<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1998
REGISTRATION STATEMENT NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
TELTRUST, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7389 06-1513427
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
6322 SOUTH 3000 EAST
SALT LAKE CITY, UTAH 84121
(801) 535-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
--------------
MARC B. COHEN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
TELTRUST, INC.
6322 SOUTH 3000 EAST
SALT LAKE CITY, UTAH 84121
(801) 535-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
--------------
COPIES TO:
DAVID F. DIETZ, P.C. MICHAEL E. MICHETTI, ESQ.
JOHN B. STEELE, ESQ. CAHILL GORDON & REINDEL
GOODWIN, PROCTER & HOAR LLP 80 PINE STREET
EXCHANGE PLACE NEW YORK, NEW YORK 10005
BOSTON, MASSACHUSETTS 02109-2881 (212) 701-3000
(617) 570-1000
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
--------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] -
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] -
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] -
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE PRICE FEE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value.................. 3,680,000 shares $17.00 $62,560,000 $18,455
</TABLE>
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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
SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 STATES IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated April 29, 1998
PROSPECTUS
3,200,000 SHARES
COMMON STOCK
-------------
Of the 3,200,000 shares of common stock, par value $.01 per share ("Common
Stock"), of Teltrust, Inc. ("Teltrust" or the "Company") offered hereby (the
"Offering"), 700,000 shares are being sold by certain stockholders of the
Company (the "Selling Stockholders"). The Company will not receive any of the
proceeds from the sale of shares of Common Stock by the Selling Stockholders
pursuant to the Offering. See "Use of Proceeds" and "Principal and Selling
Stockholders."
Prior to the Offering, there has been no public market for the Common Stock.
It is currently estimated that the initial public offering price of the Common
Stock will be between $15.00 and $17.00 per share. For information relating to
the factors to be considered in determining the initial offering price to the
public of the Common Stock, see "Underwriting."
Application has been made to list the Common Stock on the Nasdaq National
Market ("Nasdaq") under the symbol "TTST."
-------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDER
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.......................... $ $ $ $
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Total(3)........................... $ $ $ $
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- --------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters (as defined) against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Underwriting."
(2) Before deducting expenses estimated at $900,000, which will be paid by the
Company.
(3) The Company and certain of the Selling Stockholders have granted the
Underwriters an option, exercisable within 30 days of the date hereof, to
purchase up to 123,800 and 356,200 additional shares of Common Stock,
respectively, at the Price to the Public less Underwriting Discounts and
Commissions, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to the Public, Underwriting Discounts
and Commissions, Proceeds to Company and Proceeds to the Selling
Stockholders will be $ , $ , $ and $ , respectively. See
"Underwriting" and "Principal and Selling Stockholders."
-------------
The shares of Common Stock are being offered by the several Underwriters
when, as, and if delivered to and accepted by the Underwriters against payment
therefor and subject to various prior conditions, including their right to
reject orders in whole or in part. It is expected that the delivery of the
shares of Common Stock offered hereby will be made in New York, New York or
through the book-entry facilities of The Depository Trust Company on or about
, 1998.
-------------
LEHMAN BROTHERS WHEAT FIRST UNION
,1998
<PAGE>
[DESCRIPTION OF ART WORK]
Four panels comprising front cover (designated C2); a fold-out with 2 panels
(designated C2a and C2b); and the inside back cover (designated C3).
C2--corporate logos or names of major customers occupies top quadrant;
bottom quadrant depicts inset color photo of corporate headquarters with
company logo.
C2a & C2b--2-page spread shows map of United States with colored lines and
symbols representing the company's network facilities and switching centers.
Map is surrounded by 7 inset photographs showing images of call center, switch
room, live agent, prepaid calling cards, graphic depictions for third-party
verification and directory assistance and public pay telephone.
C3--Top quadrant lists markets served; bottom quadrant contains the
Company's commitment statement: "Teltrust is dedicated to: integrity in our
relationships with clients, employees and vendors; excellence in customer
service; responsiveness to the needs of the industry and the community; and
quality in all operations."
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED (THE "EXCHANGE ACT"). SEE "UNDERWRITING."
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, references in this Prospectus to "Teltrust" or the "Company" refer
collectively to Teltrust, Inc. and its subsidiaries, and all information
presented in this Prospectus assumes no exercise of the Underwriters' over-
allotment option. See the "Glossary" at page 63 for definition of certain
technical terms used in this Prospectus.
THE COMPANY
Teltrust is a leading independent outsource provider of a broad range of
enhanced call processing and calling card services to the domestic
telecommunications industry. The Company believes that it offers the most
comprehensive suite of services of any independent outsource provider in its
industry. This diversified suite of services includes call completion, national
directory assistance and third-party verification services in addition to
calling card services. Teltrust serves its customers through state-of-the-art
technology and switch-based call processing platforms and, as of March 1998,
more than 1,000 employees. The Company's customers include regional Bell
operating company ("RBOC") affiliates (such as BellSouth Long Distance and
BellSouth Public Communications), pay telephone and hospitality aggregators
(such as Peoples Telephone Company, AMI Telecommunications and Global Net),
interexchange carriers ("IXCs") (such as US Long Distance, WorldCom and LCI
International), and other large telecommunications resellers or users (such as
TON Services and Eastern Communications Network). The Company has also recently
established contractual relationships with affiliates of Ameritech Corporation
(Ameritech Communications and Ameritech Services) and emerging
telecommunications companies including competitive local exchange carriers
("CLECs") (such as Nextlink and Cox Com), wireless providers (such as
Centennial Cellular, Omnipoint Communications and PowerTel) and international
carriers (such as Justice Technology Corp. and Star Telecommunications). Many
of the Company's customers purchase a number of the Company's services under
multi-year contracts and utilize Teltrust to provide complex outsourcing
solutions. During the quarter ended March 31, 1998, Teltrust processed over 21
million call processing transactions and decremented more than 17.6 million
domestic minutes for its prepaid calling card customers.
A brief description of Teltrust's enhanced call processing and calling card
service offerings is as follows:
CALL PROCESSING SERVICES
CALL COMPLETION SERVICES. Teltrust provides call completion services to
RBOCs, IXCs, other local exchange carriers ("LECs"), CLECs, wireless providers,
pay telephone providers, hospitality service providers and international
carriers. Call completion services include calling card calling, collect
calling and third-party billed calling. A majority of calls handled are branded
in the names of Teltrust's customers. The Company also offers STATUS(TM), a
proprietary refund and repair service.
NATIONAL DIRECTORY ASSISTANCE SERVICES. Teltrust provides national directory
assistance services to RBOCs, IXCs, LECs, wireless providers and other
telecommunications resellers. As part of its national directory assistance
services, the Company offers enhanced features such as direct call connection,
reverse searches and standard industrial classification code searches.
THIRD-PARTY VERIFICATION SERVICES. Teltrust provides third-party verification
services to RBOCs, IXCs, LECs, CLECs, international carriers and
telecommunications resellers. These services allow Teltrust customers to verify
consumer orders for changes in local and long distance telephone service and
public utility service in compliance with regulations promulgated by the
Federal Communications Commission ("FCC") and many state public utility
commissions ("PUCs"). These regulations were implemented to combat "slamming"
(the practice of changing a consumer's telecommunications or other utility
provider without such consumer's knowledge).
CALLING CARD SERVICES
The Company provides calling card programs and platform services to RBOCs,
IXCs, LECs, CLECs, wireless providers, major retail operations and other firms
to allow such customers to sell prepaid and postpaid
3
<PAGE>
calling card products to the general public. Teltrust's customers utilize the
Company's advanced point-of-sale activation technology and can offer users of
calling cards serviced by Teltrust access to numerous enhanced services,
including voice mail, paging, faxing and conference calling.
INDUSTRY
During the 1990s, changes in the regulatory environment and the emergence of
new technologies have created a growing and fiercely competitive environment in
the telecommunications industry. According to FCC reports, the
telecommunications market in the United States, including local, long distance,
wireless and prepaid calling, generated revenues of more than $220 billion in
1996. As new participants enter the market, telecommunications companies,
including RBOCs, IXCs, LECs, CLECs and wireless providers, are evaluating their
existing services and seeking opportunities that will allow them to compete
more effectively, reduce operating costs, and increase usage, market
penetration and customer retention. Many of these companies are seeking access
to call completion services, national directory assistance services and calling
card platforms which are considered essential by end-users. Partnering with an
outsource provider, such as Teltrust, allows telecommunications companies to
bring to market new value-added products and services in a more expeditious and
cost-effective manner than by building the necessary infrastructure to provide
such services internally and enables telecommunications companies to focus on
their core competencies and strategies.
GROWTH STRATEGY
Teltrust believes it is well-positioned to capitalize on the changes in the
telecommunications industry by utilizing its competitive advantages as an
experienced independent outsource provider of a broad range of enhanced call
processing and calling card services. Teltrust's distinct operational advantage
is its focus on providing enhanced call processing and calling card services on
a wholesale basis to its customers. This emphasis has allowed the Company to
avoid competing in the core businesses of its customers and enables Teltrust to
concentrate on offering and expanding a diversified suite of enhanced call
processing and calling card services. Other advantages include the Company's
use of a proven operating infrastructure and technology that can be customized
to respond to customer needs, a commitment to excellence in customer service
and a demonstrated ability to meet the performance expectations of
sophisticated customers with demanding and changing standards.
Teltrust's goal is to be the premier provider of outsourced enhanced call
processing and calling card services. The key elements of the Company's focused
growth strategy are (i) cross-selling its current service offerings to existing
customers, (ii) pursuing customers in new and existing markets, (iii)
developing new services, (iv) leveraging its operating structure to enable the
Company to expand its business and meet the needs and requirements of current
and future customers, (v) maintaining its dedication to high levels of customer
satisfaction and (vi) considering strategic acquisitions.
QUEST ACQUISITION
On December 31, 1997, the Company completed the acquisition of Quest
International Group, Inc. and its affiliated companies ("Quest"), a pioneer in
the United States prepaid calling industry. This acquisition enabled the
Company to combine its existing calling card operations with Quest's
proprietary technology, innovative management and marketing team. Teltrust
believes this acquisition will enable it to offer its customers a broader range
of services and position it for additional growth in its calling card services
business.
Teltrust was incorporated under the laws of Delaware in 1998, and its
predecessor was incorporated under the laws of Utah in 1986. The Company's
principal executive offices are located at 6322 South 3000 East, Salt Lake
City, Utah, 84121, and its telephone number is (801) 535-2000.
"Teltrust", "Quest" and the Company's logo are trademarks of the Company and
are used throughout this document as such. All other trademarks and trade names
referred to in this Prospectus are the property of their respective owners.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock Offered
By the Company..................................... 2,500,000 shares
By the Selling Stockholders........................ 700,000 shares
Total.......................................... 3,200,000 shares
-------
Common Stock to be Outstanding after the Offering(1).. 12,695,023 shares
Use of Proceeds....................................... To repay existing
indebtedness; to finance
capital expenditures, to
fund working capital,
other general corporate
purposes, new business
opportunities and
possible strategic
acquisitions. See "Use
of Proceeds."
Proposed Nasdaq National Market Symbol................ TTST
</TABLE>
- --------------------
(1) Excludes: (i) an aggregate of 1,183,799 shares of Common Stock issuable
upon the exercise of outstanding stock options under the Company's 1993
Employee Stock Option Plan (the "1993 Option Plan") at a weighted average
exercise price of $5.24 per share at December 31, 1997 and (ii) 864,201
additional shares of Common Stock available for future grants under the
1993 Option Plan and the Company's 1998 Stock Option and Grant Plan (the
"1998 Option Plan"). See "Management--Stock Option Plans."
Unless otherwise indicated, all information presented in this Prospectus
assumes the conversion of all outstanding shares of the Company's Series A
Preferred Stock, par value $.01 per share ("Series A Preferred Stock"), into
shares of Common Stock immediately prior to the closing of the Offering and
gives effect to the acquisition of Quest on December 31, 1997 in a transaction
accounted for as a pooling-of-interests. Teltrust was incorporated under the
laws of the State of Delaware in 1998. Following its formation, Teltrust, Inc.
entered into a merger transaction with Teltrust Holdings, Inc., a Utah
corporation formed in 1986 and Teltrust, Inc.'s predecessor ("Holdings"), and a
wholly owned subsidiary of Teltrust, Inc. As a result of this merger, Holdings
became a wholly owned subsidiary of Teltrust, Inc. and all of the stockholders
of Holdings became stockholders of Teltrust. Prior to this Offering, Teltrust
held no assets other than its capital stock in Holdings.
5
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The following table sets forth summary consolidated financial and operating
data of the Company for the periods indicated. The Company's summary
consolidated historical financial data as of December 31, 1997 and for the
years ended December 31, 1995, 1996 and 1997 have been derived from audited
financial statements of Teltrust, Inc. and subsidiaries, as audited by Arthur
Andersen LLP, independent public accountants. The summary consolidated
historical financial data for the years ended December 31, 1993 and 1994 have
been derived from the audited financial statements of Teltrust, Inc. and
subsidiaries and the unaudited financial statements of Quest for those years
(as combined before restatement for the pooling-of-interest accounting
treatment). The summary data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and the notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1993(1) 1994(1) 1995 1996 1997
------------------------------------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE, EMPLOYEE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Operating revenues:
Call processing
services............. $ 19,796 $ 26,188 $ 29,290 $ 33,885 $ 46,222
Calling card
services............. 33 1,716 4,572 7,216 10,782
----------- ----------- ----------- ----------- -----------
Total operating
revenues........... 19,829 27,904 33,862 41,101 57,004
Costs of operating
revenues.............. 11,519 17,478 23,486 29,301 45,473
----------- ----------- ----------- ----------- -----------
Gross profit........... 8,310 10,426 10,376 11,800 11,531
Operating expenses..... 8,517 11,987 14,001 13,615 23,712
----------- ----------- ----------- ----------- -----------
Operating income
(loss)................ (207) (1,561) (3,625) (1,815) (12,181)
Other expense, net..... (90) (274) (629) (732) (1,037)
Benefit from (provision
for) income taxes..... 241 110 783 20 (5)
----------- ----------- ----------- ----------- -----------
Income (loss) from
continuing
operations............ (56) (1,725) (3,471) (2,527) (13,223)
Discontinued
operations, net of
income taxes.......... 295 296 1,380 -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)...... $ 239 $ (1,429) $ (2,091) $ (2,527) $ (13,223)
=========== =========== =========== =========== ===========
BASIC AND DILUTED NET
INCOME (LOSS) PER
COMMON SHARE(2):
Income (loss) from
continuing
operations............ $ (0.01) $ (0.48) $ (0.80) $ (0.57) $ (2.47)
Discontinued
operations............ 0.06 0.08 0.32 -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)...... $ 0.05 $ (0.40) $ (0.48) $ (0.57) $ (2.47)
=========== =========== =========== =========== ===========
Basic and diluted
weighted average
number of common
shares outstanding.... 5,031,054 3,579,005 4,339,117 4,641,999 5,843,313
OTHER OPERATING DATA:
Employees.............. 168 216 574 630 892
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
------------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................ $ (6,041) $ 8,159
Total assets......................................... 25,918 50,118
Long-term debt (including capital lease obligations),
net of current portion.............................. 14,407 2,307
Stockholders' equity (deficit)....................... (5,659) 30,641
</TABLE>
- --------------------
(1) The financial data for 1993 and 1994 is derived from the audited financial
statements of Teltrust, Inc. and subsidiaries which included $14,302 and
$20,029 of total operating revenues; $186 and $(1,873) of operating income
(loss), and $481 and $(1,577) of net income (loss), respectively, before
combination with Quest.
(2) Basic and diluted net loss per common share calculations for 1996 and 1997
include undeclared dividends on preferred stock of $132 and $1,200,
respectively. See Note 2 to the Consolidated Financial Statements. In
addition, 1993 net income (loss) per common share is presented on a diluted
basis. Basic net income (loss) per common share--continuing operations,
discontinued operations, net loss and weighted average number of common
shares outstanding--basic were $(0.01), $0.08, $(0.07) and 3,586,245,
respectively.
(3) Adjusted to reflect the sale of 2,500,000 shares of Common Stock by the
Company at an assumed public offering price of $16.00 per share and the
application of the net proceeds therefrom. As of December 31, 1997, the
Company had a $12.1 million balance outstanding under the facility.
Subsequent to December 31, 1997, the Company's balance outstanding under
the Company's senior secured credit facility increased from $12.1 million
to $13.9 million on March 31, 1998. See "Use of Proceeds," and Note 4 to
the Consolidated Financial Statements.
7
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should carefully consider the following risk
factors, in addition to the other information contained in this Prospectus,
before purchasing the Common Stock offered hereby. This Prospectus contains
forward-looking statements within the meaning of the federal securities laws.
Discussions containing such forward-looking statements may be found in the
material set forth below and under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well as
elsewhere in this Prospectus. Prospective investors are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties. Actual events or results may differ
materially from those discussed in the forward-looking statements as a result
of various factors, including, without limitation, the risk factors set forth
below and other matters set forth in this Prospectus.
HISTORY OF OPERATING LOSSES
Primarily as a result of expenses associated with the expansion of its
business and certain infrastructure and capital equipment upgrades undertaken
since 1993, the Company has incurred significant net operating losses and
negative cash flows from operating activities. As of December 31, 1997, the
Company had an accumulated deficit of $23.6 million. For the years ended
December 31, 1995, 1996 and 1997, net losses were approximately $2.1 million,
$2.5 million and $13.2 million, respectively, and the Company generated
negative cash flows from operating activities of approximately $5.3 million,
$3.5 million and $6.7 million, respectively. The Company expects to incur
significant expenditures in the future in connection with the development and
expansion of its call centers, network, services and customer base. Although
the Company achieved profitability and positive cash flows in the quarter
ended March 31, 1998, there can be no assurance that the Company will achieve
or sustain profitability or generate positive cash flows from operating
activities in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
FUTURE NEEDS FOR ADDITIONAL FINANCING
The Company's continued development, expansion and delivery of existing
services and its further development and enhancement of new services will
require substantial capital expenditures. The funding of these expenditures
will depend in part upon the Company's ability to raise substantial additional
financing. Since January 1, 1996, the Company has raised approximately $15.0
million from preferred equity financings, obtained $2.0 million in debt
financing and established a $20.0 million senior secured credit facility (the
"Credit Facility") of which $12.1 million had been drawn at December 31, 1997.
In addition, the Company continues to consider potential acquisitions or other
arrangements that may fit the Company's strategic plan. Any such acquisitions
or arrangements that the Company might consider are likely to require
additional equity or debt financing.
The Company believes that its existing cash and cash equivalents,
availability under the Credit Facility and expected cash from operations will
be sufficient to fund its operating activities through at least the end of
1998.
To meet its capital requirements and to successfully implement its growth
strategy thereafter, the Company anticipates that it will be required to sell
additional equity securities, increase the Credit Facility, obtain additional
credit facilities or sell additional debt securities. The Company may not be
able to obtain additional required capital on satisfactory terms, if at all.
Any failure by the Company in its efforts to raise the funds necessary to
finance future cash requirements could have a material adverse effect on the
Company's business, financial condition and results of operations. If Teltrust
raises additional funds through the issuance of equity securities, dilution to
the Company's existing stockholders may result. If the Company raises
additional funds through the incurrence of debt, the agreements governing such
debt may contain restrictive financial, operating and security covenants.
Because the Credit Facility is secured by substantially all of its assets, the
Company may not be able to obtain future financings which require security.
