroactive effect.
Holders of the Notes should consult their tax advisors regarding the U.S.
federal, state, local and foreign income and other tax considerations of the
purchase, exchange, ownership and disposition of the Notes.
THE FOLLOWING DOES NOT PURPORT TO BE A DISCUSSION OF ALL POTENTIAL TAX
CONSEQUENCES. EACH HOLDER IS STRONGLY URGED TO CONSULT WITH ITS OWN TAX
ADVISORS TO DETERMINE THE IMPACT OF SUCH HOLDER'S PERSONAL TAX SITUATION ON
THE ANTICIPATED TAX CONSEQUENCES, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN OR OTHER TAX LAWS, OF THE ACQUISITION, EXCHANGE OWNERSHIP AND
DISPOSITION OF THE NOTES.
THE EXCHANGE
The exchange of Senior Notes for Exchange Notes will not be treated as an
exchange for U.S. federal income tax purposes because the Exchange Notes will
not differ materially in kind or extent from the Senior Notes. As a result,
holders who exchange their Senior Notes for Exchange Notes will not recognize
any income, gain or loss for U.S. federal income tax purposes. A U.S. Holder
will have the same adjusted issue price, adjusted basis and holding period in
the Exchange Notes immediately after the exchange as it had in the Senior
Notes immediately before the exchange.
ORIGINAL ISSUE DISCOUNT
General
Because the Senior Notes were issued at an Issue Price which was
substantially less than their stated principal amounts at maturity and because
Current Interest on the Notes will not be payable until August 15, 2003, the
Notes have been issued with OID, and each U.S. Holder will be required to
include in income in each year, in advance of the receipt of cash payments on
such Notes, that portion of the OID, computed on a constant yield basis,
attributable to each day during such year on which the U.S. Holder held the
Notes.
In the event of a Registration Default as described under "Description of
the Exchange Notes--Exchange Offer; Registration Rights", Additional Interest
will accrue on the Notes in the manner described therein. According to the
Regulations, the possibility of a change in the interest rate will not affect
the amount of interest
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income recognized by a U.S. Holder if the likelihood of the change, as of the
date the Notes are issued, is remote. The Company believes that the likelihood
of a change in the interest rate on the Notes is remote and does not intend to
treat the possibility of a change in the interest rate as affecting the yield
to maturity of any Note. Solely for purposes of determining the amount of OID,
the Notes would be treated as retired and reissued on any date the amount of
interest were changed for an amount equal to its adjusted issue price.
The Amount of Original Issue Discount
The amount of OID with respect to each Note is equal to the excess of (i)
its "stated redemption price at maturity" over (ii) its "issue price." The
"issue price" of the Notes is equal to the initial offering price to the
public (not including any bond house, broker or similar person or organization
acting in the capacity of an underwriter, placement agent or wholesaler) at
which a substantial amount of the Notes are sold. The "stated redemption price
at maturity" of each Note will include all payments to be made in respect
thereof, including any Current Interest payments. Accordingly, payments on the
Note (including principal and Current Interest payments) are not separately
included in a U.S. Holder's income as interest, but rather are treated first
as payments of accrued OID and then as payments of principal which reduce the
U.S. Holder's basis in the Notes.
A U.S. Holder of a debt instrument issued with OID is required to include in
gross income for U.S. federal income tax purposes an amount equal to the sum
of the "daily portions" of such OID for all days during the taxable year on
which the holder holds the debt instrument. The daily portions of OID required
to be included in a holder's gross income in a taxable year will be determined
on a constant yield basis by allocating to each day during the taxable year on
which the holder holds the debt instrument a pro rata portion of the OID on
such debt instrument which is attributable to the "accrual period" in which
such day is included. Accrual periods with respect to a Note may be any set of
periods (which may be of varying lengths) selected by a U.S. Holder as long as
(i) no accrual period is longer than one year and (ii) each scheduled payment
of interest or principal on the Note occurs on either the first or final day
of an accrual period. The amount of OID attributable to each "accrual period"
will be equal to the product of (i) the "adjusted issue price" at the
beginning of such accrual period and (ii) the "yield to maturity" of the debt
instrument stated in a manner appropriately taking into account the length of
the accrual period. The "yield to maturity" is the discount rate that, when
used in computing the present value of all payments to be made under the
Notes, produces an amount equal to the issue price of the Notes. The "adjusted
issue price" of a Note at the beginning of an accrual period is generally
defined as the issue price of the Note plus the aggregate amount of OID that
accrued in all prior accrual periods, less any cash payments on the Note.
Accordingly, a U.S. Holder of a Note will be required to include OID thereon
in gross income for U.S. federal tax purposes in advance of the receipt of
cash in respect of such income. The amount of OID allocable to an initial
short accrual period may be computed using any reasonable method if all other
accrual periods, other than a final short accrual period, are of equal length.
The amount of OID allocable to the final accrual period at maturity of a Note
is the difference between (x) the amount payable at the maturity of the Note
and (y) the Note's adjusted issue price as of the beginning of the final
accrual period.
High-Yield Discount Obligations
The Notes constitute AHYDOs as their yield to maturity exceeds the sum of
the applicable federal rate in effect at the time of the issuance of the Notes
(the "AFR") plus five percentage points. For February 1998, the long-term AFR
was 5.84% (based on semiannual compounding). Under Sections 163(e) and 163(i)
of the Code, a C corporation that is an issuer of a debt obligation subject to
the AHYDO rules may not deduct any portion of OID on the obligation until such
portion is actually paid. A debt obligation is generally subject to the AHYDO
rules if (i) its maturity date is more than five years from the date of issue,
(ii) its yield to maturity equals or exceeds the sum of the AFR plus five
percentage points, and (iii) it bears "significant OID." A debt obligation
will bear significant OID for this purpose if, as of the close of any accrual
period ending more than five years after issuance, the total amount of income
includible by a holder with respect to the debt instrument exceeds the sum of
(i) the total amount of "interest" paid under the obligation before the close
of such accrual period and (ii) the product of the issue price of the debt
instrument and its yield to maturity. In addition, the yield to maturity of
the Notes exceeds the sum of the AFR plus six percentage points. Accordingly,
under the Code, a portion of
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the OID under the Notes, equal to the product of the total OID under the Notes
times the ratio of (a) the excess of the yield to maturity over the sum of the
AFR plus six percentage points to (b) the yield to maturity (the "Disqualified
Portion"), will not be deductible by the Company and will be treated for some
purposes as dividends to the holders of the Notes (to the extent that such
amounts would have been treated as dividends to the holders of the Notes if
they had been distributions with respect to the Company's stock). The
Disqualified Portion will be nondeductible by the Company, and may qualify for
the dividend received deduction for corporate U.S. Holders, but will be
treated as OID and not as dividends for withholding tax purposes.
Effect of Mandatory and Optional Redemptions on OID
In the event of a Change of Control, the Company will be required to offer
to redeem all of the Notes, at redemption prices specified elsewhere herein.
If after giving effect to a Change of Control Offer at least 95% of the
original aggregate stated principal amount of the Notes has been repurchased,
the Company may, at its option, redeem the balance of the Notes at redemption
prices specified elsewhere herein. In the event that the Company receives net
proceeds from one or more public offerings, the Company may, at its option,
use all or a portion of such net proceeds to redeem Notes having an aggregate
issue price of up to 35% of the aggregate Issue Price of the Notes at
redemption prices specified elsewhere herein; provided that Notes having an
issue price equal to at least 65% of the original aggregate stated principal
amount of the Notes remain outstanding after such redemption. In addition,
upon an Asset Sale, the Company may in certain circumstances be required to
redeem all or part of the Notes. Computation of the yield and maturity of the
Notes is not affected by such redemption rights and obligations if, based on
all the facts and circumstances as of the issue date, the stated payment
schedule of the Notes (that does not reflect a Change of Control, an Asset
Sale, or a Public Equity Offering) is significantly more likely than not to
occur. The Company has determined that, based on all of the facts and
circumstances as of the issue date, it is significantly more likely than not
that the Notes will be paid according to their stated schedule.
The Company may redeem the Notes, in whole or in part, at any time on or
after February 15, 2003, at redemption prices specified elsewhere herein plus
accrued and unpaid Current Interest, if any, on the Notes so redeemed to but
excluding the date of redemption. The Regulations contain rules for
determining the "maturity date" and the stated redemption price at maturity of
an instrument that may be redeemed prior to its stated maturity date at the
option of the issuer. Under the Regulations, solely for purposes of the
accrual of OID, it is assumed that the issuer will exercise any option to
redeem a debt instrument if such exercise will lower the yield-to-maturity of
the debt instrument. The Company believes that it will not be presumed to
redeem the Notes prior to their stated maturity under these rules because the
exercise of such option would not lower the yield-to-maturity of the Notes.
U.S. Holders may wish to consult their tax advisor regarding the treatment
of such contingencies under the Regulations.
Tax Basis
A U.S. Holder's initial tax basis in a Note generally will be equal to the
purchase price paid by such U.S. Holder for such Note. A U.S. Holder's tax
basis in a Note will be increased by the amount of OID that is included in
such U.S. Holder's income and will be decreased by the amount of any cash
payments received.
Sale or Redemption
Unless a nonrecognition provision applies, the sale, exchange, redemption
(including pursuant to an offer by the Company) or other disposition of a Note
will be a taxable event for U.S. federal income tax purposes. In such event, a
U.S. Holder will recognize gain or loss equal to the difference between (i)
the amount of cash plus the fair market value of any property received by such
holder and (ii) the U.S. Holder's adjusted tax basis therein. Such gain or
loss will be capital gain or loss and will be long-term capital gain or loss
if the Note was held by the U.S. Holder for more than one year at the time of
such sale, exchange, redemption or other disposition. On
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August 5, 1997, legislation was enacted which, among other things, reduces to
20% the maximum rate of tax on long-term capital gains on most capital assets
held by an individual for more than 18 months. Gain on most capital assets
held by an individual more than one year and up to 18 months is subject to tax
at a maximum rate of 28%. The distinction between capital gain or loss and
ordinary income or loss is also relevant for purposes of, among other things,
limitations on the deductibility of capital losses.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following summary describes certain United States federal income and
estate tax consequences of the ownership of Notes as of the date hereof by any
holder who is a beneficial owner of a Note but is not a U.S. Holder (a "Non-
U.S. Holder").
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) generally no withholding of United States federal income tax will be
required with respect to the payment by the Company or any paying agent of
principal or interest (including OID) on a Note owned by a Non-U.S. Holder,
provided (i) that the beneficial owner does not actually or constructively
own 10% or more of the total combined voting power of all classes of stock
of the Company entitled to vote within the meaning of section 871(h)(3) of
the Code and the regulations thereunder, (ii) the beneficial owner is not a
"controlled foreign corporation" (as defined in Section 957 of the Code)
that is related directly, indirectly or constructively to the Company
through stock ownership and (iii) the beneficial owner satisfies the
statement requirement (described generally below) set forth in section
871(h) and section 881(c) of the Code and the regulations thereunder;
(b) generally no withholding of United States federal income tax will be
required with respect to any gain or income realized by a Non-U.S. Holder
upon the sale, exchange or retirement of a Note and
(c) a Note beneficially owned by an individual who at the time of death
is a Non-U.S. Holder generally will not be includible in the individual's
gross estate for the purposes of the United States federal estate tax as a
result of such individual's death, provided that such individual does not
at the time of death actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the Company entitled
to vote within the meaning of section 871(h)(3) of the Code and provided
that the interest payments with respect to such Note will not have been, if
received at the time of such individual's death, effectively connected with
the conduct of a United States trade or business by such individual.
To satisfy the requirement referred to in (a)(iii) above, the beneficial
owner of such Note, or a financial institution holding the Note on behalf of
such owner, must provide, in accordance with specified procedures, the Company
or a paying agent of the Company with a statement to the effect that the
beneficial owner is not a U.S. person. Pursuant to current temporary
Regulations, these requirements will be met if (1) the beneficial owner
provides the payor his name and address, and certifies, under penalties of
perjury, that he is not a U.S. person (which certification may be made on an
Internal Revenue Service Form W-8 (or successor or substitute form)) or (2) a
financial institution that holds customers' securities in the ordinary course
of its trade or business and holds the Note on behalf of the beneficial owner
certifies, under penalties of perjury, that such statement has been received
by it (or by another financial institution acting on behalf of the Non-U.S.
Holder), and furnishes a paying agent with a copy thereof.
Regulations recently issued by the Internal Revenue Service, which will be
effective for payments made after December 31, 1998 (subject to certain
transition rules), made modifications to the certification procedures
applicable to Non-U.S. Holders. In general, these regulations unify certain
certification procedures and forms and clarify and modify reliance standards.
A Non-U.S. Holder should consult its own advisor regarding the effect of the
new Regulations.
If a Non-U.S. Holder cannot satisfy the requirements of the "portfolio
interest" exception described in (a) above, payments of interest (including
OID) made to Non-U.S. Holders will generally be subject to a 30%
96
<PAGE>
withholding tax, or such lower rate as may be specified by an applicable
income tax treaty, unless the beneficial owner of the Note provides the
Company or its paying agent, as the case may be, with a properly executed (1)
Internal Revenue Service Form 1001 (or successor form) claiming an exemption
from withholding under the benefit of a tax treaty or (2) Internal Revenue
Service Form 4224 (or successor form) stating that interest (including OID)
paid on the Note is not subject to withholding tax because it is effectively
connected with the beneficial owner's conduct of a trade or business in the
United States.
If a Non-U.S. Holder is engaged in a trade or business in the United States
and interest (including OID) on the Note is effectively connected with the
conduct of such trade or business, the Non-U.S. Holder, although exempt from
the withholding tax discussed above, will generally be subject to United
States federal income tax on such interest (including OID) on a net income
basis in the same manner as if it were a United States person. In addition, if
such holder is a foreign corporation, it may be subject to a branch profits
tax equal to 30% of its effectively connected earnings and profits for the
taxable year, or such lower rate as may be specified by an applicable income
tax treaty, subject to adjustments.
Any gain or income realized upon the sale, exchange or retirement of a Note
generally will not be subject to United States federal income tax unless (i)
such gain or income is effectively connected with a trade or business in the
United States of the Non--U.S. Holder, or (ii) in the case of a Non-U.S.
Holder who is a nonresident alien individual, such Holder is present in the
United States for 183 days or more in the taxable year of such sale, exchange
or retirement, and certain other conditions are met.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The "backup" withholding and information reporting requirements may apply to
certain payments of principal and interest (including OID) on a Note and to
certain payments or proceeds of the sale or retirement of a Note. The Company,
its agent, a broker, the Trustee or any paying agent, as the case may be, is
required to withhold tax from any payment that is subject to backup
withholding at a rate of 31% of such payment if the holder fails to furnish
his taxpayer identification number (social security number or employer
identification number), to certify that such holder is not subject to backup
withholding, or to otherwise comply with the applicable requirements of the
backup withholding rules. Certain holders (including, among others, all
corporations) are not subject to the backup withholding and reporting
requirements.
Under current Treasury Regulations, backup withholding and information
reporting do not apply to payments made by the Company or any agent thereof
(in its capacity as such) to a holder of a Note who has provided the required
certification under penalties of perjury that it is not a U.S. Holder as set
forth in the third paragraph under "--Non-U.S. Holders" or has otherwise
established an exemption (provided that neither the Company nor such agent has
actual knowledge that the holder is a U.S. Holder or that the conditions of
any other exemption are not in fact satisfied). Payments of the proceeds from
the sale by a holder who is not a U.S. Holder of a Note made to or through a
foreign office of a broker will not be subject to U.S. information reporting
or backup withholding, except that if the broker is a U.S. person, a
controlled foreign corporation for U.S. tax purposes or a foreign person 50%
or more of whose gross income is effectively connected with a United States
trade or business for a specified three-year period, U.S. information
reporting may apply to such payments.
Payments of the proceeds from the sale of a Note to or through the United
States office of a broker is subject to U.S. information reporting and backup
withholding unless the holder or beneficial owner certifies as to its non-U.S.
status or otherwise establishes an exemption from U.S. information reporting
and backup withholding.
In October 1997, Regulations were issued which alter the foregoing rules in
certain respects and which generally will apply to any payments (including
OID) in respect of a Note or proceeds from the sale of a Note that are made
after December 31, 1998. Among other things, such regulations expand the
number of foreign intermediaries that are potentially subject to information
reporting and address certain documentary evidence requirements relating to
exemption from the general backup withholding requirements. Holders of the
Notes should consult their tax advisors concerning possible application of the
final regulations to amounts of OID that
97
<PAGE>
they are required to include as well as the possible application of such
regulation to any payments made on or with respect to the Notes.
Any amounts withheld under the backup withholding rules from a payment to a
holder may be claimed as a credit against such holder's United States federal
income tax liability.
The Company is required to furnish certain information to the Internal
Revenue Service, and will furnish annually to record holders of Notes,
information with respect to interest and OID accruing during the calendar
year. The OID information will be based upon the adjusted issue price of the
debt instrument as if the holder were the original holder of the debt
instrument. No assurance can be given that the Internal Revenue Service will
not challenge the accuracy of the reported information. Subsequent holders who
purchase Notes for an amount other than the adjusted issue price and/or on a
date other than the last day of an accrual period will be required to
determine for themselves the amount of OID, if any, they are required to
include in gross income for U.S. federal income tax purposes.
LEGAL MATTERS
The legality of the Exchange Notes offered hereby are being passed upon for
the Company by Ross & Hardies, Chicago, Illinois.
INDEPENDENT PUBLIC ACCOUNTANTS
The Consolidated Financial Statements as of December 31, 1996 and 1997 and
for the period from May 31, 1996 to December 31, 1996 and for the year ended
December 31, 1997 and the financial statement schedule included in this
Registration Statement have been audited and the Pro Forma Consolidated
Balance Sheet and Pro Forma Statements of Operations and Stockholders' Equity
as of and for the year ended December 31, 1997 included in this Registration
Statement have been examined by Arthur Andersen LLP, independent public
accountants, as stated in their reports appearing herein.
AVAILABLE INFORMATION
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement on Form S-4 under the
Securities Act with respect to the Exchange Offer. As permitted by the rules
and regulations of the Commission, this Prospectus does not contain all the
information set forth in the Registration Statement. For further information
about the Company and the Exchange Offer, reference is made to the
Registration Statement and to the financial statements, exhibits and schedules
filed therewith. The statements contained in this Prospectus about the
contents of any contract or other document referred to are not necessarily
complete, and in each instance, reference is made to a copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. Copies of each
such document may be obtained from the Commission at its principal office in
Washington, D.C. upon payment of the charges prescribed by the Commission or,
in the case of certain such documents, by accessing the Commission's World
Wide Web site at http://www.sec.gov.
The Company has agreed that, for so long as any Notes remain outstanding, it
will furnish to the Holders of the Notes and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act. The Company
will file with the Trustee after it files with the Commission copies of the
annual reports on Form 10-K and the information, documents, and other reports
that the Company is required to file with the Commission pursuant to Section
13 or 15(d) of the Exchange Act as well as quarterly reports (collectively,
the "SEC Reports"). In the event the Company ceases to be required to file SEC
Reports pursuant to either of such Sections of the Exchange Act, the Company
will nevertheless continue to file such reports with the Commission (unless
the Commission will not accept such a filing) and the Trustee. The Company
will furnish copies of the SEC Reports to the Holders of the Notes at the time
the Company is required to file the same with the Trustee.
98
<PAGE>
GLOSSARY
Access Charges--The charges paid by an interexchange carrier to a LEC for
the origination or termination of the IXC's customer's long distance calls.
Access Line--A circuit that connects a telephone user (customer) to the
public switched telephone network.
CLEC (Competitive Local Exchange Carrier)--A category of telephone service
provider (carrier) that offers services similar to the former monopoly local
telephone company, as recently allowed by changes in telecommunications law
and regulation. A CLEC may also provide other types of telecommunications
services (long distance, etc.)
CLEC Certification--Granted by a state public service commission or public
utility commission, this allows a telecommunications service provider the
legal standing to offer local exchange telephone services in direct
competition with the incumbent LEC and other CLECs. Such certifications are
granted on a state by state basis.
Central Office--The switching system (such as a DMS-500 by Nortel) used to
connect calls.
Communications Act of 1934, The--The first major federal legislation that
established rules for broadcast and non-broadcast communications, both
wireless and wired telephony.
DMS-500--A telephone switch manufactured by Nortel, that provides both local
exchange switching (also known as a "class 5" switch) and a long distance
switch (also known as a "class 4" switch) in a single device.
FCC (Federal Communications Commission)--The United States Government
organization charged with the oversight of all public communications media.
ILEC (Incumbent Local Exchange Carrier)--The local exchange carrier that was
the monopoly carrier, prior to the opening of local exchange services to
competition.
Interconnection Agreement--A contract between an ILEC and a CLEC for the
interconnection of the party's networks, for the purpose of mutual passing of
traffic between the networks, allowing customers of one of the networks to
call users served by the other network. These agreements set out the financial
and operational aspects of such interconnection.
Interim Number Portability--A temporary technique that allows local exchange
service customers of an ILEC to keep their existing telephone number, while
moving their service to a CLEC. This interim technique uses a central office
feature called remote call forwarding. The permanent solution to number
portability is to be implemented over the next few years.
Fiber Optic Digital Network--A modern telephone technology that combines
voice and data switching in an efficient manner.
ISP (Information Service Provider)--An information service provider which
allows for access to the Internet.
IXC (Interexchange Carrier)--A provider of telecommunications services
between exchanges, or cities; also called long distance carrier. A long
distance carrier may offer services over its own or another carrier's
facilities.
LEC (Local Exchange Carrier)--Any telephone service provider offering local
exchange services.
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<PAGE>
Local Exchange--An area inside of which telephone calls are generally
completed without any toll, or long distance charges. Local exchange areas are
defined by the state regulator of telephone services.
POP (Point of Presence)--A location where a carrier, usually an IXC, has
located transmission and terminating equipment to connect its network to the
networks of other carriers, or to customers.
PUC (Public Utility Commission)--A state regulatory body, established in
most states, which regulates utilities, including telephone companies
providing intrastate services.
Reciprocal Compensation--The compensation paid by a carrier to terminate
traffic on another carrier's network.
RBOC (Regional Bell Operating Company)--One of the LECs created by the
divestiture of the local exchange business from AT&T in 1984. These include
BellSouth, Bell Atlantic, Ameritech, US West and SBC.
Special Access Lines--Private, non-switched connections between an IXC and a
customer, for the purpose of connecting the customer's long distance calls
directly to the IXC's network, without having to pay the LEC's access charges.
Switch--A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users. The DMS-
500 by Nortel is an example of a switch.
Switched Services--Transmission of switched calls through the local switched
network.
100
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................................. F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1996, 1997 and March 31,
1998................................................................... F-3
Consolidated Statements of Operations for the Period from May 31, 1996
(Commencement of Operations), to December 31, 1996, for the Year Ended
December 31, 1997 and for the Three Months Ending March 31, 1997 and
1998................................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Period
from May 31, 1996 (Commencement of Operations), to December 31, 1996,
for the Year Ended December 31, 1997 and for the Three Months Ending
March 31, 1997 and 1998................................................ F-5
Consolidated Statements of Cash Flows for the Period from May 31, 1996
(Commencement of Operations), to December 31, 1996, for the Year Ended
December 31, 1997 and for the Three Months Ending March 31, 1997 and
1998................................................................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Focal Communications Corporation:
We have audited the accompanying consolidated balance sheets of FOCAL
COMMUNICATIONS CORPORATION AND SUBSIDIARIES (a Delaware corporation) as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the period from May 31,
1996 (commencement of operations), to December 31, 1996, and for the year
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Focal
Communications Corporation and Subsidiaries as of December 31, 1996 and 1997,
and the results of its operations and its cash flows for the period from May
31, 1996 (commencement of operations), to December 31, 1996, and for the year
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Chicago, Illinois
January 14, 1998
F-2
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, DECEMBER 1998
ASSETS 1996 31, 1997 (UNAUDITED)
------ ------------ ----------- ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............ $3,790,121 $ 2,256,552 $152,758,944
Accounts receivable, trade (net of
allowance for doubtful accounts of
$469,000 and $1,046,000 at December
31, 1997 and March 31, 1998,
respectively)....................... -- 2,355,814 5,196,879
Related-party receivables............ 16,883 34,883 120,349
Other current assets................. -- 90,559 328,631
---------- ----------- ------------
Total current assets............... 3,807,004 4,737,808 158,404,803
---------- ----------- ------------
FIXED ASSETS, at cost:
Communications network............... -- 7,906,336 11,125,470
Construction in progress............. 37,285 1,938,236 4,325,152
Computer equipment................... 45,018 941,237 1,211,371
Leasehold improvements............... -- 652,173 2,268,183
Furniture and fixtures............... -- 355,759 437,337
Motor vehicles....................... -- -- 19,289
---------- ----------- ------------
82,303 11,793,741 19,386,802
Less--Accumulated depreciation and
amortization........................ 1,150 616,967 1,260,951
---------- ----------- ------------
Fixed assets, net.................. 81,153 11,176,774 18,125,851
Other non-current assets (net)....... -- -- 5,697,368
$3,888,157 $15,914,582 $182,228,022
========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
------------------------------------
CURRENT LIABILITIES:
Accounts payable..................... $ 197,246 $ 1,502,479 $ 5,256,228
Accrued liabilities.................. 71,212 367,890 497,404
Current maturities of long-term
debt................................ -- 943,621 --
---------- ----------- ------------
Total current liabilities.......... 268,458 2,813,990 5,753,632
LONG-TERM DEBT, net of current
maturities............................ -- 2,593,265 152,093,513
---------- ----------- ------------
OTHER NONCURRENT LIABILITIES........... -- 179,481 269,222
---------- ----------- ------------
REDEEMABLE COMMON STOCK:
Class A, $.01 par value, 85,567
shares authorized and 80,307 issued
and outstanding at December 31,
1997................................ 4,024,653 12,403,218 --
---------- ----------- ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, Class A, $.01 par
value, 85,567 shares authorized and
80,307 issued and outstanding at
March 31, 1998...................... -- -- 803
Common stock, Class B, $.01 par
value; 35,000 shares authorized,
20,000 shares issued and outstanding
at December 31, 1996, 1997 and March
31, 1998............................ 200 200 200
Common stock, Class C, $.01 par
value; 15,000 shares authorized,
14,711 shares issued and outstanding
at December 31, 1996, 1997 and March
31, 1998............................ 147 147 147
Additional paid-in capital........... -- (103,565) 26,098,850
Accumulated deficit.................. (405,301) (1,972,154) (1,988,345)
---------- ----------- ------------
Total stockholders' equity
(deficit)......................... (404,954) (2,075,372) 24,111,655
---------- ----------- ------------
$3,888,157 $15,914,582 $182,228,022
========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
MAY 31, 1996 FOR THE FOR THE THREE MONTHS
(COMMENCEMENT OF YEAR ENDING ENDING MARCH 31,
OPERATIONS) TO DECEMBER ---------------------
DECEMBER 31, 1996 31, 1997 1997 1998
------------------- ----------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES................ $ -- $ 4,023,690 $ -- $5,102,448
EXPENSES:
Customer service and
network operations... -- 2,154,980 8,692 1,826,893
Selling, general and
administrative....... 421,777 2,887,372 416,492 1,307,625
Depreciation and amor-
tization............. 1,150 615,817 7,337 890,871
--------- ----------- --------- ----------
Total operating ex-
penses............. 422,927 5,658,169 432,521 4,025,389
--------- ----------- --------- ----------
Operating income
(loss)............. (422,927) (1,634,479) (432,521) 1,077,059
--------- ----------- --------- ----------
OTHER INCOME (EXPENSE):
Interest income....... 17,626 195,696 43,055 1,015,902
Interest expense...... -- 128,070 135 2,109,152
--------- ----------- --------- ----------
17,626 67,626 42,920 (1,093,250)
--------- ----------- --------- ----------
NET LOSS................ $(405,301) $(1,566,853) $(389,601) $ (16,191)
--------- ----------- --------- ----------
ACCRETION TO REDEMPTION
VALUE OF CLASS A COMMON
STOCK.................. -- (103,565) (25,891) --
--------- ----------- --------- ----------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS.... $(405,301) $(1,670,418) $(415,492) $ (16,191)
========= =========== ========= ==========
BASIC AND DILUTED NET
LOSS PER SHARE OF COM-
MON STOCK.............. $ (12.42) $ (16.69) $ (4.18) $ (0.16)
========= =========== ========= ==========
BASIC AND DILUTED
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON
STOCK OUTSTANDING...... 32,625 100,093 99,461 100,307
========= =========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM MAY 31, 1996 (COMMENCEMENT OF OPERATIONS), TO DECEMBER 31,
1996, FOR THE YEAR ENDED DECEMBER 31, 1997, AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
COMMON STOCK COMMON STOCK COMMON STOCK
COMMON STOCK $.01 PAR VALUE $.01 PAR VALUE $.01 PAR VALUE ADDITIONAL
-------------- ---------------- ---------------- ---------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ -------- ------- -------- ------- -------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
May 31, 1996
(commencement of
operations)...... -- $-- -- $ -- -- $ -- -- $ -- $-- $-- $--
Issuance of
common stock.... 1,500 -- -- -- -- -- -- -- -- -- --
Conversion of
common stock to
Class B common.. (1,125) -- -- -- 20,000 200 -- -- -- -- 200
Conversion of
common stock to
Class C common.. (375) -- -- -- -- -- 14,711 147 -- -- 147
Net loss......... -- -- -- -- -- -- -- -- -- (405,301) (405,301)
------ ---- -------- ------ -------- ------ -------- ------ ----------- ----------- -----------
BALANCE,
December 31, 1996.. -- -- -- -- 20,000 200 14,711 147 -- (405,301) (404,954)
Accretion of
redeemable
common stock.... -- -- -- -- -- -- -- -- (103,565) -- (103,565)
Net loss......... -- -- -- -- -- -- -- -- -- (1,566,853) (1,566,853)
------ ---- -------- ------ -------- ------ -------- ------ ----------- ----------- -----------
BALANCE,
December 31, 1997.. -- -- -- -- 20,000 200 14,711 147 (103,565) (1,972,154) (2,075,372)
Adjustment to
reflect
amendment to
stock purchase
agreement....... -- -- 80,307 803 -- -- -- -- 12,402,415 -- 12,403,218
Class A common
capital
contributions... -- -- -- -- -- -- -- -- 13,800,000 -- 13,800,000
Net Loss......... -- -- -- -- -- -- -- -- -- (16,191) (16,191)
------ ---- -------- ------ -------- ------ -------- ------ ----------- ----------- -----------
BALANCE, March 31,
1998
(Unaudited)...... -- $-- 80,307 $ 803 20,000 $ 200 14,711 $ 147 $26,098,850 $(1,988,345) $24,111,655
====== ==== ======== ====== ======== ====== ======== ====== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 31, 1996
(COMMENCEMENT
OF FOR THE YEAR FOR THREE MONTHS ENDED
OPERATIONS), ENDED MARCH 31,
TO DECEMBER DECEMBER 31, -------------------------
31, 1996 1997 1997 1998
------------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss.............. $ (405,301) $ (1,566,853) $ (389,602) $ (16,191)
Adjustments to
reconcile net loss to
net cash provided by
(used in) operating
activities--
Depreciation and
amortization....... 1,150 615,817 7,337 890,871
Deferred lease
costs.............. -- 179,481 -- 89,741
Accretion of senior
discount notes..... -- -- -- 2,062,174
Provision for losses
on accounts
receivable......... -- 469,000 -- 577,000
(Increase) decrease
in operating assets
and liabilities--
Accounts
receivable....... -- (2,824,814) -- (3,418,065)
Related-party
receivables...... (16,883) (18,000) (29,679) (85,466)
Other assets...... -- (90,559) -- (238,072)
Accounts payable
and accrued
liabilities...... 268,458 1,601,911 (110,651) 3,883,263
---------- ------------ ----------- ------------
Net cash
provided by
(used in)
operating
activities..... (152,576) (1,634,017) (522,595) (3,745,255)
---------- ------------ ----------- ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures.. (82,303) (11,655,524) (2,244,385) (7,593,061)
Capitalized debt
issuance costs....... -- -- -- (5,944,255)
---------- ------------ ----------- ------------
Net cash used in
investing
activities..... (82,303) (11,655,524) (2,244,385) (13,537,316)
CASH FLOW FROM FINANCING
ACTIVITIES:
Proceeds from issuance
of long-term debt.... -- 3,697,500 -- 150,027,606
Payments on bank
credit facility and
capital leases....... -- (216,528) (486) (3,533,153)
Proceeds from Class A
common capital
contributions........ 4,025,000 8,275,000 4,000,000 13,800,000
---------- ------------ ----------- ------------
Net cash
provided by
financing
activities..... 4,025,000 11,755,972 3,999,514 160,294,453
---------- ------------ ----------- ------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 3,790,121 (1,533,569) 1,232,534 150,502,392
CASH AND CASH
EQUIVALENTS, beginning
of period.............. -- 3,790,121 3,790,121 2,256,552
---------- ------------ ----------- ------------
CASH AND CASH
EQUIVALENTS, end of
period................. $3,790,121 $ 2,256,552 $ 5,022,655 $152,758,944
========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997, AND MARCH 31, 1997 AND 1998
1. ORGANIZATION AND OPERATIONS
Focal Communications Corporation began operations on May 31, 1996. Focal
Communications Corporation and Subsidiaries (the "Company") is a competitive
local exchange carrier ("CLEC") in the United States and offers a range of
telecommunications services. The Company currently has operations in Illinois
and New York. The Company competes with incumbent local exchange carriers
("ILECs") by providing high quality, local telecommunications services,
primarily over fiber optic digital networks, to meet the voice and data
transmission needs of its customers. The Company's customers are principally
telecommunications-intensive businesses, other carriers and resellers and
internet service providers.
The Company incurred an accumulated deficit of $1,972,154 from May 31, 1996
(commencement of operations), through December 31, 1997. The Company must
recognize significant sales and obtain additional capital to adequately grow
its operations. Future profitability of the Company is dependent upon
continued market acceptance and the Company continuing to adequately provide
and maintain its services. Management believes that current financial
forecasts, marketing strategies and capital raising plans are adequate to
address these issues.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The 1996, 1997, and March 31, 1998 consolidated balance sheets include the
accounts of the Company and all wholly owned subsidiaries. All material
intercompany transactions and balances have been eliminated in consolidation.
Interim Financial Information
The unaudited consolidated balance sheet as of March 31, 1998, the unaudited
consolidated statement of stockholders' equity for the three months ended
March 31, 1998 and the unaudited statements of operations and cash flows for
the three months ended March 31, 1997 and 1998 include, in the opinion of
management, all adjustments (consisting of normal and recurring adjustments)
necessary to present fairly the Company's financial position, results of
operations and cash flows. Operating results for the three months ended March
31, 1998 are not necessarily indicative of the results which may be expected
for the year ended December 31, 1998. The information included in these notes
to financial statements relating to the three months ended March 31, 1998 and
1997 is unaudited.
Basis of Accounting
The accompanying consolidated financial statements have been prepared on the
accrual basis of accounting.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Risks and Uncertainties
The Company has recorded revenues and related accounts receivable totaling
$1.7 million as of December 31, 1997, and $3.2 million as of March 31, 1998
from another carrier who is currently disputing its obligation to the Company.
This dispute was ruled on in favor of the Company by the Illinois Commerce
Commission ("ICC") in March of 1998. The other carrier has appealed the ICC
ruling, and a stay of payments due was granted in federal district court
pending consideration of the appeal. A federal court ruling is expected in
June.
Concentration of Suppliers
The Company currently leases its transport capacity from a limited amount of
suppliers and is dependent upon the availability of fiber optic transmission
facilities owned by the suppliers. The Company is currently vulnerable to the
risk of renewing favorable supplier contracts, timeliness of the supplier in
processing the Company's orders for customers and is at risk to regulatory
agreements that govern the rates to be charged to the Company.
Cash and Cash Equivalents
Cash and cash equivalents (stated at cost which approximates market) consist
principally of highly liquid investments, with a maturity date of three months
or less when purchased.
Revenue Recognition
Revenue is recognized over the period in which the services are provided.
Monthly recurring charges include fees paid by customers for lines in service,
additional features on those lines and colocation space. These charges are
billed monthly, in advance, and are fully earned during the month. Usage
charges, initial, non-recurring charges, and reciprocal compensation charges
are billed in arrears and are fully earned when billed.
Depreciation and Amortization
Depreciation is provided on a straight-line basis over the estimated useful
lives of the assets as follows:
<TABLE>
<CAPTION>
ASSET DESCRIPTION USEFUL LIFE
----------------- -----------
<S> <C>
Communications network........... 3-8 years
Computer equipment............... 3 years
Leasehold improvements........... Shorter of asset life or life of lease
Furniture and fixtures........... 2-5 years
</TABLE>
When depreciable assets are replaced or retired, the amounts at which such
assets were carried are removed from the respective accounts and charged to
accumulated depreciation and any gains or losses on disposition is recorded
currently in the consolidated statements of operations.
Maintenance and repairs are charged to expense as incurred, while major
replacements and improvements are capitalized.
F-8
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Impairment of Long-Lived Assets
The Company periodically assesses the recoverability of the carrying cost of
its long-lived assets based on a review of its projected undiscounted cash
flows related to the asset held for use. If assets are determined to be
impaired then the asset is written down to its fair value based on the present
value of the discounted cash flows of the related asset or other relevant
measures (quoted market prices, third party offers, etc.). Based on its
review, management does not believe that an impairment of the long-lived
assets has occurred.
Capitalized Interest
Interest is capitalized in connection with the construction of major
facilities and communication networks. The capitalized interest is recorded as
part of the asset to which it relates and is amortized over the asset's
estimated useful life. No interest was capitalized for the period from May 31,
1996, to December 31, 1996, and for the year ended December 31, 1997, and for
the three months ended March 31, 1998.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," pursuant to which deferred income tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities, using enacted tax rates currently in effect.
State and local taxes may be based on factors other than income.
Other Noncurrent Liabilities
Other noncurrent liabilities represent deferred lease incentives which
reduce lease expense ratably over future periods.
Financial Instruments
The carrying amounts of the Company's financial instruments at December 31,
1996 and 1997 and March 31, 1997 and 1998 approximate their fair values. The
following methods were used in estimating fair value disclosures for
significant financial instruments: (i) cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate their carrying amount due to
the short duration of those instruments and (ii) long-term debt approximates
the underlying cash flows discounted at the Company's incremental borrowing
rates.
Stock-Based Compensation
The Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees." Accordingly, no
compensation expense has been recorded for its stock option awards, but
rather, the Company has determined the pro forma net loss amount for 1997, and
the three months ended March 31, 1998 as if compensation expense had been
recorded for options granted during 1997 and the three months ended March 31,
1998 under the fair value method described in SFAS No. 123, "Accounting for
Stock-Based Compensation."
The Company utilized the Black-Scholes option pricing model to estimate the
fair value of options at the date of grant during 1997 and the three months
ended March 31, 1998. Had the Company adopted SFAS No. 123, pro forma net loss
applicable to common stockholders and pro forma basic and diluted net loss per
share of common stock would have been approximately ($1,710,434) and ($17.09)
for the year ended December 31, 1997,
F-9
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and ($35,353) and ($0.35) for the quarter ended March 31, 1998. The pro forma
disclosure is not likely to be indicative of pro forma results which may be
expected in future years because of the fact that options vest over several
years, compensation expense is recognized as the options vest and additional
awards may also be granted.
Accretion to Redemption Value of Class A Common Stock
Accretion to redemption value of redeemable Class A common stock represents
the change in the redemption value of all outstanding Class A common stock
allocable to each period. The redemption values for all Class A common shares
are based on fair market value and accretion is calculated using the effective
interest method (Note 11).
Loss Per Share
Basic and diluted loss per share were computed in accordance with SFAS No.
128, "Earnings Per Share" (Note 7).
3. RELATED-PARTY RECEIVABLES
As part of the stock purchase agreement (Note 10), executive shareholders,
as defined, purchased their Class A common shares with 90-day promissory
notes. The promissory notes are with recourse to each executive and have a
prepayment provision without penalty. The notes are secured by a pledge of all
Company common stock and other assets held by the executives. Interest accrues
on a daily basis at a rate equal to the applicable federal rate (5.61% at
February 13, 1998) for obligations of similar duration. On March 31, 1998
there was $120,348 due from the executive shareholders.
4. LONG-TERM DEBT
During September, 1997, the Company entered into a credit facility with a
bank which provides for, among other things, a committed equipment line of up
to a maximum principal amount of $6,000,000. The credit facility expires on
October 30, 2002.
The Company may request advances ranging from 70% to 100%, of invoice
amounts related to equipment purchases and construction of facilities, as
defined. All advances under the committed equipment line bear interest at two
percentage points above the prime rate (10.5% at December 31, 1997).
All advances that are outstanding for 30 days will be payable in 48 equal
monthly installments of principal, plus all accrued interest. Advances, once
repaid, may not be reborrowed. Total advances of $3,480,972 were outstanding
as of December 31, 1997. All of the outstanding Class A, Class B and Class C
common stock have been pledged as security for the performance of all
obligations as defined in the credit facility. In February 1998 all amounts
outstanding on this credit facility were repaid and the credit facility was
terminated.
In February 1998 the Company completed its offering of $270 million stated
principal amount at maturity of its 12.125% senior discount notes due 2008
(the "Notes"), which resulted in gross proceeds of $150,027,606. The Notes
bear interest at the rate of 12.125% per annum (computed on a semiannual bond
equivalent basis). In the period prior to February 15, 2003, interest will
accrue but will not be payable in cash. From February 15, 2003, interest on
the stated principal amount at maturity of the Notes will be payable in cash
semi-annually on August 15 and February 15 of each year, beginning on August
15, 2003.
The Notes are senior unsecured obligations of the Company ranking pari passu
in right of payment with all other existing and future senior indebtedness of
the Company, if any, and will rank senior in right of payment to all existing
and future subordinated indebtedness of the Company, if any. Holders of
secured indebtedness of the
F-10
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company, however, will have claims that are prior to the claims of the holders
of the Notes with respect to the assets securing such other indebtedness. The
Notes will be effectively subordinated to all existing and future indebtedness
and other liabilities of the Company's subsidiaries (including accounts
payable).
The Notes are redeemable, at the Company's option, in whole or in part, at
any time or from time to time, on or after February 15, 2003, at 106.063% of
their stated principal amount at maturity, plus accrued and unpaid current
interest, declining ratably to 100% of their stated principal amount at
maturity, plus accrued and unpaid current interest, on or after February 15,
2006. In addition, at any time and from time to time, prior to February 15,
2001, the Company may redeem in the aggregate up to 35% of the original
aggregate stated principal amount at maturity of the Notes with the proceeds
from one or more public equity offerings following which there is a public
market, at a redemption price (expressed as a percentage of accreted value on
the redemption date) of 112.125%, plus additional interest, if any; provided
that at least 65% of the original aggregate stated principal amount at
maturity of the Notes remains outstanding after each such redemption.
The Notes indenture contains certain covenants which, among other things,
restrict the ability of the Company and certain of its subsidiaries to incur
additional indebtedness (and, in the case of certain subsidiaries, issue
preferred stock), pay dividends or make distributions in respect of the
Company's or such subsidiaries' capital stock, make other restricted payments,
enter into sale and leaseback transactions, incur liens, cause encumbrances or
restrictions to exist on the ability of certain subsidiaries to pay dividends
or make distributions in respect of their capital stock, issue and sell
capital stock of certain subsidiaries, enter into transactions with
affiliates, sell assets, or amalgamate, consolidate, merge or sell or
otherwise dispose of all or substantially all of their property and assets.
These covenants are subject to exceptions and qualifications.
Long-term debt at December 31, 1997 and March 31, 1998, consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Credit facility with bank, maximum borrowing
level at $6,000,000........................... $3,480,972 $ --
12.125% senior discount notes due 2008, net of
unamortized discount of $117,910,220.......... -- 152,089,780
Capital leases on equipment with interest at
14.66%, $2,327 due monthly through April,
2000.......................................... 55,914 3,733
---------- ------------
3,536,886 152,093,513
Less--Current Maturities....................... 943,621 --
---------- ------------
$2,593,265 $152,093,513
========== ============
</TABLE>
Aggregate maturities of long-term debt outstanding as of December 31, 1997,
is as follows:
<TABLE>
<S> <C>
1998........................................................... $ 943,621
1999........................................................... 943,621
2000........................................................... 937,579
2001........................................................... 712,065
----------
Total...................................................... $3,536,886
==========
</TABLE>
F-11
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. STOCK OPTIONS
The Company established the Focal Communications Corporation 1997 Non-
Qualified Stock Option Plan (the "Plan") effective February 27, 1997. The Plan
is administered by the Company's Board of Directors (the "Board"). The Board
has sole and complete authority to select participants and grant options for
the Company's Class A common shares which shall not exceed 5,260 shares, as
defined. During 1997, and the three months ended March 31, 1998 stock options
were granted to employees and a director with exercise prices approximating
the fair market value of the shares on the date of grant and, accordingly, no
compensation expense has been recognized in connection with the options.
The Plan gives the Board complete discretion in determining vesting periods
and terms of each participant's options granted. All options granted to
employees and to a director during 1997 and the three months ended March 31,
1998 provide vesting ranging from three to four years. Vesting occurs at 10%
immediately for one participant, 25% on the first-year anniversary from grant
date for all remaining participants and vesting at 12.5% to 15% every six
months for the remainder of vesting years. The term of each option is 10
years. In addition, the Plan provides for accelerated vesting upon certain
events, as defined.
The following summarizes option activity:
<TABLE>
<CAPTION>
WEIGHTED
SHARES OF AVERAGE
CLASS A EXERCISE EXERCISE
COMMON PRICES PRICES
--------- --------- --------
<S> <C> <C> <C>
Outstanding at December 31, 1996........... -- $ -- $ --
Granted during 1997...................... 1,222 $290-$320 $296.61
----- --------- -------
Outstanding at December 31, 1997........... 1,222 $290-$320 $296.61
===== ========= =======
Granted during the three months ended
March 31, 1998.......................... 627 $ 335 $335.00
----- --------- -------
Outstanding at March 31, 1998.............. 1,849 $290-$335 $309.63
===== ========= =======
</TABLE>
The fair value of each option was estimated on the date of grant based on
the Black-Scholes option pricing model assuming, among other things, no
dividend yield, a risk-free interest rate ranging from 6.0% to 6.66%, expected
volatility of 41.67% and expected life of five years.
The Black-Scholes option model estimated the weighted average fair value at
the date of grant of options granted in 1997 and for the three months ended
March 31, 1998 to be $161 per option as of March 31, 1998. The remaining
contractual life of all options was approximately 10 years.
F-12
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
There is no current or deferred tax expense for the period from May 31,
1996, to December 31, 1996, for the year ended December 31, 1997, and for the
three months ended March 31, 1998. The deferred tax consequences of temporary
differences in reporting items for financial statement and income tax purposes
are recognized, if appropriate. Realization of future tax benefits related to
the deferred tax assets is dependent on many factors, including the Company's
ability to generate taxable income. Management has considered these factors
and has concluded that a full valuation allowance for financial reporting
purposes is required for the deferred tax assets. The income tax effect of
temporary differences comprising the net deferred tax asset is a result of the
following:
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Deferred income tax liabilities--Depreciation...... $ -- $(227,000)
-------- ---------
Deferred income tax assets--Assets recorded for tax
purposes.......................................... -- 205,000
Net operating losses............................... 76,000 724,000
-------- ---------
76,000 929,000
-------- ---------
Less--Valuation allowance.......................... (76,000) (702,000)
-------- ---------
Net deferred tax assets............................ $ -- $ --
======== =========
</TABLE>
The Company has net operating loss carryforwards as of December 31, 1997 of
approximately $1,811,000 for tax purposes to offset future taxable income. The
operating loss carryforwards expire principally in 2012.
7. LOSS PER SHARE
SFAS No. 128, "Earnings Per Share," requires the Company to calculate its
earnings per share based on basic and diluted earnings per share, as defined.
Basic and diluted loss per share for the period from May 31, 1996, to December
31, 1996, for the year ended December 31, 1997, and for the three months ended
March 31, 1998 was computed by dividing net loss applicable to common
stockholders by the weighted average number of shares of common stock (Class A
and Class B common stock).
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1997 1998
------------ ------------ --------- ---------
<S> <C> <C> <C> <C>
Basic Weighted Average
Number of Common Shares
Outstanding.............. 32,625 100,093 99,461 100,307
Dilutive Stock Options.... -- -- -- 1,304
------ ------- ------ -------
Dilutive Weighted Average
Number of Common Shares
Outstanding.............. 32,625 100,093 99,461 101,611
====== ======= ====== =======
</TABLE>
The 14,711 Class C common shares and the Company's 1,849 unvested stock
options granted during 1997 and the three months ended March 31, 1998, are
antidilutive and have been excluded from diluted loss per share calculation
for the year ended December 31, 1997 and the three months ended March 31,
1998.
8. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Plan (the "Plan") covering substantially all
eligible employees. Under the Plan, participants may make pretax contributions
from 1% to 15% of eligible earnings, as defined. The Company may elect to
contribute to the Plan at its discretion. There have been no Company
contributions to the Plan for the years ended December 31, 1996 and 1997. In
February 1998 the company elected to match 30% of the first 10% that an
employee contributes to the plan.
F-13
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Under the terms of various short- and long-term contracts, the Company is
obligated to pay office rents and rent for leasing fiber optic transmission
facilities. The Company is obligated to pay office rents in connection with
its operations through 2012. The office rent contracts provide for certain
scheduled increases and for possible escalation of basic rentals based on a
change in the cost of living or on other factors. The Company expects to enter
into other contracts for additional office space, other facilities, equipment
and maintenance services in the future.
A summary of such fixed commitments at December 31, 1997, is as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ----------
<S> <C>
1998........................................................... $ 575,000
1999........................................................... 584,000
2000........................................................... 595,000
2001........................................................... 475,000
2002........................................................... 500,000
Thereafter..................................................... 4,784,000
----------
Total........................................................ $7,513,000
==========
</TABLE>
Rent expense under operating leases for office rent and rent for leasing
fiber optic transmission facilities was approximately $6,488 for the period
from May 31, 1996, to December 31, 1996, and $651,159 for the year ended
December 31, 1997, and $166,484 for the three months ended March 31, 1998.
In the ordinary course of business, the Company is involved in various
regulatory matters (Note 2), proceedings and claims.
10. STOCK PURCHASE AGREEMENT
On November 27, 1996, the Company entered into a Stock Purchase Agreement
(the "Agreement") with Institutional Investors and Executives ("Investors"),
as defined in the Agreement. The Agreement resulted in 79,384 shares of Class
A Common Stock, par value $.01 per share being issued for an aggregate
purchase price of $4 million, and subsequent transactions in which Investors
will make pro-rata contributions to the capital of the Company (with no
additional shares being issued) of up to an additional $21.8 million (total
investment of up to $25.8 million). Total capital contributions to the Company
for the issuance of Class A common were $4,025,000 and $8,275,000 for the
period from May 31, 1996, to December 31, 1996, and for the year ended
December 31, 1997, respectively.
Subsequent to the closing of the Agreement, the Company sold 77 shares and
846 shares of Class A Common shares to Designees (as defined in the Agreement)
of the Institutional Investors, for a total purchase price of $25,000 and
$275,000 for the period from May 31, 1996, to December 31, 1996, and for the
year ended December 31, 1997, respectively.
As part of the Agreement, the Company and Executives' existing common stock
held by the executives converted into newly issued Class B common and Class C
common shares (the "Exchange"). The closing of the Exchange and issuance of
Class B common and Class C common shares took place simultaneously with the
initial closing of the issuance of Class A common shares under the Agreement.
A summary of the Company's Class A, B and C common stock is as follows:
Class A Common--A total of 85,567 shares have been authorized and 79,461
and 80,307 are issued and outstanding as of December 31, 1996 and 1997,
respectively. Institutional Investors, as defined, who
F-14
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
hold Class A common shares have the right to put the shares to the Company
at fair market value (Notes 11 and 14). Once the put right is exercised by
the Institutional Investors, the Executive Investors and Designees of the
Institutional Investors have the right to participate in the put option as
to all, but not less than all, of the shares of Class A common owned by
them and pursuant to the Agreement. The Class A common held by
Institutional Investors have demand registration rights, all Class A common
stockholders have voting rights, piggyback registration rights, participate
in earnings and dividends and other preference features, as defined.
Class B Common--A total of 35,000 shares have been authorized and 20,000
shares are issued and outstanding as of December 31, 1996 and 1997. Class B
common stockholders have voting rights, piggyback registration rights,
participate in earnings and dividends and other preference features, as
defined. The Executive Stock Agreement ("ESA") provides vesting for Class B
common of 20% at the closing of the Agreement and an additional 20% on each
of the four anniversaries of the closing date of the Agreement. The ESA
also provides for vesting acceleration upon the occurrence of certain
events (as defined): (a) qualified sale of the Company; (b) qualified
reorganization; and (c) public offering of the Company's stock.
Class C Common--A total of 15,000 shares have been authorized and 14,711
shares are issued and outstanding as of December 31, 1996 and 1997. Class C
common stockholders have voting rights in which the executives have named
the Institutional Investors as their proxies to vote all unvested Class C
common shares. The ESA and other vesting agreements, under the Agreement,
provide vesting of the Class C common shares. Under the vesting agreements,
the Class C common shares vest, based upon certain triggering events (as
defined), including: (a) qualified sale of the Company; (b) qualified
liquidation of the Company; and (c) public offering of the Company's stock.
The Class C common shares will be automatically forfeited on November 27,
2003 if a triggering event does not occur. Once a triggering event takes
place the vesting of Class C common shares will also be subject to vesting
under the ESA which provides vesting at 20% at the closing of the agreement
and an additional 20% on each of the four anniversaries of the closing date
(November 27, 1996). Pursuant to the vesting agreements, upon the vesting
of any shares of Class C common an equal number of shares of Class A common
held by the Institutional Investors will be forfeited. At the time of a
triggering event the Company will be subject to a compensation charge equal
to the value transferred to the Class C common stockholders.
11. REDEEMABLE COMMON STOCK
As defined in the Agreement (Note 10), Institutional Investors which hold an
aggregate of 78,461 shares of Class A common shares have the right to put the
shares to the Company on or after November 27, 2003, at the greater of the
initial purchase price per share of Class A common owned by the Institutional
Investors or fair market value, as defined in the Agreement. Once the put
right is exercised by the Institutional Investors, the Executive Investors and
Designees of the Institutional Investors have the right to participate in the
put option as to all, but not less than all, of the shares of Class A common
owned by them and pursuant to the Agreement. This put right automatically
terminates upon the closing of an initial public offering, as defined. The
Company records accretion each quarter to the expected redemption value at
November 27, 2003, based on the effective interest method.
Although management has not obtained an appraisal of the fair market value
of the Company, certain public equity transactions have occurred within the
industry upon which management has based its estimate on the potential
redemption value of the aforementioned shares to be $333 and $325 per share as
of December 31, 1997 and 1996, respectively. The Company recorded accretion
totaling $103,565 and $0 for the year ended December 31, 1997, and for the
period from May 31, 1996, to December 31, 1996, respectively.
During January 1998, the Agreement was amended and the aforementioned put
right was replaced by a provision which would allow the Class A common
Institutional Investors, Executive Investors, and Designees of
F-15
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
Institutional Investors, as defined, to require the Company to voluntarily
liquidate. The Institutional Investors at any time and from time to time on or
after November 27, 2003, but not after the consummation of a public offering,
shall have the right to require the Company to voluntarily liquidate the
assets of the Company. Upon receipt of notice of the required liquidation, the
Company may elect to purchase all but not less than all of the Institutional
Investors' Class A common shares.
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest and noncash investing and financing activities for
the year ended December 31, 1997, and for the three months ended March 31,
1998, was as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE THREE
ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
Cash paid during the year for interest....... $ 94,533 $69,079
======== =======
Fixed assets acquired under capital leases... $ 68,589 $ --
======== =======
Payments made under capital leases........... $ 12,675 $51,908
======== =======
Accretion to redemption value of Class A
common stock................................ $103,565 $ --
======== =======
</TABLE>
13. SELECTED CONSOLIDATED QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1996 (for period from May
31, 1996 (commencement of
operations), to December
31, 1996)--
Revenues.................. $ -- $ -- $ -- $ --
Loss from operations...... -- -- (21,650) (401,277)
Net loss applicable to
common stockholders...... -- -- (21,650) (383,651)
==========
Basic and diluted net loss
per share................ $ -- $ -- $ (1.08) $ (7.77)
========== ========= ========== ==========
1997--
Revenues.................. $ -- $ 86,907 $1,226,076 $2,710,707
Income (loss) from
operations............... (432,526) (820,686) (461,382) 80,115
Net income (loss)
applicable to common
stockholders............. (415,492) (794,257) (466,446) 5,777
Basic and diluted net
income (loss) per share.. $ (4.18) $ (7.92) $ (4.65) $ .06
========== ========= ========== ==========
1998--
Revenues.................. $5,102,448
Income (loss) from
operations............... 1,077,059
Net income (loss)
applicable to common
stockholders............. (16,191)
Basic and diluted net loss
per share................ $ (0.16)
==========
</TABLE>
F-16
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE AS OF WHICH INFORMATION IS GIVEN IN THIS PRO-
SPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANY-
ONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO
DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITA-
TION.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 11
The Exchange Offer....................................................... 21
Use of Proceeds.......................................................... 29
Capitalization........................................................... 29
Selected Consolidated Financial and Operating Data....................... 30
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 32
Business................................................................. 36
Management............................................................... 48
Security Ownership of Certain Beneficial Owners and Management........... 55
Certain Transactions..................................................... 57
Description of Capital Stock............................................. 57
Description of the Exchange Notes........................................ 62
Plan of Distribution..................................................... 92
Certain United States Federal Income Tax Considerations.................. 93
Legal Matters............................................................ 98
Independent Public Accountants........................................... 98
Available Information.................................................... 98
Index to Consolidated Financial Statements............................... F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$270,000,000
FOCAL COMMUNICATIONS CORPORATION
OFFER TO EXCHANGE ITS 12.125% SENIOR DISCOUNT NOTES DUE 2008, SERIES B FOR ANY
AND ALL OF ITS OUTSTANDING 12.125% SENIOR DISCOUNT NOTES DUE 2008
[LOGO]
----------------
PROSPECTUS
DATED , 1998
----------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Delaware General Corporation Law. The Company has statutory authority to
indemnify the officers and directors. The applicable provisions of the DGCL
state that, to the extent such person is successful on the merits or
otherwise, a corporation may indemnify any person who was or is a party or who
is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation), by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise ("such Person"), against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement,
actually and reasonably incurred by such Person, if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. In
any threatened, pending or completed action by or in the right of the
corporation, a corporation also may indemnify any such Person for costs
actually and reasonably incurred by him in connection with that action's
defense or settlement, if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation;
however, no indemnification shall be made with respect to any claim, issue or
matter as to which such Person shall have been adjudged to be liable to the
corporation, unless and only to the extent that a court shall determine that
such indemnity is proper.
Under the applicable provisions of the DGCL, any indemnification shall be
made by the corporation only as authorized in the specific case upon a
determination that the indemnification of the director, officer, employee or
agent is proper in the circumstances because he has met the applicable
standard of conduct. Such determination shall be made:
(1) By the Board of Directors by a majority vote of a quorum consisting
of directors who are not parties to such action, suit or proceeding; or
(2) If such a quorum is not obtainable or, even if obtainable, a quorum
of disinterested directors so directs, by independent legal counsel in a
written opinion; or
(3) By the affirmative vote of a majority of the shares entitled to vote
thereon.
The Company's Certificate of Incorporation provides for indemnification to
the full extent permitted by the laws of the State of Delaware against and
with respect to threatened, pending or completed actions, suits or proceedings
arising from or alleged to arise from, a party's actions or omissions as a
director, officer, employee or agent of the Company or of any subsidiary of
the Company or of any other corporation, partnership, joint venture, trust or
other enterprise which he has served in such capacity at the request of the
Company if such acts or omissions occurred or were or are alleged to have
occurred, while said party was a director or officer of the Company.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
1.1 Purchase Agreement with Salomon Brothers Inc, Morgan Stanley & Co.
Incorporated, and NationsBanc Montgomery Securities LLC, dated
February 12, 1998.+
2.1 Plan of Reorganization and Agreement by and among Focal Communications
Corporation and its Subsidiaries, dated June 12, 1997.+
3.1 Certificate of Incorporation+
3.2 By-Laws+
4.1 Indenture with Harris Trust and Savings Bank, dated February 18,
1998.+
4.2 Initial Global 12.125% Senior Discount Note Due February 15, 2008,
dated February 18, 1998.+
4.3 Exchange and Registration Agreement with Salomon Brothers Inc, Morgan
Stanley & Co. Incorporated, and NationsBanc Montgomery Securities LLC,
dated February 18, 1998.+
4.4 Form of Exchange Agent Agreement with Harris Trust and Savings Bank,
dated , 1998.
4.5 Stock Purchase Agreement with Madison Dearborn Capital Partners, L.P.,
Frontenac VI, L.P., Battery Ventures III, L.P., Brian F. Addy, John R.
Barnicle, Joseph Beatty, and Robert C. Taylor Jr., dated November 27,
1996.+
4.6 Amendment to Stock Purchase Agreement with Madison Dearborn Capital
Partners, L.P., Frontenac VI, L.P., Battery Ventures III, L.P., Brian
F. Addy, John R. Barnicle, Joseph Beatty, and Robert C. Taylor Jr.,
dated January 23, 1998.+
4.7 Executive Investor Stock Pledge Agreement with Brian F. Addy, dated
November 27, 1996.+
4.8 Executive Investor Stock Pledge Agreement with John R. Barnicle, dated
November 27, 1996.+
4.9 Executive Investor Stock Pledge Agreement with Joseph A. Beatty, dated
November 27, 1996.+
4.10 Executive Investor Stock Pledge Agreement with Robert C. Taylor, Jr.,
dated November 27, 1996.+
4.11 Stockholders Agreement with Madison Dearborn Capital Partners, L.P.,
Frontenac VI, L.P., Battery Ventures III, L.P., Brian F. Addy, John R.
Barnicle, Joseph Beatty, and Robert C. Taylor Jr., dated November 27,
1996.+
4.12 Executive Stock Agreement and Employment Agreement with Brian F. Addy,
dated November 27, 1996.+
4.13 Executive Stock Agreement and Employment Agreement with John R.
Barnicle, dated November 27, 1996.+
4.14 Executive Stock Agreement and Employment Agreement with Joseph A.
Beatty, dated November 27, 1996.+
4.15 Executive Stock Agreement and Employment Agreement with Robert C.
Taylor, Jr., dated November 27, 1996.+
4.16 Registration Agreement with Madison Dearborn Capital Partners, L.P.,
Frontenac VI, L.P., Battery Ventures III, L.P., Brian F. Addy, John R.
Barnicle, Joseph Beatty, and Robert C. Taylor Jr., dated November 27,
1996.+
5.1 Opinion of Ross & Hardies+
8.1 Tax Opinion of Ross & Hardies
10.1 Interconnection Agreement with Ameritech Information Industry
Services, dated October 28, 1996.+
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10.2 Interconnection Agreement with Ameritech Information Industry
Services, dated October 24, 1997.+
10.3 Interconnection Agreement with New York Telephone Company, dated
November 10, 1997.+
10.4 Amended and Restated Interconnection Agreement with Ameritech
Information Industry Services, dated March 16, 1998.+
10.5 Network Products Purchase Agreement with Northern Telecom Inc., dated
January 21, 1997.
10.6 Amendments No. 1 and No. 2 to Network Products Purchase Agreement with
Northern Telecom Inc., both dated March 6, 1998.
10.7 Lease Agreement for property located at 200 North LaSalle, Chicago,
IL, dated December 31, 1996.+
10.8 First Amendment to Lease Agreement for property located at 200 North
LaSalle, Chicago, IL, dated May 14, 1997.+
10.9 Second Amendment to Lease Agreement for property located at 200 North
LaSalle, Chicago, IL, dated November 15, 1997.+
10.10 Third Amendment to Lease Agreement for property located at 200 North
LaSalle, Chicago, IL, dated March 2, 1998.+
10.11 Lease Agreement for property located at 32 Old Slip, New York, NY,
dated May 20, 1997.+
10.12 Lease Agreement for property located at 650 Townsend Street, San
Francisco, CA, dated January 26, 1998.+
10.13 Lease Agreement for property located at 701 Market Street,
Philadelphia, Pennsylvania, dated March 10, 1998.+
10.14 1997 Non-Qualified Stock Option Plan, adopted February 27, 1997.+
10.15 Form of Stock Option Agreement+
10.16 Employment Agreement with Renee M. Martin, dated March 20, 1998+
10.17 Software License with DPI/TFS, Inc., dated April 10, 1997
10.18 Fourth Amendment to Lease Agreement for property located at 200 North
LaSalle, Chicago, IL, dated April 4, 1998.
10.19 Lease Agreement for property located at 1120 Vermont Avenue, N.W.,
Washington, D.C., dated as of May 4, 1998.
10.20 Lease Agreement for property located at 1200 West Seventh Street, Los
Angeles, California, dated as of May 19, 1998.
12.1 Statement re Computation of Ratios
21.1 Subsidiaries of the Registrant+
23.1 Consent of Arthur Andersen LLP*
Consent of Ross & Hardies (included as part of its opinions filed as
23.2 Exhibits 5.1 and 8.1 hereto)+
24.1 Powers of Attorney (included on signature pages hereof)+
25.1 Statement of Eligibility of Trustee+
99.1 Form of Letter of Transmittal+
99.2 Form of Notice of Guaranteed Delivery+
</TABLE>
- --------
+ Previously Filed.
* To be filed by amendment.
(B) Financial Statement Schedules.
Schedules not listed have been omitted because they are inapplicable or the
information required to be set forth therein is provided in the Consolidated
Financial Statements of the Company or notes thereto.
II-3
<PAGE>
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, office or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
this Registration Statement when it became effective.
The undersigned registrant hereby undertakes that for purposes of
determining any liability under the Securities Act, the information omitted
from the form of prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this Registration Statement as of the time
it was declared effective.
The undersigned registrant hereby undertakes that for the purpose of
determining any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement related to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
The undersigned registrant hereby undertakes to file, during any period in
which offers or sales are being made, a post-effective amendment to this
Registration Statement;
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent post-
effective amendment hereof) which, individually or in the aggregate,
represents a fundamental change in the information set forth in this
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Securities and
Exchange Commission pursuant to rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in this Registration Statement when it becomes
effective; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
The undersigned registrant hereby undertakes to remove from registration by
means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Chicago, State of Illinois, on , 1998.
Focal Communications Corporation
/s/ Robert C. Taylor, Jr.
By: _________________________________
ROBERT C. TAYLOR, JR.
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on , 1998.
SIGNATURE TITLE(S)
/s/ Robert C. Taylor, Jr. President, Chief Executive Officer and
- ------------------------------------- Director
ROBERT C. TAYLOR, JR.
Executive Vice President, Chief
/s/ John R. Barnicle* Operating Officer, Assistant
- ------------------------------------- Secretary, and Director
JOHN R. BARNICLE
/s/ Joseph A. Beatty Executive Vice President, Principal
- ------------------------------------- Financial Officer, Treasurer and
JOSEPH A. BEATTY Assistant Secretary
/s/ Robert M. Junkroski
- ------------------------------------- Controller (Principal Accounting
ROBERT M. JUNKROSKI Officer)
Director
/s/ James E. Crawford, III*
- -------------------------------------
JAMES E. CRAWFORD, III
Director
/s/ Paul T. Finnegan*
- -------------------------------------
PAUL T. FINNEGAN
Director
/s/ Richard D. Frisbie*
- -------------------------------------
RICHARD D. FRISBIE
Director
/s/ James N. Perry*
- -------------------------------------
JAMES N. PERRY, JR.
Director
/s/ Paul G. Yovovich*
- -------------------------------------
PAUL G. YOVOVICH
*Signed by Joseph A. Beatty pursuant to power of attorney
II-5
<PAGE>
Exhibit 4.4
FORM OF EXCHANGE AGENT AGREEMENT
Date
Harris Trust and Savings Bank
12th Floor
311 West Monroe Street
Chicago, Illinois 60690
Ladies and Gentlemen:
______________________________, a Delaware corporation (the "Company")
hereby appoints Harris Trust and Savings Bank ("Harris Trust") to act as
exchange agent (the "Exchange Agent") in connection with an exchange offer by
the Company to exchange an aggregate principal amount of up to $_______________
of its __________________________ (the "New Notes"), which have been registered
under the Securities Act of 1933, as amended, for a like principal amount of its
outstanding __________________________ (the "Old Notes"). The terms and
conditions of the exchange offer are set forth in a Prospectus, dated
__________________, 199_ (as the same may be amended or supplemented from time
to time, the "Prospectus"), and in the related Letter of Transmittal, which
together constitute the "Exchange Offer." Capitalized terms used herein and not
defined shall have the respective meanings ascribed thereto in the Prospectus.
On the basis of the representations, warranties and agreements of the
Company and Harris Trust contained herein and subject to the terms and
conditions hereof, the following sets forth the agreement between the Company
and Harris Trust as Exchange Agent for the Exchange Offer:
1. Appointment and Duties as Exchange Agent.
----------------------------------------
(a) The Company hereby authorizes Harris Trust to act as Exchange Agent in
connection with the Exchange Offer and Harris Trust agrees to act as Exchange
Agent in connection with the Exchange Offer. As Exchange Agent, Harris Trust
will perform those services as are outlined herein or which are customarily
performed by an exchange agent in connection with an exchange offer of like
nature, including, but not limited to, accepting tenders of the Old Notes,
assisting the Company in the preparation of the documentation necessary to
effect the transactions herein contemplated (without assuming responsibility
for
<PAGE>
such documentation, unless such information has been furnished to the Company in
writing by Harris Trust).
(b) The Company acknowledges and agrees that Harris Trust has been retained
pursuant to this Agreement to act solely as Exchange Agent in connection with
the Exchange Offer, and in such capacity, Harris Trust shall perform such duties
as are outlined herein and which are specifically set forth in the section of
the Prospectus captioned "The Exchange Offer" and in the Letter of Transmittal;
provided, however, that in no way will Harris Trust's general duty to act in
good faith and without gross negligence or willful misconduct be discharged by
the foregoing.
(c) Harris Trust will examine each of the Letters of Transmittal (or
electronic instructions transmitted by the Depository Trust Corporation (the
"DTC Transmissions") and certificates for the Old Notes and any other documents
delivered or mailed to Harris Trust by or for holders of the Old Notes (or any
Book-Entry Confirmations (as set forth in the Prospectus) received by Harris
Trust with respect to the Old Notes), to ascertain whether: (i) the Letters of
Transmittal and any such other documents are duly executed and properly
completed in accordance with the instructions set forth therein (or that the DTC
Transmission contains the proper information required to be set forth therein)
and (ii) the Old Notes have otherwise been properly tendered (or that the Book-
Entry Confirmations are in due and proper form and contain the information
required to be set forth therein). In each case where the Letters of
Transmittal or any other documents have been improperly completed or executed
(or the DTC Transmissions are not in due and proper form or omit certain
information) or certificates for the Old Notes are not in proper form for
transfer (or the Book-Entry Confirmations are not in due and proper form or omit
certain information) or some other irregularity in connection with the tender or
acceptance of the Old Notes exists, Harris Trust will endeavor, subject to the
terms and conditions of the Exchange Offer, to advise the tendering holders of
Old Notes of the irregularity and to take any other action as may be necessary
or advisable to cause such irregularity to be corrected. Notwithstanding the
above, Harris Trust shall not be under any duty to give any notification of any
irregularities in tenders or incur any liability for failure to give any such
notification.
(d) With the approval of the President, any Senior Vice President, any
Executive Vice President, any Vice President or the Treasurer or any Assistant
Treasurer of the Company (such approval, if given orally, to be confirmed in
writing) or any other party designated by any such officer, Harris Trust is
authorized to waive any irregularities in connection with any tender of the Old
Notes pursuant to the Exchange Offer.
(e) Tenders of the Old Notes may be made only as set forth in the Letter of
Transmittal and in the section of the Prospectus captioned "The Exchange Offer"
and the Old Notes shall be considered properly tendered only when tendered in
accordance with such procedures set forth therein. Notwithstanding the
provisions of this paragraph, the Old Notes which the President, any Senior Vice
President, any Executive Vice President, any Vice President or the Treasurer,
any Assistant Treasurer or any other designated officer of the
-2-
<PAGE>
Company, shall approve (such approval, if given orally, to be confirmed in
writing) as having been properly tendered shall be considered to be properly
tendered.
(f) Harris Trust shall advise the Company with respect to any Old Notes
received as soon as possible after 5:00 p.m., New York City time, on the
Expiration Date and accept its instructions with respect to disposition of the
Old Notes.
(g) Harris Trust shall (i) ensure that each Letter of Transmittal and, if
required pursuant to the terms of the Exchange Offer, the related Old Notes or a
bond power are duly executed (with signatures guaranteed where required) by the
appropriate parties in accordance with the terms of the Exchange Offer; (ii) in
those instances where the person executing the Letter of Transmittal (as
indicated on the Letter of Transmittal) is acting in a fiduciary or
representative capacity, ensure that proper evidence of his or her authority so
as to act is submitted; (iii) in those instances where the Old Notes are
tendered by persons other than the registered holder of such Old Notes, ensure
that the customary transfer requirements, including any applicable transfer
taxes, and the requirements imposed by the transfer restrictions on the Old
Notes (including any applicable requirements for certification, legal opinions
or other information) are fulfilled; (iv) ensure that the Old Notes tendered in
part are tendered in principal amounts of $1,000 and integral multiples thereof;
and (v) deliver certificates for the Old Notes tendered in part to the transfer
agent for split-up and shall return any untendered Old Notes or Old Notes which
have not been accepted by the Company to the holders of such Old Notes (or in
the case of Old Notes tendered by book-entry transfer, such non-exchanged Old
Notes will be credited to an account maintained with the Book-Entry Transfer
Facility) promptly after the expiration or termination of the Exchange Offer.
(h) Upon acceptance by the Company of any Old Notes duly tendered pursuant
to the Exchange Offer (such acceptance if given orally, to be confirmed in
writing), Harris Trust will cause the New Notes in exchange therefor to be
issued as promptly as possible (subject to receipt from the Company of
appropriate certificates under the related Indenture) and Harris Trust will
deliver such New Notes on behalf of the Company at the rate of $1,000 principal
amount of New Notes for each $1,000 principal amount of the Old Notes tendered
as promptly as possible after acceptance by the Company of the Old Notes in
exchange and notice (such notice if given orally, to be confirmed in writing) of
such acceptance by the Company; provided, however, that in all cases, the Old
Notes tendered pursuant to the Exchange Offer will be exchanged only after
timely receipt by Harris Trust of certificates for such Old Notes (or a Book-
Entry Confirmation), a properly completed and duly executed Letter of
Transmittal (or facsimile thereof) with any required signature guarantees and
any other required documents (or a properly completed DTC Transmission). Unless
otherwise instructed by the Company, Harris Trust shall issue the New Notes only
in denominations of $1,000 or any integral multiple thereof.
(i) Tendered pursuant to the Exchange Offer are irrevocable, except that,
subject to the terms and the conditions set forth in the Prospectus and the
Letter of Transmittal, the Old
-3-
<PAGE>
Notes tendered pursuant to the Exchange Offer may be withdrawn at any time on or
prior to the Expiration Date in accordance with the terms of the Exchange Offer.
(j) Notice of any decision by the Company not to exchange any Old Notes
tendered shall be given by the Company either orally (if given orally, to be
confirmed in writing) or in a written notice to Harris Trust.
(k) If, pursuant to the Exchange Offer, the Company does not accept for
exchange all or part of the Old Notes tendered because of an invalid tender, the
occurrence of certain other events set forth in the Prospectus under the caption
"The Exchange Offer - Certain Conditions to the Exchange Offer" or otherwise,
Harris Trust shall, upon notice from the Company (such notice if given orally,
to be confirmed in writing), promptly after the expiration or termination of the
Exchange Offer return such certificates for unaccepted Old Notes (or effect
appropriate Book-Entry Confirmation), together with any related required
documents and the Letters of Transmittal (or DTC Transmissions) relating thereto
that are in Harris Trust's possession, to the persons who deposited such
certificates.
(l) Certificates for reissued Old Notes, unaccepted Old Notes or New Notes
shall be forwarded by (a) first-class certified mail, return receipt requested
under a blanket surety bond obtained by Harris Trust protecting Harris Trust and
the Company from loss or liability arising out of the non-receipt or non-
delivery of such certificates or (b) by registered mail insured by Harris Trust
separately for the replacement value of each such certificate.
(m) Harris Trust is not authorized to pay or offer to pay any concessions,
commissions or solicitation fees to any broker, dealer, commercial bank, trust
company or other nominee or to engage or use any person to solicit tenders.
(n) As Exchange Agent, Harris Trust:
(i) shall have no duties or obligations other than those specifically
set forth in the Prospectus, the Letter of Transmittal or herein or as may be
subsequently agreed to in writing;
(ii) will make no representations and will have no responsibilities as
to the validity, value or genuineness of any of the certificates for the Old
Notes deposited pursuant to the Exchange Offer, and will not be required to and
will make no representation as to the validity, value or genuineness of the
Exchange Offer; provided, however, that in no way will Harris Trust's general
duty to act in good faith and without gross negligence or willful misconduct be
limited by the foregoing;
(iii) shall not be obligated to take any legal action hereunder which
might in Harris Trust's reasonable judgment involve any expense or liability,
unless Harris Trust shall have been furnished with reasonable indemnity;
-4-
<PAGE>
(iv) may reasonably rely on and shall be protected in acting in
reliance upon any certificate, instrument, opinion, notice, letter, telegram or
other document or security delivered to Harris Trust and reasonably believed by
Harris Trust to be genuine and to have been signed by the proper party or
parties;
(v) may reasonably act upon any tender, statement, request, comment,
agreement or other instrument whatsoever not only as to its due execution and
validity and effectiveness of its provisions, but also as to the truth and
accuracy of any information contained therein, which Harris Trust believes in
good faith to be genuine and to have been signed or represented by a proper
person or persons acting in a fiduciary or representative capacity (so long as
proper evidence of such fiduciary's or representative's authority so to act is
submitted to Harris Trust) and Harris Trust examines and reasonably concludes
that such evidence properly establishes such authority;
(vi) may rely on and shall be protected in acting upon written or oral
instructions from the President, any Senior Vice President, any Executive Vice
President, any Vice President, the Treasurer, any Assistant Treasurer or any
other designated officer of the Company;
(vii) may consult with its own counsel with respect to any questions
relating to Harris Trust's duties and responsibilities and the written opinion
of such counsel shall be full and complete authorization and protection in
respect of any action taken, suffered or omitted to be taken by Harris Trust
hereunder in good faith and in accordance with the written opinion of such
counsel; and
(viii) shall not advise any person tendering Old Notes pursuant to the
Exchange Offer as to whether to tender or refrain from tendering all or any
portion of its Old Notes or as to the market value, decline or appreciation in
market value of any Old Notes that may or may not occur as a result of the
Exchange Offer or as to the market value of the New Notes.
(o) Harris Trust shall take such action as may from time to time be
requested by the Company (and such other action as Harris Trust may reasonably
deem appropriate) to furnish copies of the Prospectus, Letter of Transmittal and
the Notice of Guaranteed Delivery or such other forms as may be approved from
time to time by the Company, to all persons requesting such documents and to
accept and comply with telephone requests for information relating to the
Exchange Offer, provided that such information shall relate only to the
procedures for tendering into (or withdrawing from) the Exchange Offer. The
Company will furnish you with copies of such documents at your request.
(p) Harris Trust shall advise orally and promptly thereafter confirm in
writing to the Company and such other person or persons as the Company may
request, daily (and more frequently during the week immediately preceding the
Expiration Date and if otherwise reasonably requested) up to and including the
Expiration Date, the aggregate principal amount
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<PAGE>
of the Old Notes which have been duly tendered pursuant to and in compliance
with the terms of the Exchange Offer and the terms received by Harris Trust
pursuant to the Exchange Offer and this Agreement, separately reporting and
giving cumulative totals as to items properly received and items improperly
received. In addition, Harris Trust will also provide, and cooperate in making
available to the Company, or any such other person or persons upon request (such
request if made orally, to be confirmed in writing) made from time to time, such
other information as the Company may reasonably request. Such cooperation shall
include, without limitation, the granting by Harris Trust to the Company, and
such person or persons as the Company may request, access to those persons on
Harris Trust's staff who are responsible for receiving tenders, in order to
ensure that immediately prior to the Expiration Date the Company shall have
received adequate information in sufficient detail to enable the Company to
decide whether to extend the Exchange Offer. Harris Trust shall prepare a final
list of all persons whose tenders were accepted, the aggregate principal amount
of the Old Notes tendered, the aggregate principal amount of the Old Notes
accepted and deliver said list to the Company.
(q) Letters of Transmittal, Book-Entry Confirmations, DTC Transmissions and
Notices of Guaranteed Delivery shall be stamped by Harris Trust as to the date
and the time of receipt thereof and shall be preserved by Harris Trust for a
period of time at least equal to the period of time Harris Trust preserves other
records pertaining to the transfer of securities, or one year, whichever is
longer, and thereafter shall be delivered by Harris Trust to the Company. Harris
Trust shall dispose of unused Letters of Transmittal and other surplus materials
by returning them to the Company.
(r) Harris Trust hereby expressly waives any lien, encumbrance or right of
set-off whatsoever that Harris Trust may have with respect to funds deposited
with it for the payment of transfer taxes by reasons of amounts, if any,
borrowed by the Company, or any of its subsidiaries or affiliates pursuant to
any loan or credit agreement with Harris Trust or for compensation owed to
Harris Trust hereunder or for any other matter.
2. Compensation.
In consideration of Harris Trust's acceptance of the appointment set forth
in Paragraph 1 above, the Company agrees to (i) pay Harris Trust a fee for all
services rendered under the foregoing appointment of $______ and (ii) reimburse
Harris Trust for any reasonable out-of-pocket expenses incurred as Exchange
Agent in performing the services described herein; provided, however, that
Harris Trust shall not be entitled to reimbursement for the fees or
disbursements of its legal counsel without the prior written consent of the
Company.
3. Indemnification.
(a) The Company hereby agrees to protect, defend, indemnify and hold
harmless Harris Trust against and from any and all costs, losses, liabilities,
expenses (including
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<PAGE>
reasonable counsel fees and disbursements) and claims imposed upon or asserted
against Harris Trust on account of any action taken or omitted to be taken by
Harris Trust in connection with its acceptance of or performance of its duties
under this Agreement and the documents related thereto as well as the reasonable
costs and expenses of defending itself against any claim or liability arising
out of or relating to this Agreement and the documents related thereto. This
indemnification shall survive the release, discharge, termination, and/or
satisfaction of this Agreement. Anything in this Agreement to the contrary
notwithstanding, the Company shall not be liable for indemnification or
otherwise for any loss, liability, cost or expense to the extent arising out of
Harris Trust's bad faith, gross negligence or willful misconduct. In no case
shall the Company be liable under this indemnification agreement with respect to
any claim against Harris Trust unless the Company shall be notified by Harris
Trust, by letter, of the written assertion of a claim against Harris Trust or of
any other action commenced against Harris Trust, reasonably promptly after
Harris Trust shall have received any such written assertion or shall have been
served with a summons in connection therewith. The Company shall be entitled to
participate at its own expense in the defense of any such claim or other action,
and, if the Company so elects, the Company may assume the defense of any pending
or threatened action against Harris Trust in respect of which indemnification
may be sought hereunder, in which case the Company shall not thereafter be
responsible for the fees and disbursements of legal counsel for Harris Trust
under this paragraph; provided that the Company shall not be entitled to assume
the defense of any such action if the named parties to such action include both
the Company and Harris Trust and representation of both parties by the same
legal counsel would, in the written opinion of counsel for Harris Trust, be
inappropriate due to actual or potential conflicting interests between them. It
is understood that the Company shall not be liable under this paragraph for the
fees and disbursements of more than one legal counsel for Harris Trust. In the
event that the Company shall assume the defense of any such suit, the Company
shall not therewith be liable for the fees and expenses of any counsel retained
by Harris Trust.