Because there can be no assurance that the Company will be able to obtain
additional financing, the Company may be unable to fund its ongoing
operations,
8
<PAGE>
which would have a material adverse effect on its business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
RISKS RELATED TO SUBSTANTIAL CUSTOMER CONTRACT
The Company has entered into three contracts with affiliates of BellSouth
Corporation ("BellSouth"), BellSouth Long Distance ("BSLD") and BellSouth
Public Communications ("BSPC"), under which Teltrust has agreed to provide a
variety of services. Under the terms of the Company's October 1997 agreement
with BSLD, Teltrust provides enhanced call processing services for calls
placed through the 1-800-BELLSOUTH(TM) access number and certain network
services. In providing such services, the Company recognizes operating
revenues directly from end-users and pays BSLD certain commissions for
interLATA service outside the nine-state BellSouth region. The Company also
contributes to the expenses of marketing the 1-800-BELLSOUTH(TM) name.
BellSouth is currently prohibited from providing interLATA service within the
nine-state BellSouth region although it has applied for regulatory approval to
provide such services. When BellSouth obtains such approval, the Company will
no longer earn its operating revenues directly from end-users as provided in
the October 1997 contract with BSLD. Instead, the arrangement for this service
will change substantially so that the Company will earn operating revenues
directly from BSLD only for the specific services the Company provides to BSLD
under its November 1996 contract with BSLD. In addition, when BellSouth
obtains the aforementioned approval, it is expected that BSLD will cease using
the Company for automated call processing services. As a result of these
factors, the Company expects that there will be a substantial reduction in
operating revenues to the Company and it is unlikely that operating revenues
under these contracts will return to the level of operating revenues prior to
such change. Although the Company believes that, after such changes in its
contracts with BellSouth, the services it will provide to BellSouth will
generate significant gross profit, the operating revenues and gross profits
generated from such services are dependent upon the timing of BellSouth's
achieving a meaningful long distance market penetration, if at all, in the
markets that BellSouth will serve. Accordingly, it is unlikely that after such
changes the Company's gross profit under these contracts will return to the
levels achieved prior to such changes. For the year ended December 31, 1997
and the quarter ended March 31, 1998, operating revenues from the October 1997
contract accounted for approximately 2.7% and 27.5%, respectively, of the
Company's total operating revenues. Failure to return to such levels of gross
profit from such contracts may have a material adverse effect on its business,
financial condition and results of operations. In addition, future contracts
with RBOC affiliates may also contain provisions that could result in a
similar transition upon the customer's obtaining regulatory approval to
provide interLATA long distance service. See "Business--Significant Customer
Contracts."
SIGNIFICANT CUSTOMER RELATIONSHIPS
For the year ended December 31, 1997, revenues from the three contracts
between the Company and BSLD and BSPC accounted for approximately 2.7%, 11.9%
and 1.6% of the Company's total operating revenues. For the quarter ended
March 31, 1998, these three contracts accounted for approximately 27.5%, 7.4%
and 3.1% of the Company's total operating revenues. In addition, the Company
currently has contracts with two subsidiaries of Ameritech Corporation,
Ameritech Services ("ASI") and Ameritech Communications ("ACI"). The Company
began earning revenues under the Ameritech contracts during April 1998. The
aforementioned contracts require payment of a contractually-agreed upon amount
in the event of early termination of such contracts without cause. There can
be no assurance, however, that the Company would be able to collect such
amounts or that such amounts, if received, together with operating revenues
generated under such contracts, would sufficiently compensate the Company for
the investment it has made to support the canceled contracts. The amount of
such termination fees are relatively insignificant when compared to the
operating revenues generated and expected to be generated under such
contracts. There can be no assurance, however, that such expected revenues
will be realized.
None of the Company's contracts with BSLD, ASI or ACI have current terms
that extend beyond the year 2000. The Company's contract with BSPC currently
terminates in 2002. There can be no assurance that any of these customers will
renew their contracts after the expiration of their current terms, nor can
there be any assurance that these customers will not terminate the contracts
during their initial terms. In addition, if the contracts are not
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renewed, there can be no assurance that the Company can replace these
contracts with contracts with other customers. Consequently, the failure of
the Company to obtain renewal of any of the contracts with BSLD, BSPC, ASI or
ACI, or the termination of such contracts, could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Significant Customer Contracts."
The Company's five largest customers accounted for 20.4%, 27.3% and 39.7% of
the Company's operating revenues for 1995, 1996 and 1997, respectively. The
Company expects that operating revenues attributable to a relatively small
number of customers including BSPC, BSLD, ASI and ACI, will represent a
significant percentage of its total operating revenues for the foreseeable
future. The terms of the Company's contracts with these customers vary from
one to three years. Although Teltrust believes that it has good relationships
with its customers, there can be no assurance that the Company's largest
customers will continue to use the Company's services in amounts similar to
previous years or at all. The loss or significant reduction of business from
any of the Company's large customers could have a material adverse effect on
the Company's business, financial condition and results of operations.
Additionally, customers who account for significant portions of the Company's
operating revenues may have the ability to negotiate prices for the Company's
services that are more favorable to the customer and that result in lower
profit margins for the Company. See "Business--Significant Customer
Contracts."
DEPENDENCE ON THE RAPIDLY CHANGING TELECOMMUNICATIONS INDUSTRY
Substantially all of the Company's revenues to date have resulted from
services provided to companies in the telecommunications industry.
Developments in the telecommunications industry generally or by any reduction
in expenditures for, or future outsourcing of, activities by
telecommunications companies could materially and adversely affect the
Company's business, financial condition and results of operations.
Expenditures by telecommunications companies could be negatively impacted by,
among other things, changes in governmental regulations designed to alter the
manner in which companies provide their products.
Recent events, including the passage of the Telecommunications Act of 1996,
are expected to result in an increasing number of telecommunications companies
operating in each market. This may result in competitive situations that
unfavorably impact the Company, such as the withdrawal of a customer from a
market that the Company serves or the acquisition or merger of a major
customer, where the acquiror or surviving entity provides those services
itself or obtains them from another third-party or exerts substantial
influence on the contract negotiation process. In addition, the creation of
alliances and joint ventures among telecommunications companies may increase
the negotiating leverage for these carriers as they deal with providers of
services such as those the Company offers. Although the Company believes that
an increase in the number of providers generally will be beneficial to the
Company as the providers look for ways to differentiate their services, no
assurance can be given that the Company will not be adversely impacted, either
directly or indirectly, by the potential changes in the marketplace. See
"Business--Significant Customer Contracts."
DEPENDENCE ON CERTAIN SUPPLIERS
The Company relies on other telecommunications companies to supply certain
key components of its network infrastructure, including telecommunications
services, network capacity and switching and networking equipment, which, in
the quantities and quality demanded by the Company, are available only from
certain limited sources. The Company is also dependent upon certain IXCs and
other carriers to provide telecommunications services and facilities to the
Company and its customers. The Company relies on a national data provider to
supply information used by the Company in providing its national directory
assistance services and on a third-party billing and collection service to
perform certain billing and collection services for the Company's operations.
The Company has, from time to time, experienced delays, outages or other
problems in receiving telecommunications components, services and facilities
and data which it requests from certain suppliers, and there can be no
assurance that the Company will be able to obtain such services or facilities
or data on the scale and within the time frames required by the Company at an
affordable cost, or at all. Any failure to obtain such components, services,
facilities or data on a timely basis, at an affordable cost or at all, would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Operations and Technology."
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DEPENDENCE UPON NETWORK INFRASTRUCTURE; RISK OF SYSTEM FAILURE; SECURITY RISKS
The Company's success in marketing its services to telecommunications
companies requires that the Company provide superior reliability, capacity and
security via its network infrastructure. The Company owns and operates
switching, call processing and networking sites located in Salt Lake City and
additional facilities in Atlanta, Los Angeles, Miami and New York City. The
Company's call processing platforms and networks and the third-party networks
upon which they depend are subject to physical damage, power loss, capacity
limitations, software defects, breaches of security (by computer virus, break-
ins or otherwise) and other factors, certain of which may cause interruptions
in service or reduced capacity for customers. Although the Company has taken
precautions to protect itself and its customers from events that could
interrupt delivery of services, including the use of back-up systems and
redundant operations, there can be no assurance that a fire, act of sabotage,
technical failure, human error, natural disaster or any similar event would
not cause the failure of a significant technical component, thereby resulting
in a failure of service. Interruptions in service, capacity limitations or
security breaches could have a material adverse effect on the Company's
business, financial condition and results of operations. Certain losses
suffered by Teltrust as a result of any infrastructure-related disruptions
would be covered by business interruption insurance maintained by the Company.
However, there can be no assurance that the Company will be able to maintain
its business interruption insurance, that such insurance will continue to be
available at reasonable prices, that such insurance would cover all such
losses or that such insurance would be sufficient to compensate the Company
for losses it may experience due to the Company's inability to provide
services to its customers. See "Business--Operations and Technology."
RISKS RELATED TO RAPID GROWTH
Although the Company has recently experienced substantial growth in
operating revenues, there can be no assurance that such growth will continue
or that the Company will be able to effectively manage such growth. The
Company's ability to continue to grow and to effectively manage such growth
may be affected by various factors, many of which are not within the Company's
control, including competition and federal and state regulation of the
telecommunications industry. The Company's rapid growth has placed, and is
expected to continue to place, significant demands on all aspects of the
Company's business, including its administrative, technical and financial
personnel and systems. The Company's operating and reporting systems will
require enhancement and substantial investment in the future to accommodate
the Company's anticipated growth. There can be no assurance that the Company
will not encounter difficulties in expanding these systems to meet its future
needs. If the Company is unable to respond to and manage changing business
conditions, the quality of its services and its results of operations could be
materially adversely affected. Difficulties in managing continued growth could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON KEY MANAGEMENT AND PERSONNEL; ABILITY TO HIRE ADDITIONAL
QUALIFIED PERSONNEL
The Company's future operating results will substantially depend on the
ability of its officers and key employees to manage its growth, to attract,
retain and integrate additional highly qualified management, technical and
financial personnel and to implement and/or improve its technical,
administrative, financial controls and reporting systems. Further, the loss of
key management personnel would likely have a material adverse impact on the
Company. Although the Company believes that it would be able to locate
suitable replacements for such management personnel if their services were
lost, there can be no assurance that qualified personnel will be available in
the regions in which the Company operates. Accordingly, the loss of the
services of any of such management personnel could have a material adverse
effect on the Company. Failure to retain and attract additional management
personnel who can manage the Company's growth effectively would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The success of the Company also depends upon its ability to hire and retain
qualified operating, marketing, sales, financial, accounting and technical
personnel. Competition for qualified personnel in the telecommunications
industry is intense and, accordingly, there can be no assurance that the
Company will be
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able to continue to hire or retain necessary personnel. Further, tight labor
markets in areas where the Company operates, including the existence of
significant competition for skilled employees in the Salt Lake City area, may
affect the Company's ability to recruit and hire the substantial number of new
accounting, sales, information systems, network engineering and support
personnel and service agents required to implement the Company's growth
strategy. See "Management."
COMPETITION
Telecommunications markets are intensely competitive, rapidly evolving and
subject to constant technological change. The Company currently faces
significant competition in each of the markets in which it operates and
expects competition to increase in the future. Many of the Company's current
and potential competitors are substantially larger and have greater financial,
technical, engineering, personnel and marketing resources; longer operating
histories; greater name recognition; and larger and more diversified customer
bases than the Company. Telecommunications companies compete for customers
(both in the wholesale and end-user segments) on the basis of service,
quality, price, reputation, technological innovation and experience. The
Company believes that existing competitors are likely to continue to expand
their service offerings to their customers. Moreover, with the continuing
trend toward business alliances in the telecommunications industry and the
absence of substantial barriers to entry in the call completion, national
directory assistance, third-party verification and calling card services
markets, the Company expects that new competitors are likely to enter the
telecommunications market and attempt to market telecommunications services
similar to the Company's services, which would result in greater competition.
The ability of the Company to compete effectively in telecommunications
markets will depend upon the Company's continued ability to provide high
quality services at prices generally competitive with, or lower than, those
charged by its competitors. Certain of the Company's current and potential
competitors dominate the telecommunications industry and have the financial
resources to enable them to withstand substantial price competition, which is
expected to increase significantly, and there can be no assurance that the
Company will be able to compete successfully in the future. Moreover, there
can be no assurance that certain of the Company's competitors will not be
better positioned to negotiate contracts with telecommunications companies
that are more favorable than contracts negotiated by the Company. In addition,
there can be no assurance that competition from existing or new competitors or
a decrease in the rates charged for telecommunications services by competitors
would not have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Competition."
IMPACT OF TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW SERVICES
The market for the Company's services is characterized by rapidly changing
technology, evolving industry standards, emerging competition and frequent new
product and service introductions. The Company's future success will depend on
the continued use of its existing services and products, the acceptance of new
services and products in the markets in which Teltrust operates and the
Company's ability to develop new products and services or adapt existing
products and services to keep pace with changes in the telecommunications
industry. Future technological changes, including changes related to
automation of certain call processing functions, network protocols and
software, could have a material adverse effect on the Company's business,
results of operations and financial condition. There can be no assurance that
the Company will successfully identify new service opportunities and develop
and bring new services to market in a timely manner. The Company's pursuit of
necessary technological advances may require substantial time and expense, and
there can be no assurance that the Company will be successful in adapting to
new technologies and market and product evolutions. In addition, there can be
no assurance that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of its
existing services or that its new services or enhancements thereto will
adequately meet the requirements of the marketplace and achieve market
acceptance. Delay in the introduction of new services or enhancements, or the
failure of such services or enhancements to achieve market acceptance could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Industry Overview."
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YEAR 2000 COMPLIANCE
The Company has reviewed its information and technology systems to assess
what changes might be needed for those systems to recognize the year 2000
("Y2K") and not to treat any date after December 31, 1999 as a date during the
twentieth century. Management believes that all such changes have been or will
be implemented in an orderly and timely manner and without material cost. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance." The Company has begun to coordinate its
response to these issues with those third parties with whom the Company
engages in electronic transactions, both domestically and internationally,
including suppliers, customers, creditors and financial service organizations,
although the Company cannot effectively ensure against all potential Y2K
problems that might originate with third parties. If the Company or any third
party with whom the Company does business were to have a Y2K problem, the
Company's business could be seriously disrupted and the Company's business,
financial condition and results of operations could be materially adversely
affected. See "Business--Operations and Technology--Year 2000 Compliance."
DEPENDENCE ON PROPRIETARY AND LICENSED SOFTWARE
The Company has developed, and depends on, its own proprietary in-house data
reporting and tracking system to provide a series of database query and report
capabilities that are used to track inventory, control fraud and monitor
system usage. The Company also depends on its software, as well as software
developed by third parties, to provide services to its customers. The software
utilized by the Company in providing its services may contain undetected
errors. Although the Company engages in extensive testing of its software
prior to using the software on its network, there can be no assurance that
errors will not be found in software after commencement of use of such
software. Any such error may result in partial or total failure of the
Company's network, requiring the Company to commit additional and
unanticipated funds for further product development, including the retention
of additional programming personnel. In addition, any such failure may result
in a loss of customers and a corresponding decrease in revenue which could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Operations and Technology."
The Company regards certain of the software it uses as proprietary and
relies primarily on a combination of statutory and common law copyright,
trademark and trade secret laws, customer licensing agreements, employee and
third-party nondisclosure agreements and other methods to protect its
proprietary rights. These laws and contractual provisions provide only limited
protection of the Company's proprietary rights. Despite the Company's efforts
to protect its proprietary rights, it may be possible for a third party to
copy or otherwise obtain and use the Company's technology without
authorization or to develop similar technology independently. If unauthorized
copying or misuse of the Company's products were to occur to any substantial
degree, the Company's business, results of operations and financial condition
could be materially adversely affected. There can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar technology.
Although the Company does not believe that it is infringing intellectual
property rights of third parties in its operations, there can be no assurance
that third parties will not claim that the Company's current or future
products violate the proprietary rights of others. The Company expects that
software developers will increasingly be subject to such claims as the number
of products and competitors providing products and services to the
telecommunications industry grows. Any such claim, with or without merit,
could result in costly litigation, require significant management resources,
require the Company to enter into royalty or licensing agreements or cause the
Company to discontinue the use of the challenged trade name, service mark or
technology, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore, such
royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company or at all. See "Business--Operations and
Technology."
RISKS OF OPERATING IN A REGULATED INDUSTRY
As a common carrier, the Company is subject to substantial federal, state,
and local regulation. The following paragraphs describe certain impacts of
these regulations as currently in force; however, regulatory
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policies are subject to change as a result of agency, legislative and judicial
actions and there can be no assurance that the Company will not be adversely
affected by future changes of this nature.
Teltrust currently must file with the FCC tariffs setting forth the
Company's rates, terms and conditions of service for prepaid and postpaid
calling card operations and call processing services and must provide certain
information about its interstate and international long distance traffic. In
addition, the Company is required to maintain a certificate, issued by the
FCC, in connection with its international services. State regulatory agencies
regulate intrastate communications, call completion services, third-party
verification services, in-state long distance services and prepaid, postpaid
and proprietary calling card services. The Company generally must obtain and
maintain certificates of public convenience and necessity from regulatory
authorities in most states in which it offers services. In most of these
jurisdictions, the Company must file and obtain prior regulatory approval of
tariffs for intrastate services. In addition, the Company must update or amend
the tariffs and, in some cases, the certificates of public convenience and
necessity when rates are adjusted or new products are added to the
telecommunications services offered by the Company. The FCC and numerous state
agencies also impose prior approval requirements on transfers of control,
including corporate reorganizations, and assignments of certain regulatory
authorizations. Failure by the Company to adhere to these filing requirements
and other regulations could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Telecommunications Act of 1996 directs the FCC to prescribe mechanisms
for the preservation of universal service, the promotion of nationwide access
to telecommunications services in rural, insular and high cost areas that are
reasonably comparable in price and type to those found in urban areas and the
promotion of access to advanced services for schools, libraries and certain
health care providers. Providers of interstate telecommunications, including
call completion services providers, pay telephone providers and private
network operators that offer services to others for a fee on a non-common
carrier basis, must contribute toward the funding of universal service
according to a formula prescribed by the FCC. Although the Company's
competitors will be similarly affected, the universal service fund annual
assessment may have a material adverse effect on the long-term financial
condition of the Company.
Section 276 of the 1996 Telecommunications Act mandated the establishment of
a per call compensation plan to insure that all pay telephone providers are
fairly compensated for each completed intrastate and interstate pay telephone
initiated coinless call. Such calls include those placed to toll free numbers
(800/888), dial around access code calls (such as 1-800-BELLSOUTH(TM)) and
other such access code calls. The FCC has established a two-year "default"
compensation rate, payable by all IXCs including the Company, of $0.284 per
compensable call. At the end of the two year interim period, the per call pay
telephone compensation rate will be the deregulated market-based local coin
rate less $0.066. The current FCC rules became effective on October 7, 1997,
but continue to be subject to regulatory and legal challenges. The Company is
unable to predict whether this regulation or other potential changes in the
communications laws, other regulations or determinations will have a material
adverse effect on the Company's business, financial condition and results of
operations.
In May 1997, the FCC adopted changes to its system of interstate access
charges to make them compatible with the pro-competitive, deregulatory
framework established by the Telecommunications Act of 1996. The FCC's access
reform order adopts various reforms to the existing rate structure for
interstate access that are designed to move access charges, over time, to more
economically efficient levels and rate structures. The FCC's access reform
order also imposes the phase-in of replacing usage-based carrier common line
charges with a line-based flat fee to be assessed upon all telecommunications
carriers beginning on January 1, 1998. In addition, the FCC's access order
requires LECs to reduce their access revenue requirements by reducing
interconnection access charges to telecommunications carriers. Although the
Company's competitors will be similarly affected, the changes in the system of
interstate access charges may have a material adverse effect on the business,
financial condition and results of operations of the Company.