(b) Harris Trust agrees that, without the prior written consent of the
Company (which consent shall not be unreasonably withheld), it will not settle,
compromise or consent to the entry of any judgment in any pending or threatened
claim, action or proceeding in respect of which indemnification could be sought
in accordance with the indemnification provision of this Agreement (whether or
not Harris Trust or the Company or any of its directors, officers and
controlling persons is an actual or potential party to such claim, action or
proceeding).
4. Tax Information.
(a) Harris Trust shall arrange to comply with all requirements under the
tax laws of the United States, including those relating to missing Tax
Identification Numbers, and shall file any appropriate reports with the Internal
Revenue Service. The Company understands that Harris Trust is required, in
certain instances, to deduct 31% with respect to interest paid on the New Notes
and proceeds from the sale, exchange, redemption or retirement of the New Notes
from holders of the New Notes who have not supplied their correct Taxpayer
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<PAGE>
Identification Number or required certification. Such funds will be turned over
by Harris Trust to the Internal Revenue Service.
(b) Harris Trust shall notify the Company of the amount of any transfer
taxes payable in respect of the exchange of the Old Notes and, upon receipt of
written approval from the Company shall deliver or cause to be delivered, in a
timely manner, to each governmental authority to which any transfer taxes are
payable in respect of the exchange of the Old Notes, a check in the amount of
all transfer taxes so payable, and the Company shall reimburse Harris Trust for
the amount of any and all transfer taxes payable in respect of the exchange of
the Old Notes; provided, however, that Harris Trust shall reimburse the Company
for amounts refunded to it in respect of its payment of any such transfer taxes,
at such time as such refund is received by Harris Trust.
5. Governing Law.
This Agreement shall be governed by and construed and interpreted in
accordance with the laws of the State of New York but without giving effect to
applicable principles of conflicts of law to the extent that the application of
the laws of another jurisdiction would be required thereby.
6. Notices.
Any communications or notice provided for hereunder shall be in writing and
shall be given (and shall be deemed to have been given upon receipt) by delivery
in person, telecopy, or overnight delivery or by registered or certified mail
(postage prepaid, return receipt requested) to the applicable party at the
addresses indicated below:
If to Harris Trust:
311 West Monroe Street
12th Floor
Chicago, Illinois 60690
Telecopier No.: (312) 461-3525
Attention: Judy Bartolini, Vice President
If to the Company:
Address
City, State, Zip Code
Telecopier No.: ( ) -
Attention: Name and Title
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<PAGE>
or, as to each party, at such other address as shall be designated by such party
in a written notice complying as to delivery with the terms of this Section.
7. Parties in Interest.
This Agreement shall be binding upon and inure solely to the benefit of
each party hereto and nothing in this Agreement, express or implied, is intended
to or shall confer upon any other person any right, benefit or remedy of any
nature whatsoever under or by reason of this Agreement. Without limitation to
the foregoing, the parties hereto expressly agree that no holder of the Old
Notes or the New Notes shall have any right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement.
8. Counterparts; Severability.
This Agreement may be executed in one or more counterparts, and by
different parties hereto on separate counterparts, each of which when so
executed shall be deemed an original, and all of such counterparts shall
together constitute one and the same agreement. If any term or other provision
of this Agreement or the application thereof is invalid, illegal or incapable of
being enforced by any rule of law, or public policy, all other provisions of
this Agreement shall nevertheless remain in full force and effect so long as the
economic or legal substance of the agreements contained herein is not affected
in any manner adverse to any party. Upon such determination that any term or
provision or the application thereof is invalid, illegal or unenforceable, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the agreements contained herein may be performed
as originally contemplated to the fullest extent possible.
9. Headings.
The descriptive headings contained in this Agreement are included for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
10. Entire Agreement.
This Agreement constitutes the entire understanding of the parties hereto
with respect to the subject matter hereof. This Agreement may not be amended or
modified nor may any provision hereof be waived except in writing signed by each
party to be bound thereby.
11. Termination.
This Agreement shall terminate upon the earlier of (a) the 90th day
following the expiration, withdrawal, or termination of the Exchange Offer, (b)
the close of business on the date of actual receipt of written notice by Harris
Trust from the Company stating that this
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<PAGE>
Agreement is terminated, (c) one year following the date of this Agreement, or
(d) the time and date on which this Agreement shall be terminated by mutual
consent of the parties hereto.
12. Miscellaneous.
Harris Trust hereby acknowledges receipt of the Prospectus and the Letter
of Transmittal and the Notice of Guaranteed Delivery and further acknowledges
that it has examined each of them. Any inconsistency between this Agreement, on
the one hand, and the Prospectus and the Letter of Transmittal and the Notice of
Guaranteed Delivery (as they may be amended or supplemented from time to time),
on the other hand, shall be resolved in favor of the latter three documents,
except with respect to the duties, liabilities and indemnification of Harris
Trust as Exchange Agent shall be controlled by this Agreement.
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<PAGE>
Kindly indicate your willingness to act as Exchange Agent and Harris
Trust's acceptance of the foregoing provisions by signing in the space provided
below for that purpose and returning to the Company a copy of this Agreement so
signed, whereupon this Agreement and Harris Trust's acceptance shall constitute
a binding agreement between Harris Trust and the Company.
Very truly yours,
Company Name
By: Name: ____________________
Title:_____________________
Accepted and Agreed to as of the date first written above:
HARRIS TRUST AND SAVINGS BANK
By: Name:_______________________
Title:________________________
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<PAGE>
Exhibit 8.1
April 3, 1998
Focal Communications Corporation
200 North LaSalle Street
Suite 820
Chicago, Illinois 60601
Ladies and Gentlemen:
We have acted as counsel for Focal Communications Corporation, a Delaware
corporation (the "Company"), in connection with the offer by the Company to
exchange (the "Exchange Offer") its 12.125% Senior Discount Notes Due 2008,
Series B (the "Exchange Notes"), for all outstanding 12.125% Senior Discount
Notes Due 2008 (the "Senior Notes"). This letter will confirm that we have
advised the Company with respect to United States federal income tax
consequences of the Exchange Offer, as described in the discussion set forth
under the caption "Certain United States Federal Income Tax Considerations" in
the Prospectus included in the Registration Statement on Form S-4 (the
"Registration Statement"), filed on this date with the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the "Act").
Unless otherwise defined, capitalized terms used herein shall have the
respective meanings ascribed to them in the Registration Statement.
We have based our opinions set forth in this letter on the provisions of
the Internal Revenue Code of 1986, as presently amended (the "Code"), existing
Treasury regulations thereunder (the "Regulations"), published rulings and
practices of the Internal Revenue Service (the "Service") and court decisions.
It should be noted that the federal income tax consequences discussed in this
letter might be modified by legislative, judicial or administrative action at
any time, and such action might be applied retroactively or otherwise in a
manner that might alter such tax considerations.
Based on the assumptions and subject to the qualifications and limitations
set forth therein, (i) we adopt the discussion set forth under the caption
"United States Federal Income Tax Considerations" in the Registration Statement
as our opinion with respect to the material United States federal income tax
consequences of the Exchange Offer, and (ii) in our opinion such
<PAGE>
discussion accurately describes the material United States federal income tax
consequences of the exchange of the Notes. Such discussion is limited to the
material United States federal income tax consequences discussed therein, and it
does not purport to discuss all possible federal income tax consequences or any
state, local or foreign tax consequences, of the exchange of the Notes.
Except as stated above, we express no opinion with respect to any other
matter. We are furnishing this opinion to you solely in connection with the
Exchange Offer, and this opinion is not to be relied upon, circulated, quoted,
or otherwise referred to for any other purpose.
We hereby consent to the filing of this opinion letter as an exhibit to the
Registration Statement, to the use of our name in the Registration Statement and
to the reference to us and this opinion letter in the Registration Statement. By
giving such consent, we do not thereby admit that we are "experts" with respect
to this letter, as that term is used in the Act, or the rules and regulations of
the SEC thereunder.
Very truly yours,
/s/ ROSS & HARDIES
----------------------
<PAGE>
Exhibit 10.5
NETWORK PRODUCTS PURCHASE AGREEMENT
Northern Telecom Inc., a Delaware corporation having offices at 2350 Lakeside
Bvld., Richardson, TX, 75082 ("Nortel") and Focal Communications Corporation, a
Delaware corporation, having its principal offices and place of business at 300
W. Washington Street, Suite 1408, Chicago, IL 60606 ("Buyer") agree as follows:
1. SCOPE
1.1 Certain terms used in this Agreement shall be defined as set
forth in Exhibit A.
1.2 The terms and conditions of this Agreement shall apply to the
purchase by Buyer and the sale by Nortel of Equipment and
Services and the licensing of Software furnished in connection
with such Equipment. The terms and conditions contained in a
Product Attachment shall modify and/or supplement the other
terms and conditions of this Agreement, only with respect to
the Product Line and Services described in the Product
Attachment, subject to Section 18.6 herein.
1.3 All Products and Services obtained by Buyer pursuant to this
Agreement shall be obtained by Buyer solely for initial use by
Buyer in its internal business to provide services available
through its networks, and not as stock in trade or inventory
which is intended for resale by Buyer to any third party as
new and unused material. All such Products shall be installed
in the United States.
2. TERM
2.1 This Agreement shall be in effect during the period that any
Product Attachment is in effect. Each Product Attachment shall
be in effect during its Product Attachment Term. This
Agreement or any part thereof may be terminated in accordance
with the express provisions of this Agreement concerning
termination or by written agreement of the parties.
2.2 The termination of this Agreement or any part thereof shall
not affect the obligations of either party thereunder which
have not been fully performed with respect to any accepted
Order, unless such Order is expressly terminated in accordance
with this Agreement or by written agreement of the parties.
3. ORDERING
All purchases pursuant to this Agreement shall be made by means of
Orders issued from time to time by Buyer and accepted by Nortel in
writing within fifteen (15) days. Otherwise, any such Order shall be
deemed to be void. Should Nortel not accept an Order, Nortel shall
advise the Buyer in writing of the reason or reasons that the Order was
not accepted and shall
<PAGE>
provide the Buyer the opportunity to correct the Order so that it may
be accepted by Nortel. All Orders shall reference this Agreement and
the applicable Product Attachment and shall be governed solely by the
terms and conditions set forth herein as modified and/or supplemented
pursuant to Section 1.2 by the terms and conditions of any applicable
Product Attachments.
4. PRICES
4.1 The prices, charges, and fees applicable to Orders shall be
set forth in the appropriate Product Attachments and may be
revised in accordance with the provisions stated therein.
Buyer shall pay transportation charges, including insurance,
in accordance with the applicable Product Attachment.
4.2 Until the total of all prices, charges and fees for Products
and related Services furnished hereunder shall have been paid
to Nortel, Buyer shall cooperate with Nortel in perfecting
Nortel's purchase money security interest in such Products and
Buyer shall promptly execute all documents and take all
actions required by Nortel in connection therewith. Unless
otherwise agreed in writing Buyer shall not sell, lease or
otherwise transfer such Products or any portion thereof or
allow any liens or encumbrances to attach to such Products or
any portion thereof prior to payment in full to Nortel of the
total of all such prices, charges, and fees.
5. TERMS OF PAYMENT
5.1 The amounts payable for Products and/or Services may be
invoiced by Nortel to Buyer in accordance with the applicable
Product Attachments. All amounts payable and properly invoiced
pursuant to this Agreement shall be paid by Buyer to Nortel
within thirty (30) days from the date of Nortel's invoice in
accordance with the payment instructions contained in such
invoice.
5.2 Overdue payments, excluding those which are the subject of a
good faith dispute, shall be subject to interest charges,
calculated daily commencing on the 31st day after the date of
the invoice, at one and one half percent (11/2%) per month or
such lesser rate as may be the maximum permissible rate under
applicable law.
6. TAXES
Buyer shall at Nortel's direction promptly pay to Nortel or pay
directly to the applicable government or taxing authority, if requested
by Nortel, all taxes and charges, including, without limitation,
penalties and interest, which may be imposed by any federal, state, or
local governmental or taxing authority arising hereunder, such as, but
not limited to all such taxes and charges relating to the purchase,
license, ownership, possession, use, operation and/or relocation of any
Equipment, Software, or Services furnished by Seller pursuant to
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this Agreement, excluding, however, all taxes computed upon the net
income of Nortel. Buyer's obligations pursuant to this Section 6 shall
survive any termination of this Agreement.
7. RISK OF LOSS, TITLE
7.1 Risk of loss or damage to Products shall pass to Buyer upon
delivery to the loading dock at the installation site or other
delivery location specified by Buyer in its Order, and Buyer
shall keep such Products fully insured for the total amount
then due Nortel for such Products. Nortel shall bear the risk
of loss or damage to the Products if the loss or damages is
the result of Nortel's negligence or willful misconduct.
7.2 Good title to Equipment furnished hereunder which shall be
free and clear of all liens and encumbrances shall vest in
Buyer upon full payment by Buyer of the total prices, charges
and fees payable by Buyer for such Equipment and any related
Software or Services furnished by Nortel in connection with
such Equipment.
7.3 Buyer shall receive a license to use Software subject to the
terms set forth in Exhibit B.
8. TESTING, TURNOVER AND ACCEPTANCE
8.1 If Nortel installs any Products furnished hereunder, the
rights and obligations of the parties with respect to testing,
turnover and acceptance of such Products shall be as set forth
in the applicable Product Attachment.
8.2 If Nortel does not install Products furnished hereunder,
Nortel shall prior to delivery of the Products perform such
factory tests as Nortel determines to be appropriate in order
to confirm that such Products shall be in accordance with the
applicable Specifications. Buyer shall be deemed to have
accepted the Products upon completion of such tests.
8.3 In the event that Buyer places Products into
revenue-generating service, such Products shall be deemed to
have been accepted by Buyer without limitation or restriction.
8.4 Acceptance of the Products by Buyer shall not constitute a
waiver by Buyer of its rights under the Warranty provisions
set forth in Exhibit D of this Agreement.
9. DISCLAIMERS OF WARRANTIES AND REMEDIES
THE WARRANTIES AND REMEDIES SET FORTH IN EXHIBIT D AND IN ANY
PRODUCT ATTACHMENT CONSTITUTE THE ONLY WARRANTIES OF
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NORTEL WITH RESPECT TO THE PRODUCTS AND SERVICES AND BUYER'S
EXCLUSIVE REMEDIES IN THE EVENT SUCH WARRANTIES ARE
BREACHED. THEY ARE IN LIEU OF ALL OTHER WARRANTIES WRITTEN OR
ORAL. STATUTORY, EXPRESS OR IMPLIED. INCLUDING WITHOUT
LIMITATION ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE. NORTEL SHALL NOT BE LIABLE FOR ANY
INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY NATURE
WHATSOEVER. BEFORE OR AFTER THE PLACING OF ANY PRODUCT INTO
SERVICE.
10. LIABILITY FOR BODILY INJURY, PROPERTY DAMAGE AND PATENT
INFRINGEMENT
10.1 A party hereto shall defend the other party against any suit,
claim, or proceeding brought against the other party for
direct damages due to bodily injuries (including death) or
damage to tangible property which allegedly result from the
negligence or willful misconduct of the defending party in the
performance of this Agreement. The defending party shall pay
all litigation costs, reasonable attorney's fees, settlement
payments and such direct damages awarded or resulting from any
such suit, claim or proceeding.
10.2 Nortel shall defend Buyer against any suit, claim or
proceeding brought against Buyer alleging that any Products,
excluding Vendor Items, furnished hereunder infringe any
United States patent. Nortel shall pay all litigation costs,
reasonable attorney's fees, settlement payments and any
damages awarded or resulting from any such suit, claim or
proceeding. With respect to Vendor Items, Nortel shall assign
any rights with respect to infringement of U.S. patents
granted to Nortel by the supplier of such Vendor Items to the
extent of Nortel's right to do so.
10.3 The party entitled to defense pursuant to Section 10.1 or 10.2
shall promptly advise the party required to provide such
defense of the applicable suit, claim, or proceeding and shall
cooperate with such party in the defense or settlement
thereof. The party required to provide such defense shall have
sole control of the defense of the applicable suit, claim, or
proceeding and of all negotiations for its settlement or
compromise.
10.4 If an injunction is obtained against Buyer's use of any
Products as a result of any suit, claim, or proceeding
described in Section 10.2, Nortel shall at Nortel's option use
its reasonable efforts to either:
10.4.1 procure for Buyer the right to continue using the
portions of the Products enjoined from use; or
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<PAGE>
10.4.2 within a reasonable time, replace or modify the same
with equivalent or better Products so that Buyer's
use is not subject to any such injunction.
10.5 If Nortel cannot perform under Section 10.4.1 or 10.4.2, Buyer
shall have the right to return the infringing Products to
Nortel upon written notice to Nortel, and in the event of such
return, neither party shall have any further liabilities or
obligations under this Agreement on account of such
infringement or return, except Nortel shall refund the
depreciated value of such Products carried on Buyer's books at
the time of such return, less any outstanding monies due
Nortel hereunder.
10.6 The obligations of Nortel hereunder with respect to any suit,
claim, or proceeding described in Section 10.2 shall not apply
with respect to Products which are (a) manufactured or
supplied by Nortel in accordance with any design or any
special instruction furnished by Buyer, (b) used by Buyer in a
manner or for a purpose not contemplated by this Agreement,
(c) located by Buyer outside the United States, or (d) used by
Buyer in combination with other products not provided by
Nortel, including, without limitation, any software developed
solely by Buyer through the permitted use of Products
furnished hereunder, provided the infringement arises from
such combination or the use thereof. Buyer shall indemnify and
hold Nortel harmless against any loss, cost, expense, damage,
settlement or other liability, including, but not limited to,
attorneys' fees, which may be incurred by Nortel with respect
to any suit, claim, or proceeding described in this Section
10.6.
10.7 Notwithstanding the above, Nortel shall have no obligation or
liability with regard to any patent infringement suit, claim,
or proceeding that may be made or brought against Buyer (i)
alleging that method of use claims in such patent are
infringed by any service offering and/or by any use by Buyer
of Products furnished hereunder to make such service offering
available or (ii) resulting in a settlement payment, or award
of damages, or accounting of profits, where such settlement,
award, or accounting is based on the revenues or profits
earned or other value obtained by Buyer from its use of such
Products and/or is based on the lost revenues or profits of
third parties arising from Buyer's use of such Products.
10.8 If Nortel determines that any Products are or may become the
subject of a suit, claim, or proceeding as described in
Section 10.7, Nortel may provide Buyer with notice to that
effect. Nortel shall have no liability to Buyer pursuant to
Section 10.2,10.4, or 10.5 with respect to Buyer's use of such
Products which occurs subsequent to such notice. In addition
to its obligations pursuant to Section 10.3, if Buyer becomes
aware that any Products may become the subject of any such
suit, claim, or proceeding before receiving any such notice
from Nortel, Buyer shall provide Nortel with notice to that
effect.
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10.9 After receipt of notice from Nortel pursuant to Section 10.8,
Buyer shall have the option to return to Nortel the applicable
Products identified in such notice and Nortel shall refund the
depreciated value (as carried on the books of Buyer) of the
returned Products to Buyer as more fully set forth in Section
10.5.
10.10 The provisions of Sections 10.2 through 10.9 state the entire
liability of Nortel and its suppliers and the exclusive remedy
of Buyer with respect to any suits, claims, or proceedings of
the nature described in Section 10.2.
10.11 Each party's respective obligations pursuant to this Section
shall survive any termination of this Agreement.
11. REMEDIES AND LIMITATION OF LIABILITY
11.1 Nortel shall have the right to suspend its performance by
written notice to Buyer and forthwith remove and take
possession of all Products that shall have been delivered to
Buyer, if, prior to payment to Nortel of any amounts due
pursuant to this Agreement with respect to such Products,
Buyer shall (a) become insolvent or bankrupt or cease, be
unable, or admit in writing its inability, to pay all debts as
they mature, or make a general assignment for the benefit of,
or enter into any arrangement with, creditors, (b) authorize,
apply for, or consent to the appointment of, a receiver,
trustee, or liquidator of all or a substantial part of its
assets or have proceedings seeking such appointment commenced
against it which are not terminated within ninety (90) days of
such commencement, or (c) file a voluntary petition under any
bankruptcy or insolvency law or under the reorganization or
arrangement provisions of the United States Bankruptcy Code or
any similar law of any jurisdiction or have proceedings under
any such law instituted against it which are not terminated
within ninety (90) days of such commencement.
11.2 In the event of any material breach of this Agreement which
shall continue for thirty (30) or more days after written
notice of such breach (including a reasonably detailed
statement of the nature of such breach) shall have been given
to the breaching party by the aggrieved party, the aggrieved
party shall be entitled at its option to avail itself of any
and all remedies available at law or equity, except as
otherwise provided in this Agreement.
11.3 Nothing contained in Section 11.2 or elsewhere in this
Agreement shall make Nortel liable for any incidental,
indirect, consequential or special damages of any nature
whatsoever for any breach of this Agreement whether the claims
for such damages arise in tort, contract, or otherwise, or
shall increase the liability of Nortel under Section 9 or 10
or Exhibit D beyond that prescribed therein.
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11.4 Nortel shall not be liable for any additional costs, expenses,
losses or damages resulting from errors, acts or omissions of
Buyer, including, but not limited to, inaccuracy,
incompleteness or untimeliness in the provision of information
by Buyer to Nortel or fulfillment by Buyer of any of its
obligations under this Agreement.
11.5 Any action for breach of this Agreement or to enforce any
right hereunder shall be commenced within two (2) years after
the cause of action accrues or it shall be deemed waived and
barred, except any action for nonpayment by Buyer of any
prices, charges, or fees payable hereunder may be brought by
Nortel at any time permitted by applicable law.
11.6 The limitations on Nortel's liability and other obligations
set forth in Sections 9,10, and 11 shall survive any
termination of this Agreement.
12. FORCE MAJEURE
If the performance by a party of any of its obligations under this
Agreement shall be interfered with by reason of any circumstances
beyond the reasonable control of that party, including without
limitation, unavailability of supplies or sources of energy, power
failure, breakdown of machinery, or labor difficulties, including
without limitation, strikes, slowdowns, picketing or boycotts, then
that party shall be excused from such performance for a period equal to
the delay resulting from the applicable circumstances and such
additional period as may be reasonably necessary to allow that party to
resume its performance. With respect to labor difficulties as described
above, a party shall not be obligated to accede to any demands being
made by employees or other personnel.
13. CONFIDENTIAL INFORMATION
13.1 Each party which receives the other party's Confidential
Information shall use reasonable care to hold such
Confidential Information in confidence and not disclose such
Confidential Information to anyone other than to its employees
and employees of its affiliates with a need to know. A party
that receives the other party's Confidential Information shall
not reproduce such Confidential Information, except to the
extent reasonably required for the performance of its
obligations pursuant to this Agreement and in connection with
any permitted use of such Confidential Information.
13.2 Buyer shall take reasonable care to use Nortel's Confidential
Information only for study, operating, or maintenance purposes
in connection with Buyer's use of Products furnished by Nortel
pursuant to this Agreement.
13.3 Nortel shall take reasonable care to use Buyer's Confidential
Information only to perform Nortel's obligations to provide
Products and/or Services to Buyer, provided
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Nortel may use any of Buyer's Confidential Information for the
development, manufacture, marketing and maintenance of new
products and/or services and/or changes or modifications to
the existing Products and/or Services, which Nortel may, in
either case, provide to third parties without restriction.
13.4 The obligations of either party pursuant to this Section 13
shall not extend to any Confidential Information which
recipient can demonstrate through written documentation was
already known to the recipient prior to its disclosure to the
recipient, was known or generally available to the public at
the time of disclosure to the recipient, becomes known or
generally available to the public (other than by act of the
recipient) subsequent to its disclosure to the recipient, is
disclosed or made available in writing to the recipient by a
third party having a bona fide right to do so, or is required
to be disclosed by process of law, provided that the recipient
shall notify the disclosing party promptly upon any request or
demand for such disclosure.
13.5 The parties' obligations pursuant to this Section 13 shall
survive any termination of this Agreement.
14. BUYER'S RESPONSIBILITIES
14.1 All sites at which the Products shall be delivered or
installed shall be prepared by Buyer in accordance with
Nortel's standards, including, without limitation,
environmental requirements.
14.2 Buyer shall provide Nortel-designated personnel access to the
Products during the times deemed necessary by Nortel to
install, maintain and service the Products in accordance with
Nortel's obligations. Nortel personnel shall comply with
Buyer's reasonable site and security regulations, provided
Nortel receives written notice of any such regulations
reasonably in advance of the arrival of Nortel's personnel at
the site.
14.3 Buyer shall provide reasonable working space and facilities,
including heat, light, ventilation, telephones, electrical
current, trash removal and other necessary utilities for use
by Nortel-designated maintenance personnel, and adequate
secure storage space, if required by Nortel, for Products and
materials. Buyer shall also provide adequate security for the
Products while on Buyer's site.
14.4 Buyer shall obtain all necessary governmental permits
applicable to Buyer in connection with the installation,
operation, and maintenance of Products furnished hereunder,
excluding any applicable permits required in the normal course
of Nortel's doing business.
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14.5 Any information which Nortel reasonably requests from Buyer
and which is necessary for Nortel to properly install or
maintain the Products shall be provided by Buyer to Nortel in
a timely fashion and in a form reasonably specified by Nortel.
15. HAZARDOUS MATERIALS
15.1 Prior to issuing any Order for Services to be performed at
Buyer's facilities, Buyer shall identify and notify Nortel in
writing of the existence of all Hazardous Materials which
Nortel may encounter during the performance of such Services,
including, without limitation, any Hazardous Materials
contained within any equipment to be removed by Nortel.
15.2 If Buyer breaches its obligations pursuant to Section 15.1,
(a) Nortel may discontinue the performance of the appropriate
Services until all the applicable Hazardous Materials have
been removed or abated to Nortel's satisfaction by Buyer at
Buyer's sole expense, and (b) Buyer shall defend, indemnify
and hold Nortel harmless from any and all damages, claims,
losses, liabilities and expenses, including, without
limitation, attorneys' fees, which arise out of Buyer's breach
of such obligations. Buyer's obligations pursuant to this
Section 15.2 shall survive any termination of this Agreement.
16. SUBCONTRACTING
Nortel may subcontract any of its obligations under this Agreement, but
no such subcontract shall relieve Nortel of primary responsibility for
performance of its obligations.
17. REGULATORY COMPLIANCE
In the event of any change in the Specifications or Nortel's
manufacturing or delivery processes for any Products as a result of the
imposition of requirements by any government, Nortel may upon notice to
Buyer, increase its prices, charges and fees to cover the added costs
and expenses directly incurred by Nortel as a result of such change.
18. GENERAL
18.1 If any of the provisions of this Agreement shall be invalid or
unenforceable under applicable law and a party deems such
provisions to be material, that party may terminate this
Agreement upon notice to the other party. Otherwise, such
invalidity or unenforceability shall not invalidate or render
this Agreement unenforceable, but this Agreement shall be
construed as if not containing the particular invalid or
unenforceable provision and the rights and obligations of the
parties shall be construed and enforced accordingly.
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18.2 A party shall not release without the prior written approval
of the other party any advertising or other publicity relating
to this Agreement wherein such other party may reasonably be
identified. In addition each party shall take reasonable
precautions to keep the existence and the contents of this
Agreement confidential so long as this Agreement remains in
effect ________________________________.
18.3 The construction, interpretation and performance of this
Agreement shall be governed by the laws of the State of North
Carolina, except for its rules with respect to the conflict of
laws.
18.4 Neither party may assign or transfer this Agreement or any of
its rights hereunder without the prior written consent of the
other party, such consent not to be unreasonably withheld,
except Buyer's consent shall not be required for any
assignment or transfer by Nortel (a) to any Affiliate of all
or any part of this Agreement or of Nortel's rights hereunder,
or (b) to any third party of Nortel's right to receive any
monies which may become due to Nortel pursuant to this
Agreement.
18.5 Notices and other communications shall be transmitted in
writing by certified United States Mail, postage prepaid,
return receipt requested, by guaranteed overnight delivery, or
by facsimile addressed to the parties as follows:
To Buyer: Focal Communications Corporation
300 W. Washington St. Suite 1408
Chicago, IL 60606
Attention: Executive Vice President
Facsimile: (312) 578-8403
To Nortel: Northern Telecom Inc.
2221 Lakeside Blvd.
Richardson,TX 75083
Attention: General Manager, Carrier
Networks Facsimile: (972) 684-8845
In addition, notices submitted by Buyer to Nortel specific to
any Product Attachment shall be delivered to the address
stated in the applicable Product Attachment along with a copy
submitted to Nortel at the address stated above.
Any notice or communication sent under this Agreement shall be
deemed given upon receipt, as evidenced by the United States
Postal Service return receipt Mail if given by certified
United States Mail, on the following business day if sent by
guaranteed overnight delivery, or on the transmission date if
given by facsimile during the receiving party's normal
business hours.
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The address information listed for a party in this Section or
any Product Attachment may be changed from time to time by
that party by giving notice to the other as provided above.
18.6 In the event of a conflict between the provisions of this
Agreement which are not contained in a Product Attachment and
the provisions of a Product Attachment, the provisions of the
Product Attachment shall prevail with respect to the Product
Line and Services described in that Product Attachment.
18.7 All headings used herein are for index and reference purposes
only, and shall not be given any substantive effect. This
Agreement has been created jointly by the parties, and no rule
of construction requiring interpretation against the drafter
of this Agreement shall apply in its interpretation.
18.8 Buyer shall not export any technical data received from Nortel
pursuant to this Agreement, or release any such technical data
with the knowledge or intent that such technical data will be
exported or transmitted to any country or to foreign nationals
of any country, except in accordance with applicable U.S. law
concerning the exporting of such technical data. Buyer shall
obtain all authorizations from the U.S. government in
accordance with applicable law prior to exporting or
transmitting any such technical data as described above.
18.9 Any changes to this Agreement may only be effected if agreed
upon in writing by duly authorized representatives of the
parties hereto. No agency, partnership, joint venture, or
other similar business relationship shall be or is created by
this Agreement.
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18.10 This Agreement, including all Product Attachments and Exhibits
constitutes the entire agreement of the parties with respect
to the subject matter hereof.
NORTHERN TELECOM INC. FOCAL COMMUNICATIONS
CORPORATION
By: /s/ Vickie Yohe By: /s/ John Barnicle
-------------------------------- -------------------------------
(Signature) (Signature)
Name: Vickie Yohe Name: John Barnicle
-------------------------------- ----------------------------
(Print) (Print)
Title: V.P. and General Manager Title: Executive Vice President
-------------------------------- ----------------------------
Date: January 21, 1997 Date: January 17, 1997
-------------------------------- ----------------------------
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EXHIBIT A
DEFINITIONS
As used in the Agreement (as defined below), the following initially capitalized
terms shall have the following meanings:
"Affiliate" shall mean Nortel's parent corporation, Northern Telecom Limited and
any corporation controlled directly or indirectly by Northern Telecom Limited
through the ownership or control of shares or other securities in such
corporation.
"Agreement" shall mean the Agreement to which this Exhibit is attached, and all
Exhibits and Product Attachments.
"Confidential Information" shall mean all information, including, without
limitation, specifications, drawings, documentation, know-how and pricing
information, of every kind or description which may be disclosed by either party
or an Affiliate to the other party in connection with this Agreement, provided
the disclosing party shall clearly mark any such information which is disclosed
in writing as the confidential property of the disclosing party and the
disclosing party shall identify the confidential nature of any such information
which it orally discloses at the time of such disclosure and shall provide a
written summary of the orally disclosed information to the recipient within
fifteen (15) days of such disclosure.
"Equipment" shall mean the hardware listed or otherwise identified in, or
pursuant to, any Product Attachment.
"Exhibits" shall mean Exhibits A, B, C, and D attached hereto, and any
additional Exhibits which Nortel and Buyer subsequently agree in writing shall
be incorporated into, and made a part of the Agreement by reference.
"Hazardous Materials" shall mean any pollutants or dangerous, toxic or hazardous
substances (including, without limitation, asbestos) as defined in, or pursuant
to, the OSHA Hazard Communication Standard (29 CFR Part 1910, Subpart Z), the
Resource Conservation and Recovery Act of 1976 (42 USC Section 6901, et seq.),
the Toxic Substances Control Act (15 USC Section 2601, et seq.), the
Comprehensive Environmental Response Compensation and Liability Act (42 USC
Section 9601, et seq.), and any other federal, state or local environmental law,
ordinance, rule or regulation.
"Order" shall mean a written purchase order issued by Buyer to Nortel. Each
Order shall specify on the face of the Order the types and quantities of
Products and/or Services to be furnished by Nortel pursuant to the Order, the
applicable prices, charges and/or fees with respect to such Products and/or
Services, Buyer's facility to which the Products are to be delivered, the
delivery and/or completion schedule, and any other information which may be
required to be included in an Order in accordance with the provisions of this
Agreement.
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"Product Attachments" shall mean any Product Attachments which the parties agree
in writing shall be incorporated into, and made a part of, this Agreement.
"Product Attachment Term" shall mean the period specified in a Product
Attachment during which that Product Attachment shall be in effect.
"Product Line" shall mean the Products described in and which may be furnished
pursuant to a specific Product Attachment.
"Products" shall mean any Equipment and/or Software which may be provided under
this Agreement.
"Services" shall mean all services listed or otherwise identified in, or
pursuant to, any Product Attachment which may be purchased from or provided by
Nortel and which are associated with the Product Line described in that Product
Attachment.
"Software" shall mean (a) programs in machine-readable code or firmware which
(i) are owned by, or licensed to, Nortel or any of its Affiliates, (ii) reside
in Equipment memories, tapes, disks or other media, and (iii) provide basic
logic operating instructions and user-related application instructions, and (b)
documentation associated with any such programs which may be furnished by Nortel
to Buyer from time to time.
"Specifications" shall mean, with respect to any Product Line, the
specifications identified in the applicable Product Attachment, provided Nortel
shall have the right at its sole discretion to modify, change or amend such
specifications at any time.
"Third Party Software Vendor" shall mean any supplier of programs contained in
the Software which is not an Affiliate.
"Vendor Items" shall mean, with respect to a Product Line, those portions of the
Product which are identified in the applicable Product Attachment as Vendor
Items.
"Warranty Period" shall mean, with respect to a Product Line, the Warranty
Period specified in the applicable Product Attachment.
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EXHIBIT B
SOFTWARE LICENSE
1. Buyer acknowledges that the Software may contain programs which have
been supplied by, and are proprietary to, Third Party Software Vendors.
In addition to the terms and conditions herein, Buyer shall abide by
any additional terms and conditions provided by Nortel to Buyer with
respect to any Software provided by any Third Party Software Vendor.
2. Upon Buyer's payment to Nortel of the applicable fees with respect to
any Software furnished to Buyer pursuant to this Agreement, Buyer shall
be granted a personal, non-exclusive, paid-up license to use the
version of the Software furnished to Buyer only in conjunction with
Buyer's use of the Equipment with respect to which such Software was
furnished for the life of that Equipment as it may be repaired or
modified. Buyer shall be granted no title or ownership rights to the
Software, which rights shall remain in Nortel or its suppliers.
3. As a condition precedent to this license and to the supply of Software
by Nortel pursuant to the Agreement, Nortel requires Buyer to give
proper assurances to Nortel for the protection of the Software.
Accordingly, all Software supplied by Nortel under or in implementation
of the Agreement shall be treated by Buyer as the exclusive property,
and as proprietary and a TRADE SECRET, of Nortel and/or its suppliers,
as appropriate, and Buyer shall: a) hold the Software, including,
without limitation, any methods or concepts utilized therein in
confidence for the benefit of Nortel and/or its suppliers, as
appropriate; b) not provide or make the Software available to any
person except to its employees on a 'need to know' basis; c) not
reproduce, copy, or modify the Software in whole or in part except as
authorized by Nortel; d) not attempt to decompile, reverse engineer,
disassemble, reverse translate, or in any other manner decode the
Software; e) issue adequate instructions to all persons, and take all
actions reasonably necessary to satisfy Buyer's obligations under this
license; and f) forthwith return to Nortel, or with Nortel's consent
destroy, any magnetic tape, disc, semiconductor device or other memory
device or system and/or documentation or other material, including, but
not limited to all printed material furnished by Nortel to Buyer which
shall be replaced, modified or updated.
4. The obligations of Buyer hereunder shall not extend to any information
or data relating to the Software which is now available to the general
public or becomes available by reason of acts or failures to act not
attributable to Buyer.
5. Buyer shall not assign this license or sublicense any rights herein
granted to any other party without Nortel's prior written consent.
6. Buyer shall indemnify and hold Nortel and its suppliers, as
appropriate, harmless from any loss or damage resulting from a breach
of this Exhibit B. The obligations of Buyer under this Exhibit B shall
survive the termination of the Agreement and shall continue if the
Software is removed from service.
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EXHIBIT C
STORAGE
If Buyer notifies Nortel prior to the scheduled shipment date of Products that
Buyer does not wish to receive such Products on the date agreed by the parties,
or the installation site or other delivery location is not prepared in
sufficient time for Nortel to make delivery in accordance with such date, or
Buyer fails to take delivery of any portion of such Products, Nortel may place
the applicable Products in storage. In that event Buyer shall be liable for all
additional costs thereby incurred by Nortel. Delivery by Nortel of any Products
to a storage location as provided above shall be deemed to constitute delivery
of the Products to Buyer for purposes of this Agreement, including, without
limitation, provisions for payment, invoicing, passage of risk of loss, and
commencement of the Warranty Period.
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EXHIBIT D
LIMITED WARRANTS AND REMEDIES
1. Nortel warrants that the Equipment supplied hereunder will under normal
use and service be free from defective material and faulty workmanship
and will conform to the applicable Specifications for the Warranty
Period specified in the Product Attachment with respect to such
Equipment. The foregoing warranty shall not apply to items normally
consumed in operation, such as, but not limited to, lamps and fuses or
to Vendor Items. Any installation Services performed by Nortel with
respect to such Equipment shall be free from defects in workmanship for
the Warranty Period set forth in the applicable Product Attachment.
2. Nortel's sole obligation and Buyer's exclusive remedy under the
warranty set forth in Section 1 above shall be limited to the
replacement or repair, at Nortel's option and expense, of the defective
Equipment, or correction of the defective installation Services.
Replacement Equipment may be new or reconditioned at Nortel's option.
3. Nortel warrants that any Software licensed by Nortel to Buyer under
this Agreement shall function during the Warranty Period of the
Equipment with respect to which such Software is furnished without any
material, service affecting nonconformance to the applicable
Specifications, provided that Buyer shall have paid all Software
support fees specified in the applicable Product Attachment. If the
Software fails to so function, Buyer's sole remedy and Nortel's sole
obligation under this warranty is for Nortel to correct such failure
through, at Nortel's option, the replacement or modification of the
Software or such other actions as Nortel reasonably determines to be
appropriate.
4. Unless otherwise stated in a Product Attachment, (a) Nortel's
warranties in Section 3 above shall only apply to the portion of the
Software actually developed by Nortel or its Affiliates, (b) all other
Software shall be provided by Nortel "AS IS", (c) Nortel shall assign
to Buyer on a nonexclusive basis any warranty on such other Software
provided to Nortel by the developer of such other Software to the
extent of Nortel's legal right to do so.
5. The obligations and remedies set forth in Sections 1, 2, and 3 above
shall be conditional upon: the Equipment not having been altered or
repaired, the Software not having been modified, and the Products not
having been installed outside the United States; any defect or
nonconformance not being the result of mishandling, abuse, misuse,
improper storage, improper performance of installation, other services,
maintenance or operation by other than Nortel (including use in
conjunction with any product which is incompatible with the applicable
Equipment or Software or of inferior performance), and/or any error,
act, or omission of Buyer described in Section 11.4; the Product not
having been damaged by fire, explosion, power failure, power surge, or
other power irregularity, lightning, failure to comply with all
applicable environmental requirements for the Products specified by
Nortel or any other applicable supplier, such as but not limited to
temperature or humidity ranges,
<PAGE>
or any act of God, nature or public enemy; and written notice of the
defect having been given to Nortel within the applicable Warranty
Period.
6. The performance by Nortel of any of its obligations described in
Section 2 or 3 of this Exhibit D shall not extend the applicable
Warranty Period except to the extent specified in the applicable
Product Attachment.
7. Upon expiration of the applicable Warranty Period for Equipment
furnished hereunder, repair and replacement Service for such Equipment
shall be available to Buyer from Nortel in accordance with Nortel's
then-current terms, conditions and prices. Such repair and replacement
Service and notice of any discontinuance of such repair and replacement
Service shall be available for a minimum period set forth in the
Product Attachment applicable to such Equipment. This provision shall
survive the expiration of this Agreement.
8. Unless Nortel elects to repair or replace defective Equipment at
Buyer's facility, all Equipment to be repaired or replaced, whether in
or out of warranty, shall be packed by Buyer in accordance with
Nortel's instructions stated in the applicable Product Attachment and
shipped at Buyer's expense and risk of loss to a location designated by
Nortel. Replacement Equipment shall be returned to Buyer at Nortel's
expense and risk of loss. Buyer shall ship the defective Equipment to
Nortel within thirty (30) days of receipt of the replacement Equipment.
In the event Nortel fails to receive such defective Equipment within
such thirty (30) day period, Nortel shall invoice Buyer for the
replacement Equipment at the then current price in effect therefor.
9. With respect to any Vendor Item furnished by Nortel to Buyer pursuant
to this Agreement, Nortel shall assign to Buyer on a nonexclusive basis
any warranty granted by the party that supplied such Vendor Item to
Nortel to the extent of Nortel's right to do so.
10. Neither Nortel nor Nortel's suppliers, as appropriate, shall have any
responsibility for warranties offered by Buyer to any of its customers.
Buyer shall indemnify Nortel and Nortel's suppliers, as appropriate,
with respect thereto.
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PRODUCT ATTACHMENT
CARRIER NETWORKS PRODUCTS
Northern Telecom Inc. ("Nortel") and Focal Communications Corporation ("Buyer")
agree as follows:
1. INCORPORATION BY REFERENCE
This Product Attachment shall be incorporated into and made a part of
Network Products Purchase Agreement No. JRD0197FCC between Nortel and
Buyer.
2. DEFINITIONS
For purposes of this Product Attachment:
"Acceptance Criteria" shall mean, with respect to any Products
installed by Nortel hereunder, the standards and specifications
contained in the Nortel Installation Manuals which are applicable to
such Products.
"Equipment" shall mean the equipment listed in Schedule A.
"Extension" shall mean Equipment and/or Software which Nortel engineers
and installs and which is added to an Initial System after the Turnover
Date of the Initial System.
"Initial System" shall mean the Equipment and Software which is
included in any configuration identified in Schedule A as an "Initial
System."
"Installation Site" shall mean Buyer's facility identified in an Order
to which the applicable Products identified in such Order shall be
delivered or at which the applicable Services, if any, are to be
performed, respectively.
"Merchandise" shall mean any Equipment which is not part of a System
and with respect to which no engineering or installation Services shall
be provided by Nortel.
"Product Attachment Term" shall mean the period which shall commence on
the date this Product Attachment is executed by the latter of the
parties and shall expire thirty six (36) months thereafter.
"Services" shall mean the services described in Schedule B.
"Software" shall mean the software listed in Schedule A.
<PAGE>
"Specifications" shall mean with respect to any Products furnished
hereunder, the specifications published by Nortel which Nortel
identifies as its standard performance specifications for such Products
as of the date of Buyer's Order for such Products.
"System" shall mean any Initial System or Extension.
"Turnover Date" shall mean, with respect to any Products installed by
Nortel hereunder, the date on which Nortel provides the Turnover Notice
to Buyer pursuant to Section 8.a. of this Product Attachment.
"Warranty Period" shall mean, with respect to:
(a) Any System, the period which shall commence upon the Turnover
Date with respect to such System and shall expire twelve (12)
months thereafter,
(b) Merchandise, the period which shall commence upon the date of
shipment with respect to such Merchandise by Nortel to Buyer
and shall expire ninety (90) days thereafter,
(c) Installation Services involving any System, the period which
shall commence upon the Turnover Date with respect to such
System and shall expire twelve (12) months thereafter,
(d) Equipment which is repaired or replaced pursuant to Nortel's
obligations under Exhibit D to the Agreement, the period
commencing five (5) days after (i) shipment of the replacement
Equipment to Buyer or (ii) completion of the repair at the
Installation Site of the applicable Equipment and which shall
expire on the later of ninety (90) days thereafter or the last
day of the original Warranty Period with respect to the
Equipment which was repaired or replaced, and
(e) Software which was corrected pursuant to Nortel's obligations
under Exhibit D to the Agreement, the period commencing upon
delivery of the corrected Software by Nortel to Buyer and
expiring on the later of ninety (90) days thereafter or the
last day of the original Warranty Period with respect to such
Software.
3. SCOPE
a. Buyer shall during the Product Attachment Term issue Orders for a
minimum of _______ DMS-500 Initial Systems as described in Schedule A
for delivery and installation in Buyer's facilities designated by
Buyer. Buyer may during the Product Attachment Term issue Orders for
additional DMS-500 Initial Systems and Extensions as described in
Schedule A for delivery and installation in Buyer's facilities. Buyer
shall pay the prices, fees and charges set forth in Schedule A for the
Initial Systems and the Extensions in accordance with Section 7 of this
Product Attachment.
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b. Subsection b. has been Intentionally Deleted.
c. Subsection c. has been Intentionally Deleted.
4. SCHEDULES
The following Schedules which are attached hereto are an integral part
of the Product Attachment and are incorporated herein by reference:
Schedule A - Products, Prices, and Fees
Schedule B - Services and Charges
Schedule C - Delivery
Schedule D - Documentation
5. ORDERING
With respect to Section 3, ORDERING of the Agreement the following
additional terms shall apply:
a. Buyer shall identify in each Order for Products whether the Products
constitute an Initial System, Extension, or Merchandise. All Orders for
Merchandise and/or any Services other than engineering and installation
Services provided by Nortel in connection with an Order for an Initial
System and/or an Extension shall be subject to written agreement of
Buyer and Nortel on the applicable prices, charges and fees with
respect thereto as required pursuant to Section 6, PRICING, of this
Product Attachment.
b. Notwithstanding Exhibit C to the Agreement, Buyer may by written notice
to Nortel cancel without charge any Order for Products and/or Services
prior to the delivery date of the applicable Products set forth in such
Order or the agreed date for the commencement by Nortel of the
applicable Services ("Service Commencement Date"), except that if Buyer
cancels such Order within six (6) weeks or less of any such date, a
cancellation fee of ____________ of the aggregate price of all Products
and/or Services included in such cancelled Order shall be payable by
Buyer. Nortel may invoice such amount upon receipt of Buyer's notice of
cancellation of the Order.
c. Notwithstanding Exhibit C to the Agreement, Buyer may by written notice
to Nortel not less than six (6) weeks prior to the delivery date of any
Products set forth in an Order and/or the Service Commencement Date of
the applicable Services, delay the delivery date of such Products
and/or the Service Commencement Date of such Services for a period
which shall not exceed ninety (90) days from the date such Products
were originally scheduled to be delivered or ninety (90) days from the
Service Commencement Date, subject to the availability from Nortel of
the applicable Products and/or Services after such period of delay.
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d. Except as set forth in Sections 5.b. and 5.c. of this Product
Attachment, any change to an Order after Nortel's acceptance of such
Order shall require written agreement of Nortel and Buyer upon a
written change to the Order ("Change Order") which shall reference the
original Order and be executed by the parties. No such changes shall be
implemented until the applicable Change Order has been executed by the
parties.
e. With respect to each Order for Products which is accepted by Nortel,
Buyer may make a written request at least ninety (90) days prior to the
scheduled shipment date of such Products for a change ("Change")
consisting of certain addition(s) or deletion(s) to such Products.
After receipt of such request, Nortel shall submit a Job Change Order
("JCO") to Buyer for Buyer's approval with respect to the requested
Change. Each JCO shall state whether the requested Change shall
increase or decrease the Price and/or time required by Nortel for any
aspect of its performance under the Agreement with respect to such
Order. Buyer shall accept or reject the JCO in writing within ten (10)
days of receipt thereof. Failure of the Buyer to accept or reject the
JCO in writing as described above shall be deemed a rejection of the
JCO by Buyer. In the event an accepted JCO involves the return to
Nortel of any Equipment which shall have been previously delivered to
Buyer, Nortel may invoice and Buyer shall pay the transportation costs
and Nortel's then-current restocking charge for the returned Equipment,
such restocking charge shall not exceed ____________ of the list price
for the returned Equipment.
f. Any increase or decrease in the Price with respect to an Order
hereunder which is occasioned by an accepted JCO shall be added to or
subtracted from, as applicable, the amount of the last payment due
pursuant to Section 6 with respect to such Order.
g. If Buyer rejects a proposed JCO, then the rights and obligations of the
parties with respect to the applicable Order shall not be subject to
Buyer's requested Changes. Nortel shall be entitled to an extension of
the dates for performance of its obligations with respect to the
applicable Order as a result of any delays in such performance which
result from the foregoing.
6. PRICING
With respect to Section 4, PRICES of the Agreement, the following
additional terms shall apply:
a. The prices set forth in Schedule A with respect to any Initial System
and/or Extension shall be in effect for the Product Attachment Term.
The prices listed in Schedule A shall apply to any Order for an Initial
System and/or an Extension listed in Schedule A which shall be received
by Nortel during the Product Attachment Term, provided that the
delivery date for such Initial System and/or Extension as set forth in
the applicable Order shall be not more than one hundred twenty (120)
days after Nortel's acceptance of such Orders.
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b. The prices for Equipment, the fees for the right to use the Software,
prices for any Merchandise, and charges for any Services, other than
engineering and installation Services provided with any Initial System
and/or an Extension shall be as subsequently agreed in writing by
Nortel and Buyer.
c. Shipment of the Product shall be F. O. B. the Installation Site
7. TERMS OF PAYMENT
With respect to Section 5, TERMS OF PAYMENT, the following additional
terms shall apply:
a. With respect to each Initial System and/or Extension furnished
hereunder by Nortel to Buyer the price listed in Schedule A shall be
invoiced by Nortel in accordance with the following schedule:
(i) Twenty percent (20%) of such price may be invoiced upon
Nortel's acceptance of the Order for such Initial System
and/or Extension,
(ii) Fifty percent (50%) of such price may be invoiced on the date
of shipment by Nortel to Buyer of the switch component of such
Initial System and/or the Equipment of such Extension,
(iii) Twenty percent (20%) of such price may be invoiced on the
Turnover Date of such Initial System and/or Extension, and
(iv) Ten percent (10%) of such price may be invoiced on the date of
Acceptance of such Initial System and/or Extension.
b. Except as may be otherwise agreed in writing by the parties Nortel's
prices for Merchandise and charges for any Services determined in
accordance with Section 6.b. above may be respectively invoiced upon
delivery of such Merchandise and upon performance of such Services by
Nortel.
8. TESTING, TURNOVER, AND ACCEPTANCE
Pursuant to Section 8.1 of the Agreement, the rights and obligations of
the parties with respect to testing, turnover and acceptance of any
Products furnished hereunder and installed by Nortel shall be as
follows:
a. Nortel shall provide Buyer with five (5) days written notice prior to
commencing final commissioning and testing of any Products installed by
Nortel. Buyer shall cause an authorized representative of Buyer to be
present at the applicable Installation Site to witness such final
commissioning and testing, provided that in the event such
representative fails to
5
<PAGE>
be present for any reason, Nortel shall not be required to delay
performance of such final commissioning and testing. In connection with
the final commissioning and testing of such Products, Nortel shall test
the Products for conformity with the applicable Acceptance Criteria.
When such tests have been successfully completed, Nortel shall provide
Buyer with written notice ("Turnover Notice") that the applicable
Products meet such Acceptance Criteria and are ready for Buyer's
testing for compliance with such Acceptance Criteria. Buyer shall
promptly complete and return to Nortel Buyer's acknowledgment of
receipt of such Turnover Notice.
b. Following the Turnover Date, Buyer may test the applicable Products for
compliance with the Acceptance Criteria using the tests and test
procedures contained in Nortel's Installation Manuals with respect to
such Products. Within thirty (30) days following the Turnover Date of
the applicable Products, Buyer shall notify Nortel either that Buyer
has accepted such Products in writing using Nortel's standard
Acceptance Notice form or that Buyer has not accepted such Products in
which case Buyer shall also provide Nortel with a written notice
("Notice of Deficiency") which shall provide in reasonable detail the
manner in which Buyer asserts that the Products failed to meet the
Acceptance Criteria. With respect to any such details with which Nortel
agrees, Nortel shall promptly proceed to take appropriate corrective
action and following correction, Buyer may retest the Products in
accordance with this Section. Buyer shall accept the Products in
writing without delay when the tests pursuant to this Section indicate
that the Products comply with the Acceptance Criteria.
c. With respect to any points of disagreement between Nortel and Buyer
concerning any Notice of Deficiency which are not resolved by Nortel
and Buyer within twenty (20) days after the effective date of the
Notice of Deficiency, Buyer, at its option, may waive any rights it may
have on account of any such points of disagreement, or require that the
disputed points be resolved by arbitration.
d. Buyer shall notify Nortel in writing of its election pursuant to
Section 8.c. not later than twenty (20) days after the effective date
of the Notice of Deficiency, if any, given to Nortel by Buyer. Such
twenty (20) day period may be extended by mutual agreement in writing
signed by the parties. Upon expiration of such twenty (20) day period,
or any extension mutually agreed to by the parties, unless Buyer has
notified Nortel to the contrary, Buyer shall be deemed to have elected
to waive its right with respect to any points of disagreement then
existing between it and Nortel with respect to such Notice of
Deficiency.
e. If Buyer makes timely election to require arbitration of such disputed
points, the arbitrator shall be chosen by mutual agreement. If the
parties cannot agree upon an arbitrator within three (3) days of
Buyer's election to arbitrate, each party shall within three (3) days
thereafter select an independent and an unaffiliated person to be an
arbitrator. These two (2) persons selected shall select a third person,
independent and unaffiliated with either party, as a third arbitrator.
The arbitration shall be conducted in accordance with the Rules of the
American Arbitration Association, provided, however that the
Arbitrator(s) shall be empowered to
6
<PAGE>
reduce the Prices of Products only to the extent that the Arbitrator(s)
find that the benefit of Buyer's bargain has been reduced. The
Arbitrator(s) shall not have any authority to grant partial or total
rescission unless the Arbitrator(s) determine that (i) Buyer has not
substantially received the benefit of its bargain; and (ii) money
damages will not provide an adequate remedy. Judgment upon the award
rendered by the Arbitrator(s) may be entered in any Court of competent
jurisdiction.
f. For purposes of this Product Attachment, "Acceptance" of the applicable
Products shall occur upon the earliest of the following and Buyer shall
upon request sign Nortel's Acceptance Notice confirming such
Acceptance:
(i) The date on which Buyer accepts such Products pursuant to
Section 8.b. of this Product Attachment;
(ii) The failure of Buyer to provide Nortel with any notice
required by Section 8.b. of this Product Attachment, with
respect to such Products;
(iii) Use by Buyer of such Products or any portion thereof in
revenue producing service at any time; or
(iv) Waiver by Buyer of its rights pursuant to Section 8.c. or 8.d.
g. Acceptance by Buyer of such Products pursuant to Section 8.f. of this
Product Attachment above shall not be withheld or postponed due to:
(i) Deficiencies of such Products resulting from causes not
attributable to Nortel, such as, but not limited to (A)
inaccuracy of information provided by Buyer, (B) inadequacy or
deficiencies of any materials, facilities or services provided
directly or indirectly by Buyer and tested in conjunction with
the applicable Products, or (C) spurious outputs from adjacent
material; or
(ii) Minor deficiencies or shortages with respect to such Products
which are attributable to Nortel, but of a nature that do not
prevent full and efficient operation of the Products.
h. With respect to any deficiencies of the type described in Section
8.g.(i), Nortel shall at Buyer's request and expense assist Buyer in
the elimination or minimization of any such deficiencies. With respect
to any deficiencies or shortages as described in the Section 8.g.(ii),
Nortel shall, at Nortel's expense, take prompt and effective action to
correct any such deficiencies or shortages.
i. In the event Buyer's Acceptance of any Products is withheld or
postponed due to any deficiencies of the type described in Section
8.g.(i), Nortel shall invoice and Buyer shall pay
7
<PAGE>
Nortel's charges and reasonable expenses incurred by Nortel associated
with Nortel's investigation of the reasons for Buyer's withholding or
postponement of such Acceptance.
9. WARRANTIES AND REMEDIES
With respect to Exhibit D, LIMITED WARRANTIES AND REMEDIES, the
following additional terms shall apply:
a. Except as set forth in Section 9.b. below, Nortel shall in performance
of its obligations under Section 2 of Exhibit D to the Agreement, (i)
ship replacement Equipment or complete the repair within fifteen (15)
days of Nortel's receipt of the Equipment to be replaced or repaired,
and (ii) commence the correction of the applicable installation
Services within fifteen (15) days of receipt of notice from Buyer
pursuant to Section 5 of Exhibit D to the Agreement.
b. For emergency warranty service situations involving the Equipment,
Nortel shall during the applicable Warranty Period use all reasonable
efforts to ship replacement Equipment within twenty-four (24) hours of
notification of the applicable warranty defect by Buyer pursuant to
Section 5 of Exhibit D to the Agreement, provided that Buyer shall have
requested such emergency service. Nortel may invoice Buyer and Buyer
shall pay Nortel's surcharge for emergency warranty services, such
surcharge shall not exceed ____________________. If Nortel determines
that due to the particular circumstances, onsite technical assistance
is necessary, Nortel shall use all reasonable efforts to dispatch
emergency service personnel to the applicable Installation Site within
twenty-four (24) hours of receipt of notice from Buyer as described
above.
c. All Products to be repaired or replaced, both within and outside of the
applicable Warranty Period, shall be packed by Buyer in accordance with
Nortel's then current instructions.
d. No later than ninety (90) days prior to the expiration of the Warranty
Period with respect to any Initial System, Nortel shall offer to Buyer
post-warranty support by means of an extended service plan or other
terms, provided that neither party shall have any obligation with
respect thereto except as may be agreed upon in writing by the parties.
Should Nortel fail to provide such notice of offering a post-warranty
support, Buyer shall have sixty (60) days after expiration of the
Warranty Period, in which to purchase such post-warranty support.
10. NOTICES
Pursuant to Section 18.5 of the Agreement, any notices by Buyer to
Nortel which are specific to this Product Attachment shall be delivered
to the following address:
8
<PAGE>
Northern Telecom Inc.
2350 Lakeside Blvd.
Richardson, Texas 75082-4399
Attn: Vice President, Carrier Networks
11. ADDITIONAL TERMS
The following additional terms shall apply to the Agreement:
a. With respect to Section 14, BUYER'S RESPONSIBILITIES, the following
additional terms shall apply:
(i) Buyer shall be responsible for ordering and coordinating with
each applicable local telephone company the installation of
all central office trunks and test trunks and Buyer shall be
responsible for all utility charges associated with the
installation, testing, operation and maintenance of Products
furnished hereunder, including, but not limited to, all
applicable charges for such central office trunks, test trunks
and any tie lines.
b. Nortel shall provide documentation with respect to the Products in
accordance with Schedule D to this Product Attachment.
c. In consideration of Buyer's commitment under Section 3, Nortel hereby
grants Buyer ___________ worth of credits (each, a "Credit"). Each
Credit shall have a value of One Dollar ($1.00). Buyer may use the
credits any time during the Product Attachment Term. ________________
of the ________________ worth of credits may be used for the purchase
of ClusterVision services, a module of the LaserGuided Marketing
services, as those services are described and priced in Nortel
publication number 5004.15/09-96 titled "LaserGuided Marketing
ClusterVision Price List". The remaining _______________ of the
______________ worth of credits may be used during the Product
Attachment Term to purchase Total Network Solution services, as those
services are generally described and priced in Nortel's proposal dated
January 13, 1997, which proposal shall be subject to revision. The
purchase of those services shall be covered by a separate agreement,
the terms and conditions of which shall be mutually agreed upon. The
Credits may not be redeemed for cash or used for the purchase of any
other products or services, and Buyer shall not be entitled to any
refund for any Credits not used prior to the expiration of the Product
Attachment Term.
d. In the event Nortel decides to discontinue the manufacture of any
Schedule A Products during the period of seven (7) years following the
Turnover Date of each Initial System Ordered under this Product
Attachment, then Nortel shall give Buyer written notice of such intent
at least twelve (12) months prior to the date of such discontinuance.
Buyer may, during
9
<PAGE>
the twelve month period following noticaftion, order and Nortel shall
deliver as much of such Schedule A Products as Buyer needs at the then
current prices and/or license fees. Nothing herein shall be construed
to require Nortel to continue to manufacture any Schedule A Products.
NORTHERN TELECOM INC. FOCAL COMMUNICATIONS
CORPORATION
By: /s/ Vickie Yohe By: /s/ John Barnicle
-------------------------------- -------------------------------
(Signature) (Signature)
Name: Vickie Yohe Name: John Barnicle
-------------------------------- ----------------------------
(Print) (Print)
Title: V.P. and General Manager Title: Executive Vice President
-------------------------------- ----------------------------
Date: January 21, 1997 Date: January 17, 1997
-------------------------------- ----------------------------
10
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
PAGE 1
PRODUCT ATTACHMENT
S/DMS ACCESSNODE PRODUCTS
Northern Telecom Inc. ("Nortel") and Focal Communications Corporation ("Buyer")
agree as follows:
NOW, THEREFORE Buyer and Nortel agree as follows:
1. INCORPORATION BY REFERENCE
This Product Attachment shall be incorporated into and made a part
of Network Products Purchase Agreement No. JRD0197FCC between
Nortel and Buyer.
2. DEFINITIONS
For purposes of this Product Attachment:
"Equipment" shall mean the equipment listed in Schedule A.
"Product Attachment Term" shall mean the period which shall
commence on the date this Product Attachment is executed by the
latter of the parties and shall expire _________________.
"Services" shall mean the services described in Schedule B.
"Software" shall mean the software listed in Schedule A.
"Specifications" shall mean Nortel's standard published
performance specifications for the Products.
"Warranty Period" shall mean _______ months from the date of
shipment stamped on the Equipment or, if the date of shipment is
not marked on the Equipment, ______ months from the date of
manufacture. In the event Nortel performs installation Services,
the Equipment warranty shall be ______ months from the date of
acceptance as set forth in Section 7 herein.
3. SCHEDULES
The following Schedules which are attached hereto are an integral
part of the Product Attachment and are incorporated herein by
reference:
Schedule A - Products, Prices, and Fees
Schedule B - Services and Charges
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
PAGE 2
Schedule C - Delivery Intervals
Schedule D - Forecast
4. ORDERING
4.1 All Orders shall specify the Products required and the
Services, Nortel is to perform, if any.
4.2 Any change to the original Order initiated by Buyer
after Nortel's acceptance of the Order and any
resulting adjustments to prices, schedule and/or other
requirements of the Order shall be negotiated, mutually
agreed upon and subsequently detailed in a written
change to the Order ("Change Order"), referencing the
original Order and executed by authorized
representatives of Buyer and Nortel. The adjustment of
the Order prices for Products and charges for any
Services, as applicable, in a Change Order shall be
established on the basis of Nortel's then current
merchandise prices for such Products and/or charges for
Services. In the event that the Change Order affects
work already performed, the adjustment of the Order
price shall include reasonable charges incurred by
Nortel related to such work. No such changes shall be
performed until a Change Order has been executed by
Nortel and Buyer as described above.
5. PRICING
5.1 During the Product Attachment Term, Pricing for
Equipment and Software shall be as set forth in
Schedule A.
5.2 The prices for engineering, installation and/or system
line-up and testing ("SLAT") Services performed by
Nortel with respect to an accepted Order shall be as
quoted by Nortel and agreed to by Buyer prior to
issuance of the applicable Order.
5.3 Nortel will prepay freight charges and the cost of any
insurance requested by Buyer and invoice Buyer for
these items at Nortel's actual cost. These charges will
appear as separate line items on Nortel's invoice.
6. TERMS OF PAYMENT
Nortel shall invoice Buyer for the price of the Products as well as
any prepaid freight and insurance charges upon shipment of the
Products. Any Services provided hereunder shall be invoiced to
Buyer upon Nortel's completion of such Services.
7. TESTING, TURNOVER AND ACCEPTANCE
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
PAGE 3
7.1 When Nortel installs the Products, Buyer's acceptance
of the Products and Services shall take place, or be
deemed to have taken place, upon completion by Nortel
of installation and SLAT Services in accordance with
Nortel's standard procedures and practices, as
evidenced by the acceptance test results showing that
the Products meet and perform in accordance with the
applicable Specifications. Upon such acceptance, Nortel
shall provide Buyer with a turnover notice to be
acknowledged in writing by Buyer. By providing the
turnover notice, Nortel certifies that the Products
meet and perform in accordance with the applicable
Specifications. Acceptance of the Products shall not be
withheld or postponed due to:
a) deficiencies of the Products or any other product with
which such Products are used or operated, resulting
from causes not attributable to Nortel, such as but not
limited to (i) inaccuracy of information provided by
Buyer, (ii) inadequacy or deficiencies of product,
facilities or services provided by Buyer or a third
party and tested in conjunction with the Products, or
(iii) other conditions, external to the Products
provided by Nortel, which are beyond limits specified
herein and are used by Nortel in performance
calculations and spurious outputs from adjacent
product. Nortel shall, however, at Buyer's expense,
assist Buyer in the elimination or minimization of such
deficiencies; or
b) minor deficiencies or shortages, attributable to
Nortel, of a nature that do not prevent full and
efficient commercial operation of the Products. Nortel
shall, however, at its expense, take prompt and
effective action to correct any such deficiencies or
shortages.
7.2 The effort associated with Nortel's investigation of
any deficiencies not attributable to Nortel shall be
billed to Buyer.
8. WARRANTIES AND REMEDIES
8.1 The repair or replacement of Equipment and the
correction of defective installation Services shall be
warranted for a period of ___ days or the remainder of
the original Warranty Period whichever is longer.
8.2 Nortel shall provide Buyer with repair and replacement
service for a minimum period of seven (7) years from
the commencement date of this Product Attachment,
subject to the condition that should Nortel discontinue
manufacture or repair of the Product or portions
thereof prior to the expiration of such seven (7) year
period (such right of discontinuance being expressly
reserved by Nortel), Nortel shall provide Buyer with a
twelve (12) month prior written notice of any
discontinuance so as to enable Buyer to
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
PAGE 4
place an order for its requirements or to enter into
any other mutually satisfactory agreement with Nortel
prior to such discontinuance. This provision shall
survive the expiration of this Product Attachment.
9. NOTICES
Pursuant to Section 18.5 of the Agreement, any notices by Buyer to
Nortel which are specific to this Product Attachment shall be
delivered to the following address:
Northern Telecom Inc.
5555 Windward Parkway, Suite B
Alpharetta, Georgia 30201-3895
Attn: Vice President and General Manager,
Access Networks
10. ADDITIONAL TERMS
10.1 Nortel may, from time to time, issue updates to the
Software and, upon Buyer's payment of applicable Right
to Use Fees or Software License Fees, if any, shall
license these updates to Buyer. Nortel shall classify
such updates as either: 1) Incremental Software
Upgrades ("ISUs"), designed to correct any
nonconformance to the applicable Software
specifications or 2) enhancements which will provide
additional features ("Enhancements"). Updates to
Software, classified as ISUs by Nortel, will be
provided at no cost to Buyer. Notwithstanding the
foregoing, ISUs and Enhancements shall not include the
cost of any associated hardware that may be required to
update such ISUs. Updates classified as Enhancements,
which will be used by Buyer in its operations shall be
made available to Buyer on a billable basis. In the
event Nortel determines that the update includes both
ISUs and Enhancements which will be used by Buyer in
its operations, such update shall be made available to
Buyer. If Buyer elects to receive the update, Nortel
shall invoice Buyer only for the amount determined by
Nortel to be attributed to the Enhancements contained
in such update.
10.2 In order to allow Nortel to meet its delivery
requirements, Buyer shall issue a forecast showing the
specific types and quantities of Products to be
released and the dates such Products will be released
throughout the Product Attachment Term. Buyer shall
update such forecasts quarterly with each forecast
stating the specific types of Products and quantities
of Products to be released during the next quarter. The
initial forecast shall be as set forth in Schedule D.
In the event Buyer does not meet its obligation to
update its forecast quarterly, then Nortel shall not be
obligated to meet its forecasted delivery intervals as
stated in Schedule C.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
PAGE 5
Nortel's only obligation regarding such delivery
intervals shall be to meet delivery dates set forth in
an accepted Order. If Nortel, prior to acceptance of an
Order, advises Buyer that it cannot meet a delivery
date shown in an Order, both parties will negotiate a
revised date prior to acceptance of the Order by
Nortel. The installation and SLAT intervals applicable
to an Order will be quoted by Nortel and agreed to by
Buyer and Nortel prior to issuance of such Order.
10.3 If Nortel is providing Buyer with installation
Services, Buyer shall be responsible for having all
installation sites ready on time and in accordance with
Nortel's requirements. Buyer shall be responsible for
any expense incurred by Nortel as a result of Buyer's
failure to meet the foregoing obligations.
11. Section 11 has been Intentionally Deleted.
12. HOST DIGITAL TERMINALS
12.1 Buyer shall issue an Order for a voice module ("Voice
Module") and host digital terminal ("HDT") in
accordance with Section 4, ORDERING, and the pricing
set forth in Schedule A. ____________________ Each HDT
supports up to fourteen (14) Voice Modules in the AN14
Software release therefore, 70% full shall equal ten
(10) Voice Modules interfacing the HDT. For the AN16
Software release, the HDT supports up to twenty-eight
(28) Voice Modules therefore, 70% full shall equal
twenty (20) Voice Modules interfacing the HDT. The
most recently ordered HDT shall be seventy percent
(70%) of full capacity and HDTs previously ordered
shall be one hundred percent (100%) of full capacity
before additional HDTs may be ordered by Buyer.
12.2 One week after Buyer's acceptance of the HDT and
AccessNode Express as described in Section 7, TESTING,
TURNOVER, AND ACCEPTANCE, Nortel shall provide an
instructor for _______________ each new metropolitan
area where a Nortel switch with an AccessNode Express
is deployed by Buyer. Nortel shall be responsible for
travel and living expenses of the course instructor
and Buyer shall be responsible for travel and living
expenses of course attendees.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
PAGE 6
NORTHERN TELECOM INC. FOCAL COMMUNICATIONS
CORPORATION
By: /s/ Martin Rist By: /s/ John R. Barnicle
--------------------------- ----------------------------
Signature Signature
Name: Martin Rist Name: John R. Barnicle
--------------------------- ----------------------------
Print Print
Title: V.P. Marketing Title: E.V.P. - C.O.O.
--------------------------- ----------------------------
Date: February 20, 1998 Date: February 17, 1998
--------------------------- ----------------------------
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE A
PAGE 1 OF 1
PRODUCTS, PRICING AND FEES
SECTION
1 Pricing for Stock Models
2 Merchandise List
<PAGE>
AGREEMENT NO. JRD0971FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B
PAGE 1 OF 1
SERVICES AND CHARGES
SECTION
1 Repair/Replacement Procedures
2 Equipment Support
3 Training
4 Service Charges
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 1
PAGE 1 OF 7
REPAIR/REPLACEMENT PROCEDURES
1. GENERAL
Nortel's Replacement-Repair Service Center located in Nashville,
Tennessee, handles all repairs for Broadband/AccessNode Equipment.
Broadband/AccessNode Equipment processed through Nortel is
typically handled on a "Replacement-Repair" basis.
2. REPAIR SERVICES - EQUIPMENT
2.1 Normal Replacement Intervals
Normally, Nortel will ship a replacement unit within
thirty (30) calendar days after receipt of a defective
unit.
2.2 On-Site Repair
The nature of some Equipment may make it more feasible
to effect the repairs on the Buyer's premises. These
arrangements will be made through the Nortel's Global
Product Support ("GPS") group serving the Buyer's area.
2.3 Emergency Replacement
Defective Equipment vital to the call processing
ability of a system qualifies for emergency service.
This service is not intended to take the place of
normal replacement service. Emergency replacement will
be provided under the following conditions:
a. The last spare circuit pack has been used
to replace a defective pack in a system and
all similar packs in the system are
carrying live traffic.
b. Nortel's ETAS group advises that an
emergency situation exists and certain
Equipment is required to correct the
situation.
Nortel provides emergency replacement Equipment (new,
repaired, or functionally equivalent) at the service
charges set forth in Section 4 of this Schedule within
twenty-four (24) hours of a verbal request from the
Buyer. This service is available twenty-four (24) hours
a day, including holidays. Upon receiving verbal
request, a replacement unit will be shipped to the
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 1
PAGE 2 OF 7
Buyer. Written confirmation of the verbal request must
be forwarded to Nortel within three (3) working days
of the verbal request for replacement. To request
emergency replacement service, phone 1-800-251-1758,
option 8 or 1-800- 423-9658.
2.4 Upgrade to a Later Vintage Level
If requested by the Buyer, an upgrade may be applied to
a Buyer's unit submitted to Nortel for repair, provided
that the Equipment is upgradeable to the requested
vintage. Typically, the Buyer will be billed at normal
repair prices for this service. The Buyer shall make
prior arrangements with the appropriate service center
to obtain this service.
2.5 Vendor Products (OEM)
The repair of most OEM equipment can be coordinated
through the Replacement-Repair Service Center in
Nashville, Tennessee. Upon receipt from the Buyer of
defective OEM equipment, Nortel will arrange the repair
and return of these units by the OEM vendor.
3. SOFTWARE SERVICE
3.1 New Software Updates
New Software Updates will be introduced via Nortel's
established Product Change Notice (PCN) routine. At
least sixty (60) days prior to field introduction,
notification of these changes will be provided to Buyer
by Nortel in writing.
3.2 Software Updates
Software updates can be performed in-service on the
system without site visits. The policy for
compatibility over time is that a single step
in-service update will be supported for a period of two
(2) years from the general availability date of the
product release. Upgrading a system to the most recent
update from a product release beyond the two (2) year
window may involve an intermediate step (i.e.,
upgrading the system to an intermediate update) and the
purchase by Buyer of additional Equipment.
3.3 Software Update Fees
Updates which are classified as Enhancements by Nortel
will be made available to Buyer at a price determined
by Nortel at the time such Software
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 1
PAGE 3 OF 7
Update is offered to Buyer. Updates which are
classified as ISUs by Nortel will be provided at no
cost to the Buyer. Notwithstanding the foregoing, ISUs
and Enhancements shall not include the cost of any
associated hardware that may be required.
4. BUYER PROCEDURE FOR REPLACEMENT-REPAIR SERVICE
Two types of Replacement-Repair services are offered to Buyer:
a. Direct mail-in Replacement-Repair
b. Advance Authorization Replacement-Repair
Buyer may have Replacement-Repair service
pre-authorized and initiated within Nortel by a
telephone call to Nortel's Replacement Repair Service
Center.
The decision on which procedure to use is the Buyer's. (Emergency
service is handled as Advance Authorization Replacement-Repair
only). Regardless of the procedure selected, certain guidelines as
prescribed below are to be followed.
4.1 Direct Mail-In Procedure for Replacement-Repair
a. For each defective unit, failure tags
should be completed and attached to the
Equipment.
b. Two copies of Nortel's mail-in form, or an
equivalent form approved by Nortel, should
be completed and enclosed with each
shipment.
c. The following data must be provided on the mail-in
form:
o Buyer's shipping address and phone number to
contact in case of a shipping discrepancy;
o Buyer's billing address, billing contact, and
phone number;
o Buyer's Order number and authorization;
o Shipping instructions;
o Unit identification (Nortel Product Engineering
Code);
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 1
PAGE 4 OF 7
o Quantity of units;
o Date shipped.
d. Defective units are to be packaged for
shipment following the procedures outlined
in Section 4.3 and shipped to Nortel in
accordance with Section 4.4.
e. Defective units are to be shipped to:
Northern Telecom Nashville Service Center
917 Air Park Center Drive, Dock F
Nashville, Tennessee 37217
Attention: Repair and Return
Any discrepancy in the above procedure will be brought
to the attention of the Buyer upon Nortel's receipt of
the defective Equipment.
Buyer's inquiries related to Direct Mail-In service
must reference the Buyer's Order number.
4.2 Advance Authorization Procedure for Replacement-Repair
a. Upon Buyer's identification of defective
units, Nortel's Replacement-Repair Service
Center can be contacted as follows:
o Monday through Friday, excepting
holidays, from 7:00 am to 6:00 pm,
central standard time, telephone
1-800-251-1758, option 8 or
1-800-423-9658. The call will be received
directly by a Customer Service
Representative.
b. The following information must be provided
by the Buyer when calling:
o Buyer's ship to address;
o Buyer's billing address;
o Buyer's Purchase Order number and authorization
number;
o Urgency of request (normal or emergency);
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 1
PAGE 5 OF 7
o Shipping instructions;
o Unit identification (Nortel Product Engineer
Code);
o Quantity of units.
c. A unique repair order identification number
will be issued by Nortel's
Replacement-Repair Service Center for each
order. Please reference this number on all
inquiries.
d. Failure tags should be completed and
attached to each defective unit.
e. Defective units are to be packaged and
shipped in accordance with the procedures
outlined in the following Sections. The
repair order identification number should
be clearly marked on the outside of cartons
and on all paperwork.
4.3 Packaging
Defective Equipment should be packaged in anti-static
containers, preferably of standardized design for
circuit packs. (Buyer shall consult with Nortel's
Customer Service Representative for information on
approved containers.)
Note: Neither bubble pack nor Styrofoam chips
should be used as packaging material. Use
of such material may generate static
electricity which could severely damage a
circuit pack. Use of this material may, at
Nortel's discretion, result in shipments
being refused and/or warranties being
voided.
Failure tags should be completed and attached to each
unit. Each unit should be wrapped individually.
Note: Failure tags should be attached to the
lock latch of a circuit pack. Please do
not attach the tag to any component on
the circuit pack as this could result in
damage to the Equipment.
A copy of the packing list should be placed inside each
box to further ensure proper receipt of a multiple box
shipment.
4.4 Basic Shipping Procedure
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 1
PAGE 6 OF 7
a. Buyer shall bear risk of loss and damage on
shipments to Nortel. Nortel shall bear risk
of loss or damage on shipments to Buyer.
b. The Mail-In Form or a packing list (where
advance authorization is required) must be
included. The following information is
required by Nortel:
o Repair order identification (if advance
authorization replace-ment-repair service
is used);
o Buyer's Order number;
o Buyer's name, ship to address, and
telephone number to contact in case of a
shipping discrepancy;
o Buyer's bill-to address, contact person,
and telephone number;
o Date shipped;
o Unit identification (Nortel's Product
Engineering Code);
o Quantity shipped.
Note: Failure to provide the above
information could result in a delay
in processing the Order.
c. Buyer shall select an appropriate carrier
based upon the weight and size of shipment.
4.5 Shipping Costs
a. In Warranty and Out of Warranty
1. Buyer shall return defective
Equipment to Nortel prepaid.
2. Nortel shall ship the
replacement Equipment to Buyer
prepaid using an appropriate
surface carrier. Arrangements
can be made for air shipments
at Buyer's expense.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 1
PAGE 7 OF 7
4.6 Unrepairable Equipment
a. In Warranty
In the event Equipment under warranty is
returned to Nortel and is judged by
Nortel to be beyond repair due to faulty
material or workmanship, Nortel will
replace the defective Equipment with a
new, repaired, or functionally equivalent
unit at no cost to Buyer.
b. Out of Warranty
In the event Equipment not covered by
warranty is returned to Nortel and is
judged by Nortel to be beyond repair, it
will be returned to the Buyer. Nortel
will replace the defective Equipment at
Buyer's request, and invoice the Buyer at
the then current price for such new
Equipment.
4.7 Non-Return of Defective Units - Buyer Responsibility
When Nortel has shipped a replacement unit to Buyer
after verbal notification of a defective unit, Buyer is
responsible for returning the associated defective
Equipment to Nortel within thirty (30) calendar days of
the shipping date of its replacement. If Buyer's
defective Equipment is not received within such thirty
(30) calendar day period, Buyer shall be invoiced the
then current price of new Equipment plus fifteen
percent (15%). Consequently, an open Purchase Order
number must be provided by the Buyer when obtaining a
Return Authorization number.
5. BUYER PROCEDURE FOR SOFTWARE UPDATES
Software updates are to be handled via the normal Advanced
Authorization Procedure as set forth in Section 4.2. The Basic
Shipping procedure contained in Section 4.4 shall be followed
except that the Software license(s) shall be returned to Nortel
via registered mail.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 2
PAGE 1 OF 5
EQUIPMENT/SOFTWARE SUPPORT
1. WARRANTY SUPPORT
1.1 Remote (off-site) Assistance
Technical support offered at no charge to Buyer during
the Warranty Period includes Remote (off-site)
assistance to Buyer's trained personnel in resolving
Equipment and Software operational and compatibility
problems.
Remote (off-site) assistance consists of one or more of
the following:
a. Over-the-phone consultations and guidance at
1-800-275-8726.
b. Interrogation and analysis of systems over
data lines from Nortel's service facility.
c. Other activity directly related to problem
resolution, where Nortel travel is not
involved.
If after investigation, Nortel determines that the
problem was caused by equipment, software, or
conditions not attributable to Nortel then such
technical assistance shall be billable to Buyer in
accordance with Nortel's current rates and procedures
as set forth in Section 3 of this Schedule.
Calls to Nortel's service facilities during Nortel's
off-hours shall be limited to Equipment or Software
failures directly affecting service that Buyer could
not resolve by following standard troubleshooting
procedures, covered by NTPs.
1.2 Local (on-site) Assistance
Local (on-site) assistance by Nortel field engineers is
also available as part of the warranty support. To
qualify for Local (on-site) assistance without charge,
the following efforts must have been exhausted prior to
the field trip:
a. Buyer has determined that the Equipment or Software
is the source of the problem; and
b. Buyer was unable to resolve the problem by
using standard troubleshooting procedures
covered by applicable NTP's; and
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 2
PAGE 2 OF 5
c. Nortel 's engineer could not resolve the
problem remotely with full cooperation of
Buyer's personnel.
Local on-site assistance, provided at Buyer's request,
that does not meet above requirements is billable in
accordance with Nortel's current rates and procedures
as set forth in Section 3 of this Schedule. If after
investigation, Nortel determines that the need for
Local (on-site) assistance was not caused by the
Equipment, Software nor conditions attributable to
Nortel then, such technical assistance and associated
travel and living expenses shall be billable to Buyer
at Nortel's current rates and procedures as set forth
in Section 3 of this Schedule.
The following types of assistance fall outside the
scope of warranty support and are billable;
a. Local (on-site) assistance with system
verification and pre-service testing, where
required by the Buyer.
b. Local (on-site) assistance for Software
upgrades, where required by the Buyer.
c. Analysis to determine origins of the fault
and resolution of technical problems
associated with equipment or software not
furnished by Nortel.
d. Non-emergency calls for technical
assistance during Service Center off-hours.
e. Consultation in excess of 1/2 hour on
matters that are adequately covered by
standard documentation and/or for which
training programs are available, including
Software upgrades.
2. OUT-OF-WARRANTY SUPPORT
Technical assistance as set forth in Section 1 of this Schedule is
available for out-of-warranty Equipment and is billable at the
current rates and procedures as set forth in Section 1 of this
Schedule.
3. TECHNICAL SERVICE RATES
All billable technical services are billed at hourly rate plus
expenses as defined herein.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 2
PAGE 3 OF 5
Billable expenses include travel, meals and lodging costs for
Nortel's service representatives, long distance telephone and data
link charges and other costs which are directly related to the
service effort. These expenses shall be augmented by fifteen
percent (15%) handling and administration charge.
For Local (on-site) assistance service, both work and travel time
are included and charged as applicable. Minimum charge for Local
(on-site) assistance service is eight (8) hours plus expenses.
Minimum charge for Remote assistance service shall be one (1) hour,
billable according to the rate structure listed below.
The following standard rates are in effect for these procedures:
i) REGULAR WORKING HOURS (STD) - ________________
ii) OVERTIME 1 RATE (OTT) - ______________________
iii) OVERTIME 2 RATE (OT2) - ______________________
<TABLE>
<CAPTION>
Buyer's Local Time 00000 0800 16:30 2400
Midnight 8:00 a.m. 4:30 p.m. Midnight
- -------------------- ---------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
MON-FRI OT1 STD OT1
- ---------------------------------------------------------------------------------------
SAT OT1 OT1
- ---------------------------------------------------------------------------------------
SUN/HOLIDAYS OT2
- ---------------------------------------------------------------------------------------
</TABLE>
NOTE: Nortel observed holidays are. New Year's Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and the day after,
and Christmas week.
The telephone number for the Broadband Technical Support Group is as follows:
Non-Emergency Support: 1-800-ASK TRAN (1-800-27~8726)
Emergency Support: 1-800ASK ETAS (1-800-27~3827)
4. TECHNICAL PROBLEM RESOLUTION OBJECTIVES
As different types of problems require different levels of
reaction, a Nortel Priority Classification system is set up to
establish a relationship between the reported problems and
appropriate level of reaction and resolution. The Priority System
is based upon problem's direct or potential effect upon subscriber
service. Each reported problem is assigned priority rating
accordingly.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 2
PAGE 4 OF 5
The Priority System has five levels:
E1 - Emergency: Severe Degradation or Outage
E2 - Emergency: Potential Degradation or Outage
S1 - Non-Emergency: Service-Affecting Problem
S2 - Non-Emergency: Intermittently Service Affecting
NS - Non-Service Affecting Problem
The resolution objective for E1 or E2 Emergency classification is
immediate and continuous assistance until the service level is
restored to pre-incident operation. For assistance in such E1 or E2
Emergency, please call 1-800-275-3827. The resolution objective for
non-emergency condition is to provide a status response in two (2)
weeks and solution to the problem in four (4) weeks for S1
Classification or eight (8) weeks for S2. The resolution objective
for non-service affecting condition is to provide a status response
in six (6) weeks and a fix, if applicable, will be scheduled for
future standard hardware, software or documentation update or
revision.
THESE OBJECTIVES DO NOT CONSTITUTE CONTRACTUAL OBLIGATION UPON
NORTEL, BUT ARE GENERALLY IN SUPPORT OF THE TERMS AND CONDITIONS OF
THIS AGREEMENT. NORTEL RESERVES THE RIGHT TO EXERCISE JUDGMENT ON
THE ECONOMIC OR STRATEGIC BENEFITS OF EXECUTING ACTIONS ON ALL
REPORTED OR ANTICIPATED PROBLEMS. THIS MAY RESULT IN AN ACTION
DIFFERENT FROM THOSE DESCRIBED. IN SUCH CASE, THE CUSTOMER WILL BE
INFORMED.
The following is a detailed description of priority ratings:
E1 - Emergency: Severe Degradation or Outage
i) System ceased call processing
ii) 10% or more subscribers out of service;
iii) 50% or more trunk circuits out of service;
E2 - Emergency: Potential Degradation or Outage
i) Redundant Common Equipment inoperable
ii) 20% or more trunk circuits out of service;
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 2
PAGE 5 OF 5
S1 - Service Affecting Problem
i) Problems directly and continuously affecting
subscriber service, not
specified under E1 or E2;
ii) Problems that will seriously impair service after
in-service date;
S2 - Intermittently Service Affecting Problem
i) Software and hardware faults that only
intermittently affect service;
ii) Documentation errors that result or lead to service
impairments;
iii)Problems where operating company can show
significant impact upon plant and traffic
operations;
NS - Non-Service Affecting Problem
i) Service analysis, operational
measurements, or system related
documentation inaccuracies that do not
affect call processing or revenue
collection capabilities;
ii) Non-service affecting software inconsistencies;
iii)Loss of test facilities for which manual
procedures or alternate test equipment can
be readily substituted.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 3
PAGE 1 OF 2
TRAINING
The Nortel training program offers Buyer courses for all S/DMS AccessNode
Product covered by this Agreement at Nortel's then current charge for such
courses.
"In-house" courses are given at training facilities located at Nortel's Regional
Training Centers. Fully equipped with captive systems covered in the course
offering, the student gains extensive "hands-on" experience at the Nortel
training facilities. Courses may also be given at a customer's "on-site"
location where appropriate facilities and equipment are available. Nortel
recommends students attending "In-house" courses when possible as "on-site"
courses generally do not offer as effective a presentation environment and also
limits "hands-on" experience.
All courses offer students with standard training material presented by
qualified instructors. Maintenance courses cover an explanation of the
transmission principles involved, installation, operation, maintenance
(including fault locate procedures for trouble-shooting equipment and circuit
replacement), and a thorough review of Nortel's product documentation (NTP's).
For scheduling of courses, determining presentation locations, and availability
of seats, please contact Nortel's Training Coordinator in Raleigh, North
Carolina at (919) 859-8400.
"IN-HOUSE" TRAINING
Courses are offered at the Nortel Regional Training Center located in Raleigh,
North Carolina.
"In-house" training courses normally accommodate up to eight (8) students with
seats filled on a "first come/first served" basis. Courses may be subject to
rescheduling if a minimum class size is not met.
Course charges are per student for each course with travel and living expenses
paid by Buyer. Nortel will provide information on local accommodations.
Nortel will confirm in writing the course dates for each student. After
confirmation, cancellation requires at least two (2) weeks notice prior to
course commencement.
"ON-SITE" TRAINING
Many of the training courses may be conducted at the Buyer's facilities
"on-site". Two (2) months advance notice is required to schedule these courses
with Buyer providing access to working equipment. Buyer also provides all test
equipment for training. Nortel can arrange for test equipment to be available at
additional charges of up to $2000 if Buyer does not have all requisite
equipment.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 3
PAGE 2 OF 2
Charges for "on-site" training are on a per-course basis with a maximum of ten
(10) students to attend such courses unless otherwise stated. The course fee
does not cover the instructor's travel and living expenses. If Buyer cannot
provide suitable training facilities including audio/visual equipment, charges
for such equipment incurred by Nortel will be billed to the Buyer.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 4
PAGE 1 OF 1
SERVICE CHARGES
1. REPAIR/REPLACEMENT - EQUIPMENT
<TABLE>
<CAPTION>
IN-WARRANTY* OUT-OF-WARRANTY*
------------ ----------------
<S> <C> <C>
Normal Service No charge Standard unit charges
(30 days) per current price list
Emergency Service (24 hours)
1. Requested 8:00 AM- $50 surcharge $50 surcharge
6:00 PM EST weekdays per unit per unit plus standard
unit charges per
current price list
2. Requested weekends, $100 surcharge $100 surcharge per unit
holidays, and weekdays per unit plus standard unit charges
6:01 PM - 7:59 AM EST per current price list
</TABLE>
*Maximum charge is $250 for items on the same Order requiring emergency service.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE C
PAGE 1 OF 1
DELIVERY INTERVALS
PRODUCT FORECASTED UNFORECASTED
- ------- ---------- ------------
S/DMS AccessNode
------------- -------------------
Notes:
1. All After Receipt of Order ("AROCHEM") intervals are based on
standard type Product.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE D
PAGE 1 OF 1
FORECAST
TO BE PROVIDED BY CUSTOMER
<PAGE>
Exhibit 10.6
AMENDMENTS No. 1 & 2 TO THE
NETWORK PRODUCTS PURCHASE AGREEMENT
BETWEEN
NORTHERN TELECOM INC.
AND
FOCAL COMMUNICATIONS CORPORATION --
DELETED FOR SEC CONFIDENTIALITY
THIS AMENDMENT No. 1 TO NETWORK PRODUCTS PURCHASE AGREEMENT, Carrier
Networks Products, is dated effective as of the date executed by the latter of
the parties below, (the "Amendment No. 1"), is by and between Northern Telecom
Inc. ("Nortel") and Focal Communications Corporation ("Buyer"), and amends the
Network Products Purchase Agreement Number JRD0197FCC, dated January 21, 1997
("NPPA"), by and between Nortel and Buyer;
WHEREAS, the parties wish to amend the NPPA to reflect a change in the
address of the Buyer; and
NOW, THEREFORE, for the consideration shown below, the parties hereby amend
the NPPA as follows:
1. The Buyer's address for purposes of billing and notice pursuant to the
preamble and Section 18.5, is amended and restated as follows:
Focal Communications Corporation
200 N. LaSalle Street
Chicago, Illinois 60601
Attn.: Executive Vice President
Facsimile: (312) 895-8403
<PAGE>
NORTHERN TELECOM INC. FOCAL COMMUNICATIONS
CORPORATION
By: /s/ Vickie Yohe By: /s/ John R. Barnicle
-------------------------------- -----------------------------
Signature Signature
Name: Vickie Yohe Name: John R. Barnicle
------------------------------ ---------------------------
Print Print
Title: Group VP, Carrier Networks Title: E.V.P. - C.O.O.
----------------------------- ---------------------------
Date: March 6, 1998 Date: February 17, 1998
------------------------------ ---------------------------
-2-
<PAGE>
AMENDMENT No. 2 TO PRODUCT ATTACHMENT
CARRIER NETWORKS PRODUCTS
BETWEEN
NORTHERN TELECOM INC.
AND
FOCAL COMMUNICATIONS CORPORATION
THIS AMENDMENT No. 2 TO PRODUCT ATTACHMENT, Carrier Networks Products, is
dated effective as of the date executed by the latter of the parties below, (the
"Amendment No. 2"), is by and between Northern Telecom Inc. ("Nortel") and Focal
Communications Corporation ("Buyer"), and amends the Product Attachment, dated
January 21, 1997 (the "Product Attachment"), as amended by Amendment No. 1 to
Product Attachment, dated June 10, 1997 (the "Amendment No. 1"), which are
attached to the Network Products Purchase Agreement Number JRD0197FCC, dated
January 21, 1997 ("NPPA"), by and between Nortel and Buyer;
WHEREAS, the parties wish to amend the Product Attachment and the Schedule
A attached thereto to reflect a change in Buyer's commitment and Buyer's desire
to purchase additional Products and Services from Nortel; and
NOW, THEREFORE, for the consideration shown below, the parties hereby amend
the Product Attachment and Schedule A as follows:
1. "Product Attachment Term", as defined in Section 2.0, "Definitions" is
amended and restated to read:
"Product Attachment Term" shall mean the period of time which shall
commence on the date this Amendment No. 2 to Product Attachment is executed
by the latter of the parties and shall expire thirty six (36) months
thereafter.
2. Section 3, entitled "Scope", in the Product Attachment is amended and
restated as follows:
(a) Buyer shall issue Orders for delivery and installation of the Products
listed in the attached Schedule A, in the minimum amount of
_________________________ every twelve (12) months during the Product
Attachment Term, for a total minimum commitment amount of
_______________________________ during the Product Attachment Term
(the "Commitment Amount"). Included within the Commitment Amount,
Buyer shall purchase a minimum of _______________ DMS-500 Initial
Systems, as
<PAGE>
described in the attached Schedule A, Part I, Section 1.0. Buyer shall
pay the prices, fees and charges for the Products in accordance with
Section 7 of this Product Attachment.
(b) In the event that Buyer does not purchase a minimum of
__________________ in Product every twelve months during the Product
Attachment Term, Nortel shall invoice annually and Buyer shall pay
_______________ percent _______ of the difference between
_______________________ and the amount actually spent by the Buyer
during that twelve (12) month period of time, within thirty (30) days
from the date of invoice.
(c) Subsection (c) has been intentionally deleted.
(d) Buyer may issue Orders for the DMS-500 Optional Software described in
the attached Schedule A, Part III, Section 1.0, from time to time
during the Product Attachment Term. Buyer shall receive a
_______________________ discount on the prices, fees and charges set
forth in the attached Schedule A, Part m, Section 1.0, on any DMS-500
Optional Software Order included within or submitted in connection
with Buyer's Order for a DMS-500 Initial System described in Schedule
A, Part I, Section 1.0. Otherwise, Buyer shall receive a
_________________ discount on the prices, fees and charges set forth
in the attached Schedule A, Part III, Section 1.0, on any DMS-500
Optional Software Order issued at any other time during the Product
Attachment Term.
(e) Buyer shall receive a one (1) time forty five percent (45%) discount
on the initial Merchandise Order issued by Buyer during each quarter
during the Product Attachment Term, and a thirty percent (30%)
discount on all subsequent Merchandise Orders issued by the Buyer
during each quarter during the Product Attachment Term.
(f) No later than November 1st of each year during the Product Attachment
Term, Buyer shall provide to Nortel a written forecast listing the
Products that Buyer intends to order for delivery and installation
during the following twelve (12) months of the Product Attachment Term
(the "Annual Forecast"). The initial Annual Forecast is set forth in
the attached Schedule C. Buyer may revise its then-current Annual
Forecast from time to time, and, upon submission of the revised Annual
Forecast to Nortel, each such revised Annual Forecast shall supersede
all Annual Forecasts that were previously submitted to Nortel.
(g) Nortel shall perform an in-process and final audit for each and every
Initial System purchased and installed hereunder prior to the Turnover
Date as described in Section 8 of this Product Attachment. Also,
Nortel shall perform a final audit for each and every Extension
purchased and installed hereunder prior to the Turnover Date.
-2-
<PAGE>
(h) Subsection (h) has been intentionally deleted.
(i) Subsection (i) has been intentionally deleted.
3. Section 11, entitled "Additional Terms", in the Product Attachment is
amended and restated as follows:
(c) In the event that Nortel elects to discontinue the manufacture of any
Product described in the attached Schedule A at any time during the
seven (7) years following the Turnover Date of each Initial System
ordered hereunder, then Nortel shall provide Buyer with written notice
of such discontinuance at least twelve (12) months prior to the
scheduled date of such discontinuance. During the twelve (12) month
period following Buyer's receipt of such notification from Nortel,
Buyer may order and Nortel shall deliver as much of the Products
described in the attached Schedule A as Buyer reasonably requires at
the then current prices and/or licensing fees. Nothing herein shall be
construed so as to require Nortel to continue to manufacture any
Products described in the attached Schedule A.
(d) Deleted.
4. All provisions of Schedule A as attached to the Product Attachment and
Amendment No. 1 are hereby deleted and replaced with the Schedule A
attached hereto.
5. Schedule C to the Product Attachment is hereby deleted and replaced with
the Schedule C attached hereto.
-3-
<PAGE>
NORTHERN TELECOM INC. FOCAL COMMUNICATIONS
CORPORATION
By: /s/ Vickie Yohe By: /s/ John R. Barnicle
-------------------------------- -----------------------------
Signature Signature
Name: Vickie Yohe Name: John R. Barnicle
------------------------------ ---------------------------
Print Print
Title: Group VP, Carrier Networks Title: E.V.P. - C.O.O.
----------------------------- --------------------------
Date: March 6, 1998 Date: February 17, 1998
------------------------------ ---------------------------
-1-
<PAGE>
SCHEDULE C
---------
SWITCH DELIVERY FORECAST
------------------------
Purchase
Switch Type/# Destination Delivery Date Ports Price*
* Denotes ports and price for each DMS-500 and/or Extension.
<PAGE>
Schedule A
Part I. DMS-500 Initial System
(DMS-500 Switching System)
Nortel shall engineer each Initial System ordered hereunder in accordance with
Nortel's standard engineering practices and procedures, and thereafter Nortel
shall provide Buyer with a detailed list of the components of such Initial
System.
1.0 Initial System DMS-500
1.1 The following represents the SuperNode Equipment that will be delivered
with the Initial System DMS-500 switch:
Information from Section 1.1 has been deleted.
1.2 Initial System DMS-500
The price for the Initial System DMS-500 equipped and wired as
described in Section 1.1 above, and the fee for the license of the
Software is ___________.
1.3 Power Plant to support the above DMS-500 Initial System (Optional):
1.3.1 Power Plant
Information from Section 1.3.1 has been deleted.
1.3.2 Battery Distribution Fuse Bay
Information from Section 1.3.2 has been deleted.
1.4 Software Upgrades for the DMS-500 Initial System (Optional):
1.4.1 The price for the NCS05 (LLTOB005-Local/Toll) to NCS06
(LLDOB006-Local/Toll) Software Upgrade is ___________________.
1.4.2 The price for the NCS05 (LLTOB005-Local/Toll) to NCS07
(LLTOB007-Local/Toll) Software Upgrade is ___________________.
1.4.3 The price for the NCS05 (LLTOB005-Local/Toll) to NCS08
(LLTOB008-Local/Toll) Software Upgrade is ___________________.
1.4.4 The price for the NCS06 (LLDOB006-Local/Toll) to NCS08
(LLTOB008-Local/Toll) Software Upgrade is ___________________.
- 2 -
<PAGE>
1.4.5 The price for the NCS07 (LLTOB007-Local/Toll) to NCS08
(LLTOB008-Local/Toll) Software Upgrade is ___________________.
Schedule A
Part II. DMS-500 Standard Software Features
(DMS-500 System)
1.0 DMS-500 Standard Software Features
1.1 Nortel may deliver Software ordered hereunder in a single Software
load which may include Software which Buyer has not yet licensed
("Non-licensed Software"). Except as set forth in Section 1.2 below,
Buyer shall not be entitled to use such Non-licensed Software, until
such time as the applicable right to use fees are paid by Buyer
pursuant to Section 1.5.
1.2 Upon Buyer's placement of any Non-licensed Software in revenue
generating service, Buyer shall pay the applicable right-to-use fees
for such Non-licensed Software pursuant to this Agreement, except as
described in Section 1.2. Buyer shall also have the option to pay the
applicable right-to-use fees for any Non-licensed Software upon
installation of a Software load containing such Non-licensed Software.
For any Non-licensed Software that is installed and added pursuant to
a product computing module load ("PCL") and or non-computing module
load ("NCL"), if any, the right-to-use fees shall be the list price
for such feature in effect as of the date of activation.
1.3 To ensure Buyer's proper activation and/or usage of the appropriate
Software, Buyer shall properly notify Nortel at the address specified
in Section 9 of this Product Attachment to the attention of Director,
Sales Engineering, prior to the activation and/or usage by Buyer of
any Software. Buyer shall identify all Software being activated and/or
used (including the number of units activated, if applicable) in each
Initial System.
1.4 Nortel shall promptly review notification from Buyer provided pursuant
to Section 1.4 above and identify any applicable prerequisite
Equipment or Software required by Buyer prior to activation and/or
usage of the applicable Software. Nortel shall respond to Buyer's
written notice by means of a price quotation. Such price quotation
shall include Nortel's consent to activate and/or use such Software or
notification that such Software requires engineering to determine
whether the current switch configuration will require additional
Equipment prior to activation and/or usage. Upon Buyer's written
acceptance of Nortel's price quotation, Nortel shall grant its consent
to Buyer to activate and/or use such Software prior to payment of the
applicable right-to-use fees. However, under no circumstances shall
such Software be activated and/or used by Buyer prior to Buyer's
acceptance of Nortel's price quotation. Nortel shall invoice Buyer for
all applicable right to use fees and associated feature
<PAGE>
activation engineering charges. One hundred percent (100%) of such
invoiced right to use fees and engineering charges shall be due and
payable within thirty (30) days of the date of Nortel's invoice
therefor.
1.5 Notwithstanding the foregoing, Buyer shall not be required to pay
additional right to use fees associated with the Software licensed
prior to the initial date of this Product Attachment.
1.6 Nortel reserves the right, every six (6) months to submit a written
report for each site containing a Software load. The written report
shall identify all Software activated and/or used (including the
number of incremental units activated, if applicable) by Buyer during
the applicable reporting period. Buyer shall audit the report against
Purchase Order(s) which have been submitted by Buyer and accepted by
Nortel during the applicable period to determine the existence of any
discrepancies. Buyer shall submit such audited written report to
Nortel at the address specified in Section 9 of this Product
Attachment to the attention of Director, Sales Engineering, within
thirty (30) days from receipt of such request.
1.7 Nortel also reserves the right to access by remote polling or to
conduct an on-site inspection of any site in which a Software load is
installed and/or to perform an on-site review of Buyer's books and
records related to such site to verify activation and/or usage of
Software.
1.8 Nortel shall issue invoices, for any applicable prices, charges or
fees, in addition to those amounts previously invoiced, as a result of
Buyer's activation and/or usage of any Software that does not appear
on Nortel's written report or that appear as a result of Nortel's
remote polling of an Initial Systems.
1.9 Upon payment of the applicable right to use fees for Software
activated and/or used by Buyer, Buyer shall receive a non-exclusive
paid-up license to use such Software in accordance with the provisions
of this Agreement. Nortel may immediately terminate the applicable
license granted hereunder for Buyer's failure to pay the applicable
right to use fees for such Software which has been activated and/or
used.
1.10 The obligations of Buyer under this Section 1 shall without limitation
survive the termination of this Agreement and shall continue if the
Software is removed from service. Buyer agrees to indemnify Nortel or
Third Party Software Vendors as appropriate for any loss or damage
resulting from a breach of this Section 1.
2.0 LLDOB008 Software included in the DMS-500 Initial System
- 2 -
<PAGE>
2.1 Software included in the DMS-500 Initial System
The following represents the LLDOB008 Software packages that are
included in the price of the DMS-500 Initial System, described in
Schedule A, Part 1, Section 1.0. The following is a list of Software
only and does not include any/all required Equipment to provide
feature functionality.
S/W Package Description
----------- -----------
The information from this section has been deleted.
- 3 -
<PAGE>
Schedule A
Part III. DMS-500 Complete (Optional and Standard) Software Features
(DMS-500 System)
1.0 LLDOB008 Complete Software Features
1.1 Complete Software Features
The following represents all of the LLWB008 software packages that can
be licensed on a DMS500 System. The following is a list of Software
only and does not include any/all required Equipment to provide
feature functionality.
1.1.1 Standard Software Features
If the Software package IS LISTED in Schedule A, Part II,
and CONTAINS an "L" in the "License Status" column, such
Software packages ARE LICENSED to the Buyer as part of the
Standard Software load for the DMS-500 Initial System. The
price of that Software package IS INCLUDED in the price of
the DMS-500 Initial System set forth in Schedule A, Part I,
Section 1.2.
1.1.2 Optional Software Features
If the Software package IS NOT LISTED in Schedule A, Part II
and DOES NOT CONTAIN an "L" in the "License Status" column,
such Software packages IS NOT LICENSED to the Buyer as part
of the Standard Software load for the DMS-500 Initial
System. The price of that Software package IS NOT INCLUDED
in the price of the DMS-500 Initial System set forth in
Schedule A, Part I, Section 1.2. Such Software Package may
be purchased by the Buyer under the Product Attachment as
Optional Software for the DMS-500 Initial System.
<PAGE>
License Order Product Name List Price Pricing Notes
- ------- ----- ------------ ---------- -------------
Status Code
- ------ ----
This information has been deleted.
-2-
<PAGE>
Schedule A
Part IV. DMS-500 Extensions
(DMS-500 System)
DMS-500 Extension Pricing
1.0 DTCVDTC7 Port Extension Pricing
1.1 DTCVDTC7 Port Extension Pricing
The DTCI provides DS-1 interconnect for ISDN PRI or MF Trunking. The
DTC7 provides DS-1 interconnect for SS7 or MF bunking. Each DTCI/DTC7
Port Extension is configured in minimum increments of nine hundred
sixty (960) ports, and is configured for SS7 or ISDN signaling at
FOCAL's request. The price for the DTCI/DTC7 Port Extensions includes
the following
a.) DTCI/DTC7 Equipment and XPM;
b.) Either UTR, STR, CTD as required for DTCs configured for SS7, or
UTR and ISDN pre-processor circuit pack configured for ISDN PRI
capability;
c.) Any required ENET, MS;
d.) Any required DMS-500 service/test circuits to support the
DTCI/DTC7 Port Extensions;
e.) Power Distribution Center (PDC) equipment as required to support
the DTEI Port Extensions;
f.) Spare circuit packs if required; and
g.) Wired ports contain all of the above except the DS-1 circuit
packs.
1.2 Initial Port Prices
Additional DTC7/DTCI ports may be Ordered and Installed with the
Initial System for the following listed prices:
<TABLE>
<CAPTION>
Minimum Port Price per
Description Increment Port
----------- ------------ ---------
<S> <C> <C>
DTC7 ports Wired & Equipped 960 ____
DTCI ports Wired & Equipped 960 ____
</TABLE>
<PAGE>
1.3 Extensions Port Prices
The price for DTCI/DTC7 Port Extensions Ordered in minimum increments
of 4800 ports over and above the initial configuration at any time
other than with an Order for an Initial System, are as follows:
Minimum Port Price per
Description Increment Port
----------- --------- ----
DTC7 ports Wired & Equipped 4800 ____
DTCI ports Wired & Equipped 4800 ____
The price for DTCI/DTC7 Port Extensions Ordered in increments of 960
up to 3840 ports over and above the initial configuration at any time
other than with an Order for an Initial System are ____ per port.
2.0 SMA2 Port Extension Pricing
2.1 SMA2 Ports
The SMA2 provides DS-1 interconnect for TR-303 interface. Each SMA2
Port Extensions is configured in minimum increments of nine hundred
sixty (960) ports. SMA2 is only available on DMS-100 and DMS-500
systems. The price for an SMA2 Port Extensions includes the following:
a) SMA2 Equipment;
b) Any required ENET, MS;
c) Any required DMS-500 service/test circuits to support the SMA2
Extensions;
d) Power Distribution Center (PDC) equipment as required to support
the SMA2 Extensions;
e) Spare circuit packs if required; and
f.) Wired ports contain all of the above except the DS-1 circuit
packs.
2.2 Initial Port Prices
- 2 -
<PAGE>
Additional SMA2 ports may be Ordered and Installed with the Initial
System at the following prices:
Minimum Port Price per
Description Increment Port
----------- --------- ----
SMA2 ports Wired & Equipped 960 ____
2.3 Extension Port Prices
Additional SMA2 ports may be Ordered in 1920 increments at any time
other than with the Initial System for the following prices:
Minimum Port Price per
Description Increment Port
----------- -------- ----
SMA2 ports Wired & Equipped 1920 ____
SMA2 ports Wired & Equipped 960 ____
3.0 Link Peripheral Processor (LPP)
3.1 Initial Channelized Access LIU 7 Interface Unit Pricing
Additional Channelized Access LIU7 Interface Units may be Ordered and
Installed with the Initial System for the price of __________________
per unit. Channelized Access LIU7 Interface Unit consists of the
following:
Otv PEC Description
--- --- -----------
1 NTEX22BB IPF Integrated Proc & FBUS
1 NT9X76AA STP- Signalling Terminator CP
1 NTEX26AA LUI Channel Bus I/F
1 NT9X0193 STP Bulkhead Cable Assembly
3.2 Extension Channelized Access LIU 7 Interface Unit Pricing
Channelized Access LIU7 Interface Units may be Ordered at any time
other than with an Initial System for the price of ___________________
per unit. This price is for furnish only and does not include spares.
3.3 Initial Ethernet Interface Unit Pricing
- 3 -
<PAGE>
Additional Ethernet Interface Units may be Ordered and Installed with
the Initial System for the price of ____________________ per unit.
Ethernet Interface Unit consists of the following:
Qty PEC Description
--- --- -----------
1 NTEX22BB IPF Integrated Proc & FBUS
1 NT9X84AA Ethernet Interface Circuit Pack
1 NT9X85AA Ethernet Access Unit Interface PB
1 NT9X0190 Ethernet Cable Assembly
3.4 Extension Ethernet Interface Unit Pricing
Ethernet Interface Units may be Ordered at any time other than with an
Initial System for the price of _________________________ per unit.
This price is for furnish only and does not include spares.
3.5 Initial Frame Relay Interface Unit (FRIU) Pricing
Additional Frame Relay Interface Units may be Ordered and Installed
with the Initial System for the price of ____________________ per
unit. Price does not include software. Frame Relay Interface Unit
consists of the following
Otv PEC Description
--- --- -----------
1 NTEX22BB IPF Integrated Proc & FBUS
1 NTEX30AA Frame Relay T1 Access PB
1 NTEX31BA Frame Enhanced Relay Access Proc CP
2 NT9X0191 FRIU Cable Assembly
3.6 Extension Frame Relay Interface Unit (FRIU) Pricing
Frame Relay Interface Units may be Ordered at any time other than with
an Initial System for the price of _______________________ per unit.
This price is for furnish only. Pricing does not include spares or
software.
3.7 Initial Packet Handler (XLIU) Pricing
Additional Packet Handlers may be Ordered and Installed with the
Initial System for the price of _______________________ per unit.
Price does not include software. Packet Handler consists of the
following:
- 4 -
<PAGE>
Oty PEC Description
--- --- -----------
1 NTEX22BB IPF Integrated Proc & FBUS
1 NTFX09AA CBUS Interface PB
1 NTFX1OAA HDLC Frame Processor CP
3.8 Extension Packet Handler (XLIU) Pricing
Packet Handler may be Ordered at any time other than with an Initial
System for the price of ____________________ per unit. This price is
for furnish only. Pricing does not include spares or software.
3.9 Initial Network Interface Unit (NIU) Pricing
Additional Network Interface Units may be Ordered and Installed with
the Initial System for the price of ______________________ per unit.
Network Interface Unit consists of the following:
Qty PEC Description
--- --- -----------
2 NTEX22BB IPF Integrated Proc & FBUS
1 NTEX25AA Channel Bus Control Unit
1 NTEX25BA Channel Bus Control Unit
2 NTEX28AA DS30 Link Interface Unit
4 NT9X7020 Cable Assemblies
2 NT9X7021 NIU Inter CBC Cable
4.10 Extension Network Interface Unit (NIU) Pricing
Network Interface Unit may be Ordered at any time other than with an
Initial System for the price of ____________________ per unit. This
price is for furnish only.
- 5 -
<PAGE>
Exhibit 10.17
License Agreement # LA97-10
- ---------------------------
Licensee: FOCAL Communications Corporation
- ------------------------------------------
200 N. LaSalle Street
- ------------------------------------------
Chicago, Illinois 60601
- ------------------------------------------
SOFTWARE LICENSE
DPI/TFS, INC. ("DPI") and the Licensee identified above ("Licensee") in
consideration of the grants and mutual covenants made in this License, agree as
follow:
1. DEFINITIONS:
1.1 "Software" means the Telco Friendly Software in executable format
identified in Exhibit 1 and any DPI modifications to that Software.
1.2 "Modifications" means DPI improvements, enhancements, additions, and
new versions of Telco Friendly Software.
1.3 "Software Package" means the Software, related documentation, and the
DPI DEMO LIB package, or any part thereof, as the context requires.
1.4 "Module" refers to any one of the Software programs listed on Exhibit
1.
1.5 "Access Line" means the facilities that provide access to local and
toll switched networks and are located between a customer and a serving central
office. An access line may include central-office equipment, a subscriber loop,
a drop line, inside wiring, and a jack. It may be a discrete entity, such as a
wire pair or a channel in a multiplex system.
2. DPI'S GRANTS WARRANTIES AND OBLIGATIONS:
2.1 License: Subject to the terms and conditions of this License, DPI
grants to Licensee
(a) a personal, non-exclusive and non-transferable license to use the
software Package for Licensee's own internal purposes as specified in
Exhibit 4 and no others;
(b) a non-exclusive license to make a reasonable number of copies of the
Software for back-up purposes only;
<PAGE>
(c) non-exclusive license to copy the documentation provided by DPI for
Licensee's internal purposes only.
2.2 DELIVERY: DPI shall deliver the Software Package according to the
schedule in Exhibit 2 or as otherwise agreed by both Parties. If DPI fails to
deliver the Software Package to Licensee after four (4) attempts to make
delivery, Licensee may request a refund and upon such request DPI shall
reimburse all amounts paid by Licensee to DPI under this License. This License
shall thereupon terminate without further obligation of the Parties except any
obligation arising out of a previous default.
2.3 USE OF SOFTWARE: Licensee recognizes and agrees that, with respect to
the use of the Software, it accepts full responsibility (1) for the selection of
the Software and (2) that the Software will meet its intended use.
2.4 WARRANTY OF PERFORMANCE: For ninety (90) days following initial
receipt of the Software, DPI warrants that the Software shall have the functions
and capabilities and shall perform as described in Exhibit 7, provided, however,
that any program errors in the Software shall not violate this Warranty of
Performance. This "Warranty of Performance" shall not apply to any Module that
has been modified by Licensee. The Warranty of Performance shall terminate
immediately upon the occurrence of any of the following:
(a) a material breach by Licensee of any term or condition of this
License;
(b) misuse, neglect or abuse of the Software, attempts to repair the
Software, or any other causes beyond the range of normal usage; or
(c) failure by Licensee to cooperate with and assist DPI in DPI's efforts
to repair, modify, or replace the defective Module.
Licensee acknowledges that Modifications to the Software may affect the way in
which the Software works and may affect Licensee's operating procedures. DPI
shall not be liable in the event that any Modification does not conform to the
Warranty of Performance, and DPI shall not be liable for any changes in
Licensee's operating procedures necessitated or caused by Modifications.
In the event Licensee believes a breach of the Warranty of Performance has
occurred, Licensee must promptly provide written notification to DPI
specifically describing the alleged breach. Upon receipt of such notice, DPI
shall, at its option and with reasonable dispatch: issue discrepancy or error
correction information or deliver corrected Software or Modules to Licensee. If
after four (4) attempts to correct a particular defect, DPI is unable to repair,
replace, or modify the Software or Module(s), Licensee may return the Software
or Modules for a refund of the License Fees associated with the return. This
refund remedy shall be available only if DPI's examination of the Software
discloses that the breach of the Warranty of Performance actually exists and was
not caused by conditions beyond DPI's control, or by
-2-
<PAGE>
Licensee's misuse, neglect, abuse, or attempts to repair, or any other cause
beyond the range of normal usage, or by accident, fire, or other hazard.
Licensee's remedies as set forth above are exclusive of any other remedy to
which Licensee may be entitled.
2.5 WARRANTY: DPI warrants that the Software does not infringe any United
States copyright or use any trade secret of any third party. DPI shall, at its
own expense, defend Licensee from any claim or action to the extent that such
claim is based upon infringement by the Software of such intellectual property
rights of a third party. DPI shall have the right to control the defense of all
such claims and actions. DPI shall have no obligation under this paragraph if
Licensee fails to notify DPI of the claim or action within ten (10) days after
receipt by Licensee of notice of the claim or action, or if Licensee fails to
notify DPI before offering to settle such claim or action. In the event that the
Software or any portion of the Software is judicially declared to be subject to
the intellectual property right of a third party, DPI shall, at its option: (1)
obtain permission or a right for Licensee to continue using the Software or the
portion of the Software affected; or (2) replace or modify the Software or
affected portion of the Software to render it non-infringing; or (3) remove the
Software or affected portion of the Software and refund to Licensee the License
Fee or the pro-rata portion of the License Fee paid to DPI.
2.6 LIMITATION OF WARRANTIES: DPI MAKES NO OTHER WARRANTY, EXPRESS OR
IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE. DPI MAKES NO ASSURANCE OF SUCCESSFUL INSTALLATION OF THE SOFTWARE.
NEITHER DPI NOR ANY AFFILIATE OF DPI SHALL BE RESPONSIBLE TO LICENSEE, OR TO ANY
OF ITS AFFILIATES FOR LOST REVENUES, LOST PROFITS, LOST DATA OR OTHER SPECIAL,
INCIDENTAL, DIRECT, INDIRECT, OR CONSEQUENTIAL DAMAGES OR FOR LOSS OR DAMAGE OR
OTHER EXPENSE DIRECTLY OR INDIRECTLY ARISING FROM LICENSEE'S, OR ANY OTHER
PARTY'S USE OF OR INABILITY TO USE THE SOFTWARE OR FOR COMMERCIAL LOSS OF ANY
KIND; NOR SHALL ANY RECOVERY AGAINST DPI, WHETHER IN CONTRACT, TORT (INCLUDING
NEGLIGENCE), STRICT LIABILITY OR OTHERWISE, BE GREATER THAN THE AMOUNTS PAID BY
LICENSEE HEREUNDER.
2.7 REPLACEMENT COPIES: If the Software is unintentionally lost or
damaged after delivery but before the initial installation, DPI will promptly
deliver a replacement copy to Licensee. Licensee will be billed for and shall
pay the applicable media, preparation, shipping and handling fees for such a
replacement.
2.8 DATA CONVERSION: DPI assumes no responsibility for data conversion.
-3-
<PAGE>
3. LICENSEE'S OBLIGATIONS:
3.1 PAYMENTS TO DPI:
3.1.1 License Use Fees: Licensee shall pay License Use Fees to DPI
in the amounts and as provided in Exhibit 3. Such payments shall be in U.S.
dollars and paid at an address to be specified by DPI.
3.1.2 Payment For Service Required By Licensee Error: Licensee shall
pay DPI, at DPI's applicable service rates, including time and material fees,
for all maintenance services and warranty services required because of, in DPI's
determination, Licensee error or Licensee modification of the Software.
3.1.3 Taxes: Licensee shall be liable for any and all U.S. federal,
state, local, foreign or other governmental taxes, duties, or excises now or
hereafter applied to the production, storage, sale, transportation, import,
export, licensing or use of the Software or to the services provided hereunder,
including any sales tax, value added tax or similar tax. Any taxes imposed by
U.S. federal, or any other state, local, foreign or municipal government, or any
amount in lieu thereof, including interest and penalties thereon, paid or
payable at any time by DPI in connection with DPI's grant of license to
Licensee, exclusive of taxes based on DPI's net income, shall be borne by
Licensee. Licensee's payment obligation hereunder shall be made without
withholding on account of any taxes, levies, duties or other deduction
whatsoever. In the event that Licensee is required by applicable law to withhold
or deduct any sum from payments required hereby, licensee shall increase the
amount paid to DPI by such withholdings or deductions as may be necessary so
that DPI shall receive an amount which after the payment of such withholdings or
deductions shall be equal to the amount DPI would have received had such sum not
been withheld or deducted.
3.2 THE DESIGNATED HARDWARE TYPE:
Restricted Use of The Software: Licensee shall use the Software as
specified in Exhibit 5.
3.3 OBLIGATIONS TO PROTECT DPI'S PROPRIETARY RIGHTS:
3.3.1 Confidential Information: Licensee acknowledges that the
Software Package contains confidential information belonging to DPI and that
Licensee has no right to such confidential information except as expressly
provided in this License. Except as otherwise provided herein, Licensee shall
not copy, use, disclose, transmit, or commercially exploit, or allow anyone else
to copy, use, disclose, transmit, or commercially exploit any part of the
Software Package, including such confidential information, without prior express
written consent of an officer of DPI. Licensee shall keep all copies of the
Software Package including Modifications at its address identified in this
License, except for a backup copy which shall be located at the address shown
below. Licensee shall exercise all reasonable precautions to
-4-
<PAGE>
prevent access to, use of, or copying of the Software Package, including DPI's
confidential information.
Location of backup copy:
--------------------------------------
--------------------------------------
--------------------------------------
Licensee shall execute a non-disclosure agreement, as set forth in Exhibit 6,
with each employee who has access to the Software Package. Additionally, in the
event that any third party attempts to obtain access to the Software Package or
any of DPI's confidential information, Licensee shall immediately notify DPI, in
writing and either personally or by telephone, and Licensee shall cooperate with
DPI in any litigation against such third parties to prevent the recurrence of
such events.
3.3.2 Liens: Licensee shall not permit any lien or encumbrance of
any nature or description to attach to any part of the Software Package.
3.3.3 Retention of Rights: Licensee agrees that all patents,
copyrights, trademarks, and trade secrets in the Software Package shall be and
shall remain the sole and separate property of DPI. Licensee further agrees that
DPI is the owner of the Software Package and that Licensee's rights are limited
to those rights expressly provided in this License.
3.3.4 Proprietary Notices: Licensee shall not remove any copyright
notices or any other notices or disclosures from any part of the Software
Package.
3.3.5 Non-Competition: Licensee shall not directly or indirectly
develop, sell, license, or lease to others, offer to sell, license, or lease to
others, any computer applications competitive with the Software which may
violate any copyright associated with the Software. Licensee shall not use any
part of the Software Package to develop computer applications competitive with
the Software.
3.3.6 DPI's Copyright in the Software Package: Licensee acknowledges
that DPI is the owner of the copyright in the Software the Software Package, and
any Modifications, improvements, and enhancements. Licensee will not under any
circumstances challenge in court or elsewhere DPI's ownership of such copyright,
the validity of any DPI copyright registration for the Software or the Software
Package, or the facts recited in any such registration. Licensee shall, at DPI's
option, return to DPI at DPI's expense, or destroy, all copies of the replaced
or defective portion of the Software Package. Licensee shall notify DPI that all
such copies have returned or destroyed.
-5-
<PAGE>
3.4 DUTY TO RETURN OR DESTROY COPIES: Upon receipt and installation of a
replacement, upgrade, or corrected copy of any part of the Software Package as
provided under Sections 2.2 and 2.5 of this License, Licensee shall, at DPI's
option, return to DPI at DPI's expense, or destroy, all copies of the replaced
or defective portion of the Software Package. Licensee shall notify DPI that all
such copies have been returned or destroyed.
3.5 AUDIT: During reasonable business hours, DPI will have the right
periodically to inspect Licensee's premises to assure itself that Licensee is
complying with the confidentiality provisions of this Agreement and to verify
that appropriate non-disclosure agreements have been executed. DPI will have the
right to periodically inspect Licensee's system, either on premises or remotely
through telecommunications link, to confirm Licensee's compliance with the
provisions of this Agreement.
3.6 GENERAL PROCEDURES: Licensee understands that generally accepted data
processing procedures dictate that Licensee always keeps back-up copies of data
files and of program files. Licensee further understands that generally accepted
data processing procedures dictate that the existing version of the Software
should be run concurrently with an upgraded version of the Software during at
least the first month of operation with the upgraded version.
4. EFFECTIVE DATE AND TERMINATION:
4.1 EFFECTIVE DATE: Licensee shall be effective when signed by both
Parties.
4.2 TERM: Subject to termination as set forth herein, or by a subsequent
written agreement of the parties, the term of this Licensee shall be perpetual.
4.3 TERMINATION: DPI may immediately terminate this License by giving
written notice to Licensee if Licensee violates any provisions of this License.
Licensee may terminate this Agreement for any reason on written notice to DPI
following expiration or fulfillment of Licensee's obligations.
4.4 RIGHT TO POSSESSION OF SOFTWARE: In the event of termination of this
License, DPI shall have the right to take and Licensee shall have the duty to
deliver the Software Package immediately to DPI and all copies wherever located,
without demand or notice so long as no breach of the peace occurs, and upon so
doing Licensee shall certify that it has so done and that it retains no copies
in its possession. DPI has the right to inspect Licensee's premises without
advance notice, but during business hours, to verify that Licensee has returned
the Software and all copies. This right to inspect continues for one year after
DPI terminates this License.
4.5 CONTINUING DUTIES: Licensee's obligations under Sections 3.3, 3.4,
and 5 shall survive the termination of this License.
-6-
<PAGE>
4.6 CONSEQUENCES OF TERMINATION: In addition to the provisions of Section
4.4, upon termination, Licensee shall cease all use of the Software Package, and
all amounts payable to DPI shall become due and payable on demand.
5. REMEDIES:
5.1 LIMITATIONS OF DPI'S LIABILITY: In connection with this License,
DPI's liability shall be limited to the total amount of payments received by DPI
from Licensee. With respect to any claim relating to the Software or this
License, the provisions of Section 2.6 shall be applicable, even if DPI has been
advised of the possibility of damages.
5.2 INJUNCTIVE RELIEF: In the event that Licensee breaches any term of
this License, DPI may obtain injunctive relief, an appropriate security bond,
and specific performance, in addition to any other relief available. Licensee
agrees to such injunction, security bond, and specific performance, and
acknowledges that other remedies are inadequate.
5.3 LITIGATION COSTS AND EXPENSES: In any action between the Parties
relating to this License, the court may award all or any part of the costs and
expenses relating to such action, including attorney's fees, as the court shall
deem just.
5.4 CUMULATIVE REMEDIES: Except as expressly provided herein, the
remedies available to either party under this License are cumulative and not
exclusive of any other remedies available.
6. GENERAL PROVISIONS:
6.1 ASSIGNMENT: This License shall be binding upon the parties'
respective successors and permitted assignees. Licensee may not assign this
License or any rights or obligations under this License without the prior
written consent of DPI, and any such attempted assignment shall be void.
6.2 EXCUSES FOR NON-PERFORMANCE: DPI shall be excused for any delay or
failure to fulfill its obligations under this License due to causes beyond its
control, such as natural disasters, acts of government, labor strikes of other
entities, acts of war, civil disturbances, or court order.
6.3 ENTIRE AGREEMENT: This License, together with its Exhibits, contains
the entire understanding of the Parties and supersedes all prior written or
verbal agreements or representations. No change or waiver of any provision of
this License shall be valid unless in writing and signed by the party against
whom such change or waiver is sought to be enforced. Any signature required by
DPI must be that of an officer of DPI. No employee, agent, or representative of
either party has authority to bind such party by any oral representation or
warranty.
-7-
<PAGE>
6.4 SURVIVING CLAUSES: If a court deems or declares invalid or
unenforceable any clause or provision of this License, all other terms and
provisions shall remain in full force and effect.
6.5 WAIVER: No delay or omission by DPI to exercise any right or power
under this License shall impair any such right or power or be construed as a
waiver.
6.6 CLAUSE HEADINGS: Clause headings are inserted for ease of reference
only and shall not be used in construing the meaning or effect of this
Agreement.
6.7 CONTROLLING LAW AND PLACE OF SUIT: This License shall be subject to
and shall be interpreted according to the laws of the State of Texas. The
Parties hereby subject themselves to the venue and jurisdiction of any
appropriate Court in Texas.
The Parties have caused this License to be executed by their duly authorized
representatives this 10th day of April, 1997.
DPI/TFS, Inc.
By: /s/ Mark Giles
------------------------------------
Print Name: Mark Giles
----------------------------
Title: General Manager
---------------------------------
Date: 4/10/97
----------------------------------
LICENSEE
By: /s/ Robert C. Taylor, Jr.
------------------------------------
Print Name: Robert C. Taylor, Jr.
----------------------------
Title: President
---------------------------------
Date: 4/9/97
----------------------------------
-8-
<PAGE>
SOFTWARE LICENSE
EXHIBIT 1
THE SOFTWARE
(Paragraph 1.1)
================================================================================
MODULES:
Commercial Billing
Service Orders
General Plant Information
Trouble Reporting
WATS Billing & Rating
General Ledger
Payroll/Labor Distribution
Accounts Payable
Inventory
Work Orders
Continuing Property Records
Toll Center Rating
Carrier Access Billing
Data Base System Control Records
Dynamic Menu System
-9-
<PAGE>
SOFTWARE LICENSE
EXHIBIT 2
DELIVERY SCHEDULE
(Paragraph 2.2)
================================================================================
Items to be supplied will be shipped or delivered within five (5) days of
execution of this Agreement.
-10-
<PAGE>
SOFTWARE LICENSE
EXHIBIT 3
PAYMENT AMOUNTS AND SCHEDULE
(Paragraphs 3.1.1, 3.1.2, and 3.1.3)
================================================================================
1. License Use Fees:_____________. This License Use Fee has been calculated
based on_____________Access Lines. This allows usage of the Software up to______
Access Lines. Usage with more than______Access Lines will require the payment of
additional License Use Fees as shown below:
Access Line Levels Incremental License Use Fee
Chart deleted
The Incremental License Use Fees are valid for a period of three (3) years from
execution of this Agreement. After such time they are subject to change without
notice.
Any usage beyond______Access Lines is subject to the then current License Use
Fees in effect at the time.
Licensee will submit to DPI, in writing, a certified and accurate count of its
total Access Lines as of the first day (January 1) of each year following the
execution date of this Agreement. Licensee shall submit such certified Access
Line count prior to January 31 of the same year. DPI shall invoice Licensee upon
receipt of the certified Access Line count for any additional License Use Fees
as applicable. Payment in respect of such additional License Use Fees shall be
made by Licensee within 30 (thirty) days of receipt of the invoice. Not
withstanding the foregoing, in the event Licensee's access line growth exceeds
________ prior to the January 1 date of any year, beginning with January 1,
1999, Licensee shall promptly notify DPI of the number of additional Access
Lines and shall make payment of any applicable additional License Use Fees to
DPI within thirty (30) days of such notification.
2. License Use Fee Payment Schedule
a. ______________________________________________
b. ______________________________________________
c. ______________________________________________
- 11 -
<PAGE>
SOFTWARE LICENSE
EXHIBIT 4
BUSINESS FOR WHICH LICENSEE WILL USE THE SOFTWARE PACKAGE
(Paragraphs 2.1A)
================================================================================
Focal Communications Corporation, Holding Company
Focal Communications Corporation of Illinois,
wholly owned subsidiary
Focal Communications Corporation of Massachusetts,
wholly owned subsidiary
Focal Communications Corporation of New York,
wholly owned subsidiary
Focal Communications Corporation of California
wholly owned subsidiary
Licensee may not use the Software to perform service bureau or data processing
services for any third party without the express written consent of an officer
of DPI.
- 12 -
<PAGE>
SOFTWARE LICENSE
EXHIBIT 5
THE DESIGNATED HARDWARE TYPE
(Paragraphs 3.2)
================================================================================
Hardware Type: IBM AS/400
- 13 -
<PAGE>
SOFTWARE LICENSE
EXHIBIT 6
NON-DISCLOSURE AGREEMENT
(Paragraphs 3.3)
================================================================================
__________________________ ("Employee") and _______________________ ("Employer")
and ("Employee") agree as follows:
1. Agreed Facts
1.1 Employer has the right to use certain software with related
documentation (the "DPI Software Package") from DPI/TFS, Inc. (hereinafter
referred to as "DPI"). The Software Package contains confidential information
and trade secrets belonging to DPI.
2. Covenants of Employee. In consideration of continued and future employment
with Employer, Employee agrees:
2.1 Employee shall not copy, duplicate, create, or recreate all or any
part of the DPI Software Package, other than as required for Employer's normal
operations.
2.2 Employee shall not assign, lease, sell, market, donate, or
commercially exploit all or any part of the Software Package.
3. Miscellaneous
3.1 This Agreement shall be binding upon Employee and shall survive
termination of Employee's employment for a period of two (2) years.
3.2 DPI is an intended beneficiary of this Agreement. Upon failure of
Employee to keep and perform the terms and conditions of this Agreement, DPI or
Employer may seek any and all remedies available at law or in equity, including
injunctive relief, together with costs and attorney fees.
---------------------------------- ---------------------------
Employer Date
---------------------------------- ---------------------------
Employer Date
-14-
<PAGE>
SOFTWARE LICENSE
EXHIBIT 7
SOFTWARE SPECIFICATIONS
(Paragraphs 2.4 and 2.5)
================================================================================
The attachment represents the minimum specifications of the systems.
Enhancements and upgrades are a continual process, therefore some specifications
may change prior to physical installation.
-15-
<PAGE>
WIDE AREA TELECOMMUNICATIONS SERVICE (WATS) RATING & BILLING
============================================================
Standard Features:
. On-Line Entry, Inquiry and Update
. User Friendly
. Menu and Screen Driven
. Operator Oriented Prompt Screens
. Comprehensive Reporting
. On-Going Updates Provided For FCC Approved Tariff Changes
. Uses Standard 8 1/2 x 11" and 14 7/8" x 11" Computer Paper
Application Features:
. Accommodates INWATS/OUTWATS/Two-Way WATS Billing
. Designed To Make Changes Easily When New Tariffs Are Approved
. Multiple Cycle Billing
. WATS Billing Data Can Be Printed For Edit And Review
-16-
<PAGE>
GENERAL LEDGER APPLICATION
================================================================================
The GENERAL LEDGER system is designed to operate as an independent operating
application or as an integrated module with other applications. This system will
process multiple companies, locations, and cost centers. It allows up to______
unique general ledger formats for each company for printing the various reports
such as Operating Statement, Balance Sheet and Cost Center reports. All journal
entries posted to the general ledger are stored in the Accounting History fee.
The Journal Report By Source Code, General Ledger Detail Report By Account and
General Ledger Summary Report By Account are generated using the information
contained in this file. The system is designed to handle companies by fiscal or
calendar year. All companies have a master control record in the Master Data
Base. The information contained in the master control record determines how a
company is to be processed.
All journal entries entered into the system have a control field for control
month and control year. These fields control where the journal entries will be
posted in the ledger files (General Ledger Balance Forward, Work Order Ledger).
The General Ledger and Work Order files have a starting balance field and
_______ control fields for annual processing. Multi/Year ledgers can be retained
in the ledger files. The system will convert to fiscal prior to posing the
ledger files. Detail journal entries are posted to the Accounting History file
and all entries charged to work orders are posted to the World Order History
file. The Accounting System is designed to group accounting entries by type of
entry and where the entry came from. In order to accomplish this, a source code
is provided to group entries from Payroll, Accounts Payable, Billing, A/R
Payments, Inventory and Manual Journal Entries.
Below is a list of valid source codes:
Chart deleted
-17-
<PAGE>
Standard Features Include:
. G/L Accounts Inquiry/Update
. G/L Budget Maintenance (used for setting up budget amounts for profit
and loss statements)
. Profit & Loss Format Maintenance
. G/L Spread Master Maintenance
. G/L Year End Close
Reporting Includes:
. Journal Listing By Date Range Selection (from year/month to
year/month)
. G/L Chart of Accounts Listing
. Profit and Loss Formats Listing
. G/L Detail Report By Date Range Selection (month and year)
. G/L Summary Report by Date Range Selection (month and year)
. G/L Spread Edit
. Financial Reports by Profit & Loss Format Selection (balance sheet
operating statement, etc.)
Special Features:
Chart deleted
-18-
<PAGE>
PAYROLL/LABOR DISTRIBUTION APPLICATION
================================================================================
Standard Features Include:
. Hourly and Salary Employee Processing
. Weekly, Biweekly, Semimonthly And Monthly Pay Frequencies
. Twenty-five (25) Voluntary Deductions (Insurance, Profit Sharing,
Credit Union, etc.) Per Employee, And Ninety-nine (99) Per Company,
In Addition To Tax Deductions
. Seven (7) Deduction Frequency Code Options (indicates how often
deduction will be taken: each pay period, first and third pay
periods only, etc.)
. Labor Costs Distribution To Detail Or Summary General Ledger
Account Level (user defined)
. Labor Costs Accumulation By Work Order Number
. Designation of Direct or Indirect Labor
. Employee Master File Entry/Inquiry/Update (Employee number, name,
address, employment date, marital status, rate, sick leave,
deductions, department number, vacation, YTD amounts, exempt
dependents, pay period, etc.)
. Master Control File Inquiry/Update (general ledger account numbers,
deduction codes, state information, married and single percentage
withholding tables, etc.)
. Time Card Information Entry/Update
. Calculate Trial Payroll (optional feature)
. Calculate Payroll (gross, taxes and voluntary deductions)
. Manual Check Entry/Validation
. Voided Check Entry
. Print Payroll Checks
. Print 941-A Forms
-19-
<PAGE>
. Print W-2 Forms
Reporting Includes:
. Employee Master File Listing (all employees)
. Updated Employees Only Listing (payroll changes)
. Time Card Edit
. Employee Year-To-Date Listing (reflects gross pay, deductions, FICA,
etc.)
. Trial Payroll Register (optional feature)
. Payroll Register
. Deductions Register
. Labor Distribution Register
. Labor Analysis Reports By:
. 941-A Quarterly Report
. Employee W-2 Yearly Report
. Employee Payroll Detail Listing by Date Range Selection (reflects
detail information for all payrolls processed during the date
range selected)
. Payroll Data Base control Records Listing (reflects all control records
maintained in the payroll database control files)
Special Features:
Chart deleted
-20-
<PAGE>
ACCOUNTS PAYABLE APPLICATION
================================================================================
General:
This application provides the capability for entering into the system and
maintaining accounts payable information. The accounts payable system processes
all payable information on an open item basis. Transactions into the system
result from the processing of the direct payable transactions from the screen
input and mechanized computer entries. All information is maintained in detail
on a vendor/invoice basis. The system prints checks and allows hand check
processing with automatic journal entry process. The system produces detail
aging by customer and invoice and summary aging by customer reports. A cash
requirements report can be generated for each company and payment amounts are
listed by due date. The system has the ability to release by due date and has
on-line inquiry to the open item file. All control accounts are entered in the
accounts payable control maintenance and are stored in the system data base. All
offset accounts and ranges are user defined. Standard features include
applicable user file inquiry, update maintenance functions and comprehensive
reporting.
Standard Features Include:
. Independent Reporting For Each Company
. Open Item Master File
. On-Line Display And Update Via Screen
. Complete Detail Aging Analysis By Open Item
. Cash Requirements Reporting
. Computer Checks And Manual Check Processing With Full Journal Entry
Reporting To General Ledger
. Interfaces To Other System Applications
. Complete History Of All Invoiced Amounts, Debit Or Credit Adjustments
And Payments
. General Ledger Entry/Update (Accounts payable vouchers and journal
entries)
. Vendor Inquiry By Company And Vendor Number Selection
. Release Accounts Payable Hand Checks From Open Item Payables File By
Voucher Or Document Number
-21-
<PAGE>
. Process Accounts Payable Hand Checks And Generate Appropriate Journal
Entries
. Release Accounts Payable Checks By Company And Due Date Selection
. Print Accounts Payable Checks By Company Selection And Generate
Appropriate Journal Entries
. Accounts Payable Control Maintenance Inquiry/Update
Reporting Includes:
. Invoice Edit (Accounting Input Edit)
. Accounts Payable Detail and Aging Reports
. Cash Requirements Report (By due date)
. Accounts Payable Check Pre-Register
. Hand Checks Processed Report
. Vendor Listing
Special Features:
Chart deleted
-22-
<PAGE>
INVENTORY APPLICATION
================================================================================
General:
This application provides the capabilities for entering into the system and
maintaining inventory and purchase order information. All inventory items are
maintained by company number, inventory item number and bin number in the
inventory master file. This file contains entries for company and inventory item
number, last date item was updated, inventory class, unit of measure, quantities
on hand and on order, MTD and YTD quantities for receipts, issues and
adjustments, current average cost, beginning of year on hand quantity, current
inventory value, primary and secondary vendor numbers, reorder point, staging
quantity breakdowns and reorder quantity. This information is accessible through
the inventory item inquiry or maintenance screen programs.
New purchase orders and inventory issues, receipts and adjustments are entered
via the transaction entry screen programs. After the transactions to be
processed have been entered, edit reports are generated for verification and
correction purposes prior to posting the transaction entry information to the
applicable inventory and purchase order files. During the posting cycle, each
inventory item having a receipt, issue or adjustment transaction is updated and
the open purchase order item quantities are reduced based on the quantity
received for each purchase order item. The application allows for automated
posting to the General Ledger for all inventory transactions during a month.
Current inventory dollar values are reduced accurately using calculations that
generate the true average cost of each inventory item being issued. Standard
features include applicable user file maintenance functions and the
comprehensive reporting.
Standard Features Include:
. Inventory Item Inquiry By Company Number, Item Number and Bin
. Label Selection
. Inventory Transactions Entry/Inquiry/Update
. Transaction Types:
- 1) Receipts
- 2) Transfers
- 3) Adjustments
- 4) Purchase Orders
-23-
<PAGE>
Reporting Includes:
. Active Inventory Item Number Listing (reflects all inventory items
maintained in the inventory master file; includes company number, item
number, class and description, unit of measure, item status, and
totals for active items and inactive items)
. Inventory Transactions Entry Edits For: Receipts, Transfers,
Adjustments and Purchase Orders
. Inventory Stock Status Report
. Inventory On Order Report
. Transaction Activity Report
. Inventory Activity To-Date
Special Features:
Chart deleted
-24-
<PAGE>
WORK ORDERS APPLICATION
================================================================================
The WORK ORDERS application provides the capability for entering into the system
and maintaining work order information by company number and work order number.
The work order master file accommodates entries for the work order number,
company number, project description, project completion date, estimated
completion date, budget and project status. Project cost to date information is
generated and maintained via journal entries created through the Accounts
Payable, Payroll Inventory and General Ledger applications. User assigned
account number entries are allowed for defining valid work order ledger account
numbers and the associated account number description. The information
maintained in the work order master and account number files is used for
validation purposes when the associated project costs are being allocated to the
work order or the completed work order costs are being spread to the Continuing
Property Records. Only valid work orders that reflect a project completion date
can be spread to the Continuing Property Records and completed work orders may
be purged from the work order master file by accounting year and month
selection. Standard features include applicable user file maintenance functions
and reporting includes Work Order Detail and Summary reports and a Work Order
Master File listing.
Standard Features Include:
. Work Order Master File Entry/Inquiry/Update
. Purge Completed Work Orders By Date Range Selection
. Valid General Ledger Work Order Accounts Inquiry/Update
(accommodates as many work order accounts and account
descriptions as the general ledger chart of accounts - up to
9,999,999)
Reporting Includes:
. Work Order Detail Ledger Report (reflects detail transactions by work
order)
. Work Order Summary Ledger Report (reflects work order activity costs
by general ledger account for twelve (12) month period)
. Work Order Master Listing (reflects all current work orders, including
work order number, project description, project completion date and
project cost-to-date amounts)
Special Features:
Chart deleted
-25-
<PAGE>
CONTINUING PROPERTY RECORDS APPLICATION
================================================================================
General:
This application provides the capability for entering into the system and
maintaining continuing property records information. The application
accommodates 1) continuing property items entry 2) spreading of completed work
order costs to continuing property items and 3) retirement of specific
continuing property items. Standard features include applicable user file
inquiry, update maintenance functions, comprehensive audit trail and analysis
reporting.
Standard Features Include:
. Continuing Property Item Entry/Inquiry/Update
. Continuing Property Item Retirement Quantity Entry
. Spread Work Order Costs to Continuing Property Records
. Continuing Property Records Spread Amounts Update (updates CPR item
masters with appropriate work order spread amounts)
. Continuing Property Records Item Retirement Update (updates CPR item
masters with appropriate retirement quantities)
. Continuing Property Records Month End Reset (clears MTD received and
retired quantity amounts)
. Continuing Property Records Year End Reset (clears MTD and YTD
received and retired quantity amounts and updates beginning year
totals)
Reporting Includes:
. Work Order Spread Amounts Edit (reflects work order amounts to be
spread to each CPR item)
. Work Order Spread Amounts Posted Report (reflects work order amounts
posted to each CPR item)
. Retired Continuing Property Record Items Posted Report (reflects
retirement quantities posted to each CPR item)
. Continuing Property Records Analysis Report (reflects property
analysis by exchange and plant type)
-26-
<PAGE>
. Active Continuing Property Records Item Number Listing (reflects
active CPR item numbers by exchange)
. Continuing Property Records Factored Quantity Analysis Report For All
Exchanges (reflects totals by plant type and general ledger account
number. Detail information includes: plant type, CPR item number, item
description, last update, in place quantity and cost, unit of measure,
factor of measure, factor of measure, factored quantity and property
value. The item factor of measure allows the user to convert one type
of measurement to another type of measurement, i.e., wire or cable
footage to miles. This converted information can be used for both
internal or external reporting purposes)
Special Features:
Chart deleted
-27-
<PAGE>
COMMERCIAL BILLING APPLICATION
================================================================================
. On-Line Access To Current & Comprehensive Subscriber Billing
Information
. Subscriber Information Accessed By Name Or Telephone Number Selection:
. Primary Subscriber . Adjustments
. Miscellaneous . Payments
. Service and Equipment . Treatment
. Directory . Toll
. Group Billing . Plant
. Accounts Receivable . Trouble
. Calling Card . Service Order
. Deposits and interest . Prior Billing
. Equal Access information
. Scroll Screen Functions Facilitate Information Retrieval
. Accounts Receivables Payments
. Accounts Receivables Adjustments
. Group Billing
. Toll Processing
. Unlocated Toll
. Service & Equipment
. Service & Equipment Proration
. Service & Equipment Rate Changes
. Detail Or Summary DA Call Billing
-28-
<PAGE>
. Cycle Billing (Accommodates Up To 99 Billing Cycles)
. Subscriber Reassignment
. Subscriber Treatment
. Deposits & Interest
. Calling Cards
. Subscriber Write Off
. Subscriber Billing Statements
. Reminder Notices
. Bank Drafts
. Subscriber Credit Rating Promotion/Demotion
. Accounts Receivable Reporting, Control And Auditing
. Directory Assistance Reporting
. High Toll Usage Reporting
. Advance or Arrears Billing Methods
. Subscriber Billing Information Updated From NYNEX DPI Service Order
Application
. Variable Billing Statement Form Print Formats Available
. User Defined Billing Statement Handling Codes
. Allows Up To 99 Billing Statement Copies Per Subscriber
. Billing Statements Printed By Cycle With Handling Code. Phone Number
Order Option
. On-Line Balance Forward Accounts Receivable and Credit Rating
Information Inquiry For Each Billing Period Per Main Number Billed
. Unlimited Number of Billing Periods Can Be Maintained
-29-
<PAGE>
. Subscriber Physical Address Can Be Defined By: State, City, Subdivision,
Street Name, Street Number, Street Direction a nd Street Subtitle,
Building, Building Sub-number
. Free Format Directory Listings
. User Defined Directory Codes
. Multiple "List With" Entries
. Allows Prefix Designation To The Subscriber Service and Equipment Item
Level For Special Rates (i.e., Vacation, Convention, etc.)
. Automatic Booking Of Refunds To Subscriber's Bill
. Industry Standard EMR 210 Toll Record Format Used Throughout Billing
Process
. Up To 12 Months of Detail Toll information Can Be Accessed For Inquiry,
Investigation Or Reporting Purposes
. Toll Dollar Limit Amounts Can Be Designated For Credit Or Security
Deposit Purposes
. Up To 999 Deposit, Interest and Refund Amounts Per Subscriber
. User Defined and Controlled Data Base Control Records
. On-Line Entry, Inquiry and Update Menu and Screen Driven
. Operator Oriented Prompt and Instruction Screens
. Comprehensive Reporting With Variable Selections
. Comprehensive User Oriented Documentation
-30-
<PAGE>
SERVICE ORDER
================================================================================
. On-Line Multi-User One Step Process Service Order Entry
. On-Line Access To Current And Comprehensive Service Order and Subscriber
Billing Information
. Automatic Service Order Number Assignment
. Automatic Screen Mode For Entry Of New Orders
. Optional Planning Schedule Interfacing and Usage Reporting
. Service Order Entry Information Validated Against Data Base
. Automatic Retrieval of Existing Subscriber Information During Service
Order Entry
. Scroll Screen Functions Facilitate Information Retrieval:
. Service Order By Number
. Service Order By Name
. Service Order By Telephone No. Number (Open Only)
. Service Order By Number (Open Only)
. Physical Address By Location
. Physical Address By Street
. Subscriber Deposits
. Line Card By Location
. Line Card By Street
. Line Card By Special Circuit
. Line Card By Telephone Number
. Line Card By Distribution Cable Card
. Line Card By Name
. Service & Equipment By Item Code
. Calling Card By Sequence Number
. Comprehensive Service Order Information:
. Physical Address . Service and Equipment
. Billing . Calling Card
. Additional Subscriber . Free Form Memo w/Unlimited Pages
. Advance Payment And Deposit . Basic Order
. Directory . Line Card
-31-
<PAGE>
. User Defined Service Order Types
. Customer Contact Memo Printing With Multiple Copies Option
. Mass Order Processing Capability (No. Change, Disconnect, Switch Cut,
etc.)
. Comprehensive Audit & Balancing Features
. Service Results Tracking
. Multi-Level Service Order Scheduling And Rescheduling
. Service Order Processing By Actual Completion Date or Effective Date
. Service Order Printing Controlled By User Designation
. User Defined Variable Print Routing Of Service Order Forms
. Automatic Removal Of Old Subscriber Information On Number Change,
Transfer, And Disconnect Orders
. User Defined And Controlled Data Base Control Records
. On-Line Entry, Inquiry and Update
. Menu and Screen Driven
. Operator Oriented Prompt and Instruction Screens
. Comprehensive Reporting With Variable Selection Options:
. Service Order Information . Subscriber Information
. Service Order Activity . Before & After Service Order Post
. Advance Payments and Deposits . Station Gain and Loss
. Planning Schedule Usage . Number Changes
. Service Order Log . Comprehensive User-Oriented
Documentation
-32-
<PAGE>
GENERAL PLANT/LINE ASSIGNMENT
================================================================================
. On-Line Inquiry To Current Line Card Information Including:
. Physical Address
. Dedicated Cable and Pair . Service Order Activity
. Distribution Drop . Trouble Activity
. Map Number . User-Defined Data Fields
. Terminal Location . Service and Equipment
. Cable Network . Carrier Information
. Telephone Number . Central Office Information
. Service Type . Special Circuit Information
. Name . Detached Extension Information
. Connect/Disconnect Date
. Service Area Master Broken Down By:
. State (Or Region) . Street Subdescription
. City . Map Number
. Subdivision . Dedicated Cable and Pair
. Street . Terminal Location #1
. Street Direction . Terminal Location #9
. Street Subtitle . Building Number
. Street Number . Building Subnumber
. Line Card Access By:
. Telephone Number . Distribution Cable
. Name . Address
. Special Circuit . Street
. Line Card Scroll By:
. Telephone Number . Distribution Cable
. Name . Address
. Special Circuit . Street
. Standard Listings and Reporting Including:
. Line Card Print Out
. Line Card Listing
. Cable Usage Reports
-33-
<PAGE>
Standard Features Include:
. Cable Network Assignment To Selected Address
. Cable Usage For All Or Specific Cable Routes (Available Pairs And
Percentage Usage)
. Interface Into Billing, Service Order, And Trouble Applications
. Reports And Listings For Line Cards
. Validation Of Information Against User Defined Data Base
. Automatic Central Office Assignment, Direct Interface of Central
Office Data Base To Commercial Representatives. Total Assignment To
Premise May Be Accomplished From Commercial Office.
Currently Under Development:
. Automatic Polling of Central Office Diagnostics By Trouble Clerks.
Results of Test Will Be Attached Automatically To Trouble Ticket.
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<PAGE>
TROUBLE REPORTING APPLICATION
================================================================================
General
This application provides the capability for entering into the system and
maintaining subscriber telephone trouble information. The application
accommodates 1) subscriber trouble entry 2) REA or user defined and controlled
data base 4) purging of cleared trouble calls from the system by date selection
and 5) printing of trouble codes and descriptions.
. Trouble Information Includes:
. General Information . Completion Information
. Line Card Information . Physical Address Information
. Service and Equipment Information . Subscriber Miscellaneous
Information (User-Defined)
. Memo Information
. Scheduling Information . Testing Information
. Dispatch Information
Standard Features Include:
. Subsequent and Common Cause Tickets
. Automatic Completion Of Common Cause Tickets
. Automatic Crediting of S/E Charges (User Option)
. Entry of Service Charges
. Unlimited Trouble History Capability
. Unlimited Memo Screen Information
. Trouble Ticket Printout Up To Twenty Locations
. Buried Drop Wire Requirements Reporting
. REA User Defined Reporting
. Validation Against Disconnect For Nonpayment Information
. User Defined Trouble Scheduling/Dispatch Tracking
-35-
<PAGE>
. Purge Trouble File By Date Range Selection (All Cleared Trouble
Records Having A Trouble Report Date That Is Equal To Or Less Than The
Date Entered Will Be Purged From The System)
. Assign To Trouble Ticket Information By:
. Ticket Number . Telephone Number
. Address . Circuit Number
. Appointment Date And Time . Billing Name
. Line Card Number . Cable Pair
. User Defined Data Base Information Includes:
. Trouble Ticket Types . Cause Codes
. Report Codes . Fault Codes
. Action Taken Codes . Memo Information
. Plant Class Codes . Completion Status Codes
. Plant Usage Codes . Source Codes
. Plant Item Codes . Trouble Service Results Code
. Manufacturer Codes . Test Result Codes
. Weather Codes . Appointment Codes
. User Controlled Information Includes:
. Validation And Closeout Requirements . REA Reporting
. Entry Screen Access . Trouble Ticket Printing
Reporting Includes:
. Trouble Analysis Report By Variable Option Selection
. Detail Trouble By Telephone Number- (Reflects trouble location,
report number and code, action taken, line number, reported data
and time, cleared date and time, employee number, hours elapsed,
plant class and item, manufacturer code, fault code, cause code,
weather code, reassigned telephone number designation and total
number of troubles reported. Elapsed time is calculated from the
time the trouble was reported to the time the trouble was
cleared.)
. Summary Trouble By Exchange- (Reflects number of months
processed, plant class code and description, plant item and
description, number of troubles, trouble rate, plant units, index
base sheath miles, etc., totals for number of troubles cleared,
trouble reports, other reports and associated number of
-36-
<PAGE>
troubles, trouble rate, plant units and index base, and the
exchange trouble percentage of all trouble.)
. Summary Trouble For All Exchanges By Plant Class - Reflects
number of troubles, trouble rate, plant units and index base
total stations for total troubles cleared, total other reports,
total trouble reports, plant class and the plant class trouble
percentage of all trouble.)
Variable Options:
- Weather - To Date Reported
- Manufacturer - Plant Item
- Exchange - From Date Reported
- Report Number - Report Code
- Fault Code - Incomplete Only
- Repair Person I.D. - Plant Class
- Cause Code
. Trouble Code And Descriptions Listing (Reflects all active trouble
codes and descriptions)
Special Features:
Chart deleted
-37-
<PAGE>
TOLL CENTER RATING AND REPORTING
Standard Features:
. Rated Toll Data and Applicable Non-rated Converted Message Types
Interfaces To The NYNEX DPI Commercial Billing Application
. Can Be Used Stand Alone With Other Billing Application Software
. User Selection Options Provided For Rating "One Rate Period Messages"
and Rate Period Specific Billing (RPSB)
. On-Line Entry, Inquiry and Update
. Menu and Screen Driven
. Operator Oriented Prompt and Instruction Screens
. Comprehensive Reporting With Variable Selections
. Comprehensive User Oriented Documentation
. Standard 14 7/8" X 11" Computer Paper. No Special Forms Required.
Application Features:
This information has been intentionally deleted.
Reporting:
. Terminating Point Master (TPM) File Listings Selection Options:
. Beginning and Ending Place Abbreviations
. Beginning and Ending Area Codes
. Beginning and Ending Exchange Numbers
. Combination of Above
. ATTIX Master File Listings Selection Options:
. Beginning Ending Area Codes
. Beginning and Ending Exchange Numbers
. Combination of above
-38-
<PAGE>
. Other Carrier Master File Listings Selection Options:
. Beginning and Ending Area Codes
. Beginning and Ending Exchange Numbers
. Combination of Above
. Rate Table Master File Listings Selection Options:
. Carrier Code . Rating Period Code
. Lata Indicator . Non-overseas and Overseas Points
. Place Code . Combination of Above
. Type Code (PP,SS,DD,CC)
. Rate Period Master File Listings Selection Options:
. Year To List . Call Type (PP,SS,DD,CC)
. Carrier Code . Non-Overseas and Overseas
. Lata Indicator . Combination of Above
. Place Abbreviation
. Exchange Master File Listings Selection Options:
. Individual Exchange
. All Exchanges
. Dial-It Master file Listings Selection Options:
. Individual Area Code
. All Area Codes
. Company Master File Listings Selection
. State Tax Master File Listing
. Collect Surcharge Master File Listing
. Group Location Master File Listing Selection Options:
. Individual Group Location
. All Group Locations
. Independent To Independent Points Master File Listing
-39-
<PAGE>
. List All Toll Center Rating Data Base Master files
. Conversion Summary (Edit Reports)
. EAX No. 1, No. 2 and No. 5 Tape
. SATT Tape
. TOPS Tape
. Mark Sense
. Hand Tickets Edit Report
. Connect Hour Peg Count Summary Report
. Unratable Toll Listing (Invalid Tickets). Multiple Copies Option
Provided in Toll Rating Process.
. Credit Toll Listing. Multiple Copies Option Provided in Toll Rating
Process.
. Message Toll and WATS Data/B-I Settlement Reports Selection Options:
. Beginning Month and Day of Report
. Ending Month and Day of Report
. Year of Report
. Number of Copies
. Print Intra/Inter Lata Separately (Yes/No)
. Tape Invoice Summary Report
User Requirements:
The user is responsible for accommodating the transfer of tape data to and from
the AS/400 computer via tape drive or direct communication processing.
Ticketing Record Format Conversion Requirements:
Record format conversion programs are required for ticketing record formats not
presently accommodated by this application.
-40-
<PAGE>
CARRIER ACCESS BILLING SYSTEM (CABS)
Standard Features:
. Stand Alone Application
. On-Line Entry, Inquiry and Update
. User Friendly
. Menu and Screen Driven
. Operator Oriented Prompt Screens
. Comprehensive Reporting
. On-going Updates Provided For FCC Approved Tariff Changes
. Uses Standard 8 1/2 x 11" and 14 7/8" x 11" Computer Paper
Application Features:
This information has been intentionally deleted.
Reporting:
. Message and Minute Count Audit Report
. Measured Feature Group Usage Report
. Non-measured Feature Group Service Report
. Special Access Lines (S.A.L.) Recurring and Nonrecurring
. Installation Charges Report
. Billing and Collection Charges Report
. Accounts Receivable Transaction Report
. Management Analysis Reports consist of:
. NECA Report (Current Month and Year-To-Date)
. USOC Count Report
-41-
<PAGE>
Listings: (All Generated By Company, Carrier Combinations)
. Company Information Listing
. Carrier Information Listing
. CLLI Code Listing
. Switched and Special Route Listing
. Wire Center Listing
. Wire Center Message Factor Listing
. FCC Account Listing
. Charge Code Listing
. Wire Center Trunk Group Routing Listing
. Feature Group Rate Listing
. Universal Service Order Code (USOC) Listing (Utilizing Daily and Monthly
Rates, Recurring and Nonrecurring Charges)
. Special Transport USOC Listing
. Access Connection USOC Listing
. Special Access Line USOC Listing
. Features and Functions USOC Listing
. Channel Mileage USOC Listing
. Point of Termination USOC Listing
. Channel Termination USOC Listing
. Billing and Collections USOC Listing
. Installation USOC Listing
. Rate Period Listing
-42-
<PAGE>
. Carrier Network Listing
-43-
<PAGE>
DATA BASE SYSTEM CONTROL RECORDS
================================================================================
General
The System Software is a highly integrated system with application programs
sharing common information to reduce redundant information being setup for each
application. All control records are user defined and controlled, and only have
to be entered one time.
Once setup, all associated applications have immediate access to the data
entered. This common integration not only helps reduce the required hardware
disk storage, but also provides more accurate editing and cross checking of the
application information entries through the built-in entry validation processes.
The system control record information must be entered first, as all other
applications utilize this information. The control records for each application
must be setup prior to processing of that application. Listings for each
control record type can be generated for initial setup validation, maintenance
and on-going reference purposes.
The following is a list of the current system control records used.
SYSTEM CONTROL MAINTENANCE
- --------------------------------------------------------------------------------
1. Company Information
2. Location Information
3. Department Information
4. Data Base Sequence Counters Maintenance
5. State Tax Codes
6. Batch Jobs Control Information
7. City Code
8. County Code
9. School Code
10. Tax District
11. Batch Jobs Control Information
12. Intercompany Transfer J/E Data Base
BILLING CONTROL MAINTENANCE
- --------------------------------------------------------------------------------
1. Exchange Code
2. Service Code
3. Billing Method
4. Toll Limit
5. Handling Code
6. Credit Rating
-44-
<PAGE>
7. Deposit Code
8. Interest Method
9. Billing Cycle
10. EMR Toll Record ID
11. Directory Code
12. Charge Codes
13. Service & Equipment Item
14. Service & Equipment Category
15. Service & Equipment Class Code
16. Directory Assistance Charges
17. Other Tax
18. EMR Message Type
19. EMR Rate Class
20. EMR Rate Period
21. Equal Access Transaction Codes
22. Equal Access Status Indicator
23. Matrix Category Codes
24. Payment Type Codes
25. Private Line Type Codes
26. "BRMIS" Item Codes
27. "BRMIS" Charge Codes
28. Billing Journal Entries
29. Corner Default Payment
30. Caller I.D. Codes
31. Toll Concession
32. Optional Calling Plan
33. OCP Schedule Definition
34. OCP Rerate Period
35. OCP Rerate Table
36. Tax Exempt Location
37. Reverse Billing
PAYROLL CONTROL MAINTENANCE
- ---------------------------
1. Payroll Rate
2. Hour Type
3. Paid Period Information
4. Hour Groups
5. Check Information
6. State Information
7. FICA Tax Limits
8. Federal Tax Table
9. The Card Hour Types
10. Deduction Information
-45-
<PAGE>
11. Class Description
12. Grade Description
13. Step Description
14. Job Description
15. Education
16. Check Distribution
17. Last Raise Reason
18. Termination Reason
19. Labor Function Code
20. State Tax Tables
21. Deduction Registers Control
22. Sick Information
23. State FIPS 5-1 Code
-46-
<PAGE>
WORK ORDER CONTROL MAINTENANCE
- --------------------------------------------------------------------------------
1. Project Status
SERVICE ORDER CONTROL MAINTENANCE
- --------------------------------------------------------------------------------
1. Last S/O Number
2. Routing Control Master
3. Contact Memo Routing
4. Service Order Type Codes
5. ISR Type Codes
6. Service Order Type Codes
7. Reason Not Complete Codes
8. Planning Schedule Codes
9. Employee Code
10. Memo Default
11. Service Order Entry Default
12. Service Order Stage Code Description
CONTINUING PROPERTY RECORD MAINTENANCE
- --------------------------------------------------------------------------------
1. Item Number
2. Plant Type
3. Plan/Item Combinations
GENERAL PLANT MAINTENANCE
- --------------------------------------------------------------------------------
1. State
2. City
3. Subdivision
4. Street Name
5. Street Direction
6. Street Subtitle
7. Taxing District
8. County Codes
9. School Codes
10. Cable Type Codes
11. Cable Record Codes
12. Distribution Cable Pair Counts
13. Line Card Miscellaneous Description Information
14. Cross Connect Box Location
15. Features and Functions
-47-
<PAGE>
INVENTORY MAINTENANCE
- --------------------------------------------------------------------------------
1. Staging and Disbursement Codes
2. Offset G/L Account
TROUBLE MAINTENANCE
- --------------------------------------------------------------------------------
1. Trouble Control Master
2. Printing Control Master
3. Ticket Type
4. Source Code
5. Report Code
6. Schedule Code
7. Appointment Code
8. Plant Class
9. Plant Item
10. Plant Category
11. Fault Code
12. Cause Code
13. Action Taken Code
14. Weather Code
15. Plant Usage Code
16. Manufacturer Code
17. Employee Code
18. Completion Status Code
19. Test Result Code
20. Service Result Code
21. Memo Form
22. Plant Class/Item
23. Plant Unit of Measure
24. Trouble Ticket Surge Description
-48-
<PAGE>
Future Release Addendum
-----------------------
This document is an addendum to the Software License agreement, number LA97-10
between DPI/TFS, Inc. ("DPI") and Focal Communication Corporation ("FOCAL").
Both parties have discussed plans for the two releases that will transition
Telco Friendly Software to the Integrated Customer Management System. The
functional specifications for these releases are attached hereto as Exhibits 1
and 2.
The schedule below reflect wireline object code software only.
Release Availability
Release 1 2nd quarter 1997
Release 2 4th quarter 1997
These figures are based on the number of access lines provided for in the
current License Agreement between DPI and FOCAL. Provided that delivery is made
as shown above, FOCAL will be obligated to pay the charges shown.
Both parties agree and understand that development plans are subject to change
and that it is possible that the releases described in this Addendum may not be
delivered. If a specific release, described above, is not delivered by the
delivery date shown above or does not contain all of the functions described in
the applicable attached Exhibit, FOCAL's sole remedy is that it may choose not
to accept the Release as and when it is available and be entitled to a refund of
Software License Fees paid to date upon if the Telco Friendly Software is
returned as described in the Software License. Other than the specific remedies
set forth in this paragraph, neither party shall have any obligation to the
other for any failure to deliver the future Releases and functions described
above.
Licenses to the releases will be provided under the terms and conditions of the
existing Software License agreement unless modified or additional terms are
provided no less than thirty (30) days prior to delivery of the release.
Agreed: Agreed:
DPI/TFS, Inc. Focal Communication Corporation
By: /s/ Mark Giles By: /s/ Robert C. Taylor, Jr.
-------------------------- ------------------------------------------
Name Mark Giles Name: Robert C. Taylor, Jr.
------------------------- ----------------------------------------
Title: General Manager Title: President
----------------------- ---------------------------------------
Date: 4/10/97 Date: 4/9/97
----------------------- ---------------------------------------
-49-
<PAGE>
Exhibit 1
Release 1
---------
Full details of each enhancement will be provided in external specification
documents once the final details are approved and have passed all quality
verifications and inspections.