In January 1998, the FCC addressed what it viewed as widespread consumer
dissatisfaction concerning high charges by many IXCs and call completion
service providers for calls from public phones and other aggregator locations
such as pay telephones, hospitals, hospitality locations and educational
institutions. Although it declined to implement a concept known as "billed
party preference," which would have required that the billed
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party be allowed to choose the preferred long-distance service provider for
each of its calls, the FCC issued an order requiring call processing service
providers and IXCs to disclose orally to "away from home callers" how to
obtain the total cost of a 0+ interstate domestic call before the call is
connected. The Company is unable to predict whether this regulation or other
potential changes in the communications laws, other regulations or
determinations could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Government
Regulation."
RISKS RELATED TO STRATEGIC INVESTMENTS OR BUSINESS COMBINATIONS
The Company recently completed the acquisition of Quest and may consider
future acquisitions of, or strategic investments in, companies engaged in
businesses similar or related to the business of the Company in order to
complement Teltrust's existing services, broaden its customer base and improve
its operating efficiencies. Acquisitions and strategic investments also
involve numerous additional risks, including difficulties in the integration
of the operations, services, products and personnel of the acquired company,
which could result in charges to earnings or otherwise adversely effect the
Company's operating results. In addition, there can be no assurance that
acquisition opportunities will be available, that the Company will have access
to the capital required to finance potential acquisitions, that the Company
will acquire businesses, that any acquired business will be profitable or that
any acquisition or strategic investment effected through the issuance of
equity will not ultimately prove to be dilutive. There can be no assurance
that the anticipated benefits of the Quest acquisition will be fully realized
or that the combination of the Company and Quest will ultimately be considered
successful.
In addition, the Company from time to time engages in discussions with
potential business partners to consider formation of business combinations or
strategic alliances that would expand the reach of the Company's networks or
services and potential strategic investors who have expressed an interest in
making an investment in the Company. Such acquisitions, combinations or
alliances, if consummated, could divert the resources and management time of
the Company and may require integration with the Company's existing networks
and services. There can be no assurance that any acquisitions, combinations or
alliances will occur or, if consummated, would be on terms favorable to the
Company or would be successfully integrated into the Company's operations.
CONTROL BY CERTAIN STOCKHOLDERS AND MANAGEMENT
Upon completion of the Offering, the Company's Directors and executive
officers are expected to own beneficially approximately 64.7% of the
outstanding Common Stock. At such time, approximately 22.6% of the outstanding
Common Stock will be beneficially owned by Lyle O. Keys, the Company's
Chairman and 11.8% of the outstanding Common Stock will be beneficially owned
by Carmelo Catalano, a Director of the Company. In addition, at such time,
entities affiliated with Media/Communications Partners, whose designees occupy
two positions on the Board of Directors, will own approximately 23.6% of the
outstanding Common Stock. As a result, these stockholders will be able to
exercise significant influence over all matters requiring stockholder
approval, including the election of directors and the approval of significant
corporate transactions. Such concentration of ownership may also have the
effect of delaying or preventing a change in control of the Company. See
"Principal and Selling Stockholders."
SEASONALITY; FACTORS AFFECTING OPERATING RESULTS; POTENTIAL FLUCTUATIONS IN
PERIOD-TO-PERIOD RESULTS
The Company's sales have been, and the Company expects that its sales will
continue to be, somewhat seasonal, due to the nature of call traffic from
independent and LEC-owned pay telephones and the use of prepaid and other
calling cards. Traditional agent-assisted long distance services produce peak
revenues during the summer months, coincident with domestic travel and
vacation patterns. To a lesser degree, national directory assistance, prepaid
and other calling card and third-party verification services are also affected
by seasonal demand fluctuations with demand peaking in the spring and summer
months.
The Company's operating results have varied significantly from period-to-
period in the past and may vary significantly in the future. Factors that may
cause the Company's operating results to vary include: (i) changes in
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operating expenses; (ii) the timing of the introduction of services; (iii)
market acceptance of new and enhanced versions of services; (iv) potential
acquisitions; (v) changes in legislation and regulations that affect the
competitive environment for services; (vi) customer marketing strategies; and
(vii) general economic factors. As a result of these factors, the Company
believes that period-to-period comparisons of its results of operations are
not necessarily meaningful and should not be relied upon as an indication of
future performance.
RISK OF LOSS FROM RETURNED TRANSACTIONS; FRAUD; BAD DEBT; THEFT OF SERVICES
The Company utilizes national and credit card clearance systems for
electronic credit card settlement and billing of telephone calls. The Company
often bears the same credit risks normally assumed by other users of these
systems arising from returned transactions that are caused by closed accounts,
frozen accounts, unauthorized use, disputes, theft or fraud. The Company's
relationship with providers of merchant card services, including credit card
issuers, could be adversely affected by excessive uncollectables or
chargebacks, which are generally higher in the telecommunications services
industry than in other industries, particularly with respect to recharging (or
"refreshing") the limits on prepaid calling cards because the transaction does
not require a cardholder signature. Termination of the Company's ability to
refresh prepaid calling cards through merchant card services would have a
material adverse effect on the business, financial condition and results of
operations of the Company. Although the Company attempts to limit its
financial exposure by limiting the amount that consumers can refresh within
specified time frames, from time to time, persons have obtained services
without rendering payment to the Company by unlawfully utilizing the Company's
access numbers and personal identification numbers. The Company attempts to
manage these credit, theft and fraud risks through its internal controls,
monitoring and blocking systems. The Company also maintains reserves which it
deems adequate for such risks. Past experience in estimating and establishing
reserves and the Company's historical losses are not necessarily accurate
indications of the future. Although the Company believes that its risk
management and bad debt reserve practices are adequate, there can be no
assurance that the Company's risk management practices or reserves will be
sufficient to protect the Company from unauthorized or returned transactions
or thefts of services which could have a material adverse effect on the
Company. See "Business--Operations and Technology--Fraud Prevention."
POSSIBLE DELAY IN RECOGNIZING A PORTION OF DEFERRED REVENUE
The sale of long distance domestic and outbound international telephone
service through prepaid calling cards may be subject to "escheat" laws in
various states. These laws generally provide that payments or deposits
received in advance or in anticipation of the provision of utility (including
telephone) services that remain unclaimed for a specific period of time after
the termination of such services are deemed "abandoned property" and must be
submitted to the state. The Company, however, is not aware of any case in
which escheat laws have been applied to unused balances remaining on prepaid
calling cards and does not believe that such laws are applicable. In the event
that such laws were deemed applicable and tariffed service charges for periods
of non-use had not accumulated to reduce such unused balance, the Company may
be unable to recognize the portion of its deferred revenue remaining upon the
expiration of the cards with unused calling time. In such event, the Company
may be required to deliver such amounts to certain states in accordance with
these laws, which could have a material adverse effect on the Company.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
The sale of a substantial number of shares of Common Stock of the Company in
the public market could adversely affect the market price of the Common Stock.
After giving effect to the offering of the Company's 2,500,000 shares of
Common Stock, the 3,200,000 shares offered hereby will be eligible for
immediate sale in the public market without restriction under the Securities
Act (except that any shares purchased in the Offering by "affiliates" of the
Company may generally be resold only in compliance with applicable provisions
of Rule 144). Beginning 90 days after the date of this Prospectus, an
additional shares may be resold under Rule 144 subject to the volume and
manner limitations set forth in Rule 144 and an additional shares may be
resold under Rule 144 without such restrictions (in each case, subject to the
lock-up agreements described in "Underwriting"). Holders of approximately
of these shares have contractual rights to have those shares
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registered with the Commission for resale to the public. In addition, after
the effective date of the Registration Statement, the Company intends to file
a registration statement covering the 2,200,000 shares of Common Stock issued
or reserved for issuance under the Company's 1993 Stock Option Plan and 1998
Stock Option Plan, and, upon filing any shares subsequently issued under such
plans will be eligible for sale in the public market, subject to compliance
with Rule 144 in the case of affiliates of the Company. A decision by any such
stockholder(s) to publicly sell a significant number of shares of the Common
Stock will have the potential to cause a material decrease in the trading
price of the Common Stock and may impair the future ability of the Company to
raise capital at prices or on terms favorable to the Company. See "Shares
Eligible for Future Sale."
SUBSTANTIAL DISCRETION OF MANAGEMENT CONCERNING USE OF PROCEEDS
The Company has allocated approximately $30.0 million of the net proceeds of
the Offering for specific identified purposes, with the remainder of
approximately $6.0 million to be used for working capital and general
corporate purposes, including possible acquisitions. Accordingly, management
will have substantial discretion in using a significant percentage of the
proceeds to be received by the Company, and there is no assurance that
management's use of the proceeds can or will yield a return. See "Risks
Related to Strategic Investments or Business Combinations" and "Use of
Proceeds."
ANTI-TAKEOVER CONSIDERATIONS
Prior to the completion of the Offering, the Company will adopt an amended
and restated certificate of incorporation and amended and restated by-laws.
Certain provisions of these documents may have the effect of discouraging a
third party from making an acquisition proposal for the Company and thereby
inhibit a change in control of the Company in circumstances that could give
holders of the Common Stock the opportunity to realize a premium over the then
prevailing market price of such stock. Such provisions may also adversely
affect the market price of the Common Stock. Such provisions include, among
other things, a classified Board of Directors serving staggered three-year
terms, the elimination of stockholder voting by consent, the removal of
Directors only for cause, the vesting of exclusive authority in the Board of
Directors to determine the size of the Board of Directors and (subject to
certain limited exceptions) to fill vacancies thereon, the vesting of
exclusive authority in the Board of Directors (except as required by law) to
call special meetings of stockholders and certain advance notice requirements
for stockholder proposals and nominations for election to the Board of
Directors. These provisions, and the ability of the Board of Directors to
issue preferred stock without further action by stockholders, could delay or
frustrate the removal of incumbent Directors or the assumption of control by
stockholders, even if such removal or assumption of control would be
beneficial to stockholders, and also could discourage or make more difficult a
merger, tender offer or proxy contest, even if such events could be beneficial
to the interests of stockholders. The Company will be subject to Section 203
of the General Corporation Law of the State of Delaware which, in general,
imposes restrictions upon certain acquirors (including their affiliates and
associates) of 15% or more of the Company's Common Stock. See "Description of
Capital Stock--Certain Provisions of Certificate of Incorporation and By-laws"
and "Description of Capital Stock--Statutory Business Combination Provision."
DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS
The Company has never paid a cash dividend on the Common Stock and does not
anticipate paying cash dividends on the Common Stock in the foreseeable
future. Further, the ability of the Company to pay cash dividends is subject
to contractual restrictions contained in the Credit Facility. See "Dividend
Policy."
ABSENCE OF PUBLIC MARKET
Prior to the Offering, there has been no established trading market for the
Common Stock and there can be no assurance that, following this Offering, an
active trading market for the Common Stock will develop or be sustained or
that the market price of the Common Stock will not decline below the initial
public offering price. The initial public offering price will be determined by
negotiations between the Company and the Underwriters
17
<PAGE>
and will not necessarily be indicative of the market price of the Common Stock
after this Offering. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. After the
Offering, the market price of shares of Common Stock is likely to be volatile.
The Company believes factors such as actual or anticipated quarterly
fluctuations in financial results, changes in earnings estimates by securities
analysts and announcements of material events by the Company, its customers or
its competitors may cause the market price for the Common Stock to fluctuate.
In addition, in recent years the stock market has experienced extreme price
and volume fluctuations which have affected the market price for many
companies in industries similar to the telecommunications industry and which
have often been unrelated to the operating performance of these companies.
These fluctuations, as well as general economic conditions, may have a
material adverse effect on the price of the Common Stock.
DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution of the net tangible book value of the Common Stock in the
amount of $13.02 per share. To the extent options to purchase the Common Stock
are exercised in the future, there will be further dilution. See "Dilution."
USE OF PROCEEDS
The net proceeds to the Company from the sale of 2,500,000 shares of Common
Stock offered by the Company hereby, at an assumed public offering price of
$16.00 per share (the midpoint of the filing range), are estimated to be $36.0
million. Of the net proceeds to be received by the Company, the Company plans
to use (i) approximately $20.0 million to repay amounts outstanding under the
Credit Facility and (ii) approximately $10.0 million for anticipated capital
expenditures, over the next 12 to 18 months, including purchases of new
switches and software, expansion of the Company's facilities and network
infrastructure and implementation of telephony and other related improvements.
The Company entered into the Credit Facility in November 1997 and subsequently
amended such facility in March 1998. The Credit Facility consists of a five-
year revolving credit facility in the amount of $20.0 million. The Credit
Facility expires on December 31, 2002. Funds may be borrowed at either the
bank's base rate plus 1.5% or LIBOR plus 2.75%. The Company has used its
borrowings under the Credit Facility for working capital and capital
expenditures. See "Capitalization" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The remaining estimated net proceeds of approximately $6.0 million will be
used for working capital and other general corporate purposes. Such general
corporate purposes include the continued funding of the development and
enhancement of the Company's services and technology and the expansion of its
operations. The Company may also use a portion of the net proceeds to acquire
businesses, technologies, services or products complementary to the Company's
current business, although the Company currently has no agreements or
understandings with respect to any acquisition, and no portion of the net
proceeds has been allocated to specific acquisitions. Pending such uses of the
net proceeds, the Company intends to invest such funds in short-term,
interest-bearing investment grade securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain its earnings for future growth
and, therefore, does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results and current and
anticipated cash needs. In addition, under the terms of the Credit Facility,
the payment of cash dividends generally is prohibited without the consent of
the lenders.
18
<PAGE>
CASH AND CAPITALIZATION
The following table sets forth the cash and cash equivalents, current
portion of long-term debt and capitalization of the Company as of December 31,
1997 and as adjusted as of such date to reflect the sale of the 2,500,000
shares of Common Stock offered by the Company hereby (at an assumed public
offering price of $16.00 per share) and the application of the net proceeds
therefrom, after deducting estimated underwriting discounts and offering
expenses payable by the Company. See "Use of Proceeds." This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Consolidated Financial Statements and
notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C>
Cash and cash equivalents............................. $ 526 $ 14,726
======== ========
Current portion of long-term debt and capital lease
obligations.......................................... $ 1,205 $ 1,204
-------- --------
Long-term debt and capital lease obligations, less
current portion...................................... 14,407 2,307
-------- --------
Stockholders' equity (deficit):
Preferred Stock, $.01 par value; 5,000,000 shares
authorized; 3,218,884 shares issued and
outstanding; 0 shares issued and outstanding, as
adjusted (2)....................................... 14,511 --
Common Stock, $.01 par value, 20,000,000 shares
authorized; 6,974,039 shares issued and
outstanding; 12,692,293 shares issued and
outstanding, as adjusted (2)(3).................... 70 127
Additional paid-in capital.......................... 3,616 54,370
Stockholder receivables............................. (275) (275)
Accumulated deficit................................. (23,581) (23,581)
-------- --------
Total stockholders' equity (deficit).............. (5,659) 30,641
-------- --------
Total capitalization............................ $ 9,953 $ 34,152
======== ========
</TABLE>
- ---------------------
(1) As of December 31, 1997, the Company had a $12.1 million balance
outstanding under the Credit Facility. Subsequent to December 31, 1997,
the Company's balance outstanding under the Credit Facility increased from
$12.1 million to $13.9 million as of March 31, 1998. See "Use of Proceeds"
and Note 4 to the Consolidated Financial Statements.
(2) Assumes conversion of preferred stock into 3,218,884 shares of Common
Stock in connection with the Offering.
(3) Excludes: (i) an aggregate of 1,183,799 shares of Common Stock issuable
upon the exercise of outstanding stock options under the 1993 Option Plan
at a weighted average exercise price of $5.24 per share at December 31,
1997 and (ii) 864,201 additional shares of Common Stock available for
future grants under the 1993 Option Plan and the 1998 Option Plan. See
"Management--Stock Option Plans."
19
<PAGE>
DILUTION
As of December 31, 1997, Teltrust had a pro forma deficit in net tangible
book value of approximately $6.1 million or a deficit of $0.60 per share of
Common Stock. Pro forma net tangible book value represents the amount of total
tangible assets less total liabilities divided by the number of shares of
Common Stock outstanding, excluding all outstanding stock options. Without
taking into account any other changes in the pro forma net tangible book value
after December 31, 1997, other than to give effect to the receipt by the
Company of the net proceeds from the sale of the 2,500,000 shares of Common
Stock offered by the Company hereby at an assumed public offering price of
$16.00 per share, the pro forma net tangible book value of the Company as of
December 31, 1997 would have been approximately $30.2 million or $2.38 per
share. This represents an immediate increase in pro forma net tangible book
value of $2.98 per share to existing stockholders and an immediate dilution of
$13.02 per share to new investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $16.00
------
Pro forma deficit in net tangible book value per share at
December 31, 1997 (1)........................................ $(0.60)
Increase per share attributable to new investors.............. 2.98
------
Pro forma net tangible book value per share after the Offering.. 2.38
------
Pro forma net tangible book value dilution per share to new in-
vestors........................................................ $13.02
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1997, the differences between existing stockholders and the new investors with
respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -------------------
PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 10,192,923 80.3% $17,743,290 30.7% $ 1.74
New investors.................. 2,500,000 19.7 40,000,000 69.3 16.00
---------- ----- ----------- -----
Total........................ 12,692,923 100.0% $57,743,290 100.0%
========== ===== =========== =====
</TABLE>
Other than as noted above, the foregoing computations assume no exercise of
any outstanding stock options after December 31, 1997 or the Underwriters'
over-allotment option. See "Use of Proceeds." As of December 31, 1997, options
to purchase 1,183,799 shares of Common Stock were outstanding at a weighted
average exercise price of $5.24 per share. To the extent these options or the
Underwriters' over-allotment option are exercised, there will be further
dilution to new investors. See "Underwriting" for information concerning the
Underwriters' over-allotment option.
- ---------------------
(1) Assumes conversion of all outstanding preferred stock into Common Stock as
if it had occurred as of December 31, 1997.