1. E911 Interface
- -------------------
. Supports National Emergency Number Association (NENA) Version 2 file
format
Master Street Address Guide (MSAG)
Automatic Location Identification (ALI)
. Various input and output options
Electronic via CA/400
Magnetic Tape
Paper
2. Installment and Lease Support
- ----------------------------------
. Supports automatic calculation of installment and lease payments
Recurring charges over time
Calculates interest on installments and lease payments
. Tracks current versus past due balances
. Supports late payment charges (through Accounts Receivable by Service)
. Allows early payoff or balloon payments
3. Billing for Internet Services
- ----------------------------------
. Converts data, provided from a Service Provider, into a toll record
billable format
. Processes and bills regular and overtime usage to customer accounts
. Provides error reports and capability of correcting errors or returning
to service provider
. Provides capability of billing multiple sessions as a single line item
4. Graphical User Interface
- -----------------------------
. "Point and click" environment
. Provides a pictorial representation of screen data including graphs and
charts
. Pull down menus, tool bars and message bars
. Integrates PC functions with TFS applications
-50-
<PAGE>
5. Directory Management System
- --------------------------------
. Provides a single place for the storage and retrieval of directory
related information
. Customer data is defaulted no re-entry required.
. Allows out-of-alphabetical order placement of listings
. Allows the look-up of directory information by a wide variation of
selections
. Allows maintenance of multiple directories and multiple sections within
a directory
. Generates publisher directory tapes, electronic files and reports
6. Flexible Taxation
- ----------------------
. Supports multiple jurisdictions
. Supports taxes paid by customer or company
. Provides tax on tax capabilities
. Supports foreign state tax on in-collect messages
. Provides a flat tax per call
. Message taxation rules by carrier, record ID and jurisdiction
. Supports limits (tax only amounts over or under a fixed amount)
. Provides overrides
. Provides unlimited taxes per geographic location and billing element
-51-
<PAGE>
Exhibit 2
---------
Release 2
---------
Full details of each enhancement will be provided in external specification
documents once the final details are approved and have passed all quality
verifications and inspections.
1. Flexible Pricing Plans (OCP's)
- -----------------------------------
. Combines non-recurring, recurring and usage charges
. Provides flexible Alters to select eligible charges
. Provide cross product discounting capabilities
. Allows utilization of loyalty plans
2. ICMS Plant Records
- -----------------------
. Retains logical plant record information
Devices and terminals with ports
Bandwidth-defined transport elements
. Supports fiber optic and data services
3. ICMS Service Orders
- ------------------------
. Provides an expanded service order number
. Provides a "Fast Path" function for new connections
. Allows simple customer changes to be input interactively
Name/Address changes
Billing-only S&E additions/changes
4. Provisioning Performance and Jeopardy Monitoring
- -----------------------------------------------------
. Measures service order activity and stage performance
. Provides proactive commitment management
. Allows real-time monitoring of work flow
. User defined parameters for performance monitoring
5. Disputes Management
- ------------------------
. Captures and tracks customer disputes, complaints and inquiries
. Supports adjustments to customer accounts
. Parameter driven allowing enforcement of business rules.
. Work flow support
-52-
<PAGE>
6. Faults Management
- ----------------------
. Fault entry on multiple customer services
. Automatic creation of common cause faults through Network Fault entry
. Group scheduling of faults
. Link/Unlink capabilities
7. Near Real-Time Rating
- --------------------------
. Message processing using logical manager/server controls
. Processes small batches of switch records
. On-line access to rated records in unbilled detail
8. Customer Correspondence
- ----------------------------
. Generate customer correspondence documents importing customer data
into custom forms
9. Migration Aids
- -------------------
. Utilities available for conversion processes
10. Customer and Account Model
- -------------------------------
. Manage customers at entity level
. Discounts applied at service, account or customer level
. Summary billing available for multi-account customers
11. *Multi-Service Billing Enabled Capabilities
- ------------------------------------------------
. Wireline (Telephony)
* . Wireless
* . Cable Television
* . Combined billing
. One-stop customer service
*Note: Release 3 multi-service billing enabled capabilities are available as
separate purchases. The base price of the ICMS product supports wireline
services only.
12. Customer at-a-time Billing
- -------------------------------
. 24 Hour on-line day
. Self recovering
. Multi-thread for performance
-53-
<PAGE>
13. Custom Statement Formats
- -----------------------------
. System generates statement details file
. Processed by:
- Out source print/stuff/mail
- IBM AFP Printers
- Custom Statement Formatter (CSF, an option, add-on product)
- Other print solutions
14. Credit Card Payments
- -------------------------
. Supports electronic credit card payments
15. Third-party Billing
- ------------------------
. Support for resale of services on combined bill
. Segregates accounts receivable for treatment and write off
16. Number Portability
- -----------------------
. Support for both Incumbent and Competitive LECs
. Industry standard interfaces
17. Interconnection Support
- ----------------------------
. Support for incumbent and Competitive LECs
. Track network element ownership and usage
. Ordering and order fulfillment
. Invoicing and invoice reconciliation
18. Century Date Support
- -------------------------
. Year 2000 support throughout system functions
Release contents subject to change.
-54-
<PAGE>
Exhibit 10.18
FOURTH AMENDMENT TO LEASE
-------------------------
THIS FOURTH AMENDMENT TO LEASE (this "Amendment") is made and entered into
as of this 4th day of April, 1998 by and between TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA, a New York corporation ("Landlord") and FOCAL
COMMUNICATIONS CORPORATION OF ILLINOIS (formerly known as Focal Communications
Corporation), a Delaware corporation, ("Tenant").
W I T N E S S E T H
-------------------
WHEREAS, Landlord and Tenant have heretofore entered into that certain
lease dated as of December 31, 1996 the ("Original Lease"), pursuant to which
Landlord leased to Tenant 10,236 rentable square feet of certain premises on the
lower level (the "Original Space") of the building commonly known as 200 North
LaSalle Street, Chicago, Illinois (the "Building");
WHEREAS, Landlord and Tenant have heretofore entered into that certain
First Amendment to Lease dated May 14, 1997 (the "First Amendment") to evidence
Tenant's expansion into the additional space of 6,202 rentable square feet on
the eighth (8th) floor of the Building (the "Additional Space"), as more
particularly set forth in the First Amendment;
WHEREAS, Landlord and Tenant entered into that certain Second Amendment to
Lease dated November 15, 1997 (the "Second Amendment") to evidence Tenant's
expansion into the additional space of 4,153 rentable square feet on the eighth
(8th) floor of the Building (the "Second Additional Space"), collectively (such
Additional Space and the Second Additional Space referred to herein as the
"Eighth Floor Space"), as more particularly set forth in the Second Amendment;
WHEREAS, Landlord and Tenant entered into that certain Third Amendment to
Agreement of Lease dated March 2, 1998 (the "Third Amendment") to evidence
Tenant's installation of a communication device, as more particularly set forth
in the Third Amendment (such Original Lease as amended by the First Amendment,
the Second Amendment and the Third Amendment and as modified or amended from
time to time, hereafter is called the "Lease");
WHEREAS, Landlord and Tenant desire to amend the Lease according to the
terms hereof in order to document the leasing of additional space on the Seventh
Floor, the extension of the term of the Lease with respect to the space on the
Eighth Floor and corresponding adjustment of the rent for the space on the
Eighth Floor, and to make such other changes on the terms and conditions set
forth below. This Amendment does not modify the terms of the Lease with respect
to the Original Space;
NOW THEREFORE, for and in consideration of the covenants and agreements
hereinafter set forth, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant
hereby mutually agree as follows:
1. Recitals. The foregoing recitals are true and correct and are
incorporated herein by reference.
<PAGE>
2. Controlling Language. Insofar as the specific terms and provisions of
this Amendment purport to amend or modify or are in conflict with the specific
terms, provisions and exhibits of the Lease, the terms and provisions of this
Amendment shall govern and control; in all other respects, the terms, provisions
and exhibits of the Lease shall remain unmodified in full force and effect.
3. Seventh Floor Space/Term. Landlord and Tenant hereby agree that
beginning on June 1, 1998 (the "Seventh Floor Space Commencement Date"),
Landlord shall lease to Tenant approximately 11,956 rentable square feet of
space on the seventh (7th) floor of the Building as more particularly described
on Exhibit A attached hereto (the "Seventh Floor Space") for a period of five
(5) years ending on May 31, 2003 (the "Seventh Floor Space Term"; May 31, 2003
is referred to herein as the "Seventh Floor Space Termination Date"). The
Seventh Floor Space shall be subject to all the terms and conditions of the
Lease except to the extent expressly modified or excluded hereby or herein and
shall be included in the "Premises" as the term is used in the Lease.
4. Seventh Floor Space Rent. Effective as of the Seventh Floor Space
Commencement Date and for the duration of the Seventh Floor Space Term, in
addition to (and not in substitution for) the Rent payable with respect to the
Original Space and the Eighth Floor Space under the Lease, Tenant shall pay to
Landlord Rent with respect to the Seventh Floor Space as follows:
A. Base Rent.
(1) Base Rent to be paid in monthly installments in advance on or
before the first day of each month of the Term of this Lease set
forth in the following schedule:
-2-
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Period Annual Base Rent Monthly Base Rent
- --------------------------------------------------------------------------------------------
<S> <C> <C>
First Lease Year of Seventh Floor $95,648.00 ($8.00 x 11,956 $7,970.67
Space Term rentable square feet)
- --------------------------------------------------------------------------------------------
Second Lease Year of Seventh Floor $101,626.00 ($8.50 x 11,956 $8,468.83
Space Term rentable square feet)
- --------------------------------------------------------------------------------------------
Third Lease Year of Seventh Floor $107,604.00 ($9.00 x 11,956 $8,967.00
Space Term rentable square feet)
- --------------------------------------------------------------------------------------------
Fourth Lease Year of Seventh Floor $113,582.00 ($9.50 x 11,956 $9,465.17
Space Term rentable square feet)
- --------------------------------------------------------------------------------------------
Fifth Lease Year of Seventh Floor $119,560.00 ($10.00 x 11,956 $9,963.33
Space Term rentable square feet)
- --------------------------------------------------------------------------------------------
</TABLE>
B. Operating Cost Share Rent.
(1) Operating Cost Share Rent in an amount equal to the Tenant's
Proportionate Share of the Operating Costs for the applicable
Fiscal Year of the Lease, paid monthly in advance in an estimated
amount.
C. Tax Share Rent.
(1) Tax Share Rent in an amount equal to the Tenant's
Proportionate Share of Taxes for the applicable Fiscal Year of
this Lease, paid monthly in advance in an estimated amount.
For purposes hereof, the term "Lease Year" shall mean each consecutive twelve
month period beginning with the Seventh Floor Space Commencement Date, and each
subsequent Lease Year shall be the period of twelve months following the last
day of the prior Lease Year through the Seventh Floor Space Termination Date.
The method of billing and payment of Operating Cost Share Rent and Tax Share
Rent are set forth in Section 5 of this Amendment.
Any provision of the Lease or this Amendment to the contrary
notwithstanding, the abatement of Rent payable with respect to the Original
Space pursuant to the Schedule of the Lease shall not apply to the payment of
Rent with respect to the Seventh Floor Space and the Eighth Floor Space, and
such Rent, with respect to the Seventh Floor Space and the Eighth Floor Space,
shall accrue and Tenant shall be liable for payment thereof without regard to
such abatement provision.
5. Payment of Operating Cost Share Rent and Tax Share Rent. During the
Seventh Floor Space Term, Tenant shall pay Operating Expenses Share Rent and Tax
Share Rent for the Seventh Floor Space in the manner set forth below.
-3-
<PAGE>
A. Payment of Estimated Operating Cost Share Rent and Tax Share
Rent. Landlord shall reasonably estimate the Operating Costs and
Taxes of the Project each Fiscal Year, generally after the
beginning of the year. Landlord may revise these estimates, but
no more often than twice during any Fiscal Year, whenever it
obtains more accurate information, such as the final real estate
tax assessment or tax rate for the Project.
Within ten (10) days after notice from Landlord setting forth an
estimate of Operating Costs for a particular Fiscal Year, Tenant
shall pay Landlord an amount equal to one-twelfth (1/12th) of
Tenant's Proportionate Share of such estimated Operating Costs
for such Fiscal Year, multiplied by the number of months that
have elapsed in the applicable Fiscal Year to the date of such
payment including the current month, minus payments previously
made by Tenant for the months elapsed during the Term. Thereafter
on the first day of each month, Tenant shall pay monthly until a
new estimate of Operating Costs is applicable, one-twelfth
(1/12th) of Tenant's Proportionate Share of the estimated
Operating Costs.
Within ten (10) days after notice from Landlord setting forth an
estimate of Taxes for a particular Fiscal Year, Tenant shall pay
Landlord an amount equal to one-twelfth (1/12th) of Tenant's
Proportionate Share of such estimated Taxes, multiplied by the
number of months that have elapsed during the Term in the
applicable Fiscal Year to the date of such payment, including the
current month, minus payments previously made by Tenant for the
months elapsed. Thereafter on the first day of each month,
Tenant shall pay monthly until a new estimate of Taxes is
applicable, one-twelfth (1/12th) of Tenant's Proportionate Share
of the estimated Taxes. In no event shall anything contained in
this Lease be construed to allow Landlord to be reimbursed for
greater than one hundred percent (100%) of the actual Taxes or
Operating Costs.
B. Correction of Operating Cost Share Rent. As soon as reasonably
possible after the end of each Fiscal Year, Landlord shall
deliver to Tenant a report for such year (the "Operating Cost
Report") setting forth (a) the actual Operating Costs incurred,
(b) the amount of Operating Cost Share Rent due from Tenant, and
(c) the amount of Operating Cost Share Rent paid by Tenant.
Within twenty (20) days after such delivery, Tenant shall pay to
Landlord the amount due minus the amount paid. If the amount
paid exceeds the amount due, Landlord shall apply the excess to
Tenant's next month's payment of Operating Cost Share Rent,
refunding any overage directly to Tenant within a reasonable
period of time after the determination of such overage.
-4-
<PAGE>
C. Correction of Tax Share Rent. As soon as reasonably possible
after the end of each Fiscal Year, Landlord shall deliver to
Tenant a report for such Fiscal Year (the "Tax Report") setting
forth (a) the actual Taxes, (b) the amount of Tax Share Rent due
from Tenant, and (c) the amount of Tax Share Rent paid by Tenant.
Within twenty (20) days after such delivery, Tenant shall pay to
Landlord the amount due from Tenant minus the amount paid by
Tenant. If the amount paid exceeds the amount due, Landlord
shall apply the excess as a credit against Tenant's next month's
payment of Tax Share Rent, refunding any overage directly to
Tenant within a reasonable period of time after the determination
of such overage.
The definition of Taxes and Operating Costs shall be as set forth in
Section 2C of the Original Lease.
"Tenant's Proportionate Share," with respect to the Seventh Floor Space,
for calculating the Operating Cost Share Rent and Tax Share Rent is 1.9201%
(based upon 11,956 rentable square feet in the Seventh Floor Space and 622,667
rentable square feet in the Building).
6. Eighth Floor Space Extension. The Term of the Eighth Floor Space is
hereby extended for an additional period of twenty-nine (29) months (the "Eighth
Floor Space Term") commencing on January 1, 2001 (the "Eight Floor Space
Commencement Date"), and ending twenty-nine (29) months thereafter on May 31,
2003 (the "Eighth Floor Space Termination Date"). The Eighth Floor Space shall
be subject to all the terms and conditions of the Lease except to the extent
expressly modified or excluded hereby or herein and shall be included in the
"Premises" as the term is used in the Lease.
7. Eighth Floor Space Rent. Effective as of the Eighth Floor Space
Commencement Date and for the duration of the Eighth Floor Space Term, in
addition to (and not in substitution for) the Rent payable with respect to the
Original Space and the Seventh Floor Space, Tenant shall pay to Landlord Rent
with respect to the Eighth Floor Space as follows:
A. Base Rent.
(1) Base Rent to be paid in monthly installments in advance on or
before the first day of each month of the Term of this Lease set forth
in the following schedule:
-5-
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Period Annual Base Rent Monthly Base Rent
- -------------------------------------------------------------------------------
<S> <C> <C>
January 1, 2001 - May 31, 2001 $93,195.00 ($9.00 x 10,355 $7,766.25
rentable square feet)
- -------------------------------------------------------------------------------
June 1, 2001 - May 31, 2002 $98,372.50 ($9.50 x 10,355 $8,197.71
rentable square feet)
- -------------------------------------------------------------------------------
June 1, 2002 - May 31, 2003 $103,550.00 ($10.00 x $8,629.17
10,355
rentable square feet)
- -------------------------------------------------------------------------------
</TABLE>
B. Operating Cost Share Rent.
(1) Operating Cost Share Rent in an amount equal to the Tenant's
Proportionate Share of the Operating Costs for the applicable Fiscal
Year of the Lease, paid monthly in advance in an estimated amount.
C. Tax Share Rent.
(1) Tax Share Rent in an amount equal to the Tenant's Proportionate
Share of Taxes for the applicable Fiscal Year of this Lease, paid
monthly in advance in an estimated amount.
For purposes hereof, the term "Lease Year" shall mean each consecutive twelve
month period beginning with the Eighth Floor Space Commencement Date, and each
subsequent Lease Year shall be the period of twelve months following the last
day of the prior Lease Year through the Eighth Floor Space Termination Date. The
method of billing and payment of Operating Cost Share Rent and Tax Share Rent
are set forth in Section 5 of this Amendment.
Effective as of the Eighth Floor Space Commencement Date, Tenant's
Proportionate Share with respect to the Eighth Floor Space is 1.6630%.
8. Condition of the Seventh Floor Space. Except to the extent expressly
provided in Section 9 of this Amendment, Landlord is leasing the Seventh Floor
Space to Tenant on the Seventh Floor Space Commencement Date "AS IS", without
any representations or warranties of any kind (including, without limitation,
any express or implied warranties of merchantability, fitness or habitability)
and without any obligation on the part of Landlord to alter, remodel, improve,
repair, or decorate the Premises or any part thereof.
9. Seventh Floor Space Improvements. Landlord hereby agrees to provide
Tenant an amount not to exceed eighty-three thousand six hundred ninety-two
dollars ($83,692.00) ($7.00 per rentable square foot x 11,956 rentable square
feet) (the "Redecoration Allowance") to be applied to the cost of redecorating
the Seventh Floor Space. Landlord shall deliver the Redecoration Allowance, in
whole or in part, to Tenant upon Landlord's receipt of paid invoices
-6-
<PAGE>
for such Tenant improvements. Any costs incurred by Tenant in excess of the
Redecoration Allowance shall be paid by Tenant.
10. Right of First Offer. Effective as of the Seventh Floor Space
Commencement Date and subject to (i) Section 10B below, (ii) any expansion or
renewal options of any current tenant or tenants in the Building existing on the
date of this Amendment, including, without limitation, the option held by the
Florsheim Shoe Company, AMA Services, Inc., and Smith & Albert, Ltd. (for 1000
square feet contiguous to Smith & Albert Ltd.'s current space), and (iii) any
tenants currently occupying the ROFO Space (defined below) desiring to extend
their lease pursuant to an explicit right or otherwise (individually, a "Prior
Tenant"), during the Term of this Lease, Tenant shall have a right of first
offer on any space that may become available on the 7th floor contiguous to the
Seventh Floor Space depicted on Exhibit B (collectively, the "ROFO Space"),
which right shall be exercised in accordance with the procedures set forth in
Section 10A below.
A. If at any time during the Term of this Lease any ROFO Space becomes
available for lease to anyone other than a Prior Tenant, Landlord shall give
written notice thereof to Tenant (the "Landlord's ROFO Notice") identifying that
portion of the ROFO Space that is available (the "Subject ROFO Space").
Landlord's ROFO Notice may be given at any time up to sixteen (16) months in
advance of such availability and shall contain the terms upon which Landlord
intends to offer the Subject ROFO Space for lease to the market. Tenant shall
notify Landlord within ten business (10) days of receipt of Landlord's ROFO
Notice whether it desires to lease the Subject ROFO Space on the terms set forth
in Landlord's ROFO Notice; provided, however, that failure to notify Landlord
within said 10-business day period shall be deemed a refusal by Tenant. After
any such refusal or deemed refusal, Tenant shall have no farther rights to such
Subject ROFO Space and Landlord shall be free to lease such space to any person
or entity for any term. Subsequent to any refusal or deemed refusal, should
Landlord amend the terms upon which Landlord intends to offer the Subject ROFO
Space for lease to the market, such amendment shall require Landlord to provide
Landlord's ROFO Notice to Tenant pursuant to the procedures set forth in this
Section 10. If Tenant exercises its right of first offer with respect to such
Subject ROFO Space, such space shall be added to the Premises for the remaining
Term of the Lease (including the Renewal Term, if any) on (a) all the terms,
covenants and conditions specified in the Landlord's ROFO Notice, and (b) the
terms, covenants and conditions of this Lease to the extent that such terms,
covenants and conditions of this Lease do not conflict with the terms, covenants
and conditions specified in the Landlord's ROFO Notice. Any ROFO Space added to
the Premises pursuant to this Section 10 shall become a part of the Premises for
all purposes of this Lease, and any reference in this Lease to the term
"Premises" shall be deemed to refer to and include such portion of the ROFO
Space, except as expressly provided otherwise in this Lease.
B. Tenant's right to exercise its right of first offer with respect
to any portion of the ROFO Space pursuant to this Section 10, is subject to the
following conditions: (i) that on the date that Tenant delivers its binding
written notice of its election to exercise its right of first offer, Tenant is
not in default under any of the terms, covenants or conditions of the Lease, and
an unmatured event of default has not occurred and is not continuing; and
(ii) except as provided
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<PAGE>
under the Lease, as approved by the Landlord, or as assigned by Tenant to an
affiliate of Tenant, that Tenant shall not have assigned the Lease or sublet any
portion of the Premises at any time during the period commencing with the date
that Tenant delivers its binding written notice to Landlord of its exercise of
its right of first offer and ending on the date on which such ROFO Space is
available to be added to the Premises, or at any time prior to such period, if
such assignment or sublease extends into such period.
C. Promptly after Tenant's exercise of its right of first offer
pursuant to this Section 10, Landlord shall prepare an amendment to the Lease to
reflect changes in the size of the Premises, Base Rent, Tenant's Proportionate
Share and any other appropriate terms, due to the addition of the ROFO Space.
Tenant shall execute and return such an amendment to the Lease within fifteen
(15) days after its submission to Tenant.
11. Tenant's Proportionate Share for Original Space. Effective as of the
Eighth Floor Space Commencement Date, Landlord and Tenant agree that Tenant's
Proportionate Share with respect to the Original Space is 1.6438%.
12. Brokerage Commission. Tenant represents that it has dealt with no
broker in connection with this Amendment other than Miglin-Beitler Management
Corporation or Julien J. Studley (collectively, the "Brokers"), and that no
broker other than Brokers are entitled to or has made any claims to any
commission or fee in connection with this Amendment. Tenant hereby indemnifies,
defends and holds harmless Landlord and its agents and employees from all claims
of any broker other than Brokers arising through Tenant in connection with this
Amendment. Landlord agrees to pay any real estate commissions which may be due
Brokers pursuant to Landlord's written agreement with such Brokers.
13. Incorporation of Lease. Landlord and Tenant hereby agree that (a) this
Amendment is incorporated into and made a part of the Lease, (b) any and all
references herein to the Lease shall include this Amendment, and (c) the Lease
and all terms, conditions and provisions of the Lease are in full force and
effect as of the date hereof, except as expressly modified and amended
hereinabove.
14. Defined Terms. All terms capitalized but not defined herein shall have
the same meaning ascribed to such terms in the Lease. The marginal headings and
titles to the paragraphs of this Amendment are not a part of this Amendment and
shall have no effect upon the construction or interpretation of any part hereof.
15. Governing Law. This Amendment shall be governed by and construed under
the laws of the State of Illinois.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
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<PAGE>
LANDLORD: TENANT:
TEACHERS INSURANCE AND ANNUITY FOCAL COMMUNICATIONS
ASSOCIATION OF AMERICA CORPORATION OF ILLINOIS
a New York corporation a Delaware corporation
By: /s/ S. Marc Flannery By: /s/ Brian F. Addy
-------------------- ------------------------
Name: S. Marc Flannery Name: Brian F. Addy
-------------------- ------------------------
Title: Assistant Secretary Title: Executive Vice President
-------------------- ------------------------
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<PAGE>
Floor plans shown on Exhibit A and Exhibit B have been deleted.
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<PAGE>
Exhibit 10.19
OFFICE LEASE AGREEMENT
Between
1120 VERMONT AVENUE ASSOCIATES
And
FOCAL COMMUNICATIONS CORPORATION
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C> <C>
I. BASIC LEASE INFORMATION; DEFINITIONS ........................... 4
II. LEASE GRANT .................................................... 8
III. ADJUSTMENT OF COMMENCEMENT DATE/POSSESSION ..................... 8
IV. RENT ........................................................... 9
V. USE ............................................................ 15
VI. SECURITY DEPOSIT ............................................... 16
VII. SERVICES TO BE FURNISHED BY LANDLORD ........................... 16
VIII. LEASEHOLD IMPROVEMENTS ......................................... 17
IX. GRAPHICS ....................................................... 18
X. REPAIRS AND ALTERATIONS ........................................ 18
XI. USE OF ELECTRICAL SERVICES BY TENANT ........................... 22
XII. ENTRY BY LANDLORD .............................................. 22
XIII. ASSIGNMENT AND SUBLETTING ...................................... 23
XIV. LIENS .......................................................... 25
XV. INDEMNITY AND WAIVER OF CLAIMS ................................. 25
XVI. TENANT'S INSURANCE ............................................. 26
XVII. SUBROGATION .................................................... 28
XVIII. LANDLORD'S INSURANCE ........................................... 28
XIX. CASUALTY DAMAGE ................................................ 28
XX. LANDLORD'S ALLOWANCE TO TENANT ................................. 29
XXI. CONDEMNATION ................................................... 30
XXII. EVENTS OF DEFAULT .............................................. 30
XXIII. REMEDIES ....................................................... 31
XXIV. LIMITATION OF LIABILITY ........................................ 33
XXV. NO WAIVER ...................................................... 33
XXVI. EVENT OF BANKRUPTCY ............................................ 33
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
XXVII. WAIVER OF JURY TRIAL ........................................... 34
XXVIII. COMPLIANCE MATTERS ............................................. 35
XXIX. HOLDING OVER ................................................... 36
XXX. SUBORDINATION TO MORTGAGES ..................................... 36
XXXI. ATTORNEYS' FEES ................................................ 37
XXXII. NOTICE ......................................................... 38
XXXIII. ESTOPPEL CERTIFICATES .......................................... 38
XXXIV. INTENTIONALLY OMITTED .......................................... 38
XXXV. EXCEPTED RIGHTS ................................................ 38
XXXVI. SURRENDER OF PREMISES .......................................... 39
XXXVII. PARKING ........................................................ 39
XXXVIII. ACCESS ......................................................... 40
XXXIX. MISCELLANEOUS .................................................. 40
XL. ENTIRE AGREEMENT ............................................... 42
</TABLE>
<PAGE>
OFFICE LEASE AGREEMENT
This Office Lease Agreement (the "Lease") is made and entered into as of
the 4th day of May, 1998 by and between 1120 VERMONT AVENUE ASSOCIATES, a
District of Columbia limited partnership ("Landlord") and FOCAL COMMUNICATIONS
CORPORATION, a Delaware Corporation duly qualified to transact business in the
District of Columbia (Tenants).
I. BASIC LEASE INFORMATION; DEFINITIONS.
A. The following are some of the basic lease information and defined
terms used in this Lease.
1. "Additional Base Rental" shall mean Tenant's Pro Rata Share of
Basic Costs and any other sums (exclusive of Base Rental) that are required to
be paid by Tenant to Landlord hereunder, which sums are deemed to be additional
rent under this Lease. Additional Base Rental and Base Rental are sometimes
collectively referred to herein as "Rent."
2. "Base Rental" shall mean the sums that Tenant is required to pay
to Landlord in accordance with the following schedule.
<TABLE>
<CAPTION>
Lease Year Rate Per Square Foot of Rentable Area
<S> <C>
First $14.750
Second $15.045
Third $15.346
Fourth $15.653
Fifth $15.967
Sixth $17.786
Seventh $18.142
Eighth $18.505
Ninth $18.875
Tenth $19.252
Eleventh $21.387
Twelfth $21.815
Thirteenth $22.251
Fourteenth $22.696
Fifteenth $23.150
</TABLE>
Assuming a Rentable Area of the Premises equal to 19,414 square feet, the
aggregate amount of Base Rental that Tenant is required to pay to Landlord
during the initial Lease Term is Five Million Four Hundred Forty-Seven Thousand
Nine Hundred Fifty-Six and 67/100 Dollars ($5,447,956.67). Such Base Rental
shall be payable by Tenant to Landlord in one hundred eighty (180) monthly
installments as follows:
a. twelve (12) equal installments of Twenty-Three Thousand Eight
Hundred Sixty-Three and 04/100 Dollars ($23,863.04), each payable on or before
the first day of each month during the period beginning October 15, 1998 and
ending October 31, 1999.
b. twelve (12) equal installments of Twenty-Four Thousand Three
Hundred Forty and 30/100 Dollars ($24,340.30), each payable on or before the
first day of each month during the period beginning November 1, 1999 and ending
October 31, 2000.
c. twelve (12) equal installments of Twenty-Four Thousand Eight
Hundred Twenty-Seven and 27/100 Dollars ($24,827.27), each payable on or before
the first day of each month during the period beginning November 1, 2000 and
ending October 31, 2001.
d. twelve (12) equal installments of Twenty-Five Thousand Three
Hundred Twenty-Three and 95/100 Dollars ($25,323.95), each payable on or before
the first day of each month during the period beginning November 1, 2001 and
ending October 31, 2002.
<PAGE>
e. twelve (12) equal installments of Twenty-Five Thousand Eight
Hundred Thirty-One and 94/100 Dollars ($25,831.94), each payable on or before
the first day of each month during the period beginning November 1, 2002 and
ending October 31, 2003.
f. twelve (12) equal installments of Twenty-Eight Thousand Seven
Hundred Seventy-Four and 78/100 Dollars ($28,774.78), each payable on or before
the first day of each month during the period beginning November 1, 2003 and
ending October 31, 2004.
g. twelve (12) equal installments of Twenty-Nine Thousand Three
Hundred Fifty and 73/100 Dollars ($29,350.73), each payable on or before the
first day of each month during the period beginning November 1, 2004 and ending
October 31, 2005.
h. twelve (12) equal installments of Twenty-Nine Thousand Nine
Hundred Thirty-Eight and 01/100 Dollars ($29,938.01), each payable on or before
the first day of each month during the period beginning November 1, 2005 and
ending October 31, 2006.
i. twelve (12) equal installments of Thirty Thousand Five Hundred
Thirty-Six and 60/100 Dollars ($30,536.60), each payable on or before the first
day of each month during the period beginning November 1, 2006 and ending
October 31, 2007.
j. twelve (12) equal installments of Thirty-One Thousand One Hundred
Forty-Six and 53/100 Dollars ($31,146.53), each payable on or before the first
day of each month during the period beginning November 1, 2007 and ending
October 31, 2008.
k. twelve (12) equal installments of Thirty-Four Thousand Six
Hundred and 60/100 Dollars ($34,600.60), each payable on or before the first day
of each month during the period beginning November 1, 2008 and ending October
31, 2009.
l. twelve (12) equal installments of Thirty-Five Thousand Two
Hundred Ninety-Three and 03/100 Dollars ($35,293.03), each payable on or before
the first day of each month during the period beginning November 1, 2009 and
ending October 31, 2010.
m. twelve (12) equal installments of Thirty-Five Thousand Nine
Hundred Ninety-Eight and 41/100 Dollars ($35,998.41), each payable on or before
the first day of each month during the period beginning November 1, 2010 and
ending October 31, 2011.
n. twelve (12) equal installments of Thirty-Six Thousand Seven
Hundred Eighteen and 35/100 Dollars ($36,718.35), each payable on or before the
first day of each month during the period beginning November 1, 2011 and ending
October 31, 2012.
o. twelve (12) equal installments of Thirty-Seven Thousand Four
Hundred Fifty-Two and 84/100 Dollars ($37,452.84), each payable on or before the
first day of each month during the period beginning November 1, 2012 and ending
October 31, 2013.
The foregoing schedule is based on the assumption that the Lease Term will
commence on the Target Commencement Date. If the Lease Term does not commence on
the Target Commencement Date, the beginning and ending dates set forth above
with respect to the payment of any installment(s) of Base Rental shall be
appropriately adjusted on a per diem basis and set forth in the Commencement
Letter to be prepared by Landlord. In the event that the Base Rental rate
adjusts (up or down) on any day other than the first day of the month, Base
Rental for the month in which such adjustment occurs shall be determined based
on the number of days in such month for which each particular Base Rental rate
is applicable.
3. "Building" shall mean the office building located at 1120 Vermont
Avenue, N.W., Washington, D.C., 20005, commonly known as 1120 Vermont Avenue.
4. The "Lease Term" shall mean a period of one hundred eighty (180)
months commencing on the first to occur of (1) October 15, 1998 (the "Target
Commencement Date");
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<PAGE>
and (2) the date upon which Tenant commences commercial operational use and
occupancy within the Premises (i.e. Tenant has personnel conducting business
operations within any substantial portion of the Premises as opposed to
performing its Initial Leasehold Improvements therein) (the earlier to occur of
such dates being defined as the Commencement Date"). The Target Commencement
Date has been established assuming a Delivery Date (below defined) of April 15,
1998. In the event the Delivery Date occurs on other than April 15, 1998, the
October 15, 1998 date referred to in the immediately preceding sentences shall
be modified to reflect the date which is the last day of the six month period
immediately following the Delivery Date. The Delivery Date shall be defined as
the date Landlord delivers possession of the Premises to Tenant with the
Landlord's Work substantially completed. The "Termination Date" shall, unless
sooner terminated as provided herein, mean the last day of the Lease Term.
Notwithstanding the foregoing, if the Termination Date, as determined herein,
does not occur on the last day of a calendar month, the Lease Term shall be
extended by the number of days necessary to cause the Termination Date to occur
on the last day of the last calendar month of the Lease Term; recognizing that
the Base Rental for the partial calendar month at the termination of the Term
shall be at the same rate as payable during the immediately preceding full
month. Tenant shall pay Base Rental and Additional Base Rental for such
additional days at the same rate payable for the portion of the last calendar
month immediately preceding such extension. The term "Lease Year" shall refer to
each consecutive twelve (12) month period commencing with the Commencement Date
(if such date is the 15th day of a calendar month) or on the first day of the
calendar month closest to the date upon which such Commencement Date shall occur
(if such date is other than on the first day of a calendar month) and each
successive anniversary thereof; provided, however that the first Lease Year
shall commence as of the Commencement Date. It is agreed that in the case of a
Commencement Date on or after the 15th day of a month, the first day of the
month immediately following such Commencement Date shall be used for
determination of each new Lease Year.
5. "Premises" shall mean the area located on the Terrace Level of the
Building, as outlined on Exhibit A attached hereto. Landlord and Tenant hereby
stipulate and agree that the "Rentable Area of the Premises" shall mean 19,414
square feet.
6. "Permitted Use" shall mean general office use and/or any lawful
use or activity within the Premises in connection with the provision of
telecommunications services by Tenant, consistent with the operations of a
modern office building in the central business district of Washington, D.C.; and
for the installation, operation and maintenance of telecommunications equipment
and transmission facilities, including, but not limited to, a local and long
distance switch and radio transmission and reception of a non-broadcast nature,
node, customer co-location, cabling and related equipment, and general office
uses and other uses normally related thereto. Landlord agrees to cooperate with
Tenant, at Tenant's expense, in making application for and obtaining all
licenses, permits and any and all other necessary approvals that may be required
for Tenant's intended use of the Premises recognizing that Landlord makes no
representations or warranties with respect to Tenant's procurement of same.
7. "Security Deposit" shall mean the sum of Twenty-Three Thousand
Eight Hundred Sixty-Three and 04/100 Dollars ($23,863.04).
8. "TENANT'S Pro Rata Share" shall mean Four and Three One Hundredths
percent (4.03%), which is the quotient (expressed as a percentage), derived by
dividing the Rentable Area of the Premises by the Rentable Area of the Building
(namely 483,520 square feet). "TENANT'S Pro Rata Share of Additional Base
Rental" shall mean TENANTS Pro Rata Share of Expenses and TENANT'S Pro Rata
Share of Taxes, in the aggregate.
9. "Guarantor(s)" shall mean any party that agrees in writing to
guarantee the Lease. The parties acknowledge that as of the date hereof there
are no Guarantors of this Lease.
10. "Notice Addresses" shall mean the following addresses for Tenant
and Landlord, respectively:
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<PAGE>
Landlord: c/o S.C. Herman & Associates, Inc.
1120 Vermont Avenue, Suite 900
Washington, D.C. 20005
Tenant: 200 North LaSalle Street
Chicago, Illinois 60601
Attention: Mr. Brian Addy
With a copy after the Commencement Date:
c/o the Premises
Payments of Rent only shall be made payable to the order of:
1120 Vermont Avenue Associates
c/o S.C. Herman & Associates, Inc.
1120 Vermont Avenue, N.W., Suite 900
Washington, D.C. 20005
B. The following are additional definitions of some of the defined terms
used in the Lease.
1. Base Year shall refer to the following:
(i) "Expense Base Year" shall mean the calendar year 1998.
(ii) "Tax Base Year" shall mean the Taxes for the 2000 Tax Years
(i.e. the respective Tax Year commencing October 1, 1999)
2. "Basic Costs" shall mean all costs and expenses paid or incurred
in connection with operating, maintaining, repairing, managing and owning the
Building and the Property, as further described in Article IV hereof.
3. "Brokers" mean: Charles E. Smith Real Estate Services, L.P.
("Landlord's Broker") and Blake Construction Co., Inc. ("Tenant's Broker").
4. "Building Standard" shall mean the type, grade, brand, quality
and/or quantity of materials Landlord designates from time to time to be the
minimum quality and/or quantity to be used in the Building.
5. "Business Day(s)" shall mean Mondays through Fridays exclusive of
the normal business holidays ("Holidays") of New Year's Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Landlord, from
time to time during the Lease Term, shall have the right to designate additional
Holidays, provided that such additional Holidays are recognized by the federal
government as such within the District of Columbia.
6. "Common Areas" shall mean those areas provided for the common use
or benefit of all tenants generally and/or the public, such as corridors,
elevator foyers, common mail rooms, restrooms, lobby areas (whether at ground
level or otherwise) and other similar facilities.
7. "Landlord Work" shall mean the demolition of the existing
partitions within the Premises that Landlord shall perform in the Premises prior
to tender of possession. "Initial Leasehold Improvements" shall mean the work
that Tenant initially causes to be performed within the Premises prior to its
commencement of use and occupancy therein, pursuant to the Plans to be first
approved by Landlord.
8. "Maximum Rate" shall mean the lesser of (i) five percent (5%) per
annum in excess of the Prime Rate (below defined) (the "Lease Interest Rate") or
(ii) the maximum per
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<PAGE>
annum rate of interest permitted from time to time under applicable law. As used
herein, the expression "Prime Rate" shall be defined as the base rate of
interest per annum on corporate loans posted by at least 75% of the nation's
thirty (30) largest banks from time to time published by The Wall Street Journal
New York, New York, presently designated as the "Prime Rate" under the category
of "Money Rates," as the same may fluctuate from time to time. In the event more
than one base rate shall be so published, the "Prime Rate", for purposes hereof,
shall be the highest such published base rate. The rate of interest hereunder
shall be adjusted as and when any adjustment in such "Prime Rate" occurs.
9. "Normal Business Hours" for the Building shall mean 7:00 A.M. to
6:00 P.M. Mondays through Fridays, exclusive of Holidays.
10. "Property" shall mean the Building and the parcel(s) of land on
which it is located and the Building garage, if any, and all other improvements
owned by Landlord and serving the Building and the tenants thereof and the
parcel(s) of land on which they are located.
11. "Supplemental Rent" shall mean $ 13,440.00 per annum, to be
payable in equal monthly installments commencing as of the Commencement Date.
The Supplemental Rent shall increase by Three percent (3%) per annum,
compounded, the first such 3% increase being effective as of the 1 day of the
second Lease Year and continuing annually thereafter during the Lease Term and
each such increased amount shall be deemed to constitute the revised
Supplemental Rent until the next such increase.
II. LEASE GRANT.
Subject to and upon the terms herein set forth, Landlord leases to Tenant
and Tenant leases from Landlord the Premises, together with the right, in common
with others, to use the Common Areas.
III. ADJUSTMENT OF COMMENCEMENT DATE/POSSESSION.
A. The Lease Term, Commencement Date and Termination Date are to be
determined in accordance with subsection I.A.4. above. Promptly after the
determination of the Commencement Date, Landlord and Tenant shall enter into a
letter agreement (the Commencement Letters) on the form attached hereto as
Exhibit C setting forth the Commencement Date, the Termination Date and any
other dates that are affected by the adjustment of the Commencement Date.
Tenant, within seven (7) days after receipt thereof from Landlord, shall execute
the Commencement Letter and return the same to Landlord.
B. By taking possession of the Premises, Tenant is deemed to have
accepted the Premises and agreed that the Premises is in good order and
satisfactory condition, with no representation or warranty by Landlord as to the
condition of the Premises or the Building or suitability thereof for Tenant's
use. Tenant acknowledges that it shall accept possession of the Premises prior
to the Commencement Date in "as in" condition, without the requirement or
necessity that Landlord perform or provide any renovations, alterations or
modifications thereto whatsoever other than the Landlord's Work defined above.
C. Inasmuch as Tenant plans to perform its Initial Leasehold Improvements
within the Premises prior to the Commencement Date, Tenant covenants and agrees
that its possession of the Premises shall be subject to all the terms and
conditions of the Lease, with the understanding, however that no Base Rental nor
Additional Base Rental or Supplemental Rent shall be payable to Landlord prior
to the Commencement Date. Tenant shall, however, be liable for the cost of any
services (e.g. utilities at anytime beyond the Building standard services or
otherwise required or requested to be provided to Tenant to test its particular
equipment) or overtime HVAC or access requirements (recognizing that there
shall be no special charge for use of the freight or loading dock of the
Building during Normal Business Hours and that the charge for other than Normal
Business Hours shall be computed at the hourly overtime charge for the Building
engineer) that are requested by Tenant or are provided by Landlord to the
Premises or within the Building
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<PAGE>
as a result of Tenant's activities during the period of Tenant's possession
prior to the Commencement Date. The initial charge by Landlord for overtime
services in order to enable Tenant to access such areas shall be $75.00 per
hour, for a minimum of four (4) hours, with the understanding that there is no
such minimum hourly requirement with respect to an on-duty engineer who simply
extends his/her shift at the Building to accommodate the Tenant's overtime
request. It is understood and agreed by the parties that Landlord shall deliver
possession of the Premises to Tenant immediately following execution of this
Lease by both parties, with the Landlord's Work completed, in order to permit
Tenant to perform its Initial Leasehold Improvements. In addition, promptly
following execution of this Lease, and provided Tenant makes appropriate
arrangements with Landlord in advance, Landlord agrees that Tenant, its
architects, engineers, employees, agents and contractors shall be afforded
reasonable access to the Premises, and the Common Areas, together with the
rooftop and other portions of the Building (excluding portions occupied by other
tenants) in order to design, construct and install, as necessary, the Initial
Leasehold Improvements. However, nothing herein shall be construed as granting
Tenant the right to commence performance of its Initial Leasehold Improvements
prior to Landlord's written approval thereof and written approval of the
licensed contractor proposed to be engaged by Tenant for such purposes. Landlord
agrees not to unreasonably withhold, condition or delay its approval required
under the immediately preceding sentence, or of any items proposed by Tenant to
be made as part of the Initial Leasehold Improvements or the proposed
contractor. Tenant shall be required to deliver certificates of insurance naming
Landlord as an additional insured from all contractors prior to commencement by
such contractors of work or services at the Building, which insurance shall be
at limits consistent with industry standards for similar work.
IV. RENT.
A. During each calendar year, or portion thereof, falling within the
Lease Term, Tenant shall pay to Landlord the Base Rental and Supplemental Rent.
The Base Rental and Supplemental Rent shall be payable in equal monthly
installments during the Lease Term, commencing as of the Commencement Date. In
the event the Commencement Date shall occur on other than the first day of a
calendar month, the Base Rental and Supplemental Rent, and if applicable, the
Additional Base Rental, shall be pro-rated for such month based upon a thirty
(30) day month.
Tenant shall also pay during the Lease Term as Additional Base Rental
hereunder the sum of (1) Tenant's Pro Rata Share of the Taxes (hereinafter
defined) for the applicable calendar or fiscal year plus (2) Tenant's Pro Rata
Share of the Expenses (hereinafter defined). Tenant's Pro Rata Share of Taxes
and Tenant's Pro Rata Share of Expenses shall be computed separate and
independent of each other. Prior to the first anniversary of the Commencement
Date and prior to January 1 of each subsequent calendar year during the Lease
Term, or as soon thereafter as practical, Landlord shall provide to Tenant the
amount of estimated Additional Base Rental for the applicable calendar year and
Tenant's Pro Rata Share thereof. On or before the first day of each month during
such calendar year, Tenant shall pay to Landlord, as Additional Base Rental, a
monthly installment equal to one-twelfth of Tenant's Pro Rata Share of
Landlord's estimate. Landlord shall have the right from time to time during any
such calendar year to revise the reasonable estimate of Additional Base Rental
to be paid by Tenant for such year to reflect a new reasonable estimate, and
provide Tenant with a revised statement therefor, and thereafter the amount
Tenant shall pay each month shall be based upon such revised estimate. If
Landlord does not provide Tenant with an estimate of the Additional Base Rent by
January 1 of any calendar year, Tenant shall continue to pay a monthly
installment based on the previous year's estimate until such time as Landlord
provides Tenant with an estimate of such Additional Base Rental for the current
year. Upon receipt of such current year's estimate, an adjustment shall be made
for any month during the current year with respect to which Tenant paid monthly
installments of Additional Base Rental based on the previous year's estimate.
Tenant shall pay Landlord any underpayment within twenty (20) days after demand.
Any overpayment shall, at Landlord's option (unless otherwise below provided in
the next paragraph), be refunded to Tenant within ten (10) days from the date
determined by Landlord or credited against the installment of Additional Base
Rental due for the months immediately following the furnishing of such estimate;
provided that
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in the event Tenant shall then be in default hereunder, Landlord shall be
entitled to apply any such overpayment on account of other sums then due to
Landlord. Any overpayments of estimated Basic Costs (other than Taxes) shall
accrue interest at the Lease Interest Rate in the event Landlord's estimate
shall exceed 105% of the actual amount of the Excess obligation of Tenant. Any
amounts paid by Tenant based on any estimate shall be subject to adjustment
pursuant to the immediately following paragraph when actual Expenses are
determined for such calendar year. Tenant shall not be entitled to any credit or
offset if Taxes decrease below the Taxes for the Tax Base Year or Expenses
decrease below the Expenses for the Expense Base Year.
As soon as is practical following the end of each calendar year during the
Lease Term, but in no event later than May 15/th/ of the succeeding year,
Landlord shall furnish to Tenant a statement of Landlord's actual Basic Costs
and the actual Excess for the previous calendar year. If the estimated Excess
actually paid by Tenant for the prior year is in excess of Tenant's actual Pro
Rata Share of the Excess for such prior year, then Landlord shall apply such
overpayment against Additional Base Rental due or to become due hereunder,
provided if (i) the Lease Term expires prior to the determination of such
overpayment or provided (ii) prior to the expiration of the Lease Term, if
Tenant is not then in default, and if Tenant expressly requests in writing that
Landlord refund the amount by which the estimated excess payment exceeded the
actual Excess obligation, in lieu of obtaining a credit as aforesaid, in either
such event, Landlord shall refund such overpayment to Tenant after first
deducting the amount of any Rent due hereunder. Likewise, Tenant shall pay to
Landlord, within twenty (20) days after demand, any underpayment with respect to
the prior year, whether or not the Lease has terminated prior to receipt by
Tenant of a statement for such underpayment, it being understood that this
clause shall survive the expiration of the Lease.
B. Basic Costs shall mean all costs and expenses paid or incurred in each
calendar year in connection with operating, maintaining, repairing, managing and
owning the Building and the Property, in accordance with generally accepted
accounting or management practices, including, but not limited to, the
following:
1. All labor costs for all persons performing services required or
utilized in connection with the operation, repair, replacement and maintenance
of and control of access to the Building and the Property, including but not
limited to amounts incurred for wages, salaries and other compensation for
services, payroll, social security, unemployment and other similar taxes,
workers' compensation insurance, uniforms, training, disability benefits,
pensions, hospitalization, retirement plans, group insurance or any other
similar or like expenses or benefits. Costs for any employees providing services
on a part-time basis for the Building shall be pro-rated to reflect the part-
time nature of such services in order to avoid allocation of costs applicable to
other properties.
2. All reasonable management fees not to exceed four percent (4%) of
the gross rental receipts unless Landlord or a related entity provides such
services as below provided), the cost of equipping and maintaining a management
ounce the Building, (in the event there is a separate special management ounce
for solely the Building's operation therein) accounting services, legal fees not
attributable to leasing and collection activity, and all other administrative
costs relating to the Building and the Property. If management services are not
provided by a third party, Landlord shall be entitled to a management fee not to
exceed three percent of gross rental receipts of Landlord provided Landlord or
management companies owned by, or management divisions of, Landlord perform
actual management services of a comparable nature and type as nominally would be
performed by third parties with the understanding; however, that in the event
Landlord shall receive such management fee, Landlord shall waive any general
overhead of Landlord as to general management of the Building for which Landlord
receives such management fee, including, overhead charges for services such as
accounting, secretarial, bookkeeping, ounce rent for the management office,
office furniture, supplies and equipment.
3. Subject to the limitations below provided in the case of capital
improvements, all rental and/or purchase costs of materials, supplies, tools and
equipment used
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in the operation, repair, replacement and maintenance and the control of access
to the Building and the Property.
4. Subject to the limitations below provided in the case of capital
improvements, all amounts charged to Landlord by contractors and/or suppliers
for services, replacement parts, components, materials, equipment and supplies
furnished in connection with the operation, repair, maintenance, replacement of
and control of access to any part of the Building, or the Property generally,
including the heating, air conditioning, ventilating, plumbing, electrical,
elevator and other systems and equipment. At Landlord's option, major repair
items may be amortized over a period of up to five (5) years.
5. All premiums and deductibles paid by Landlord for fire and
extended coverage insurance, earthquake and extended coverage insurance,
liability and extended coverage insurance, rental loss insurance, elevator
insurance, boiler insurance and other insurance customarily carried from time to
time by landlords of comparable ounce buildings or required to be carried by
Landlord's Mortgagee.
6. Charges for all utilities to common areas of the Building,
including but not limited to water, electricity, gas and sewer, but excluding
those charges for which Landlord is otherwise specially entitled to be
reimbursed by tenants and also excluding those charges for electricity to any
tenantable space within the Building so long as Tenant is paying its own
electricity charges within the Premises. Should Tenant elect to obtain any
Building HVAC system services at the Premises, Tenant agrees that it shall pay a
reasonable separate additional charge to Landlord for such services, and such
charge shall be agreed upon by the parties prior to commencement of use by
Tenant of such service.
7. "Taxes," which for purposes hereof, shall mean: (a) all real
estate taxes and assessments on the Property, the Building or the Premises, and
taxes and assessments levied in substitution or supplementation in whole or in
part of such taxes, (b) all personal property taxes for the Building's personal
property, including license expenses, (c) all taxes imposed on services of
Landlord's agents and employees, (d) all other taxes, fees or assessments now or
hereafter levied by any governmental authority on the Property, the Building or
its contents or on the operation and use thereof (except as relate to specific
tenants), (e) all amounts paid to any business improvement district by Landlord
and (f) all costs and fees incurred in connection with seeking reductions in or
refunds in Taxes including, without limitation, any costs incurred by Landlord
to challenge the tax valuation of the Building or to sustain a proposed
assessment by reason of a challenge thereto from a citizens group or other
entity, but excluding income taxes. Taxes shall not include any inheritance,
estate, gift, franchise, transfer or recordation tax, or net income tax, but
shall include any gross rents tax or any tax computed based upon gross income or
gross rents (as opposed to net income unless such net income tax is imposed as a
substitution for real estate taxes). Taxes shall also be computed after
consideration of any abatements, reductions or credits received by Landlord
against such Taxes applicable to the particular period for which the abated,
reduced or credited Taxes were originally assessed (i.e. there shall be no
reduction within a current fiscal tax year in Taxes for a refund received
attributable to an earlier fiscal tax period). For the purpose of determining
real estate taxes and assessments for any given calendar year, the amount to be
included in Taxes for such year shall be as follows: (1) with respect to any
special assessment that is payable in installments, Taxes for such year shall
include the amount of the installment (and any interest) due and payable during
such year; and (2) with respect to all other real estate taxes, Taxes for such
year shall, at Landlord's election, include either the amount accrued, assessed
or otherwise imposed for such year or the amount due and payable for such year,
provided that Landlord's election shall be applied consistently throughout the
Lease Term. If a reduction in Taxes is obtained for any year of the Lease Term
during which Tenant paid its Pro Rata Share of Basic Costs, then Basic Costs for
such year will be retroactively adjusted and Landlord shall provide Tenant with
a credit, if any, based on such adjustment. Likewise, if a reduction is
subsequently obtained for Basic Costs for the Base Year (if Tenant's Pro Rata
Share is based upon increases in Basic Costs over a Base Year), Basic Costs for
the Base Year shall be restated and the Excess for all subsequent years re-
computed. Tenant shall pay to Landlord
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Tenant's Pro Rata Share of any such increase in the Excess within thirty (30)
days after Tenant's receipt of a statement therefor from Landlord.
8. All landscape expenses and costs of maintaining, repairing,
resurfacing and striping of the parking areas and garages of the Property, if
any.
9. Cost of all maintenance service agreements, including those for
equipment, alarm service, window cleaning, drapery or Venetian blind cleaning,
janitorial services, pest control, uniform supply, plant maintenance,
landscaping, and any parking equipment, excluding, however, costs incurred by
Landlord for char or cleaning services within any tenanted spaces of the
Building.
10. Cost of all other repairs, replacements and general maintenance
of the Property and Building neither specified above nor directly billed to
tenants; subject to the limitations expressly contained within this Article.
11. The amortized cost of capital improvements made to the Building
or the Property which are: (a) reduce operating expense costs or otherwise
improving the operating efficiency of the Property or Building; or (b) required
to comply with any laws, rules or regulations of any governmental authority
first applicable to the Property or Building subsequent to the date hereof or a
requirement of Landlord's insurance carrier. The cost of such capital
improvements (herein referred to collectively as "Permitted Capital
Expenditures") shall be amortized over the estimated useful life of such capital
improvement and shall, at Landlord's option, include interest at a rate that is
reasonably equivalent to the interest rate that Landlord would be required to
pay to finance the cost of the capital improvement in question as of the date
such capital improvement is performed provided if the payback period for any
capital improvement is less than five (5) years, Landlord may amortize the cost
of such capital improvement over the payback period.
12. Cost to furnish or maintain lobby attendants, security services
or personnel for the Building.
13. Any other expense or charge of any nature whatsoever which, in
accordance with general industry practice with respect to the operation of a
first-class ounce building, would be construed as an operating expense.
Basic Costs shall not include the following items:
(i) Any Capital Expenditures, including any capital replacement,
capital repair or capital improvement made to the Building, the
Common Areas, the land or the Project and any other expense
which would be deemed to be a capital expenditure under
generally accepted accounting principles, consistently applied,
other than (1) the Permitted Capital Expenditures (defined
above) or (2) costs for replacement parts or components
purchased and installed in the ordinary course.
(ii) Depreciation or amortization of the Building or its contents or
components;
(iii) Expenses incurred in leasing or obtaining new tenants or
retaining existing tenants, including leasing commissions,
legal expenses, advertising or promotion; costs incurred by
Landlord to assume existing leases or subleases of any new
tenants; costs to alter, change or renovate any tenant space in
the Building required to lease such space to a new tenant or in
connection with any renewal or extension of an existing lease;
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<PAGE>
(iv) Interest (other than interest under Permitted Capital
Expenditures above), principal or other costs, including legal
fees, associated with any mortgage, loan or refinancing of the
land, the Building, or the Common Areas, as well as costs
directly incurred in order to effect or negotiate any sale or
change of ownership of the Building, such as attorneys' fees,
title insurance premiums, and recording costs;
(v) Any personal property taxes of the Landlord for equipment or
items not used directly in the operation or maintenance of the
Building;
(vi) Contributions to reserves;
(vii) All bad debt loss, rent loss, or reserve for bad debt or rent
loss;
(viii) Any other cost or expense which, under generally accepted
accounting principles consistently applied or under prevailing
local management practices, would not be considered to be an
Expense of the Building.
(ix) Any unfunded pension or other benefits for personnel accruing
for periods prior to the Commencement Date;
(x) Interest or penalties incurred by reason of late payment,
unless Tenant has failed to timely pay its Base Rental or
Additional Base Rent hereunder during the thirty (30) day
period preceding the due date of such period;
(xi) Payments for rented equipment, the cost of which if purchased
would be excluded above;
(xii) Compensation of clerks or attendants in concessions operated
for profit by Landlord or any affiliate in the Building;
(xiii) Items includable in Taxes (as defined below) so as to avoid
duplication;
(xiv) Franchise, transfer, inheritance, or capital stock taxes, or
any other tax measured by the net income earned by Landlord;
(xv) Costs of repairs, restoration, replacements or other work
occasioned by (A) fire, windstorm or other casualty (whether
such destruction be total or partial) and (B) the exercise by
governmental authorities of the right of eminent domain
(whether such taking be total or partial);
(xvi) legal fees paid or incurred in connection with litigation with
tenants for any defaults under their leases and any legal fees
paid or incurred in leasing space to tenants (but not any
reasonable legal fees directly relating to the maintenance,
operation or repair of the Building);
(xvii) costs incurred by Landlord which are associated with the
operation of the business of the legal entity which
constitutes Landlord as the same is separate and apart from
the cost of the operation of the Building, including legal
entity formation and maintenance charges, legal entity
accounting (including the incremental accounting fees relating
to the operation of the Building to the extent incurred
separately in reporting operating results to the Building's
owners or
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<PAGE>
lenders), and legal fees (other than with respect to Building
operations properly includable in Expenses);
(xviii) amounts paid to any person, firm or corporation related to or
otherwise affiliated with Landlord or its management company
or any general partner or member of Landlord, or any
management fees whether paid to a related or otherwise
affiliated party or not, but which are in excess of arms-
length competitive prices paid in the Washington, D.C.
metropolitan area for the services or goods provided;
(xix) Ground rent payments to any ground lessor; and
(xx) the costs of any items for which Landlord (a) is reimbursed
by insurance or parties other than tenants of the Building
pursuant to operating expense provisions included in their
respective lease or (b) would have been covered by insurance
proceeds had Landlord maintained the insurance required to be
maintained by Landlord under this Lease.
If the Building is not at least ninety-five percent (95%) occupied during any
calendar year of the Lease Term (including the Base Year) or if Landlord is not
supplying services to at least ninety-five percent (95%) of the total Rentable
Area of the Building at any time during any calendar year of the Lease Term,
actual Basic Costs which vary with occupancy (other than Taxes) for purposes
hereof shall be determined as if the Building had been ninety-five percent (95%)
occupied and Landlord had been supplying services to ninety-five percent (95%)
of the Rentable Area of the Building during such year (recognizing, however that
there shall be no such gross-up for any electricity or char and cleaning
services to the extent same are excluded from the definition of Expenses". If
Tenant pays for its Pro Rata Share of Basic Costs based on increases over a
"Base Year" and Basic Costs for any calendar year during the Lease Term are
determined as provided in the foregoing sentence, Basic Costs for such Base Year
shall also be determined as if the Building had been ninety-five percent (95%)
occupied and Landlord had been supplying services to ninety-five percent (95%)
of the Rentable Area of the Building (recognizing, however that there shall be
no such gross-up for any electricity or char and cleaning services to the extent
same are excluded from the definition of "Expenses" above). Any necessary
extrapolation of Basic Costs under this Article shall be performed by adjusting
the cost of those components of Basic Costs that are impacted by changes in the
occupancy of the Building to the cost that would have been incurred if the
Building had been ninety-five percent (95%) occupied and Landlord had been
supplying services to ninety-five percent (95%) of the Rentable Area of the
Building.
C. If Basic Costs for any calendar year increase by more than five
percent (5%) over Basic Costs for the immediately preceding calendar year,
Tenant, within ninety (90) days after receiving Landlord's statement of actual
Basic Costs (inclusive of those which vary with occupancy) for a particular
calendar year, shall have the right to provide Landlord with written notice (the
Review Notice") of its intent to review Landlord's books and records relating to
the Basic Costs for such calendar year. Within a reasonable time after receipt
of a timely Review Notice, Landlord shall make such books and records available
to Tenant or Tenant's agent for its review at either Landlord's home ounce or at
the office of the Building, provided that if Tenant retains an agent to review
Landlord's books and records for any calendar year, such agent must (i) be a CPA
firm or an in-house accountant or finance department employee of Tenant, (ii)
not be compensated on a contingency basis and (iii) execute a copy of a
confidentiality agreement with respect to such audit. Tenant shall be solely
responsible for any and all costs, expenses and fees incurred by Tenant or
Tenant's agent in connection with such review. If Tenant elects to review
Landlord's books and records, within thirty (30) days after such books and
records are made available to Tenant, Tenant shall have the right to give
Landlord written notice stating in reasonable detail any objection to Landlord's
statement of actual Basic Costs for such calendar year. If Tenant fails to give
Landlord written notice of objection within such thirty (30) day period or fails
to provide Landlord with a Review Notice within the ninety (90) day period
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<PAGE>
provided above, Tenant shall be deemed to have approved Landlord's statement of
Basic Costs in all respects and shall thereafter be barred from raising any
claims with respect thereto. Upon Landlord's receipt of a timely objection
notice from Tenant, Landlord and Tenant shall work together in good faith to
resolve the discrepancy between Landlord's statement and Tenant's review. If
Landlord and Tenant determine that Basic Costs for the calendar year in question
are less than reported, Landlord shall provide Tenant with a credit against
future Additional Base Rental in the amount of any overpayment by Tenant.
Likewise, if Landlord and Tenant determine that Basic Costs for the calendar
year in question are greater than reported, Tenant shall forthwith pay to
Landlord the amount of underpayment by Tenant with the understanding that there
shall be no interest or late charge added thereto at the time same is billed to
Tenant by reason of the failure of Tenant to previously have paid same when the
Excess was billed for such audited period. Any information obtained by Tenant
pursuant to the provisions of this Section shall be treated as confidential.
Notwithstanding anything herein to the contrary, Tenant shall not be permitted
to examine Landlord's books and records or to dispute any statement of Basic
Costs unless Tenant has paid to Landlord the amount due as shown on Landlord's
statement of actual Basic Costs, said payment being a condition precedent to
Tenant's right to examine Landlord's books and records.
D. Tenant covenants and agrees to pay to Landlord during the Lease Term,
without any setoff or deduction whatsoever, the full amount of all Base Rental
and Additional Base Rental due hereunder. In addition, Tenant shall pay and be
liable for, as additional rent, all rental, sales and use taxes or other similar
taxes, if any, levied or imposed by any city, state, county or other
governmental body having authority, such payments to be in addition to all other
payments required to be paid to Landlord by Tenant under the terms and
conditions of this Lease. Any such payments shall be paid concurrently with the
payments of the Rent on which the tax is based. The Base Rental, Tenant's Pro
Rata Share of Basic Costs and any recurring monthly charges due hereunder shall
be due and payable in advance on the first day of each calendar month during the
Lease Term without demand, provided that the installment of Base Rental for the
first full calendar month of the Lease Term shall be payable upon the execution
of this Lease by Tenant. All other items of Rent shall be due and payable by
Tenant on or before ten (10) days after written billing by Landlord. If the
Lease Term commences on a day other than the first day of a calendar month or
terminates on a day other than the last day of a calendar month, then the
monthly Base Rental and Tenant's Pro Rata Share of Basic Costs for such month
shall be prorated for the number of days in such month occurring within the
Lease Term based on a fraction, the numerator of which is the number of days of
the Lease Term that fell within such calendar month and the denominator of which
is thirty (30). All such payments shall be by a good and sufficient check. No
payment by Tenant or receipt or acceptance by Landlord of a lesser amount than
the correct amount of Rent due under this Lease shall be deemed to be other than
a payment on account of the earliest Rent due hereunder, nor shall any
endorsement or statement on any check or any letter accompanying any check or
payment be deemed an accord and satisfaction, and Landlord may accept such check
or payment without prejudice to Landlord's right to recover the balance or
pursue any other available remedy. The acceptance by Landlord of any Rent on a
date after the due date of such payment shall not be construed to be a waiver of
Landlord's right to declare a default for any other late payment. Tenant's
covenant to pay Rent shall be independent of every other covenant set forth in
this Lease.
E. All Rent not paid within five (5) days of the date when due and
payable shall bear interest from the date due until paid at the Maximum Rate. In
addition, if Tenant fails to pay any installment of Rent within five (5)
business days from the date when due and payable hereunder, a service fee equal
to five percent (5%) of such unpaid amount will be due and payable immediately
by Tenant to Landlord. Notwithstanding the foregoing, Landlord shall waive the
first such late payment charge in any Lease Year provided Landlord receives from
Tenant the late payment within three (3) business days following Landlord's
written notice to Tenant of Landlord's failure to timely receive the late
payment when initially due.
V. USE.
The Premises shall be used for the Permitted Use and for no other purpose.
Landlord hereby consents to the use by Tenant of the Permitted Use. Tenant
agrees not to use or permit the
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<PAGE>
use of the Premises for any purpose which is illegal, dangerous to life, limb or
property or which, in Landlord's reasonable opinion, creates a nuisance or which
would increase the cost of insurance coverage with respect to the Building.
Tenant shall conduct its business and control its agents, servants, contractors,
employees, customers, licensees, and invitees in such a manner as not to
interfere with, annoy or disturb other tenants, or in any way interfere with
Landlord in the management and operation of the Building. Tenant will maintain
the Premises in a clean and healthful condition, and comply with all laws,
ordinances, orders, rules and regulations of any governmental entity with
reference to the operation of Tenant's business and to the use, condition,
configuration or occupancy of the Premises, including without limitation, the
Americans with Disabilities Act (collectively referred to as "Laws"). Tenant,
within ten (10) days after receipt thereof, shall provide Landlord with copies
of any notices it receives with respect to a violation or alleged violation of
any Laws. Tenant will comply with the rules and regulations of the Building
attached hereto as Exhibit B and such other rules and regulations adopted and
altered by Landlord from time to time and will cause all of its agents,
servants, contractors, employees, customers, licensees and invitees to do so.
Following lease-up of the balance of the Building presently vacant, Landlord
agrees that It shall be responsible to assure that Building's common areas
servicing the Tenant include fire/life safety systems to the extent necessary
and required by the Americans with Disabilities Act and any regulations
promulgated thereunder. Nothing contained herein shall be deemed to affect the
representations of Landlord made under section XXVIII below.
VI. SECURITY DEPOSIT.
Simultaneously with Tenant's execution of this Lease, Tenant shall deposit
with Landlord the Security Deposit (as set forth in Section I.A.7) as a security
deposit which shall be security for the performance by Tenant of all of Tenant's
obligations, covenants, conditions and agreements under this Lease. Landlord
shall maintain such security deposit in an interest bearing escrow account to be
maintained by Landlord which shall bear interest at the pass-book rate paid by
Landlord's designated bank. Within approximately thirty (30) days after the
later of the expiration or earlier termination of the Lease Term or Tenant's
vacating the Premises, Landlord shall return such security deposit to Tenant
(inclusive of interest accrued thereon), less such portion thereof as Landlord
shall have appropriated to satisfy any of Tenant's obligations, or any default
by Tenant, under this Lease. Notwithstanding the foregoing, provided there have
been no Monetary Defaults (as defined in Section XXII below) remaining uncured
hereunder, following the giving of written notice and expiration of the
applicable cure period prior to December 31, 2005, Landlord agrees that the
Security Deposit, inclusive of all interest thereon then held by Landlord, shall
be resumed to Tenant within fifteen (15) days following written demand for same
from Tenant. If there shall be any default under this Lease by Tenant, then
Landlord shall have the right, but shall not be obligated, to use, apply or
retain all or any portion of the security deposit for the payment of any (a)
Base Rental, Additional Rental or any other sum as to which Tenant is in
default, or (b)amount Landlord may spend or become obligated to spend, or for
the compensation of Landlord for any losses incurred, by reason of Tenant's
default (including, but not limited to, any damage or deficiency arising in
connection with the reletting of the Premises). If any portion of the security
deposit is so used or applied, then within three (3) business days after
Landlord gives written notice to Tenant of such use or application, Tenant shall
deposit with Landlord such cash in an amount equal to that expended from the
Security Deposit by Landlord, and Tenants failure to do so shall constitute an
Event of Default under this Lease.
VII. SERVICES TO BE FURNISHED BY LANDLORD.
A. Landlord, as part of Basic Costs (except as otherwise provided),
agrees to furnish Tenant the following services:
1. Hot and cold water for use in the lavatories on the floor on
which the Premises is located. If Tenant desires water in the Premises for any
approved reason, including a private lavatory or kitchen, cold water shall be
supplied, at Tenant's sole cost and expense, from the Building water main
through a line and fixtures installed at Tenant's sole cost and expense with the
prior reasonable consent of Landlord. If Tenant desires hot water in the
Premises, Tenant, at
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its sole cost and expense and subject to the prior reasonable consent of
Landlord, may install a hot water heater in the Premises. Tenant shall be
solely responsible for maintenance and repair of any such hot water heater.
2. Central heat and air conditioning is not furnished by Landlord.
Should Landlord be requested to provide central heat and air conditioning, all
costs, including, but not limited to, installation, repair, maintenance,
utilities (i.e. gas, water, electricity) shall be at Tenant's sole expense. If
Tenant desires to utilize the base building HVAC System and/or the 24-hour
cooling system central plants, all services, including, but not limited to
repair, maintenance, utilities or installation shall be metered and/or
calculated by Landlord to identify the costs associated with such service for
reimbursement to Landlord, together with a customary overhead charge and fee to
Landlord or its agent as reasonably determined by Landlord from time to time.
Temperatures and hours of operation within the Premises shall be at Tenant's
discretion. Temperatures and hours of operation within the building core/public
space shall be at the building standard temperatures and during Business Hours.
At the option of Tenant, maintenance and/or repair of Tenant's special equipment
by Landlord shall be available at a reasonable fee to be determined by Landlord
upon request.
3. Maintenance and repair of all Common Areas in the manner and to
the extent reasonably deemed by Landlord to be standard for buildings of
similar class, size, age and location.
4. Tenant shall furnish at its sole cost and expense janitor service
(char and cleaning) for the Premises from its own service contractor, or at
Tenant's option from Landlord's contractor. Landlord shall retain the right to
approve the particular service contractor, which approval shall not be
unreasonably withheld, conditioned or delayed.
5. Passenger elevator service in common with other tenants of the
Building.
B. The failure by Landlord to any extent to furnish, or the interruption
or termination of, any services in whole or in part, resulting from adherence to
laws, regulations and administrative orders, wear, use, repairs, improvements,
alterations or any causes beyond the reasonable control of Landlord shall not
render Landlord liable in any respect nor be construed as a constructive
eviction of Tenant, nor give rise to an abatement of Rent, nor relieve Tenant
from the obligation to fulfill any covenant or agreement hereof. Should any of
the equipment or machinery used in the provision of such services for any cause
cease to function properly, Landlord shall use reasonable diligence to repair
such equipment or machinery.
C. Tenant expressly acknowledges that if Landlord, from time to time,
elects to provide a lobby attendant or security services, Landlord shall not be
deemed to have warranted the efficiency of any lobby attendant, security
personnel, service, procedures or equipment and Landlord shall not be liable in
any manner for the failure of any such security personnel, services, procedures
or equipment to prevent or control, or apprehend anyone suspected of personal
injury, property damage or any criminal conduct in, on or around the Property.
D. Notwithstanding the foregoing, in the event the Premises shall be
without electricity (i.e. there shall be no power within the Premises) by
reason of matters within the control of Landlord for more than five (5)
consecutive business days, and if as a result thereof Tenant shall suspend using
the Premises for the conduct of its business operations, then and in such event
as the sole and exclusive remedy available to Tenant, Landlord agrees to abate
Base Rental and Additional Base Rental for the period of time during which such
failure shall continue.
VIII. LEASEHOLD IMPROVEMENTS.
Any trade fixtures, unattached and movable equipment or furniture
(including without limitation Tenant's equipment used to provide
telecommunication services), or other personally brought into the Premises by
Tenant ("Tenant's Property") shall be owned and insured by Tenant.
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<PAGE>
Tenant shall remove all such Tenant's Property from the Premises in accordance
with the terms of Article XXXVI hereof. Any and all alterations, additions and
improvements to the Premises, including any built-in furniture (collectively,
Leasehold Improvements") shall be owned by Landlord (excluding therefrom any
telecommunications equipment or fixtures related to the operation of Tenant's
business) and shall remain upon the Premises, all without compensation,
allowance or credit to Tenant. Landlord may, nonetheless, at any time prior to,
or within six (6) months after, the expiration or earlier termination of this
Lease or Tenant's right to possession, require Tenant to remove any Leasehold
Improvements performed by or for the benefit of Tenant and all electronic, phone
and data cabling as are designated by Landlord at the time of Landlord's consent
thereto (the "Required Removables") at Tenant's sole cost. In the event that
Landlord so elects, Tenant shall remove such Required Removables within ten (10)
days after notice from Landlord, provided that in no event shall Tenant be
required to remove such Required Removables prior to the expiration or earlier
termination of this Lease or Tenant's right to possession. In addition to
Tenant's obligation to remove the Required Removables, Tenant shall repair any
damage caused by such removal and perform such other work as is reasonably
necessary to restore the Premises to a broom-clean condition. If Tenant fails
to remove any specified Required Removables or to perform any required repairs
and restoration within the time period specified above, Landlord, at Tenant's
sole cost and expense, may remove, store, sell and/or dispose of the Required
Removables and perform such required repairs and restoration work. Tenant,
within ten (10) days after demand from Landlord, shall reimburse Landlord for
any and all reasonable costs incurred by Landlord in connection with the
Required Removables.
IX. GRAPHICS.
Landlord shall provide and install, at Landlord's cost, any suite numbers
and Tenant identification on the exterior of the Premises using the standard
graphics for the Building. Tenant shall not be permitted to install any signs or
other identification without Landlord's prior written consent. Landlord's
consent shall not be unreasonably withheld in the case of any Building interior
signage on the Terrace Level of the Building. Any other signage within the
Building shall be in Landlord's sole discretion. Landlord shall reasonably
consider the proposed use by Tenant at Tenant's cost of an exterior signbox
containing signage identifying Tenant's presence in the Building.
X. REPAIRS AND ALTERATIONS.
A. Except to the extent such obligations are imposed upon Landlord
hereunder, Tenant, at its sole cost and expense, shall perform all maintenance
and repairs to the Premises as are necessary to keep the same in good condition
and repair throughout the entire Lease Term, reasonable wear and tear excepted.
Tenant's repair and maintenance obligations with respect to the Premises shall
include, without limitation, any necessary repairs with respect to: (1) any
carpet or other floor covering, (2) any interior partitions, (3) any doors, (4)
the interior side of any demising walls, (5) any telephone and computer cabling
that serves Tenant's equipment exclusively, (6) any supplemental air
conditioning units, private showers and kitchens, including any plumbing in
connection therewith, and similar facilities serving Tenant exclusively, and (7)
any alterations, additions or improvements performed by contractors retained by
Tenant. All such work shall be performed in accordance with section X.B. below
and the rules, policies and procedures reasonably enacted by Landlord from time
to time for the performance of work in the Building. Absent circumstances
believed by Landlord to constitute an emergency, Landlord shall use reasonable
efforts to conduct such entries in a manner and at such times so as to minimize
interference with Tenant's business operations within the Premises. However, in
the event Tenant requests Landlord to perform any such entries during after
business hours, Tenant agrees to pay all additional costs incurred for overtime
service. If after written notice to Tenant (except in cases where such notice
would not be practicable in Landlord's reasonable opinion), Tenant fails to make
any necessary repairs to the Premises, Landlord may, at its option, make such
repairs, and Tenant shall pay the cost thereof to the Landlord on demand as
Additional Base Rental, together with an administrative charge in an amount
equal to ten percent (10%) of the cost of such repairs. Landlord shall, at its
expense (except as included in Basic Costs), keep and maintain in good repair
and working order, and make all repairs to and perform necessary maintenance
upon: (a) all
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structural elements of the Building; and (b) all mechanical, electrical and
plumbing systems that serve the Building in general; and (c) the Building
facilities common to all tenants including, but not limited to, the ceilings,
walls and floors in the Common Areas.
B. Tenant shall not make or allow to be made any alterations, additions
improvements (collectively "Alterations") to the Premises without first
obtaining the written consent of Landlord in each such instance which consent
shall not be unreasonably withheld; provided, however, that unless Tenant shall
first give assurances reasonably acceptable to Landlord for payment or avoidance
of such increased cost without expense to Landlord, Landlord shall not be deemed
unreasonable for withholding approval of any Alterations which will require or
result in (i) unusual expense to readapt the Premises to normal office use on
Lease termination, (ii) an increase in the cost of construction or of insurance
or real estate taxes on the building or of Landlord's services called for under
this Lease, or (iii) modification of mechanical, electrical or other systems
installed in the Premises. Prior to commencing any such work and as a condition
to obtaining Landlord's consent, Tenant must furnish Landlord with plans and
specifications reasonably acceptable to Landlord; names and addresses of
contractors reasonably acceptable to Landlord; copies of contracts; necessary
permits and approvals; evidence of contractor's and subcontractors insurance in
accordance with Article XVI section B. hereof; and payment bond or other
security, all in form and amount satisfactory to Landlord (provided Landlord
shall waive the requirement for bond or security in the event the Tenant has
timely paid the Basic and Additional Rents during the preceding twelve month
period). Landlord agrees to respond to any complete working drawings (as opposed
to schematics) necessary to construct Tenant's Premises received by Landlord
from Tenant within fifteen (15) days following receipt advising Tenant of
Landlord's approval, or if appropriate, disapproval, and explanation therefor.
If Landlord fails to approve or disapprove Tenant's complete working drawings
for the Initial Leasehold Improvements within such fifteen (15) day period, then
Tenant shall have the right to terminate this Lease by delivering written notice
to Landlord within five (5) business days following the expiration of such
fifteen (15) day period. If Landlord reasonably disapproves of any of Tenant's
plans, specifications, and working drawings; Landlord shall advise Tenant of the
required revisions concurrently with such disapproval. After being so advised by
Landlord, Tenant shall promptly submit a redesign, addressing the revisions
required by Landlord, for Landlord's reasonable approval. Landlord shall then
have five (5) days to approve or disapprove any re-submittal of Tenant's
complete working drawings, and failure to respond within such five (5) day
period shall be deemed Landlord's approval of such re-submitted complete working
drawings. If Landlord disapproves Tenant's redesign of the Initial Leasehold
Improvements within such five (5) day period, then, Tenant shall have the right
to terminate this Lease within five (5) days following receipt of such
disapproval. Other than with respect to (i) any claims arising by reason of the
entry into the Building by Tenant or its agents, employees or contractors prior
to the termination of this Lease by Tenant, (ii) the obligation to repair or
restore the Premises to the extent Tenant has made any alterations or
modifications thereto, and (iii) the requirement that Tenant reimburse Landlord
for the reasonable costs of reviewing the plans or drawings, all further
obligations of the Tenant hereunder shall be of no further force or effect. In
the event that Tenant is not able to submit complete working drawings to
Landlord by May 15, 1998, Tenant shall be entitled to submit progress prints
(50% CD's) to Landlord for response. Tenant shall be entitled to rely upon
Landlord's response to these progress prints in preparing the complete working
drawings (i.e Landlord will approve the complete working drawings to the extent
same are consistent with the requirements and modifications as designated in the
Landlord approved progress prints. Notwithstanding the foregoing, in no event
shall Tenant be entitled to terminate this Lease subsequent to June 1, 1998,
time being of the essence, irrespective of the date Tenant's working drawings
(complete or progress prints) are furnished to Landlord. All such improvements,
alterations or additions shall be constructed in a good and workmanlike manner
using Building Standard materials or other new materials of equal or greater
quality. Landlord, to the extent reasonably necessary to avoid any disruption to
the tenants and occupants of the Building, shall have the right to reasonably
designate the time when any such alterations, additions and improvements may be
performed (taking into consideration the rights of other tenants and affect on
the operations of the Building) and to otherwise designate reasonable rules,
regulations and procedures for the performance of work in the Building. Upon
completion, Tenant shall furnish "as-built" plans, contractor's affidavits and
full and final waivers of lien and receipted bills covering all labor and
materials. All
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improvements, alterations and additions shall comply with all insurance
requirements, codes, ordinances, laws and regulations, including without
limitation, the Americans with Disabilities Act. Tenant shall reimburse
Landlord upon demand as Additional Base Rental for all sums, if any, expended by
Landlord for third party examination of the architectural, mechanical, electric
and plumbing plans for any alterations, additions or improvements in those
instances where such alterations, additions or improvements are beyond typical
ounce building renovations, or where special review is required because of the
particular change proposed by Tenant. In addition, if Landlord so requests,
Landlord shall be entitled to oversee the construction of any alterations,
additions or improvements that may affect the structure of the Building or any
of the mechanical, electrical, plumbing or life safety systems of the Building.
In the event Landlord elects to oversee any such work, Landlord shall be
entitled to receive a reasonable hourly fee for such applicable services and
Tenant shall reimburse Landlord no later than thirty (30) days following written
demand those amounts requested by Landlord for such hourly fee as Additional
Base Rental. Landlord's approval of Tenant's plans and specifications for any
work performed for or on behalf of Tenant shall not be deemed to be a
representation by Landlord that such plans and specifications comply with
applicable insurance requirements, building codes, ordinances, laws or
regulations or that the alterations, additions and improvements constructed in
accordance with such plans and specifications will be adequate for Tenant's use.
It is expressly recognized by Landlord that Tenant's operations shall require
installation of various equipment such as back-up power generators, supplemental
air conditioning and wiring and cabling. Landlord shall reasonably consider all
requests of Tenant to install such items, subject to the various provisions
contained in this Article and the remaining provisions of this Lease.
C. It is agreed that with respect to the Initial Leasehold Improvements:
1. All of Tenant's construction activities shall be scheduled at
such times and in such manner by Tenant so as to minimize unreasonable
interference with other tenants, and to avoid disruption in the provision of
Building services to such tenants during Business Hours.
2. Tenant shall be entitled to use the service elevator on a
scheduled basis (as to date and time) with Landlord for the purpose of
installing such equipment scheduled (as to approximate size and weight) with
Landlord in advance. There shall be no additional charge for such use during
Business Hours.
3. Landlord shall not unreasonably delay or withhold its approval of
any proposed plans or specifications, nor of the particular contractor proposed
by Tenant to perform such work. Landlord shall be entitled to also approve in
advance in writing any subcontractors or sub-subcontractors proposed to be
engaged by Tenant, its contractor or any subcontractor performing work on or to
any Building system, or performing connections to any utility, fire or life
safety system of the Building.
D. During the Lease Term, Tenant is also hereby granted the right to
install telecommunications wiring and cabling (including, without limitation,
supporting structures such as conduits, trenches, backboards, slots, sleeves,
utility spaces, interconnecting locations and facilities (recognizing, however
that Tenant shall be required to use existing risers, chaseways, shafts, ducts,
and conduits on a non-exclusive basis), and related service locations
(collectively the Wiring and Cablings).
(i) Tenant may from time to time install, maintain, repair and
replace any or all the Wiring and Cabling in accordance with plans and
specifications from time to time provided by Tenant to Landlord and approved by
Landlord, provided that Landlord shall not be the guarantor of, or responsible
for, the correctness or accuracy of those plans and specifications or for their
compliance with any applicable law, rule or regulation of any governmental or
quasi-governmental authority. All costs associated with the installation,
maintenance, repair, replacement and removal of the Wring and Cabling,
including, without limitation, all design and engineering costs and governmental
charges, and insurance costs, shall be paid by Tenant. Landlord shall have no
liability, obligation or responsibility with respect to any actual or alleged
failure to perform any of its obligations under this section or under comparable
provisions of
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leases with other tenants in the Building, unless Landlord shall have acted with
negligence or willful misconduct in connection therewith. Landlord shall have
no liability, obligation or responsibility with respect to any service actually
or allegedly performed or not performed by the third person, unless Landlord
shall have acted with negligence or willful misconduct in selection of the third
person.
(ii) To the extent that Tenant shall cause any Wiring or Cabling
(including, without limitation, any and all supporting structures) to be
installed, pulled or operated in the Building or the Premises or any other
tenant premises, or between the premises of any other tenant and the Premises
(including, without limitation, any telecommunications equipment installed by or
on behalf of Tenant on the roof or elsewhere in the Building), Tenant shall be
responsible for any and all costs associated therewith, as well as compliance
therewith with all applicable laws, rules and regulations of any governmental or
quasi-governmental authority, as well as with all reasonable rules and
regulations of Landlord. Tenant shall not interfere with the rights of other
tenants in the Building to use of areas for wiring or cabling and access to
telecommunications providers. Any such Tenant-installed wiring or cabling (and
supporting structures) shall be removed and the Building restored by Tenant at
Tenant's expense upon expiration or earlier termination of this Lease, or as
reasonably required by Landlord.
(iii) Subject to the Landlord's reasonable rules and regulations for
the Building in effect from time to time, and Landlord's right to review and
approve the number, area and location of any radio-telecommunications or other
telecommunications equipment proposed to be installed by Tenant (which approval
shall not be unreasonably withheld, conditioned or delayed). Tenant shall also
have access to, and the right to use a portion of the roof-top area to be
mutually agreed upon by Landlord and Tenant on the south side of the roof,
permitting a nine (9) inch dish (herein the "Roof Area") in area. Provisions
dealing with access to such areas and to other areas as required by Tenant are
described more fully in Article XXXVIII below. There shall be no additional
rent charged to Tenant for use of the Roof Area for such purposes. Landlord and
Tenant agree that Tenant's communication equipment will require Tenant to use
the Building shafts, risers, chases, utility entrances, equipment rooms and
distribution areas or conduits between the Premises and other parts of the
Building (including the roof), and Tenant shall be afforded the right to use or
construct conduits to connect Tenant's telecommunications systems and services
to the roof. In addition, Tenant shall be entitled to the use of that area
behind the Building described on Exhibit "A-1" attached hereto (the "Outside
Area") for the purpose of locating therein a minimum 500 KVA emergency power
generator (with appropriate conduit, wiring and cabling), and other facilities
consistent with Tenant's use of its Premises for continuous uninterrupted
telecommunications services, all at Tenant sole cost, risk and expense
(including all costs of installation, maintenance and operation).
Notwithstanding the foregoing, none of Tenant's Outside Area equipment may
obstruct views of any second floor (or higher) tenant in the Building. Tenant
shall pay the Supplemental Rent for use of the Outside Area. Tenant shall have
the right to conduct periodic tests of the emergency power generator after
normal business hours at any time provided Landlord is given reasonable advance
notice (of not less than 48 hours) and that such test will not interfere with
operations of the other tenants or the Building. Landlord shall work with
Tenant to establish a time mutually acceptable during non-Business hours to
accommodate Tenant's testing. However, routing of conduit, cable, pipes, and
all other devices shall be coordinated with Landlord and restricted to areas
that do not interfere with the operations of the Building or any of its other
tenants.
Tenant shall be entitled to use the Building water tower to obtain
sufficient condenser water to provide up to 100 tons of cooling for the
Premises, subject to Tenant's obligation to compensate Landlord for use of such
tower and provision of the condenser water pursuant to Exhibit D hereof.
In addition to any other rules and regulations Landlord may reasonably
establish from time to time governing of the Wiring and Cabling, Tenant shall
comply with the following with respect to the roof of the Building: (i) Tenant's
use of any portions of the Building beyond the Premises shall be at Tenant's
sole risk, cost and expense and Landlord shall have no responsibility therefore
and no liability on account of any damage to or interference with Tenant's
equipment (excepting damage caused solely by reason of any willful misconduct of
Landlord or intentional disregard of
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Tenant's rights regarding Landlord access provided under this Lease); (ii)
Tenant shall be solely responsible for installing, operating, maintaining and
repairing its equipment at its own expense in a manner that causes no
interference with or damage to the roof itself or any other person's use of the
roof; (iii) Tenant shall perform all of such work in such a way as to not damage
any Building systems or void any warranty or guaranty relating thereto, and
Landlord may require that Tenant use Building contractors (or other contractors
reasonably approved by Landlord) in performing such work; (iv) Tenant shall be
responsible for obtaining and paying for all governmental licenses and permits
required by law (and shall deliver copies thereof to Landlord as a condition
precedent to its use of the roof and for complying with all applicable laws
relating to its exercise of said right; and (v) Tenant shall remove all of its
rooftop equipment no later than thirty (30) days following the expiration of the
Lease Term and shall repair any damage resulting from such removal and restore
the roof to the condition they were in (ordinary wear and tear and damage by
fire or other casualty excepted) before Tenant exercised said right.
Tenant's rights under this subsection D may not be separately assigned or
subleased to a party other than a party succeeding to all of the right, title or
interest of Tenant under this Lease.
Landlord's rights to establish rules and regulations under the foregoing
provisions of this Section D shall be exercised in such a manner so as to avoid
material adverse impact on Tenant's permitted operations within the Building.
XI. USE OF ELECTRICAL SERVICES BY TENANT.
A. All electricity used by Tenant in the Premises shall be paid for by
Tenant either directly to the utility service provider or as additional rent to
Landlord. Tenant also shall be responsible for all costs incurred by reason
thereof, including, without limitation, costs to furnish and install any
separate submeters, checkmeters, utility deposits, etc. Landlord shall be
entitled to establish such conditions as Landlord reasonably elects (including
the installation of utility service upgrades, air handlers or cooling units),
and all such additional usage (to the extent permitted by law), installation and
maintenance thereof shall be paid for by Tenant as Additional Base Rental.
Tenant shall be required to separately meter electrical usage for the Premises
at all times during the Lease Term. Tenant shall be solely responsible for any
increased demand charges resulting to Landlord for the Building by reason of
Tenant's consumption of electricity within the Premises. Tenant shall be
afforded access to the Building's electrical supply to obtain up to 500
kilowatts of power at the Premises.
B. If Landlord generates or distributes electric current for the
Building, Tenant shall obtain all current from Landlord and pay as Additional
Base Rental Landlord's charges therefor, provided, however, the charges to
Tenant shall not exceed the rate that would be charged Tenant if billed directly
by the local utility for the same services. Landlord may cease to furnish
electricity upon thirty (30) days' prior written notice, provided within the
thirty (30) days' Landlord connects the Building to a comparable source of
electric supply. It is expressly agreed that in the event the utility company
shall require Landlord to either generate or distribute electric current to
Tenant or, to require Tenant to obtain such electric current directly from the
utility provider, Tenant shall bear the cost incurred in connection with such
provision of electric current or change of electric current source.
It is expressly agreed that Tenant shall have the right, on a scheduled
basis with Landlord, to exercise its generator weekly; recognizing that any such
exercise by Tenant shall not interfere with Building operations or other
tenants.
XII. ENTRY BY LANDLORD.
Landlord and its agents or representatives shall have the right to enter
the Premises to inspect the same, or to show the Premises to prospective
purchasers, mortgagees, tenants (during the last twelve months of the Lease Term
or earlier in connection with a potential relocation) or insurers, or to clean
or make repairs, alterations or additions thereto, including any work that
Landlord deems necessary for the safety, protection or preservation of the
Building or any
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occupants thereof, or to facilitate repairs, alterations or additions to the
Building or any other tenants' premises. Except for any entry by Landlord in an
emergency situation or to provide normal cleaning and janitorial service,
Landlord shall provide Tenant with reasonable prior notice of any entry into the
Premises, which notice may be given verbally. Entry by Landlord hereunder shall
not constitute a constructive eviction or entitle Tenant to any abatement or
reduction of Rent by reason thereof. Absent circumstances believed by Landlord
to constitute an emergency, Landlord shall use reasonable efforts to conduct
such entries in a manner and at such times so as to minimize interference with
Tenant's business operations within the Premises. However, in the event Tenant
requests Landlord to perform any such entries during after business hours,
Tenant agrees to pay all additional costs incurred for overtime service.
XIII. ASSIGNMENT AND SUBLETTING.
A. Tenant shall not assign, sublease, transfer or encumber this Lease or
any interest therein or grant any license, concession or other right of
occupancy (excepting therefrom equipment owned by Tenant's customers; as
permitted by Landlord in the co-location provision below) of the Premises or any
portion thereof or otherwise permit the use of the Premises or any portion
thereof by any party other than Tenant (any of which events is hereinafter
called a Transfer") without the prior written consent of Landlord, which consent
shall not be unreasonably withheld, conditioned or delayed with respect to any
proposed assignment or subletting. Landlord's consent shall not be considered
unreasonably withheld if: (1) the proposed transferee's financial responsibility
does not meet the same criteria Landlord uses to select Building tenants; (2)
the proposed transferee's business is not suitable for the Building considering
the business of the other tenants and the Building's prestige or would result in
a violation of an exclusive right granted to another tenant in the Building; (3)
the proposed use is different than the Permitted Use; (4) the proposed
transferee is a government agency or occupant of the Building; (5) Tenant is in
default; or (6) any portion of the Building or Premises would become subject to
additional or different governmental laws or regulations as a consequence of the
proposed Transfer and/or the proposed transferee's use and occupancy of the
Premises. Tenant acknowledges that the foregoing is not intended to be an
exclusive list of the reasons for which Landlord may reasonably withhold its
consent to a proposed Transfer. Any attempted Transfer in violation of the
terms of this Article shall, at Landlord's option, be void. Consent by Landlord
to one or more Transfers shall not operate as a waiver of Landlord's rights as
to any subsequent Transfers.
Landlord acknowledges that in the course of Tenant's business, Tenant shall
locate (co-locate) certain equipment of its customers in the Premises. Landlord
acknowledges that such co-location shall be permitted subject to the terms of
this Lease.
B. If Tenant requests Landlord's consent to a Transfer, Tenant, together
with such request for consent, shall provide Landlord with the name of the
proposed transferee and the nature of the business of the proposed transferee,
the term, use, rental rate and all other material terms and conditions of the
proposed Transfer, including, without limitation, a copy of the proposed
assignment, sublease or other contractual documents and evidence satisfactory to
Landlord that the proposed transferee is financially responsible. Tenant shall
reimburse Landlord on demand for any reasonable costs that may be incurred by
Landlord in connection with said Transfer, including, without limitation, the
costs of making investigations as to the acceptability of the proposed assignee
or subtenant, and reasonable legal costs incurred in connection with the
granting of any requested consent. Notwithstanding Landlord's agreement to act
reasonably under Section XIII.A. above, in the case of a Transfer to a party
other than a party intending to operate the business of Tenant within the
Premises following the Transfer (e.g. a party acquiring either the assets of the
Tenant as well as the Lease), Landlord may, within fortyfive (45) days after its
receipt of all information and documentation required herein, either, (1)
consent to or reasonably refuse to consent to such Transfer in writing; or (2)
negotiate directly with the proposed transferee and in the event Landlord is
able to reach an agreement with such proposed transferee, terminate this Lease
(in part or in whole, as appropriate) upon thirty (30) days' notice; or (3)
cancel and terminate this Lease, in whole or in part as appropriate. In the
event Landlord consents to any such Transfer, the Transfer and consent thereto
shall be in a form approved by Landlord. Tenant shall bear all costs and
expenses incurred by Landlord in connection with the review and approval of
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such documentation, including without limitation, Landlord's reasonable
attorneys' fees as well as in those instances where Landlord's consent is
required, a special administrative charge of One Thousand Dollars ($1,000.00).
C. One-half of any cash or other proceeds (the "Transfer Consideration")
of any Transfer of Tenant's interest in this Lease and/or the Premises, whether
consented to by Landlord or not, received by Tenant, and after reimbursement to
Tenant of all reasonable costs and expenses incurred by Tenant in connection
with such Transfer, shall be paid to Landlord and Tenant hereby assigns all
rights it might have or ever acquire in any such proceeds to Landlord. In
addition to the Rent hereunder, Tenant hereby covenants and agrees to pay to
Landlord one-half of all rent and other consideration (with respect to the
transfer of the Lease or Leasehold as opposed to Tenant's business operations
therein) which it receives which is in excess of the Rent payable hereunder,
after reimbursement to Tenant of all reasonable costs and expenses incurred by
Tenant in connection with the assignment or subletting, within ten (10) days
following receipt thereof by Tenant. In addition to any other rights Landlord
may have, Landlord, following an Event of Default and expiration of any
applicable notice and cure periods, shall have the right to contact any
transferee and require that all payments made pursuant to the Transfer shall be
made directly to Landlord, with the understanding that Landlord shall apply such
amounts on account of the Event of Default, and following cure thereof, remit
any balance to Tenant.
D. Notwithstanding anything to the contrary in this Lease, Tenant shall
have the right to transfer and assign this Lease and/or sublet all or any part
of the Leased Premises without obtaining Landlord's consent (and therefor
Landlord shall have no right to terminate the Lease by reason thereof under this
Article) to any of the following: (1) any entity into which Tenant has been
consolidated; (2) any entity which shall result from a merger of the Tenant with
one or more entities; (3) any affiliate or subsidiary of Tenant or to such other
parties as may be required in connection with any offering on a recognized
security exchange (i.e. NYSE, AMEX or NASDAQ) (recognizing that Tenant shall
remain jointly and severally liable with such affiliate, subsidiary or other
party at all times thereafter for the performance and payment of the various
obligations of the original Tenant under this Lease) or (4) any entity to whom
Tenant shall have sold all or substantially all of its assets or stock. Tenant
shall be required to provide Landlord with copies of the Agreement executed by
the assignee of this Lease evidencing the assumption by such assignee of all of
the obligations and liabilities imposed upon Tenant under the Lease.
E. If Tenant is a corporation, limited liability company or similar
entity, and if at any time during the Lease Term the entity or entities who own
the voting shares at the time of the execution of this Lease cease for any
reason (including but not limited to merger, consolidation or other
reorganization involving another corporation) to own a majority of such shares,
or if Tenant is a partnership and if at any time during the Lease Term the
general partner or partners who own the general partnership interests in the
partnership at the time of the execution of this Lease, cease for any reason to
own a majority of such interests (except as the result of transfers by gift,
bequest or inheritance to or for the benefit of members of the immediate family
of such original shareholder[s]or partner[s]), such an event shall be deemed to
be a Transfer. The preceding sentence shall not apply whenever Tenant is a
corporation, the outstanding stock of which is listed on a recognized security
exchange, or if at least eighty percent (80%) of its voting stock is owned by
another corporation, the voting stock of which is so listed.
F. Any Transfer consented to by Landlord in accordance with this Article
XIII shall be only for the Permitted Use or for general office use and for no
other purpose. In no event shall any Transfer release or relieve Tenant or any
Guarantors (if any) from any obligations under this Lease.
G. Tenant shall not be prohibited from negotiating or consummating a
sublease at a lower rental rate than the average rental rate then being paid by
tenants in the Building if, and only if, Tenant shall first have offered to
sublet the Sublet Premises to Landlord for the same rent and terms by written
notice given with or after Tenant's request for consent to the subletting or
assignment. Landlord shall accept or reject such offer within fifteen (15) days
from receipt of such request for consent or ten (10) days after receipt of the
offer, whichever is later.
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Notwithstanding anything to the contrary contained in this Lease, no assignment
of Tenant's interest in this Lease shall be binding upon Landlord unless the
assignee shall execute and deliver to Landlord an agreement whereby such
assignee agrees unconditionally to be bound by and to perform all of the
obligations of Tenant hereunder and further expressly agrees that
notwithstanding such assignment the provisions of this paragraph shall continue
to be binding upon such assignee with respect to all future assignments and
transfers. A failure or refusal of such assignee to execute or deliver such an
agreement shall not release the assignee from its liability for the obligations
of Tenant hereunder assumed by acceptance of the assignment of this Lease.
H. If Landlord shall decline to give its consent to any proposed
Transfer, or if Landlord shall exercise any of its options under this Article,
Tenant shall indemnify, defend and hold harmless Landlord against and from any
and all loss, liability, damages, costs and expenses (including attorneys' fees
and disbursements) resulting from any claims that may be made against Landlord
by the proposed assignee or sublessee or by any brokers or other persons
claiming a commission or similar compensation in connection with the proposed
assignment or sublease.
XIV. LIENS.
Tenant will not permit any mechanic's liens or other liens to be placed
upon the Premises or Tenant's leasehold interest therein, the Building, or the
Property. Landlord's title to the Building and Property is and always shall be
paramount to the interest of Tenant, and nothing herein contained shall empower
Tenant to do any act that can, shall or may encumber Landlord's title. In the
event any such lien does attach, Tenant shall, within ten (10) days of notice of
the receipt by Tenant of notice of the filing of said lien, either discharge or
bond over such lien to the satisfaction of Landlord and Landlord's Mortgagee (as
hereinafter defined), and in such a manner as to remove the lien as an
encumbrance against the Building and Property. If Tenant shall fail to so
discharge or bond over such lien, then, in addition to any other right or remedy
of Landlord, Landlord may, but shall not be obligated to bond over or discharge
the same. Any amount paid by Landlord for any of the aforesaid purposes,
including reasonable attorneys' fees (if and to the extent permitted by law)
shall be paid by Tenant to Landlord on demand as Additional Base Rental.
Landlord shall have the right to post and keep posted on the Premises any
notices that may be provided by law or which Landlord may deem to be proper for
the protection of Landlord, the Premises and the Building from such liens.
Notice is hereby given that the Landlord shall not be liable for any labor or
materials furnished or to be furnished to the Tenant upon credit, and that no
mechanic's or materialmen's or other lien for any such labor or materials shall
attach to or affect the reversionary or other estate or interest of the Landlord
in and to the Land and Building. In no event shall Landlord be deemed to be the
agent of Tenant for purposes of Title 38-101 of the District of Columbia Code
(1981 Edition, as amended) and no contractor of Tenant shall by virtue of its
contract be entitled to assert any mechanic's lien against the Building or land
appurtenant thereto.
XV. INDEMNITY AND WAIVER OF CLAIMS.
A. Tenant shall indemnify, defend and hold Landlord, its members,
principals, beneficiaries, partners, officers, directors, employees,
Mortgagee(s) and agents, and the respective principals and members of any such
agents (collectively the "Landlord Related Parties") harmless against and from
all liabilities, obligations, damages, penalties, claims, costs, charges and
expenses, including, without limitation, reasonable attorneys' fees and other
professional fees (if and to the extent permitted by law), which may be imposed
upon, incurred by, or asserted against Landlord or any of the Landlord Related
Parties and arising out of or in connection with the use, occupancy or
maintenance of the Premises by, through or under Tenant including, without
limitation, any of the following: (1) any work or thing done in, on or about
the Premises or any part thereof by Tenant or any of its transferees, agents,
servants, contractors, employees, customers, licensees or invitees; (2) any use,
non-use, possession, occupation, condition, operation or maintenance of the
Premises or any part thereof; (3) any act or omission of Tenant or any of its
transferees, agents, servants, contractors, employees, customers, licensees or
invitees, occurring on or about the Building; (4) any injury or damage to any
person or property occurring in, on or about the Premises or any part thereof;
or (5) any failure on the part of Tenant to
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perform or comply with any of the covenants, agreements, terms or conditions
contained in this Lease with which Tenant must comply or perform. In case any
action or proceeding is brought against Landlord or any of the Landlord Related
Parties by reason of any of the foregoing, Tenant shall, at Tenant's sole cost
and expense, resist and defend such action or proceeding with counsel approved
by Landlord or, at Landlord's option, reimburse Landlord for the cost of any
counsel retained directly by Landlord to defend and resist such action or
proceeding.
B. Landlord and the Landlord Related Parties shall not be liable for, and
Tenant hereby waives, all claims for loss or damage to Tenant's business or
damage to person or property sustained by Tenant or any person claiming by,
through or under Tenant [including Tenant's principals, agents and employees
(collectively, the "Tenant Related Parties")] resulting from any accident or
occurrence in, on or about the Premises, the Building or the Property,
including, without limitation, claims for loss, theft or damage resulting from:
(1) the Premises, Building, or Property, or any equipment or appurtenances
becoming out of repair; (2) wind or weather; (3) any defect in or failure to
operate, for whatever reason, any sprinkler, heating or air-conditioning
equipment, electric wiring, gas, water or steam pipes; (4) broken glass; (5) the
backing up of any sewer pipe or downspout; (6) the bursting, leaking or running
of any tank, water closet, drain or other pipe; (7) the escape of steam or
water; (8) water, snow or ice being upon or coming through the roof, skylight,
stairs, doorways, windows, walks or any other place upon or near the Building;
(9) the falling of any fixture, plaster, tile or other material; (10) any act,
omission or negligence of other tenants, licensees or any other persons or
occupants of the Building or of adjoining or contiguous buildings, or owners of
adjacent or contiguous property or the public, or by construction of any
private, public or quasi-public work; or (11) any other cause of any nature
except, as to items 1-9 and item 11, where such loss or damage is due to
Landlord's willful or negligent failure to make repairs required to be made
pursuant to other provisions of this Lease, after the expiration of a reasonable
time after written notice to Landlord of the need for such repairs. To the
maximum extent permitted by law, Tenant agrees to use and occupy the Premises,
and to use such other portions of the Building as Tenant is herein given the
right to use, at Tenant's own risk.
C. Subject to the limitations set forth in Section X above, and in
subsection XV B above, Landlord shall indemnify, defend, and hold harmless
Tenant against and from all liabilities, obligations, damages, penalties,
claims, costs, charges and expenses, including, without limitation, reasonable
attorneys' fees and other professional fees (if and to the extent permitted by
law), which may be imposed upon, incurred by, or asserted against or incurred by
Tenant in connection with any negligent, intentionally tortious or other act or
omission by Landlord or any of its agents, contractors, employees, licensees or
suppliers during the Lease Term; or any injury to or death of any person caused
by Landlord or its employees or agents, and from and against all costs incurred
in connection with any claim arising in whole or in part by reason of any of the
foregoing, including costs of enforcement.
D. If any action giving rise to the right of indemnification above is
brought against Landlord or Tenant, such party shall promptly and at their
expense, resist or defend such action or cause it to be resisted or defended by
an insurer.
XVI. TENANT'S INSURANCE.
A. At all times commencing on and after the earlier of the Commencement
Date and the date Tenant or its agents, employees or contractors enters the
Premises for any purpose, Tenant shall carry and maintain, at its sole cost and
expense:
1. Commercial General Liability Insurance applicable to the
Premises and its appurtenances providing, on an occurrence basis, a minimum
combined single limit of Two Million Dollars ($2,000,000.00), with a contractual
liability endorsement covering Tenant's indemnity obligations under this Lease.
2. All Risks of Physical Loss Insurance written at replacement cost
value and with a replacement cost endorsement covering all of Tenant's Property
in the Premises.
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3. Workers' Compensation Insurance as required by the state in
which the Premises is located and in amounts as may be required by applicable
statute, and Employers' Liability Coverage of One Million Dollars
($1,000,000.00) per occurrence.
4. Whenever good business practice, in Landlord's reasonable
judgment, indicates the need of additional insurance coverage or different types
of insurance in connection with the Premises or Tenant's use and occupancy
thereof, Tenant shall, upon request, obtain such insurance at Tenant's expense
and provide Landlord with evidence thereof.
B. Before any repairs, alterations, additions, improvements, or
construction are undertaken by or on behalf of Tenant, Tenant shall carry and
maintain, at its expense, or Tenant shall require any contractor performing work
on the Premises to carry and maintain, at no expense to Landlord, in addition to
workers' compensation insurance as required by the jurisdiction in which the
Building is located, All Risk Builder's Risk Insurance in the amount of the
replacement cost of any alterations, additions or improvements (or such other
amount reasonably required by Landlord) and Commercial General Liability
Insurance (including, without limitation, Contractor's Liability coverage,
Contractual Liability coverage and Completed Operations coverage), written on an
occurrence basis with a minimum combined single limit of Two Million Dollars
($2,000,000.00) and adding the "owner(s) of the Building and its (or their)
respective members, principals, beneficiaries, partners, officers, directors,
employees, agents (and their respective members and principals) and
mortgagee(s)" (and any other designees of Landlord as the interest of such
designees shall appear) as additional insureds.
C. Any company writing any insurance which Tenant is required to
maintain or cause to be maintained pursuant to the terms of this Lease (all such
insurance as well as any other insurance pertaining to the Premises or the
operation of Tenant's business therein being referred to as "Tenant's
Insurance"), as well as the form of such insurance, shall at all times be
subject to Landlord's reasonable approval, and each such insurance company shall
have an A.M. Best rating of "A-" or better and shall be licensed and qualified
to do business in the state in which the Premises is located. All policies
evidencing Tenant's Insurance (except for Workers' Compensation) shall specify
Tenant as named insured and the "owner(s) of the Building and its (or their)
respective members, principals, beneficiaries, partners, officers, directors,
employees, agents (and their respective members and principals) and
mortgagee(s)" (and any other designees of Landlord as the interest of such
designees shall appear) as additional insureds. Provided that the coverage
afforded Landlord and any designees of Landlord shall not be reduced or
otherwise adversely affected, all of Tenant's Insurance may be carried under a
blanket policy covering the Premises and any other of Tenant's locations. All
policies of Tenant's Insurance shall contain endorsements that the insurer(s)
will give to Landlord and its designees at least thirty (30) days' advance
written notice of any change, cancellation, termination or lapse of said
insurance. Tenant shall be solely responsible for payment of premiums for all of
Tenant's Insurance. Tenant shall deliver to Landlord at least fifteen (15) days
prior to the time Tenant's Insurance is first required to be carried by Tenant,
and upon renewals at least fifteen (15) days prior to the expiration of any such
insurance coverage, a certificate of insurance of all policies procured by
Tenant in compliance with its obligations under this Lease. The limits of
Tenant's Insurance shall in no event limit Tenant's liability under this Lease.
D. Tenant shall not do or fail to do anything in, upon or about the
Premises which will: (1) violate the terms of any of Landlord's insurance
policies; (2) prevent Landlord from obtaining policies of insurance acceptable
to Landlord or any Mortgagees; or (3) result in an increase in the rate of any
insurance on the Premises, the Building, any other property of Landlord or of
others within the Building. In the event of the occurrence of any of the events
set forth in this Section, Landlord shall provide written notice thereof to
Tenant promptly upon Landlord acquiring actual knowledge thereof and Tenant
shall to the extent practicable have an opportunity to correct the matter.
Tenant shall pay Landlord upon demand, as Additional Base Rental, the cost of
the amount of any increase in any such insurance premium, provided that the
acceptance by Landlord of such payment shall not be construed to be a waiver of
any rights by Landlord in connection with a default by Tenant under the Lease.
In addition, should another tenant of the Building cause a similar increase in
the rate of insurance on the Building, such increase shall be disregarded in
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determining Tenant's pro-rata share of Basic Costs under this Lease. If Tenant
fails to obtain the insurance coverage required by this Lease, Landlord may, at
its option, obtain such insurance for Tenant, and Tenant shall pay, as
Additional Base Rental, the cost of all premiums thereon and all of Landlord's
costs associated therewith.
XVII. SUBROGATION.
Notwithstanding anything set forth in this Lease to the contrary, Landlord
and Tenant do hereby waive any and all right of recovery, claim, action or cause
of action against the other, their respective principals, beneficiaries,
partners, officers, directors, agents, and employees, and, with respect to
Landlord, its Mortgagee(s), for any loss or damage that may occur to Landlord or
Tenant or any party claiming by, through or under Landlord or Tenant, as the
case may be, with respect to their respective property, the Building, the
Property or the Premises or any addition or improvements thereto, or any
contents therein, by reason of fire, the elements or any other cause, regardless
of cause or origin, including the negligence of Landlord or Tenant, or their
respective principals, beneficiaries, partners, officers, directors, agents and
employees and, with respect to Landlord, its Mortgagee(s), which loss or damage
is (or would have been, had the insurance required by this Lease been carried)
covered by insurance. Since this mutual waiver will preclude the assignment of
any such claim by subrogation (or otherwise) to an insurance company (or any
other person), Landlord and Tenant each agree to give each insurance company
which has issued, or in the future may issue, policies of insurance, with
respect to the items covered by this waiver, written notice of the terms of this
mutual waiver, and to have such insurance policies properly endorsed, if
necessary, to prevent the invalidation of any of the coverage provided by such
insurance policies by reason of such mutual waiver. For the purpose of the
foregoing waiver, the amount of any deductible applicable to any loss or damage
shall be deemed covered by, and recoverable by the insured under the insurance
policy to which such deductible relates. In the event that Tenant is permitted
to and self-insures any risk which would have been covered by the insurance
required to be carried by Tenant pursuant to Article XVI of the Lease, or if
Tenant fails to carry any insurance required to be carried by Tenant pursuant to
Article XVI of this Lease, then all loss or damage to Tenant, its leasehold
interest, its business, its property, the Premises or any additions or
improvements thereto or contents thereof shall be deemed covered by and
recoverable by Tenant under valid and collectible policies of insurance.
XVIII. LANDLORD'S INSURANCE.
Landlord agrees that Landlord will maintain or cause to be maintained in
full force and effect at all times during the Term fire and extended coverage
insurance covering the Building and the leasehold improvements to the Leased
Premises originally supplied, furnished or installed at Landlord's expense in
amounts equal to no less than ninety percent (90%) of the full insurable value
thereof (actual replacement value, without deduction for physical depreciation
as such may be adjusted to account for increased replacement value costs) or in
such lesser amount as shall be sufficient to avoid the effects of co-insurance
provisions of the policies and public liability insurance with limits no less
than the minimum limits required of Tenant in the case of Tenant's public
liability insurance required above. The cost of such insurance shall be included
as a part of the Basic Costs, and payments for losses and recoveries thereunder
shall be made solely to Landlord or the Mortgagees of Landlord as their
interests shall appear.
XIX. CASUALTY DAMAGE.
If the Premises or any part thereof shall be damaged by fire or other
casualty, Tenant shall give prompt written notice thereof to Landlord. In case
(i) the Building shall be so damaged that in Landlord's reasonable judgment,
substantial alteration or reconstruction of the Building shall be required
(whether or not the Premises has been damaged by such casualty), (ii) Landlord
will not be permitted by applicable law to rebuild the Building in substantially
the same form as existed prior to the fire or casualty, or (iii) the Premises
has been materially damaged and there is less than two (2) years of the Lease
Term remaining on the date of such casualty, (iv) any Mortgagee should require
that the insurance proceeds payable as a result of a casualty be applied to the
payment of the mortgage debt, or (v) any material uninsured loss to the
Building, Landlord may,
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at its option, terminate this Lease by notifying Tenant in writing of such
termination within ninety (90) days after the date of such casualty. Such
termination shall be effective as of the date of fire or casualty, with respect
to any portion of the Premises that was rendered untenantable, and the effective
date of termination specified in Landlord's notice, with respect to any portion
of the Premises that remained tenantable. If Landlord does not elect to
terminate this Lease, Landlord shall commence and proceed with reasonable
diligence to restore the Building (provided that Landlord shall not be required
to restore any unleased premises in the Building) and the Leasehold Improvements
(but excluding any improvements, alterations or additions made by Tenant in
violation of this Lease) located within the Premises, if any, which Landlord has
insured to substantially the same condition they were in immediately prior to
the happening of the casualty. Notwithstanding the foregoing, Landlord's
obligation to restore the Building, and the Leasehold Improvements, if any,
shall not require Landlord to expend for such repair and restoration work more
than the insurance proceeds actually received by the Landlord as a result of the
casualty. When repairs to the Premises have been completed by Landlord, Tenant
shall complete the restoration or replacement of all Tenant's Property necessary
to permit Tenant's reoccupancy of the Premises, and Tenant shall present
Landlord with evidence satisfactory to Landlord of Tenant's ability to pay such
costs prior to Landlord's commencement of repair and restoration of the
Premises. Landlord shall not be liable for any inconvenience or annoyance to
Tenant or injury to the business of Tenant resulting in any way from such damage
or the repair thereof, except that, subject to the provisions of the next
sentence, Landlord shall allow Tenant a fair diminution of Rent on a per diem
basis during the time and to the extent any damage to the Premises causes the
Premises to be rendered untenantable and not used by Tenant. If the Premises or
any other portion of the Building is damaged by fire or other casualty resulting
from the negligence of Tenant or any Tenant Related Parties, the Rent hereunder
shall not be diminished during any period during which the Premises, or any
portion thereof, is untenantable (except to the extent Landlord is entitled to
be reimbursed by the proceeds of any rental interruption insurance), and Tenant
shall be liable to Landlord for the cost of the repair and restoration of the
Building caused thereby to the extent such cost and expense is not covered by
insurance proceeds. Notwithstanding the foregoing, subject to the limitation in
the immediately preceding sentence, Tenant shall be excused from paying full
rent until the first to occur of (i) resumption of use and occupancy by Tenant
of the damaged portion for the conduct of its business operations thereon or
(ii) the last to occur of (x) substantial completion by Landlord of its repair
and restoration of the Premises or (y) substantial completion by Tenant of its
repair and restoration, not to exceed however under this subsection (y) thirty
(30) days following the date of substantial completion by Landlord of its
repairs and restoration. In the case of damage or destruction affecting less
than the entire Premises but rendering Tenant unable to reasonably conduct its
business in the remaining undamaged portion, then any abatement of rent to which
Tenant shall be entitled hereunder shall be extended to the entire premises.
Landlord and Tenant hereby waive the provisions of any law from time to time in
effect during the Lease Term relating to the effect upon leases of partial or
total destruction of leased property. Landlord and Tenant agree that their
respective rights in the event of any damage to or destruction of the Premises
shall be those specifically set forth herein.
XX. LANDLORD'S ALLOWANCE TO TENANT
Tenant shall receive a total construction allowance (the "Allowance") in
the amount of Fifteen Dollars ($15.00) per rentable square foot of the Premises
(namely $291,210.00 assuming a Rentable Area of the Premises of 19,414 square
feet), which shall be applied towards the cost of Tenant's Initial Leasehold
Improvements over the existing As is" condition. For the purposes of this
paragraph, leasehold improvements may specifically include, but not be limited
to, construction of tenant improvements, construction management services,
permit fees, Tenant's design costs (to include architectural, mechanical,
electrical and plumbing drawings), suite security systems, and millwork, or
items which either Tenant may require Landlord or the Tenant's Contractor to
furnish, provide or complete or which under the terms of this Lease shall be
provided or furnished by Landlord or Tenant's Contractor in connection with the
completion of the Initial Leasehold Improvements. In the event Tenant shall fail
to expend the entire Allowance, Tenant shall be entitled to obtain a credit
against the first rentals otherwise payable under this Lease in such amount as
necessary to result in Tenant obtaining the benefit of the entire Allowance
after consideration of the disbursements previously made by Landlord.
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Landlord agrees to disburse the Allowance on a monthly basis directly to
the general contractor or others as directed by Tenant on account of work
performed, or in the event Tenant has paid the requested amount itself directly
to such contractor or other party, Landlord shall reimburse Tenant the portion
of the Allowance to which Tenant is then entitled, based upon paid receipts
submitted to Landlord. Tenant shall provide a proposed monthly requisition no
later than the twentieth (20th) day of the calendar month preceding the month in
which Tenant requests such disbursement in order to permit Landlord to process
Tenant's request by the tenth (10th) day of the following month. It is hereby
agreed that all leasehold improvements paid for by Landlord out of the Allowance
shall immediately become the property of Landlord upon completion unless
otherwise agreed to in writing. In the event the total cost of the Initial
Leasehold Improvements exceeds the Allowance, all such excess costs shall be
solely payable by Tenant. In no event shall any contractor of Tenant be
considered as a third party beneficiary hereunder, and Landlord's agreement to
provide payments directly to Tenant's contractor shall not create any
contractual relationship between Landlord and such contractor, or otherwise
constitute an acknowledgment or representation by Landlord that the particular
work being paid for by Landlord has been performed in accordance with the
specifications therefor, or is otherwise sufficient to fulfill Tenant's
expectations.
XXI. CONDEMNATION.
If (a) the whole or any substantial part of the Premises or (b) any portion
of the Building or Property which would leave the remainder of the Building
unsuitable for use as an office building comparable to its use on the
Commencement Date, shall be taken or condemned for any public or quasi-public
use under governmental law, ordinance or regulation, or by right of eminent
domain, or by private purchase in lieu thereof, then Landlord may, at its
option, terminate this Lease effective as of the date the physical taking of
said Premises or said portion of the Building or Property shall occur. In the
event of a taking either (i) affecting a substantial portion of the Premises, or
(ii) beyond the Premises or of less than a substantial portion of the Premises
but which in either such instance materially and adversely impacts either access
to or use of the Premises by Tenant, then and in the case of either (i) or (ii)
above, Tenant shall also be entitled to terminate this Lease, effective as of
the date the physical taking shall occur. In the event this Lease is not
terminated, the Rentable Area of the Building, the Rentable Area of the Premises
and Tenant's Pro Rata Share shall be appropriately adjusted. In addition, Rent
for any portion of the Premises so taken or condemned shall be abated during the
unexpired term of this Lease effective when the physical taking of said portion
of the Premises shall occur. All compensation awarded for any such taking or
condemnation, or sale proceeds in lieu thereof, shall be the property of
Landlord, and Tenant shall have no claim thereto, the same being hereby
expressly waived by Tenant, except for any portions of such award or proceeds
which are specifically allocated by the condemning or purchasing party for the
taking of or damage to trade fixtures of Tenant, Tenant's Removables or for
moving costs, or for any other amounts personal to Tenant which if paid to
Tenant will not reduce the award to which Landlord would in the absence of such
payment be entitled to claim for its account, all of which Tenant specifically
reserves to itself.
XXII. EVENTS OF DEFAULT.
The following events shall be deemed to be events of default under this
Lease:
A. Tenant shall fail to pay when due any Base Rental, Additional Base
Rental or other Rent under this Lease and such failure shall continue for five
(5) business days after written notice from Landlord (hereinafter sometimes
referred to as a "Monetary Default").
B. Any failure by Tenant (other than a Monetary Default) to comply with
any term, provision or covenant of this Lease, including, without limitation,
the rules and regulations, which failure is not cured within twenty (20) days
after delivery to Tenant of notice of the occurrence of such failure, provided
that if any such failure creates a hazardous condition, such failure must be
cured immediately. However, with respect to any failure to comply with or
perform any covenant or obligation which is not curable within such twenty (20)
day period, if (i) Tenant has expeditiously commenced to cure same, (ii) the
failure does not affect the Building or other tenants
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therein and does not result in any liability to, or expenditure of funds by,
Landlord, and (iii) Tenant diligently pursues the cure of such condition, the
cure period shall be extended to the time reasonably necessary to cure the
condition, (inclusive of the original 20 days). Notwithstanding the foregoing,
if Tenant fails to comply with any particular provision or covenant of this
Lease, including, without limitation, Tenant's obligation to pay Rent when due,
on three (3) occasions during any twelve (12) month period, any subsequent
violation of such provision or covenant shall be considered to be an incurable
default by Tenant.
C. Tenant or any Guarantor shall become insolvent, or shall make a
transfer in fraud of creditors, or shall commit an act of bankruptcy or shall
make an assignment for the benefit of creditors, or Tenant or any Guarantor
shall admit in writing its inability to pay its debts as they become due.
D. Tenant or any Guarantor shall file a petition under any section or
chapter of the United States Bankruptcy Code, as amended, pertaining to
bankruptcy, or under any similar law or statute of the United States or any
State thereof, or Tenant or any Guarantor shall be adjudged bankrupt or
insolvent in proceedings filed against Tenant or any Guarantor thereunder; or a
petition or answer proposing the adjudication of Tenant or any Guarantor as a
debtor or its reorganization under any present or future federal or state
bankruptcy or similar law shall be filed in any court and such petition or
answer shall not be discharged or denied within sixty (60) days after the filing
thereof.
E. A receiver or trustee shall be appointed for all or substantially all
of the assets of Tenant or any Guarantor or of the Premises or of any of
Tenant's Property located thereon in any proceeding brought by Tenant or any
Guarantor, or any such receiver or trustee shall be appointed in any proceeding
brought against Tenant or any Guarantor and shall not be discharged within sixty
(60) days after such appointment or Tenant or such Guarantor shall consent to or
acquiesce in such appointment.
F. The leasehold estate hereunder shall be taken on execution or other
process of law or equity in any action against Tenant.
G. Omitted Intentionally
H. Tenant shall fail to take possession of and occupy the Premises within
sixty (60) days following the Commencement Date unless due to force majeure.
I. The liquidation, termination, dissolution, forfeiture of right to do
business, or death of Tenant or any Guarantor.
J. Tenant is in default beyond any notice and cure period under any other
lease with Landlord.
XXIII. REMEDIES.
A. Upon the occurrence of any event or events of default under this
Lease, Landlord shall have the option to pursue any one or more of the following
remedies without any notice (except as expressly prescribed in Article XXII
above) or demand whatsoever (and without limiting the generality of the
foregoing, Tenant hereby specifically waives notice and demand for payment of
Rent or other obligations due [except as expressly prescribed in Article XXII
above] and waives any and all other notices or demand requirements imposed by
applicable law which may lawfully be waived by Tenant):
1. Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord. If Tenant fails to surrender the Premises
upon termination of the Lease hereunder, Landlord may without prejudice to any
other remedy which it may have, enter upon and take possession of the Premises
and expel or remove Tenant and any other person who may be occupying said
Premises, or any part thereof, and Tenant hereby agrees to pay to
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Landlord on demand the amount of all loss and damage, including consequential
damage, which Landlord may suffer by reason of such termination, whether through
inability to relet the Premises on satisfactory terms or otherwise, specifically
including but not limited to all Costs of Reletting (hereinafter defined) and
any deficiency that may arise by reason of any reletting or failure to relet.
2. Enter upon and take possession of the Premises and expel or
remove Tenant or any other person who may be occupying said Premises, or any
part thereof, without having any civil or criminal liability therefor and
without terminating this Lease. Landlord may (but shall be under no obligation
to) relet the Premises or any part thereof for the account of Tenant, in the
name of Tenant or Landlord or otherwise, without notice to Tenant, for such term
or terms which may be greater or less than the period which would otherwise have
constituted the balance of the Lease Term and on such conditions (which may
include concessions, free rent and alterations of the Premises) and for such
uses as Landlord in its absolute discretion may determine, and Landlord may
collect and receive any rents payable by reason of such reletting. Tenant agrees
to pay Landlord on demand all Costs of Reletting and any deficiency that may
arise by reason of such reletting or failure to relet. Landlord shall not be
responsible or liable for any failure to relet the Premises or any part thereof
or for any failure to collect any Rent due upon any such reletting. No such re-
entry or taking of possession of the Premises by Landlord shall be construed as
an election on Landlord's part to terminate this Lease unless a written notice
of such termination is given to Tenant.
3. Enter upon the Premises without having any civil or criminal
liability therefor, and do whatever Tenant is obligated to do under the terms of
this Lease, and Tenant agrees to reimburse Landlord on demand for any expense
which Landlord may incur in thus affecting compliance with Tenant's obligations
under this Lease together with interest at the lesser of a per annum rate equal
to the Maximum Rate.
4. In order to regain possession of the Premises and to deny Tenant
access thereto in any instance in which Landlord has terminated this Lease or
Tenant's right to possession, or to limit access to the Premises in accordance
with local law in the event of a default by Tenant, Landlord or its agent may,
at the expense and liability of the Tenant, alter or change any or all locks or
other security devices controlling access to the Premises without posting or
giving notice of any kind to Tenant. Landlord shall have no obligation to
provide Tenant a key or grant Tenant access to the Premises so long as Tenant is
in default under this Lease. Tenant shall not be entitled to recover possession
of the Premises, terminate this Lease, or recover any actual, incidental,
consequential, punitive, statutory or other damages or award of attorneys' fees,
by reason of Landlord's alteration or change of any lock or other security
device. Landlord may, without notice, remove and either dispose of or store, at
Tenant's expense, any property belonging to Tenant that remains in the Premises
after Landlord has regained possession thereof.
5. Terminate this Lease, in which event, Tenant shall immediately
surrender the Premises to Landlord and pay to Landlord the sum of: (a) all Rent
accrued hereunder through the date of termination, and, upon Landlord's
determination thereof, (b) an amount equal to: the total Rent that Tenant would
have been required to pay for the remainder of the Lease Term discounted to
present value at the Prime Rate then in effect, minus the then present fair
rental value of the Premises for the remainder of the Lease Term, similarly
discounted, after deducting all anticipated Costs of Reletting (as defined
below).
B. For purposes of this Lease, the term "Costs of Reletting" shall mean
all costs and expenses incurred by Landlord in connection with the reletting of
the Premises, including without limitation, the cost of cleaning, renovation,
repairs, decoration and alteration of the Premises for a new tenant or tenants,
advertisement, marketing, brokerage and legal fees (if and to the extent
permitted by law), the cost of protecting or caring for the Premises while
vacant, the cost of removing and storing any property located on the Premises,
any increase in insurance premiums caused by the vacancy of the Premises and any
other out-of-pocket expenses incurred by Landlord including tenant incentives,
allowances and inducements.
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C. Except as otherwise herein provided, no repossession or re-entering of
the Premises or any part thereof pursuant to Article XXIII hereof or otherwise
shall relieve Tenant or any Guarantor of its liabilities and obligations
hereunder, all of which shall survive such repossession or re-entering.
Notwithstanding any such repossession or reentering by reason of the occurrence
of an event of default, Tenant will pay to Landlord the Rent required to be paid
by Tenant pursuant to this Lease.
D. No right or remedy herein conferred upon or reserved to Landlord is
intended to be exclusive of any other right or remedy, and each and every right
and remedy shall be cumulative and in addition to any other right or remedy
given hereunder or now or hereafter existing by agreement, applicable law or in
equity. In addition to other remedies provided in this Lease, Landlord shall be
entitled, to the extent permitted by applicable law, to injunctive relief, or to
a decree compelling performance of any of the covenants, agreements, conditions
or provisions of this Lease, or to any other remedy allowed to Landlord at law
or in equity. Forbearance by Landlord to enforce one or more of the remedies
herein provided upon an event of default shall not be deemed or construed to
constitute a waiver of such default.
E. This Article XXIII shall be enforceable to the maximum extent such
enforcement is not prohibited by applicable law, and the unenforceability of any
portion thereof shall not thereby render unenforceable any other portion.
XXIV. LIMITATION OF LIABILITY.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS LEASE, THE LIABILITY
OF LANDLORD (AND OF ANY SUCCESSOR LANDLORD HEREUNDER) TO TENANT SHALL BE LIMITED
TO THE INTEREST OF LANDLORD IN THE BUILDING, AND TENANT AGREES TO LOOK SOLELY TO
LANDLORD'S INTEREST IN THE BUILDING FOR THE RECOVERY OF ANY JUDGMENT OR AWARD
AGAINST THE LANDLORD, IT BEING INTENDED THAT NEITHER LANDLORD NOR ANY MEMBER,
PRINCIPAL, PARTNER, SHAREHOLDER, OFFICER, DIRECTOR OR BENEFICIARY OF LANDLORD
SHALL BE PERSONALLY LIABLE FOR ANY JUDGMENT OR DEFICIENCY. TENANT HEREBY
COVENANTS THAT, PRIOR TO THE FILING OF ANY SUIT FOR AN ALLEGED DEFAULT BY
LANDLORD HEREUNDER, IT SHALL GIVE LANDLORD AND ALL MORTGAGEES WHOM TENANT HAS
BEEN NOTIFIED HOLD MORTGAGES OR DEED OF TRUST LIENS ON THE PROPERTY, BUILDING OR
PREMISES NOTICE AND REASONABLE TIME TO CURE SUCH ALLEGED DEFAULT BY LANDLORD.
XXV. NO WAIVER.
Failure of Landlord to declare any default immediately upon its occurrence,
or delay in taking any action in connection with an event of default shall not
constitute a waiver of such default, nor shall it constitute an estoppel against
Landlord, but Landlord shall have the right to declare the default at any time
and take such action as is lawful or authorized under this Lease. Failure by
Landlord to enforce its rights with respect to any one default shall not
constitute a waiver of its rights with respect to any subsequent default.
Receipt by Landlord of Tenant's keys to the Premises shall not constitute an
acceptance or surrender of the Premises.
XXVI. EVENT OF BANKRUPTCY.
In addition to, and in no way limiting the other remedies set forth
herein, Landlord and Tenant agree that if Tenant ever becomes the subject of a
voluntary or involuntary bankruptcy, reorganization, composition, or other
similar type proceeding under the federal bankruptcy laws, as now enacted or
hereinafter amended, then:
A. "Adequate protection" of Landlord's interest in the Premises pursuant
to the provisions of Section 361 and 363 (or their successor sections) of the
Bankruptcy Code, 11 U.S.C. Section 101 et seq., (such Bankruptcy Code as amended
from time to time being herein referred
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to as the "Bankruptcy Code"), prior to assumption and/or assignment of the Lease
by Tenant shall include, but not be limited to all (or any part) of the
following:
1. the continued payment by Tenant of the Base Rental and all other
Rent due and owing hereunder and the performance of all other covenants and
obligations hereunder by Tenant;
2. the furnishing of an additional/new security deposit by Tenant in
the amount of three (3) times the then current monthly Base Rental.
B. "Adequate assurance of future performance" by Tenant and/or any
assignee of Tenant pursuant to Bankruptcy Code Section 365 will include (but not
be limited to) payment of an additional/new Security Deposit in the amount of
three (3) times the then current monthly Base Rental payable hereunder.
C. Any person or entity to which this Lease is assigned pursuant to the
provisions of the Bankruptcy Code, shall be deemed without further act or deed
to have assumed all of the obligations of Tenant arising under this Lease on and
after the effective date of such assignment. Any such assignee shall, upon
demand by Landlord, execute and deliver to Landlord an instrument confirming
such assumption of liability.
D. Notwithstanding anything in this Lease to the contrary, all amounts
payable by Tenant to or on behalf of the Landlord under this Lease, whether or
not expressly denominated as Rent," shall constitute "rent" for the purposes of
Section 502(b) (6) of the Bankruptcy Code.
E. If this Lease is assigned to any person or entity pursuant to the
provisions of the Bankruptcy Code, any and all monies or other considerations
payable or otherwise to be delivered to Landlord (including Base Rentals and
other Rent hereunder), shall be and remain the exclusive property of Landlord
and shall not constitute property of Tenant or of the bankruptcy estate of
Tenant. Any and all monies or other considerations constituting Landlord's
property under the preceding sentence not paid or delivered to Landlord shall be
held in trust by Tenant or Tenant's bankruptcy estate for the benefit of
Landlord and shall be promptly paid to or turned over to Landlord.
F. If Tenant assumes this Lease and proposes to assign the same pursuant
to the provisions of the Bankruptcy Code to any person or entity who shall have
made a bona fide offer to accept an assignment of this Lease on terms acceptable
to the Tenant, then notice of such proposed offer/assignment, setting forth: (1)
the name and address of such person or entity, (2) all of the terms and
conditions of such offer, and (3) the adequate assurance to be provided Landlord
to assure such person's or entity's future performance under the Lease, shall be
given to Landlord by Tenant no later than twenty (20) days after receipt by
Tenant, but in any event no later than ten (10) days prior to the date that
Tenant shall make application to a court of competent jurisdiction for authority
and approval to enter into such assumption and assignment, and Landlord shall
thereupon have the prior right and option, to be exercised by notice to Tenant
given at any time prior to the effective date of such proposed assignment, to
accept an assignment of this Lease upon the same terms and conditions and for
the same consideration, if any, as the bona fide offer made by such persons or
entity, less any brokerage commission which may be payable out of the
consideration to be paid by such person for the assignment of this Lease.
G. To the extent permitted by law, Landlord and Tenant agree that this
Lease is a contract under which applicable law excuses Landlord from accepting
performance from (or rendering performance to) any person or entity other than
Tenant within the meaning of Sections 365(c) and 365(e) (2) of the Bankruptcy
Code.
XXVII. WAIVER OF JURY TRIAL.
Landlord and Tenant hereby waive any right to a trial by jury in any action
or proceeding based upon, or related to, the subject matter of this Lease. This
waiver is knowingly,
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intentionally, and voluntarily made by Tenant, and Tenant acknowledges that
neither Landlord nor any person acting on behalf of Landlord has made any
representations of fact to induce this waiver of trial by jury or in any way to
modify or nullify its effect. Tenant further acknowledges that it has been
represented (or has had the opportunity to be represented) in the signing of
this Lease and in the making of this waiver by independent legal counsel,
selected of its own free will, and that it has had the opportunity to discuss
this waiver with counsel.
XXVIII. COMPLIANCE MATTERS.
Landlord hereby advises Tenant that Landlord has no actual knowledge or
credible reports of the presence in the Premises or in the Building or in or on
the land associated with the Building of any Hazardous Material, recognizing,
however, that Landlord has not undertaken any studies or investigations
pertaining to same other than with respect to asbestos. Landlord further
advises that the ground storage tank operated by Landlord at the Building has
been tested, lined and cathodically protected, with continuous monitoring and
leak tested with automated controls. Landlord shall defend, indemnify and hold
harmless Tenant from all claims, costs or damages of any kind whatsoever arising
during or after the Term hereof from or in connection with the presence or
suspected presence of any Hazardous Material (including without limitation the
diesel fuel permitted below) in the Leased Premises, the Building or the soil,
groundwater or soil vapor on or under the Building to the extent arising by
reason of any act or omission of Landlord, or its predecessor-in-interest, or
any agent, employee or contractor of Landlord. Tenant shall defend, indemnify
and hold harmless Landlord from all claims, costs or damages of any kind
whatsoever arising during or after the Term hereof from or in connection with
the presence or suspected presence of Hazardous Materials (including without
limitation the diesel fuel permitted below) in the Leased Premises, the Building
or the soil, groundwater or soil vapor on or under the Building to the extent
arising by reason of any act or omission of Tenant or any agent, employee or
contractor of Tenant. Landlord acknowledges that Tenant shall be entitled to
store in a lawful manner in strict accordance with all Environmental Law diesel
fuel for its diesel generator to be located at the Building. "Hazardous
Material" means (1) asbestos and any asbestos containing material and any
substance that is then defined or listed in, or otherwise classified pursuant
to, any Environmental Law (as hereinafter defined) as a "hazardous substance,"
"hazardous material," "hazardous waste," "infectious waste," "toxic substance,"
"toxic pollutant" or any other formulation intended to define, list, or classify
substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, toxicity, reproductive toxicity, or
Toxicity Characteristic Leaching Procedure (TCLP) toxicity, (2) any petroleum
and drilling fluids, produced waters, and other wastes associated with the
exploration, development or production of crude oil, natural gas, or geothermal
resources, and (3) any petroleum product, polychlorinated biphenyls, urea
formaldehyde, radon gas, radioactive material (including any source, special
nuclear, or by-product material), medical waste, chlorofluorocarbons lead or
lead-based product, and any other substance whose presence could be detrimental
to the Building or the Land or hazardous to health or the environment.
"Environmental Law" means any present and future Law and any amendments (whether
common law, statute, rule, order, regulation or otherwise), permits and other
requirements or guidelines of governmental authorities applicable to the
Building or the Land and relating to the environment and environmental
conditions or to any Hazardous Material (including, without limitation, CERCLA,
42 U.S.C. (S) 9601 et seq., the Resource Conservation and Recovery Act of 1976,
42 U.S.C. (S) 6901 et seq., the Hazardous Materials Transportation Act, 49
U.S.C. (S) 1801 et seq., the Federal Water Pollution Control Act, 33 U.S.C. (S)
1251 et seq., the Clean Air Act, 42 U.S.C. (S) 7401 et seq., the Toxic
Substances Control Act, 15 U.S.C. (S) 2601 et seq., the Safe Drinking Water Act,
42 U.S.C. (S) 300f et seq., the Emergency Planning and Community Right-To-Know
Act, 42 U.S.C. (S) 11.01 et seq., the Occupational Safety and Health Act, 29
U.S.C. (S) 651 et seq., and any so-called "Super Fund" or "Super Lien" law, any
Law requiring the filing of reports and notices relating to hazardous
substances, environmental laws administered by the Environmental Protection
Agency, and any similar state and local Laws, all amendments thereto and all
regulations, orders, decisions, and decrees now or hereafter promulgated
thereunder concerning the environment, industrial hygiene or public health or
safety).
Landlord further represents to Tenant that as of the Lease Commencement
Date, the Common Areas of the Building shall comply as required with all
applicable governmental laws,
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rules and codes (including without limitation the American with Disabilities Act
and all applicable fire protection and life safety requirements) with the
exception of those requirements, if any, directly resulting by reason of
Tenant's occupancy within the Building. In the event Landlord is in breach of
the foregoing representation, Landlord agrees that at no cost or expense to
Tenant the Landlord shall take those actions necessary to cure the condition
giving rise to such breach.
XXIX. HOLDING OVER.
In the absence of a written agreement executed by Landlord expressly
recognizing that such agreement shall prevail over the provisions contained in
this Article XXIX, in the event of holding over by Tenant after expiration or
other termination of this Lease or in the event Tenant continues to occupy the
Premises after the termination of Tenant's right of possession pursuant to
Articles XXII and XXIII hereof, occupancy of the Premises subsequent to such
termination or expiration shall be that of a tenancy at sufferance and in no
event for month-to-month or year-to-year, but Tenant shall, throughout the
entire holdover period, be subject to all the terms and provisions of this Lease
and shall pay for its use and occupancy an amount (on a per month basis without
reduction for any partial months during any such holdover) equal to 175% of the
sum of the Base Rental and Additional Base Rental due for the period immediately
preceding such holding over, provided that in no event shall Base Rental and
Additional Base Rental during the holdover period be less than the fair market
rental for the Premises. No holding over by Tenant or payments of money by
Tenant to Landlord after the expiration of the term of this Lease shall be
construed to extend the Lease Term or prevent Landlord from recovery of
immediate possession of the Premises by summary proceedings or otherwise. In
addition to the obligation to pay the amounts set forth above during any such
holdover period, Tenant also shall be liable to Landlord for all damage,
including any consequential damage, which Landlord may suffer by reason of any
holding over by Tenant, and Tenant shall indemnify Landlord against any and all
claims made by any other tenant or prospective tenant against Landlord for delay
by Landlord in delivering possession of the Premises to such other tenant or
prospective tenant.
XXX. SUBORDINATION TO MORTGAGES.
Tenant accepts this Lease subject and subordinate to any mortgage, deed of
trust, ground lease or other lien presently existing or hereafter arising upon
the Premises, or upon the Building and/or the Property and to any renewals,
modifications, refinancings and extensions thereof (any such mortgage, deed of
trust, lease or other lien being hereinafter referred to as a "Mortgage", and
the person or entity having the benefit of same being referred to hereinafter as
a "Mortgagee"), but Tenant agrees that any such Mortgagee shall have the right
at any time to subordinate such Mortgage to this Lease on such terms and subject
to such conditions as such Mortgagee may deem appropriate in its discretion
provided the mortgagee for itself and any party claiming by, through or under
such mortgagee agrees in writing to recognize this Lease in the event it or such
party acquires the Building by foreclosure or deed-in-lieu of foreclosure.
Tenant agrees upon demand to execute such further instruments subordinating this
Lease, acknowledging the subordination of this Lease or attorning to the holder
of any such Mortgage as Landlord may reasonably request. If any person shall
succeed to all or part of Landlord's interests in the Premises whether by
purchase, foreclosure, deed in lieu of foreclosure, power of sale, termination
of lease or otherwise, and if and as so requested or required by such successor-
in-interest, Tenant shall, without charge, attorn to such successor-in-interest.
Tenant waives the provisions of any statute or rule of law, now or
hereafter in effect, which may give or purport to give Tenant any right to
terminate or otherwise adversely affect this Lease and the obligations of Tenant
hereunder in the event that any such foreclosure proceeding is prosecuted or
completed. In addition, if the Landlord's leasehold interest in any ground
lease shall be terminated, Tenant agrees that this Lease shall, at the option of
the ground lessor, remain in full force and effect (or if terminated by law as a
result of Landlord's interest being terminated, Tenant will enter into a new
Lease with the identical terms and conditions of this Lease). Tenant agrees to
give any Mortgagee, by certified mail, return receipt requested, a copy of any
notice of default served upon Landlord, provided that prior to such notice
Tenant has been notified in writing (by way of notice of Assignment of Rents and
Leases, or otherwise) of the address of such
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mortgagees and/or trust deed holders. Tenant further agrees that if Landlord
shall have failed to cure such default within the time provided for in this
Lease, then the mortgagees and/or trust deed holders shall have an additional
thirty (30) days within which to cure such default or if such default cannot be
cured within that time, then such additional time as may be necessary if within
such thirty (30) days, the mortgagee and/or trust deed holder has commenced and
is diligently pursuing the remedies necessary to cure such default (including
but not limited to commencement of foreclosure proceedings, if necessary, to
effect such cure), in which event this Lease shall not be terminated while such
remedies are being so diligently pursued. Tenant agrees that in the event of
the sale of the Land or the Building, by foreclosure or deed in lieu thereof,
the purchaser at such sale shall only be responsible for the return of any
Security Deposit paid by Tenant to Landlord in connection with this Lease to the
extent that such purchaser actually receives such Security Deposit. Tenant
further agrees that any successor to Landlord's interest shall not be bound by
(i) any payment of monthly Rent or Additional Rent for more than one (1) month
in advance, except prepayments in the nature of security for the performance by
Tenant of its obligations under this Lease or (ii) any amendment or modification
of this Lease made without the consent of Landlord's mortgagee or such successor
in interest. Landlord agrees to transfer all of its right, title and interest in
any security deposit posted by Tenant hereunder remaining at the time of
Landlord's transfer to the transferee and to notify Tenant of such transfer.
Landlord agrees to use all reasonable efforts to obtain from the party
presently holding the note secured by a deed of trust against the Building, and
shall, as a condition to any future subordination obtain from any future
Mortgagee, an agreement (a "Nondisturbance Agreement") which shall provide that,
as long as Tenant is not in default under this Lease after written notice and
expiration of the applicable cure period, this Lease will not be terminated
during the Lease term hereof as a result of any foreclosure or conveyance in
lieu of foreclosure under the deed of trust on the Building held by such
mortgagee, nor shall any such mortgagee condition its recognition of this Lease
to any change in the financial terms of this Lease. Any such Nondisturbance
Agreement shall be in form and content as required by Landlord's mortgagee, and
shall also include such subordination and adornment provisions as such mortgagee
may reasonably require. Landlord has delivered to Tenant the form of
Nondisturbance Agreement received from MBL (defined below), with the
understanding that MBL will not complete its review of this Lease until it has
received a final signed copy. In the event Tenant desires to negotiate the
provisions contained in any such Nondisturbance Agreement Tenant shall indemnify
and hold Landlord harmless from any costs or expenses incurred with either
Landlord's or Lender's counsel in connection therewith. In the event Landlord
is unable to obtain any form of Nondisturbance Agreement from its Mortgagee
notwithstanding Landlord's reasonable best efforts to do so, within the initial
fifteen (15) days period following the date of execution hereof, then and in
such event by written notice to Landlord, the Tenant shall be entitled to
terminate this Lease no later than three (3) business days following expiration
of such fifteen (15) days period, time being of the essence.
Landlord represents and warrants to Tenant that as of the date hereof that
it has heretofore granted a deed of trust secured against the Building to Mutual
Benefit Life Insurance Company (now known as MBL Life Assurance Company) ("MBL")
in the original principal balance of $22,000,000, for a thirty-five (35) year
term commencing approximately in February, 1982, which mortgage has a principal
balance of approximately $19,015,000, and to the best of Landlord's actual
knowledge, information and belief such mortgage is in good standing and free of
default.
XXXI. ATTORNEYS' FEES.
In the event that Landlord should retain counsel and/or institute any suit
against Tenant for violation of or to enforce any of the covenants or conditions
of this Lease, or should Tenant institute any suit against Landlord for
violation of any of the covenants or conditions of this Lease, or should either
party intervene in any suit in which the other is a party to enforce or protect
its interest or rights hereunder, the prevailing party in any such suit shall be
entitled to all of its costs, expenses and reasonable fees of its attorney(s)
(if and to the extent permitted by law) in connection therewith.
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XXXII. NOTICE.
Whenever any demand, request, approval, consent or notice ("Notice") shall
or may be given to either of the parties by the other, each such Notice shall be
in writing and shall be sent by registered or certified mail with return receipt
requested, or sent by overnight courier service (such as Federal Express) at the
respective addresses of the parties for notices as set forth in Section I.A.10.
of this Lease, provided that if Tenant has vacated the Premises or is in default
of this Lease Landlord may serve Notice by any manner permitted by law. Any
Notice under this Lease delivered by registered or certified mail shall be
deemed to have been given, delivered, received and effective on the earlier of
(a) the third day following the day on which the same shall have been mailed
with sufficient postage prepaid or (b) the delivery date indicated on the return
receipt. Notice sent by overnight courier service shall be deemed given,
delivered, received and effective upon the day after such notice is delivered to
or picked up by the overnight courier service. Either party may, at any time,
change its Notice Address by giving the other party Notice stating the change
and setting forth the new address.
XXXIII. ESTOPPEL CERTIFICATES.
Tenant agrees, at any time and from time to time during the Term of this
Lease, but not in excess of one (1) time per year in the absence of a proposed
sale or re-financing (in which event Landlord shall be limited to three (3)
times in any calendar year), upon not less than five (5) days prior written
notice by Landlord, to execute, acknowledge and deliver to Landlord a statement
certifying to substantially the following provisions (recognizing that any of
such statement may be modified by Tenant to reflect the then state of facts):
(i) a statement that this Lease is unmodified and in full force and effect (or
if there have been modifications, that the Lease is in full force and effect as
modified and stating the modifications), (ii) a statement of the dates to which
the Rent and any other charges hereunder have been paid by Tenant, (iii) a
statement of whether or not, to the best knowledge of Tenant, Landlord is in
default in the performance of any covenant, agreement or condition contained in
this Lease, and if so, specifying each such default of which Tenant may have
knowledge, (iv) a statement of the address to which notices to Tenant should be
sent, (v) a statement that all work required to be performed by the Landlord
under this Lease has been completed and that Tenant accepts the Premises and
improvements therein and/or that all payments of the Allowance have been
satisfied by Landlord, (vi) a statement that Tenant will not attempt to
terminate this Lease by reason of Landlord's default or omission without giving
written notice of such default or omission to Landlord and any mortgagee of
which Tenant has knowledge and (vi) such other statement or statements as
Landlord, any prospective purchaser of the Building or the Land, any mortgagee
or prospective mortgagee of the Building or the Land or of Landlord's interest
in either and/or any prospective assignee of any such mortgagee, may reasonably
request. Any such statement delivered pursuant hereto, may be relied upon by any
owner of the Building or the Land, any prospective purchaser of the Building or
the Land, any mortgagee or prospective mortgagee of the Building or the Land or
of Landlord's interest in either, or any prospective assignee of any such
mortgagee. Tenant will agree to make such reasonable changes or modifications to
this Lease as may be required by any mortgagee of the Building and/or the Land,
provided that such changes or modifications shall not increase the amount of
Base Rental, Additional Base Rental, shorten the Term of this Lease or change or
redefine the Premises, or otherwise adversely affect the rights or obligations
of the parties hereunder.
Landlord agrees to provide a similar estoppel following the written
request of Tenant periodically during the Term, upon which Tenant or its lender,
assignee or sublessee may rely.
XXXIV. INTENTIONALLY OMITTED.
XXXV. EXCEPTED RIGHTS.
This Lease does not grant any rights to light or air over or about the
Building. Landlord specifically excepts and reserves to itself the use of any
roofs, the exterior portions of the Premises, all rights to the land and
improvements below the improved floor level of the Premises,
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the improvements and air rights above the Premises and the improvements and air
rights located outside the demising walls of the Premises, and such areas within
the Premises as are required for installation of utility lines and other
installations required to serve any occupants of the Building and the right to
maintain and repair the same, and no rights with respect thereto are conferred
upon Tenant unless otherwise specifically provided herein. Landlord further
reserves to itself the right from time to time: (a) to change the Building's
name or street address; (b) to install, fix and maintain signs on the exterior
and interior of the Building; (c) to designate and approve window coverings; (d)
subject to Landlord's obligation to minimize interference with Tenant's business
or use of or access to the Premises, to make any decorations, alterations,
additions, improvements to the Building, or any part thereof (including the
Premises) which Landlord shall desire, or deem necessary for the safety,
protection, preservation or improvement of the Building, or as Landlord may be
required to do by law; (e) subject to Landlord's obligation to minimize
interference with Tenant's business or use of or access to the Premises, to have
access to the Premises to perform its duties and obligations and to exercise its
rights under this Lease; (f) except with respect to certain "secure" areas
desired by Tenant, to retain at all times and to use pass-keys to all locks
within and into the Premises; (g) to approve the weight, size, or location of
heavy equipment, or articles in and about the Premises; (h) subject to
Landlord's obligation to minimize interference with Tenant's business or use of
or access to the Premises, to change the arrangement and/or location of
entrances of passageways, doors and doorways, corridors, elevators, stairs,
toilets and public parts of the Building; (i) if Tenant has vacated the Premises
(i.e. removed all of its equipment therefrom) during the last six (6) months of
the Lease Term, to perform additions, alterations and improvements to the
Premises in connection with a reletting or anticipated reletting thereof without
being responsible or liable for the value or preservation of any then existing
improvements to the Premises; and (j) to grant to anyone the exclusive right to
conduct any business or undertaking in the Building. Landlord, in accordance
with Article XII hereof, shall have the right to enter the Premises in
connection with the exercise of any of the rights set forth herein with the
understanding that absent circumstances believed by Landlord to constitute an
emergency circumstance, Landlord shall use all reasonable efforts to minimize
interference with Tenant's business or use of or access to the Premises in
connection with any such entry. Landlord's entry into the Premises and the
performance of any work therein shall not constitute a constructive eviction or
entitle Tenant to any abatement or reduction of Rent by reason thereof.
XXXVI. SURRENDER OF PREMISES.
At the expiration or earlier termination of this Lease or Tenant's right of
possession hereunder, Tenant shall remove all Tenant's Property from the
Premises, remove all Required Removables designated by Landlord and quit and
surrender the Premises to Landlord, broom clean, and in good order, condition
and repair, ordinary wear and tear excepted. If Tenant fails to remove any of
Tenant's Property within one (1) day after the termination of this Lease or
Tenant's right to possession hereunder, Landlord, at Tenant's sole cost and
expense, shall be entitled to remove and/or store such Tenant's Property and
Landlord shall in no event be responsible for the value, preservation or
safekeeping thereof. Tenant shall pay Landlord, upon demand, any and all
expenses caused by such removal and all storage charges against such property so
long as the same shall be in the possession of Landlord or under the control of
Landlord. In addition, if Tenant fails to remove any Tenant's Property from the
Premises or storage, as the case may be, within ten (10) days after written
notice from Landlord, Landlord, at its option, may deem all or any part of such
Tenant's Property to have been abandoned by Tenant and title thereof shall
immediately pass to Landlord.
XXXVII. PARKING
The parking garage within the Building may be used by Tenant and Tenant's
visitors, invitees and licensees while engaged in business in the Premises, for
the parking of their automobiles, in common with like use by other tenants of
space in the Building, but subject to those charges which Landlord or its
operator may impose from time to time on such use. The use of said automobile
parking areas by Tenant and Tenant's visitors, invitees and licensees shall be
at their sole risk and expense, and in no event shall Landlord have any
liability for damage to, theft or loss of property of the Tenant or of Tenant's
employees, visitors, licensees or invitees
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<PAGE>
suffered or sustained in or about said parking areas. Said parking areas shall
be under the exclusive control of Landlord or its garage operator, who shall
have the right to establish rules and regulations governing the use of said
parking areas, and the right to change such rules and regulations from time to
time, and the right to limit or terminate the right of Tenant, its visitors,
invitees and licensees or any other parties to use such parking areas. Tenant
agrees to keep, observe and comply with all such rules and regulations so
established by Landlord, and will direct and require its employees, licensees,
visitors and invitees to comply therewith. No employee of Landlord is
authorized to accept possession of any vehicle from the Tenant or from Tenant's
employees, licensees, visitors or invitees, nor to accept custody of any
articles from Tenant. Landlord shall assist Tenant in obtaining a commitment
from the parking garage operator to permit Tenant to obtain during the term of
this Lease up to five (5) parking contracts in the Building garage, for parking
of automobiles of Tenant's executives and personnel, such contracts to be upon
the monthly rental and upon the terms and conditions, rules and regulations
prevailing and imposed from time to time by the parking garage operator. The
terms of such garage contracts shall be as set forth therein.
XXXVIII. ACCESS.
Tenant shall have access to the Premises twenty-four (24) hours per day,
seven (7) days per week. There will be a minimum of one (1) elevator in
operation for tenant's use outside of the Normal Business Hours. In the event of
any emergency, or to prevent the interruption of essential services, Tenant
shall have access (without any requirement of prior notification to Landlord but
to be followed by written notice to the Landlord within three (3) business days
thereafter) at all times, 24 hours per day, seven (7) days per week, 365 days a
year, to the Premises, roof, ducts and telephone closets, equipment rooms and
equipment areas, (subject to the requirements of the next sentence in the case
of certain areas more particularly described therein) required for the
replacement and repair of telecommunications and related facilities. Provided
Tenant shall first install at its sole cost and expense appropriate card readers
with Landlord's security company at the entrances therefor, in order to permit
Landlord with the ability to monitor Tenant's access thereto at all times,
Tenant shall also have access pursuant to the immediately preceding sentence to
the roof, equipment rooms and electrical systems of the Building. Tenant agrees
to give Landlord a courtesy notice of any access made by Tenant to any portion
of the Building beyond the Premises within the hour of such access, or, to the
extent practical, in advance. Landlord agrees to cooperate with Tenant in
coordinating Tenant's access to any other areas required in order for Tenant to
perform requisite repairs and/or replacements required by reason of any
emergency as described above, following notice to Landlord from Tenant.
XXXIX. MISCELLANEOUS.
A. If any term or provision of this Lease, or the application thereof to
any person or circumstance shall, to any extent, be invalid or unenforceable,
the remainder of this Lease, or the application of such term or provision to
persons or circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby, and each term and provision of
this Lease shall be valid and enforced to the fullest extent permitted by law.
This Lease represents the result of negotiations between Landlord and Tenant,
each of which has been (or has had opportunity to be) represented by counsel of
its own selection, and neither of which has acted under duress or compulsion,
whether legal, economic or otherwise. Consequently, Landlord and Tenant agree
that the language in all parts of the Lease shall in all cases be construed as a
whole according to its fair meaning and neither strictly for nor against
Landlord or Tenant.
B. Tenant agrees not to record this Lease or any memorandum hereof
without Landlord's prior written consent.
C. This Lease and the rights and obligations of the parties hereto shall
be interpreted, construed, and enforced in accordance with the laws of the state
in which the Building is located.
D. Events of "Force Majeure" shall include strikes, riots, acts of God,
shortages of labor or materials, war, governmental law, regulations or
restrictions and any other cause
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<PAGE>
whatsoever that is beyond the control of Landlord or Tenant. Whenever a period
of time is herein prescribed for the taking of any action by Landlord or Tenant,
such party shall not be liable or responsible for, and there shall be excluded
from the computation of such period of time, any delays due to events of Force
Majeure. In no event shall either party claim Force Majeure with respect to any
payment obligation hereunder.
E. Landlord shall have the right to transfer and assign, in whole or in
part, all of its rights and obligations hereunder and in the Building and
Property referred to herein, and in such event and upon such transfer, Landlord
shall be released from any further obligations hereunder, and Tenant agrees to
look solely to such successor in interest of Landlord for the performance of
such obligations.
F. Tenant hereby represents to Landlord that it has dealt directly with
and only with the Brokers as the brokers in connection with this Lease. Tenant
agrees to indemnify and hold Landlord and the Landlord Related Parties harmless
from all claims of any brokers claiming to have represented Tenant in connection
with this Lease. Landlord hereby represents to Tenant that it has dealt directly
with and only with the Brokers as the brokers in connection with this Lease and
that Landlord shall be responsible for paying the Landlord's Broker any amounts
due in connection with this Lease as determined pursuant to that certain
separate written agreement heretofore entered into by Landlord and such Broker.
Tenant and Landlord agree that Tenant's Broker shall be paid by Landlord's
Broker within five (5) days following receipt by Landlord's Broker of the monies
received from Landlord (i.e. pay when paid) the following portions of the
commission to which Tenant's Broker shall be entitled (based upon the separate
written agreement entered into with Landlord's Broker and Landlord) based upon
with the following schedule:
1/2 of the commission to which Tenant's Broker is entitled at Lease
Execution
1/4 of the commission to which Tenant's Broker is entitled at the
Commencement Date
1/8 of the commission to which Tenant's Broker is entitled three months
after the Commencement Date or if earlier, the date Base Rental commences
to be payable hereunder.
1/8 of the commission to which Tenant's Broker is entitled six months after
the Commencement Date or the date Base Rental commences to be payable
hereunder.
Landlord agrees to indemnify and hold Tenant and the Tenant Related Parties
harmless from all claims of any brokers claiming to have represented Landlord in
connection with this Lease. Tenant agrees to indemnify and hold Landlord and the
Landlord Related Parties harmless from all claims of any brokers claiming to
have represented Tenant in connection with this Lease.
G. If there is more than one Tenant, or if the Tenant is comprised of
more than one person or entity, the obligations hereunder imposed upon Tenant
shall be joint and several obligations of all such parties. All notices,
payments, and agreements given or made by, with or to any one of such persons or
entities shall be deemed to have been given or made by, with or to all of them.
H. In the event Tenant is a corporation (including any form of
professional association), partnership (general or limited), or other form of
organization other than an individual (each such entity is individually referred
to herein as an "Organizational Entity"), then Tenant hereby covenants, warrants
and represents: (1) that such individual is duly authorized to execute or attest
and deliver this Lease on behalf of Tenant in accordance with the organizational
documents of Tenant and has been duly appointed as the attorney-in-fact for the
Tenant; (2) that this Lease is binding upon Tenant; (3) that Tenant is duly
organized and legally existing in the state of its organization, and is
qualified to do business in the state in which the Premises is located; and (4)
that the execution and delivery of this Lease by Tenant will not result in any
breach of, or constitute a default under any mortgage, deed of trust, lease,
loan, credit agreement, partnership agreement or other contract or instrument to
which Tenant is a party or by which Tenant may be bound. If Tenant is an
Organizational Entity, upon request, Tenant will, prior to the Commencement
Date, deliver to Landlord true and correct copies of all organizational
documents of Tenant, including, without limitation, copies of an appropriate
resolution or consent
-41-
<PAGE>
of Tenant's board of directors or other appropriate governing body of Tenant
authorizing or ratifying the execution and delivery of this Lease, which
resolution or consent will be duly certified to Landlord's satisfaction by an
appropriate individual with authority to certify such documents, such as the
secretary or assistant secretary or the managing general partner of Tenant.
I. Tenant acknowledges that the financial capability of Tenant to
perform its obligations hereunder is material to Landlord and that Landlord
would not enter into this Lease but for its belief, based on its review of
Tenant's financial statements, that Tenant is capable of performing such
financial obligations. Tenant hereby represents, warrants and certifies to
Landlord that its financial statements previously furnished to Landlord were at
the time given true and correct in all material respects and that there have
been no material subsequent changes thereto as of the date of this Lease. At
any time during the Lease Term if requested by either a lender, purchaser or
prospective lender or purchaser of Landlord, Tenant shall provide Landlord, upon
ten (10) days' prior written notice from Landlord, with a current financial
statement and financial statements of the two (2) years prior to the current
financial statement year and such other information as Landlord or its Mortgagee
may request in order to create a "business profile" of Tenant and determine
Tenant's ability to fulfill its obligations under this Lease. Such statement
shall be prepared in accordance with generally accepted accounting principles
and, if such is the normal practice of Tenant, shall be audited by an
independent certified public accountant.
J. Except as expressly otherwise herein provided, with respect to all
required acts of Tenant, time is of the essence of this Lease. This Lease shall
create the relationship of Landlord and Tenant between the parties hereto.
K. This Lease and the covenants and conditions herein contained shall
inure to the benefit of and be binding upon Landlord and Tenant and their
respective permitted successors and assigns.
L. Notwithstanding anything to the contrary contained in this Lease, the
expiration of the Lease Term, whether by lapse of time or otherwise, shall not
relieve Tenant from Tenant's obligations accruing prior to the expiration of the
Lease Term, and such obligations shall survive any such expiration or other
termination of the Lease Term.
M. The headings and titles to the paragraphs of this Lease are for
convenience only and shall have no affect upon the construction or
interpretation of any part hereof.
N. Landlord has delivered a copy of this Lease to Tenant for Tenant's
review only, and the delivery hereof does not constitute an offer to Tenant or
option. This Lease shall not be effective until an original of this Lease
executed by both Landlord and Tenant is delivered to and accepted by Landlord,
and this Lease has been approved by Landlord's Mortgagees, if required.
O. Tenant shall, and may peacefully have, hold, and enjoy the Premises,
subject to the other terms of this Lease (including, without limitation, Article
XXX hereof), provided that tenant pays the Rent herein recited to be paid by
Tenant and performs all covenants and agreements herein contained. This covenant
and any and all other covenants of Landlord shall be binding upon Landlord and
its successors only during its or their respective periods of ownership of the
Landlord's interest hereunder.
XL. ENTIRE AGREEMENT.
This Lease Agreement, including the following Exhibits:
Exhibit A - Outline and Location of Premises
---------
Exhibit B - Rules and Regulations
---------
Exhibit C - Commencement Letter
---------
Exhibit D - Terms of Use of Building Water Tower and Condenser
--------- Water
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<PAGE>
constitutes the entire agreement between the parties hereto with respect to
the subject matter of this Lease and supersedes all prior agreements and
understandings between the parties related to the Premises, including all lease
proposals, letters of intent and similar documents. TENANT EXPRESSLY
ACKNOWLEDGES AND AGREES THAT LANDLORD HAS NOT MADE AND IS NOT MAKING, AND
TENANT, IN EXECUTING AND DELIVERING THIS LEASE, IS NOT RELYING UPON, ANY
WARRANTIES, REPRESENTATIONS, PROMISES OR STATEMENTS, EXCEPT TO THE EXTENT THAT
THE SAME ARE EXPRESSLY SET FORTH IN THIS LEASE. ALL UNDERSTANDINGS AND
AGREEMENTS HERETOFORE MADE BETWEEN THE PARTIES ARE MERGED IN THIS LEASE WHICH
ALONE FULLY AND COMPLETELY EXPRESSES THE AGREEMENT OF THE PARTIES, NEITHER PARTY
RELYING UPON ANY STATEMENT OR REPRESENTATION NOT EMBODIED IN THIS LEASE. THIS
LEASE MAY BE MODIFIED ONLY BY A WRITTEN AGREEMENT SIGNED BY LANDLORD AND TENANT.
LANDLORD AND TENANT EXPRESSLY AGREE THAT THERE ARE AND SHALL BE NO IMPLIED
WARRANTIES OF MERCHANTABILITY, HABITABILITY, SUITABILITY, FITNESS FOR A
PARTICULAR PURPOSE OR OF ANY OTHER KIND ARISING OUT OF THIS LEASE, ALL OF WHICH
ARE HEREBY WAIVED BY TENANT, AND THAT THERE ARE NO WARRANTIES WHICH EXTEND
BEYOND THOSE EXPRESSLY SET FORTH IN THIS LEASE.
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<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the
day and year first above written.
WITNESS/ATTEST: LANDLORD:
--------
1120 VERMONT AVENUE ASSOCIATES
/s/ J. Scott Ogden /s/ Sylvan C. Herman
______________________________ By:________________________________________
J. Scott Ogden Sylvan C. Herman, General Partner
TENANT:
------
/s/ Joseph A. Beatty /s/ Brian F. Addy
______________________________ By:_________________________________________
(Secretary) Authorized Officer and Attorney-in-Fact
Brian F. Addy
Executive V.P.