20
<PAGE>
SELECTED FINANCIAL AND OPERATING INFORMATION
The following table sets forth selected consolidated financial and operating
data of the Company for the periods indicated. The selected financial data as
of December 31, 1995, 1996 and 1997 and for the years then ended have been
derived from the audited financial statements of Teltrust, Inc. and
subsidiaries, as audited by Arthur Andersen LLP, independent public
accountants. The selected financial data as of December 31, 1993 and 1994 and
for the years then ended have been derived from the audited financial
statements of Teltrust, Inc. and subsidiaries and the unaudited financial
statements of Quest for those years (as combined before restatement for the
pooling-of-interests accounting treatment). The selected financial and
operating data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and the notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1993 (1) 1994 (1) 1995 1996 1997
------------------------------------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE, EMPLOYEE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Operating revenues:
Call processing
services............. $ 19,796 $ 26,188 $ 29,290 $ 33,885 $ 46,222
Calling card
services............. 33 1,716 4,572 7,216 10,782
----------- ----------- ----------- ----------- -----------
Total operating
revenues........... 19,829 27,904 33,862 41,101 57,004
Cost of operating
revenues.............. 11,519 17,478 23,486 29,301 45,473
----------- ----------- ----------- ----------- -----------
Gross profit.......... 8,310 10,426 10,376 11,800 11,531
Operating expenses..... 8,517 11,987 14,001 13,615 23,712
----------- ----------- ----------- ----------- -----------
Operating income
(loss)............... (207) (1,561) (3,625) (1,815) (12,181)
Other expense, net..... (90) (274) (629) (732) (1,037)
Benefit from (provision
for) income taxes..... 241 110 783 20 (5)
----------- ----------- ----------- ----------- -----------
Income (loss) from
continuing
operations............ (56) (1,725) (3,471) (2,527) (13,223)
Discontinued
operations, net of
income taxes.......... 295 296 1,380 -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)...... $ 239 $ (1,429) $ (2,091) $ (2,527) $ (13,223)
=========== =========== =========== =========== ===========
BASIC AND DILUTED NET
INCOME (LOSS) PER
COMMON SHARE (2):
Income (loss) from
continuing
operations............ $ (0.01) $ (0.48) $ (0.80) $ (0.57) $ (2.47)
Discontinued
operations............ 0.06 0.08 0.32 -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)...... $ 0.05 $ (0.40) $ (0.48) $ (0.57) $ (2.47)
=========== =========== =========== =========== ===========
Basic and diluted
weighted average
number of common
shares outstanding.... 5,031,054 3,579,005 4,339,117 4,641,999 5,843,313
OTHER OPERATING DATA:
Employees.............. 168 216 574 630 892
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1993 1994 1995 1996 1997
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).... $(4,801) $ (6,857) $ (5,285) $ (1,699) $ (6,041)
Total assets................. 7,670 11,461 11,588 24,667 25,918
Long-term debt (including
capital lease obligations),
net of current portion...... 2,369 3,907 4,421 5,373 14,407
Stockholders' equity
(deficit)................... (1,861) (3,303) (3,143) 9,141 (5,659)
</TABLE>
- ---------------------
(1) The financial data for 1993 and 1994 is derived from the audited financial
statements of Teltrust, Inc. and subsidiaries financial statements which
included $14,302 and $20,029 of total operating revenues; $186 and
$(1,873) of operating income (loss), $481 and $(1,577) of net income
(loss); $5,535 and $8,859 of total assets; and $(1,636) and $(3,213) of
stockholders' deficit for 1993 and 1994, respectively, before combination
with Quest.
(2) Basic and diluted net loss per common share calculations for 1996 and 1997
include undeclared dividends on preferred stock of $132 and $1,200,
respectively. See Note 2 to the Consolidated Financial Statements. In
addition, 1993 net income (loss) per common share is presented on a
diluted basis. Basic net income (loss) per common share-continuing
operations, discontinued operations, net loss and weighted average number
of shares outstanding-basic were $(0.01), $0.08, $(0.07) and 3,586,245,
respectively.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Prospectus. This Prospectus contains forward-looking statements.
Discussions containing such forward-looking statements may be found in the
material set forth below and under "Business," as well as elsewhere in this
Prospectus. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties. Actual events or results may differ materially from those
discussed in the forward-looking statements as a result of various factors,
including, without limitation, the risk factors set forth under "Risk Factors"
and the matters set forth elsewhere in this Prospectus.
OVERVIEW
Teltrust is a leading independent outsource provider of a broad range of
enhanced call processing and calling card services to the domestic
telecommunications industry. The Company believes that it offers the most
comprehensive suite of services of any independent outsource provider in its
industry. This diversified suite of services includes call completion,
national directory assistance and third-party verification services in
addition to calling card services. Teltrust serves its customers through
state-of-the-art technology and switch-based call processing platforms and, as
of March 1998, more than 1,000 employees. The Company's customers include RBOC
affiliates (such as BSLD and BSPC), pay telephone and hospitality aggregators
(such as Peoples Telephone Company, AMI Telecommunications and Global Net),
IXCs (such as US Long Distance, WorldCom and LCI International), and other
large telecommunications resellers or users (such as TON Services and Eastern
Communications Network). The Company has also recently established contractual
relationships with affiliates of Ameritech Corporation and emerging
telecommunications companies including CLECs (such as Nextlink and Cox Com),
wireless providers (such as Centennial Cellular, Omnipoint Communications and
PowerTel) and international carriers (such as Justice Technology Corp. and
Star Telecommunications). Many customers purchase a number of the Company's
services under multi-year contracts and utilize Teltrust to provide complex
outsourcing solutions. During the quarter ended March 31, 1998, Teltrust
processed over 21 million call processing transactions and decremented more
than 17.6 million domestic minutes for its prepaid calling card customers.
The Company believes the following market factors, among others, create
excellent opportunities for growth as an outsource service provider in the
telecommunications industry. With the continued increase in telecommunications
competition, fostered by the Telecommunications Act of 1996 and subsequent
entry of new providers, an increasing number of telecommunications companies
are seeking to outsource certain functions, such as those provided by
Teltrust, in order to focus capital and other resources on consumer market
penetration and core asset deployment. Also critical to these companies is the
ability to offer differentiated enhanced call processing services to end-
users. Teltrust's growth strategy addresses these two factors by offering
customers the ability to bring enhanced services to market in a more
expeditious and cost-effective manner when compared to building the necessary
infrastructure and expertise to deliver the services internally and enables
customers to focus instead on their core competencies and strategies.
The Company has over 12 years of experience in the telecommunications
industry, its predecessor having been incorporated under the laws of the State
of Utah as Romney & Johnson Company on July 21, 1986. The Company became one
of the largest independent pay telephone providers in Utah by 1988. In 1989,
the Company initiated its call completion services business by installing a
small switch, along with its own dedicated network lines, and obtaining
necessary federal and state regulatory approvals. The Company changed its name
on July 31, 1990 to Teltrust, Inc. Since 1992, the Company has expanded its
service offerings to include national directory assistance, third-party
verification and calling card services. On November 1, 1995, the Company sold
all of the assets of its independent pay telephone business in order to focus
on its enhanced call processing and calling card service businesses. Effective
December 31, 1997, the Company acquired Quest to expand the
23
<PAGE>
Company's calling card services market and infrastructure. TTST Holdings, Inc.
was incorporated under the laws of the State of Delaware in April 1998.
Following the reorganization of the Company in April 1998, TTST Holdings
changed its name to Teltrust, Inc.
Teltrust's business is primarily transaction-based and operating revenues
are recognized as fees are earned for services performed. Depending on the
application, fees can be based on a variety of factors, including but not
limited to, calls attempted, calls completed, minutes of usage or hours of
service. The Company has a recurring revenue stream from a majority of its
customers. See "Business--Significant Customer Contracts."
The Company's costs of operating revenues consist primarily of compensation
and benefits for service agents, network and telephony costs, the cost of data
for its national directory assistance services and direct overhead costs
associated with generating operating revenues.
Operating expenses consist primarily of salaries, wages and related
benefits, sales and marketing costs, professional fees, legal fees, accounting
fees, rent, insurance and other general expenses including depreciation and
amortization.
RESULTS OF OPERATIONS
The following table sets forth selected data derived from the Company's
statements of operations as a percentage of total operating revenues for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Total operating revenues......................... 100% 100% 100%
Costs of operating revenues...................... 69 71 80
------ ------ ------
Gross profit..................................... 31 29 20
Operating expenses............................... 41 33 41
------ ------ ------
Operating income (loss).......................... (10) (4) (21)
Other expense, net............................... (2) (2) (2)
------ ------ ------
Net income (loss) from continuing operations be-
fore income taxes............................... (12) (6) (23)
Income taxes..................................... 2 0 0
Discontinued operations, net of income taxes..... 4 -- --
------ ------ ------
Net income (loss)................................ (6)% (6)% (23)%
====== ====== ======
</TABLE>
The following table sets forth for the years presented, the total operating
revenues of each of the Company's services, within the Company's two business
segments, and the percentage of total operating revenues represented by each
service:
<TABLE>
<CAPTION>
FOR THE
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Call Processing Services:
Call completion services..................... $27.8 82% $29.6 72% $38.3 67%
National directory assistance services....... 0.8 2 2.3 5 4.0 7
Third-party verification services............ 0.7 2 2.0 5 3.9 7
----- --- ----- --- ----- ---
Total call processing services............. 29.3 86 33.9 82 46.2 81
Calling card services.......................... 4.6 14 7.2 18 10.8 19
----- --- ----- --- ----- ---
Total operating revenues....................... $33.9 100% $41.1 100% $57.0 100%
===== === ===== === ===== ===
</TABLE>
24
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
OPERATING REVENUES
Operating revenues increased $15.9 million, or 39%, to $57.0 million in 1997
from $41.1 million in 1996. Call processing services revenues increased $12.3
million, or 36%, to $46.2 million in 1997 from $33.9 million in 1996. Calling
card services revenues increased $3.6 million, or 49%, to $10.8 million in
1997 from $7.2 million in 1996. The primary reasons for the increased revenues
can be attributed to: (i) additional business volumes with existing customers,
(ii) business with new customers and (iii) a shift to larger contracts with
both new and existing customers.
The Company's three contracts with BSLD and BSPC accounted for approximately
2.7%, 11.9% and 1.6% of the Company's 1997 consolidated operating revenues,
which combined represented 16.2% of the Company's 1997 consolidated operating
revenues. There were no other customers that accounted for more than 10% of
the Company's consolidated operating revenues during 1997. Furthermore, there
were no customers that accounted for more than 10% of the Company's
consolidated operating revenues in 1996. See "Business--Significant Customer
Contracts."
COSTS OF OPERATING REVENUES
Costs of operating revenues increased $16.2 million, or 55%, to $45.5
million in 1997 from $29.3 million in 1996. Approximately $12.7 million of
this increase was associated with the 39% increase in operating revenue during
1997 from 1996 levels. The remaining $3.5 million increase can be attributed
to: (i) a shift in the mix of operating revenues toward more lower-margin
services; (ii) the opening of two new call centers; (iii) increased staffing
and training costs; and (iv) additional network and telephony infrastructure
required for new business that the Company contracted for in 1996 and 1997.
Most of the operating revenues for this new business were not realized in
1997, but are expected to be realized in 1998 and thereafter.
OPERATING EXPENSES
Operating expenses increased $10.1 million, or 74%, to $23.7 million in 1997
from $13.6 million in 1996. This increase was primarily due to: (i) a $2.6
million provision for bad debts in 1997 (as opposed to a $0.8 million
provision for bad debts in 1996); (ii) the write-down of the Company's
investment in, and assets related to, dot.One (formerly Teltrust Data
Services, LLC d.b.a. Teltrust.com), which totaled $1.9 million; (iii) costs
associated with the Company's acquisition of Quest; (iv) increased
depreciation expenses of $ 0.5 million relating to greater capital asset
acquisitions and infrastructure enhancements during 1997; (v) increased
staffing and related compensation and benefits expense consistent with the 39%
growth in 1997 operating revenues; and (vi) increases in operating expenses
attributable to the increased business volume in 1997 and the ramp-up of
programs to accommodate expected future growth based upon new contracts
obtained during 1997.
OTHER EXPENSE
Other expense increased $0.3 million, or 42%, to $1.0 million in 1997 from
$0.7 in 1996. This increase was primarily attributable to increased interest
expense relating to higher borrowing levels in 1997 than in 1996 which was
partially offset by increased interest income on higher average cash and cash
equivalent balances in 1997.
INCOME TAXES
During 1997, the Company's effective income tax rate was less than 1% as a
result of recording a valuation allowance against the deferred tax asset
resulting from the 1997 net operating loss. During 1996, the Company's
effective income tax rate was less than 1% also as a result of recording a
valuation allowance against the 1996 net operating loss which was partially
offset by a benefit resulting from refunds of previously paid income taxes.
Certain of the Company's net operating loss carryforwards ("NOLs") are
limited by ownership changes (as that term is defined in Section 382 of the
Internal Revenue Code of 1986, as amended) that occurred on
25
<PAGE>
January 21, 1997 and December 31, 1997. See Note 7 to the Consolidated
Financial Statements for a more detailed discussion of the Company's NOLs.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
OPERATING REVENUES
Operating revenues increased $7.2 million, or 21%, to $41.1 million in 1996
from $33.9 million in 1995. Call processing service revenues rose $4.6 million,
or 16%, to $33.9 million in 1996 from $29.3 million in 1995. The national
directory assistance services and third-party verification services revenues
increased due to increased business with a broader range of customers and
additional revenues being realized from previously secured contracts. Both of
these product lines were in the formative stages in 1995 with revenue growth
accelerating in 1996. Calling card services grew $2.6 million, or 58%, to $7.2
million in 1996 from $4.6 million in 1995. The Company increased its focus and
its sales efforts on larger accounts with longer sales cycles in 1995 and 1996
and was successful in securing a contract with BSLD in November 1996.
COSTS OF OPERATING REVENUES
Costs of operating revenues increased $5.8 million, or 25%, to $29.3 million
in 1996 from $23.5 million in 1995. Approximately $5.0 million of this increase
was associated with the 21% increase in revenue during 1996 from 1995 levels.
The remaining $0.8 million increase is attributable to: (i) the opening of a
second call center and the corresponding increase in staffing and training
costs and (ii) additional network and telephony infrastructure required for new
business that the Company contracted for in 1995 and 1996.
OPERATING EXPENSES
Operating expenses decreased $0.4 million, or 3%, to $13.6 million in 1996
from $14.0 million in 1995. This decrease of $0.4 million was primarily due to
cost reductions by Teltrust during 1996.
OTHER EXPENSE
Other expense increased $0.1 million, or 16%, to $0.7 million in 1996 from
$0.6 million in 1995. This increase was primarily attributable to increased
interest expense relating to higher borrowing levels in 1996 than in 1995 which
was partially offset by increased interest income on higher average cash and
cash equivalent balances in 1996.
INCOME TAXES
During 1996, the Company's effective income tax rate was less than 1% as a
result of recording a valuation allowance against the deferred tax asset
resulting from 1996 net operating loss which was partially offset by a benefit
resulting from refunds of previously paid income taxes. During 1995, the
Company's net effective income tax rate (after combining the benefit from
income taxes with the income tax provision for the discontinued operations and
gain on disposal) was 2%. This net income tax provision primarily resulted from
the Company's alternative minimum tax liability. During 1995, the Company
provided a valuation allowance against the deferred tax asset resulting from
the 1995 net operating loss.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements consist primarily of working capital
needs, capital expenditures and payments of interest on its Credit Facility.
The Company's working capital requirements have increased largely as a result
of higher accounts receivable due to increases in operating revenues. In
addition, the Company has purchased and deployed additional property and
equipment in anticipation of future operating revenue growth.
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Teltrust had a negative $6.0 million working capital position at December
31, 1997 compared with a negative $1.7 million working capital position at
December 31, 1996. This $4.3 million change in working capital was primarily
due to the net loss the Company incurred in 1997.
The Company has a $20.0 million secured operating line of credit with Fleet
National Bank (the "Credit Facility"). The Credit Facility expires September
30, 2002 but is subject to quarterly reductions in the commitment amount
beginning March 31, 1999 in the following amounts: (i) 3.0% per quarter in
1999; (ii) 5.625% per quarter in 2000; (iii) 9.0% per quarter in 2001; and
(iv) 9.833% per quarter in 2002. Under the terms of the Credit Facility,
outstanding borrowings bear interest at the bank's base rate plus 1.5% or the
LIBOR rate plus 2.75%, although, these rates can change based upon the ratio
of total debt to EBITDA. Availability under the Credit Facility is subject to,
among other things, compliance with loan covenants. The Credit Facility
contains certain restrictive covenants such as: (i) minimum EBITDA
requirements; (ii) minimum interest and debt service coverage ratios; (iii) a
minimum fixed charge coverage ratio; (iv) a capital expenditures limitation;
and (v) a prohibition against the payment of cash dividends. The Credit
Facility is secured by a first priority perfected security interest in all
assets of the Company in addition to a pledge of the capital stock of Holdings
and its subsidiaries. As of December 31, 1997, the Company had advances under
the Credit Facility of $12.1 million with an effective interest rate of 8.8%.
As of December 31, 1997, the Company had $0.5 million in cash and cash
equivalents compared to a total of $8.5 million in cash and cash equivalents
and restricted cash at December 31, 1996, a decrease of approximately $8.0
million resulting primarily from the Company's net losses, the expansion of
the Company's switch and network infrastructure, and the addition of two new
call centers.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used by operating activities for the year ended December 31, 1997
was $6.7 million, resulting primarily from the net loss for 1997 of $13.2
million. The impact of the net loss was mitigated in part by increases in
current liabilities of $7.2 million, depreciation and amortization of $2.0
million, provision for doubtful accounts of $3.6 million and loss on writedown
of joint venture of $0.8 million which were partially offset by increases in
receivables of $6.6 million due to longer payment terms on larger contracts.
Net cash used by operating activities for the year ended December 31, 1996
was $3.4 million, resulting primarily from the net loss for that period. The
impact of the net loss was mitigated in part by depreciation and amortization
of $1.5 million and provision for doubtful accounts of $0.8 million and an
increase in receivables of $2.0 million. The use of cash by operating
activities in 1995 was primarily due to the Company's net loss of $2.0
million. The net loss was mitigated in part by depreciation and amortization
of $1.4 and a provision for doubtful accounts of $0.5 million and increased by
(i) increases in accounts receivable of $1.2 million and (ii) decreases in
current liabilities of $1.5 million and a gain not relating to operating
activities of $1.6 million. The gain related to the disposal of the assets of
the Company's pay telephone business in November 1995.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash used in investing activities was $3.2 million for 1997 and was related
primarily to $7.2 million of capital expenditures for new switch and computer
equipment, software, operator stations, furniture and leasehold improvements
for new call centers which was partially offset by use of $4.0 million in cash
restricted pursuant to the Company's sale of preferred stock. During the year
ended December 31, 1997, approximately $1.0 million of capital equipment was
acquired through lease financing.
Cash used in investing activities was $5.7 million in 1996 and was related
primarily to capital expenditures for equipment upgrades and expansion. During
the year ended December 31, 1996, approximately $1.9 million of capital
equipment was acquired through lease financing. In addition, $4.0 million of
the proceeds from the Company's sale of preferred stock was restricted for
capital expenditures. Net cash provided by investing activities in 1995 was
$2.5 million. Approximately $1.1 million was used for the purchase of
equipment which
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was offset by proceeds from the sale of the Company's pay telephone operations
for $3.7 million. Capital equipment acquired through lease financing was $0.5
million during the year ended December 31, 1995.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided from financing activities for the year ended December 31,
1997 was $8.9 million resulting primarily from $12.1 million in borrowings
under the Company's line of credit which was established in November 1997, the
use of $2.9 million of restricted cash to repurchase common stock and retire
debt and $0.8 million from the exercise of warrants, offset by $3.1 million in
notes payable that were retired in conjunction with the Quest acquisition,
$2.4 million in payments made to repurchase the Company's common stock and
$1.5 million in other debt and capital lease obligations that were retired.
Net cash provided from financing activities for the year ended December 31,
1996 was $10.2 million resulting primarily from $14.5 million of proceeds from
the sale of preferred stock, $1.5 million from the issuance of notes relating
to Quest and $0.5 million of proceeds from the issuance of subordinated notes
payable offset by $3.1 million in notes that were retired during 1996 and $0.3
million in capital lease obligations that were retired. In addition, $2.9
million of the proceeds from the sale preferred stock was restricted for the
retirement of debt.
Net cash provided from financing activities for the year ended December 31,
1995 was $3.0 million resulting primarily from the issuance of $4.9 million in
notes payable net of $1.5 million in notes that were retired in 1995 and $0.4
million in capital lease obligations that were retired.