(Corporate Seal)
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<PAGE>
EXHIBIT A
PREMISES
--------
<PAGE>
EXHIBIT B
BUILDING RULES AND REGULATIONS
------------------------------
The following rules and regulations shall apply, where applicable, to the
Premises, the Building, the parking garage associated therewith (if any), the
Property and the appurtenances thereto:
The Landlord may, upon request by any Tenant, waive the compliance by such
Tenant of any of the foregoing rules and regulations, provided that (a) no
waiver shall be effective unless signed by Landlord or Landlord's authorized
agent, (b) any such waiver shall not relieve such Tenant from the obligation to
comply with such rule or regulation in the future unless expressly consented to
by Landlord, and (c) no waiver granted to any Tenant shall relieve any other
Tenant from the obligation of complying with the foregoing rules and regulations
unless such other Tenant has received a similar waiver in writing from Landlord.
In the event of any conflict between these Rules and Regulations and the
terms of the attached Lease, the terms of the attached Lease shall govern and
control.
1. The sidewalks, entrances, passages, courts, elevators, vestibules,
stairways, corridors or halls or other parts of the Building not
occupied by any Tenant shall not be obstructed or encumbered by any
Tenant or used for any purpose other than ingress and egress to and
from the demised premises. Subject to Landlord's obligation to
minimize interference with Tenant's business or use of or access to
the Premises, Landlord shall have the right to control and operate the
public portions of the Building, and the facilities furnished for the
common use of the Tenants, in such manner as Landlord deems best for
the benefit of the Tenants generally. No Tenant shall permit the visit
to the demised premises of persons in such numbers or under such
conditions as to interfere with the use and enjoyment by other Tenants
of the entrances, corridors, elevators and other public portions of
facilities of the Building.
2. No awnings or other projections shall be attached to the outside walls
of the Building without the prior written consent of the Landlord,
which consent may be consented or denied in Landlord's sole and
exclusive discretion. No drapes, blinds, shades, or screens shall be
attached to or hung in, or used in connection with, any window or door
of the demised premises, without the prior written consent of the
Landlord which shall not be unreasonably withheld, conditioned or
delayed. Such projections, curtains, blinds, shades, screens or other
fixtures must be of a quality, type, design and color, and attached in
the manner approved by Landlord.
3. No sign, advertisement, notice or other lettering shall be exhibited,
inscribed, painted or affixed by any Tenant on any part of the outside
or, if visible from beyond the demised premises, inside of the demised
premises or the Building without the prior written consent of the
Landlord. In the event of the violation of the foregoing by Tenant,
Landlord may remove same without any liability, and may charge the
expense incurred by such removal to the Tenant or Tenants violating
this rule. Interior signs on doors and directory tablet shall be
inscribed, painted or affixed for each Tenant by the Landlord at the
expense of such Tenant, and shall be of a size, color and style
reasonably acceptable to the Landlord.
4. No show cases or other articles shall be put in front of or affixed
to any part of the exterior of the Building, nor placed in the halls,
corridors or vestibules without the prior written consent of the
Landlord.
5. The water and wash closets and other plumbing fixtures shall not be
used for any purposes other than those for which they were
constructed, and no sweepings, rubbish, rags, or other substances
shall be thrown therein. All damages resulting from any misuse of the
fixtures (unless caused by Landlord or its agents,
<PAGE>
employees or contractors) shall be borne by the Tenant who, or whose
servants, employees, agents, visitors or licensees, shall have caused
the same.
6. There shall be no marking, painting, drilling into or in any way
defacing any part of the demised premises or the Building. No boring,
cutting or stringing of wires shall be permitted. Tenant shall not
construct, maintain, use or operate within the demised premises or
elsewhere within or on the outside of the Building, any electrical
device, wiring or apparatus in connection with a loud speaker system
or other sound system that can be heard outside the demised premises.
7. No bicycles, vehicles or animals (other than guide dogs), birds or
pets of any kind shall be brought into or kept in or about the demised
premises, and no cooking for any parties other than on an incidental
basis for Tenant employees and invitees, shall be done or permitted by
any Tenant on said premises. No Tenant shall cause or permit any
unusual or objectionable odors to be produced upon or permeate from
the demised premises.
8. No space in the Building shall be used for manufacturing, for the
storage of merchandise, or for the sale of merchandise, goods or
property of any kind at auction.
9. No Tenant shall make, or permit to be made, any unseemly or disturbing
noises or disturb or interfere with occupants of this or neighboring
buildings or premises of those having business with them whether by
the use of any musical instrument, radio, talking machines, unmusical
noise, whistling, singing, or in any other way. No Tenant shall throw
anything out of the doors or windows or down the corridors or stairs.
10. No inflammable, combustible or explosive fluid, chemical or substance
shall be brought or kept upon the demised premises except for ordinary
cleaning supplies.
11. No additional locks or bolts of any kind shall be placed upon any of
the doors, or windows by any Tenant, nor shall any changes be made in
existing locks or the mechanism thereof without the prior written
consent of the Landlord which shall not be unreasonably withheld,
conditioned or delayed. The doors leading to the corridors or main
halls shall be kept closed during business hours, except as they may
be used for ingress or egress. Each Tenant shall, upon the termination
of his tenancy, restore to Landlord all keys of stores, offices,
storage, and toilet rooms either furnished to, or otherwise procured
by, such Tenant, and in the event of the loss of any keys so
furnished, such Tenant shall pay to the Landlord the cost thereof.
12. All removals, or the carrying in or out of any safes, freight,
furniture or bulky matter of any description must take place during
the hours which the Landlord or its agent may reasonably determine
from time to time. The Landlord reserves the right to inspect all
freight to be brought into the Building and to exclude from the
Building all freight which violates any of these Rules and Regulations
or the lease of which these Rules and Regulations are a part.
13. Any person employed by any Tenant to do janitor work within the
demised premises must obtain Landlord's consent and such person shall,
while in the Building and outside of said demised premises, comply
with all reasonable instructions issued by the Property Manager of the
Building. No Tenant shall engage or pay any employees on the demised
premises, except those actually working for such Tenant on said
premises.
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<PAGE>
14. No Tenant shall purchase spring water, ice, coffee, soft drinks,
towels, or other like service from any company or persons who, in
Landlord's opinion, has proven to be an unsatisfactory vendor.
15. Landlord shall have the right to prohibit any advertising by any
Tenant which, in Landlord's opinion, tends to impair the reputation of
the Building or its desirability as a building for ounces, and upon
written notice from Landlord, Tenant shall refrain from or discontinue
such advertising.
16. The Landlord reserves the right to exclude from the Building at all
times any person who is not known or does not properly identify
himself to the Building management or watchman on duty. Landlord may,
at his option, require all persons admitted to or leaving the Building
between the hours of 6 P.M. and 7 A.M., Tuesdays through Fridays or at
all times after 6:00 P.M. on Friday through 7:00 A.M. on Mondays or at
all times during any legal holidays, to register. Each Tenant shall be
responsible for all persons for whom he authorizes entry into or exit
out of the Building, and shall be liable to the Landlord for all acts
of such persons.
17. The demised premises shall not be used for lodging or sleeping or for
any immoral or illegal purposes.
18. No Tenant shall occupy or permit any portion of the demised premises
to be used or occupied as an office for a public stenographer or
typist, or for the possession, storage, manufacture, or sale of
liquor, narcotics, dope, tobacco in any form, or as a barber or
manicure shop, or as an employment bureau, unless said Tenant's lease
expressly grants permission to do so. No Tenant shall engage or pay
any employees on the demised premises, except those actually working
for such Tenant on said premises, nor advertise for laborers giving an
address at said premises.
19. Each Tenant, before closing and leaving the demised premises at any
time, shall see that all windows are closed and all lights turned off.
20. The requirements of Tenants will be attended to only upon application
at the ounce of the Building. Employees shall not perform any work or
do anything outside of their regular duties, unless under special
instruction from the management of the Building.
21. Canvassing, soliciting and peddling in the Building is prohibited and
each Tenant shall cooperate to prevent the same.
22. No water cooler, plumbing or electrical fixtures shall be installed by
any Tenant, except in accordance with the Lease.
23. There shall not be used in any space, or in the public halls of the
Building, either by any Tenant or by jobbers or others, in the
delivery or receipt of merchandise, any hand trucks, except those
equipped with rubber tires and side guards.
24. Access plates to underfloor conduits shall be left exposed. Where
carpet is installed, carpet shall be cut around access plates.
25. Mats, trash or other objects shall not be placed in the public
corridors.
26. Drapes installed by the Landlord for the use of the Tenant or drapes
installed by the Tenant, which are visible from the exterior of the
Building must be cleaned by Tenant at Tenant's expense as required to
maintain an image consistent with a first class office building.
-3-
<PAGE>
EXHIBIT C
COMMENCEMENT LETTER
-------------------
Date:____________________________________________
Tenant:__________________________________________
Address:_________________________________________
Re: Commencement Letter with respect to that certain Lease dated
___________ by and between 1120 Vermont Avenue Associates, as Landlord, and
___________________, as Tenant, for ___________ square feet of Rentable
Area on the terrace level of the Building located at 1120 Vermont Avenue,
N.W., Washington, D.C. 20005.
DEAR __________________:
In accordance with the terms and conditions of the above referenced Lease,
Tenant hereby accepts possession of the Premises and agrees as follows:
1. The Commencement Date of the Lease is ___________________;
2. The Termination Date of the Lease is ____________________.
Please acknowledge your acceptance of possession and agreement to the terms
set forth above by signing all three (3) copies of this Commencement Letter in
the space provided and returning two (2) fully executed copies of the same to my
attention.
Sincerely,
Agreed and Accepted:
Tenant:______________________________
By:__________________________________
Name:________________________________
Title:_______________________________
Date:________________________________
-1-
<PAGE>
EXHIBIT "D"
For purposes of determining the costs of utilities for use of the cooling
tower and condenser water at the Building, Landlord shall implement the
following procedure:
Following installation of Tenant's equipment within the Premises, Landlord
shall commission a study at Tenant's cost by the Building's
mechanical/electrical/plumbing engineers of the utility costs incurred in
connection with the use of the Building's systems. The Building maintains two
systems; namely a base building system and a special system. The Base Building
system provides for chilled water and hot water available for heating and
cooling during the Business Hours of the Building. The special HVAC system has
condenser water available 24 hours a day - seven (7) days a week.
Should the special system be used for heating, electric resistance heaters
will need to be added as necessary.
It should be noted that previous studies have shown an energy cost of
approximately $300.00 per ton per year connected to the special system.
In addition to utility costs, Tenant shall also be required to pay its
share of the preventive maintenance and repair costs of the special system.
Tenant's share of such costs shall be determined based upon a cost per ton basis
of connected load divided into the total costs for the entire system. For
example, assuming total costs of approximately $30,000 per year for the entire
system, and further assuming the connected load is 150 tons, the cost of
condenser water will be approximately $200.00 per ton (i.e. $30,000 divided by
150) per year.
Assuming preventive and maintenance costs of $200.00 per ton, and assuming
condenser water costs as above noted of $300.00 per ton, the aggregate per ton
charge would be $500.00 per ton. Such amounts are estimates only and shall be
subject to revision pursuant to the actual study to be obtained by Landlord as
above provided.
Should Tenant decide to use the Base Building system a comparable study
will be obtained and Tenant will pay for both utility costs as well as its share
of the preventive and maintenance costs.
Landlord further reserves the right to periodically revise the charge to
reflect increases in costs to Landlord to provide all such services with respect
to the particular system used.
<PAGE>
Exhibit 10.20
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE GARLAND CENTER
1200 WEST SEVENTH STREET
SUBLEASE
by and between
WELLS FARGO BANK, N.A.,
a national banking association
("Sublandlord")
and
FOCAL COMMUNICATIONS CORPORATION OF CALIFORNIA,
a Delaware corporation
("Subtenant")
Dated as of
May 19, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
INDEX OF DEFINED TERMS..................................................... iv
ARTICLE 1 SUMMARY OF BASIC TERMS......................................... 2
ARTICLE 2 DEMISE, TERM AND OCCUPANCY..................................... 3
ARTICLE 3 RENT........................................................... 4
ARTICLE 4 OPERATING EXPENSE ADJUSTMENTS.................................. 5
ARTICLE 5 SECURITY DEPOSIT............................................... 15
ARTICLE 6 USE AND COMPLIANCE WITH LAW.................................... 16
ARTICLE 7 INSURANCE...................................................... 22
ARTICLE 8 ALTERATIONS.................................................... 24
ARTICLE 9 SUBLANDLORD'S AND SUBTENANT'S PROPERTY......................... 27
ARTICLE 10 REPAIRS AND MAINTENANCE........................................ 29
ARTICLE 11 UTILITIES AND SERVICES......................................... 31
ARTICLE 12 RIGHTS OF SUBLANDLORD.......................................... 37
ARTICLE 13 DAMAGE OR DESTRUCTION.......................................... 39
ARTICLE 14 EMINENT DOMAIN................................................. 42
ARTICLE 15 SURRENDER OF PREMISES.......................................... 43
ARTICLE 16 DEFAULT BY SUBTENANT........................................... 44
ARTICLE 17 SUBORDINATION AND ATTORNMENT................................... 47
ARTICLE 18 QUIET ENJOYMENT................................................ 49
ARTICLE 19 ASSIGNMENTS AND SUBLEASES...................................... 49
ARTICLE 20 NOTICES........................................................ 57
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ARTICLE 21 ESTOPPEL CERTIFICATES.......................................... 58
ARTICLE 22 RELOCATION OF PREMISES......................................... 58
ARTICLE 23 BROKER......................................................... 58
ARTICLE 24 EXCULPATION AND INDEMNIFICATION................................ 59
ARTICLE 25 PARKING........................................................ 61
ARTICLE 26 MISCELLANEOUS.................................................. 61
ARTICLE 27 SIGNAGE........................................................ 65
EXHIBITS
- --------
EXHIBIT A WORK LETTER FOR SUBTENANT IMPROVEMENTS......................... A-1
EXHIBIT B FLOOR PLAN OF THE PREMISES..................................... B-1
EXHIBIT C FORM OF MEMORANDUM OF SUBLEASE COMMENCEMENT.................... C-1
EXHIBIT D THE GARLAND CENTER 1200 WEST SEVENTH STREET RULES
AND REGULATIONS................................................ D-1
EXHIBIT E [Intentionally omitted]........................................ E-1
EXHIBIT F [Intentionally omitted]........................................ F-1
EXHIBIT G JANITORIAL SPECIFICATIONS...................................... G-1
EXHIBIT H BUILDING CONSTRUCTION RULES.................................... H-1
EXHIBIT I BUILDING MEASUREMENT GUIDELINES................................ I-1
</TABLE>
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<TABLE>
<CAPTION>
INDEX OF DEFINED TERMS
TERM PRIMARY REFERENCE
<S> <C>
ADA...................................................... Section 4.1(b)(xix)
Additional Charges....................................... Section 3.1
Agreed Rate.............................................. Section 4.1(a)(iv)
Alterations.............................................. Section 8.1
Arbiter.................................................. Section 4.2(e)(ii)
Base Building Work....................................... Exhibit A, Section 2
Base Building Definition................................. Section 11.1
Base Costs of Operation.................................. Section 1.7
Base Taxes............................................... Section 1.7
Base Year................................................ Section 1.7
Basic Rent............................................... Section 1.6
Building................................................. Section 1.2
Building Hours........................................... Section 11.1
Certificate.............................................. Section 7.5
Certifying Party......................................... Section 21
Claims................................................... Section 24.2
Commencement Date........................................ Section 2.2
Common Area.............................................. Section 1.3
Comparable Buildings..................................... Section 6.1
Comparison Year.......................................... Section 4.1(a)
Consent Request.......................................... Section 19.6(a)
Contractor............................................... Exhibit H
Cost Saving Capital Improvements......................... Section 4.1(a)(iv)
Costs of Operation....................................... Section 4.1(a)
Date of the Taking....................................... Section 14.1
Eminent Domain........................................... Section 14.1
Excess Services.......................................... Section 11.2
Expiration Date.......................................... Section 1.5
First Interstate......................................... Introduction
Focal Entities........................................... Section 19.2(b)
Hazardous Substances..................................... Section 6.2
Holiday.................................................. Section 11.1
HVAC..................................................... Section 11.1
Insolvency Proceeding.................................... Section 16.1(e)
Land..................................................... Section 1.2
Lease.................................................... Introduction
Master Lease............................................. Introduction
Memorandum of Sublease Commencement...................... Section 2.2
Official Records......................................... Introduction
Outside Completion Date.................................. Section 2.2
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Outside Date............................................. Section 13.4(b)
Parking Garage........................................... Section 1.3
Permitted Use............................................ Section 6.1
Premises................................................. Section 1.4
Providing Parties........................................ Section 19.3
Providing Parties' Equipment............................. Section 19.3
Records.................................................. Section 4.2(e)(i)
Redetermination Event.................................... Section 26.9
Rentable Area............................................ Section 1.4
Rentable Area of the Building............................ Section 26.9
Rentable Area of the Premises............................ Section 1.4
Rents.................................................... Section 3.1
Requesting Party......................................... Section 21
RML...................................................... Introduction
RML Lease................................................ Introduction
Rooftop Equipment........................................ Section 6.8(a)
Rules and Regulations.................................... Section 6.6
Security Deposit......................................... Section 5
Specialty Equipment...................................... Section 11.11
Sublandlord.............................................. Introduction
Sublandlord's Affiliates................................. Section 26.8
Sublandlord's Architect or Contractor.................... Section 13.4(b)
Sublandlord's Broker..................................... Section 1.9
Sublease................................................. Introduction
Sublease Term............................................ Section 1.5
Substantially Complete................................... Exhibit A, Section 3.1
Subtenant................................................ Introduction
Subtenant's Architect.................................... Exhibit A, Section 4.1
Subtenant's Broker....................................... Section 1.9
Subtenant's Parking...................................... Section 1.8
Subtenant's Plans........................................ Exhibit A, Section 4.1
Subtenant's Property..................................... Section 9.2
Subtenant's Representative............................... Section 4.2(e)(i)
Subtenant's Share........................................ Section 1.7
Subtenant's Work......................................... Exhibit A, Section 3.1
Successor Sublandlord.................................... Section 17.4
Superior Lessor.......................................... Section 17.1
Superior Sublease........................................ Section 17.1
Taxes.................................................... Section 4.1(d)(i)
Trigger Event............................................ Section 6.3
Trumbull................................................. Introduction
UCBRC.................................................... Introduction
Untenantability Date..................................... Section 13.4(b)
Useable Area............................................. Section 1.4
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Useable Area of the Premises............................. Section 1.4
Work Letter.............................................. Section 2.3
</TABLE>
v
<PAGE>
THE GARLAND CENTER
1200 WEST SEVENTH STREET
SUBLEASE
THIS SUBLEASE (this "Sublease") is entered into as of May 19, 1998, by and
between WELLS FARGO BANK, N.A., a national banking association ("Sublandlord"),
having an office c/o Corporate Properties Group, 333 South Grand Avenue, Suite
700, Los Angeles, California 90071, Attention: Negotiations Manager, and FOCAL
COMMUNICATIONS CORPORATION OF CALIFORNIA, a Delaware corporation ("Subtenant"),
having an office at 200 North LaSalle Street, Chicago, Illinois 60601,
Attention: Brian F. Addy.
BACKGROUND INFORMATION
A. Trumbull Associates Limited Partnership, a Massachusetts limited
partnership ("Trumbull") owns an estate for years in and to the Land
(hereinafter defined) and the Building (hereinafter defined) pursuant to that
certain Grant Deed made by United California Bank Realty Corporation ("UCBRC")
in favor of Trumbull and recorded in the Official Records of Los Angeles County,
California (the "Official Records") on February 15, 1984 as Instrument No. 84-
197838.
B. Trumbull leased the Land and Building to RML Leasing Corp., a Delaware
corporation ("RML") pursuant to that certain Master Lease Agreement dated as of
January 20, 1984 (the "Master Lease") by and between Trumbull and RML, of which
a Memorandum of Master Lease Agreement dated as of January 20, 1984 by and
between Trumbull and RML was recorded in the Official Records on February 15,
1984 as Instrument No. 84-197841.
C. RML subleased the Land and Building to First Interstate Bank of
California ("First Interstate") pursuant to that certain Sublease Agreement
dated as of January 20, 1984 (the "RML Lease") by and between RML and First
Interstate, of which a Memorandum of Sublease Agreement dated as of January 20,
1984 by and between RML and First Interstate was recorded in the Official
Records on February 15, 1984 as Instrument No. 84-197842.
D. Sublandlord succeeded by merger to all of the right, title and
interest of First Interstate in and to the RML Lease.
E. On the terms and conditions set forth herein, Sublandlord desires to
sublease the Premises to Subtenant and Subtenant desires to sublease the
Premises from Sublandlord.
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ARTICLE 1
SUMMARY OF BASIC TERMS
1.1 Purpose. This Article defines certain basic terms used in this
Sublease, subject to qualifications and exceptions set forth herein.
1.2 "Land" means that certain real property in the City of Los Angeles,
County of Los Angeles, State of California, described in that certain Memorandum
of Sublease Agreement dated as of January 20, 1984 by and between RML and First
Interstate recorded in the Official Records on February 15, 1984 as Instrument
No. 84-197842; subject to all easements, covenants, rights of way, exceptions
and other matters of record affecting said property. "Building" means that
certain office building and related improvements located on the Land, commonly
known as The Garland Center, 1200 West Seventh Street, Los Angeles, California,
including all office space and the Common Area.
1.3 "Common Area" means the parking garage for the Building (the "Parking
Garage"), outside plazas, lobbies, landscaping, driveways, sidewalks, the
cafeteria located in the Building and all other areas included within the Land
and used in common by "tenants" (which term for purposes of this Sublease shall
also include subtenants) of the Building and their invitees.
1.4 "Premises" means 19,199 square feet of Rentable Area (the "Rentable
Area of the Premises") located on Lower Level II of the Building and more
particularly described in Exhibit B attached hereto. As used in this Sublease,
the terms "Rentable Area" and "Useable Area" shall have the meaning set forth in
Exhibit I. "Useable Area of the Premises" means 16,694 square feet.
1.5 "Sublease Term" means the term of this Sublease, which will commence
on the Commencement Date (defined in Section 2.2) and will expire on January 31,
2009 (the "Expiration Date").
1.6 "Basic Rent" means, throughout the Sublease Term, a per annum amount
equal to the product of (a) $15.75 times (b) the number of square feet of
Rentable Area included within the Premises from time to time. As of the
Commencement Date, Subtenant's monthly installment of Basic Rent (based on
19,199 square feet of Rentable Area) will be $25,198.69 ($302,384.25 annually).
1.7 "Base Costs of Operation" means Costs of Operation (defined in
Section 4.1(a)) for calendar year 1998 (the "Base Year") and "Base Taxes" means
the Taxes (defined in Section 4.1(d)) for the Base Year, in each case divided by
the Rentable Area of the Building (defined in Section 26.9). "Subtenant's
Share" means 2.67%.
1.8 "Subtenant's Parking" means the parking rights granted to Subtenant
in accordance with the terms of Article 25.
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1.9 "Sublandlord's Broker" means Cushman Realty Corporation. "Subtenant's
Broker" means Investment Development Services, Inc. at the following address:
888 West Sixth Street, 9th Floor
Los Angeles, California 90017
Attention: Mr. Robert Fuelling
Telephone: (213) 362-9300
Telecopy: (213) 627-9937
ARTICLE 2
DEMISE, TERM AND OCCUPANCY
2.1 Demise and Reservations. Sublandlord hereby leases the Premises to
Subtenant, and Subtenant hereby hires the Premises from Sublandlord, subject to
the provisions of this Sublease, reserving to Sublandlord all of its rights,
interests and estates in the Premises, Building and Land not specifically
granted to Subtenant by this Sublease.
2.2 Commencement and Expiration. This Sublease shall constitute a binding
agreement and the obligations of Sublandlord and Subtenant hereunder shall be
effective upon full execution and delivery of this Sublease by both Sublandlord
and Subtenant. However, the Sublease Term shall commence on the Commencement
Date (the "Commencement Date") that is the earlier of: (i) the date that
Subtenant's Work (as defined in the Work Letter referenced below) is
Substantially Complete (as defined in the Work Letter) and (ii) August 1, 1998
(the "Outside Completion Date"). The Sublease Term shall end at noon on the
Expiration Date or on such earlier date on which this Sublease shall terminate
pursuant to any of its provisions or pursuant to law. Within 90 days after the
Commencement Date, upon Sublandlord's request, Sublandlord and Subtenant shall
promptly execute a "Memorandum of Sublease Commencement" in the form attached
hereto as Exhibit C, specifying the calendar dates of the Commencement Date and
the Expiration Date. Failure by Subtenant or Sublandlord to execute a
Memorandum of Sublease Commencement when requested by Sublandlord shall not
affect the occurrence of the Commencement Date or Expiration Date.
2.3 Preparation of Premises. Immediately upon execution of this Sublease,
Subtenant and its architects, engineers, employees, agents and contractors
shall, upon reasonable prior consultation with Sublandlord, have reasonable
access to the Premises for the purpose of designing, constructing and installing
Subtenant's Work pursuant to the terms of Exhibit A (the "Work Letter").
Subtenant agrees that Sublandlord is not required to perform any work or install
any improvements or equipment to make the Premises ready for Subtenant's
occupancy, and agrees to accept the Premises "AS IS" subject to the terms of the
Work Letter and this Sublease. As set forth in Section 11.11, Subtenant has
informed Sublandlord that Subtenant's Work is expected to include: (w)
installation of electrical facilities to provide additional power to the
Premises; (x) installation of an emergency generator facility for the purpose of
providing a backup electrical system for the Premises; (y)
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supplemental HVAC facilities, utilizing chilled water; and (z) telecommunication
system and ancillary fixtures and equipment, some of which shall be made a part
of the Premises. Installation of such facilities shall be in accordance with
Subtenant's Plans, to be submitted and reviewed upon execution hereof and in
accordance with the Work Letter. All of Subtenant's Plans shall be subject to
review and approval by Sublandlord in accordance with the terms of the Work
Letter and Subtenant acknowledges that all proposed improvements and
modifications are subject to engineering review and available building and
system capacity.
2.4 Delay in Completion of Subtenant's Work. Subtenant shall use all
commercially reasonable efforts to complete Subtenant's Work (as defined in the
Work Letter) prior to the Outside Completion Date. It is expressly understood
and agreed that the Outside Completion Date shall be extended only for the
period of any actual delay in the completion of Subtenant's Work (which causes
Subtenant's Work to be Substantially Complete after Outside Completion Date)
which results solely from:
(a) an event of force majeure that is beyond the control of Subtenant,
and that does not result from the negligence or willful misconduct of Subtenant
or its contractors or agents;
(b) any failure by Sublandlord to timely approve or disapprove any
plans and specifications for Subtenant's Work, it being agreed that delay shall
be deemed to have occurred if Sublandlord fails to either approve or disapprove
any plans or specifications submitted by Subtenant within ten (10) business days
after submission in the form and manner required by this Sublease or otherwise
prescribed by Sublandlord (but no delay will be deemed to occur for the period
Sublandlord and Subtenant are meeting to resolve any disagreement over the plans
for Subtenant's Work so long as Sublandlord timely provided its approval or
disapproval to Subtenant as required by the terms of the Work Letter); or
(c) any unreasonable and material interference by Sublandlord or its
agents or contractors which affects Subtenant's ability to achieve substantial
completion of Subtenant's Work by the Outside Completion Date.
Notwithstanding any extension of the Outside Completion Date, in no event will
the Sublease Term expire later than the Expiration Date.
ARTICLE 3
RENT
3.1 Rents. Subtenant shall pay to Sublandlord the following rents for the
Premises during the Sublease Term (collectively, the "Rents"): (a) a Basic Rent
per annum in the amount specified in Section 1.6, which shall be due and payable
in equal monthly installments in advance on the first day of each and every
calendar month during the Sublease Term commencing on the Commencement Date
(subject to the provisions of this Section 3.1), and
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(b) additional charges ("Additional Charges") consisting of all other sums of
money payable by Subtenant under the terms of this Sublease. It is acknowledged
and agreed that Subtenant may use and occupy portions of the Premises for the
operation of its business prior to the Commencement Date. Subtenant's occupancy
of all or any portion of the Premises prior to the Commencement Date shall be
subject to all of terms and conditions of this Sublease.
3.2 Payment. Subtenant shall pay the Rents when due, without notice or
demand, and without any abatement, deduction or setoff, except for abatement
rights specifically set forth in this Sublease. Subtenant's first installment of
monthly Basic Rent hereunder shall be due and payable on the date of full
execution and delivery of this Sublease. Subtenant shall pay the Rents in lawful
money of the United States, to Sublandlord at its office in the Building (1200
West 7th Street, Los Angeles, California 90071, Attention: Building Manager) or
to such other person or place as Sublandlord may designate in writing from time
to time. If Subtenant pays Rents by check, the check must clear within five (5)
business days of delivery to the bank for processing. Basic Rent for periods
less than a full calendar month shall be prorated based on the actual number of
days in said partial month and the actual number of days in the entire month.
3.3 Partial Payment. No payment by Subtenant or receipt or acceptance by
Sublandlord of a lesser amount than the correct Basic Rent or Additional Charges
due shall be deemed to be other than a payment on account, nor shall any
endorsement or statement on any check or any letter accompanying any check or
payment be deemed an accord and satisfaction, and Sublandlord may accept such
check or payment without prejudice to Sublandlord's right to recover the
balance, treat such partial payment as a default or pursue any other remedy
provided in this Sublease or at law.
3.4 Late Charge. Subtenant acknowledges that the late payment of Rents
will cause Sublandlord to incur damages, including administrative costs, loss of
use of the overdue funds and other costs, the exact amount of which would be
impractical and extremely difficult to ascertain. Accordingly, if Sublandlord
does not receive a payment of Rents within seven (7) days after delivery of
written notice to Subtenant that such payment is overdue, Subtenant shall pay to
Sublandlord on demand, as Additional Charges, a late charge equal to five
percent (5%) of the overdue amount. Acceptance of the late charge by Sublandlord
shall not cure or waive Subtenant's default, nor prevent Sublandlord from
exercising, before or after such acceptance, any of the rights and remedies for
a default provided by this Sublease or at law. Payment of the late charge is not
an alternative means of performance of Subtenant's obligation to pay Rents at
the times specified in this Sublease.
ARTICLE 4
OPERATING EXPENSE ADJUSTMENTS
4.1 Operating Expense Definitions. For the purpose of this Sublease, the
following terms shall have the following meanings:
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(a) Costs of Operation. "Costs of Operation" means, in the Base Year,
and in each subsequent calendar year (a "Comparison Year"), all expenses, costs
and disbursements of every kind and nature paid or incurred by or on behalf of
Sublandlord with respect to the operation, maintenance, repair, replacement,
security and management of the Building, calculated in accordance with Generally
Accepted Accounting Principles (GAAP) as adjusted pursuant to Section 4.1(c).
Without limiting the generality of the foregoing, Costs of Operation shall
include the following:
(i) Wages, including all fringe benefits and employee-related
expenses of every nature, workers' compensation and payroll taxes of
employees of Sublandlord or Sublandlord's managing agent at the level of
building manager and below engaged in the operation, maintenance and
management of the Building; provided, that if any such employees of
Sublandlord or Sublandlord's managing agent provide services for more than
one building of Sublandlord, then only a prorated portion of their wages,
benefits and taxes shall be included, based on the portion of their working
time devoted to the Building.
(ii) Costs of goods, tools, supplies and services supplied or
used in or with respect to the operation, repair, maintenance and
management of the Building, including the cost of insurance premiums and
insurance consultants; cleaning, decorating, painting, janitorial, trash
removal, security (including uniforms) and other services; legal,
accounting and other consultants' fees; operation of elevators and security
systems; heating, cooling, air-conditioning and ventilating; hot and cold
water, gas, electricity, sewer and other utilities together with any taxes
and surcharges on, and fees paid in connection with the calculation and
billing of such utilities; maintenance of and repairs to the Building and
to any equipment, machinery or apparatus, including elevators; window
cleaning; service agreements on equipment; licenses, permits and
inspections; costs of personal property and moveable equipment used in the
repair, maintenance or operation of the Building or provided by Sublandlord
for the use or benefit of all lessees or occupants, including window
coverings and carpeting in the Common Area; reasonably contesting the
validity or applicability of any law if a successful contest would reduce
Costs of Operation; costs incurred in providing services and amenities for
all tenants and occupants of the Building, including costs incurred in
connection with operating and maintaining the cafeteria located in the
Building and maintenance and repairs of the Parking Garage, landscaping,
signs, plazas, furnishings, water elements, sidewalks, private streets and
walkways in or adjacent to the Building. It is understood and agreed that
so long as Subtenant's electrical usage at the Premises is separately
metered and Subtenant is paying the entire cost of electrical service
provided to the Premises for lighting and outlets, Costs of Operation under
this Sublease shall include charges for electricity only with respect to
the Common Areas, including the cafeteria, Parking Garage, elevators, lobby
and other portions of the Building and the Land used in common with others
and for other electricity provided to Subtenant's Premises which is not
separately metered, including
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without limitation electricity provided in connection with HVAC services to
the Premises.
(ii) Management fees and expenses paid to Sublandlord's managing
agent; or, if Sublandlord acts as the managing agent, a sum in lieu thereof
which, if in excess of 3% of gross revenues (determined in accordance with
GAAP) from the Building, shall not exceed the then-prevailing rate for
management fees for Comparable Buildings (defined in Section 6.1 below).
(iv) Costs of capital improvements and replacements (and all
tools and equipment related thereto) made after the Base Year which are
intended to reduce Costs of Operation ("Cost Saving Capital Improvements"),
amortized over the useful life of such improvements on a straight line
basis, including imputed interest at the rate announced from time to time
by the Los Angeles Main Office of Wells Fargo Bank, N.A. as its "Reference
Rate" (referred to herein as the "Prime Rate") as of December 31st of the
year in which the expenditure is made, plus 2% per annum (the "Agreed
Rate"). Sublandlord agrees to use its commercially reasonable efforts to
amortize Cost Saving Capital Improvements for purposes of this Article 4 at
an annual rate which does not exceed the annual savings to be realized
thereby, as estimated in good faith by Sublandlord at the time such
improvement is made.
(v) Rentals (including interest charges) paid by Sublandlord with
respect to machinery, equipment, tools, materials, facilities or systems
installed, provided or used, after completion of the Building, for the
normal management, maintenance, repair or operation of the Building.
(vi) Those taxes, duties, charges, levies and assessments (such
as sales, license, use, excise and utility taxes or fees) which are
expensed as a part of the maintenance, management or operation of the
Building, but which are not included in Taxes (as defined in Section
4.1(d)). It is understood and agreed that Taxes are not included in Costs
of Operation under this Lease, as they are treated separately for purposes
of calculating Additional Rent hereunder.
(vii) All charges, taxes, surcharges, or assessments imposed by
any government agency or public utility to conserve or control consumption
of water, gas, electricity, energy sources or products, natural resources,
or other products or services.
(viii) Fees paid to any parking facility operator and
compensation paid to clerks, attendants or other persons in the Parking
Garage.
(b) Costs of Operation - Exclusions. Costs of Operation shall exclude
the following (determined in accordance with GAAP):
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(i) Costs of capital improvements and replacements (and all tools and
equipment relating thereto), except to the extent specifically permitted to
be included in Costs of Operation pursuant to Section 4.1(a)(iv);
(ii) Repair costs to the extent that Sublandlord is reimbursed for
such costs by insurance proceeds or condemnation proceeds;
(iii) Costs arising from Sublandlord's political or charitable
contributions;
(iv) Costs (including "lease takeover" expenses, leasing commissions,
brokerage fees, legal fees, and space planning fees) incurred in connection
with the leasing of space in the Building and the renewal of existing
leases;
(v) Costs (including permit, license and inspection costs) incurred
for installation of tenant improvements made for tenants or other occupants
of the Building or incurred in renovating or otherwise improving,
decorating, painting or redecorating vacant space for tenants or other
occupants of the Building;
(vi) Depreciation (other than on personal property, tools and moveable
equipment described in clause (ii) of Section 4.1(a) above), debt service
on mortgages encumbering the Building (including any interest or other
financing charge, including points and fees), reserves for capital
replacements, bad debts or other purposes, or other similar charges not
involving the payment of money to third parties (except as otherwise
provided herein), and any ground lease rental;
(vii) Costs of purchasing art works (not including graphics, signs and
conventional decoration so long as a reasonable line item amount therefor
is included in the Base Year);
(viii) Costs and expenses otherwise includable in Costs of Operation,
to the extent that Sublandlord is directly reimbursed (or is required to be
reimbursed under the terms of a binding lease or other agreement) for such
costs and expenses by tenants (i.e., other than by paying a share of Costs
of Operation), or other sources,
(ix) Costs incurred by Sublandlord in providing services, utilities,
or other benefits to other tenants or occupants of the Building which are
not offered to Subtenant or for which Subtenant is charged directly but
which are provided to one or more other tenants or occupants of the
Building without charge other than inclusion of the cost thereof in Costs
of Operation including after-hours HVAC services and electricity for
Subtenant's lights and outlets which is to be separately metered and paid
for directly by Subtenant;
(x) Advertising and promotional expenses;
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(xi) Electric power costs or other utility costs for which any tenant
or occupant of the Building directly contracts with the local public
utility or service company and costs associated with excess utility use by
other tenants or occupants of the Building not reimbursed by such tenants
or occupants;
(xii) Fines, penalties and interest and awards incurred solely as a
result of Sublandlord's negligent or intentional failure to make payments
when due or due to violations of law by Sublandlord;
(xiii) The wages and benefits of any employee of Sublandlord who does
not devote substantially all of his or her employed time to the Building,
unless such wages and benefits are prorated to reflect time spent on
matters related to the operation and management of the Building versus time
spent on matters unrelated to the operation and management of the Building;
(xiv) Salaries and benefits of Sublandlord's employees above the grade
of building manager;
(xv) Costs (including in connection therewith all attorneys' fees and
costs of settlement judgments and payments in lieu thereof) arising from
claims, disputes or potential disputes with tenants or occupants of the
Building (other than costs arising from claims or disputes where the
tenants of the Building would benefit if Sublandlord prevails, including
claims in connection with Sublandlord's efforts to enforce the Rules and
Regulations);
(xvi) Costs incurred in removing and storing the property of former
tenants or occupants of the Building;
(xvii) Costs incurred in the original construction of the Building or
in connection with a major change in the Building, such as the addition or
deletion of floors;
(xviii) Rentals attributable to space occupied for the Office of the
Building;
(xix) Costs incurred to cure violations of codes, laws or regulations
(or cure lack of compliance with codes, laws or regulations), including,
without limitation, the Americans with Disabilities Act of 1990, 42 U.S.C.
12101 et. seq., as amended (the "ADA") to the extent such violations or
lack of compliance exists at the Building (outside of Subtenant's Premises)
as of the Commencement Date or existing within Subtenant's Premises as of
the date of delivery of such Premises to Subtenant and, subject to the
terms of Article 6, to the extent existing as of the Commencement Date to
the extent any such violation or lack of compliance does not result from a
Trigger Event (as defined in Section 6.3 below);
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(xx) Costs, fees and compensation paid to Sublandlord or to
affiliates or subsidiaries of Sublandlord for services and materials to the
extent the same exceeds the charges for comparable services and materials
performed or provided by unaffiliated entities of comparable stature and
reputation and on a competitive basis;
(xxi) Overhead and profit increment paid to Sublandlord or to
subsidiaries or affiliates of Sublandlord for goods and/or services in or
to the Building to the extent the same materially exceeds the costs of such
goods and/or services rendered by unaffiliated third parties on a
competitive basis;
(xxii) Costs incurred to provide training in Building
operations or management to employees of Sublandlord or Sublandlord's
managing agent to the extent such costs exceed $10,000 per year (it being
acknowledged that the cost of providing tenant life safety information may
be included within Costs of Operation);
(xxiii) Except for making repairs or keeping permanent systems
in operation while repairs are being made or in connection with the
operation of temporary or backup equipment in lieu of the regular building
systems, rentals and other related expenses incurred in leasing air-
conditioning systems, elevators or other equipment ordinarily considered to
be of a capital nature, except equipment not affixed to the Building which
is used in providing janitorial or similar services;
(xxiv) Any and all costs arising from the presence of Hazardous
Substances in or about the Premises, the Building or the Land including
Hazardous Substances in the ground water or soil, not placed in the
Premises, the Building or the Land by Subtenant or its agents, employees or
contractors.
(xxv) Any bad debt loss, rent loss or reserves for bad debts
or rent loss;
(xxvi) Costs incurred by Sublandlord due to the violation by
Sublandlord or any tenant (other than Subtenant) of the terms and
conditions of any lease of space in the Building;
(xxviii) Subject to Section 4.1(a)(iii), costs for which
Sublandlord has actually been compensated by a management fee; and
(xxviii) Costs of defending any lawsuits with any mortgagee
(except as the actions of Subtenant may be in issue), costs of selling,
syndicating, financing, mortgaging or hypothecating any of Sublandlord's
interest in the Building, costs engaged in Building management, or outside
fees paid in connection with disputes with other tenants; and
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(c) Costs of Operation - Adjustments. Costs of Operation shall be
calculated in accordance with Generally Accepted Accounting Principles (GAAP),
consistently applied. If during any period in the Base Year or a Comparison Year
the Building is not both 95% occupied and fully serviced by Sublandlord, the
Costs of Operation which vary with occupancy for such year shall be adjusted to
what they would have been if 95% of the Building had been occupied and fully
serviced throughout such year, as estimated in good faith by Sublandlord.
Sublandlord further agrees to calculate the management fee for the Building in
the Base Year assuming that the Building is 95% leased, with all tenants paying
rent.
(d) Taxes.
(i) Definition. "Taxes" means, in the Base Year and in any
Comparison Year, all of the following definition: (1) all taxes, general
and special assessments, duties, charges and levies of every kind,
character and description whatsoever, levied, imposed or charged upon or
against the Land and the Building or any part thereof or the various
estates therein or upon Sublandlord with respect thereto, including all
taxes and assessments levied for any public transit system; (2) all taxes
levied, imposed or charged on real and personal property used in the
operation, maintenance or management of the Building or any part thereof;
(3) all taxes levied, imposed or charged against or measured by or based
upon the value of, or the rent payable by lessees and occupants of, the
Building or any part thereof; (4) all other taxes of every kind, character
and description whatsoever, from time to time levied, imposed or charged in
the future in lieu of or as substitute, in whole or in part, for any Taxes
described in clauses (1), (2) or (3) or for which Sublandlord is liable
with respect to the Building; and (5) all costs and expenses (including
legal and other professional fees and interest on deferred payments)
incurred by Sublandlord in contesting the amount, validity or applicability
of any of the foregoing. Taxes shall not include Sublandlord's income,
franchise, gift, estate, inheritance, transfer, excise or excess-profits
taxes except to the extent that any such specified types of taxes are
levied in whole or partial substitution for any Taxes. All Taxes shall be
paid in installments if permitted by the taxing public agency, and such
installments shall be charged to Taxes when paid. If any Taxes of a type
described in clauses (3) or (4) of this Section 4.1(d) are now or hereafter
levied, imposed or charged, for purposes of this Sublease, the amount of
such Taxes shall be based on the assumptions that the Building is the only
commercial building owned and operated by Sublandlord and that the rental
or other income received by Sublandlord from the Building is the only
rental and income received by Sublandlord. If the Taxes for any Comparison
Year are changed as a result of a protest, appeal or other action taken by
a taxing authority, the Taxes as so changed shall be deemed the Taxes for
such Comparison Year, and Sublandlord shall deliver a revised statement of
actual Taxes for the affected calendar year or years to Subtenant. If such
change reduces the Additional Charges payable by Subtenant on account of
Taxes for any Comparison Year to less than the Additional Charges
theretofore actually paid by Subtenant on account of Taxes for such
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Comparison Year, Sublandlord shall promptly pay the difference to Subtenant
or credit such amount against Rents thereafter coming due hereunder. If
any change increases the Additional Charges payable by Subtenant on account
of Taxes for any Comparison Year to more than the Additional Charges
theretofore actually paid by Subtenant on account of Taxes for such
Comparison Year, Subtenant, upon receipt of Sublandlord's revised statement
showing the amount of such excess, shall promptly pay such excess to
Sublandlord. Nothing herein shall obligate Sublandlord to bring any
application or proceeding seeking a reduction in Taxes or assessed
valuation.
4.2 Adjustment of Rents.
(a) Costs of Operation. If, for any Comparison Year, Subtenant's Share
of Costs of Operation exceeds the product of Base Costs of Operation multiplied
by the Rentable Area of the Premises, Subtenant shall pay the excess to
Sublandlord as Additional Charges. It is understood and agreed that if, as a
result of deregulation in the utilities industry, there occurs during a
Comparison Year a reduction in the cost of electricity below the level of such
costs during the Base Year, it is agreed for purposes of this Sublease (and
notwithstanding anything to the contrary herein) that electricity charges
included within Costs of Operation will in no event be reduced to a level lower
than the level of electricity charges included within Costs of Operation during
Subtenant's Base Year and such reduction below the amount of electricity charges
in the Base Year shall not be applied to other expenses included within Costs of
Operation. For purposes of clarification, if electricity charges for any
subsequent Comparison Year remain at a level below the level of Base Year
electricity charges, electricity charges for such subsequent Comparison Year
shall be deemed to be at the level of Base Year electricity charges.
(b) Taxes. If, for any Comparison Year, Subtenant's Share of Taxes
exceeds the product of Base Taxes multiplied by the Rentable Area of the
Premises, Subtenant shall pay the excess to Sublandlord as Additional Charges.
(c) Manner of Payment; Sublandlord's Estimates. Subtenant shall pay
Additional Charges pursuant to Sections 4.2(a) and (b) in the following manner:
(i) Prior to the commencement of each Comparison Year during the
Sublease Term, or as soon after such commencement as reasonably possible,
Sublandlord shall furnish to Subtenant statements showing Sublandlord's
reasonable estimates of the Costs of Operation and Taxes for such
Comparison Year, and the amount of any Additional Charges payable by
Subtenant based on such estimates.
(ii) On or before the first day of each calendar month of each
Comparison Year, Subtenant shall pay Sublandlord one-twelfth (1/12) of the
amount of the estimated Additional Charges due from Subtenant for such
Comparison Year for the Costs of Operation and Taxes, as shown by the
statement furnished by Sublandlord, provided, however, that (1) the
Additional Charges payable by Subtenant
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for any partial Comparison Year shall be prorated based on a 365-day year
and the actual number of days in such partial Comparison Year, and (2) on
the first day of each calendar month during such partial Comparison Year,
Subtenant shall pay to Sublandlord a sum equal to the total estimated
Additional Charges due from Subtenant for that partial Comparison Year
(prorated as described above) divided by the number of calendar months in
that partial Comparison Year (counting any fractional calendar month as a
whole month).
(iii) If Sublandlord's statement is furnished after January 1 of
a Comparison Year, then until such statement is received, Subtenant shall
continue to pay estimated Additional Charges based on Sublandlord's most
recent statement. On or before the first day of the first calendar month
following Subtenant's receipt of Sublandlord's statement, in addition to
the monthly installment of estimated Additional Charges for the Comparison
Year due on that date, Subtenant shall pay the difference between the
estimated Additional Charges for the period that has already elapsed in
that Comparison Year, as set forth in Sublandlord's statement, and the
estimated Additional Charges already paid by Subtenant for such period.
Notwithstanding the foregoing, if Subtenant receives Sublandlord's
statement less than fifteen (15) days prior to the first day of the next
calendar month thereafter, Subtenant shall pay the differential amount
described above, if any, within fifteen (15) days following receipt of such
statement.
(iv) During the Sublease Term (but not more frequently than
quarterly), Sublandlord may revise its estimate of Costs of Operation if
evidence is received indicating higher or lower Costs of Operation than the
previous estimate, and Sublandlord may revise its estimate of Taxes for
such Year upon receipt of any tax bill or notification of assessed value.
The estimated Additional Charges on account of Costs of Operation and
Taxes, and the installment payments made pursuant to clause (ii) shall be
adjusted as necessary so that, as nearly as possible, by the end of the
Comparison Year, Subtenant shall have paid all Additional Charges on
account of Costs of Operation and Taxes, based on such revised estimates.
(d) Final Statement. Following the end of each Comparison Year,
Sublandlord shall furnish to Subtenant a final statement of actual Costs of
Operation and Taxes for that Comparison Year. Within ten (10) days of
presentation of the final statement for any Comparison Year, Subtenant shall pay
Sublandlord, as Additional Charges, any amount due for Subtenant's Share of
Taxes and Costs of Operation. Any credit due Subtenant for overpayment of
Subtenant's Share of Taxes and Costs of Operation shall be credited against the
monthly installments of Basic Rent next coming due (except that Sublandlord
shall refund to Subtenant the amount of any such credit for the final Comparison
Year in the Sublease Term to the extent that no amounts are then owing by
Subtenant hereunder). Subtenant shall have 180 days after presentation of
Sublandlord's statement of actual Taxes and Costs of Operation within which to
object or question in writing to the accuracy of the statement in accordance
with the terms of subsection (e) below; unless
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Subtenant so objects or questions within said 180-day period, Sublandlord's
statement shall be conclusive and binding on Subtenant. Objection by Subtenant
shall not excuse or abate Subtenant's obligation to make the payments required
by this Section 4.2 pending resolution of Subtenant's objection.
(e) Examination Right.
(i) Within 180 days after presentation of Sublandlord's final
statement of Costs of Operation and Taxes for any Comparison Year,
Subtenant shall have the right to examine, or to have its duly authorized
agent ("Subtenant's Representative") examine, Sublandlord's books, accounts
and records that reasonably relate to the verification of actual Costs of
Operation and Taxes for that Comparison Year ("Records"), in order to
determine the accuracy thereof. In making such examination, Subtenant shall
keep confidential, and shall cause Subtenant's Representative to agree to
keep confidential, any and all information contained in such Records, and
the circumstances and details pertaining to such examination and inspection
and any dispute or settlement between Sublandlord and Subtenant arising
therefrom or relating thereto, except for such disclosure as may be
required by law and for any of Subtenant's legal, financial and ongoing
business purposes and requirements. Subtenant and Subtenant's
Representative shall confirm such agreement in a separate written
reasonable confidentiality agreement, if requested by Sublandlord. Upon
execution of such a confidentiality agreement by Subtenant and Subtenant's
Representative, Sublandlord shall provide Subtenant with copies, at
Subtenant's expense, of such Records as Subtenant or Subtenant's
Representative request.
(ii) If Subtenant commences such an examination within such
period, Subtenant shall have the right to object to the accuracy of
Sublandlord's final statement by submitting a detailed written statement of
such objections to Sublandlord no later than twelve (12) months after
receipt of Sublandlord's final statement. Sublandlord and Subtenant shall
attempt in good faith to resolve any such objection. If the objection
cannot be resolved by mutual agreement within 30 days after the end of such
objection period, then a CPA mutually acceptable to Sublandlord and
Subtenant (the "Arbiter") shall audit the actual Costs of Operation and/or
Taxes for the Comparison Year covered by Sublandlord's statement (which
audit shall be limited to the items in dispute), and the Arbiter's findings
shall be conclusive and binding upon Sublandlord and Subtenant.
(iii) If the figure for Costs of Operation and Taxes in
Sublandlord's final statement exceeds the total amount of Subtenant's Share
of Costs of Operation and Taxes by more than $50,000 for any given year,
then Sublandlord shall pay the Arbiter's fees and costs. Otherwise,
Subtenant shall pay the Arbiter's fees and costs. In either case, if the
Costs of Operation or Taxes, as determined by the Arbiter, differ from the
amount indicated in Sublandlord's statement, Subtenant shall pay
Sublandlord any Additional Charges owing on account of an increase in Costs
of Operation or
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Taxes, while Subtenant shall receive a credit against Basic Rent (or, for
the final Comparison Year in the Sublease Term, a refund) for any
overpayment of Additional Charges resulting from a reduction of Costs or
Taxes.
(f) Delay. Delay in rendering a statement of actual Costs of Operation
or Taxes shall not prejudice Sublandlord's right to thereafter render such
statement, nor shall the rendering of any statement of actual Costs of Operation
or Taxes prejudice Sublandlord's right to thereafter render a corrected
statement.
ARTICLE 5
SECURITY DEPOSIT
Concurrent with Subtenant's execution of this Sublease, Subtenant shall
deposit with Sublandlord immediately available funds (cashier's check, cash or
wire transfer) the amount of $25,198.69, representing the security deposit
("Security Deposit") under this Sublease. The Security Deposit shall be held by
Sublandlord as security for the faithful performance by Subtenant of all the
terms, covenants, and conditions of this Sublease to be kept and performed by
Subtenant during the Sublease Term. The Security Deposit shall not be mortgaged,
assigned or encumbered in any manner whatsoever by Subtenant without the prior
written consent of Sublandlord. If Subtenant defaults with respect to any
provisions of this Sublease, including, but not limited to, the provisions
relating to the payment of Rents, Sublandlord may, but shall not be required to,
use, apply or retain all or any part of the Security Deposit for the payment of
any Rents or any other sum in default, or for the payment of any amount that
Sublandlord may spend or become obligated to spend by reason of Subtenant's
default, or to compensate Sublandlord for any other loss or damage that
Sublandlord may suffer by reason of Subtenant's default. If any portion of the
Security Deposit is so used or applied, Subtenant shall, within five (5) days
after written demand therefor, deposit cash with Sublandlord in an amount
sufficient to restore the Security Deposit to its original amount, and
Subtenant's failure to do so shall be a default under this Sublease. The use,
application or retention of the Security Deposit, or any portion thereof, by
Sublandlord shall not prevent Sublandlord from exercising any other right or
remedy provided by this Sublease or by law, it being intended that Sublandlord
shall not first be required to proceed against the Security Deposit, nor operate
as a limitation on any recovery to which Sublandlord may otherwise be entitled.
Subtenant acknowledges that Sublandlord has the right to transfer or mortgage
its interest in the Building and in this Sublease and Subtenant agrees that in
the event of any such transfer or mortgage, Sublandlord shall have the right to
transfer or assign the Security Deposit to the transferee or mortgagee. Upon
such transfer or assignment of the Security Deposit, Sublandlord shall thereby
be released by Subtenant from all liability or obligation for the return of such
Security Deposit and Subtenant shall look solely to such transferee or mortgagee
for the return of the Security Deposit. If Subtenant shall fully and faithfully
perform every provision of this Sublease to be performed by it, the Security
Deposit, or any balance thereof, shall be returned to Subtenant, or, at
Sublandlord's option, to the last assignee of Subtenant's interest hereunder,
within sixty (60) days following
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the expiration of the Sublease Term. Subtenant shall not be entitled to any
interest on the Security Deposit.
ARTICLE 6
USE AND COMPLIANCE WITH LAW
6.1 Permitted Use. Subject to the terms and conditions of this Sublease,
Subtenant shall use and occupy the Premises for the installation, operations and
maintenance of telecommunications systems and related equipment and
transmissions facilities, including, but not limited to, a local and long
distance switch, node, customer collocation subject to the terms of Section 19.3
and related equipment, together with general administrative and executive office
purposes, all as permitted by applicable laws, rules and regulations and with
the class and character of the Building as one of the first class buildings for
ancillary/administrative office operations located in downtown Los Angeles
("Comparable Buildings"). Such permitted uses may be collectively referred to in
this Sublease as the "Permitted Use". Subject to the terms and conditions of
this Sublease, including without limitation the Rules and Regulations and the
Work Letter, Subtenant shall have the right to install, operate, repair and
maintain its telecommunications systems and related equipment in horizontal and
vertical shafts, risers and pathways within the Building and in accordance with
all governmental codes and regulations, for the purpose of providing
telecommunications services to its customers. Sublandlord confirms, to the best
of its actual knowledge, that the Building complies with all codes, laws and
regulations (including, without limitation, handicapped access laws) applicable
to the Building as of the date of this Sublease. Subtenant shall obtain,
maintain and comply with the terms and conditions of all licenses and permits
required by law for the uses permitted hereunder. Subject to Subtenant's
compliance with the terms of this Sublease, Subtenant shall have access to the
Building and the Parking Garage 24 hours per day, 7 days per week, 365 days per
year, subject to temporary, full or partial closures which may be required from
time to time for construction, maintenance, repairs, actual or threatened
emergency or other events or circumstances which make it reasonably necessary to
temporarily restrict or limit access. Except in the case of emergencies,
Sublandlord shall provide Subtenant sufficient prior written notice of such
temporary restricted access and shall exercise commercially reasonable efforts
to minimize any interruption to Subtenant's use, possession and occupancy of the
Premises under the terms of this Sublease. As used herein, the "actual
knowledge" of Sublandlord shall mean the actual current knowledge of Barbara
Reeve-Bailey, in her capacity as an officer of Sublandlord, without any duty of
inquiry or investigation and without having any personal liability therefor.
6.2 Prohibited Uses. Without limiting the generality of Section 6.1,
Subtenant shall not at any time use or occupy or allow any person to use or
occupy the Premises or the Common Area or do or permit anything to be done or
kept in the Premises or the Common Area in any manner which: (a) violates any
certificate of occupancy in force for the Premises, the Building or any part
thereof; (b) causes or is likely to cause damage to the Building or any part
thereof or any equipment, facilities or other systems therein; (c)
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constitutes a violation of law; (d) violates a requirement or condition of the
standard fire insurance policy issued for office buildings in the City of Los
Angeles; (e) impairs the character, reputation, image or appearance of the
Building as a first- class office building for back office operations; (f)
impairs the proper and economic maintenance, operation or repair of the Building
or any part thereof; (g) constitutes a nuisance, annoyance or inconvenience to
other lessees or occupants of the Building or unreasonably interferes with or
disrupts the use or occupancy of any area of the Building (other than the
Premises) by other lessees or occupants; (h) interferes with the transmission or
reception of microwave, television, radio or other communications signals by
antennae located on the roof or elsewhere in the Building or the operations or
signals of any other tenant, occupant or other user of the Building; (i) results
in repeated demonstrations, bomb threats or other events which require
evacuation of any part of the Building or otherwise disrupt the use, occupancy
or quiet enjoyment thereof by other lessees and occupants. In determining
whether Subtenant has taken any action inconsistent with or in violation of the
foregoing, all relevant facts and circumstances shall be taken into account,
including the actual features of Subtenant's Premises and the effects of
Subtenant's operations on portions of the Building and operations outside the
Premises. Subtenant shall not use or allow the use of any part of the Premises
for: (1) a restaurant or bar; (2) the storage, manufacture or sale of food,
beverages, liquor, tobacco in any form or drugs (except that Subtenant may
maintain vending machines for the use of its officers, employees and invitees
and except that Subtenant's officers and employees may bring food, beverages,
tobacco and medicine onto the Premises for their personal and lawful
consumption); (3) the storage use, treatment, manufacture or sale of Hazardous
Substances (as defined below); (4) the business of photocopying or offset
printing (but Subtenant may use part of the Premises for photocopying or offset
printing for its own business); (5) medical or dental offices or laboratories;
(6) a typing or stenography business; (7) a barber, beauty or manicure shop; (8)
a school or classroom except for Subtenant's internal training activities; (9)
the manufacture, retail sale or auction of merchandise, goods or property of any
kind; or (10) cooking (except that Subtenant may maintain coffee or lunch rooms
with coffee makers and microwave ovens for the exclusive use of Subtenant's
officers, employees and invitees), lodging or sleeping. No excessive or
unreasonable noise, vibration or odor shall be permitted to escape from the
Premises. For purposes of this Sublease, the term "Hazardous Substances" shall
mean (w) asbestos; (x) urea formaldehyde foam insulation, (y) transformers or
other equipment which contain dielectric fluid containing levels of
polychlorinated biphenyls in excess of 50 parts per million; or (z) any other
chemical, material, substance, compound or other matter of any kind whatsoever
prohibited, limited or regulated by any Federal, State, County, regional or
local authority or legislation, including the Federal Resource Conservation and
Recovery Act, 42 U.S.C. (S)(S) 6901 et seq. and the Federal Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended, 42
U.S.C. (S)(S) 9601 et seq., the Emergency Planning and Community Right-To-Know
Act, as amended, 42 U.S.C. (S)(S) 11001 et seq., the regulations promulgated
from time to time thereunder, environmental laws administered by the
Environmental Protection Agency and similar laws and regulations of the State of
California, City of Los Angeles or any other governmental organization or agency
having jurisdiction over any portion of the Building. Sublandlord confirms, to
the best of its actual knowledge, that the Building does not contain asbestos or
other Hazardous Substances
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as of the date of this Sublease, provided, however, a slight soil contamination
condition occurred outside of the Building near Eighth Street a few years ago
and such condition is in the stages of final cleanup.
6.3 Compliance by Subtenant. Subtenant shall promptly forward to
Sublandlord any notice it receives of the violation of any law involving the
Premises or its use and occupancy by Subtenant or any other parties. Subtenant
shall, at Subtenant's expense, comply with all present and future laws and
requirements that impose any obligation, order or duty on Sublandlord or
Subtenant in respect of the Premises or any fixtures, equipment or other
property contained therein, other than any obligation, order or duty requiring
alteration to the structural elements (i.e., roof, slab, beams, skin and load-
bearing walls) of the Building or to the Building systems (i.e., HVAC, plumbing,
electrical, water and fire-life-safety systems) outside the point of connection
to the Premises. Subtenant shall also be responsible for the cost of compliance
with all laws and requirements (including ADA upgrades within the Premises or in
the Common Area of the Building to the extent triggered by Subtenant's Work or
any Alterations within the Premises or Subtenant's business operations but only,
with respect to required ADA work in the Common Area in proportion to
Subtenant's Share or to the extent triggered by work performed by Subtenant
after the completion of Subtenant's Work) that impose any obligation, order or
duty on Sublandlord or Subtenant in respect of the Land or the Building, arising
from or related to: (a) Subtenant's particular use of the Premises (other than
normal office uses); (b) the manner of conduct of Subtenant's business or
operation of its installations, equipment or other property; (c) any cause or
condition created by or at the instance of Subtenant, or (d) breach of any of
Subtenant's obligations hereunder (any of the events in (a), (b), (c) or (d)
being a "Trigger Event"); and Subtenant shall pay all costs, expenses, fines,
penalties and damages imposed upon Sublandlord by reason of or arising out of
Subtenant's failure to fully and promptly comply with and observe the provisions
of this Section. Where Subtenant's compliance as required by this Section
necessitates actions by Subtenant for which this Sublease requires Sublandlord's
consent, Subtenant shall obtain such consent before taking such actions and such
consent shall not be unreasonably withheld, conditioned or delayed.
6.4 [Intentionally omitted]
6.5 [Intentionally omitted]
6.6 Rules and Regulations. Subtenant shall observe and comply with the
Rules and Regulations set forth in Exhibit D and any reasonable, non-
discriminatory amendments and additions thereto that Sublandlord adopts from
time to time, including such reasonable and non-discriminatory rules and
regulations as may be in effect from time to time relating to construction or
other improvement work at the Building (collectively, the "Rules and
Regulations"). Sublandlord shall not be responsible or liable to Subtenant for
violations of the Rules and Regulations by other lessees and occupants but
Sublandlord will use its commercially reasonable efforts to non-discriminatorily
enforce the Rules and Regulations. If any of the Rules and Regulations conflict
with the Sublease, then the Sublease shall prevail.
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6.7 Nondiscrimination. Subtenant covenants by and for itself, its heirs,
executors, administrators and assigns, and all persons claiming under or through
Subtenant, and this Sublease is made and accepted upon and subject to the
following conditions: that there shall be no discrimination or segregation of
any person or group of persons on account of disability, age, race, color,
creed, sex, religion, sexual orientation, veteran or marital status, ancestry or
national origin in the leasing, subleasing, transferring, use, or enjoyment of
the Premises, nor shall Subtenant itself, or any person claiming under or
through Subtenant, establish or permit any such practice or practices of
discrimination or segregation with reference to the selection, location, number,
use or occupancy, of sublessees or vendees in the Premises. Sublandlord agrees
that it will not declare a default under this Sublease based solely upon alleged
discrimination, so long as Subtenant discloses the allegations of discrimination
to Sublandlord, declares in writing to Sublandlord that the alleged
discrimination did not in fact occur and proceeds to diligently and vigorously
defend against the discrimination claim. If it is determined through appropriate
proceedings (which may include administrative hearings, arbitrations or the
like) that Subtenant has violated its obligations under this Section 6.7,
Sublandlord may, at its option, declare a default hereunder.
6.8 Permitted Rooftop Equipment.
(a) Right to Install and Maintain Rooftop Equipment. During the
Sublease Term, Subtenant may install on the roof of the Building one satellite
dish no greater than 12 inches in diameter, as necessary for the operation of
Subtenant's equipment within the Premises, including any cabling or wiring
necessary to connect this satellite dish to the Premises (collectively, the
"Rooftop Equipment"). If Subtenant wishes to install any Rooftop Equipment
(including the initial equipment referenced above), Subtenant shall first notify
Sublandlord in writing, which notice shall fully describe the Rooftop Equipment,
including, without limitation, its purpose, weight, size and desired location on
the roof of the Building and its intended method of connection to the Premises.
If Sublandlord determines in its good faith and non-arbitrary discretion that
the Building can structurally accommodate the Rooftop Equipment and that the
installation, operation and maintenance of the Rooftop Equipment will not
interfere with other equipment or business operations then installed and
operating at the Building (subject to the terms of Section 6.8(d) below) or any
helipad use or emergency access on the roof, Subtenant may, at its sole cost and
expense, install the Rooftop Equipment subject to the terms hereof. Sublandlord
also reserves the right to restrict the number and size of dishes, antennae and
other Rooftop Equipment installed on the roof of the Building. Sublandlord
further confirms that in determining the amount of rooftop space that is
available for installation of Communications Equipment, Sublandlord will
consider all factors relevant to the ownership and operation of the Building,
including, without limitation, structural capacity, fire-life-safety
requirements, applicable laws, rules and regulations and emergency access needs.
(b) Additional Charges for Rooftop Equipment. Subtenant will be solely
responsible, at Subtenant's sole expense, for the installation, maintenance,
repair and removal
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of the Rooftop Equipment, and Subtenant shall at all times maintain the Rooftop
Equipment in good condition and repair.
(c) Conditions of Installation. Subtenant shall comply with all
applicable laws, rules and regulations relating to the installation, maintenance
and operation of Rooftop Equipment at the Building (including, without
limitation, all construction rules and regulations) and will pay all costs and
expenses relating to such Rooftop Equipment, including the cost of obtaining and
maintaining any necessary permits or approvals for the installation, operation
and maintenance thereof in compliance with applicable laws, rules and
regulations. The installation, operation and maintenance of the Rooftop
Equipment at the Building shall not adversely affect the structure or operating
systems of the Building or the business operations of any other tenant or
occupant at the Building. Subtenant may install cabling and wiring through the
Building interior conduits, risers, and pathways of the Building in order to
connect Rooftop Equipment with the Premises provided that Subtenant obtains
Sublandlord's prior written approval therefor (which may be granted or denied by
Sublandlord in its sole discretion, applied in a good faith, non-arbitrary
manner) and provided, further that without such prior written approval therefor
(which may be granted or denied by Sublandlord in its sole discretion, applied
in a good faith, non-arbitrary manner), Subtenant may not utilize more than 2.4%
of the available riser space for its cabling through the Building or to the
rooftop.
(d) Non-Exclusive Right. Subtenant's right to install and maintain
Rooftop Equipment is non-exclusive and is subject to termination or revocation
as set forth herein, including upon the occurrence of an Event of Default under
this Sublease. Subtenant acknowledges and agrees that its right to install
Rooftop Equipment is subject and subordinate to all existing uses of the rooftop
of the Building, which Subtenant may, at its election, review and investigate.
Subject to the terms set forth below in this subsection (d), Sublandlord at its
election may require the relocation, reconfiguration or removal of the Rooftop
Equipment, if in Sublandlord's reasonable judgment the Rooftop Equipment is
interfering with the use of the rooftop for the helipad or other Building
operations or the business operations of other tenants or occupants of the
Building, causing damage to the Building or if Subtenant otherwise fails to
comply with the terms of this Section 6.8. If relocation or reconfiguration
becomes necessary due to interference difficulties, Sublandlord and Subtenant
will reasonably cooperate in good faith to agree upon an alternative location or
configuration that will permit the operation of the Rooftop Equipment for
Subtenant's business at the Premises without interfering with other operations
at the Building or communications uses of other tenants or occupants. If removal
is required due to any breach or default by Subtenant under the terms of this
Section 6.8, Subtenant shall remove the Rooftop Equipment upon thirty (30) days'
written notice from Sublandlord. Any relocation, removal or reconfiguration of
the Rooftop Equipment as provided above shall be at Subtenant's sole cost and
expense. In addition to the other rights of relocation and removal as set forth
herein, Sublandlord reserves the right to require relocation of Subtenant's
Rooftop Equipment at any time at its election at Sublandlord's cost (but not
more frequently than once per year) so long as Subtenant is able to continue
operating its Rooftop Equipment in substantially the same manner as it was
operated prior to its relocation. In connection with
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any relocation of Subtenant's Rooftop Equipment at the request of or required by
Sublandlord (other than in the case of a default by Subtenant hereunder),
Sublandlord shall provide Subtenant with at least thirty (30) days' prior
written notice of the required relocation and will conduct the relocation in a
commercially reasonable manner and in such a way that will, to the extent
reasonably possible, prevent interference with the normal operation of
Subtenant's Rooftop Equipment. In connection with any relocation, Sublandlord
further agrees to work with Subtenant in good faith to relocate Subtenant's
Rooftop Equipment to a location that will permit its normal operation for
Subtenant's business operations. Sublandlord acknowledges that relocation of
Subtenant's Rooftop Equipment may be disruptive to Subtenant's business and,
without limiting its rights to require such removal, confirms that it will not
exercise its rights hereunder in a bad faith manner or for the purpose of
harassing or causing a hardship to Subtenant.
(e) Costs and Expenses. If Subtenant fails to comply with the terms
of this Section 6.8 within thirty (30) days following written notice by
Sublandlord (or such longer period as may be reasonably required to comply so
long as Subtenant is diligently attempting to comply), Sublandlord may take such
action as may be necessary to comply with these requirements. In such event,
Subtenant agrees to reimburse Sublandlord for all costs incurred by Sublandlord
to effect any such maintenance, removal or other compliance subject to the terms
of this Section 6.8, including interest on all such amounts incurred at the
Agreed Rate, accruing from the date which is thirty (30) days after the date of
Sublandlord's demand until the date paid in full by Subtenant, with all such
amounts being Additional Charges under this Sublease.
(f) Indemnification; Removal. Subtenant agrees to indemnify
Sublandlord, its partners, agents, officers, directors, employees and
representatives from and against any and all liability, expense, loss or damage
of any kind or nature from any suits, claims or demands, including reasonable
attorneys' fees, arising out of Subtenant's installation, operation,
maintenance, repair, relocation or removal of the Rooftop Equipment, except to
the extent any such liability, expense, loss or damage results from the gross
negligence or intentional misconduct of Sublandlord or its agents, partners,
officers, directors, employees, contractors or representatives. At the
expiration or earlier termination of the Sublease, Subtenant may and, upon
request by Sublandlord, shall remove all of the Rooftop Equipment, including any
wiring or cabling relating thereto, at Subtenant's sole cost and expense and
will repair at Subtenant's cost any damage resulting from such removal. If
Sublandlord does not require such removal, any Rooftop Equipment remaining at
the Building after the expiration or earlier termination of this Sublease which
is not removed by Subtenant shall be deemed abandoned and shall become the
property of Sublandlord.
(g) Roof Access; Rules and Regulations. Subject to compliance with
the construction rules for the Building and Sublandlord's reasonable and
nondiscriminatory rules and regulations regarding access to the roof and, upon
receipt of Sublandlord's prior written consent to such activity (which shall not
be unreasonably withheld, conditioned or delayed), Subtenant and its
representatives shall have access to and the right to go upon the roof of the
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Building, on a seven (7) day per week, twenty-four (24) hour basis, to exercise
its rights and perform its obligations under this Section 6.8. Subtenant
acknowledges that advance notice is required and a Building engineer must
accompany all persons gaining access to the rooftop, provided, however, in the
case of emergency (such as a failure of Subtenant's equipment to transmit or
receive), Subtenant's obligation shall be to provide verbal notice to the Office
of the Building, and if Subtenant is unable to reach Sublandlord's managing
agent, Subtenant shall immediately notify Building security personnel. Following
the giving of such notice, Subtenant may take action to avert or cure the
emergency situation, provided, however, Subtenant shall be fully responsible for
all costs, expenses and damages resulting from its actions, including, without
limitation, costs of damage to the Building or any equipment therein and damage
to or interference with any other rooftop equipment. Subtenant may install
Rooftop Equipment at the Building only in connection with its business
operations at the Premises, and may not lease or license any rights or equipment
to third parties or allow the use of any rooftop equipment by any party other
than Subtenant, or an assignee or subtenant permitted by the terms of this
Sublease, provided, however, no assignee or subtenant will be entitled to any
rights that differ for those set forth in this Section 6.8. Subtenant
acknowledges that Sublandlord has made no representation or warranty as to
Subtenant's ability to operate Rooftop Equipment at the Building and Subtenant
acknowledges that helicopters, other equipment installations and other
structures and activities at or around the Building may result in interference
with Subtenant's Rooftop Equipment. Except as set forth in this Section 6.8 and
as referenced in Section 12.9, Sublandlord shall have no obligation to prevent,
minimize or in any way limit or control any existing or future interference with
Subtenant's Rooftop Equipment.
ARTICLE 7
INSURANCE
7.1 Use of Premises. Subtenant shall not violate, or permit the violation
of, any condition, standard for use in California, imposed by any insurance
policy relating to the Building and shall not do, or permit anything to be done,
or keep or permit anything to be kept in the Premises which: (a) might subject
Sublandlord to any liability or responsibility for personal injury or death or
property damage, or (b) might increase any insurance rate with respect to the
Building over the rate which would otherwise be in effect (beyond normal
increases for tenancies generally), or (c) might result in insurance companies
of good standing refusing to insure the Building in amounts satisfactory to
Sublandlord, or (d) might result in the cancellation of any policy relating to
the Building or might result in the assertion of any defense by the insurer in
whole or in part to claims under any such policy.
7.2 Property Insurance. During the Sublease Term, Subtenant shall
maintain, at Subtenant's expense, "All Risk" property insurance, insuring
Subtenant's Property (as defined in Section 9.2) and the fixtures and equipment
located within the Premises (excluding Building systems which are the
responsibility of Sublandlord as set forth in Section 6.3), with a replacement
cost endorsement, in the amount of their full replacement cost. If a boiler,
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pressure object, supplemental air conditioning or other mechanical equipment is
or becomes located within the Premises, Subtenant shall also obtain and maintain
(and will cause co-location customers to obtain and maintain as set forth in
Section 19.3 below), at its expense, property insurance covering such equipment,
with coverage limits of not less than full replacement cost. As used in this
Sublease, the "full replacement cost" of the Building means its replacement cost
excluding (a) footings and foundations and (b) property and fixtures that
tenants are contractually required to insure. Subtenant and its co-location
customers shall also carry business interruption insurance to cover any
interruption of operations at the Premises.
7.3 Liability Insurance. Subtenant, at its expense, shall maintain
throughout the Sublease Term, commercial general liability insurance, including
contractual liability, with respect to the Premises, their use and occupancy by
Subtenant and the conduct or operation of business therein, with combined
single-limit coverage of not less than $3,000,000. Sublandlord may, from time to
time, but not more frequently than once every year, increase the policy amounts
to be maintained by Subtenant under this Section 7.3 as Sublandlord deems
necessary to maintain adequate liability coverage.
7.4 Waiver of Subrogation. Sublandlord and Subtenant each shall secure an
appropriate clause in, or an endorsement upon, each insurance policy required by
Section 7.2 or otherwise carried by such party with respect to the Building,
pursuant to which the insurance company waives subrogation or permits the
insured, prior to any loss, to agree with a third party to waive any claim it
might have against said third party without invalidating the coverage under the
insurance policy. On Subtenant's policies, the waiver of subrogation or
permission for waiver of any claim shall extend to Sublandlord, Sublandlord's
managing agent, if any, Sublandlord's Affiliates (as defined in Section 26.8(b))
and its and their officers and employees. On Sublandlord's policies, the waiver
of subrogation or permission for waiver of any claim shall extend to Subtenant
and its officers and employees. Each party releases the above-named persons with
respect to any claim (including a claim for negligence) which it might otherwise
have against them for injury, loss, damage or destruction occurring before the
end of the Sublease Term and covered by any insurance policy required of such
party under Section 7.2.
7.5 Policy Requirements. Sublandlord, Sublandlord's managing agent, if
any, Sublandlord's Affiliates and its and their officers and employees, each
Superior Lessor and each mortgagee whose name and address shall have been
furnished to Subtenant shall be designated as additional insured parties on each
insurance policy required to be carried by Subtenant under this Article.
Subtenant shall deliver to Sublandlord fully paid-for policies or certificates
of insurance for the insurance coverage required by this Article, in form
satisfactory to Sublandlord, issued by the insurance company or its authorized
agent (each a "Certificate"), at least 20 days before the Commencement Date.
Subtenant shall procure and pay for renewals of such insurance from time to time
before expiration and deliver to Sublandlord a renewal policy or renewal
Certificate at least 30 days before the expiration of any existing policy. At
Sublandlord's request, Subtenant shall also deliver insurance policies
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or Certificates to additional insured parties other than Sublandlord. All
policies required to be carried by Subtenant hereunder shall be issued by
companies of recognized responsibility, acceptable to Sublandlord, maintaining a
rating of A-VIII or better in Best's Insurance Reports - Property - Casualty (or
an equivalent rating on any successor index adopted by Best's), and licensed to
do business in California. All such policies shall provide that they cannot be
cancelled or materially modified unless Sublandlord, each Superior Lessor and
each mortgagee named as an additional insured party are given at least 30 days'
prior written notice of such cancellation or modification.
7.6 Premium Increase. If, due to any action or omission by Subtenant in
default of any of its obligations under this Sublease, or due to any
improvements installed by or at the direction of Subtenant, the premiums on
Sublandlord's insurance shall be higher than they otherwise would be, Subtenant
shall reimburse Sublandlord, on demand, as Additional Charges, for the part of
the premiums attributable to the default by Subtenant or to such improvements.
For purposes of this Section, a schedule or statement of rates for the Building,
issued by Sublandlord's insurer, or by a fire insurance rating organization or
other similar body making rates for insurance for the Building shall be
conclusive evidence of the facts therein stated and of the several items and
charges in the insurance rate then applicable to the Building.
ARTICLE 8
ALTERATIONS
8.1 Conditions. Subtenant may from time to time, at its expense, make such
alterations ("Alterations") in and to the Premises as Subtenant reasonably
considers necessary for the conduct of its business in the Premises, provided
and upon the following conditions (unless otherwise reasonably approved by
Sublandlord which approval shall not be unreasonably withheld conditioned or
delayed): (a) the Alterations do not affect the outside appearance of the
Building and are not visible from the outside of the Building; (b) the
Alterations are nonstructural and do not impair the strength or structural
integrity of the Building, (c) the Alterations are to the interior of the
Premises and do not affect any part of the Building outside of the Premises; (d)
the Alterations do not affect the proper functioning of the mechanical,
electrical, HVAC or other systems of the Building, or increase the usage of such
systems by Subtenant beyond Subtenant's allocation of such mechanical,
electrical, HVAC or other systems, (e) before proceeding with any Alteration
other than those meeting the conditions set forth in (a), (b), (c) and (d) above
and costing less than $100,000, Subtenant shall submit to Sublandlord, for
Sublandlord's approval, plans and specifications therefor, and Subtenant shall
not proceed with the Alteration unless and until it obtains Sublandlord's
approval, which approval, if such Alteration satisfies the other conditions set
forth in this Section shall not be unreasonably withheld, conditioned or delayed
(taking into account, among other things, any increased demands that such
Alterations may place on the mechanical, electrical, HVAC or other systems of
the Building beyond Subtenant's allocation of such mechanical, electrical, HVAC
or other systems); (f) Subtenant shall pay to
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Sublandlord upon demand Sublandlord's or its managing agent's reasonable,
direct, out-of-pocket costs and expenses incurred in reviewing Subtenant's plans
and specifications and inspecting the Alterations to determine whether they are
consistent with the guidelines set forth in this Section 8.1, whether they are
being performed in accordance with the approved plans and specifications and in
compliance with law, including the fees of any architect or engineer employed by
Sublandlord for such purpose; (g) before proceeding with any Alteration costing
more than $100,000, as defined in Section 9.2, as estimated by a reputable
contractor approved by Sublandlord, Subtenant shall obtain and deliver to
Sublandlord either: (1) a performance bond and a labor and materials payment
bond for Sublandlord's benefit, issued by a corporate surety licensed to do
business in the State of California, each in an amount equal to 125% of the
estimated cost of the Alterations and in form satisfactory to Sublandlord, or
(2) other security reasonably satisfactory to Sublandlord (which Subtenant, at
its election, may submit for Sublandlord's consideration); (h) not less than 15
days nor more than 20 days before commencement of the Alterations, Subtenant
shall notify Sublandlord of the work commencement date, so that Sublandlord may
post notices of nonresponsibility about the Premises; (i) Subtenant shall fully
and promptly comply with the Rules and Regulations and construction rules and
regulations for the Building then in force with respect to the making of
Alterations; and (j) in no event shall any Alterations or the performance
thereof result in interference or disruption to the business operations of any
other tenant or other occupant of the Building. Any bid obtained by Subtenant,
and the contractor making the bid, shall satisfy the criteria specified in
Section 6.4 and Section 8.2. Subtenant agrees that the review and approval by
Sublandlord of Subtenant's plans and specifications for Alterations are solely
for Sublandlord's benefit. Sublandlord shall have no duty toward Subtenant, nor
shall Sublandlord be deemed to have made any representation or warranty to
Subtenant, as to the safety, adequacy, correctness, efficiency or compliance
with laws of the plans and specifications, the Alterations or their design, or
any other matter regarding the Alterations. Sublandlord agrees to respond in a
commercially reasonable and prompt manner to requests by Subtenant for approval
for Alterations necessary to accommodate Subtenant's ongoing business
operations.
8.2 Performance. Subtenant shall obtain at its sole expense all necessary
governmental permits and certificates for the commencement and performance of
Alterations and for final approval of the Alterations upon completion. Subtenant
shall retain at its sole expense a reputable contractor, acceptable to and
reasonably approved by Sublandlord for specific Alterations, to perform the
Alterations in compliance with the permits and certificates and applicable law.
Alterations shall be diligently performed in a good and workmanlike manner,
using new materials and equipment at least equal in quality to the prevailing
Building standards established by Sublandlord. Any Alterations affecting
mechanical, electrical, HVAC or other systems of the Building shall be performed
only by contractors approved by Sublandlord unless such systems are contained
entirely within the Premises and do not in any way affect Building systems
outside the Premises. Alterations shall be performed in a manner that does not
interfere with, delay or impose additional expense on Sublandlord in the
construction, maintenance, repair or operation of the Building; and if any such
additional expense is so incurred by Sublandlord, Subtenant shall reimburse
Sublandlord for such
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additional expense, upon demand, as Additional Charges. Throughout the
performance of Alterations, Subtenant, at its sole expense, shall carry, or
cause to be carried, workers' compensation insurance as required by law and
general liability insurance, with completed operations endorsements, for any
occurrence in or about the Building, in such coverage limits as Sublandlord may
reasonably require (taking into account the financial strength of Subtenant and
the nature and extent of the work to be performed), with insurers meeting the
requirements of Section 7.5. Sublandlord and the persons specified in Section
7.5 shall be designated as additional insured parties on such insurance
policies. Subtenant shall furnish Sublandlord with evidence reasonably
satisfactory to Sublandlord that such insurance is in effect before the
commencement of Alterations and, on request of Sublandlord during construction,
Subtenant shall provide evidence reasonably satisfactory to Sublandlord that the
insurance remains in effect. Upon Sublandlord's request following the completion
of any Alterations, Subtenant shall deliver to Sublandlord "as built" drawings
of the Alterations. If any Alterations involve removal of fixtures, equipment or
other property in the Premises which are not Subtenant's Property (as defined in
Section 9.2), the removed fixtures, equipment or other property shall be
promptly replaced at Subtenant's expense with new fixtures, equipment or other
property of like utility and at least equal value, unless Sublandlord otherwise
directs Subtenant in writing.
8.3 Liens and Violations. Subtenant, at its expense, and with diligence
and dispatch, shall procure the cancellation or discharge of all notices of
violation arising from or otherwise connected with Alterations, or any other
work, labor, services or materials done for or supplied to Subtenant, or any
person claiming through or under Subtenant, which shall be issued by the
Building and Safety Department of the City of Los Angeles or any other public
authority. Subtenant shall not utilize materials in Alterations (except with
respect to Subtenant's Property) that are subject to security interests or
liens. Subtenant shall defend, indemnify and hold Sublandlord harmless from and
against any and all mechanics' liens, stop notices and other liens and
encumbrances or claims of liens or encumbrances filed in connection with
Alterations, or any other work, labor, services or materials done for or
supplied to Subtenant, or any person claiming through or under Subtenant,
including security interests in any materials, fixtures or articles installed in
the Premises; and against all costs, expenses and liabilities incurred in
connection with any such lien or encumbrance, or claim of lien or encumbrance,
its removal or any related action or proceeding. Subtenant, at its sole expense,
shall satisfy or discharge of record each lien or encumbrance within 15 days
after it is filed. If Subtenant fails to do so, Sublandlord shall have the right
to satisfy or discharge such lien or encumbrance by payment to the claimant on
whose behalf it was filed, by the posting of a bond, or by other action.
Subtenant shall reimburse Sublandlord on demand for the actual out-of-pocket
costs and expenses so incurred by Sublandlord, as Additional Charges, and
without regard for any defense or offset that Subtenant may have had against the
claimant, but neither Sublandlord's curative action nor the reimbursement of
Sublandlord by Subtenant shall cure Subtenant's default in failing to satisfy or
discharge the lien or encumbrance.
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ARTICLE 9
SUBLANDLORD'S AND SUBTENANT'S PROPERTY
9.1 Sublandlord's Fixtures and Equipment. All fixtures, equipment,
appurtenances, improvements and other personal property existing at the Building
as of the date of this Sublease, shall be and remain the property of Sublandlord
and shall not be removed by Subtenant and shall, upon expiration or earlier
termination of the Sublease, remain a part of the Premises and the property of
Sublandlord. Upon notice to Subtenant in connection with a termination of the
Sublease, Sublandlord may require Subtenant to remove all or any part of any
non-standard fixtures (e.g., vaults, kitchens, raised floors (excluding raised
floors existing as of the date the Premises are initially delivered to
Subtenant), auditoriums, internal stairways and any other improvements or
alterations which differ from those typically included within normal office use
(excluding any other non-standard improvements which existed as of the date the
Premises are initially delivered to Subtenant), whether or not installed by
Subtenant or existing as of the date of this Sublease, and any other
Alterations, in which event Subtenant shall remove the foregoing from the
Premises before the end of the Sublease Term at Subtenant's expense and shall
repair and restore the Premises to its condition before such installation,
ordinary wear and tear and insured casualty loss excepted, and repair any damage
resulting from such removal. Upon request by Subtenant, Sublandlord agrees to
specify at the time of approval of Alterations within the Premises which may be
considered non-standard whether such improvements or Alterations will be
required to be removed at the end of the Sublease Term.
9.2 Other Property and Equipment. All telecommunications systems and
related equipment and office equipment and other equipment or property, whether
or not attached to or built into the Premises, that is installed in the Premises
by or for the account of Subtenant or its customers, agents, vendees, subtenants
(including Providing Parties) or service providers without expense to
Sublandlord, and which can be removed without any significant damage to the
Premises or the Building, and all furniture, furnishings and other articles of
movable personal property owned by Subtenant (or leased from any person other
than Sublandlord) and located in the Premises (collectively, "Subtenant's
Property") shall remain the property of Subtenant (or such other owner) and may
be removed by Subtenant (or such other owner) at any time during the Sublease
Term. If and to the extent significant damage is expected to result from the
removal of Subtenant's Property, such property and equipment shall not be
removed without the prior written consent of Sublandlord, which consent shall
not be unreasonably withheld so long as Subtenant agrees to repair, at
Subtenant's sole cost and expense, all damage resulting from such removal.
Subtenant shall repair, at its sole expense, any damage to the Premises or to
the Building resulting from the installation or removal of Subtenant's Property,
ordinary wear and tear and insured casualty loss excepted. Equipment or other
property for which Sublandlord shall have granted an allowance or credit to
Subtenant, and any replacement of such equipment or property, shall not be
deemed Subtenant's Property and shall become the property of Sublandlord.
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9.3 Removal at Termination. Before the expiration of the Sublease Term, or
immediately upon any earlier termination of this Sublease, Subtenant, at its
sole expense, shall remove from the Premises all of Subtenant's Property, except
such items as Sublandlord has expressly permitted, either at the time of
installation or otherwise, to remain. Subtenant shall repair any damage to the
Premises or the Building resulting from the installation or removal of
Subtenant's Property or other fixtures or equipment from the Premises.
9.4 Abandonment. At Sublandlord's option, any items of Subtenant's
Property that remain in the Premises after the expiration of the Sublease Term
or any earlier termination of this Sublease shall be deemed abandoned and may be
retained by Sublandlord (or successor in interest) as its property or disposed
of, without accountability, in such manner as Sublandlord shall determine, and
at Subtenant's expense.
9.5 Taxes on Subtenant's Property and Non-Standard Subtenant Improvements.
(a) Subtenant's Property. At least 10 days before delinquency,
Subtenant shall pay all taxes levied or assessed upon any property, equipment,
fixtures or improvements installed at the Premises after the date of this
Sublease. If the assessed value of the Building, the Premises or property of
Sublandlord is increased by the inclusion of a value placed upon property
installed at the Premises after the date of this Sublease, Subtenant shall pay
to Sublandlord, upon demand, as Additional Charges, the taxes levied against
Sublandlord on account of the included value of such property.
(b) Subtenant Improvements. Subtenant shall pay to Sublandlord, upon
demand, as Additional Charges, the portion of all real estate taxes levied or
assessed against Sublandlord with respect to improvements, property or equipment
installed in the Premises, to the extent such levy or assessment is based upon a
value determined to be in excess of Thirty-Five Dollars ($35.00) per square foot
of Rentable Area of the Premises. For the purposes of calculating the amount
payable by Subtenant pursuant to this Section 9.5(b), the assessed value of
improvements and equipment installed in the Premises shall be deemed to be equal
to the cost of such improvements and equipment, including any fees paid to
Sublandlord in connection therewith, and including the cost of any Alterations
performed pursuant to Section 8.1.
9.6 Sublandlord Liens. Sublandlord recognizes that Subtenant will be
installing Subtenant's Property at the Premises, including telephone switching
equipment, and furniture, fixtures and equipment. Sublandlord further recognizes
that Subtenant may, from time to time, finance and refinance certain items of
Subtenant's Property. Accordingly, Sublandlord hereby (a) consents to the
installation of Subtenant's Property subject to and in accordance with the terms
of this Sublease; (b) waives, in favor of both Subtenant and any party providing
financing to Subtenant for any purpose, any lien, interest, and or right of
Sublandlord in and to Subtenant's Property, whether statutory or possessory,
whether arising by statute or at common law, including but not limited to any
Sublandlord's lien, and any
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right of execution, attachment, levy or to distraint for rent. Notwithstanding
the foregoing, Sublandlord shall have no obligation or liability to any holder
of a lien with respect to Subtenant's Property or equipment except to the extent
of any written agreement which may be entered into between Sublandlord and such
lienholder. No lienholder shall be permitted access to the Premises or any other
rights with respect to the Building unless set forth in a written agreement.
Further, Subtenant agrees to indemnify, defend and hold harmless Sublandlord
from and against all liens which may be recorded against the Land, the Building
or any portion thereof and the exercise of any remedies by any lienholder of
Subtenant.
ARTICLE 10
REPAIRS AND MAINTENANCE
10.1 Sublandlord's Obligations. Sublandlord shall keep and maintain the
Common Area, the Building's exterior walls, glass, roof and foundation, Building
core, and shall keep in proper working order, condition and repair the Building
systems and facilities serving the Premises and improvements to the extent such
systems, facilities and improvements are included within the Base Building
Definition (but specifically excluding any Specialty Equipment and any other
equipment installed by Subtenant or its agents, employees, vendees, subtenants,
Providing Parties or service providers). However, Sublandlord shall have no
obligation to Subtenant to perform such repairs in or about the Common Area, the
Premises, or with respect to Building systems and facilities serving the
Premises, unless Sublandlord has learned of the need or been notified in writing
of the need for such repairs, describing the problem in reasonable detail, and
except in the case of emergency, in which case Sublandlord shall perform such
repairs with reasonable diligence as quickly as possible upon Subtenant's oral
notification to Sublandlord of the need of such repair.
10.2 Subtenant's Obligations. Except for Sublandlord's obligations
specifically set forth in Sections 10.1 and 13.1, Subtenant shall, at its
expense, throughout the Sublease Term, take good care of the Premises,
Subtenant's Property and all equipment and other property of Subtenant, its
agents, employees, vendees, subtenants (including Providing Parties) or service
providers located within the Premises from time to time. Subtenant shall be
responsible for all repairs, maintenance and replacements in and to the
Premises, including any improvements installed by or for Subtenant or its
agents, employees, vendees, subtenants (including Providing Parties) or service
providers, and for all wall and floor coverings, all water fountains, sinks,
sanitary and electrical fixtures and equipment in the Premises, ordinary and
reasonable wear and tear excepted. Subtenant, at its expense, shall promptly
replace all scratched, damaged or broken doors and interior glass in the
Premises. Subtenant shall be responsible for all maintenance and repairs,
interior and exterior, structural and non-structural, ordinary and
extraordinary, of the Premises, the Building, and its facilities and systems,
made necessary, in whole or in part, by: (a) the performance or existence of
Alterations or other improvements performed by or for Subtenant or its agents,
employees, vendees, subtenants (including Providing Parties) or service
providers; (b) the installation, use or operation of any equipment or property
within the Premises; (c) the moving of any equipment or property in or
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out of the Building; or (d) any act, omission, misuse or neglect of Subtenant or
its officers, partners, employees, agents, contractors, vendees, customers or
invitees. All repairs in or to the Premises for which Subtenant is responsible
shall be subject to the provisions of Article 8 regarding Alterations.
Sublandlord shall perform or cause to be performed, at Subtenant's expense, any
other repairs of the Building and its facilities and systems for which Subtenant
is responsible. Subtenant shall reimburse Sublandlord, as Additional Charges,
for all reasonable actual, out-of-pocket costs of such repairs.
10.3 Exculpation of Sublandlord for Repairs. Except as otherwise expressly
provided in this Sublease, Sublandlord shall have no liability to Subtenant, and
Subtenant's covenants and obligations under this Sublease shall not be reduced
or abated in any manner whatsoever, by reason of any inconvenience, annoyance,
interruption or injury to business arising from Sublandlord making any
reasonable maintenance, repairs, alterations, additions or improvements in or to
any portion of the Building or the Premises or in or to the fixtures, equipment
or appurtenances of the Building or the Premises, which Sublandlord is required
or permitted to make by this Sublease, or which are required by law, or which
Sublandlord deems appropriate, excepting any actual (but not consequential)
damages occurring during the performance of such maintenance, repair,
alteration, addition or improvement to the extent caused by the negligence or
willful misconduct of Sublandlord or its employees, contractors, agents, or
partners. When practicable, Subtenant shall be given the reasonable opportunity
to perform such work within the Premises in lieu of the Sublandlord undertaking
such work. Sublandlord shall have the right to erect scaffolding and barricades
in the Premises and elsewhere in the Building for purposes of such repairs,
provided that such structures do not unreasonably impair access to and use of
the Premises. Subtenant waives any rights it may have under California Civil
Code Sections 1941 and 1942, and any other provisions of law now or hereafter in
force, regarding the duties of a lessor to repair leased premises or the rights
of lessees to make repairs if the lessor fails to do so. Sublandlord agrees that
it will not (except in the event of an emergency or a force majeure event)
intentionally and knowingly take any action to reduce, interrupt or cease
service of the heating, air conditioning, ventilation, elevator, plumbing,
electrical systems, telephone systems and/or utilities services of the Premises,
or the Building. If Sublandlord becomes aware of the need for work which will
affect services, Sublandlord shall exercise commercially reasonable efforts to
meet with Subtenant in advance to advise Subtenant of the necessary work or
other event so that Subtenant may devise a procedure to minimize the
interruption to Subtenant's use, possession and occupancy of the Premises for
the purpose of conducting its business.
10.4 Notice. Promptly upon becoming aware of any such matter, Subtenant
shall give prompt written notice to Sublandlord of: (a) any occurrence in or
about the Premises for which Sublandlord might be liable; (b) any fire or other
casualty in the Premises; (c) any damage to or defect in the Premises, including
fixtures, for the repair of which Sublandlord might be responsible; and (d) any
damage to or defect in any part or appurtenance of the Building's sanitary,
electrical, HVAC, elevator, fire warning or other systems located in or passing
through the Premises.
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ARTICLE 11
UTILITIES AND SERVICES
11.1 Basic Utilities and Services. Subject to the availability of
utilities and services on a 24-hour basis as described in this Sublease,
Sublandlord shall furnish to the Premises during "Building Hours," which are
from 7:00 a.m. to 7:00 p.m. Monday through Friday and from 9:00 a.m. to 2:00
p.m. Saturday, except New Year's Day, Martin Luther King Day, Presidents' Day,
Memorial Day, Independence Day, Labor Day, Thanksgiving, Christmas and other
holidays generally observed in the City of Los Angeles by the closing of
businesses (each a "Holiday"), and subject to the Rules and Regulations: (a)
heating, air-conditioning and ventilation ("HVAC") in accordance with the Base
Building Definition attached as Schedule 1 to the Work Letter ("Base Building
Definition"); (b) non-exclusive freight and passenger elevator service included
within the Base Building Definition; (c) hot and cold water in amounts required
for normal lavatory, cleaning and drinking purposes (including water for coffee
machines). Subtenant's Premises shall be separately metered or submetered
(including through an e-mon metering system) at Subtenant's cost so that
Subtenant may contract or otherwise arrange for excess electricity in amounts
consistent with or at Subtenant's sole expense, in addition to, Base-Building
Definition, subject to Sublandlord's approval, engineering review, system
compatibility and available capacity. Sublandlord shall provide janitorial
services on business days in accordance with the specifications attached as
Exhibit G. It is acknowledged that certain portions of Subtenant's electricity
usage at the Premises is and will remain separately metered or submetered, and
Subtenant hereby assumes all responsibility for maintenance of the utility
meters (or submeters) for the Premises. If Subtenant wishes to contract with a
utility provider other than the utility provider now servicing the Building or
wishes to contract directly with a utility provider directly rather than
operating under a submetering arrangement, Subtenant shall first obtain
Sublandlord's prior written consent, which shall not be unreasonably withheld,
conditioned or delayed.
11.2 Additional Subtenant Use. Subject to the Rules and Regulations, the
Base Building Definition and the terms of this Sublease, passenger elevator
service, electricity, life-safety system, and water will be available 24 hours a
day, every day of the year, and HVAC and freight elevator service will be
available at other than Building Hours by arrangement with Sublandlord, at
Sublandlord's customary charges for such overtime use (which, for after-hours
HVAC, is currently charged at $54.00 per hour) for Building standard HVAC
services to the office area portions of the Premises. To the extent other
tenants require after-hours HVAC on the Lower Level I, II, or III floors of the
Building and other tenants within the lower levels pay their pro rata share of
such services, Subtenant's after-hours HVAC costs shall be adjusted to reflect
such cost sharing arrangement. Notwithstanding the foregoing Subtenant's use and
access rights as described herein shall be subject to emergency shutdowns and
the annual power shutdown and inspection (conducted in conjunction with the Los
Angeles Fire Department), on one weekend per year (as determined by Sublandlord)
or more frequently if required by applicable laws, rules or regulations, it
being agreed that Sublandlord's managing agent shall use its commercially
reasonable efforts to notify Subtenant prior to any scheduled shutdown of the
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Building's power which Sublandlord or its managing agent schedules or of which
it receives reasonable advance notice. Without Sublandlord's prior written
consent, Subtenant shall not use any apparatus or device in the Premises
designed to operate on electrical current in excess of the capacity provided in
the Base Building Definition, except as specifically set forth in this Sublease.
Sublandlord may impose a reasonable charge for the use by Subtenant of: (a) HVAC
or freight elevators at any time other than during Building Hours; (b) HVAC or
water in amounts exceeding the amounts Sublandlord has undertaken to provide in
Section 11.1 ("Excess Services"), it being agreed that Sublandlord may audit
(including by consultant, survey, and/or through installation of meters)
Subtenant's consumption of utilities for such purpose, which audits and metering
shall be at Subtenant's expense unless they disclose that Subtenant is not in
fact using Excess Services; and (c) any additional or unusual janitorial or
cleaning services in the Premises made necessary by reason of (i) non-standard
tenant improvements in the Premises (such as a large number of glass partitions
or other glass surfaces in the interior of the Premises), (ii) the carelessness
of Subtenant or its employees, or (iii) the manner in which Subtenant's business
is conducted. Sublandlord shall not be required to provide janitorial services
for any portions of the Premises which differ from normal office uses, including
portions utilized for preparing or consuming food or beverages, storage, offset
printing, equipment rooms or lavatories.
11.3 Temperature Maintenance. Sublandlord makes no representation with
respect to, and shall have no liability in connection with, the adequacy or
fitness of the HVAC systems to operate in a manner which is inconsistent with
the Base Building Definition. If the temperature otherwise maintained in any
portion of the Building by the HVAC systems is affected as a direct or proximate
result (as determined by a qualified building engineer) of any lights, machines,
equipment, occupancy, or electrical load in or with respect to the Premises
other than in accordance with the Base Building Definition, Sublandlord shall
have the right, but not the obligation, to install any machinery and equipment
which Sublandlord reasonably deems necessary to maintain or restore temperature
balance, including modifications to the standard HVAC equipment. The cost of any
such additional machinery or equipment, including the cost of installation and
any additional cost of operation and maintenance incurred thereby, shall be paid
by Subtenant as Additional Charges.
11.4 Exculpation of Sublandlord for Utilities. Except as specifically
provided in this Sublease to the contrary, Sublandlord shall not be liable for
any failure to furnish any services or utilities when such failure is caused by
acts of God, accidents, breakage, repairs, strikes, lockouts, other labor
disputes, alterations or improvements to the Premises or the Building, the
inability to obtain an adequate supply of fuel, water, electricity, labor or
other supplies or for any other condition beyond Sublandlord's reasonable
control (including any governmental energy conservation program), and Subtenant
shall not be entitled to any damages nor shall such failure abate or suspend
Subtenant's obligation to pay the Rents or constitute or be construed as a
constructive or other eviction of Subtenant. If any governmental entity
promulgates or revises any law, or issues guidelines or mandatory controls
relating to the use or conservation of energy, water, gas, light or electricity,
the reduction of automobile or other emissions or the provision of any other
utility or service
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furnished by Sublandlord in the Building, Sublandlord may, in its sole
discretion, take any appropriate action to comply with such provisions of law,
guidelines or mandatory controls, including the making of alterations to the
Building. Except as specifically provided in this Sublease, neither
Sublandlord's actions nor its failure to act shall entitle Subtenant to any
damages, abate or suspend Subtenant's obligation to pay the Rents or constitute
or be construed as a constructive or other eviction of Subtenant.
11.5 Access. Sublandlord, its cleaning contractor and their employees shall
have access to the Premises after 5:30 p.m. and before 8:00 a.m. and shall have
the right to use, without charge therefor, all light, power and water in the
Premises reasonably required to clean the Premises, except such persons shall
not have access to Subtenant's proprietary assets or technical equipment areas
designated by Subtenant in writing and Sublandlord shall have no liability with
respect thereto. If Subtenant wishes to designate any areas containing equipment
or assets as areas which will not be accessible, Subtenant agrees to provide for
emergency access as requested by Sublandlord.
11.6 Directory Listing. If Sublandlord elects to utilize a directory board
in the lobby of the Building, Sublandlord shall provide to Subtenant up to 5
lines on the Building directory. The reasonable charge of Sublandlord for any
changes in such listings requested by Subtenant shall be paid by Subtenant to
Sublandlord on demand, as Additional Charges. The content and design of the
directory board shall be determined by Sublandlord in its sole and absolute
discretion. Subtenant's signage rights at the Building are set forth in Article
27.
11.7 Building Security. Sublandlord (or its property manager) shall, as
part of the Costs of Operation, provide security services for the Building,
including the Parking Garage, in a manner consistent with the security services
provided in Comparable Buildings. Sublandlord shall be in no event obligated to
provide armed guards at the Building. Subject to the requirements of the Work
Letter and terms of Section 8 (Alterations), if applicable, Subtenant shall be
permitted at its sole expense, to install its own security system (such as a
card key system) and may retain supplemental security services for its Premises
(but in no event such supplemental security services consist of armed guards),
so long as such systems and services are compatible with Sublandlord's security
measures for the Building. If Subtenant elects to employ any of its own security
measures, Sublandlord and Subtenant agree to use reasonable efforts to
coordinate their respective security functions and shall cooperate to develop
procedures to implement their respective procedures in an efficient and
effective manner. Notwithstanding anything to the contrary herein, Subtenant
assumes responsibility for (1) keeping the Premises reasonably secure, and (2)
locking the doors in and to the Premises. Any damage to Subtenant's property or
the Premises resulting from neglect shall be paid for by Subtenant, subject to
Subtenant's right to collect insurance proceeds and proceed against third
parties. All property belonging to Subtenant or any person in the Premises shall
be there at the sole risk of the Subtenant or such other person only, and
Sublandlord and its agents and employees shall not be liable for theft or
misappropriation, except to the extent resulting from the gross negligence or
willful misconduct of Sublandlord or its agents, employees or contractors. It is
further acknowledged and agreed that Sublandlord makes no representation
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or warranty to Subtenant as to the protection which may be provided by
Sublandlord's security measures to Subtenant's employees or visitors, and
Sublandlord shall not be responsible for any criminal acts which may be
committed within the Common Areas or at or around the Premises or the Building.
11.8 Subtenant's Right to Retain Janitorial Services. Subtenant shall have
the right, at Subtenant's expense, upon not less than 30 days' prior written
notice to Sublandlord, to retain a reputable janitorial service contractor to
perform janitorial services in accordance with the specifications attached
hereto as Exhibit G to the entire Premises or a specifically designated portion
of the Premises. In the event Subtenant shall so notify Sublandlord, Sublandlord
shall have no Further obligation to provide janitorial services to the Premises
after the effective date of commencement of the service retained by Subtenant.
Sublandlord and Subtenant shall coordinate all janitorial services to avoid
duplication of services, improper charges, disagreements between service
contractors and to ensure that the Building and the Premises will be maintained
in accordance with the standards of Comparable Buildings. If Subtenant elects to
provide its own janitorial services, all storage of cleaning supplies and
equipment for such janitorial service shall be within the Premises in compliance
with all applicable laws, rules and regulations.
11.9 Telephone Services. Currently, the following telephone companies
serve the Premises: MCI, AT&T, MFS and PacBell. Subtenant shall have the right
to select and contract with any telecommunications provider of its choice, so
long as (i) such provider is limited to the utilization, within the Premises, of
existing equipment available at the Building or other equipment approved by
Sublandlord in its sole discretion and installed in accordance with the terms of
this Sublease; (ii) such provider is to provide service solely to Subtenant
(unless otherwise approved in writing by Sublandlord); (iii) such provider
enters into an agreement with Sublandlord, in a form reasonably acceptable to
Sublandlord, pertaining to issues such as liability, insurance, indemnity,
removal of equipment, repair of damage and protection against interference with
other tenants of the Building; and (iv) upon the expiration or earlier
termination of the rights of Subtenant under this Sublease, all rights of such
provider to provide services to the Building shall automatically cease except to
the extent of contracts with other tenants or occupants of the Building which
have been approved by Sublandlord in advance. Subtenant acknowledges and agrees
that Sublandlord, except as may be imposed by law, shall have no obligation to
provide access to the Building or any portion thereof to any persons or entities
except upon the terms of written agreements which may be entered into between
Sublandlord and such parties. Sublandlord specifically reserves the right to
deny access to any persons or entities in sole and absolute discretion, except
to the extent and subject to the terms of written agreements. It is acknowledged
and agreed that the foregoing shall not be applicable to Subtenant's Providing
Parties who enter into agreements with Subtenant subject to and in accordance
with the terms of Section.3.
11.10 Uninterrupted Power System (UPS). Subject to the approval of the
Building's engineers with respect to method of connection and confirmation of
capacity needs and subject to availability as determined by Landlord in its good
faith discretion, Subtenant
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shall have the right to utilize the Building's Uninterrupted Power System (UPS)
for Subtenant's operations in accordance with Subtenant's design documents
approved by Sublandlord and its engineers. Subtenant agrees to pay to
Sublandlord, as part of the Rents payable hereunder (and not as part of
Subtenant's Share of Costs of Operation), (i) costs incurred by Sublandlord to
connect Subtenant's Premises to the UPS, including engineering fees as required,
and (ii) the actual cost of operating and maintaining the UPS to the extent
exceeding the basic annualized cost of operating the UPS prior to the date of
commencement of Subtenant's use and hookup, with such costs being determined by
a licensed and qualified engineer or contractor experienced in the operation of
the UPS and reasonably verified through available operating cost records.
Sublandlord has made no representation or warranty regarding the UPS and has
provided no assurances to Subtenant regarding its operations. Subtenant's use of
the UPS shall be at the sole risk of Subtenant.
11.11 Subtenant's Specialty Equipment. Subject to the terms of this
Section 11.11, Sublandlord acknowledges that Subtenant's use of the Premises may
require some or all of the following (the "Specialty Equipment"), all of which
shall be subject to engineering review and approval:
(a) Subject to engineering review and confirmation of methods of
connection and available capacity, Subtenant shall have limited access to the
Building's back up diesel generators on terms specified by Sublandlord. All work
associated with connections to such generators shall be at Subtenant's sole cost
and expense and Sublandlord makes no representation or warranty regarding the
capability or availability of the generator system at any time. Subtenant shall
pay all costs associated with its use of the generator system. If Subtenant
wishes to install its own backup power system to serve the Premises, it will
comply with all requirements applicable to the performance of Alterations within
the Premises, including, without limitation, necessary engineering review for
compatibility with existing Building systems. Tenant acknowledges that the total
power to the Premises shall not exceed 500 kw aggregate.
(b) To the extent available and subject to engineering review,
Subtenant may access the existing electrical closet intended to serve the
Premises and all necessary connections from such location to Subtenant's
equipment, with capacity of up to 7 VA per square foot. Any costs associated
with such service, including its installation of electrical panels and other
necessary equipment to serve the Premises, shall be paid by Subtenant. If
Subtenant requires more power for the operation of its business at the Premises,
Subtenant may install equipment necessary to deliver such additional power to
the Premises (to bring the level of power available to the Premises up to 800
amps service), subject to Sublandlord's review and approval of Final Plans for
such equipment and engineering review to confirm compatibility with the Building
and all Building systems. Subtenant shall pay all costs associated with the
design, review, installation and operation of any such additional equipment.
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(c) An independent, Subtenant-controlled fire suppression system of FM
200 or newer technologies, at Subtenant's expense, with Sublandlord's approval
which shall not be unreasonably withheld, conditioned or delayed, which will
include access to Subtenant for exhaust louvers, shafts or risers necessary for
the discharge of exhaust from the Premises from such system as well as
Subtenant's air conditioning system. Subtenant will pay for all changes
necessary to zone off and change the fire suppression system.
(d) Connection of the office space areas within the Premises to
Sublandlord's fire alarm system.
(e) The right to use, store and/or relocate, at Subtenant's sole cost
and expense, the existing raised floor system in the Premises to accommodate
Subtenant's telecommunications equipment.
(f) Subtenant may install, at its sole cost and expense, a 750 MCM
copper insulated ground conductor associated fittings and/or conduit from the
master ground at the lowest point in the Building to the Premises. Subtenant may
ground its telecommunications equipment in accordance best industry practice and
sound electrical engineering principles, subject to Sublandlord's reasonable
approval.
(g) Subtenant shall have the right to utilize the existing pre-action
(i.e., "dry") fire suppression system, or to modify existing wet sprinkler
system components to create a pre-action system in all or selected parts of the
Premises. Such system shall be in compliance with applicable standards and codes
and shall be subject to reasonable Sublandlord and local governmental approvals.
Any sprinklers not converted to a "pre-action" design shall remain of "wet"
design.
(h) Subject to review and approval of Subtenant's Final Plans for such
installation, Subtenant may install fixtures and equipment necessary for the
operation of its telecommunications operations at the Premises.
(i) If necessary for Subtenant's business operations at the Premises
and subject to review of Subtenant's Final Plans for such installation,
Subtenant shall have the right to install within the Premises systems necessary
to provide supplemental HVAC services to the Premises, utilizing chilled water.
Subtenant shall pay all costs and expenses associated with the installation, use
and operation of any supplemental HVAC equipment or system, including, without
limitation, the costs of installing a chilled water loop to the Premises and a
usage charge for the supply of chilled water to the Premises. As of the date of
this Lease, the chilled water charge for the operation of supplemental HVAC
equipment is $32 per hour during other than Building Hours (with no charge
during Building Hours), which amount shall be subject to adjustment to
Subtenant's pro rata share of such cost if other subtenants on the Lower Level
I, II or III floors of the Building also use such service at the same time it is
requested by Subtenant. The charge for providing chilled water shall be subject
to adjustment based upon increases in Sublandlord's actual costs of providing
such service. Subtenant shall
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pay all costs associated with its use of the Building's systems described above
as a direct charge, provided that if services are provided to many tenants or
occupants together, Subtenant shall pay its proportionate share of such costs.
Notwithstanding anything to the contrary herein, Subtenant acknowledges and
agrees that installation, use and maintenance of the Specialty Equipment is
subject to Sublandlord's engineering review and confirmation of compatibility
with the operation of the Building from time to time and the operations, use and
access rights of other tenants, subtenants and occupants of the Building. In
addition, Subtenant agrees to comply with the terms of Article 8 and the Work
Letter, as applicable to the installation of any Specialty Equipment.
ARTICLE 12
RIGHTS OF SUBLANDLORD
12.1 Reservation from Premises. Except for the space within the inside
surfaces of all walls, hung ceilings, floors, windows and doors bounding the
Premises and areas covered by Subtenant's rights to signage, Sublandlord
reserves from the Premises leased hereunder all of the Building, including,
without limitation, the roof, exterior Building walls, core corridor walls and
doors, any terraces or roofs adjacent to the Premises (but in no event over the
equipment area of the Premises), the space between hung ceilings and the slab
above the office space portion of the Premises used for shafts, stacks, pipes,
conduits, fan rooms, ducts, electric, telephones or other utilities, sinks or
other Building facilities, and their use, as well as access thereto through the
Premises for the purposes of operation, maintenance, decoration and repair of
the Premises or the Building. Sublandlord reserves the right, and Subtenant
shall permit Sublandlord, to install, erect, use and maintain pipes, ducts and
conduits in and through the Premises; provided that Sublandlord shall disguise,
conceal or camouflage the pipes, ducts and conduits.
12.2 Entry by Sublandlord. Sublandlord and its agents shall have the right
to enter or pass through the Premises at reasonable times upon reasonable
advance notice and when accompanied by a representative of Subtenant, except in
the case of emergency: (a) to examine the Premises and to show them to actual
and prospective lenders, purchasers, lessors, and lessees of the Building and
(b) to make repairs, alterations, additions and improvements in the Premises,
the Building or Building facilities and equipment provided that such work will
not interfere with Subtenant's rights under this Sublease unless and to the
extent there is a commercially reasonable justification for such interference.
No advance written notice shall be required in emergency situations if advance
notice is not possible, provided that Sublandlord shall attempt to be
accompanied by Subtenant's personnel in such situations. In exercising its
rights under this Section 12.2, Sublandlord shall take reasonable measures
(without requiring the use of overtime or premium pay labor except at
Subtenant's expense) to avoid interference with Subtenant's use and occupancy of
the Premises. Sublandlord shall have a pass key to the Premises and shall, upon
reasonable advance notice and when accompanied by a representative of Subtenant,
be allowed to bring materials and equipment into the Premises as required in
connection with repairs, alterations, additions and improvements, without any
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liability to Subtenant and without any reduction of Subtenant's covenants and
obligations. Notwithstanding the foregoing, Subtenant shall have the right to
reschedule, except in times of emergency, any entry by Sublandlord upon
Sublandlord's notice of such entry and Subtenant shall pay any direct costs
incurred by Sublandlord for such rescheduling.
12.3 Temporary Obstructions of Light or View; Closures. Except to the
extent such actions may affect the life-safety system or violate any applicable
codes or other governmental laws, if at any time any windows of the Premises are
temporarily darkened or the light or view therefrom is obstructed by reason of
any repairs, improvements, maintenance or cleaning in or about the Building, or
if any part of the Building other than the Premises is temporarily or
permanently closed or inoperable, the same shall be without liability to
Sublandlord and without any reduction or diminution of Subtenant's obligations
under this Sublease.
12.4 [Intentionally omitted]
12.5 Entry Before End of Term. Unless otherwise notified by Subtenant, if,
during the last two months of the Sublease Term, Subtenant shall have removed
all or substantially all of Subtenant's Property from the Premises, Sublandlord
may, upon reasonable advance notice, immediately enter the Premises and alter,
renovate and decorate the same, without liability or cost to Subtenant and
without reducing or otherwise affecting Subtenant's covenants and obligations
hereunder.
12.6 Building Name and Address. Subject to Subtenant's signage rights under
Article 27, Sublandlord reserves the right at any time, with 30 days' prior
notice to Subtenant, to change the Building's name or address, and Sublandlord
shall have no liability to Subtenant for any cost or inconvenience occasioned
thereby.
12.7 Alterations of Building. Sublandlord reserves the right, at any time
but with 30 days' prior notice to Subtenant, without incurring any liability to
Subtenant therefor and without affecting or reducing any of Subtenant's
covenants and obligations hereunder, to make such changes, alterations,
additions and improvements in or to the Building and its respective systems and
equipment (including street entrances, doors, halls, passages, elevators,
escalators stairways, and other public parts of the Building), as Sublandlord
shall deem necessary or desirable. However, Sublandlord shall not exercise its
rights under this Section 12.7 in a manner that would interfere with Subtenant's
use of or access to the Premises.
12.8 Other Rights. The enumeration of rights of Sublandlord in this Article
12 is not all-inclusive, and shall not be construed to preclude or limit other
rights reserved to Sublandlord by this Sublease or by law.
12.9 Interference. Notwithstanding anything to the contrary herein,
Subtenant acknowledges and agrees that Sublandlord shall have no obligation to
ensure that other parties do not interfere with Subtenant's business operations
or communication services or Federal
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Communications Commission's rules and Sublandlord shall have no liability for
interference resulting from actions or operations of others. Sublandlord will
non-discriminatorily enforce Building Rules and Regulations and the terms of
Subleases only with respect to normal office building uses and not with respect
to issues of interference with communication uses. Subtenant shall be and remain
responsible for preventing and guarding against interference with other uses and
operations in the Building and agrees to indemnify, defend and hold harmless
Sublandlord from and against any and all claims, losses, liabilities or causes
of action brought against Sublandlord by reason of any actual or claimed
interference arising out of the use of the Premises by Sublandlord or any
Providing Parties. Without limiting the foregoing, Subtenant acknowledges and
agrees that Sublandlord shall have no obligation to become involved in disputes
or disagreements which may arise between or among various rooftop users
regarding interference or other issues. If a dispute arises between Subtenant
and another rooftop user, Subtenant may request that such other user meet with
Subtenant to resolve such dispute in a manner consistent with prevailing
industry standards and customs and all costs of such dispute resolution
proceedings shall be paid by Subtenant (or as otherwise agreed with such other
rooftop user) and Sublandlord shall have no liability or responsibility with
respect thereto.
ARTICLE 13
DAMAGE OR DESTRUCTION
13.1 Restoration. If the Building or the Premises is damaged or destroyed
by fire or other casualty, and if this Sublease is not terminated as provided in
this Article 13, Sublandlord shall repair the damage and restore or rebuild the
Building or the Premises (except for Subtenant's Property but including fixtures
to the extent Sublandlord receives insurance proceeds or funds from Subtenant
sufficient to complete repair, restoration or rebuilding of the fixtures), after
notice to Sublandlord of the damage or destruction and the collection of
substantially all of the insurance proceeds receivable on account of the
casualty, provided that in no event shall Sublandlord be required to expend on
such repair, rebuilding or restoration amounts in excess of the total insurance
proceeds collected on account of the casualty. Notwithstanding the foregoing
Sublandlord shall have no obligation to so repair, restore or rebuild
Subtenant's Property, which shall be the sole responsibility of Subtenant.
Proceeds of insurance policies providing coverage of fixtures shall be paid
directly to Sublandlord. Concurrently with the payment to Sublandlord of such
insurance proceeds attributable to equipment or fixtures within the Premises,
Subtenant shall pay to Sublandlord, as Additional Charges, the amount, if any,
by which the cost of repairing, restoring and/or rebuilding fixtures (as
reasonably estimated by a reputable contractor designated by Sublandlord)
exceeds the insurance proceeds attributable thereto actually received by
Sublandlord. If the amount of insurance proceeds attributable to fixtures plus
any additional sums paid to Sublandlord by Subtenant pursuant to the preceding
sentence exceeds the amount actually paid or incurred by Sublandlord in
repairing, restoring and/or rebuilding fixtures, then, upon completion of the
work, Sublandlord shall return the excess to Subtenant.
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13.2 Rent Abatement. Subject to Section 13.3, if the Premises shall be
damaged or destroyed or rendered completely or partially untenantable by fire or
other casualty, or if damage to the Building by fire or casualty deprives
Subtenant of reasonable access to or use of the Premises for more than four (4)
consecutive business days, the Basic Rent shall be abated or reduced, as the
case may be, in the proportion that the Rentable Area of the untenantable
portion for the conducting of Subtenant's business operations of the Premises
bears to the total Rentable Area of the Premises, for the period from the date
of the damage or destruction to the date that any damage to the Premises
(exclusive of Subtenant's Property) has been substantially repaired except for
minor incorrect or incomplete details of construction, mechanical adjustment or
decoration which do not materially interfere with Subtenant's use of the
Premises and Subtenant has reasonable access to the Premises; provided, however,
that if such repairs would have been substantially completed at an earlier date
but for Subtenant having failed to cooperate reasonably with Sublandlord in
effecting such repair, or if Subtenant reoccupies all or part of the
untenantable portion of the Premises for the conduct of its business prior to
the date that repairs are substantially completed, then the Premises shall be
deemed to have been substantially repaired on such earlier date and any
reduction or abatement of Basic Rent shall cease as of such earlier date.
13.3 Exception to Abatement. Subtenant shall not receive any abatement or
reduction of Basic Rent if by reason of some act or omission on the part of
Subtenant, its subtenant or assignee, or its or their partners, directors,
officers, servants, employees, agents or contractors, either: (a) Sublandlord
(or any successor in interest to Sublandlord) is unable to collect all of the
insurance proceeds (including, without limitation, rent insurance proceeds) for
damage or destruction of the Premises or the Building by fire or other casualty;
or (b) the Premises or the Building was damaged or destroyed or rendered
completely or partially untenantable due to fire or other casualty and the loss
of Basic Rent is not covered by Sublandlord's rental loss insurance. Collection
of rent by Sublandlord under the circumstances described in Section 13.3 shall
not preclude Sublandlord from seeking damages from Subtenant or exercising other
remedies it may have under this Sublease or under law.
13.4 Election to Terminate.
(a) Sublandlord's Election to Terminate. If: (i) the Building or the
Premises is totally destroyed by fire or other casualty; or (ii) the Building is
so damaged (whether or not the Premises are damaged or destroyed) that its
repair or restoration requires the expenditure (as reasonably estimated by a
reputable independent contractor or architect designated by Sublandlord) of more
than 20% of the full replacement cost of the Building immediately before the
casualty; or (iii) less than two years remains in the Sublease Term at the time
of the fire or other casualty and the time necessary to rebuild or repair the
Building, in the opinion of a reputable contractor, would exceed ninety (90)
days; or (iv) Sublandlord would be required under Section 13.2 to abate or
reduce the Basic Rent for a period in excess of six (6) months if rebuilding or
repairs were undertaken, then, in any of such cases, Sublandlord may terminate
this Sublease by giving Subtenant notice to such effect within
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sixty (60) days after the date of the casualty. This Sublease shall terminate on
the date specified in Sublandlord's notice.
(b) Subtenant's Election to Terminate. If the Building or the Premises
is destroyed or damaged by fire or other casualty such that Subtenant is
deprived of access to the Premises or the use and occupancy thereof in the same
manner then being used by Subtenant and a reputable independent contractor or
architect designated by Sublandlord ("Sublandlord's Architect or Contractor")
reasonably estimates in a notice provided to Subtenant by Sublandlord within
ninety (90) days after the casualty that the Building or the Premises is damaged
to such an extent that Subtenant will be deprived of access to the Premises or
use and occupancy of the Premises in the same manner then being used by
Subtenant for a period in excess of 180 days, then Subtenant may terminate this
Sublease by giving Sublandlord notice within thirty (30) days after delivery of
such contractor's or architect's estimate, whereupon this Sublease shall
terminate as of the date of the casualty. If the Building or the Premises is
destroyed or damaged by fire or other casualty and Sublandlord's Architect or
Contractor has estimated (in a notice delivered to Subtenant pursuant to the
previous sentence) that Subtenant will be deprived of access to the Premises or
use and occupancy of the Premises for a period of 180 days or less, but the
Premises and access thereto in the same manner then being used by Subtenant and
the use and occupancy thereof are not actually restored within 180 days from the
date (the "Untenantability Date") that Subtenant is first deprived of such
access or use and occupancy due to such casualty (the "Outside Date"), Subtenant
may terminate this Sublease as of the Untenantability Date by giving Sublandlord
notice within thirty (30) days after the Outside Date.
13.5 Business Interruption. Subtenant shall not be entitled to terminate
this Sublease, and no damages, compensation or claim shall be payable by
Sublandlord, for inconvenience, loss of business or annoyance arising from any
repair or restoration of any portion of the Premises or of the Building pursuant
to this Article. Sublandlord shall exert reasonable efforts to make such repair
or restoration promptly and in such manner as not to interfere unreasonably with
Subtenant's use and occupancy of the Premises, but Sublandlord shall have no
obligation to perform such work on an overtime or premium-pay basis except for
any work which affects the life-safety system and keeps the Premises from not
being in compliance with any applicable governmental codes.
13.6 Subtenant's Property. Sublandlord shall not be obligated to repair any
damage to or replace Subtenant's Property and Subtenant shall restore and repair
Subtenant's Property with reasonable dispatch after the repair of the Premises
and shall look solely to its insurance for recovery of any damage to or loss of
Subtenant's Property.
13.7 Waiver. Subtenant waives the application of California Civil Code
Sections 1932 and 1933, and any other law of similar import, now or hereafter in
force, to any case of damage to or destruction of the Building or the Premises
by fire or other casualty, or to a taking of all or part of the Building or the
Premises subject to the provisions of Article 14 below.
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ARTICLE 14
EMINENT DOMAIN
14.1 Complete Taking. If the whole of the Building or the Premises is taken
by condemnation, sale in lieu of condemnation, or in any other manner for any
public or quasi public use or purpose ("Eminent Domain"), this Sublease and the
term and estate hereby granted shall terminate as of the date of vesting of
title on such taking or the date that the condemning or purchasing authority
takes possession, whichever is earlier ("Date of the Taking"), and the Rents
shall be prorated and adjusted as of such date.
14.2 Partial Taking. If only part of the Building or the Land is taken by
Eminent Domain, this Sublease shall be unaffected by such taking, except that:
(a) if Sublandlord in the exercise of its good faith business judgment
determines that it would be economically impractical to operate the portion of
the Building remaining after the taking, Sublandlord may, at its option,
terminate this Sublease by giving Subtenant notice to that effect within ninety
(90) days after the Date of the Taking (as defined in Section 14.1) provided
that Subtenant can require rescission of such termination decision if, within 10
business days of receipt of Sublandlord's notice of termination, Subtenant
advises Sublandlord that, in Subtenant's judgment, Subtenant has been
discriminated against relative to other tenants in the Building or Subtenant
presents an economically feasible plan for Subtenant's continuous operation in
the Building, and (b) if five percent (5%) or more of the Premises shall be so
taken and the remaining area of the Premises shall not be reasonably adequate
for Subtenant to continue operation of its business as it is then being
conducted, Subtenant may terminate this Sublease by giving Sublandlord notice to
that effect within ninety (90) days after the Date of the Taking. This Sublease
shall terminate as of the date that such termination notice from Sublandlord or
Subtenant is given, and the Rents shall be prorated and adjusted as of such
termination date. Upon a partial taking of the Building, where this Sublease
continues in force as to less than all of the Premises, Subtenant shall be
entitled to an adjustment in the Basic Rent, and in Subtenant's Share, as
provided in Section 26.9.
14.3 Award. Sublandlord shall be entitled to receive the entire award or
payment in connection with any taking of the Premises, without deduction for any
estate vested in Subtenant by this Sublease. Subtenant expressly assigns to
Sublandlord all of its right, title and interest in and to every such award or
payment. Subtenant shall be entitled to claim and receive any award or payment
from the condemning authority expressly granted for the taking of Subtenant's
Property, interruption of its business, moving expenses or any other actual
costs, provided that Subtenant's claim does not adversely affect Sublandlord's
award or interfere with Sublandlord's prosecution of its claim for the taking
except to the extent related to Subtenant's Property. If Subtenant intervenes in
a condemnation proceeding in which Sublandlord is a party, Sublandlord and
Sublandlord's counsel shall manage and control the proceeding for the claimants.
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14.4 Temporary Taking. If, all or any portion of the Premises is taken by
Eminent Domain for a limited period of time, this Sublease shall remain in full
force and effect and Subtenant shall continue to perform all of the terms,
conditions and covenants of this Sublease, except with abatement of Rents to the
extent Subtenant's business operations are actually prevented. If such temporary
taking which entirely prevents the use of the Premises for Subtenant's business
operation continues for more than ninety (90) days, Subtenant shall have the
right to terminate this Sublease upon notice to Sublandlord. Subtenant shall be
entitled to receive that portion of the award which is made for any such
temporary taking of the Premises attributable to any period within the term of
this Sublease and for any damage to Subtenant's Property. Sublandlord shall be
entitled to receive that portion of the award which is made for any such
temporary taking of the Premises attributable to the period after the expiration
of the term of this Sublease or which is allocable to the Building, other than
the Premises, or to the cost of restoration of the Premises or which is made for
any other purpose. If any such temporary taking terminates before the expiration
of the term of this Sublease, Subtenant shall restore the Premises as nearly as
possible to their condition before the taking, at Subtenant's sole cost and
expense; provided that Subtenant shall receive the portion of the award
attributable to such restoration.
ARTICLE 15
SURRENDER OF PREMISES
15.1 Surrender. On the last day of the Sublease Term, or upon any earlier
termination of this Sublease, or upon any reentry by Sublandlord upon the
Premises, Subtenant shall quit and surrender the Premises to Sublandlord "broom-
clean" and in good order, condition and repair, excepting ordinary wear and tear
and any damage or destruction caused by fire or other casualty that Subtenant is
not obligated by this Sublease to repair. As provided in Section 9.3, Subtenant
shall remove all of Subtenant's Property from the Premises and shall also remove
any non-standard fixtures or equipment installed by Subtenant in accordance with
the terms of Article 9 of this Sublease. Upon expiration of the Sublease Term or
earlier termination of this Sublease, all of Subtenant's right, title and
interest in the Premises or the Building, including any possessory interest,
shall cease.
15.2 Acceptance of Surrender. Before expiration of the Sublease Term, or
earlier termination of this Sublease in accordance with its terms, no act or
thing done by Sublandlord or its agents shall be deemed an acceptance of
surrender of the Premises, and no agreement to accept such surrender shall be
valid unless in writing and signed by Sublandlord.
15.3 No Merger. The surrender of this Sublease by Subtenant or the
termination of this Sublease before expiration of the Sublease Term shall not
constitute a merger, and at the option of Sublandlord shall operate as an
assignment to Sublandlord of any subleases of the Premises.
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15.4 No Holding Over. There shall be no holding over by Subtenant after
expiration of the Sublease Term and the failure by Subtenant to deliver
possession of the Premises to Sublandlord on or before the Expiration Date shall
be an unlawful detainer. In addition to such amounts, Subtenant shall be
responsible for all other costs, losses, damages and expenses (which need not be
asserted in a summary eviction proceeding or action brought by Sublandlord
against Subtenant but may be asserted in a separate proceeding or action by
Sublandlord) arising from any hold-over or the inability of Sublandlord to lease
or deliver such space to any third party, including, without limitation, any
damages incurred by Sublandlord under the RML Lease by reason of any such
holdover.
ARTICLE 16
DEFAULT BY SUBTENANT
16.1 Default. The occurrence of any of the following shall constitute a
material default and breach of this Sublease by Subtenant:
(a) Any failure by Subtenant to pay Basic Rent or Additional Charges
when due, where such failure continues for five (5) business days after delivery
of written notice of such failure by Sublandlord to Subtenant; provided,
however, that any such notice shall be in lieu of, and not in addition to, any
notice required under Section 1161 et seq. of the California Code of Civil
Procedure or any successor or similar law;
(b) [Intentionally omitted]
(c) [Intentionally omitted]
(d) The failure by Subtenant to observe and perform any provision of
this Sublease to be observed or performed by Subtenant, if such failure is not
expressly described in this Section 16.1 or elsewhere in this Sublease as a
default hereunder and if such failure continues for thirty (30) days after
written notice by Sublandlord to Subtenant; provided, however, that if the
nature of such default is such that it cannot reasonably be cured within such
30-day period, Subtenant shall not be deemed to be in default under this Section
16.1(d) if Subtenant within that period commences to cure the default and
thereafter diligently proceeds to completion within a reasonable time, not to
exceed 90 days after Sublandlord's notice;
(e) The making by Subtenant, or by any guarantor of any of Subtenant's
obligations hereunder, of a general assignment for the benefit of creditors; the
commencement by Subtenant or any such guarantor of any case, proceeding or other
action seeking reorganization, arrangement, adjustment, liquidation, dissolution
or composition of it or its debts under any law relating to bankruptcy,
insolvency, reorganization or relief of debtors, or for the appointment of a
receiver for, or the seizure or takeover by any governmental agency of, it or
all or any substantial part of its property (collectively, an "Insolvency
Proceeding");
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the commencement of any Insolvency Proceeding against Subtenant, unless such
Insolvency Proceeding is contested (and such contest is diligently pursued) and
such Insolvency Proceeding is discharged or dismissed within sixty (60) days
after the date filed or commenced; a trustee or receiver shall be appointed to
take possession of substantially all of Subtenant's assets located at the
Premises or of Subtenant's interest in this Sublease, unless possession is
restored to Subtenant within thirty (30) days; or substantially all of
Subtenant's assets located at the Premises or Subtenant's interest in this
Sublease shall be attached or judicially seized, unless such attachment or
seizure is discharged within 30 days; and
(f) The failure by Subtenant to observe or perform according to the
provisions of the Work Letter or Article 8 (Alterations) or Section 6.2
(Prohibited Uses), if such failure continues for more than twenty-four (24)
hours after notice from Sublandlord.
16.2 Termination of Sublease. In the event of any such default by Subtenant
and beyond any applicable notice and cure periods, then in addition to any other
remedies available to Sublandlord at law or in equity, Sublandlord shall have
the immediate option to terminate this Sublease and all rights of Subtenant
hereunder by giving Subtenant a notice of termination. If Sublandlord elects so
to terminate this Sublease, then Sublandlord may recover from Subtenant: (a) the
worth at the time of award of any unpaid rent which had been earned at the time
of such termination; plus (b) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss Subtenant proves could have
been reasonably avoided, plus (c) the worth at the time of award of the amount
by which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that Subtenant proves could be reasonably
avoided; plus (d) any other amount necessary to compensate Sublandlord for all
of the detriment proximately caused by Subtenant's failure to perform its
obligations under this Sublease or which in the ordinary course of things would
be likely to result therefrom; plus (e) such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by applicable
California law. As used in clauses (a) and (b) above, the "worth at the time of
award" is computed by allowing interest from the date of termination until the
time of award at the maximum rate allowable under applicable law, or, if no such
maximum rate applies, at the rate of 10% per annum. As used in clause (c) above,
the "worth at the time of award" is computed by discounting such amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time of award
plus 1%. In addition, Sublandlord shall also have the option to maintain
Subtenant's right to possession, in which case this Sublease will continue in
effect whether or not Subtenant has vacated or abandoned the Premises.
Sublandlord shall be entitled to enforce all Sublandlord's rights and remedies
under this Sublease, including, without limitation, the right to recover Rent as
it becomes due. Sublandlord has the remedy set forth in California Civil Code
Section 1951.4 (Sublandlord may continue this Sublease in effect after
Subtenant's breach and abandonment and recover rent as it becomes due, if
Subtenant has the right to sublet or assign, subject only to reasonable
limitations). Further, in addition to and independent of any of Sublandlord's
other rights and remedies upon a default by Subtenant hereunder, if Sublandlord
elects to terminate this Sublease by reason of a default by Subtenant hereunder,
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Subtenant shall also be obligated to pay to Sublandlord a fee equal to the
unamortized portion of Sublandlord's Sublease Costs (as defined in Exhibit E),
calculated as of the effective date of termination of the Sublease.
16.3 Reentry by SubLandlord. In the event of any such default by Subtenant
beyond any applicable notice and cure periods, Sublandlord shall also have the
right, with or without terminating this Sublease, to reenter the Premises and
remove all persons and property; the removed property may be stored in a public
warehouse or elsewhere at the cost of and for the account of Subtenant. No
reentry or taking possession of the Premises by Sublandlord pursuant to this
Section shall be construed as an election to terminate this Sublease unless a
written notice of such intention is given to Subtenant or unless such
termination shall have been decreed by a court of competent jurisdiction.
Subtenant shall not interpose any counterclaim of any kind in any action or
proceeding commenced by Sublandlord to recover possession of the Premises.
16.4 Redemption Rights. Subtenant, on behalf of itself and any and all
persons claiming through or under Subtenant, waives and surrenders all rights
and privileges which it might have, under California Code of Civil Procedure
Section 1179 or any similar or successor statute, to redeem the Premises or to
have a continuance of this Sublease after being dispossessed or ejected from the
Premises by process of law or under the terms of this Sublease or after the
termination of this Sublease.
16.5 Application of Rent Payments. Subtenant waives any right it may have
under present or future law to designate the items to which any payments made by
Subtenant are to be credited. Sublandlord may apply any payments made by
Subtenant to such items as Sublandlord sees fit, irrespective of any designation
or request by Subtenant as to the items to which such payments should be
credited.
16.6 Performance by Sublandlord. If Subtenant shall default in the
performance of any of Subtenant's obligations under this Sublease, Sublandlord,
without thereby waiving or curing such default, may (but shall not be obligated
to) perform the defaulted obligation for the account and at the expense of
Subtenant, provided that, except in case of an emergency, Sublandlord shall have
given Subtenant notice of such default and such default shall have continued for
at least fifteen (15) days after such notice is given.
16.7 Payment of Sublandlord's Expenses. If Subtenant is determined to be
in default under this Sublease beyond any applicable notice and cure periods,
all costs and expenses, including reasonable attorneys' fees (whether or not
legal proceedings are instituted), involved in collecting Rents or enforcing the
obligations of Subtenant under this Sublease, including the cost and expense of
instituting and prosecuting legal proceedings or recovering possession of the
Premises after default by Subtenant and beyond any applicable notice and cure
periods, and any expenses incurred by Sublandlord in connection with any
performance by it for the account of Subtenant under Section 16.6, shall be due
and payable by Subtenant, on demand, as Additional Charges.
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16.8 Interest. The amount of any judgment obtained by Sublandlord against
Subtenant in any legal proceeding arising out of a default by Subtenant under
this Sublease shall bear interest until paid at the maximum rate allowed by law,
or, if no such maximum rate prevails, at the rate of 10% per annum.
Notwithstanding anything to the contrary contained under California Civil Code
Section 3287, in the case of any damages that were certain or ascertainable by
calculation, such interest shall accrue from the day that the right to such
damages vested in Sublandlord and in the case of any unliquidated claim, such
interest shall accrue from the day such claim arose.
16.9 No Waivers. The failure of Sublandlord to insist, in any one or more
instances, upon the strict performance by Subtenant of any of Subtenant's
obligations under this Sublease, or to exercise any right or remedy given
Sublandlord upon a default by Subtenant, shall not be construed as a waiver or
relinquishment for the future, and the obligation of Subtenant and Sublandlord's
rights and remedies upon a default shall continue in full force and effect with
respect to any subsequent breach, act or omission. Receipt by Sublandlord of
Rents with knowledge of a breach by Subtenant of any obligation of this Sublease
shall not be deemed a waiver of such breach.
16.10 Remedies Not Exclusive. The rights and remedies of Sublandlord
provided in this Article 16 for a default by Subtenant are not exclusive, and
Sublandlord may exercise any other right or remedy it may have pursuant to this
Sublease, at law or in equity.
ARTICLE 17
SUBORDINATION AND ATTORNMENT
17.1 Subordination. Subject to Section 17.6 below, this Sublease, (and all
rights of Subtenant hereunder) is and shall be subordinate to all present and
future leases of all or any part of the Building or the Land (except for leases
of office or commercial space by other occupants of the Building); all existing
and future mortgages and deeds of trust (each referred to herein as a
"mortgage", and the mortgagee or beneficiary thereof being referred to herein as
a "mortgagee") encumbering the Building, the Land or any of such leases,
including mortgages also covering other real property; all past and future
advances made under such mortgages, all renewals, modifications, consolidations,
replacements and extensions of such leases and mortgages; unless the lessor
under any such lease or the mortgagee or beneficiary under any such mortgage, or
any of their respective successors in interest, elects that this Sublease shall
be superior to its lease or mortgage pursuant to Section 17.2; provided,
however, that Subtenant's subordination to any future leases or mortgages shall
be conditional on Subtenant receiving a non-disturbance agreement with respect
to any such future lease or mortgage. This Section shall be self-operative; no
further instrument of subordination shall be required. However, in confirmation
of subordination, Subtenant shall promptly execute, acknowledge and deliver any
instrument that Sublandlord, the lessor under any such lease or any mortgagee
may reasonably request to evidence such subordination. If Subtenant fails to
execute, acknowledge or deliver any such instrument within ten (10) days after
request
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therefor, such failure shall constitute a material default and breach of this
Sublease by Subtenant. Any lease to which this Sublease, at the time referred
to, is subordinate is herein called a "Superior Sublease" and the lessor of a
Superior Sublease or its successor in interest at the time referred to is herein
called a "Superior Lessor".
17.2 Election to Subordinate. By written notice to Subtenant, any Superior
Lessor or mortgagee may elect to subordinate its Superior Sublease or mortgage
to this Sublease.
17.3 Notice and Cure of Sublandlord's Default. If any act or omission of
Sublandlord would give Subtenant the right, immediately or after lapse of a
period of time, to cancel or terminate this Sublease, or to claim a partial or
total eviction, Subtenant shall not exercise such right: (a) until it has given
written notice of the act or omission to Sublandlord and to each mortgagee and
each Superior Lessor whose name and address shall previously have been furnished
to Subtenant, which notice shall specifically refer to this Section 17.3 and
shall describe Sublandlord's default with reasonable specificity and detail,
specifying the section of this Sublease as to which Sublandlord is in default,
and (b) until a reasonable period not to exceed thirty (30) days for remedying
the act or omission shall have elapsed following the giving of such notice and
following the time during which each such mortgagee or Superior Lessor would be
entitled under its mortgage or Superior Sublease to remedy the act or omission
(which reasonable period shall in no event be longer than the period during
which Sublandlord would be entitled under this Sublease or otherwise, after
similar notice, to effect such remedy). If, within said reasonable period, such
a mortgagee or Superior Lessor gives Subtenant notice of its intention to remedy
the act or omission, and thereafter diligently commences the required remedial
action and pursues it to completion, Subtenant shall have no right to cancel or
terminate this Sublease or to claim a partial or total eviction on account of
the act or omission.
17.4 Attornment. Any Superior Lessor, mortgagee or foreclosure sale
purchaser who succeeds to the rights of Sublandlord under this Sublease or to
Sublandlord's interest in the Building, whether as a result of the exercise of
remedies in a Superior Sublease or mortgage or by operation of law, is sometimes
referred to herein as a "Successor Sublandlord." If the Successor Sublandlord
does not elect to treat this Sublease as extinguished, upon the Successor
Sublandlord's request, Subtenant shall attorn to and recognize the Successor
Sublandlord as Subtenant's landlord under this Sublease and shall promptly
execute and deliver any instrument that such Successor Sublandlord may
reasonably request to evidence the attornment (although no writing shall be
required in order to effect or confirm such attornment). Subtenant hereby waives
any and all rights to terminate this Sublease, or to treat this Sublease as
terminated, as a result of the exercise of remedies or other occurrence that
resulted in any transfer to a Successor Sublandlord. If a Successor Sublandlord
requests Subtenant's attornment, this Sublease shall continue in full force and
effect and as a direct lease between the Successor Sublandlord and Subtenant,
upon all of the terms, conditions and covenants set forth in this Sublease,
subject to the provisions of Section 24.4.
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17.5 Requirements of Superior Lessor or Mortgagee. If any Superior Lessor
or mortgagee requires modification of this Sublease, Subtenant shall, at
Sublandlord's request, promptly execute and deliver to Sublandlord instruments
effecting the modification that the Superior Lessor or mortgagee requires,
provided that such modifications do not adversely affect in a material respect
any of Subtenant's rights hereunder.
17.6 Delivery of Non-Disturbance Agreements. Sublandlord shall use its
best efforts, at its sole cost and expense, to promptly provide Subtenant with
commercially reasonable non-disturbance agreements in favor of Subtenant from
(i) all present Superior Leases and (ii) all future lessors, mortgagees and lien
holders, with respect to all or any part of the Land or the Building which
require Subtenant to subordinate its interest under this lease to such leases,
liens or mortgages. Sublandlord confirms to the best of its knowledge that the
Non-Disturbance and Attornment Agreement dated January 20, 1984, by and among
UCBRC, Trumbull, RML and First Interstate, Sublandlord's predecessor in
interest, recorded February 15, 1994, as Instrument No. 84-197842 in the
Official Records of Los Angeles County, California (the "Master Non-Disturbance
Agreement") is unmodified and remains in full force and effect. Sublandlord
agrees to exercise commercially reasonable efforts to enforce its rights under
the Master Non-Disturbance Agreement at its sole cost and expense.
ARTICLE 18
QUIET ENJOYMENT
So long as Subtenant timely pays all the Rents and performs all of
Subtenant's other obligations hereunder within the time periods permitted under
this Sublease, Subtenant shall peaceably and quietly have, hold and enjoy the
Premises during the Sublease Term without hindrance by Sublandlord or any person
lawfully claiming through or under Sublandlord, subject, nevertheless, to the
provisions of this Sublease and to Superior Subleases and mortgages. This
covenant is a covenant running with the land, and is not a personal covenant of
Sublandlord, except to the extent of Sublandlord's interest in this Sublease and
for only so long as such interest shall continue.
ARTICLE 19
ASSIGNMENTS AND SUBLEASES
19.1 Prohibition. Subtenant shall not mortgage, pledge, encumber or
otherwise hypothecate this Sublease or the Premises or any part thereof in any
manner whatsoever, and any attempt to do so shall be void and a material breach
of and default under this Sublease. Except as provided in Section 19.2 and 19.3
below, Subtenant shall not, whether voluntarily, involuntarily, by operation of
law or otherwise, sublet all or any part of the Premises, or assign or otherwise
transfer this Sublease (or its term and estate), without in each instance
obtaining the prior written consent of Sublandlord, which shall not be
unreasonably withheld, conditioned or delayed, in accordance with this Article.
Without limiting the effect of any
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other provision, Subtenant expressly agrees that it shall not assign, or
otherwise transfer this Sublease (or its term or estate) or sublease any portion
of the Premises to any person that would conduct any activity in the Premises
prohibited by Article 6. Any attempt by Subtenant to sublet all or any part of
the Premises or to assign or transfer this Sublease (or its term or estate) or
to offer or advertise to do so, without strictly complying with the requirements
of this Article, shall be void and a material breach of and default under this
Sublease. Except as permitted by Section 19.3 below, use or occupancy of the
Premises by a licensee, concessionaire, or any other person other than Subtenant
shall be deemed a sublease subject to the provisions of this Article. Subtenant
shall submit to Sublandlord, in advance, for Sublandlord's reasonable approval
(which shall be granted or denied within ten business days), any advertising or
offering materials that Subtenant intends to use in connection with any efforts
to sublease, assign or transfer.
19.2 Corporate and Partnership Transactions.
(a) Mergers and Stock Transfers. If Subtenant is a corporation, a
dissolution of the corporation or a transfer of a majority of Subtenant's voting
stock (by one or more transactions, other than the sale of publicly traded
stock) shall be deemed an assignment of this Sublease subject to the provisions
of this Article; but such provisions (with the exception of Section 19.7) shall
not apply to an assignment or deemed assignment of this Sublease on account of
the transfer to, or a merger transaction with, a corporation into or with which
Subtenant is merged or consolidated or to which substantially all of Subtenant's
assets are transferred, provided that (i) a principal purpose of such merger or
transfer is not the assignment of this Sublease and (ii) in any of such events
proof reasonably satisfactory to Sublandlord of the net worth of Subtenant
immediately prior to such transaction and the prospective net worth of
Subtenant's successor immediately following such transaction is delivered to
Sublandlord at least fifteen (15) days before the effective date of such
transaction, and Subtenant's successor shall have a net worth following
consummation of such transaction, as reasonably determined by Sublandlord in
accordance with generally accepted accounting principles, that is at least equal
to the net worth which Sublandlord deems would be reasonably necessary to
perform Subtenant's obligations under this Sublease, which in no event shall be
less than the net worth of Subtenant as of the date of this Sublease. A
duplicate original instrument of assignment and assumption (in which the
transferee assumes all obligations of Subtenant under this Sublease) shall have
been delivered to Sublandlord on or prior to the effective date of such
transaction. Notwithstanding the foregoing, any transfer of Subtenant's voting
stock to Focal Entities (defined below) shall not be deemed an assignment of
this Sublease so long as Subtenant remains controlled by the same person or
persons that control Subtenant prior to such stock transfer. Any change in
control of Subtenant following any such stock transfer shall be deemed an
assignment by Subtenant hereunder and subject to all of the terms and provisions
of this Article.
(b) Transfer to Affiliates. Sublandlord's approval shall not be
required for any assignment or subletting to Focal Entities, provided that (i)
such party is a reputable entity of good character and agrees in writing for the
benefit of Sublandlord to perform the
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obligations of Subtenant under this Sublease, (ii) the use of the Premises or
the applicable portion thereof shall comply with the "Permitted Use" and with
all other terms of this Sublease, (iii) a duplicate original instrument of the
assignment or sublease, as the case may be, in form reasonably satisfactory to
Sublandlord, and in compliance with the applicable provisions of this Sublease,
duly executed by Subtenant and such party, shall have been delivered to
Sublandlord within ten (10) days following the effective date of any such
assignment or sublease and (iv) the net worth of the Focal Entities bound to
perform the obligations of Subtenant under this Sublease is at least equal to
the net worth of Subtenant as of the date of this Sublease, it being agreed that
no entity shall be deemed released by reason of any transfer to or among the
Focal Entities. Such right to assign or sublet to Focal Entities shall be
effective only for so long as such assignee or subtenant remains as one of the
Focal Entities. Any change of control that results in the assignee or subtenant
no longer being one of the Focal Entities shall be deemed an assignment or
subletting by Subtenant hereunder and subject to all of the terms and provisions
of this Article 19. As used in this Sublease, "Focal Entities" means, Focal
Communications Corporation of California, its successors by merger or
consolidation, and any corporation or other entity which controls, is controlled
by or is under common control with Focal Communications Corporation of
California or its successors by merger or consolidation. As used herein
"control" of a person means the possession, directly or indirectly, of the power
to direct that person's management and policies, whether through the ownership
of voting securities or otherwise, as such concepts are commonly interpreted and
understood under Federal securities laws.
19.3 Co-Location of Subtenant Customers. Subtenant shall have the right to
allow certain of its customers, consistent with the custom and practice of the
telecommunications business, to "co-locate" such customers' ("Providing
Parties") telecommunications equipment ("Providing Parties' Equipment") within
the Premises to allow such Providing Parties to avail themselves of Subtenant's
services consistent with the Permitted Use by Subtenant of the Premises. Such
co-location shall not be considered an assignment or sublease by Subtenant,
shall not grant any such Providing Parties any possessory interest in the
Premises, and, as between Sublandlord and Subtenant, any rights and liabilities
with respect to the Providing Parties or Providing Parties' Equipment shall be
the sole responsibility of Subtenant, including without limitation the movement
thereof in and out of the Premises and the security therefor, in the same manner
and to the same extent as if the Providing Parties were Subtenant and Providing
Parties' Equipment belonged to Subtenant. With respect to any Providing Parties
or Providing Parties' Equipment, the following shall apply:
(a) Upon Sublandlord's reasonable request, but not more frequently
than four (4) times per year, Subtenant shall provide Sublandlord with the names
of all Providing Parties at the Premises and reasonable evidence of compliance
with the terms of this Section 19.3.
(b) All agreements with Providing Parties shall be entered into
using a form agreement approved by Sublandlord, which agreement shall contain,
among other things, that
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the Providing Party shall have no possessory interest in the Premises or the
Building, including an indemnification in favor of Sublandlord and requiring
that each of the Providing Parties carry adequate insurance coverage for its
equipment and operations at the Premises, which policies shall name Sublandlord
as additional insured.
(c) Sublandlord's liabilities and obligations with respect to the
Providing Parties and Providing Parties' Equipment shall only be those of
Sublandlord to Subtenant pursuant to and accordance with this Sublease, and
Sublandlord shall not have any direct liabilities or obligations, nor shall the
Providing Parties have any direct rights or claims against Sublandlord, with
respect to the locating, presence or removal of the Providing Parties or
Providing Parties' Equipment on or with respect to the Premises.
(d) Subtenant shall not have the right to permit any Providing
Parties or Providing Parties' Equipment to use, possess or in any way be located
on or have any involvement with the Premises or any other portions of the
Building except to the extent expressly permitted by this Sublease for
Subtenant. This Section 19.3 shall not create any additional rights of Subtenant
or Providing Parties, or liabilities of Sublandlord, under or with respect to
Providing Parties or Providing Parties' Equipment which would not otherwise
apply if the Providing Party were Subtenant or the Providing Parties' Equipment
belonged to Subtenant.
(e) Any use and occupancy of the Premises by the Providing Parties,
or location of any Providing Parties' Equipment on the Premises, shall be
subject to the same provisions, as to termination of possession, removal of
property or otherwise, as apply to Subtenant under and in accordance with the
provisions of this Sublease. All equipment placed upon the Premises by a third
party customer shall remain the personal property of the third party customer,
the third party customer shall release Sublandlord from any and all claims
arising from the presence of the equipment in, on or about the Premises, and if
the Subtenant's rights to possession have been terminated, the third party
customer shall agree to remove the equipment within five (5) business days of
receipt of notice from Sublandlord, and repair any damage caused by said
removal.
(f) The access rights of the Providing Parties shall be subject to
security measures in place at the Building from time to time and all Providing
Parties shall comply with the Building's Rules and Regulations and construction
rules for the Building.
(g) All costs and expenses (including reasonable attorneys' fees and
costs) incurred by Sublandlord in connection with the installation, maintenance
and operation of Providing Parties' Equipment at the Premises shall be borne by
Subtenant and shall be payable upon demand as Additional Rent hereunder,
including, without limitation, freight elevator, loading dock and security
service charges.
19.4 [Intentionally omitted]
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19.5 [Intentionally omitted]
19.6 Consent by Sublandlord.
(a) Sublandlord shall not be required to consider a request for
consent to a proposed sublease or assignment unless and until Sublandlord shall
have received from Subtenant a written request for Sublandlord's consent to such
proposed transfer in accordance with this Section (a "Consent Request"),
specifying the conditions for the proposed transfer. Each Consent Request shall
include (i) a conformed or photostatic copy of the proposed assignment or
sublease, (ii) a statement setting forth in reasonable detail the identity of
the proposed assignee or subtenant and the nature of its business, (iii) current
financial information with respect to the proposed assignee or subtenant,
including, without limitation, its most recent financial report, and (iv)
Subtenant's calculation of the annualized rental equivalent or effective
assignment price, as the case may be, for the proposed transfer. Provided that
all of the foregoing conditions are satisfied and Subtenant is not then in
default hereunder beyond any applicable notice and cure period, Sublandlord
agrees to act reasonably (subject to the terms of Section 19.6(b)) in
considering any such Consent Request. In all other cases, Sublandlord may permit
or prohibit any proposed transfer in its absolute and unfettered judgment. If
Sublandlord consents to a proposed transfer and it is not actually consummated
within 60 days after such consent is given, then such consent shall be of no
further force or effect, and Subtenant must submit a new Consent Request to
Sublandlord.
(b) Subtenant acknowledges and agrees that a decision by Sublandlord
to disapprove a proposed transfer shall be deemed to have been made in a
reasonable manner if any of the following conditions is not satisfied (which
conditions, however, shall not be construed as the sole grounds on which
Sublandlord may withhold its consent to a proposed transfer):
(i) The business of the proposed assignee or subtenant and its
use of the Premises shall be consistent with the Permitted Use and Section
6.2, shall, in Sublandlord's good faith judgment, be in keeping with the
standards of the Building, and will not violate any "exclusive use" right
granted to any other tenant or occupant of the Building;
(ii) The proposed assignee or subtenant shall be a reputable
person of good character, with sufficient assets and income, in
Sublandlord's reasonable judgment, to bear the financial responsibilities
in respect of its sublease (or in the case of an assignment, the Sublease),
and Sublandlord shall have been furnished with reasonable proof thereof;
(iii) Neither the proposed assignee or subtenant, nor any person
who directly or indirectly, controls, is controlled by, or is under common
control with, the proposed assignee or subtenant or any person who controls
the proposed assignee or subtenant, shall be (A) a government entity (or
subdivision or agency thereof) unless,
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and only to the extent, Sublandlord has voluntarily and directly leased
space in the Building to a government entity, provided that such government
entity proposed by Subtenant is of comparable prestige, character and
reputation, and comparable or smaller in size (based on the aggregate
amount of rentable square feet voluntarily and directly leased by
Sublandlord to such governmental entity), or (B) an occupant of the
Building on the date the Consent Request is delivered, or (C) someone with
whom Sublandlord has been engaged in discussions regarding the leasing of
space in the Building within the six (6)-month period immediately preceding
delivery of the Consent Request;
(iv) The form of the proposed sublease shall be reasonably
satisfactory to Sublandlord and shall comply with the applicable provisions
of this Article 19;
(v) The proposed sublease shall not result in there being more
than two sublessees within the Premises (including Sublandlord or
Sublandlord's designee);
(vi) The Proposed Sublease Space shall be regular in shape and
suitable for normal leasing purposes as a separately demised premises.
19.7 Miscellaneous.
(a) Any sublease consented to by Sublandlord shall be expressly
subject and subordinate to all of the covenants, agreements, terms, provisions
and conditions contained in this Sublease. Any proposed sub-sublease or proposed
assignment of a sublease shall be subject to the provisions of this Article.
Subtenant shall reimburse Sublandlord on demand, as Additional Charges, for any
out-of-pocket costs (including reasonable attorneys' fees and expenses up to but
not more than $2,500) reasonably incurred by Sublandlord in connection with any
actual or proposed assignment or sublease, whether or not consummated, including
the costs of making investigations as to the acceptability of the proposed
assignee or subtenant. Any assignment of this Sublease to which Sublandlord
gives its consent shall not be valid or binding on Sublandlord unless and until
the assignee executes an agreement in form and substance satisfactory to
Sublandlord, expressly enforceable by Sublandlord, whereby the assignee assumes
and agrees to be bound by all of the provisions of this Sublease and to perform
all of the obligations of Subtenant hereunder.
(b) Notwithstanding any sublease to any person or any assignment to
any person other than Sublandlord (or Sublandlord's designee), or any amendments
or modifications subsequent thereto, Subtenant will remain fully liable for the
payment of Rents and for the performance of all other obligations of Subtenant
contained in this Sublease. Any act or omission of any assignee or subtenant, or
of anyone claiming under or through any assignee or subtenant, that violates any
of the obligations of this Sublease shall be deemed a violation of this Sublease
by Subtenant, unless, in the case of a sublease to Sublandlord or an assignment
to Sublandlord or Sublandlord's designee, such act or omission is an act or
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omission of Sublandlord or Sublandlord's designee or of anyone claiming under or
through any Sublandlord or Sublandlord's designee.
(c) The consent by Sublandlord to any assignment or sublease shall
not relieve Subtenant or any person claiming through or under Subtenant of the
obligation to obtain the consent of Sublandlord, pursuant to the provisions of
this Article, to any subsequent assignment or sublease.
(d) [Intentionally omitted]
(e) With respect to each and every sublease authorized by Sublandlord
under the provisions of this Article, it is further agreed that (i) the term of
the sublease must end no later than one day before the last day of the Sublease
Term; (ii) no sublease shall be valid, and no subtenant shall take possession of
all or any part of the Premises until a fully executed counterpart of such
sublease has been delivered to Sublandlord; (iii) each sublease shall provide
that it is subject and subordinate to this Sublease and to all mortgages and
Superior Subleases; (iv) Sublandlord may enforce the provisions of the sublease,
including collection of rents; (v) in the event of termination of this Sublease
or reentry or repossession of the Premises by Sublandlord, Sublandlord may, at
its option, take over all of the right, title and interest of Subtenant, as
sublessor, under such sublease, and such subtenant shall, at Sublandlord's
option, attorn to Sublandlord but nevertheless Sublandlord shall not (A) be
liable for any previous act or omission of Subtenant under such sublease; (B) be
subject to any defense or offset previously accrued in favor of the subtenant
against Subtenant; or (C) be bound by any previous modification of such sublease
made without Sublandlord's written consent or by any previous prepayment of more
than one month's rent.
(f) Any material modification or amendment to a sublease shall be
deemed a new proposed sublease subject to the terms of this Article, requiring a
new Consent Request.
19.8 Lapse. If Sublandlord gives its consent to a proposed sublease or
assignment, and Subtenant fails to deliver to Sublandlord a fully-executed and
effective duplicate original of the assignment or sublease to which Sublandlord
has consented within 45 days after the giving of such consent, then
Sublandlord's consent shall be null and void, and Subtenant shall again comply
with all of the provisions and conditions of this Article before assigning this
Sublease or subletting all or any part of the Premises.
19.9 Additional Charges. If Sublandlord shall grant its consent to any
proposed sublease or assignment, then Subtenant, in consideration therefor,
shall pay to Sublandlord, as Additional Charges, a sum equal to 50% of the
aggregate of all sums and other consideration received by Subtenant for or by
reason of such proposed transfer (including all rents, charges and other
consideration payable to Subtenant under the terms of the sublease or assignment
and any collateral agreements, and also sums paid for the purchase or rental of
any of Subtenant's Property), as and when such sums and other consideration are
received by
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Subtenant; provided, however, that such Additional Charges shall be reduced (but
not to less than zero) by the following amounts, to the extent that Subtenant
shall have furnished to Sublandlord reasonably satisfactory documentation
therefor: (a) in the case of a sublease, all Rents theretofore actually paid to
Sublandlord by Subtenant hereunder for the subleased portion of the Premises
during the term of such sublease (determined based on the ratio of the Rentable
Area of the subleased portion of the Premises to the Rentable Area of the
Premises, except to the extent that different Basic Rents are specified herein
for different portions of the Premises); (b) any reasonable and customary
brokerage commissions theretofore actually paid by Subtenant on account of such
sublease or assignment; (c) any Additional Charges theretofore actually paid to
Sublandlord pursuant to Section 19.7(a) in connection with such assignment or
sublease; (d) any reasonable advertising costs theretofore actually paid by
Subtenant in connection with such assignment or sublease; (e) any out-of-pocket
costs theretofore actually paid by Subtenant in providing concessions to the
assignee or subtenant in connection with such transaction (such as the cost of
any tenant improvement allowance or other payment provided by Subtenant to such
assignee or subtenant); (f) any reasonable fees and charges theretofore actually
paid by Subtenant to attorneys, architects and space planners reasonably
necessary to effect such assignment or sublease; and (g) the net unamortized or
undepreciated cost of any of Subtenant's Property that was paid for by Subtenant
(without contribution by Sublandlord) and that is sold to the assignee or
subtenant in connection with such assignment or sublease, determined on the
basis of Subtenant's federal income tax returns.
19.10 Acceptance of Rent. If this Sublease is assigned, whether or not in
violation of the provisions of this Sublease, Sublandlord may collect rent from
the assignee. If all or any part of the Premises are sublet, whether or not in
violation of this Sublease, Sublandlord may, after default by Subtenant and
expiration of Subtenant's time to cure such default, collect rent from the
subtenant. In either event, Sublandlord may apply the net amount collected to
payment of Rents, but no such assignment, subletting, or collection shall be
deemed a waiver of any of the provisions of this Article, an acceptance of the
assignee or subtenant as a lessee, or a release of Subtenant from the
performance by Subtenant of Subtenant's obligations under this Sublease.
19.11 Actions. If Sublandlord withholds or conditions its consent to a
proposed sublease, sub-sublease or assignment and Subtenant believes that
Sublandlord did so improperly, Subtenant, as its sole remedy, may prosecute an
action for declaratory relief to determine if Sublandlord properly withheld or
conditioned its consent, and Subtenant hereby waives and discharges (i) any
claims it may have against Sublandlord or Sublandlord's Affiliates for damages
arising from Sublandlord's withholding or conditioning its consent and (ii) any
right that it may have to terminate this Sublease on account thereof pursuant to
Section 1995.310 of the California Civil Code or otherwise.
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ARTICLE 20
NOTICES
Whenever either of the parties hereto desires to give or serve any notice,
demand, request or other communication with respect to this Agreement, each such
notice, demand, request or communication shall be given in writing (at the
addresses as set forth below) by any of the following means: (i) personal
service (including service by overnight courier service); (ii) electronic
communication, whether by telex, telegram or telecopying (if confirmed in
writing sent by personal service or United States registered or certified mail,
first class postage prepaid, return receipt requested); or (iii) United States
registered or certified mail, first class postage prepaid, return receipt
requested), and addressed as below. Any notice, demand, request or other
communication sent pursuant to items (i) and (ii) of this Article 20 shall be
deemed received upon such personal service or upon dispatch by electronic means,
and, if sent pursuant to item (iii) of this Article 20, shall be deemed received
3 days following the date identified by the United States Post Office as of the
date of deposit in the United States mail. No notice, demand, request or other
communication given by any party to the other through electronic mail ("e-
mail"), by way of the Internet (whether on a website created for or maintained
by a party or otherwise) shall be deemed effective for purposes of this
Sublease. Either party may change such address upon written notice to the other
party.
If to Subtenant: Focal Communications Corporation of California
200 North LaSalle Street
Chicago, Illinois 60601
Attention: Brian F. Addy
with a copy to: Bischoff, Kenney & Niehaus
5630 North Main
Sylvania, Ohio 43560
Attention: Charles D. Niehaus, Esq.