FUTURE CAPITAL NEEDS AND RESOURCES
The Company expects to incur approximately $7.8 million in capital
expenditures during 1998 for: (i) additional switches, (ii) software, (iii)
network capability, (iv) telephony infrastructure and (v) the expansion and
improvement of the Company's facilities including its corporate offices and
call center operations. The Company will also use capital to repay principal
and interest on indebtedness.
The Company believes that its existing cash and cash equivalents,
availability under the Credit Facility and expected cash from operations will
be sufficient to fund its operating activities at least through the end of
1998. See "Risk Factors--Future Needs for Additional Financing."
IMPACT OF INFLATION
Teltrust does not consider inflation to have had a material impact on the
results of operations for the years ended December 31, 1995, 1996 and 1997.
YEAR 2000 COMPLIANCE
The Company believes that it has achieved substantial compliance on all
systems and software utilized in its operations. At present, the fraud control
systems at each of the Company's sites are not yet Y2K compliant. However,
each of the systems is being upgraded, with a target compliance date of
September 1998. The Company expects its total cost to achieve Y2K compliance
to be between $100,000 and $150,000. See "Risk Factors--Year 2000 Compliance"
and "Business--Operations and Technology--Year 2000 Compliance."
SEASONALITY
The Company's business follows the seasonal trends of its customers'
businesses. The Company generally experiences lower operating revenues during
the first and fourth quarters of each calendar year due to seasonal travel and
vacation patterns and reduced sales efforts by the Company's customers.
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BUSINESS
Teltrust is a leading independent outsource provider of a broad range of
enhanced call processing and calling card services to the domestic
telecommunications industry. The Company believes that it offers the most
comprehensive suite of services of any independent outsource provider in its
industry. This diversified suite of services includes call completion,
national directory assistance and third-party verification services in
addition to calling card services. Teltrust serves its customers through
state-of-the-art technology and switch-based call processing platforms and, as
of March 1998, more than 1,000 employees. The Company's customers include RBOC
affiliates (such as BSLD and BSPC), pay telephone and hospitality aggregators
(such as Peoples Telephone Company, AMI Telecommunications and Global Net),
IXCs (such as US Long Distance, WorldCom and LCI International), and other
large telecommunications resellers or users (such as TON Services and Eastern
Communications Network). The Company has also recently established contractual
relationships with affiliates of Ameritech Corporation (ACI and ASI) and
emerging telecommunications companies including CLECs (such as Nextlink and
Cox Com), wireless providers (such as Centennial Cellular, Omnipoint
Communications and PowerTel) and international carriers (such as Justice
Technology Corp. and Star Telecommunications). Many of the Company's customers
purchase a number of the Company's services under multi-year contracts and
utilize Teltrust to provide complex outsourcing solutions. During first
quarter ended March 1998, Teltrust processed over 21 million call processing
transactions and decremented more than 17.6 million domestic minutes for its
prepaid calling card customers.
INDUSTRY OVERVIEW
During the 1990s, changes in the regulatory environment and the emergence of
new technologies have created a growing and fiercely competitive environment
in the telecommunications industry. As a result, telecommunications companies,
including RBOCs, IXCs, LECs, CLECs and wireless providers, are evaluating
their existing services and seeking opportunities that will allow them to
compete more effectively, reduce operating costs, and increase usage, market
penetration and customer retention. Many of these companies are seeking access
to call completion services, national directory assistance services and
calling card platforms which are considered essential by end-users. Partnering
with an outsource provider, such as Teltrust, allows telecommunications
companies to bring new value-added products and services to market in a more
expeditious and cost-effective manner than by building the necessary
infrastructure to provide such services internally and enables
telecommunications companies to focus on their core competencies and
strategies. Additionally, such consumer service providers, through
outsourcing, are able to focus capital and other resources on marketing, in
addition to building and maintaining switching and network capacity. The
Company believes that an increasing number of telecommunications companies
consider outsourcing a critical element in executing their business plans as
evidenced by the emergence of growing numbers of third-party billing, customer
care and calling card service providers.
According to FCC reports, the telecommunications market in the United
States, including local, long distance, wireless and prepaid calling,
comprised an overall market estimated at more than $220 billion in 1996. In
addition, CLEC and wireless markets are growing at rates in excess of the
telecommunications industry as a whole, thus attracting new entrants into
those markets. As a result, the competitive environments in which
telecommunications companies compete for market share are being reshaped,
placing increasing demands on these companies to establish and differentiate
themselves in order to penetrate new markets and retain existing business.
Outsourcing allows new entrants in the telecommunications industry to
accomplish these goals without incurring extensive capital expenditures.
TELTRUST'S COMPETITIVE ADVANTAGES
Teltrust provides telecommunications companies with a broad range of
flexible and cost-effective solutions to their call completion, national
directory assistance, third-party verification service and calling card needs.
The Company believes that its services allow its customers to: (i) offer new,
value-added services to their retail customers, (ii) expand and enhance
traditional services such as agent-assisted, calling card and directory
assistance calling, (iii) reduce capital expenditures and operating costs
through outsourcing, and (iv) differentiate themselves in markets in ways that
enhance brand recognition and customer loyalty.
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The Company believes that the following constitute key competitive
advantages in its ability to successfully market and deliver to its customers
and potential customers the enhanced call processing and calling card services
they need:
FOCUS ON PROVIDING WHOLESALE OUTSOURCE SERVICES
Teltrust offers its diversified suite of enhanced call processing and
calling card services on a wholesale basis to companies in the
telecommunications industry. The Company's ability to provide a diversified
suite of outsource services to its customers distinguishes Teltrust from most
of its competitors who provide a more limited range of services. In addition,
unlike many other providers of call processing services, the Company does not
compete with its customers in their core businesses or target the end-users of
their products and services. Because Teltrust does not engage in mass market
operations, it is able to direct its service, technical and other resources
toward offering and developing a broad array of enhanced call processing and
calling card services to telecommunications companies. The Company believes
that telecommunications companies are increasingly seeking to outsource
functions to specialized third-party service providers, particularly those who
can offer a wide array of services.
PROVEN AND FLEXIBLE OPERATING INFRASTRUCTURE AND TECHNOLOGY
The Company's advanced technology and infrastructure has met and continues
to meet the rigorous service performance standards of its customers. The
Company believes its proven infrastructure and technology are key
differentiating factors in furthering existing relationships and attracting
new customers. In addition, the Company's flexible infrastructure allows it to
customize services to meet its customers' changing needs. The call processing
software resident in its switch platforms offers flexible call treatment and
routing options, and the search engine technology utilized in national
directory assistance services offers enhanced search capabilities and service
agent responsiveness. Components of the Company's call completion platforms
and calling card platforms are proprietary and have been developed to offer a
highly versatile approach to service delivery and have been tested over
several years of operations.
EXCELLENCE IN CUSTOMER SERVICE
Teltrust is committed to providing excellent service to its customers and
strives to respond to their individual needs. For example, many of Teltrust's
customers need to provide call processing and calling card services to end-
users who do not speak English. The Company believes that its ability to offer
service to its customers in over 20 foreign languages has been an important
factor for many of its customers in choosing Teltrust as its service provider.
Teltrust's customer support staff works closely with its customers to
establish quality standards and tailor the Company's services to meet the
individual needs of such customers. Service representatives participate in
extensive training that emphasizes courtesy, accuracy and time of response to
callers.
DEMONSTRATED PERFORMANCE AND EXPERIENCE
Since its founding in 1986, Teltrust has developed the infrastructure,
technology and operating methods and procedures necessary to secure ongoing
relationships with telecommunications companies. The Company provides reliable
and high quality enhanced call processing and calling card services as
measured against the stringent contractual performance standards that its
customers demand. The Company believes this experience has positioned it as a
recognized provider of high quality services and has enabled it to attract
customers such as BSLD, BSPC, ACI and ACS, LCI International, Cox Com and
Nevada Bell. Additionally, the Company believes its demonstrated performance
for existing clients has prompted such clients to turn to the Company to
fulfill their expanding service needs.
TELTRUST'S GROWTH STRATEGY
Teltrust's goal is to be the premier provider of outsourced enhanced call
processing and calling card services. The key elements of the Company's
focused growth strategy are as follows:
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CROSS-SELL TO EXISTING CUSTOMERS
The Company is focusing on expanding current customer relationships by
cross-selling additional services. The majority of the Company's customers
require many or all types of services the Company provides as part of its end-
user service offerings. Local, long distance and wireless providers offer call
completion and national directory assistance as standard services to their
retail customers, and many also offer prepaid calling card programs. In
addition, many of the Company's customers operate in regulated environments
requiring third-party verification of new service orders. The Company has been
successful in forming relationships in which its customers purchase one or,
more frequently, a combination of the Company's enhanced call processing and
calling card services. In some instances, network connectivity between the
Company and a particular customer for a single service can be utilized for the
provision of additional services, increasing operating efficiencies for the
customer, the Company, or both.
SECURE NEW CUSTOMERS
The Company is expanding its customer base by continuing to target RBOCs,
IXCs, LECs, CLECs, wireless providers and others that are not currently
customers. Such companies are seeking cost-effective and flexible ways to
provide enhanced services such as those offered by Teltrust to distinguish
themselves in retail markets. The Company intends to use its operating
experience, product strength and position in the marketplace to capture
increased market share and become the leading provider of outsourced enhanced
call processing and calling card services. The Company also intends to
generate growth by expanding its current service offerings to new markets.
Further, as deregulation continues and competition expands in international
telecommunications markets, the Company intends to offer its suite of call
processing and calling card services to international carriers. In addition,
deregulation of the public utility industry may lead to opportunities to
utilize the Company's third-party verification services in new markets.
DEVELOP ADDITIONAL SERVICES
The Company believes that telecommunications companies seeking to outsource
call processing and calling card functions will increasingly rely on full-
service outsource providers who can offer a broad array of high-quality
services. To meet this demand, the Company intends to continue to expand the
types of services it offers to meet its customers' expanding needs. One
current example of a new service is the Company's proprietary B.O.S.S.TM
system which expedites carrier change orders. Possible additional service
offerings could include international directory assistance and enhanced
calling card features such as conferencing, "follow me/find me" service and
speed-dialing.
MAINTAIN HIGH LEVELS OF CUSTOMER SATISFACTION
The Company intends to continue to provide superior customer service in
order to maintain and enhance its reputation as a leading independent provider
of outsourced call processing and calling card services. By responding to the
individual needs of customers, tailoring its services to those needs and
delivering its services professionally and efficiently, the Company believes
it will continue to be regarded as a high quality provider of such services.
LEVERAGE OPERATING INFRASTRUCTURE
Teltrust's operational structure provides opportunities to realize operating
leverage as the Company expands its business to meet the needs of current and
future customers. The Company currently operates 14 switches at 11 locations
in five cities, maintains network facilities in 24 states, operates four
service agent centers and employs, as of March 1998, more than 1,000 people.
In 1997, the Company upgraded and expanded certain switch sites and invested
in additional service agent centers. The flexible architecture of the
Company's infrastructure facilitates network connectivity between Teltrust and
its customers. Once it establishes a connection in order to provide a service
to a customer, the Company is often able to leverage this relationship to
provide additional services with the existing network connection.
Additionally, the Company has significant infrastructure capacity. As a
result, the Company can realize greater efficiencies through growth in its
business.
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CONSIDER STRATEGIC ACQUISITIONS
The Company's business strategy includes consideration of strategic
acquisitions in complementary and existing business areas, which may
facilitate more effective and rapid development of a broader array of services
or expansion of existing services than developing these service capabilities
internally. As an example, the Company's acquisition of Quest expanded
Teltrust's presence in the calling card services market and enhanced its
technology base.
DESCRIPTION OF TELTRUST SERVICES
ENHANCED CALL PROCESSING SERVICES
Teltrust provides its customers with a variety of enhanced call processing
services. These services provide the Company's customers the ability to
distinguish themselves in mass markets, bring products and services to market
faster and reduce operating costs. The Company's suite of enhanced call
processing services includes (i) call completion services, (ii) national
directory assistance and (iii) third-party verification services.
CALL COMPLETION SERVICES. The Company provides call completion services to
many sectors of the telecommunications industry, including RBOCs, IXCs, LECs,
CLECs, wireless providers, pay telephone and hospitality aggregators,
telecommunications resellers and international carriers. Customers of the
Company's call completion services include RBOC affiliates, such as BSPC and
BSLD; pay telephone and hospitality aggregators, such as Peoples Telephone
Company, Global Net and AMI Telecommunications; and IXCs, such as Access Long
Distance and Tel America/Kenna Communications. The Company also recently
entered into an agreement with an affiliate of Ameritech Corporation and
emerging telecommunications companies including CLECs, such as Cox Com and
Comcast Telecommunications. Teltrust's call completion services consist of
automated or live agent assisted calling card calling, collect calling and
third-party billed calling. The Company generally earns revenues from its call
completion services customers on a per-completed call, per call-attempt or
per-minute-of-use basis.
The Company's call completion services are delivered through the use of
state-of-the-art automated call processing platforms and highly trained
service agents. The Company provides call completion services from call
processing platforms located in Salt Lake City, Atlanta, Los Angeles, Miami,
and New York City, and from three service agent centers located in Salt Lake
City. Call completion services are accessed when users dial proprietary 1-800
numbers (e.g. 1-800-BELLSOUTH(TM) or 1-800-AMERITECH(TM)), 0 + area code and
phone number or 00 or 0. Calls being transported to Company facilities for
call completion services are dependent on network routing, programming of
premise equipment, or customer switch to Company switch connections.
When a call is routed to Company telecommunications switches for service,
databases are accessed to determine the type of service(s) to be provided.
Switching databases capture the incoming circuit identification, and the line
number (i.e., the phone number) from which a call was originated. Customer
specific configurations are implemented at the time of service initiation
based on customer requirements. These configurations instruct switching
systems how to treat a call based on circuit identification and/or line
number. The Company's switching databases employ extensive use of local and
wide area networks and are centrally managed from the Company's headquarters
in Salt Lake City. See "Business--Operations and Technology."
In conjunction with providing call completion services, the Company also
offers STATUS(TM), a proprietary refund and repair service that enables
callers who are experiencing difficulty in completing a call or who may have
lost money at a pay telephone to register their complaint and either arrange
to receive a cash refund or have their call completed at no charge (or free
call completion service). Each call that identifies a problem with a telephone
location results in a "trouble ticket" being posted on an electronic bulletin
board to enable the Company's customer to retrieve the information and take
corrective measures. The Company has developed a sophisticated fraud control
system in conjunction with its free call completion service, without which
system the offering of free calls would entail a high degree of risk of
fraudulent abuse of the system. Customers who utilize the Company's free call
completion service are able to realize substantial savings by avoiding the
expense of
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mailing small refund checks, and they are able to minimize their risk of
losses from callers abusing the system by making repeated requests for free
calls. Among the Company's clients utilizing this service are Peoples
Telephone Company and Nevada Bell.
One of the Company's advantages in the marketplace is its ability to offer
multiple services from a single platform. In addition to traditional calling
card, collect or third-party call options, the Company can implement enhanced
service options for its customers. For example, a customer may wish to offer
their telecommunications cardholders the ability to access national directory
assistance or customer service, in addition to traditional call completion
options, by dialing "0" or a proprietary "1-800" number. The Company believes
its ability to integrate service offerings in this fashion provides a
competitive advantage.
According to industry reports, it is estimated that calling card or agent-
assisted calls generate more than $13.0 billion in revenue per year. The vast
majority of these calls are handled by the major IXCs, such as AT&T, MCI and
Sprint, the RBOCs and GTE. Over the last five or more years, the
telecommunications industry has seen a significant transition to "access code"
calling, such as 1-800-BELLSOUTH(TM). These calls, handled by automated
platforms or live operators, are generally billed to IXC- or LEC-issued
calling cards or are collect or third-party billed. Many second and third tier
IXCs, as well as CLECs and wireless communications providers, simply route
these calls, from their telephony switches, to the major IXCs or RBOCs for
call completion, instead of building the necessary infrastructure to handle
such calls. Historically, these calls were placed by consumers dialing "0"
plus the area code and the number to which they wished to be connected.
With increased competition in telecommunications markets, many
telecommunications companies seek a more economical way to provide call
completion services to end-users, and expect increased flexibility and
functionality in the platforms and operators who provide such services. The
Company has developed and deployed systems, technology, management and trained
service agents to deliver a broad range of call completion services. These
services are distinguished by branding capabilities and enhanced functionality
resident in platforms to which such "0" or "1-800" calls are routed.
NATIONAL DIRECTORY ASSISTANCE SERVICES. The Company currently provides
national directory assistance services to many sectors of the
telecommunications industry including RBOCs, IXCs, LECs, CLECs, wireless
providers, pay telephone and hospitality aggregators, telecommunications
resellers and international carriers. Customers of the Company's national
directory assistance services are telecommunications aggregators, such as
Eastern Communications Network, and IXCs, such as US Long Distance (recently
acquired by LCI International), Total Tel and Coastal Telephone. The Company
has also established relationships with wireless providers, such as Omnipoint
Communications, CellularOne of Springfield, Centennial Cellular and PowerTel,
and CLECs, such as Cox Com. Teltrust provides national directory assistance
service covering the entire United States, Puerto Rico and the United States
Virgin Islands. The Company earns revenues from its national directory
assistance operations on a per-call basis.
One of the advantages of the Company's national directory assistance
services is that a user does not need to know the area code for the listing
being requested. This is an important feature given the recent proliferation
of new area codes throughout the United States. Under traditional directory
assistance service models, if a user dialed 213-555-1212 to find a listing in
Los Angeles, but the desired listing was in the 310 area code, the user would
need to hang up and dial 310-555-1212 to access the listing. Teltrust's
national directory assistance services can provide the 310 listing even if the
user dialed 213-555-1212. Additionally, listings can be provided for different
geographic regions during the same call.
Teltrust's national directory assistance service has a number of enhanced
features, including automated national directory assistance call completion
services. A user has the option, after having received the listing, of
automatically being connected to the listing received. The Company's wireless
provider customers, in particular, find this option attractive in enhancing
"ease of use" for their subscribers. Industry estimates indicate that by the
year 2000 calls placed through wireless providers will account for 50% of all
directory assistance calls. The Company's national directory assistance
services can also provide reverse search listings to an end-user who has a
phone number for which a name listing is sought. Additionally, the Company's
systems can provide listings
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based on a single key word search criterion. For example, if an end-user is on
California Street in San Francisco, and is looking for the nearest flower
shop, national directory assistance can provide a listing by searching on the
entry "flower" and the entry "California Street" in San Francisco. In
addition, the Company's national directory assistance services can perform
searches by standard industrial classification code.
The Company utilizes a leading national database provider to supply the data
used by the Company in providing national directory assistance services.
Additionally, the Company has access to Electronic Directory Assistance
databases maintained by LECs. Access to such data enhances the Company's
accuracy in providing listings to callers and provides it with a competitive
advantage in the marketplace.
In late 1997, the Company invested in substantial system upgrades to further
enhance its national directory assistance services. The upgrades are expected
to provide additional value-added service components to the existing national
directory assistance service, reduce Company operating costs by providing
additional staff management tools and enhancing system interface for service
agents and provide the Company with the ability to offer a stratified product
set to meet its customers' demands.
According to industry reports, it is estimated that directory assistance
calls generate more than $1.5 billion in revenue per year. The directory
assistance market has historically been primarily served by the RBOCs and
other traditional LECs such as GTE. Only recently has the market seen IXCs and
other directory assistance companies provide this service. This is due to the
fact that the RBOCs and LECs issue a phone number when local service is
initiated for a residence or business and therefore have been the parties who
control and maintain the data regarding phone numbers and addresses. The RBOCs
and LECs operate directory assistance centers within their respective regions
and ultimately handle most calls needing a directory listing for residences or
businesses served by that RBOC or LEC. This historically included providing
service to IXCs and wireless providers. For example, if a long distance
carrier customer dialed information for a listing in another state, the long
distance carrier would typically route that call to the LEC that provided
local service to that listing.