If to Sublandlord: Wells Fargo Bank
Corporate Properties Group
111 Sutter Street, 22nd Floor
San Francisco, California 94163
Attn: Lease Administration
with a copy to: Wells Fargo Bank
Corporate Properties Group
333 So. Grand Avenue, Suite 700
Los Angeles, California 90071
Attn: Negotiations Manager
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ARTICLE 21
ESTOPPEL CERTIFICATES
Within 10 business days after a request by Sublandlord or Subtenant (the
"Requesting Party"), the other party hereto (the "Certifying Party") shall
execute an estoppel certificate, in form satisfactory to the Requesting Party,
which: (a) certifies that this Sublease is unmodified and in full force and
effect (or if there have been modifications, that the same is in full force and
effect as modified, and stating the modifications); (b) states the expiration
date of the Sublease Term and any agreements to extend or renew the Sublease
Term or to permit any holding over (and specifies the terms of any such
agreements or confirms that none exist); (c) certifies the dates through which
Rents have been paid; (d) states whether or not, to the knowledge and belief of
the Certifying Party, there exist any defaults by either party hereto in the
performance of any of their respective obligations under this Sublease (and
specifies any such default); (e) states whether or not, to the knowledge and
belief of the certifying party, any event has occurred which, with the giving of
notice or passage of time, or both, would constitute a default hereunder and, if
such an event has occurred, specifies each such event; and (f) states whether
Subtenant is entitled to any credits, offsets, defenses or deductions against
payment of Rents, or has any other claims against Sublandlord for abatement or
rent, damages, or other liability, and, if so, describes them. Such estoppel
certificate shall be addressed and delivered as the Requesting Party may
reasonably direct. Any estoppel certificate issued pursuant to this Section may
be relied upon by the Requesting Party, by the addressee, and by others with
whom the Requesting Party may be dealing, regardless of independent
investigation. The Certifying Party shall also include in any estoppel
certificate such other information concerning this Sublease as the Requesting
Party may reasonably request.
ARTICLE 22
RELOCATION OF PREMISES
[intentionally omitted]
ARTICLE 23
BROKER
Each of Sublandlord and Subtenant warrants and represents that (a) no
brokers except Sublandlord's Broker and Subtenant's Broker (as those terms are
defined in Section 1.9) were instrumental in bringing about or consummating this
Sublease and (b) it had no conversations or negotiations with any broker except
Sublandlord's Broker and Subtenant's Broker concerning the leasing of the
Premises by Subtenant. Each of Subtenant's Broker and Sublandlord's Broker shall
be compensated by Sublandlord in accordance with the terms of separate written
agreements which they have entered into with Sublandlord, as applicable. Each of
Sublandlord and Subtenant agrees to indemnify, defend and hold the other
harmless
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from and against any claims for any brokerage commissions, finder's fees or
other damages or liabilities relating to such claims by persons other than
Sublandlord's Broker and Subtenant's Broker, and all costs, expenses and
liabilities incurred in connection with such claims, including reasonable
attorneys' fees and expenses, to the extent any of such claims result from a
breach of the foregoing warranties and representations made by the indemnifying
party.
ARTICLE 24
EXCULPATION AND INDEMNIFICATION
24.1 Exculpation. Neither Sublandlord, nor Sublandlord's Affiliates, nor
any partner, director, officer, agent or employee of Sublandlord or
Sublandlord's Affiliates shall be liable to Subtenant or its partners,
directors, officers, contractors, agents, employees, invitees, sublessees or
licensees, for any loss, injury or damage to Subtenant or to any other person,
or to its or their property, irrespective of the cause of such injury, damage or
loss, except that Sublandlord shall be liable for any such injury, damage or
loss to Subtenant to the extent caused by or resulting from the negligence or
willful misconduct of Sublandlord or its employees in the operation or
maintenance of the Building. Under no circumstances shall Sublandlord,
Sublandlord's Affiliates, or any partner, director, officer, agent or employee
of Sublandlord or Sublandlord's Affiliates be liable: (a) for any damage caused
by other lessees or persons in or about the Building, or caused by operations in
construction of any private, public or quasipublic work; or (b) for
consequential damages (including, without limitation, lost profits), including
as a result of any loss of the use of the Premises or any equipment or
facilities therein.
24.2 Indemnity. Subtenant shall indemnify, hold harmless and defend
(utilizing counsel reasonably satisfactory to Sublandlord and the indemnified
person) Sublandlord, Sublandlord's Affiliates, all Superior Lessors and
mortgagees, and its and their respective partners, directors, officers, agents
and employees from and against any and all claims, demands, causes of action,
liability, loss, damage, costs and expenses (including, without limitation,
reasonable attorneys' fees and expenses) arising from or in connection with: (a)
the conduct or management of the Premises or of any business therein, or any
work or act whatsoever done, or any condition created by Subtenant, its
subtenants (including any co-location customers), licensees or its or their
partners, directors, officers, agents, employees, contractors or invitees in or
about the Premises or the Building during the Sublease Term or during the period
of time, if any, before the Commencement Date that Subtenant is given access to
the Premises; (b) any act, omission or negligence of Subtenant or any of its
subtenants or licensees (including any co-location customers) or its or their
partners, directors, officers, agents, employees, contractors or invitees; (c)
any accident, injury or damage whatsoever (except to the extent caused by
Sublandlord's negligence or willful misconduct) occurring in or about the
Premises; or (d) any breach or default by Subtenant in the full and prompt
payment and performance of Subtenant's obligations under this Sublease; provided
that Subtenant shall not be required to indemnify and hold Sublandlord harmless
from any loss, cost, liability, damage or expense, including, but not limited
to, penalties, fines,
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attorneys' fees or costs (collectively, "Claims"), to any person, property or
entity resulting from the gross negligence or willful misconduct or breach of
this Sublease by Sublandlord or its agents, contractors, servants, employees or
licensees, in connection with Sublandlord's activities in the Building (except
for damage to Subtenant's Work and Subtenant's Property, fixtures, furniture and
equipment in the Premises, to the extent Subtenant is required to obtain the
requisite insurance coverage pursuant to this Sublease and to the extent
insurance proceeds are available). Further, since Sublandlord is required to
maintain insurance on the Building and Subtenant compensates Sublandlord for
such insurance as part of Subtenant's Share of Costs of Operation and because of
the existence of waivers of subrogation set forth in Section 7.4 of this
Sublease, Sublandlord hereby indemnifies and holds Subtenant harmless from any
Claim to any property outside of the Premises but only if and to the extent such
Claim is covered by such insurance, even if resulting from the negligent acts,
omissions, or willful misconduct of Subtenant or those of its agents,
contractors, servants, employees or licensees.
24.3 Satisfaction of Remedies. Neither Sublandlord, Sublandlord's
Affiliates, nor any successor to Sublandlord's interest, including any Successor
Sublandlord (as defined in Section 17.4), shall be personally liable for the
performance of Sublandlord's obligations under this Sublease. Subtenant shall
look only to Sublandlord's estate and property in the Land and the Building, and
to no other property or assets of Sublandlord or Sublandlord's Affiliates, for
the satisfaction of Subtenant's remedies under this Sublease, or for the
collection of any judgment (or other judicial process) requiring the payment of
money by Sublandlord or Sublandlord's Affiliates. The covenants and agreements
contained in this Article shall be enforceable by Sublandlord, Sublandlord's
Affiliates, and its and their respective successors and assigns.
24.4 Transfers of Sublandlord's Interest. The covenants and agreements of
Sublandlord under this Sublease shall not be binding on any person at any time
holding the interest of Sublandlord (including the original named Sublandlord)
subsequent to the transfer of that person's interest in the Building. In the
event of such a transfer, the covenants and agreements of Sublandlord thereafter
shall be binding upon the transferee of Sublandlord's interest. If Sublandlord's
interest in the Building or the Land shall be sold, assigned or otherwise
transferred to any person, including any transfer upon the exercise of any
remedy provided in a Superior Sublease or a mortgage or at law or equity, that
person, and each person thereafter succeeding to its interest in the Building or
the Land, shall not be: (a) liable for any act or omission of Sublandlord under
this Sublease occurring before such sale, assignment or other transfer; (b)
subject to any offset, defense or counterclaim accruing before such sale,
assignment or other transfer; or (c) bound by any payment, made before such
sale, assignment or other transfer, of Basic Rent or Additional Charges more
than one month in advance.
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ARTICLE 25
PARKING
Subtenant shall have the non-exclusive right to use nineteen (19) parking
privileges in the Parking Garage at no charge to Subtenant for the initial term
of this Sublease. All of Subtenant's parking privileges hereunder shall be on a
non-exclusive, unreserved basis and shall be subject to such reserved areas for
visitor or other tenant parking as Sublandlord may designate. All parking
privileges under this Sublease shall be personal to Subtenant (including its
employees and visitors) and non-transferable to any other party except for a
Subtenant's assignees or subtenants permitted under this Sublease. Subtenant
shall comply with the rules, regulations, terms and conditions as Sublandlord or
its parking operator may reasonably establish from time to time. Sublandlord
agrees to maintain existing lighting levels within the Parking Garage and
further agrees that the Parking Garage shall be open and accessible 24 hours per
day, 7 days per week, subject to closures due to emergency and necessary
closures for scheduled repair and maintenance and work necessary to comply with
applicable laws, rules or regulations, it being agreed that Sublandlord shall
use commercially reasonable efforts to avoid closures and will conduct necessary
closures in a manner that will minimize interference with Subtenant's use of the
Parking Garage, including, if reasonably possible, conducting necessary work
during other than Building Hours.
ARTICLE 26
MISCELLANEOUS
26.1 Memorandum of Sublease. Subtenant and Sublandlord shall not record
this Sublease. However, at the request of Sublandlord, Subtenant shall promptly
execute, acknowledge and deliver to Sublandlord a memorandum of lease with
respect to this Sublease sufficient for recording. Such memorandum shall not
change or otherwise affect any of the obligations or provisions of this
Sublease.
26.2 Entire Agreement. This Sublease contains all of the agreements and
understandings related to the leasing of the Premises and the respective
obligations of Sublandlord and Subtenant in connection therewith. Sublandlord
has not made and is not making, and Subtenant, in executing and delivering this
Sublease, is not relying upon, any warranties, representations, promises or
statements, except those that are expressly set forth in this Sublease,
including any riders and all exhibits hereto. All prior agreements and
understandings between the parties have merged into this Sublease, which alone
fully and completely expresses the agreement of the parties.
26.3 Amendments. No agreement shall be effective to amend, change, modify,
waive, release, discharge, terminate or effect an abandonment of this Sublease,
in whole or in part, unless such agreement is in writing, refers expressly to
this Sublease and is signed by Sublandlord and Subtenant.
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26.4 Successors. Except as otherwise expressly provided herein, the
obligations of this Sublease shall bind and benefit the successors and assigns
of the parties hereto; provided, however, that no assignment, sublease or other
transfer in violation of the provisions of Article 19 shall operate to vest any
rights in any putative assignee, subtenant or transferee of Subtenant.
26.5 Force Majeure. Sublandlord or Subtenant shall have no liability
hereunder, except with respect to any monetary obligations under this Sublease,
on account of: (a) the inability of either party to fulfill, or delay in
fulfilling, any of its obligations under this Sublease by reason of strike,
other labor trouble, governmental preemption of priorities or other controls in
connection with a national or other public emergency, or shortages of fuel,
supplies or labor resulting therefrom, or any other cause, whether similar or
dissimilar to the above, beyond that party's reasonable control; or (b) any
shutdown, failure or defect in the supply, quantity or character of electricity
or water furnished to the Premises, by reason of any requirement, act or
omission of the public utility or others furnishing the Building with
electricity or water or of any governmental agency, or for any other reason,
whether similar or dissimilar to the above, beyond Sublandlord's or Subtenant's
reasonable control. If this Sublease specifies a time period for performance of
an obligation of Sublandlord or Subtenant, that time period shall be extended by
the period of any delay in Sublandlord's performance caused by any of the events
of force majeure described above.
26.6 Post-Termination Obligations. Upon the expiration of the Sublease
Term or earlier termination of this Sublease, neither party shall have any
further obligation or liability to the other except as otherwise expressly
provided in this Sublease, and except for such obligations as by their nature or
under the circumstances can only be, or by the provisions of this Sublease, may
be, performed after such expiration or earlier termination. However, any
liability for a payment of Rents or indemnity shall survive the expiration of
the Sublease Term or earlier termination of this Sublease.
26.7 Excavations. If an excavation is made upon land adjacent to or under
the Building, or is authorized to be made, then at the request of Sublandlord,
Subtenant shall afford persons performing the excavation and shoring license to
enter the Premises for the purpose of doing such work as those persons may deem
necessary or desirable to preserve and protect the Building from injury or
damage and to support the Building. If the excavation work could reasonably be
expected to affect any operation of Subtenant, Sublandlord shall notify
Subtenant and, to the extent practical and commercially reasonable, shall notify
Subtenant of the work needed and shall give Subtenant the reasonable opportunity
to take the necessary steps to minimize or avoid interference with Subtenant's
business operations. Subtenant shall have no claim for damages or liability
against Sublandlord or such persons, and Subtenant's obligations under this
Sublease shall not be reduced or otherwise affected. Sublandlord shall have no
liability or responsibility with respect to any equipment of Subtenant located
outside the Premises, except to the extent Sublandlord approved the work or
installation and is provided with plans showing the exact location of such
equipment (in
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which case, Sublandlord's obligation to be limited to the obligation to perform
as set forth herein.)
26.8 Certain Definitions. For the purposes of this Sublease: (a)
"Sublandlord" means the Sublandlord herein named or any successor in interest,
but only for the time that any such person owns the Building or a lease of the
Building in accordance with and subject to the provisions of Section 24.4; (b)
"Sublandlord's Affiliates" means Wells Fargo Bank, N.A., and each of its
subsidiaries or any parent entity, and any successor-in interest to any of the
foregoing, and their respective shareholders, affiliates and related entities;
(c) "laws," "provisions of law" and words of similar import mean laws, statutes,
ordinances, building and fire codes, rules, regulations, judgments, rulings,
decrees, orders and directives of any or all of the federal, state, county and
city governments and all departments, subdivisions, bureaus, courts, agencies or
offices thereof, and of any other governmental, public or quasi public
authorities having jurisdiction over the Building or the Premises, and the
direction of any public officer pursuant to law, whether now or hereafter in
force. References to specific statutes include successor statutes of similar
purpose and import; (d) "person" means any natural person or persons, a
partnership, a corporation, and any other form of business or legal association
or entity; and (e) "business day" means Monday through Friday, except for
Holidays described in the first sentence of Section 11.1.
26.9 Rentable Area. The "Rentable Area of the Building" shall mean 719,000
square feet, and the number of rentable square feet and useable square feet in
the Premises, respectively, shall be deemed to be the square footages
respectively set forth as the "Rentable Area of the Premises" and the "Useable
Area of the Premises" in Section 1.4, which have been calculated in accordance
with the method of measurement set forth in Exhibit I. If the Rentable Area of
the Premises or the Building is reduced as a result of a partial taking in
eminent domain or other circumstance (each a "Redetermination Event") then the
Rentable Area of the Premises, the Useable Area of the Premises and the Rentable
Area of the Building, to the extent each is affected by such Redetermination
Event, shall be reasonably redetermined by Sublandlord's space planner or
architect for purposes of this Sublease, in a manner consistent with the
measurement standards set forth in Exhibit I. In such event, the Basic Rent
shall be adjusted by multiplying it by a fraction, the numerator of which is the
adjusted number of square feet of Rentable Area of the Premises, as so
redetermined by Sublandlord's space planner or architect, and the denominator of
which is the Rentable Area of the Premises prior to such redetermination, and
"Subtenant's Share" shall be adjusted to the percentage that the Rentable Area
of the Premises bears to the Rentable Area of the Building following such
redetermination. Whenever any provision of this Sublease calls for any
calculation based upon the Rentable Area of any portion of the Building
(including, without limitation, any such calculations required pursuant to
Articles 6, 13, 14 or 19), such calculations shall be made based upon the
Rentable Area as reasonably determined by Sublandlord's space planner or
architect in a manner consistent with the method of measurement set forth in
Exhibit I (and excluding the Parking Garage in the case of any such calculation
of the Rentable Area of the Building).
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26.10 Light and Air. No diminution or shutting off of light, air or view
by any structure that may be erected on lands in the vicinity of the Building
shall in any manner affect this Sublease or the obligations of Subtenant
hereunder, or impose any liability on Sublandlord.
26.11 Joint and Several Liability. If Subtenant at any time comprises more
than one person, all such persons shall be jointly and severally liable for
payment of Rents and for performance of every obligation of Subtenant under this
Sublease.
26.12 Sublease Interpretation. This Sublease shall be governed by and
construed in accordance with the laws of the State of California, without regard
to choice of law rules. If any provision of this Sublease or its application to
any person or circumstance shall be invalid or unenforceable, for any reason and
to any extent, the remainder of this Sublease and the application of that
provision to other persons or circumstances shall not be affected but rather
shall be enforced to the extent permitted by law. The Table of Contents, Index
of Defined Terms, captions, headings and titles of this Sublease are solely for
convenience of reference and shall not affect its interpretation. This Sublease
shall be construed without regard to any presumption or other rule requiring
construction against the party drafting a document. It shall be construed
neither for nor against Sublandlord or Subtenant, but shall be given a
reasonable interpretation in accordance with the plain meaning of its terms and
the intent of the parties. Each covenant, agreement, obligation or other
provision of this Sublease on Subtenant's part to be performed shall be deemed
and construed as a separate and independent covenant of Subtenant, not dependent
on any other provision of this Sublease. Unless otherwise required by the
context (or otherwise provided in this Sublease), the words "herein", "hereof"
and "hereunder" and similar words refer to this Sublease generally and not
merely to the provision in which such term is used. All terms and words used in
this Sublease, regardless of the number or gender in which they are used, shall
be deemed to include any other number and any other gender as the context may
require. Time is of the essence of this Sublease and of each provision hereof in
which a time of performance is established. All exhibits and any riders appended
to this Sublease are hereby incorporated herein and by this reference made a
part hereof. The words "including" and "include" shall be interpreted as though
followed by the words "without limitation" except where the context otherwise
requires.
26.13 Submission of Sublease. The submission of this Sublease to Subtenant
or its broker, agent or attorney for review or signature does not constitute an
offer to Subtenant to lease the Premises or the grant of an option to do so.
This instrument shall have no binding force or effect until its execution and
delivery by both Sublandlord and Subtenant.
26.14 WAIVER OF TRIAL BY JURY. THE RESPECTIVE PARTIES HERETO SHALL AND
THEY HEREBY DO WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER ON ANY MATTER
WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS SUBLEASE, THE
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RELATIONSHIP OF SUBLANDLORD AND SUBTENANT, SUBTENANT'S USE OR OCCUPANCY OF THE
PREMISES, OR ANY CLAIM OF INJURY OR DAMAGE, OR THE ENFORCEMENT OF ANY REMEDY
UNDER ANY STATUTE, EMERGENCY OR OTHERWISE.
26.15 Consent to Jurisdiction. Subtenant hereby (a) irrevocably consents
and submits to the jurisdiction of the federal courts of the United States of
America located in the Central District of California and of any state, county
or municipal court sitting in the State of California, County of Los Angeles in
respect of any action or proceeding brought therein by Sublandlord against
Subtenant concerning any matters arising out of or in any way relating to this
Sublease; (b) expressly waives any rights of Subtenant pursuant to the laws any
other jurisdictions by virtue of which exclusive jurisdiction of the courts of
any other jurisdiction might be claimed; and (c) agrees that the laws of the
State of California shall govern in any such action or proceeding and waives any
defenses under the laws of any other country or jurisdiction unless such defense
is also allowed by the laws of the State of California. Nothing herein shall
affect the right of Sublandlord to commence legal proceedings or otherwise
proceed against Subtenant in any other country or jurisdiction in which assets
of Subtenant are located or to serve process in any manner permitted by
applicable law.
26.16 Authority. Each individual executing this Sublease on behalf of
Subtenant hereby represents and warrants that Subtenant is a duly formed and
existing entity qualified to transact intrastate business in California, with
full corporate power and authority to execute and deliver this Sublease, and
that each person signing on behalf of Subtenant is authorized to do so.
ARTICLE 27
SIGNAGE
Subtenant shall be permitted to install appropriate Building standard
signage on the entrance doors to the Premises. Such signage will be installed by
Sublandlord at Subtenant's sole cost and expense at locations approved by
Sublandlord.
[SIGNATURES ON NEXT PAGE]
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IN WITNESS WHEREOF, Sublandlord and Subtenant have caused their duly
authorized representatives to execute this Sublease as of tine date first above
written.
SUBTENANT: SUBLANDLORD:
FOCAL COMMUNICATIONS WELLS FARGO BANK, N.A.,
CORPORATION OF CALIFORNIA, a national banking association
a Delaware corporation
By: By:
------------------------- -------------------------
Name: Name:
----------------------- -----------------------
Title: Title:
---------------------- ----------------------
By: By:
------------------------- -------------------------
Name: Name:
----------------------- -----------------------
Title: Title:
---------------------- ----------------------
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EXHIBIT A
WORK LETTER FOR SUBTENANT IMPROVEMENTS
This Work Letter for Subtenant Improvements, including any schedules and
exhibits attached hereto (this "Work Letter"), is attached to and forms a part
of that certain Sublease dated as of May 19, 1998, by and between WELLS FARGO
BANK, N.A., as Sublandlord, and FOCAL COMMUNICATIONS OF CALIFORNIA, a Delaware
corporation, as Subtenant (the "Sublease"). Unless otherwise specified,
"Article" and "Section" references herein are to Articles and Sections of the
body of the Sublease and "Paragraph" references are to paragraphs of this Work
Letter.
1. Definitions. All capitalized terms used herein and not defined shall
have the meanings set forth in the body of the Sublease. As used in the body of
the Sublease and in this Work Letter:
1.1 Code. The term "code" means all applicable electrical, building,
architectural barrier, zoning, health, safety, seismic, fire, energy and other
codes, ordinances, regulations, rulings, interpretations, requirements and
relevant provisions of law issued or adopted by the City of Los Angeles, County
of Los Angeles, State of California, the United States Government or any other
governmental authority.
2. Base Building Work. The following is in place at the Building as of the
date of this Sublease: (1) Building shell; (2) Building core areas, including
mechanical, electrical, plumbing, heating, ventilation, air-conditioning, and
fire and life-safety systems; (3) core toilet rooms on the office floors of the
Building; (4) public stairs; (5) elevators; and (6) main lobby. The work
referenced above and the work described in the Base Building Definition attached
as Schedule 1 to this Work Letter will be collectively referred to herein as the
"Base Building Work". Subtenant acknowledges that it has inspected the Premises
and the Base Building Work, is familiar with the condition thereof, and subject
to the terms of this Work Letter, accepts the Base Building Work, the Premises,
and any existing equipment and improvements located in the Premises absolutely
"AS IS," and agrees that, except as otherwise specifically set forth in this
Work Letter and the Sublease to which this is an Exhibit, Sublandlord shall not
be required to perform any work, install (or remove) any improvements or
equipment, or render any services to make the Building or the Premises ready for
Subtenant's occupancy. Subtenant acknowledges that some portions of the Premises
may have been previously occupied by other tenants and may contain fixtures and
improvements, which may be used or removed at Subtenant's option and at
Subtenant's sole cost, subject to the terms of the Sublease.
3. Subtenant's Work.
3.1 Definition. Except for the Base Building Work provided by
Sublandlord, all tenant improvements in the Premises (including, without
limitation, removal
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or modification of any existing improvements and construction of any necessary
demising walls), to prepare the Premises for occupancy by Subtenant, will be
performed by Subtenant at Subtenant's sole expense. The improvements to be
constructed by Subtenant are referred to in this Work Letter as "Subtenant's
Work." Subtenant's Work shall be deemed "Substantially Complete" for purposes of
this Sublease as of the date that Subtenant's Work, as described in Subtenant's
Plans approved by Sublandlord is complete, subject to reasonable punch list
items, including minor details of mechanical adjustment or decoration which do
not materially interfere with Subtenant's use of the Premises for business
purposes and the City of Los Angeles has issued a temporary Certificate of
Occupancy (or reasonable equivalent) for Subtenant's intended use for the
Premises.
3.2 Requirements. All Subtenant's Work is subject to the approval of
Sublandlord and must meet the Building construction standards. Subtenant shall
be responsible for the design, function and maintenance of all Subtenant's Work.
Subtenant shall not specify uses or materials that are subject to an insurance
hazard rate different from the rate assigned to the Building as a whole.
3.3 Heating, Ventilation and Air-Conditioning. Subtenant shall be
required to furnish and install as Subtenant's Work all HVAC and related
apparatus not included as part of the Base Building Work, including all
additional duct, pipe, electrical and mechanical work.
3.4 Sprinkler System. Subject to Subtenant's right to install and/or
convert to a "pre-action" design as permitted in Section 11.11(j) of this
Sublease, Subtenant shall install as part of Subtenant's Work all portions of
the sprinkler system for the Premises not included as part of the Base Building
Work, including, any raising, lowering, moving or adding of sprinkler heads.
3.5 Life-Safety System. All emergency lighting, exit signs, branch
wiring, alarms, smoke detectors, speakers and other devices required by code or
desired by Subtenant for the life-safety system in the Premises but not included
as part of the Base Building Work, shall be installed as Subtenant's Work.
3.6 Window, Wall and Floor Coverings. All window, wall and floor
coverings shall be installed as Subtenant's Work. Subtenant may utilize any
existing mini blinds which are in place in all perimeter windows of Subtenant's
Premises in "AS IS" condition, and will not install any other types of window
coverings without Sublandlord's prior consent, which shall not be unreasonably
withheld, conditioned, or delayed.
3.7 Floor Loading. Specific sections of the Premises may require
loading to a maximum of 200 lbs. per square foot. If Subtenant wishes to design
and install structural and/or non-structural modifications to the Premises to
accommodate floor loads greater than the existing capacity of 100 pounds per
square foot as shown in the Base Building Definition, all of such work shall be
considered to be an Alteration which, consistent with the terms of
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Article 8, shall be, subject to Sublandlord's approval and subject to all
applicable code and engineering design standards. If reinforcing is required,
Subtenant, at Subtenant's sole cost and expense, shall reinforce the floors in
the areas as specified and designed by Subtenant's structural engineer.
Subtenant shall be granted, with reasonable notice, floor access to the space
below the Premises for reinforcement of Subtenant's Premises during construction
of Subtenant's Work, if required. All charges for additional security and other
services needed to accommodate such entry shall be at the sole cost and expense
of Subtenant.
3.8 Ceiling and Floor Tiles. Sublandlord will provide to Subtenant,
at Sublandlord's cost and expense, ceiling and floor tiles to the extent such
tiles are available in Sublandlord's current inventory. Otherwise, ceiling and
floor tiles shall be provided at Subtenant's cost and expense.
4. Subtenant's Plans.
4.1 Description. Subtenant shall have an architect licensed by the
State of California ("Subtenant's Architect") prepare architectural plans and
specifications for the layout and improvements of the Premises and Subtenant's
Work ("Subtenant's Plans"), all in such form and detail as reasonably required
by Sublandlord. Subtenant's Plans shall be in form and content sufficient to
secure all required governmental approvals. Subtenant shall pay all of the fees
and charges of Subtenant's Architect for all of the work required by this Work
Letter. Subtenant's Architect shall coordinate with the architect of
Sublandlord ("Sublandlord's Architect") and Sublandlord's engineers to assure
the consistency of Subtenant's Plans with the plans and specifications for the
Base Building Work. Subtenant's Plans shall include the following:
(a) Space Plan: The "Space Plan" shall be a schematic space plan
for the Premises, including a full and accurate description of the size and
location of all partitions, doors, furniture and equipment line ups. Before
submission to Sublandlord, the Space Plan shall have been reviewed and approved
by the Los Angeles Building and Fire Departments, and shall be on file with the
Building Department, registered with a preliminary plan check number.
(b) Final Plans: The "Final Plans" shall consist of all plans and
specifications necessary to construct Subtenant's Work, including mechanical and
electrical working drawings.
4.2 Mechanical and Electrical. Subtenant's Plans shall contain all
mechanical and electrical working drawings. Mechanical and electrical working
drawings shall be prepared at Subtenant's expense by engineers reasonably
approved by Sublandlord. Subtenant's Architect shall be responsible for
coordination of all engineering work with Subtenant's Plans.
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4.3 Approval by Sublandlord. Subtenant's Plans shall be subject to
Sublandlord's reasonable approval. Sublandlord shall have ten (10) business days
following receipt of Subtenant's Plans to approve or disapprove the submissions
by Subtenant. If Sublandlord fails to approve or disapprove Subtenant's Plans
within such 10-business day period, then Subtenant shall have the option to
terminate this Sublease by delivering written notice to Sublandlord within five
(5) days following the expiration of such 10-business day period, or extend the
Commencement Date for the number of days Sublandlord's approval or disapproval
is delinquent, pursuant to the terms of Section 2.4 of the Sublease. The rights
described in the foregoing sentence shall be Subtenant's sole remedy for such
failure to approve Subtenant's Plans within the time specified. If Sublandlord
reasonably disapproves of any of Subtenant's Plans, Sublandlord shall advise
Subtenant of the required revisions concurrently with such disapproval. After
being so advised by Sublandlord, Subtenant shall promptly submit a redesign,
addressing the revisions required by Sublandlord, for Sublandlord's reasonable
approval. Sublandlord shall then have five (5) business days to approve or
disapprove any resubmittal of Subtenant's plans, and failure to respond within
such 5-business day period shall be deemed Sublandlord's approval of such re-
submitted plans and specifications. If Sublandlord disapproves Subtenant's
redesign within such 5-business day period, then, Subtenant shall have the right
to terminate this Sublease within five (5) days following receipt of such
disapproval and such termination shall be Subtenant's sole remedy for such
disapproval. Notwithstanding the right of Subtenant as set forth herein to
terminate this Sublease if Subtenant's Plans are disapproved, if Subtenant's
Plans have not been approved within sixty (60) days from the date of this
Sublease, the parties agree to promptly meet in good faith to attempt to reach
agreement regarding Subtenant's Plans. If Subtenant's Plans are not fully
approved within seventy-five (75) days from the date of this Sublease despite
the exercise of good faith efforts, either Sublandlord or Subtenant may, as its
sole remedy, terminate this Sublease by written notice delivered within ten (10)
days following the expiration of such 75-day period. The period for resolving a
dispute regarding Subtenant's Plans shall not constitute a delay for purposes of
extending the Outside Completion Date pursuant to Section 2.4 of the Sublease.
Approval by Sublandlord shall not be deemed to be a representation or warranty
by Sublandlord with respect to the safety, adequacy, correctness, efficiency or
compliance with law of Subtenant's Plans.
4.4 Permits. Subtenant's Architect shall be responsible for
submission of Subtenant's Plans for plan check by the City of Los Angeles. Any
changes required by the City of Los Angeles shall be submitted to Sublandlord
for Sublandlord's review and reasonable approval. Subtenant's contractor shall
apply for the building permit for Subtenant's Work and Subtenant shall be
responsible for and shall pay all fees and expenses for securing the building
permit and all other permits necessary for construction of the tenant
improvements.
4.5 "As-Built" Plans. A set of "as-built" plans of the Premises, in
such form and detail as reasonably required by Sublandlord, shall be delivered
to Sublandlord within sixty (60) days after Subtenant's occupancy.
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5. Construction of Subtenant's Work.
5.1 Subtenant's Contractor. Subtenant will enter into a construction
contract with a contractor approved by Sublandlord for construction of
Subtenant's Work ("Subtenant's Contractor"). Sublandlord agrees to approve or
disapprove in writing Subtenant's proposal for Subtenant's Contractor within 4
business days of receiving Subtenant's written proposal. If Sublandlord fails
to respond within such 4-business day period, Subtenant's proposal for
Subtenant's Contractor shall be deemed approved. Subtenant will inform
Sublandlord of the amount of the contract price.
5.2 Performance. Subtenant shall perform, through Subtenant's
Contractor, all work shown on the approved Subtenant's Plans, in accordance with
such plans, and in a professional and workmanlike manner and in strict
accordance with code. Subtenant shall comply, and will cause its agents,
contractors and employees to comply, with all construction rules and regulations
of the Building as set forth in Exhibit H to the Sublease (which rules shall be
subject to change from time to time upon reasonable advance notice to Subtenant
and its contractors).
5.3 Services During Construction. Sublandlord shall provide to
Subtenant's Contractor free of charge all necessary utilities (including water
and electricity but not including temporary power), hoisting (but not including
an operating engineer), general security and access to the Building and the
Premises. Subtenant and Subtenant's Contractors shall also have the right to use
the Building's freight elevators and loading dock at no charge during Building
Hours, and may use the freight elevators and loading dock outside of Building
Hours, subject to a reasonable charge therefor to reimburse Sublandlord for its
actual costs, if incurred, of providing such use and such access. Subtenant
shall have the non-exclusive use of at least one loading dock and freight
elevator during construction. For the services of Sublandlord's engineering
personnel in connection with Subtenant's Work (including the cost of
accompanying Subtenant or its agents or contractors during the performance or
planning of Subtenant's Work outside of the Premises and the performance of
Subtenant's Work within the Premises that may affect Building systems, and
during the inspection of Building facilities outside of the Premises in
connection with the planning of Subtenant's Work, whether prior to or subsequent
to the execution of this Sublease), Subtenant shall compensate Sublandlord at
the normal hourly rates for such personnel. Sublandlord shall use its
commercially reasonable best efforts to provide space for a 40-yard rubbish
container within close proximity of the freight elevator or loading dock of the
Building throughout the period of constructing Subtenant's Work.
5.4 Subtenant's Move Into the Premises. Sublandlord shall also
provide all necessary utilities, general security and access to the Building and
the Premises at no charge to Subtenant during Subtenant's move into the
Premises. Subtenant shall have the non-exclusive use of at least one loading
dock and one freight elevator during Subtenant's move into the Premises, and
shall also have the right to utilize passenger elevators during its move into
the Premises. If Subtenant wishes to use the passenger elevators for its move
into
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the Premises, Subtenant shall provide reasonable advance notice to Sublandlord
and Sublandlord will provide pads to protect the elevator cab interiors.
5.5 Labor Harmony. Subtenant acknowledges and understands that the
Building is a "union building" and organized labor has a strong presence at the
Building. Subtenant agrees to utilize union labor as necessary to maintain labor
harmony at the Building. Sublandlord will permit Subtenant's Contractor and
subcontractors access to the Premises to perform their work in the proper
sequence, provided that the workers and mechanics of Subtenant's Contractor and
subcontractors work in harmony with and do not interfere with the labor employed
by Sublandlord, Sublandlord's mechanics or contractors or by any other tenant or
its contractors. If at any time such entry shall cause disharmony or
interference, Sublandlord shall not be liable in any way for any injury, loss or
damage which may occur to any of Subtenant's decorations or installations so
made before commencement of the term of the Sublease, the same being solely at
Subtenant's risk, and Subtenant shall hold Sublandlord harmless from any claim,
demand or action arising from activities of Subtenant's Contractor,
subcontractors, workers or mechanics. Sublandlord and Subtenant agree to
cooperate in good faith in connection with Subtenant's Contractor's entry into
the Building and the Premises and the installation of Subtenant's Work. Subject
to the provisions of Sections 2.5(b) and (c) of the Sublease, under no
circumstances shall Sublandlord be held responsible or liable for any delay
whatsoever in the construction of Subtenant's Work.
5.6 Deliveries. Subtenant's Contractor shall coordinate the
scheduling of deliveries of materials with Sublandlord, and the timing of such
deliveries shall be subject to Sublandlord's reasonable approval. Sublandlord
may require that delivery of construction materials be made at a time other than
during Building Hours.
5.7 Insurance. Throughout the performance of Subtenant's Work,
Subtenant, at its expense, shall carry, or cause to be carried, workers'
compensation insurance as required by law and general liability insurance, with
completed operations endorsements, for any occurrence in or about the Building,
in such coverage limits and with insurers in each case meeting the requirements
of Article 7 of the Sublease. Sublandlord and the persons specified in Section
7.5 of the Sublease shall be designated as additional insured parties on the
insurance policies. Subtenant shall furnish Sublandlord with evidence
satisfactory to Sublandlord that such insurance is in effect before the
commencement of Subtenant's Work, and, on request of Sublandlord during
construction, Subtenant shall provide evidence satisfactory to Sublandlord that
the insurance remains in effect.
5.8 Liens and Violations. Subtenant, at its expense, and with
diligence and dispatch, shall procure the cancellation or discharge of all
notices of violation arising from or otherwise connected with Subtenant's Work,
or any other work, labor, services or materials done for or supplied to
Subtenant, or any person claiming through or under Subtenant, which shall be
issued by the Building and Safety Department of the City of Los Angeles or any
other public authority. Subtenant shall not utilize materials in Subtenant's
Work (except with respect to Subtenant's Property) that are subject to security
interests or liens. Subtenant shall
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defend, indemnify and hold Sublandlord harmless from and against any and all
mechanics' liens, stop notices and other liens and encumbrances or claims of
liens or encumbrances filed in connection with Subtenant's Work, Alterations, or
any other work, labor, services or materials done for or supplied to Subtenant,
or any person claiming through or under Subtenant, including, without
limitation, security interests in any materials, fixtures or articles installed
in the Premises; and against all costs, expenses and liabilities incurred in
connection with any such lien or encumbrance, or claim of lien or encumbrance,
its removal or any related action or proceeding. Subtenant, at its expense,
shall satisfy or discharge of record each stop notice, lien or encumbrance
within 15 days after it is filed. If Subtenant fails to do so, Sublandlord shall
have the right to satisfy or discharge the stop notice, lien or encumbrance by
payment to the claimant on whose behalf it was filed, by the posting of a bond,
or by other action. Subtenant shall reimburse Sublandlord on demand for the
costs and expenses so incurred by Sublandlord, as Additional Charges, and
without regard for any defense or offset that Subtenant may have had against the
claimant, but neither Sublandlord's curative action nor the reimbursement of
Sublandlord by Subtenant shall cure Subtenant's default in failing to satisfy or
discharge the lien or encumbrance.
5.9 Indemnity. Subtenant will be directly responsible to Sublandlord
for the performance of Subtenant's Contractor, and will indemnify, defend and
hold harmless Sublandlord, Sublandlord's Affiliates and Sublandlord's managing
agent from any cost, expense, claim, lien, loss, damage or liability in
connection with the construction contract with Subtenant's Contractor or with
the performance of Subtenant's Work.
5.10 Inspection by Sublandlord. Sublandlord shall have the right to
inspect Subtenant's Work at any reasonable time, and may reasonably reject work
that does not conform with applicable laws or Subtenant's Plans. In the event of
such rejection, the parties shall promptly meet to agree upon a resolution to
bring such work into conformity.
5.11 Code Requirements. Subtenant shall bear all costs and expenses of
constructing Subtenant's Work in compliance with code and shall be responsible,
at its expense, for obtaining, and, if requested by Sublandlord, furnishing
copies to Sublandlord of, all governmental permits, certificates, and approvals
necessary for the commencement and prosecution of Subtenant's Work and for final
approval thereof upon completion.
5.12 Construction Supervision Fee. Sublandlord may, at its option,
retain a construction supervisor to oversee the construction and performance of
Subtenant's Work and Subtenant agrees to pay the costs of any construction
supervisory fee not to exceed $4,000.00.
A-7
<PAGE>
SCHEDULE 1 TO WORK LETTER
BASE BUILDING DEFINITION
[ALL SUBJECT TO REVIEW AND REVISION TO REFLECT LOWER LEVEL II]
FLOORS
Floor Leveling The concrete floors of the Building will have a
floor level variance of no more than 1/4 inch per
10 feet, non-cumulative
Floor Loading The floor loading capacity in the Building is as
follows:
Live Load: 100 lbs. per SF
Partition Load: 125 lbs. per SF
- --------------------------------------------------------------------------------
DROPPED CEILING AND Dropped ceilings and lights shall be provided
LIGHTS "as-is".
- -------------------------------------------------------------------------------
ELEVATORS . The Building has 4 passenger elevators serving
Lower Level II.
. The Building has 2 service/freight elevators
serving Lower Level II.
- -------------------------------------------------------------------------------
HVAC
System Description . The Building's HVAC system specifications
for Lower Level II are as follows:
A single VAV duct system serviced by 3 fanrooms;
heating is supplied by return air across light
fixtures.
Temperature Specifications The HVAC on Lower Level II meets the
following temperature specifications:
Schedule 1 to Exhibit A - Page 1
<PAGE>
. Design population: 160 RSF per person
. Average air circulation: 1.0 cfm/rsf
. Indoor air temperature:
. Summer: 68-74 degrees Fahrenheit and 50%
relative humidity
. Winter: 68-74 degrees Fahrenheit (plus or
minus 2 degrees)
. Outdoor air temperature:
. Summer: 95 degrees Fahrenheit dry bulb, 74
degrees Fahrenheit wet bulb
. Winter: 30 degrees Fahrenheit dry bulb
. Fresh outdoor air ventilation to be provided at a
minimum of 0.15 cfm per rentable square foot.
- --------------------------------------------------------------------------------
ELECTRICAL CAPACITY . The Building will provide 8 watts per RSF for
Subtenant's lights and outlets. Total power in
the building is 4 2,500 KVA; 5,600 amp services.
- --------------------------------------------------------------------------------
FIRE & LIFE-SAFETY . The Building is fully sprinklered.
. The Building is equipped with a Honeywell Fire &
Life-Safety system throughout the entire structure.
Schedule 1 to Exhibit A - Page 2
<PAGE>
EXHIBIT B
FLOOR PLAN OF THE PREMISES
[Diagram]
B-1
<PAGE>
EXHIBIT C
FORM OF
MEMORANDUM OF SUBLEASE COMMENCEMENT
This Memorandum of Sublease Commencement is made as of ______________, by
WELLS FARGO BANK, N.A., a national banking association ("Sublandlord"), having
an office c/o Corporate Properties Group, 333 South Grand Avenue, Suite 700, Los
Angeles, California 90071, Attention: Negotiations Manager, and FOCAL
COMMUNICATIONS OF CALIFORNIA, a Delaware corporation ("Subtenant") having an
office at 200 North LaSalle Street, Chicago, Illinois 60601, Attention: Brian F.
Addy. Sublandlord and Subtenant agree to and acknowledge the following matters:
1. Sublandlord and Subtenant have entered into that certain Office Sublease
dated May 19, 1998, (the "Sublease"), covering office space containing square
feet of Rentable Area in The Garland Center Building, located at 1200 West
Seventh Street, Los Angeles, California, as more particularly described in the
Sublease.
2. All terms defined in the Sublease shall have the same meaning when used
in this Memorandum of Sublease Commencement.
3. The Commencement Date of the Sublease is ___________________, and the
Expiration Date of the Sublease is the January 31, 2009.
IN WITNESS WHEREOF, Sublandlord and Subtenant have caused their duly
authorized representatives to execute this Memorandum of Sublease Commencement
as of the date first above written.
SUBTENANT: SUBLANDLORD:
FOCAL COMMUNICATIONS WELLS FARGO BANK, N.A.,
CORPORATION OF CALIFORNIA, a national banking association
a Delaware corporation
By: By:
------------------------------ --------------------------------
Name: Name:
---------------------------- ------------------------------
Title: Title:
--------------------------- -----------------------------
By: By:
------------------------------ --------------------------------
Name: Name:
---------------------------- ------------------------------
Title: Title:
--------------------------- -----------------------------
C-1
<PAGE>
EXHIBIT D
THE GARLAND CENTER
1200 WEST SEVENTH STREET
RULES AND REGULATIONS
These Rules and Regulations are attached to and form a part of that certain
Sublease (the "Sublease") dated as of May 19, 1998, by and between WELLS FARGO
BANK, N.A., a national banking association ("Sublandlord") and FOCAL
COMMUNICATIONS CORPORATION OF CALIFORNIA, a Delaware corporation ("Subtenant").
In the event of any conflict between the terms of the Sublease and these Rules
and Regulations, the terms of the Sublease shall prevail.
1. The rights of each tenant in the Common Area and entrances, corridors,
elevators and other public areas servicing the Building are limited to ingress
to and egress from such tenant's premises for the tenant and its employees,
licensees and invitees, and no tenant shall use, or permit the use of, the
entrances, corridors or elevators for any other purpose. Neither Sublandlord nor
any tenant shall invite to the tenant's premises, or permit the visit of,
persons in such numbers or under such conditions as to interfere with the use
and enjoyment of any of the entrances, corridors, elevators, plazas, and other
facilities of the Building or the Common Area by any other tenants except as may
be incident to Subtenant's Permitted Use. Fire exits and stairways are for
emergency use only, and they shall not be used for any other purpose by the
Sublandlord, tenants, their employees, licensees or invitees. Neither the
Sublandlord nor any tenant shall encumber or obstruct, or permit the encumbrance
or obstruction of any of the sidewalks, plazas, entrances, corridors, doorways,
elevators, fire exits or stairways of the Building or the Common Area.
Sublandlord reserves the right to control and operate the public portions of the
Building and the Common Area, in such manner as it, in its reasonable judgment,
deems best for the benefit of the tenants generally. No tenant and no invitees
or employees of any tenant shall be allowed on the roof of the Building, except
as otherwise allowed in the Sublease.
2. Sublandlord may refuse admission to the Building during the days and
hours specified in Rule 35 to any person not known to the watchman in charge or
not having a pass issued by Sublandlord or the tenant whose premises are to be
entered or not otherwise properly identified, and Sublandlord may require all
persons admitted to or leaving the Building outside of Building Hours to provide
appropriate identification and to register. Sublandlord shall not be held
responsible or liable for damages for any error with regard to the admission to
or exclusion from the Building of any person unless properly identified.
Subtenant shall be responsible for all persons for whom it issues any such pass
and shall be liable to Sublandlord for all acts or omissions of such persons.
Any person whose presence in the Building or the Common Area at any time shall,
in the reasonable judgment of Sublandlord, or its representatives, be
prejudicial to the safety, character or reputation of the Building, the Common
Area or of its tenants may be denied access to the Building or the Common Area
or may be ejected therefrom. During any invasion, riot, public excitement or
other commotion, Sublandlord may prevent all access to the Building or the
Common Area by
D-1
<PAGE>
closing the doors or otherwise for the safety of the tenants and protection of
property in the Building or the Common Area.
3. Subtenants shall obtain ice, drinking water, food, beverage, linen,
barbering, shoe-polishing, floor-polishing, cleaning, janitorial, plant-care or
other similar services only from vendors who have registered with the Building
office and who have been reasonably approved by Sublandlord for provision of
such services in the Building.
4. The cost of repairing any damage to the public portions of the Building
or to the Common Area, caused by a tenant or its employees, agents, contractors,
licensees or invitees, shall be paid by the tenant.
5. [Intentionally omitted]
6. No lettering, sign, advertisement, notice or object shall be displayed
in or on the exterior windows or doors, or on the outside of any tenant's
premises, or at any point inside any tenant's premises where the same might be
visible outside of such premises, without the prior written consent of
Sublandlord, which consent may be withheld in the sole and absolute discretion
of Sublandlord. In the event of the violation of the foregoing by any tenant,
Sublandlord may remove the same without any liability, and may charge the
expense incurred in such removal to the tenant violating this rule. Interior
signs, elevator cab designations and lettering on doors or the Building
directory shall, if and when approved by Sublandlord, be inscribed, painted of
affixed for each tenant by Sublandlord at the expense of such tenant, and shall
be of size, color and style acceptable to Sublandlord.
7. [Intentionally omitted]
8. No showcases or other articles shall be put in front of or affixed to
any part of the exterior of the Building, nor placed in the halls, corridors or
vestibules except by a newsstand licensed by Sublandlord.
9. No bicycles, vehicles or animals (except any which are providing
handicap assistance) of any kind shall be brought into or kept in or about the
premises of any tenant of the Building or the Common Area.
10. Subtenants shall permit no noise, vibration or odor to escape from
their premises. Nothing shall be done or permitted in the premises of any tenant
which would impair or interfere with the use or enjoyment by any other tenant of
any other space in the Building or the Common Area.
11. Subtenants and their contractors, employees, agents, visitors and
licensees shall not at any time bring into or keep upon any tenant's premises or
in the Building any foul or noxious gas or substance or any inflammable,
explosive or otherwise Hazardous Substance
D-2
<PAGE>
12. No locks or bolts of any kind which are not operable by the grand
master key for the Building shall be placed upon any of the doors by any tenant,
nor shall any changes be made in locks or the mechanism thereof which would make
such locks inoperable by the grand master key. Additional keys for a tenant's
premises and toilet rooms shall be procured only from Sublandlord, who may make
a reasonable charge therefor. Each tenant shall, upon the termination of its
tenancy, turn over to Sublandlord all keys of stores, offices and toilet rooms,
either furnished to or otherwise procured by such tenant, and in the event of
the loss of any keys furnished by Sublandlord, such tenant shall pay to
Sublandlord the cost thereof.
13. All equipment removals, or the carrying in or out of any safes,
freight, furniture, packages, boxes, crates or any other sizeable object or
matter of any description, must take place during such hours, in such elevators
and in such manner as Sublandlord or its agent may reasonably determine from
time to time. Persons employed to move safes and other heavy objects shall be
reasonably acceptable to Sublandlord. Before moving large quantities of
furniture and equipment into or out of the Building, tenants shall notify
Sublandlord and shall comply with Sublandlord's reasonable requirements
concerning the time and manner in which the work shall be performed. All labor
and engineering costs incurred by Sublandlord in connection with any moving,
including a reasonable charge for overhead and profit, shall be paid by tenant
to Sublandlord, on demand. Sublandlord shall not be responsible for loss or
damage to any such safe or property from any cause, and all damage done to the
Building by moving or maintaining any such safe or other property shall be
repaired at the expense of tenant.
14. Sublandlord reserves the right to inspect all objects and matter to be
brought into the Building and to exclude from the Building any objects or matter
which violate any of these Rules and Regulations or the lease of which this
Exhibit is a part. Sublandlord may require any person leaving the Building with
any package or other object or matter to submit a pass issued by the tenant from
whose premises the item is being removed, listing the item. This rule shall not
be deemed to impose any responsibility or liability on Sublandlord for the
protection of any tenant against the removal of property from the premises of
such tenant. Sublandlord shall in no way be liable to any tenant for damages or
loss arising from the reasonable admission, exclusion or ejection of any person
to or from the premises or the Building under the provisions of this rule or of
other of these Rules and Regulations.
15. No tenant shall occupy or permit any portion of its premises to be
occupied as an office for a public stenographer or public typist, or for the
storage, manufacture, or sale of food, liquor, drugs or tobacco in any form, or
as a barber, beauty or manicure shop, or as a school or classroom except for
internal training by the Subtenant, unless such use has been specifically
approved by Sublandlord. No tenant shall use or permit its premises or any part
thereof to be used for manufacturing or the sale at retail or auction of
merchandise, goods or property of any kind. These prohibitions supplement the
prohibited uses specified in the lease of which this Exhibit is a part.
D-3
<PAGE>
16. Sublandlord shall have the right to prohibit any advertising or
identifying sign by any tenant which, in Sublandlord's sole and absolute
judgment, tends to impair the reputation of the Building or its desirability as
a building for others, and upon written notice from Sublandlord, such tenant
shall refrain from and discontinue such advertising or identifying sign.
17. Sublandlord shall have the right to reasonably prescribe the weight,
size and position of safes and other objects of excessive weight unless such
activity is consistent with the design specifications of the Premises approved
by the Sublandlord and is required by Subtenant's Permitted Use, and no safe or
other object whose weight exceeds the lawful load for the area upon which it
would stand shall be brought into or kept upon any tenant's premises. If, in the
reasonable judgment of Sublandlord, the concentrated weight of any heavy
equipment will exceed the structural capacity of the Building and it will be
necessary to distribute the concentrated weight of any heavy object, the work
involved in such distribution shall be done at the expense of the tenant and in
compliance with plans reasonably approved by Sublandlord.
18. Except as may be required by Subtenant's Permitted Use of the Premises
and approved by Sublandlord, no machinery or mechanical equipment other than
ordinary portable business machines may be installed or operated in any tenant's
premises without Sublandlord's prior written consent, which consent shall not be
unreasonably withheld, conditioned or delayed. Machines and mechanical equipment
that Sublandlord permits a tenant to install and use shall be so equipped,
installed or maintained by the tenant as to prevent any noise, vibration or
electrical or other interference from being transmitted from the tenant's
premises to any other area of the Building.
19. Sublandlord, its contractors, and their respective employees shall have
the right to reasonably use, without charge therefor, all light, power and water
in the premises of any tenant while cleaning or making repairs or alterations in
the premises of such tenant.
20. No premises of any tenant shall be used for lodging or sleeping or for
any immoral or illegal purpose.
21. The requirements of tenants will be attended to only upon application
at the office of the Building. Employees of Sublandlord shall not perform any
work or do anything outside of their regular duties, unless under special
instructions from Sublandlord.
22. Canvassing, soliciting and peddling in the Building are prohibited and
each tenant shall cooperate to prevent the same.
23. No tenant or other occupant shall cause or permit any unusual or
objectionable odors to emanate from its premises which would annoy other tenants
or create a public or private nuisance. No cooking shall be done in the premises
of any tenant except as is expressly permitted in such tenant's lease.
D-4
<PAGE>
24. Nothing shall be done or permitted in any tenant's premises, and
nothing shall be brought into or kept in any tenant's premises, which would
impair or interfere with any of the Building's services or the proper and
economic heating, ventilating, air conditioning, cleaning or other servicing of
the Building or the premises, or the use or the enjoyment by any other tenant of
any other premises, nor shall there be installed by any tenant any ventilating,
air conditioning, electrical or other equipment of any kind which, in the
reasonable judgment of Sublandlord, might cause any such impairment or
interference.
25. No acids, vapors or other materials shall be discharged or permitted to
be discharged into the waste lines, vents or flues of the Building which may
damage them. The sinks and toilets and other plumbing fixtures in or serving any
tenant's premises shall not be used for any purpose other than the purposes for
which they were designed or constructed, and no sweepings, rubbish, rags, acids
or other foreign substances shall be deposited therein. A tenant shall be liable
to Sublandlord for all damages resulting from any misuse of the fixtures by the
tenant or the tenant's servants, employees, agents, visitors or licensees. All
garbage receptacles used in the premises of any tenant shall be emptied, cared
for and cleaned by and at the expense of the tenant.
26. All entrance doors in a tenant's premises shall be left locked by the
tenant when the tenant's premises are not in use. Entrance doors shall not be
left open at any time. Each tenant, before closing and leaving its premises at
any time, shall turn out all lights and entirely shut off all water faucets.
27. Hand trucks shall not be used in the Building unless they are equipped
with rubber tires and side guards.
28. Subtenant shall not obstruct, alter or in any way impair the efficient
operation of the Building heating, ventilating and air conditioning systems and
shall not place furniture, equipment or other objects where they would interfere
with air flow. Subtenant shall not tamper with or change the setting of any
thermostats or temperature control valves in the office area portions of the
Premises.
29. [Intentionally omitted]
30. [Intentionally omitted]
31. [Intentionally omitted]
32. Sublandlord shall have the right, exercisable with 30 days' prior
notice and without liability to tenant, to change the name and street address of
the Building of which the premises are a part. The name of the Building, as
reflected in the Building's signage from time to time, may not be used for any
purpose without the prior written consent of the party or entity that is the
legal owner of such name and/or logo.
D-5
<PAGE>
33. The bulletin board or directory of the Building shall be provided
exclusively for the display of the name and location of tenants only and
Sublandlord reserves the right to exclude any other names therefrom and
otherwise limit the number of listings thereon.
34. [Intentionally omitted]
35. Sublandlord reserves the right to close and keep locked all entrance
and exit doors and otherwise regulate access of all persons to the halls,
corridors, elevators and stairways in the Building on Sundays and legal holidays
and on other days between the hours of 7:00 P.M. and 7:00 A.M., and at such
other times as Sublandlord may deem advisable for the adequate protection and
safety of the Building, its tenants and property in the Building, so long as 24-
hour, 365-day access is available to the Premises. Sublandlord shall not be
responsible or liable for damages for any error with regard to the admission to
or exclusion from the Building of any person; provided that Sublandlord allow
such person a reasonable opportunity to adequately identify himself/herself.
36. Subject to Subtenant's rights under the Sublease as specifically set
forth therein, Sublandlord reserves the right to rescind, alter or waive any
rule or regulation at any time prescribed for the Building when, in its
reasonable judgment, it deems it necessary, desirable or proper for its best
interest and for the best interests of the tenants generally, and no alteration
or waiver of any rule or regulation in favor of one tenant shall operate as an
alteration or waiver in favor of any other tenant or give rise to any liability
on the part of Sublandlord. Sublandlord shall not be responsible or liable to
any tenant for the non-observance or violation by any other tenant of any of the
rules and regulations at any time prescribed for the Building.
37. Subtenant shall neither contract for, nor employ any labor in
connection with, the maintenance, cleaning or other servicing of the Premises
without the prior consent of Sublandlord, which consent shall not be
unreasonably withheld or delayed. Subtenant shall not use (and upon notice from
Sublandlord shall cease using) contractors, services, workmen, labor, materials
or equipment that, in Sublandlord's reasonable judgment, would disturb labor
harmony with the workforce or trades engaged in performing other work, labor or
services in or about the Building or the Common Area.
The following Rules and Regulations pertain to the loading dock of the
Building (the "Loading Dock") and the freight elevator(s) and apply during
periods of construction as well as during the Lease Term:
38. The Loading Dock hours are 6:00 a.m. to 6:00 p.m., Monday through
Friday. The dock is closed on Saturday, Sunday and Legal Holidays.
39. All deliveries of furniture, equipment supplies, fixtures, merchandise,
and other materials to or from the Building and the Premises must be made
through the Loading Dock by means of the freight elevators.
D-6
<PAGE>
40. Any deliveries totaling more than two (2) elevator loads must be
coordinated through the Office of the Building at (213) 239-5202.
41. Reservation of freight elevators after hours with an operator is a
billable service. Arrangements for this service must be coordinated through the
Office of the Building.
42. Vehicles for any freight reservation may arrive 15 minutes before the
scheduled time.
43. The Loading Dock speed limit is 5 MPH.
44. The maximum height for trucks using the Loading Dock is 13'6". The
maximum length is 54'.
45. The parking limit in a dock lane is 30 minutes. After the freight has
been delivered or dropped off, vehicles must leave the dock as soon as possible.
46. Drivers who leave their vehicles must check their keys in with Building
Security. All unattended vehicles must be locked and all items secured.
47. Trucks will not be allowed to leave their motors running.
48. Drivers are to remain with their vehicles unless making a delivery in
the building.
49. Parking of vehicles for other than the purpose of loading and unloading
goods is prohibited. No private vehicles are allowed to park in the Loading Dock
at any time.
50. All accidents must be reported to the Office of the Building
immediately. An Incident Report must be filed in all cases.
51. Tenants receiving deliveries must have their address (including suite
or location number) clearly indicated on all packages and/or shipping documents.
52. Large deliveries must be delivered between the hours of 06:00 a.m. and
08:00 a.m., after 03:00 p.m. or on weekends. Contractors will be responsible for
cleaning the service area used following the delivery of construction material.
53. Unless previously approved by building management, use of the pallet
jack is prohibited.
54. Hard hats must be worn at all times in construction areas and safety
policies are strictly enforced.
D-7
<PAGE>
55. No material or equipment shall be left on the Loading Dock.
56. Unless previously approved, there will be no entering or exiting by
contractors through the lobby levels. No equipment, tools, materials etc. shall
be transported through the building lobby at any time.
57. No person will be allowed to remove property through the Loading Dock
without an authorized property removal pass from the removing floor.
58. Foremen and superintendents should make contact with the Office of the
Building and provide a phone number for their location.
59. Any delivery person found placing graffiti on any part of the property
will be charged for its clean up and will be banned from the use of the Loading
Dock.
60. Neither Building Management nor ownership shall be responsible for the
loss of items left in the dock area.
61. If for some reason a vehicle must be left unattended by the driver, the
driver must leave the vehicle keys with Building Security. Due to the size and
activity of the dock area, it is necessary for Building Security to keep the
keys of any unattended vehicles so that they may be moved in order to
accommodate other delivery vehicles. The turning in of keys is not required if
the driver remains with the vehicle.
62. Delivery personnel are responsible for the clean up of any fallen
debris or spills resulting from or occurring during pickup or delivery.
D-8
<PAGE>
EXHIBIT E
[Intentionally omitted]
E-1
<PAGE>
EXHIBIT F
[Intentionally omitted]
F-1
<PAGE>
EXHIBIT G
JANITORIAL SPECIFICATIONS
A. GENERALLY
The intent of this Exhibit G is to clarify the parties' expectations of the
character of cleaning services to be provided at the Building. It is agreed
that cleaning services shall be consistent with those that provided in
Comparable Buildings (as defined in the Sublease).
B. JANITORIAL SPECIFICATIONS FOR SUBTENANT'S PREMISES
The following services will be provided in Subtenant's office space only.
No services will be provided to switching or equipment rooms except upon
specific written agreement.
1. Nightly Services - five nights per week (Monday through Friday),
between the hours of 6:00 p.m. and 5:00 a.m., or another schedule to
be reviewed and approved by Sublandlord and Subtenant, excluding
Holidays.
a. Vacuum all carpets.
b. Dust mop all stone, ceramic tile, marble and other unwaxed or
untreated flooring with treated dust mops. Damp mop to remove
spills and water stains as required. Clean waxed or treated
flooring as necessary.
c. Dust all desks, office furniture and files and counters with
treated dust cloths.
d. Dust all telephones as necessary.
e. Empty all waste paper baskets and other trash containers. Install
or replace trashcan liners as required.
f. Remove all trash from floors to the designated trash areas.
g. Return chairs and waste baskets to proper positions.
h. Clean all water fountains.
i. Sweep and clean as necessary all service stairwells.
G-1
<PAGE>
j. Wipe clean smudged bright work.
k. Spot clean carpets, as required.
l. Clean lunchroom furniture, vending areas and exterior surfaces of
appliances.
m. Janitorial staff will have no obligation (a) to wash or otherwise
clean dishes, glasses and other utensils used for preparing food
or beverages or (b) to remove or store such dishes, glasses and
other utensils in order to clean any area, fixture or surface of
the Subtenant Premises.
2. Weekly Services
a. Dust all low reach areas, including chair rungs, structural and
furniture ledges, base boards, wood paneling, molding, handrails
and railings, etc.
b. Wipe clean and polish all bright work.
c. Sweep all stairways throughout Building.
d. Dust window frames and sills.
e. Remove all fingermarks and smudges from doors, partitions, walls,
woodwork, window frames, mullions and ledges, wall switches and
outlet plugs on floors and walls.
3. Quarterly Services
a. Dust all high reach areas, window sills, including tops of door
frames, structural and furniture ledges, air conditioning
diffusers and return grills, tops of partitions, picture frames,
etc.
b. Dust building standard Venetian blinds.
c. Wash all stone, ceramic tile, marble and other unwaxed or
untreated flooring.
d. Wash floors in public stairwells.
4. Annual Services
a. Interior glass shall be cleaned once per year.
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<PAGE>
Note: The cleaning of partition glass within the Premises shall be
done at the sole cost of Subtenant, and not as a part of regular
janitorial services.
5. Specialty for Raised Flooring
The following will be provided only upon request by Subtenant and at
an additional charge therefor.
Underfloor cleaning to include:
a. Remove all floor tiles.
b. Remove dust, dirt and debris
c. Clean all tile rests.
d. Wipe and clean all power cables.
e. Vacuum and clean the underfloor.
f. Vacuum and clean channels and supports.
g. Re-align all tiles.
All work to be performed under the supervision of janitorial project
manager. Notification of security and engineering is required to
prevent initiation of false fire alarms.
C. RESTROOM SPECIFICATIONS
1. Nightly Services - five nights per week (Monday through Friday),
excluding Holidays.
a. Restock all restrooms with supplies including paper towels,
toilet tissue, seat covers and hand soap, as required.
b. Restock all sanitary napkin dispensers as required.
c. Wash and polish all mirrors, dispensers, faucets and bright work
with disinfectant cleaners.
d. Wash and sanitize all toilet bowls, toilet seats, urinals and
sinks with disinfectant cleaner.
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<PAGE>
e. Mop all restroom floors with disinfectant solution.
f. Empty all waste and sanitary napkin receptacles.
g. Remove all restroom trash to the designated trash areas.
h. Spot clean fingerprints, marks and graffiti from walls,
partitions and wall switches as required.
2. Monthly Services
a. Wash and polish all wall tile and stall surfaces.
b. Machine scrub restroom floors with disinfectant solution.
c. Wash waste cans and receptacles.
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EXHIBIT H
BUILDING CONSTRUCTION RULES
The following are general rules and regulations governing all work in the
Building, including Subtenant's Work and any Alterations (collectively,
"Subtenant's work"). The manager for the Building ("Building Manager") will be
Sublandlord's representative in coordinating and supervising Subtenant's work.
Nothing contained in these Construction Rules shall (i) create any contractual
obligations for Sublandlord or Building Manager in connection with Subtenant's
work or (ii) in any way affect, modify or supersede any of the terms set forth
in this Sublease. The Construction Rules may be modified and supplemented from
time to time as Sublandlord may reasonably require for the proper monitoring and
control of construction at the Building.
1. Neither Building Manager nor Sublandlord will be responsible for any
material, equipment, tools or other property belonging to Subtenant's general
contractor for Subtenant's work, or any subcontractors, employees, agents or
others associated in any way with Subtenant's work.
2. The Building is equipped with a freight elevator serving all floors. The
contractor and all construction personnel must use only the freight elevator for
transportation of workers, materials and equipment. No contractor or any
construction personnel, nor any materials or equipment, are permitted in, nor
shall any of the foregoing be transported in, the passenger elevators. If the
contractor or any construction personnel are found in the passenger elevators,
the contractor or subcontractor may be removed from the job and the elevators
will be immediately inspected for damage. All damage resulting from such use
shall be corrected by Building Manager at Subtenant's expense.
3. The contractor shall furnish Building Manager with a list of
subcontractors prior to commencement of Subtenant's work. This list will include
phone numbers and contacts for the contractor and each subcontractor, including
home and emergency telephone numbers. Any persons not on the approved contractor
list will be denied access to the Premises. NO EXCEPTIONS. Access badges,
authorizing access to the Premises, will be issued by Building Manager to all
personnel designated by the contractor on such list. The contractor and all
construction personnel working over the weekend and after the normal hours shall
provide Building Manager with a list of workers 24 hours prior to the worker
being on site or they will be denied access. The list should also include an
estimated time the contractor and all construction personnel will be working,
the location of the work to be done, the number of employees and the working
supervisor who will be present in the Building during the performance of the
work. Any deviation will require Building Manager's approval.
4. Unless Building Manager requires otherwise, all contractors and other
construction personnel shall enter and exit through the loading dock or main
lobby at all times. Additionally, all contractors and subcontractors shall sign
in and sign out at the security
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desk. Building security personnel have the right to inspect all tool boxes of
any and all construction personnel upon departure from the Building. Loading
dock and freight elevator procedures and hours will be provided by Building
Manager.
5. When working on a tenant-occupied floor, all deliveries are to be
accepted, moved and delivered to the contracted suite by 7:30 a.m. All equipment
and material deliveries shall be made at the loading dock or service entry
between the hours of 6:00 p.m. and 6:00 a.m. Monday through Friday or all day
Saturday and Sunday via a freight reservation. If deliveries are to be made at
other times, prior approval must be obtained from Building Manager. At no other
time will material be transported through the Building lobby or public areas
unless specifically authorized in writing. When making deliveries, reinforced,
nonstaining masonite board acceptable to Building Manager must be installed by
the contractor (in a manner approved by Building Manager) to protect all wall
and floor finishes, including the freight elevator. The contractor and
subcontractors shall consult with Building Manager for complete rules and
procedures relating to corridor, elevator and public area protection. All
contractors and other construction personnel shall leave the Building lobby and
other public areas in a neat and clean condition consistent with other
Comparable Buildings (including, without limitation, sweeping and mopping the
lobby floors, dusting all furniture in the lobby and otherwise removing all
debris and dust) and otherwise in a condition satisfactory to Building Manager
and Sublandlord. Subtenant shall be responsible for all costs incurred by
Building Manager if this clean-up work is not performed satisfactorily.
6. The contractor must notify Building Manager prior to conducting any of
Subtenant's work that will require ceiling access, specifying the areas that
will be worked on and the length of time needed to complete or perform work in
the space.
7. No drilling, hammering, loud noise, vibrations or disturbances of any
nature will be allowed during the business day (i.e., from 7:00 a.m. to 7:00
p.m., Monday through Friday, and from 9:00 a.m. to 2:00 p.m. on Saturday).
8. The contractor shall keep all spaces affected by Subtenant's work clean
at all times, including all public areas such as corridors, restrooms, janitor's
closets, etc. The contractor shall erect and maintain dust barriers at all exit
areas of construction and proper dust covers (including walk-off mats) on the
floors at exit areas of construction and at the doors to the freight elevator.
The contractor is responsible for taking all extra precautions to safeguard the
floors, walls and/or elevators from damage which may be caused by the movement
of materials, equipment or debris.
9. Sprinkler shut down and construction procedures:
a. The contractor or the subcontractor requiring the shutdown and
draining of the fire sprinkler system on any floor must follow
the Building's procedures for this process.
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b. All work performed on fire sprinklers and/or fire standpipes must
be scheduled with The Building Chief Engineer at least 24 hours
in advance.
c. Isolation and draining of the sprinkler system must be done by
the Building Engineering Department.
d. Prior to start of work, the contractor must report to Building
Manager on the loading dock, and the contractor will be given
instructions and assistance. Building supplied shut-off tags are
to be placed on all closed valves.
10. Construction personnel shall at all times maintain the highest level of
project cleanliness. All construction waste and debris shall be removed via the
freight elevator or stairs to the loading dock on a daily basis and shall not be
allowed to accumulate or produce a fire hazard. No construction waste or debris
may be placed in the Building dumpster/compactor. The contractor and all
construction personnel shall provide for removal of waste and debris from the
Building at their own expense, and shall dispose of all waste and debris in an
environmentally safe manner and in full compliance with all laws and ordinances.
If a dumpster is required (space allowing), the location must be approved by
Building Manager. If the contractor fails or refuses to keep such spaces free of
accumulated waste, debris, dust, etc., Building Manager reserves the right to
enter such spaces (including the Premises) and to clean and remove the debris,
dust, etc. at Subtenant's expense. In addition, all public areas, i.e.,
corridors, restrooms, janitor's closets, etc. shall be maintained and kept free
of construction debris, dust, etc.
11. Removal of combustible objects such as cardboard, empty paint cans,
paint rags and other combustible materials shall occur on a daily basis; such
objects shall be disposed of in an approved receptacle and in an environmentally
safe manner in full compliance with all laws and ordinances. The storage of all
flammable liquids (paint, lacquer thinners, paint thinners, etc.) shall be in UL
approved fire rated (for flammable liquids) storage cabinets or the liquids are
to be removed from the Building daily. If such liquids are to be stored in the
proper storage cabinets, Building Manager shall be notified of their existence,
location and quantity. Upon completion of Subtenant's work, all remaining
flammable liquids shall be removed from the Building and disposed of in an
environmentally safe manner in full compliance with all laws and ordinances. Any
flammable or hazardous materials (i.e. paint) may only be stored on the Premises
with permission of Building Manager who shall designate an area for such
storage. No gasoline operated devices (e.g., concrete saws, coring machines,
welding machines, etc.) shall be permitted within the Building. All work
requiring such devices shall be performed by means of electrically operated
substitutes. All approved gas and oxygen canisters shall be properly chained and
supported to eliminate all potential hazards. At the completion of use, said
containers shall be promptly removed from the Building.
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12. All electrical and telephone rooms on construction floors are to be
kept clean and orderly at all times and must be locked at the end of each
workday. These rooms cannot be used as storage for tools or supplies. At the end
of each day, all garbage and wire remnants are to be removed and a clear pathway
maintained to all panels. Initial access to electrical and telephone equipment
rooms must be arranged through Building Manager. Keys will be issued by Building
security. Doors to electrical and telephone equipment rooms may not be propped
or blocked open in any way. Subtenant equipment may not be installed in
electrical rooms. All panels are to be replaced and properly labeled upon
completion of work. All penetrations through floors, walls and ceilings shall be
properly fire rated upon completion.
13. Upon completion and termination of all electrical circuits, and before
energizing, the contractor must notify the Building's engineer so that a neutral
to ground bonding test can be performed.
14. Specific restrooms will be designated for use by construction
personnel. The contractor is responsible for maintenance while using such
designated restrooms. Upon completion of Subtenant's work, the contractor will
be responsible for restoring all designated restrooms to their original state.
Anyone found using restrooms other than those specified, or anyone using the
janitorial closets, will be subject to dismissal. No one is permitted to use the
janitorial closets without Building Manager permission. Janitors' slop sinks
cannot be used for disposal of flammable material, hazardous waste or drywall.
15. Any use of telephone room chase way must be approved in advance by the
Building's engineer.
16. Construction personnel are not permitted to block open stairway doors
and electrical room doors. These doors provide the fire protection required by
code. Continued violation of this provision shall be subject to a $300 fine.
Janitorial doors shall be kept closed at all times on occupied tenant floors.
During construction of Subtenant's work, stairwells and fire doors leading to
stairwells may not be blocked with materials, equipment, trash or debris of any
kind. Fire doors may not be propped or blocked open in any fashion or in any
way. Keys will be issued by Building security. Stairwells may not be used for
the storage of any equipment, materials, trash or debris of any kind and are to
be kept clear at all times. During construction of Subtenant's work, air
conditioning smoke dampers may not be propped open.
17. All smoke detectors in the construction areas are to be protected
during construction, demolition, sweeping, clean-up or other operations that may
cause considerable dust or smoke. At the end of each work day, after the dust
has settled, each smoke detector that has been protected during the day is to be
uncovered to ensure proper operation.
18. Each contractor and all construction personnel are to take adequate
precautions to prevent the accidental tripping of the fire alarm system. False
alarms shall be fined at
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$400 per offense. All management and other costs connected with resetting false
alarms initiated by the contractor or any construction personnel will be charged
to the Subtenant's account. At completion of every work day, the fire-life-
safety system shall be left trouble and alarm free. The contractor must notify
the Building's engineer of said status before leaving the job site.
19. The contractor must provide and keep available at least four currently
certified 10 pound ABC fire extinguishers on each floor during construction.
They are to be placed inside the controlled area, and all workers are to be
informed as to their location and proper use. In addition, construction
personnel shall be informed by their supervisors of the means of egress from the
floor in case of an emergency, location of fire pull stations and locations of
wet stand pipes.
20. All "J" boxes and fire-life-safety conduits that are installed during
the construction of Subtenant's work must be marked with red spray paint. All
fire-life-safety wiring must be done strictly in accordance with Building
specifications (contact the Building's engineer for such wire specifications).
Failure to adhere to the required color code may result in costly, time-
consuming rewiring. Only life-safety contractors designated or approved by
Building Manager will be allowed to install and/or connect life-safety devices
(i.e., speakers, pull stations and smoke detectors).
21. Prior to core drilling, the contractor must inform Building Manager of
the locations of the core drill for the review and approval of the Building's
engineer. All core drills are to be located from the underside to prevent damage
to any of the exposed fire-life safety conduits on the underside of the decking.
If cores are to be wet-drilled, slurry run-off shall be contained and must not
be allowed to reach tenant areas below the construction. Any slurry that does
migrate to the floor below shall be cleaned by the contractor at its expense.
Coring hours will be 8:00 p.m. to 7:00 a.m. Any penetrations made in steel
structural beams are to be approved in advance by the Building's engineer and
permitted by government authorities, if applicable.
22. Any damage sustained during construction of Subtenant's work to
electrical rooms, telephone rooms, storage closets, janitor closets, restrooms,
or freight lobbies is the responsibility of the Subtenant. A list of pre-
existing damage to these areas should be submitted to Building Manager, and
should be acknowledged by Building Manager, prior to commencement of Subtenant's
work.
23. The contractor must notify Building Manager at least 24 hours prior to
commencing any painting or varnishing. Any spray painting with solvent based
paints must be preapproved by the Los Angeles Fire Department. Painting of
elevator doors is to be supervised by the elevator maintenance company
appropriate to the Building.
24. Building Manager shall at all time have access to the areas in which
Subtenant's work is ongoing regardless of its state, preparation and progress.
Building
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Manager reserves the right to inspect work, stop work and/or have a worker
removed from the job at any time during Subtenant's work if these Rules and
Regulations are not being followed.
25. The Building shall provide electrical service consisting of 120V
outlets with 15A/20A capacity. Any power requirements in excess of that listed
per the Sublease shall be the responsibility of the contractor. The contractor
shall provide temporary electrical devices within the Premises for its
subcontractors' use. The contractor will not be permitted to run extension cords
through public space. The contractor shall use reasonable measures to minimize
energy consumption in the construction area when possible. The Building shall
pay for normal electrical consumption during the construction process. All
lights and equipment must be turned off at the end of the contractor's business
day. If the contractor or any construction personnel leave lights or equipment
on during off hours, Building Manager reserves the right to receive from
Subtenant just compensation for excessive electrical consumption.
26. The contractor and each subcontractor shall implement and maintain an
accident prevention program and an employee safety training program. Proof of
compliance with CALOSHA Rule SB198 must be submitted to Building Manager. All
persons on the job, regardless of whose direct payroll they are on, are required
to respond to safety instructions from the contractor's supervisor. Persons who
do not respond shall be removed from the job.
27. The contractor shall cover all return air transfers when working next
to a tenant-occupied space to control the transmission of dust and dirt.
Covering must be removed at the completion of daily construction. The contractor
shall keep all tenant entrance and exit doors closed to restrict the movement of
dust or dirt and shall close-off temporary openings with polyurethane approved
by the Los Angeles Fire Department. Due to local fire codes, no openings may be
made on a tenant-occupied floor to the corridor unless materials are being
delivered. All HVAC filters in fan rooms shall also be delivered in operable
condition at time of completion (thus temporary filter should be added to the
existing filter). Pre-filters should be installed over all return air openings
until finished floors are installed. If Building filters or equipment require
replacement or cleaning due to construction dust, the contractor will be
charged. The contractor shall verify with the Building's engineer prior to
installation of pre filters.
28. Upon completion of Subtenant's work, the contractor shall submit
complete sets of marked-up as-built drawings and record documents to the
architect (or space planner) for approval. Upon approval, these shall be
forwarded to Building Manager. In addition, Building Manager shall be allowed to
obtain, at no cost to Subtenant or the contractor, copies of manuals for each
item of equipment and apparatus furnished in connection with the Subtenant's
work.
29. At the completion of Subtenant's work, the contractor and each
subcontractor, along with Building Manager's Building maintenance personnel,
shall direct the checkout of
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utilities, operation systems and equipment for readiness, shall assist in their
initial start-up and testing by subcontractors and shall provide general
familiarization training for Building Manager personnel during the checkout and
startup period.
30. No tobacco smoking or chewing will be permitted in occupied or public
areas. Smoking is allowed only in designated areas approved by Building Manager.
It is understood that Building Manager, in its sole discretion, may choose not
to designate any approved areas in the Building for smoking.
31. No radios or other non-functional sound producing equipment will be
permitted on any floor (unless required by code).
32. Respect must be shown to the Building tenants at all times. Rude and
obscene behavior, including foul and abusive language, will be not be tolerated.
Offenders will be asked to remove themselves from the Premises and shall not be
permitted to return.
33. All work performed within the Building's conduits, risers and pathways
(including, without limitation, cabling or wiring to the rooftop of the
Building), work on the rooftop and work which affects or may reasonably be
expected to affect Building systems (such as plumbing, electrical, HVAC, fire-
life-safety, emergency power or the like) must be performed by bonded
contractors or subcontractors specifically approved in advance by Sublandlord.
Upon request, the Building Manager will provide Subtenant with a list of
approved contractors or subcontractors for certain types of projects. Access to
the rooftop shall be scheduled in advance with the Building Manager. A Building
engineer shall accompany all persons performing work or inspecting equipment on
the rooftop, including in the case of emergency, except as otherwise agreed in
Subtenant's Sublease. If rooftop access is required during other than Building
Hours, Subtenant shall pay the cost of the Building's engineer for the time
spent accompanying Subtenant's contractor or other agent to the rooftop.
34. No one shall be allowed to endanger the Building, its premises or its
occupants in any manner whatsoever. If such a situation occurs, the contractor,
any subcontractor, supplier, etc., shall immediately take steps to correct and
eliminate the hazardous condition. In the event that the contractor's personnel
fail to perform in a satisfactory manner, the Building Manager reserves the
right to immediately take steps to remedy the hazard at the contractor's
expense.
35. All corrective work or work performed in occupied spaces at any time
must be scheduled and approved by Building Manager and must be immediately
cleaned up by the workmen prior to their leaving the job or at the end of the
business day if the project is on going. The contractor shall be responsible for
all costs incurred by Building Manager if this clean-up work is not performed
satisfactorily.
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36. All traffic control, flagmen, barricades, etc., as may be necessary or
required by any agency having jurisdiction shall be the sole responsibility of
and at the expense of the contractor.
37. Subtenant shall contact the Building Manager to schedule work on the
following Building systems: (Any disruption of services will be scheduled at
Building Manager's discretion.)
A. Domestic water.
B. Fire alarm or speaker.
C. Electrical tie-ins to Base Building or the addition of equipment
to any suite other than the subtenant suite except subpanels
located within the subtenant premises.
D. Sprinkler system.
E. Any work that will take place outside the demised subtenant
premises.
F. Any tie-ins that may affect other subtenant spaces.
If a Building alarm is turned off for the contractor's work, the contractor must
notify Building Manager upon completion so the system can be tuned back on as
soon as possible.
38. No graffiti or vandalism will be tolerated. Any individual caught in
the act shall be immediately removed from the Premises and will not be allowed
to return. In addition, all repairs will be at the contractor's expense.
39. Wet paint signs must be posted in all public areas when appropriate.
40. The contractor/subcontractors may park in designated spaces only. Any
vehicles found in unauthorized spaces will be subject to towing.
41. No contractor shall be allowed to start any work in the Building
without having a current certificate of insurance on file with Building Manager.
The contractor must keep current insurance certificates on all subcontractors.
Any contractor or subcontractor performing work found not to have current
insurance will be immediately ordered off the Premises. General contractors
shall list the following as additionally insured:
Wells Fargo Bank. N.A.
----------------------
Jones Lang Wootton
------------------
42. The contractor/subcontractors shall obtain and pay for a City of Los
Angeles business license.
43. The contractor/subcontractors shall obtain at their expense, all
permits and licenses necessary to perform the work and shall obtain at their
expense, all permits and licenses necessary to perform the work and shall comply
will all laws, ordinances, State and
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Federal government regulations, and all rules or regulations of any board or
commission or other duly qualified body.
44. All work shall be performed in accordance with all applicable laws and
the rules and regulations of all City, State and Federal agencies having
jurisdiction over the work.
45. No work is to be performed, nor materials stored in public areas. No
staging of trucks or materials will be allowed in areas which may affect traffic
flow to the surrounding properties or ingress and egress to Building entrances,
fire lanes, reserved parking areas, etc.
46. Rubber wheels are required on all vehicles transporting materials in
the Building.
47. All equipment and material will be designed and attached for seismic
loading in accordance with governmental agencies having jurisdiction over the
work.
48. Material storage shall be limited to the following area of the tenant
floor: intended construction area.
49. The contractor, or its agent, shall provide safety barricades or cables
at floor penetrations.
50. Subtenant shall take such action as is necessary to confirm that all
contractors, subcontractors and other construction personnel are aware of these
construction rules, including, if necessary, requiring each to sign a copy
hereof.
The Loading Dock and freight elevator rules and regulations contained in
Exhibit D (Rules and Regulations) shall also apply to periods of construction.
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EXHIBIT I
BUILDING MEASUREMENT GUIDELINES
THE GARLAND CENTER, 1200 WEST SEVENTH STREET, LOS ANGELES
"Useable Area" shall mean the useable square footage of space to be
measured, calculated pursuant to the standards set forth in ANSI Z65.1-1996,
promulgated by the Building Owners and Managers Association.
"Rentable Area" shall mean the product of (a) the Useable Area of the
space to be measured, calculated as described above, times (b) 1.15.
The Useable Area of the Premises, Rentable Area of the Premises and
Subtenant's Share will be calculated and agreed upon prior to execution and
delivery of this Sublease.
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Exhibit 12.1
STATEMENT REGARDING COMPUTATION OF RATIOS
<TABLE>
<CAPTION>
1996 Income
Loss 1Q97 2Q97 3Q97 4Q97 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Income (Loss) $(405,301) $(389,601) $(768,366) $(440,555) $ 31,669 $(1,566,853)
Plus fixed charges
interest on debt - 135 3,562 22,314 102,060 128,070
Amortization of
deferred finance
charges - - - - - -
Estimated interest
component of
rental expenses - - 4,173 52,836 52,834 109,843
--------- --------- --------- --------- -------- -----------
Numerator $(405,301) $(389,466) $(760,631) $(365,405) 186,563 $(1,328,941)
Divided by fixed
charges - 135 7,735 75,150 154,894 237,913
Ratio of earnings
to fixed charges - - - - 1.20 -
</TABLE>