With the advent of national listing databases, long distance and wireless
providers have an alternative and can begin to purchase directory assistance
service from new competitive providers. During recent years, the market has
seen companies develop comprehensive and updated national listing databases,
followed by companies who set up operations to utilize such data for directory
assistance resale. These databases are typically comprised of any number of
input sources, including white and yellow page listings and the purchase of
RBOC and LEC data.
The demand for competitive directory assistance service has grown in recent
years, in large part due to increased competition among established local and
long distance carriers and wireless providers, as well as new entrants in each
of these markets. Telecommunications companies are looking to single source,
competitive alternatives to provide their retail customers with national
directory assistance, complemented by enhanced services. The introduction of
national "411" directory assistance by some of the RBOCs has heightened
consumer awareness of national directory assistance, and has set the stage for
local competitors also requiring a national product. Competition in the
directory assistance marketplace has also spurred innovation and resulted in
increased functionality of directory assistance platforms, above and beyond
the typical playback of a listed number. For many companies, a single source,
national provider can reduce network interconnection costs and provide branded
service, something historically not available from the RBOCs and LECs. The
Company has established key relationships with data providers and deployed
highly technical database interface software to take advantage of this trend,
with the goal of becoming the premier national directory assistance provider
in its markets.
THIRD-PARTY VERIFICATION SERVICES. The Company is one of the leading
independent providers of third-party verification services to
telecommunications companies in the United States. The Company recently
expanded operations into a new service agent center with 250 stations
dedicated to its third-party verification services. Utilizing a strong
management team and sophisticated call management and digital recording
technology, the Company provides third-party verification services to all
sectors of the telecommunications industry. Customers utilizing the Company's
third-party verification services include IXCs, such as LCI
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International and WorldCom, and telecommunications resellers, such as The
Furst Group and Cydcor. The Company also recently entered into agreements to
provide third-party verification services to an RBOC affiliate, US West
Communications, CLECs, such as Cox Com and Comcast Telecommunications and
international carriers, such as Star Telecommunications and RSL Com U.S.A.
Third-party verification is an FCC requirement designed to protect consumers
from a practice known as "slamming," which is the unauthorized switching of an
end-user's IXC or LEC without first obtaining the consent of the end-user.
Slamming first emerged as a significant problem in the late 1980's and early
1990's with the emergence of significant competition in the long distance
marketplace. Hundreds of new long distance carriers and resellers began
competing with AT&T through a variety of innovative marketing approaches
including telemarketing. The increase in competition in the long distance
marketplace benefited end-users by lowering long distance charges
significantly, but it also created an environment that made slamming all too
common. By 1996, the FCC and many state PUCs received more complaints
regarding slamming than any other issue.
To deter slamming, in 1992 the FCC ordered all IXCs to implement one of four
procedures to verify long distance service change orders generated by
telemarketing. The four alternatives are: (i) obtain a written Letter of
Agency from the end-user; (ii) receive confirmation from the end-user via a
toll-free number provided exclusively for the purpose of confirming change
orders electronically; (iii) use an independent third party to verify the end-
user's order; or (iv) send an information package that includes a postpaid
postcard which the end-user can use to deny, cancel or confirm a service
order, and wait 14 days after mailing the packet before submitting the
preferred IXC change order. Because the third option, the use of an
independent third party to verify an end-user's order, is the quickest way to
effect the change to an end-user's preferred IXC, most IXC's have adopted this
option when telemarketing their services. It is estimated that more than 40
million third-party verification transactions were processed in the United
States in 1997. With the passage of the Telecommunication Act of 1996 and the
emergence of telecommunications competition in local markets, Congress, the
FCC, state PUCs and numerous other consumer protection organizations have
begun to evaluate the need to implement third-party verification and other
anti-slamming measures on a broader scale than is currently in place in the
long distance marketplace. For example, the FCC has proposed to amend its
rules to apply the four verification procedures described above to changes in
local exchange, as well as long distance, services.
In addition to the FCC's efforts to expand verification requirements to all
carriers, several state PUCs have implemented anti-slamming rules, which the
Company believes will result in the increased need for the Company's third-
party verification services. For example, on January 1, 1997, the State of
California implemented rules that expanded the requirements for third-party
verification services by requiring that an independent third-party
verification company verify any residential subscriber carrier change, no
matter how the carrier marketed its services to the residential consumer.
Numerous other states have either implemented new verification requirements or
are in the process of implementing verification requirements to combat
slamming.
The Company believes third-party verification services will benefit from
regulatory changes taking place in the United States telecommunications
industry. Third-party verification should become increasingly important as
telecommunications competition increases at the local level. The Company
believes that deregulation in other monopoly markets such as gas and electric
utilities may also create new demand for third-party verification services
beyond the telecommunications industry.
CALLING CARD SERVICES
The Company's calling card services are provided through two applications:
wholesale service applications and co-branded applications. Wholesale service
applications customers purchase network and platform services from the Company
on a "minutes of use" basis. Such customers have their own distribution or
end-user bases in place and outsource the telecommunications carriage and
technology provision. Certain customers, including IXCs, CLECs and others, may
utilize an existing network and simply route calls over that network to the
Company's platforms, paying the Company solely for the use of its call
processing technology. The Company
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also works closely with its customers to offer additional enhanced services to
end-users. Customers of co-branded service applications purchase cards from
the Company at a discount from retail value. Customers in this market segment
are generally retail chains who wish to offer patrons prepaid calling cards in
their name. Customers utilizing the Company's calling card services include
TON Services (an affiliate of one of the largest operators of truck stop
fueling and convenience facilities in the United States) and ACI. In co-
branded service applications, the Company provides services to retailers, such
as Heilig Myers and El Amal, a Puerto Rico-based convenience and drug store
chain.
All customers have access to state-of-the-art point-of-sale activation
technology, offering users quick, convenient activation of accounts. The
Company also can supply ready-to-use displays for its customers' outlets.
Customers are able to leverage the Company's technology to offer end-users
multiple services from a single access point. Enhanced services available as
part of the Company's calling card services include: voice mail, fax
capabilities, the ability to purchase other types of products, and access to
weather and stock market reports. The Company's technology also provides its
customers with the ability to quickly refresh cards for re-use.
Point-of-sale activation and refresh technology is a critical component of
prepaid calling card services. Generally, cards are either "active" on the
shelf or activated by swiping an exposed magnetic strip at the time of end-
user payment. Such programs generally utilize cards carrying certain
denominations of value, such as $10, $25 or $50. The Company has developed
technology allowing retail locations to stock cards that carry no pre-
determined denomination or value. The end-user elects how much credit to
purchase, and upon remittance of payment, the card is swiped through a cash
register or credit card verification machine, and instantly activated in the
Company's platforms. Cards can be refreshed either at a point of sale or
through a customer service agent over the telephone. The Company is also
deploying postpaid applications utilizing its technologically advanced
existing prepaid platforms. The Company's objective is to provide a robust,
flexible calling card platform giving Teltrust customers the ability to offer
a broad range of services with flexible payment options.
Prepaid calling cards have been widely accepted and used for many years
outside of the United States and have become an increasingly accepted method
of payment for away from home calling over the last four years in the United
States. The prepaid calling card segment is now one of the fastest growing
segments in the telecommunications industry and is estimated in industry
reports to be a $2.0 billion market by 2000. Prepaid calling cards allow the
consumer to purchase a pre-determined amount of calling value. Cards are
usually purchased in grocery stores, drug stores, convenience stores and other
retail locations. A prepaid calling card enables a consumer to place local,
long distance and international calls from virtually any touch tone phone.
Callers dial special "1-800" numbers, are prompted for a card number and PIN,
and then given access to Company platforms for a variety of service options.
End-users in the United States are increasingly finding prepaid calling cards
advantageous and convenient. With prepaid calling cards, users receive no
monthly billing statement, can purchase and refresh cards by purchasing
additional minutes based on their calling needs, and the risk of fraud or
theft is limited to the purchased amount of time on the card.
In December 1997, the Company completed the acquisition of Quest and
combined its calling card operations with those of the Company. Quest is a
ten-year old company and over the last five years has been a pioneer in the
United States prepaid calling card market, being one of the first prepaid
service companies to be fully tariffed for service provision in the entire
United States. Quest has developed and deployed sophisticated and flexible
proprietary technology, utilizing Harris Digital Telephone Systems ("Harris")
telephony switches similar to those used by the Company. The Company believes
the acquisition will enable it to offer its customers a broader range of
services, position it for additional growth and enhance the Company's focus on
the ongoing growth of prepaid and postpaid calling card revenues and profits.
The Quest transaction was the Company's first acquisition and was executed as
a strategic expansion of an existing service. Certain economies of scale are
anticipated to be realized from the acquisition, including purchasing power
relative to network transmission, the primary cost in the provision of prepaid
services.
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SALES AND MARKETING
The Company markets its services through its executive management, sales
management, customer support and marketing teams. Executive level personnel
are based in Salt Lake City and Atlanta, and the Company has sales
representatives in several other locations in the United States. Sales and
marketing strategies focus on leveraging initial service contacts to include
additional services and often cross multiple vertical markets, taking
advantage of the Company's diversified suite of services.
Product management teams facilitate the Company's marketing strategies
through: (i) market research performed in-house and by outside specialty
firms; (ii) evaluations of the Company's product lines vis-a-vis its
competition; (iii) product enhancements required to meet vertical market
demands; and (iv) product development recommendations to meet short and long-
term marketing and profitability goals.
In Salt Lake City, the Company's sales force is comprised of three sales
executives and five sales professionals. This staff focuses primarily on the
following markets: RBOCs, IXCs, LECs, CLECs, wireless providers and calling
card service providers. In Atlanta, the Company has a sales executive and
professional staff focused on the calling card services market. Additionally,
the Company has sales professionals located in Chicago, Las Vegas and Vero
Beach who serve clients in the pay telephone provider and hospitality service
markets. The Company also engages a limited number of brokers or non-employee
sales aggregators nationwide. Sales cycles are typically measured in months.
An important component of the Company's sales and marketing efforts is its
customer support team. Once the sales staff has secured a customer contract,
Teltrust's customer support specialists work closely with the new customer to
coordinate operations set up and implement the appropriate technical interface
applications, such as switch interfaces and customized data communications
processes. In addition, the customer support staff works with the Company's
clients to establish quality standards and tailor Teltrust's services to the
individual needs of such customers. In addition, as customer support
specialists learn about new customers, they work with sales and marketing
personnel to attract these customers to other components of the Company's
suite of services.
The Company's advertising and promotional activities include the production
of a variety of sales and marketing materials across all markets served. The
Company advertises in prominent trade publications, and produces white papers
and feature articles aimed at local and national publications. The Company has
a public relations program assisted by an outside public relations firm for
development of press materials and participates in major industry trade shows
in all of the Company's vertical markets.
OPERATIONS AND TECHNOLOGY
The technology segments that support the Company's operations are (i)
switching and service agent centers, (ii) network technology, (iii)
information systems and (iv) remote systems and a network control center.
SWITCHING AND SERVICE AGENT CENTERS. The Company utilizes Harris 2020
switches for both tandem and operator switching systems for its call
processing and calling card services. The Company utilizes the Harris
Protocall operator services systems for automated and live agent services. In
its calling card operations, the Company utilizes the Harris 2020 system as
the base switching system. The Harris 2020 system is modular and scalable in
design allowing for cost-effective systems deployment from 768 to 10,000
ports. The Harris 2020 system is fully certified for Class 4 (tandem), agent
services/ACD and Class 5 (local exchange) operation, is fully Signaling System
7 ("SS7") compliant and has full critical component redundancy for network
reliability. In addition to such designed redundancy, each site has been
configured with fully redundant and dual redundant SS7 links, battery back-up
and triple redundant common control links from all sites to the Salt Lake City
tandem and network operations center. All sites are also supported by
emergency power systems.
Switching sites for its call processing services currently include the
principal tandem location in Salt Lake City, four additional switching sites
in the Salt Lake City area and remote switching sites in Atlanta, Miami, Los
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<PAGE>
Angeles and New York City. Switching sites for the Company's calling card
operations currently include Salt Lake City and two switches in Atlanta. The
Company currently plans to install several new switch sites in 1998 to
accommodate additional business under contract.
The following chart depicts the Company's switch deployment as at March 31,
1998:
<TABLE>
<CAPTION>
NUMBER NUMBER % PORT TOTAL PORT
CITY OF SITES OF SWITCHES UTILIZATION CAPACITY
- ---- -------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Salt Lake City...................... 5 6 55% 32,000
Atlanta............................. 2 4 60 28,000
Los Angeles......................... 2 2 50 14,000
Miami............................... 1 1 45 10,000
New York City....................... 1 1 72 2,000
--- --- ------
Total........................... 11 14 55 86,000
=== === ======
</TABLE>
The Company presently operates three service agent centers in Utah and one
service agent center in Atlanta, Georgia. An additional Utah-based service
agent center (Clearfield) is planned to be utilized beginning in the quarter
ending September 30, 1998. The following chart depicts the Company's service
agent center capacity at March 31, 1998 (including the Clearfield facility):
<TABLE>
<CAPTION>
STATION STATION %
SERVICE CENTER CAPACITY UTILIZATION UTILIZATION SERVICE
- -------------- -------- ----------- ----------- ----------------------
<S> <C> <C> <C> <C>
Gatty Center(1)........ 269 202 75% Call Completion,
National Directory
Assistance, STATUS(TM)
Teltrust West Center... 250 100 40 Third-Party
Verification
Cottonwood Center...... 219 86 39 Call Completion,
National Directory
Assistance, Calling
Card Services
Clearfield Center...... 150 0 0 As Required
Atlanta Center......... 60 10 12 Calling Card Services
--- ---
Total.............. 948 398 42(1)
=== ===
</TABLE>
- --------
(1) The Company expects to terminate its operations at the Gatty Center in
November 1998. Termination of such operations will result in a station-
capacity reduction of 269 stations. Such capacity loss is expected to be
offset, however, by the planned opening of an additional Utah-based
service agent center in the quarter ending September 30, 1998 that would
provide approximately 125 additional stations. After giving effect to a
net 144-station capacity loss, the Company's utilization of its station
capacity on a pro forma basis at March 31, 1998 would be 50% of capacity
rather than 42%. The Company believes, however, that its current capacity
is adequate for its existing business and that it will have the ability
to add additional station capacity when required in the future.
The Company operates a proprietary Least Queue Routing system for its call
processing services to provide the network the ability to query the service
agent center command routing database prior to selecting a location to which
to route each call. This system allows the network to be updated every second
as to the availability of agents in each functional service center which
increases overall efficiency while adding a level of redundancy not otherwise
available.
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NETWORK TECHNOLOGY. The Company has developed a communications and control
network between all remote locations and the Salt Lake City main tandem and
the Company's network operations control center. The Company's communications
and control network provides triple redundant high-speed data communication
between each site and the main tandem, all service agent centers, the
information systems center and the network operations center. Each independent
function within the network that requires command and control is not only
triple redundant but all circuits are also routed on diverse routes for
greater reliability.
The network technology operation utilizes highly reliable communications
equipment such as Codex, Cisco routers, Cisco ATM and 100Mb wide area data
networks. The Company has also embarked on a program of developing an even
higher level of network reliability with the deployment of synchronous optical
network self-healing technology between all locations in the greater Salt Lake
City area.
INFORMATION SYSTEMS. The Company's information systems operation is based on
client server technology. Network data is processed by the information systems
department into a base call record. The Company utilizes the base call record
to deliver all revenue, traffic, utilization, exception and agent activity
reports. Complete and comprehensive reporting packages have been developed
over the last seven years. Network technology provides dual redundant data
feeds from all sites to the information systems operations. Data feeds are
both real time and hourly. Dual real-time feeds are crosschecked to each other
and the dual hourly feeds are also checked to each other. Accuracy is further
maximized by cross checking the real-time feeds to the hourly feeds. Data
processing systems are all client server systems with redundant or triple
redundant mission critical components. Quality control processes are managed
by the Company's information systems support and quality control group within
the information systems department. The Company has taken aggressive steps to
ensure that its information systems are able to consistently handle and
process information using post-year 2000 date information.
REMOTE SYSTEMS AND NETWORK CONTROL. The Company presently monitors and
manages all sites, including all Salt Lake City sites, remotely from the
technical operations center. The present remote systems and network control
operation allows the Company's technical and engineering staff to manage and
monitor all network elements and network support elements remotely. The
Company's technical operations center currently utilizes several surveillance
systems for monitoring and managing its remote sites including: a Boole and
Babbage "Command Post" system used to monitor the Harris switches and many of
the site support systems; a General Signal 7 View system used to monitor SS7
links at all sites; a Hewlett Packard HP Open View system used to monitor all
peripheral processors, billing, validation, and fraud control processors,
local area networks, wide area networks, routers, data communications gear and
all other SNMP compliant network and network support elements.
FRAUD PREVENTION. The Company presently utilizes a three-tiered fraud
prevention system: the Company's internal controls, checks conducted by the
Company's "Hub" provider and safeguards implemented by credit card companies.
All of the Company's switches have on-site proprietary fraud-control systems
that are redundant and utilize the validation, verification and fraud control
processes of both its validation "Hub" provider and each of the RBOCs and
major commercial credit card companies. Prior to any call being placed on the
network, the billing number or card number is checked against Teltrust's
proprietary fraud system which analyzes factors such as high usage in a short
time period, long call durations, high-risk location information,
international calling patterns and several other factors. After call
information clears the Company's proprietary fraud control application, a
query is sent to the validation "Hub" provider which conducts a similar fraud-
control check based on activity from dozens of other carriers that utilize the
validation networks. After call information clears the Hub provider's
scrutiny, a query is launched to the applicable RBOC or credit card system for
final verification. The applicable RBOC or credit card company conducts
additional audits on a more global basis and then sends an appropriate
acceptance, warning or negative response to the Hub provider which in turn
forwards such information to the Company's system. Statistics are provided on
a real-time basis to the Company's fraud control department and the technical
operations center for additional decision making if necessary. Management
believes that its fraud prevention program has enabled its losses attributable
to fraud to be substantially less than the industry average.
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<PAGE>
YEAR 2000 COMPLIANCE. In mid-1997, the Company embarked upon an in-depth Y2K
compliance project. Working with the major system and software manufacturers,
the Company believes that it has achieved substantial compliance on all
systems and software utilized in its operations. Presently, the Harris
switching systems and the Harris-provided automated operator service systems
are Y2K compliant. In addition, the Company's billing and validation systems,
information systems, database systems and network surveillance and control
center systems are presently Y2K compliant. At present, the fraud control
systems at each of the Company's sites are not yet Y2K compliant; however,
each of such systems is being upgraded, with a target compliance date of
September 1998.
Y2K compliance "inter-operability" testing is currently underway or has been
completed with all major customers such as BSLD, BSPC and ASI. All bulletin
board data files have been brought up to Y2K compliance, and all of the
Company's customers have been notified of the compliance methodology and file
modifications. The Company intends to continue to notify all customers of
compliance issues and implementation.
SIGNIFICANT CUSTOMER CONTRACTS
The Company has entered into a series of multi-service contracts with BSLD,
BSPC, ACI and ASI. For the year ended December 31, 1997, operating revenues
from Teltrust's three contracts with BSLD and BSPC accounted for 2.7%, 11.9%
and 1.6% of the Company's operating revenues, and operating revenues from
these contracts are expected to generate a higher percentage of total
operating revenues in the future. The Company expects to begin earning
operating revenues under its contracts with ASI and ACI during the quarter
ending June 30, 1998. The Company believes its contracts with ASI and ACI will
generate significant operating revenues in the future. An overview of the
principal terms of Teltrust's contracts with these customers is set forth
below. See "Risk Factors--Risk Related to Loss of Substantial Customer
Contract" and "--Significant Customer Relationships."
BELLSOUTH AGREEMENTS. In November 1996, the Company entered into a contract
with BSLD under which the Company provides call processing and national
directory assistance services to BSLD's markets, which currently include
wireless markets, wireline markets outside of the nine-state BellSouth region
and certain intraLATA markets within the nine-state BellSouth region. At this
time, BellSouth does not have the authority to provide interLATA long distance
service within the nine-state BellSouth region. When BellSouth obtains such
authority and commences providing such service, this contract provides that
Teltrust will supply call processing and national directory assistance
services to BSLD in such expanded markets. It is expected, however, that when
BellSouth obtains the aforementioned authority, BSLD will cease using the
Company for automated call processing services. The initial term of the
contract expires on January 2000, but the agreement is automatically renewed
quarterly unless one of the parties provides prior written notice of its
intention to terminate.
In February 1997, the Company entered into a contract with BSPC to provide
call processing and national directory assistance services for calls
originating from BSPC's paystations. In addition, the Company serves as the
interLATA network carrier for services originating from certain BSPC
locations. In the event that BellSouth becomes able to provide interLATA long
distance service within the nine-state BellSouth region, the Company will
cease to provide interLATA long distance carrier services and will lose the
interLATA network carrier operating revenues generated by the provision of
these services. The initial term of the contract expires in February 2002, but
the agreement is automatically renewed quarterly unless one of the parties
provides prior written notice of its intention to terminate.
In October 1997, the Company entered into an additional contract with BSLD
to provide call processing and national directory assistance services for
calls placed through the 1-800-BELLSOUTH(TM) access number. As the contract is
currently structured, the Company earns revenues directly from the end-users
of its services and remits certain commissions to BSLD for calls initiated
outside the nine-state BellSouth region. The Company also contributes to the
expenses of marketing the 1-800-BELLSOUTH(TM)name. In the event BellSouth
receives regulatory authority to provide interLATA long distance service in
any of the nine states in the BellSouth region prior to December 31, 1999, the
nature of the relationship will change substantially so that the Company will
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<PAGE>
begin paying commissions that it has not previously incurred. If BellSouth
secures such regulatory authority in all nine states, the Company will
recognize a wholesale operating revenue stream under the terms of the November
1996 contract with BSLD, and the Company will no longer recognize operating
revenues from end-users. As a result, there would be a substantial reduction
in operating revenues to the Company. The Company would continue, however, to
be a provider of outsourced services to BSLD to support its 1-800-
BELLSOUTH(TM) service. The initial term of the contract expires on December
31, 1999, but the agreement is automatically renewed on a monthly basis unless
otherwise agreed by the parties. See "Risk Factors--Risks Related to
Substantial Customer Contract" and "Risk Factors--Significant Customer
Relationships."
AMERITECH AGREEMENTS. In February 1998, the Company entered into a contract
with ASI to be a provider of call processing services for calls placed through
the 1-800-AMERITECH(TM) access number. Teltrust provides the
telecommunications services sold under such name which originate from the
Ameritech region. The ASI contract is scheduled to terminate in March 2000 but
is renewable at ASI's option for additional twelve-month periods. ASI has the
right to terminate the agreement if a change in control of the Company occurs
so that it is controlled by any of certain specified telecommunications
companies or, after the initial term of the contract, without cause.
In September 1997, Quest entered into a contract with ACI to provide
technology and a variety of services in connection with ACI's prepaid calling
card program. ACI purchases from Teltrust on a wholesale basis services such
as calling card activation and personal identification number implementation,
card printing and design, and three-way calling, voice mail and similar
services. The initial term of this contract is scheduled to expire in
September 2000, but the agreement is automatically renewed on an annual basis
unless one of the parties delivers notice of its intention to terminate. ACI
has the right to terminate the agreement if a change in control of the Company
occurs so that it is controlled by any of certain specified telecommunications
companies.
Each of the BSLD, BSPC, ASI and ACI contracts requires payment of a
contractually-agreed upon amount in the event of early termination of such
contracts without cause. There can be no assurance, however, that any such
amount will sufficiently compensate the Company for the investment it has made
to support the canceled contract or that it will replace the revenues it will
lose as a result of the early termination. Consequently, the failure of the
Company to obtain renewal of any of the contracts with BSLD, BSPC, ASI or ACI,
or the termination of such contracts, could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Risk Factors--Significant Customer Relationships."
PERSONNEL AND TRAINING
The Company believes a key component of its success is the quality of its
employees; therefore, the Company emphasizes a systematic approach to
recruiting, training and managing qualified personnel. The Company enjoys a
full-time training staff that customizes programs for all its service
applications. Typically, training for call completion and national directory
assistance is a four-week process that includes classroom training and closely
supervised call handling. Sales and marketing personnel also attend the
training sessions provided to the Company's service agents. The Company
provides regular refresher training, motivational training sessions and
training on how to address process changes, new services features and enhanced
system functions.
As of February 28, 1998, the Company employed approximately 1,030 persons.
Of this total, approximately 714 persons worked full time and 316 persons
worked on a part-time basis. None of the Company's employees are members of a
labor union or are covered by a collective bargaining agreement. The Company
believes that its relations with its employees are good. The Company has
located its primary switching and service agent centers in Salt Lake City to
take advantage of the available high quality, dedicated, multilingual work
force. The Company believes that its relatively high proportion of full time
employees provides a stable work force and reduces the Company's recruiting
and training expenditures.
COMPETITION
The various markets in which the Company competes are characterized by
rapidly changing market forces, technological advancements and increasing
competition from large IXC- or RBOC-affiliated companies and a
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<PAGE>
variety of small, independent companies. The Company expects competition to
increase in the future. The Company attempts to differentiate itself from its
competitors by offering an integrated suite of services primarily on a
wholesale basis to other telecommunications companies. Other providers
currently offer each of the individual services and certain combinations of
the services offered by the Company, but Teltrust is unaware of any single
competitor offering the full range of products offered by the Company.
CALL COMPLETION SERVICES. In the call completion services market, the
Company's principal competitors include RBOCs and RBOC affiliates, IXCs and
IXC affiliates, independent LECs, such as SNET and Century Telephone, and
other independent companies offering various forms of call completion services
including Opticom, a division of One Call Communications.
NATIONAL DIRECTORY ASSISTANCE SERVICES. In the national directory assistance
services market, the Company's principal competitors include RBOCs and RBOC
affiliates, IXCs and IXC affiliates and independent LECs. The Company also
faces competition in this market from independent companies offering various
forms of directory assistance services including Metro One Telecommunications,
Excell Agent Services, INFONXX and HebCom. Management believes that many of
these independent companies typically focus on narrow market segments, such as
the wireless market, rather than offer directory assistance services to the
broader telecommunications marketplace.
THIRD-PARTY VERIFICATION SERVICES. In the third-party verification services
market, the Company's principal competitors include specialized companies such
as Verification Plus--Advanced Datacomm, Quick Response, Unibase Technologies
and Century Telecommunication. The Company also faces competition from smaller
companies that offer automated verification services including VoiceLog and
Unitel. Because federal and state third-party verification rules typically
mandate that carrier verification services be conducted by an "independent"
third-party, the Company does not anticipate that large RBOCs, IXCs, or other
telecommunication carriers will enter this business segment.
CALLING CARD SERVICES. In the calling card services market, the Company's
principal competitors include RBOCs and RBOC affiliates, IXCs and IXC
affiliates and independent LECs. The Company also faces competition in this
market from independent companies including SmarTalk Teleservices and Premiere
Technologies.
The Company believes that the principal competitive factors in the
aforementioned markets are service, quality, price, reputation, technological
innovation and experience. Historically, the Company has sought to distinguish
itself from competitors based on its independence in the marketplace, the
quality of its product, the development of enhanced features and its
experience derived from successfully establishing its call centers and
operations centers. The Company believes, however, that its future growth will
depend on its ability to maintain and improve the quality of its products, and
to develop and successfully introduce new connectivity features and content.
PROPERTIES
The Company's corporate headquarters is located in approximately 33,000
square feet of office space in Salt Lake City under a lease expiring March 31,
2004. The lease may be renewed for two additional five-year terms. On December
31, 1997, the Company acquired a building with approximately 25,000 square
feet in Atlanta as part of its acquisition of Quest. The Company also leases
approximately 124,000 square feet of space for its various call centers and
network operations in and around Salt Lake City, Los Angeles, New York City,
Atlanta and Miami. The various leases expire on dates ranging from November
30, 1998, to July 8, 2007. Most leases have renewal options. Additional office
space and equipment rooms will be leased as additional network switches are
added and the Company's operations are expanded. The Company believes that its
insurance coverage on these properties is adequate and in compliance with the
related leases.
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GOVERNMENT REGULATION
FEDERAL REGULATION OF LONG DISTANCE AND CALL PROCESSING SERVICES. The
Company, as a provider of call processing and calling card services, is
subject to substantial federal regulation. Under the Telephone Operator
Consumer Services Improvement Act of 1990 and implementing rules promulgated
by the FCC thereunder, interstate call processing services providers are
required to file "informational" tariffs, in order to ensure that their
aggregator customers unblock access to other providers of call processing
services and to identify their services prior to the initiation of charges,
through both an audible "brand" and the posting of consumer information near
pay telephones and other aggregator telephones. In addition, long distance
companies are required to obtain authority under Section 214 of the
Communications Act of 1934 (as amended) prior to providing international
service and to file tariffs setting forth their international rates and
charges with the FCC.
Providers of interstate long distance, operator services and calling card
services are considered nondominant interstate service providers by the FCC
and, as such, have for many years been subject to an FCC policy, known as
"forbearance," pursuant to which rates and charges for such services are not
reviewed or affirmatively regulated by the FCC and, except for the requirement
to file informational tariffs for call processing services, tariff filings
were optional. However, a Supreme Court decision in 1994 reinstated the
requirement that all carriers file tariffs for all interstate communications
services. Under the Telecommunications Act of 1996, the FCC has proposed
extending the forbearance doctrine by requiring mandatory detariffing of all
interstate, nondominant interexchange services. Under this proposal, which has
been stayed pending legal challenges, long distance services including
traditional 1+ long distance services, travel and calling card services and
prepaid calling card services and call processing services available to
presubscribed customers would be provided as a nontariff offerings. Call
processing services provided at aggregator locations, such as hotels,
hospitals, prisons, public and private pay telephones etc., would not be
detariffed.
The FCC's forbearance doctrine continues its traditional policy favoring
competition in the marketplace as the principal means of ensuring just and
reasonable interstate rates for telephone end-users. It nonetheless requires
that long distance companies implement methods, other than tariffs, for
setting rates, terms and other conditions of their relationship with end-
users. The FCC suggests that a legal relationship, known as an "implied-in-
fact" contract, may be established when the caller provides billing or payment
information and completes use of the telecommunications service.
Since 1992, the FCC has been considering proposals for adoption of a billed
party preference system for interstate 0 + operator-assisted calls. A billed
party preference system is an access plan pursuant to which 0+ calls from
aggregator locations, including call processing services and calls placed with
calling cards, would be routed to the carrier chosen by the billed party,
rather than the presubscribed provider of call processing services, thus
eliminating the need for the caller to input an access code to "dial around"
the presubscribed carrier.
In June 1994, the FCC had proposed that a billed party preference system
should apply to all interstate operator assisted 0 + calls. This proposed
solution was widely criticized by various IXCs, RBOCs, LECS, call processing
services providers and others as excessively costly and not in the public
interest. Trade associations representing both pay telephone providers and
competitive long distance companies had submitted alternative proposals for
rate "ceilings" on interstate call processing services as an alternative to a
billed party preference system. These rate ceiling proposals, with
modification, were tentatively endorsed by the FCC in a proposal to establish
benchmarks for call processing services rates at the average charges of AT&T,
MCI and Sprint, the three largest providers of interstate call processing
services. The FCC, in a June 1996 Notice of Proposed Rulemaking, proposed to
require call processing services providers that charge rates above the
benchmark to disclose the applicable charges to consumers orally before
completing a call. Although the FCC did not formally withdraw its earlier
proposal for implementation of a billed party preference system, it noted the
cost and widespread opposition to the billed party preference plan and sought
comment on the efficacy of rate benchmarks as an alternative to a billed party
preference system.
43
<PAGE>
In May 1997, the FCC adopted changes to its system of interstate access
charges to make them compatible with the pro-competitive, deregulatory
framework established by the Telecommunications Act of 1996. The FCC's access
reform order adopts various reforms to the existing rate structure for
interstate access that are designed to move access charges, over time, to more
economically efficient levels and rate structures. The FCC's access reform
order also imposes the phase-in of replacing usage-based carrier common line
charges with a line-based flat fee to be assesssed upon all telecommunications
carriers beginning on January 1, 1998. In addition, the FCC's access order
requires LECs to reduce their access revenue requirements by reducing
interconnection access charges to telecommunications carriers.
In January 1998, the FCC took action on the billed party preference issue.
In its order, the FCC addressed what it views as widespread consumer
dissatisfaction concerning high charges by many IXCs and call processing
services providers for calls from public phones and other aggregator locations
such as pay telephones, hospitals, hospitality locations and educational
institutions. Rather than implement its billed party preference system or any
of the other alternative proposed by participants in the telecommunications
industry, the FCC has ordered all call processing services providers and IXCs
providing call processing services to orally disclose to "away from home
callers" how to obtain the total cost of a 0 + interstate domestic call,
before the call is connected. The FCC required that such consumer disclosure
must be done without the consumer having to hang up or dial a separate
telephone number and must be accomplished by dialing no more than two keys.
The FCC mandated that the rate notification apply to all domestic 0+
interstate calls. While the Company is unable to predict whether this
regulation will have a material adverse effect on the Company, it is a far
more favorable proposal to the Company than the original billed party
preference system proposal and other alternatives considered by FCC.
FEDERAL REGULATION OF PREPAID CALLING CARD SERVICES. As noted above, prepaid
calling card services are considered interstate services, subject to the FCC's
forbearance doctrine and mandatory detariffing. Currently, providers of these
services are required to file tariffs with the FCC disclosing the rates, terms
and conditions of their services. The FCC has proposed to abolish this tariff
requirement, but its order has been stayed pending court review.
PAYPHONE COMPENSATION. The Telecommunications Act of 1996 mandated that the
FCC promulgate rules to establish a per call compensation plan to insure that
all pay telephone providers are fairly compensated for each completed
intrastate and interstate pay telephone initiated call, including non-coin
calls for which pay telephone providers had not heretofore received
compensation. The FCC has established a two year "default" compensation rate,
effective October 7, 1997, of $0.284 per pay telephone originated toll free or
access code call. At the end of the two year interim period, the per call pay
telephone-compensation rate will be the deregulated market-based local coin
rate less $0.066. This amount is payable by all IXCs and may be passed through
to non-facilities-based resellers. The revised FCC rules continue to be
subject to regulatory and legal challenges.
While prepaid calling cards are one of the types of so-called "dial-around"
calling for which compensation to pay telephone service providers is due under
the Telecommunications Act of 1996, the FCC has not fully addressed the unique
technical and competitive impact of per-call pay telephone compensation on
prepaid card services. Comments submitted by the International Telecard
Association, a prepaid card trade group, urged the FCC to limit pay telephone
compensation to calls completed to the end-user (i.e., the called party),
rather than calls that only reach the calling card "platform" switch via an
"800" toll-free access number. In a November 1996 order, the FCC accepted the
International Telecard Association's position and, in addition, ruled that pay
telephone compensation is to be implemented on a "carrier pays" basis, without
deciding how, if they choose to do so, facilities-based carriers may recover
such charges from their reseller customers.
STATE REGULATORY ISSUES. Long distance service, call processing services and
prepaid and calling card services are also regulated at the state level
through state PUCs. Such regulation typically includes certification and/or
registration requirements, authorizations for changes in corporate control,
filing and approval of tariffs for in-state calls and special consumer
protection rules applicable to call processing services and calling card
services. Certification can generally be conditioned, modified, canceled,
terminated or revoked by state regulatory
44
<PAGE>
agencies for failure to comply with state law and/or the rules, regulations
and policies of the state regulatory authorities. Penalties, fines and other
sanctions, such as refund of monies collected from residents of a state, may
be imposed for violations such as overcharging, billing errors, or
noncompliance with certain requirements of intrastate services. In extreme
cases, PUCs have the authority to revoke a carrier's right to offer in-state
services within a state.
In connection with the Company's provision of intrastate call processing
services and prepaid calling card services, the Company's Teltrust
Communications Services and Quest Telecommunications, Inc. subsidiaries must
maintain certificates of public convenience and necessity from state
regulatory authorities and are generally required to file tariffs with such
authorities.
INTERNATIONAL REGULATORY ISSUES. International common carriers, such as the
Company and its regulated subsidiaries, are required to obtain authority under
Section 214 of the Communications Act of 1934 (as amended) and file a tariff
containing the rates, terms and conditions applicable to their services prior
to initiating their international value-added telecommunications services. The
Company has obtained all required authorizations from the FCC to use, on a
facilities and resale basis, various transmission media for the provision of
international switched services and international private line services.
LEGAL PROCEEDINGS
The Company is not party to any legal proceedings which, individually or in
the aggregate, the Company expects to have a material adverse effect on its
financial condition or results of operations. The Company is, from time to
time, involved in regulatory proceedings before various PUCs, as well as
before the FCC.
45
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers and Directors and their ages as of April 1,
1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Lyle O. Keys(1)......... 73 Chairman of the Board of Directors and Director
Jerry E. Romney, Jr..... 44 Vice Chairman, President-Corporate Development and Director
Marc B. Cohen........... 32 President, Chief Executive Officer and Director
Martin J. Huebschman.... 50 Vice President-Finance, Secretary and Chief Financial Officer
Vicki S. Pearson........ 55 Senior Vice President-Business Operations
Joseph E. Sharkey....... 51 Senior Vice President and Chief Operating Officer
Carmelo Catalano........ 47 Director
Christopher S. 35 Director
Gaffney(1)(2)..........
John G. Hayes(1)(2)..... 34 Director
George C. Huff, Jr...... 36 Director
Alan W. Saltzman(2)..... 51 Director Nominee*
</TABLE>
- ---------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
* Mr. Saltzman has consented to become a Director of the Company after the
closing of the Offering.
Lyle O. Keys has served as the Chairman of the Board of Directors since July
1988 and was also the Chief Executive Officer of the Company from 1991 until
March 1997. Prior to joining Teltrust in 1988, Mr. Keys had an extensive
background in the manufacture of equipment for broadcast television. In 1977,
he founded Utah Scientific, a manufacturer of broadcast switching and control
products. After Utah Scientific was acquired by Dynatech Corp. in 1981, Mr.
Keys remained as President of Utah Scientific until 1987. Prior to joining
Utah Scientific, Mr. Keys founded Telemation, also a manufacturer of high-end
television equipment, which was sold to Bell & Howell in 1976. Mr. Keys is
also a director of Fi-Foil Company, Inc. and Protective Technologies
International, Inc.
Jerry E. Romney, Jr. founded the Company in 1986 and served as its President
until March 1997. Mr. Romney has served as a Director since 1986. In March
1997, Mr. Romney was elected to the position of Vice Chairman and President-
Corporate Development. Mr. Romney is involved in investigating emerging
opportunities for Teltrust, including new service offerings, mergers and
possible acquisition candidates and directs the Company's regulatory affairs.
Mr. Romney currently serves on the Board of Directors of the American Public
Communications Council and is active in other industry associations. Mr.
Romney has more than 18 years of communications management experience.
Marc B. Cohen was appointed President and Chief Executive Officer and
elected a Director of the Company in March 1997. From 1988 until March 1997,
Mr. Cohen served in various other positions with the Company, most recently as
Chief Financial Officer and Executive Vice President where he directed the
Company's finance functions and was active in contract negotiations and
strategic and business segment analysis. Prior to joining Teltrust, Mr. Cohen
held positions in finance and accounting in the entertainment and
communications industries.
Martin J. Huebschman joined Teltrust in November 1997 and since that time
has served as Chief Financial Officer and Vice President-Finance of the
Company. Mr. Huebschman was also elected the Secretary of the Company in April
1998. Mr. Huebschman directs all of the Company's accounting, financial
planning and legal functions. From January 1993 until its sale, Mr. Huebschman
was President, Chief Operating Officer and Chief Financial Officer at Voice-
Tel Enterprises, Inc., a leading multinational voice messaging service
provider, and from January 1991 until January 1993, Mr. Huebschman was Senior
Vice President and Chief Financial Officer of Edge Systems, Inc., a computer
integration and software development company. Mr. Huebschman holds a juris
doctorate degree and is an attorney licensed to practice in Ohio.
46
<PAGE>
Vicki S. Pearson joined Teltrust in January 1994 as Vice President-Corporate
Communications and has served as Senior Vice President-Business Operations
since March 1997. Ms. Pearson is responsible for call center operations,
customer operations, marketing services, human resources and corporate
training. Previously, Ms. Pearson held the position of Vice President-
Corporate Communications, where she directed the company's marketing services,
client services, implementation services, human resources and corporate
training activities. Prior to joining Company's management, Ms. Pearson served
as an independent consultant to the Company since March 1993. Ms. Pearson has
more than 25 years of management experience, having owned and operated a
successful advertising agency for nearly 10 years and having held executive
management positions with several communications equipment manufacturers.
Joseph E. Sharkey joined the Company in October 1997 and since that time has
served as Senior Vice President and Chief Operating Officer. Mr. Sharkey is
responsible for Teltrust's network, technical and information systems
operations. Mr. Sharkey has over 32 years of management experience with
interexchange and operator services companies. For 15 years prior to joining
Teltrust, Mr. Sharkey owned The Sharkey Group, a domestic and international
telecommunications consulting firm, which specialized in the design and
upgrade of telecommunications systems, networks and call centers. Mr. Sharkey
is active in numerous other industry forums, committees and telecommunications
associations including the Ordering and Billing Forum, Network Operations
Forum, Electronic Directory Assistance Group and COMPTEL (Competitive
Telecommunications Association).
Carmelo Catalano has served as a Director of the Company since January 1992.
Since 1982, Mr. Catalano has been President of Comtech Video Engineering,
S.P.A., a distributor of broadcast television and communications equipment
located in Milan, Italy.
Christopher S. Gaffney has served as a Director of the Company since
November 1996. Mr. Gaffney has been associated with Media/Communications
Partners, a venture capital firm, since 1986 and has served as a partner since
1992. Mr. Gaffney also serves as Chairman of the Board of Adams Business
Media, Inc., a business-to-business publishing company, and also as a director
of Medical World Communications, Inc., a medical information company;
Financial Communications Corporation, a financial information publishing and
services company; Haights Cross Communications, LLC, a provider of
professional continuing education programs and supplemental educational
materials; Marks-Farber Communications, Inc., a community newspaper publisher;
Sunburst Radio LLC, a radio broadcaster; Tarver Holdings, Inc., a computer
services company; and several other privately held companies.
John G. Hayes has served as Director of the Company since November 1996. Mr.
Hayes has been associated with Media/Communications Partners, a venture
capital investment firm, since 1989 and has served as a partner since 1993.
Mr. Hayes also serves as Chairman of Horizon Telecom International, L.L.C., a
cable television operator focused on developing cable television systems in
Brazil. Mr. Hayes serves as a director of Outdoor Communications, Inc., an
outdoor advertising company; Voyager Information Networks, Inc., an internet
service provider; Language for Industry Worldwide, Inc., a consolidator of
business translation services companies; and several other privately held
companies.
George C. Huff, Jr. has served as a Director of the Company since March
1996. Mr. Huff is also Chairman and Chief Executive Officer of NSC
Communications Corporation ("NSC"), a telecommunications services and
independent pay telephone operator. In 1987, Mr. Huff co-founded GFA Capital
Corporation and formed four pay telephone investment funds operated by GFA
Capital Corporation as the general partner. Such funds were acquired by NSC in
September 1997.
Alan W. Saltzman has served as President and a Director of Billing Concepts,
Inc., a billing and collection company, since May 1996. From May 1993 until
August 1996, Mr. Saltzman also served as Executive Vice President-Operations,
Billing of US Long Distance, a telecommunications company. Mr. Saltzman is
also an advisory director of Tanisys Technology, Inc.
47
<PAGE>
OTHER KEY EMPLOYEES
Other key employees of the Company include the following individuals:
Deborah M. Barrett is the Company's Vice President, Regulatory Affairs. Ms.
Barrett joined Teltrust in January 1997 to oversee all of the company's
regulatory affairs and to assure FCC compliance in all telecommunications
areas. Prior to joining Teltrust, Ms. Barrett held several positions with One
Call Communications, Inc. and its division, Opticom, Inc, including her most
recent position as Vice President of Regulatory Compliance. Ms. Barrett has
served on various committees of COMPTEL, and she is currently Vice President
of ACTA (America's Carriers Telecommunication Association).
Michael L. Bird serves as the Company's Vice President, Sales. Mr. Bird
joined Teltrust in 1992 with more than 22 years of communications and high
technology industry experience. Mr. Bird oversees the nationwide sales
activities for many of the Company's call completion services and took an
active role in the development of the Company's national directory assistance
service. Mr. Bird's extensive background in sales includes management
positions with Fone America, Pamtel Long Distance and Cascade
Telecommunications, a distribution arm of Rolm Communications. Mr. Bird has
also held high-level sales positions with Ashton-Tate, Xerox and Lotus
Development.
Richard J. Dewitt serves as President of the Company's Quest subsidiary. Mr.
Dewitt founded Quest Group International in 1991 and assumed the position of
President for the Company's calling card services subsidiary coincident with
the acquisition of Quest by the Company. Mr. Dewitt is active in industry
associations. He has previously served as Chairman of the American Public
Communications Council and is currently serving on the board of directors of
the United States Telecard Association. Mr. Dewitt holds a juris doctorate
degree.
Mark D. McNeill is the Company's Vice President, Operator and Directory
Services. Mr. McNeill joined the Company in September 1997 to assume
responsibility for the management, planning, product development and expansion
of Teltrust's call processing and national directory assistance services.
Prior to joining Teltrust, Mr. McNeill held the position of Product Group
Director at Ameritech Corporation, where he was responsible for operator
services, national and international directory assistance services and
teleconferencing. Prior to joining Ameritech, Mr. McNeill served for 10 years
at AT&T, where he was involved in product management, market research,
corporate strategy and directory assistance marketing.
Martin Senn is the Company's Vice President, Sales and Marketing for Third-
Party Verification. Mr. Senn joined Teltrust in July 1995 as a co-director of
Sales and Marketing for Teltrust's third-party verification products. In his
current position, Mr. Senn directs the strategic sales and marketing efforts
for this product line. Prior to joining Teltrust, Mr. Senn was with On-line
Reservations Systems, where he directed the company's wholesale and retail
travel operations. Mr. Senn is fluent in German, French and Italian and has
held positions with several other travel and market research organizations.
Eric Stein is the Company's Vice President, Business Development for Third-
Party Verification. Mr. Stein joined Teltrust in July 1995 as a co-director of
Sales and Marketing for Teltrust's third-party verification services. In his
current position, Mr. Stein directs the technical and operational activities
for this product line, as well as the formulation of new business development.
Prior to joining Teltrust, Mr. Stein held positions with Marketwise
Communications, where he directed the company's telecommunications and
operational inbound/outbound call activities.
Steven E. Swenson is the Company's Vice President and Corporate Counsel. Mr.
Swenson joined Teltrust as Corporate Counsel in 1994. Prior to joining the
company, Mr. Swenson was in private practice in Washington, D.C., where he
specialized in telecommunications law. He has a broad background in FCC
regulatory matters and transactions involving telecommunications companies.
Mr. Swenson received his juris doctorate degree from Georgetown University.
48
<PAGE>
BOARD OF DIRECTORS
The number of Directors of the Company is currently fixed at seven. Following
this offering, the number of Directors will be fixed at eight, and the Board of
Directors will be divided into three classes, with the members of each class of
directors serving for staggered three-year terms. The Board will consist of
three Class I Directors (Messrs. Catalano, Keys and Huff), two Class II
Directors (Messrs. Romney and Gaffney) and three Class III Directors (Messrs.
Cohen, Hayes and Saltzman), whose initial terms will expire at the 1999, 2000
and 2001 annual meetings of stockholders, respectively.
Messrs. Gaffney and Hayes were elected to the Board of Directors as designees
of the holders of Series A Preferred Stock in accordance with the Company's
Certificate of Incorporation in effect prior to the Offering. These voting
rights will terminate in accordance with their terms upon the consummation of
the Offering.
The Board of Directors has established an Audit Committee (the "Audit
Committee") and a Compensation Committee (the "Compensation Committee"). The
Audit Committee recommends the firm to be appointed as independent public
accountants to audit financial statements and to perform services related to
the audit, reviews the scope and results of the audit with the independent
public accountants, reviews with management and the independent public
accountants the Company's annual operating results, considers the adequacy of
the internal accounting procedures and considers the effect of such procedures
on the public accountants' independence. Following the completion of this
offering, the Audit Committee will consist of Messrs. Hayes, Gaffney and
Saltzman, none of whom is an officer nor an employee of the Company. The
Compensation Committee reviews and recommends the compensation arrangements for
officers and other senior level employees, reviews general compensation levels
for other employees as a group, generally determines the options or stock to be
granted to eligible persons under the 1993 Stock Option Plan and the 1998 Stock
Option Plan and takes such other action as may be required in connection with
the Company's compensation and incentive plans. The Compensation Committee
consists of Messrs. Gaffney, Hayes and Keys.
Non-employee directors (the "Independent Directors") each receive a fee of
$1,000 for each meeting of the Board of Directors they attend and $300 for each
meeting of the Board of Directors in which they participate by telephone.
Independent Directors will receive $500 for each meeting of a Board committee
they attend and $200 for each meeting of a Board committee in which they
participate by telephone. Further, each Director is reimbursed for reasonable
travel and other expenses incurred in attending meetings and is eligible to
participate in the Company's Stock Option Plan. See "--Stock Option Plans."
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth information concerning
compensation for services rendered in all capacities awarded to, earned by or
paid to the Chief Executive Officer and the other three (3) executive officers
of the Company whose aggregate annual base salary and bonus for 1997 exceeded
$100,000 (the "Named Executive Officers"). No other executive officers of the
Company earned in excess of $100,000 during the year ended December 31, 1997.
<TABLE>
<CAPTION>
1997
----------------------------
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
--------------- ------------
SECURITIES
UNDERLYING
OPTIONS
SALARY BONUS (IN SHARES)
-------- ------ ------------
<S> <C> <C> <C>
NAME AND PRINCIPAL POSITION
- ---------------------------
Marc B. Cohen
President and Chief Executive Officer............. $170,908 $ -- 120,000
Lyle O. Keys
Chairman and former Chief Executive Officer....... 118,589 19,200 --
Vicki S. Pearson
Senior Vice President, Business Operations........ 142,495 -- 37,500
Jerry E. Romney, Jr.
Vice Chairman..................................... 173,645 -- --
</TABLE>
49
<PAGE>
OPTION GRANTS. The following table provides information on option grants
made during the fiscal year ended December 31, 1997 to the Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
PERCENT OF RATES OF STOCK PRICE
NUMBER OF TOTAL OPTIONS APPRECIATION
SECURITIES GRANTED TO EXERCISE FOR OPTION TERM(1)
UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION ---------------------
NAME OPTIONS GRANTED FISCAL YEAR SHARE(2) DATE(3) 5% 10%
---- --------------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Marc B. Cohen........... 70,000 10.7% $8.00 12/10/07 $352,181 $892,496
........................ 50,000 7.6 6.00 03/01/07 188,668 478,123
Lyle O. Keys............ -- -- -- -- -- --
Vicki S. Pearson........ 20,000 3.1 8.00 12/10/07 100,623 254,999
........................ 17,500 2.7 6.00 03/01/07 66,034 167,343
Jerry E. Romney, Jr. ... -- -- -- -- -- --
</TABLE>
- ---------------------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based upon assumed rates of share price appreciation set by the
Securities and Exchange Commission of 5% and 10% compounded annually from
the date the respective options were granted to their expiration date. The
gains shown are net of the option exercise price but do not include
deductions for taxes or other expenses associated with the exercise.
Actual gains, if any, are dependent on the performance of the Common Stock
and the date on which the option is exercised. There can be no assurance
that the amounts reflected will be achieved.
(2) The exercise price equals the fair market value of the Common Stock on the
date of grant as determined by the Company's Board of Directors.
(3) Such options vest in equal installments over the five-year period
following the date of grant and terminate on the tenth anniversary of the
date of grant.
AGGREGATE 1997 YEAR-END OPTION VALUES. The following table sets forth
certain information with respect to exercisable and unexercisable stock
options as of December 31, 1997 for each of the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT 12/31/97 12/31/97(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Marc B. Cohen.............. 28,500 187,000 $ 60,000 $115,000
Lyle O. Keys............... -- -- -- --
Vicki S. Pearson........... 39,000 81,000 121,200 12,000
Jerry E. Romney, Jr........ 20,500 77,000 42,000 170,400
</TABLE>
- ---------------------
(1) Calculated on the basis of the fair market value of the underlying
securities at December 31, 1997 of $6.00 per share, as determined by the
Board of Directors, minus the per share exercise price.
STOCK OPTION PLANS
1993 STOCK OPTION PLAN. The 1993 Stock Option Plan permits the grant of (i)
options to purchase shares of Common Stock intended to qualify as incentive
stock options under Section 422 of the Internal Revenue Code of 1986, as
amended, and (ii) options that do not so qualify. The 1993 Stock Option Plan
is designed and intended as a performance incentive for key employees,
including officers, of the Company to encourage such persons to acquire or
increase a proprietary interest in the success of the Company. The
Compensation Committee administers the 1993 Stock Option Plan and grants
options to eligible employees in its discretion
50
<PAGE>
3subject to certain limits in the 1993 Plan. As of April 1, 1998, options to
purchase 1,183,799 shares of Common Stock were outstanding and an additional
64,201 shares of Common Stock were available for issuance under the 1993 Stock
Option Plan.
1998 STOCK OPTION PLAN. In April 1998, the Board of Directors adopted, and
the stockholders of the Company approved, the 1998 Stock Option Plan, which
authorizes the issuance of up to 800,000 shares of Common Stock. The 1998
Stock Option Plan permits the grant of (i) options to purchase shares of
Common Stock intended to qualify as incentive stock options under Section 422
of the Internal Revenue Code of 1986, as amended, (the "Code"), (ii) options
that do not so qualify, (iii) stock appreciation rights and (iv) restricted
and unrestricted stock awards.
The 1998 Stock Option Plan is designed and intended as a performance
incentive for officers, directors, employees, consultants and other key
persons performing services for the Company to encourage such persons to
acquire or increase a proprietary interest in the success of the Company. The
1998 Stock Option Plan provides that it shall be administered by the
Compensation Committee appointed by the Board of Directors from time to time,
the majority of whom shall be non-employee directors. With respect to option
grants or other awards to executive officers of the Company under the 1998
Stock Option Plan, such grants and awards shall be subject to the approval of
the entire Board of Directors. The Compensation Committee determines the terms
of each individual stock option and stock award, subject to the terms of the
1998 Stock Option Plan, including the exercise price or purchase price of such
awards. The exercise price for incentive stock options must be equal to the
fair market value of the Common Stock on the date of grant. The exercise price
for non-qualified stock options and the purchase price for Common Stock awards
is determined at the discretion of the Compensation Committee. As of April 1,
1998, no options were outstanding under the 1998 Stock Option Plan and 800,000
shares of Common Stock were available for issuance under the 1998 Stock Option
Plan.
EMPLOYMENT AGREEMENTS
The Company has entered into noncompetition agreements with most of its
executive officers and other key employees which provide that, during the 182-
day period following any such employee's termination of employment, such
person shall refrain from engaging in any competitive activities with the
Company. The Company has the right to extend the initial 182-day period for up
to five additional 182-day periods. Teltrust, in turn, is obligated to pay to
such employee an amount equal to 100% of such employee's highest base salary
during the ninety-day period prior to his or her termination of employment
during each 182-day period during which such employee's noncompetition
agreement is in effect.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company formed its Compensation Committee in April 1998. Previously,
compensation decisions were made by the entire Board of Directors. Messrs.
Gaffney, Hayes and Keys comprise the Company's Compensation Committee. Mr.
Keys serves on the compensation committee of the board of directors of Fi-Foil
Company, Inc. No executive officer of such company has served as a Director of
Teltrust. Mr. Hayes serves on the compensation committee of the board of
directors of Outdoor Communications, Inc. No executive officer of such company
has served as a Director of Teltrust.
51
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Messrs. Lyle O. Keys, Jerry E. Romney, Jr. and Marc B. Cohen, each an
executive officer and Director of the Company, Carmelo Catalano, a Director of
the Company, and entities affiliated with Media/Communications Partners, of
which Christopher S. Gaffney and John G. Hayes, Directors of the Company,
serve as partners, collectively own 56.2% of the common stock of dot.One,
Inc., a Utah corporation ("dot.One"). Teltrust and Premier Messaging
Integrators, Inc. ("PMI") own shares of nonconvertible preferred stock of
dot.One. Messrs. Keys, Romney and Cohen also serve on the Board of Directors
of dot.One. The Company has extended credit and currently sells services and
leases office space to dot.One. The Board of Directors of the Company has
reviewed and approved the Company's arrangements with dot.One and determined
that it is in the Company's best interests to continue its relationship with
dot.One.
Pursuant to a Stock Redemption Agreement dated November 22, 1996 and
effective January 2, 1997, the Company purchased 536,481 shares of Common
Stock held by Lyle O. Keys, an executive officer and Director of the Company,
for $2.5 million less Mr. Keys' share of an investment banking firm
commission.
On March 28, 1997 and May 12, 1997, the Company made two loans at interest
rates of 7% and 10%, respectively, in the principal amounts of $110,000 and
$93,552, respectively, to Jerry E. Romney, Jr., an officer of the Company.
Such loans are secured by 70,750 shares of Common Stock owned by Mr. Romney.
During 1997, the Company loaned $80,400 to Jerry E. Romney, Jr. and $145,200
to Marc B. Cohen, each officers of the Company, to enable them to purchase
85,000 and 67,000 shares of Common Stock, respectively, upon the exercise of
vested stock options. The obligations of Messrs. Romney and Cohen to repay the
borrowed funds to the Company are evidenced by promissory notes that bear
interest at the prime interest rate and mature two years from date of issue.
The notes are secured by the underlying shares of Common Stock and other
assets of Messrs. Romney and Cohen.
On April 9, 1997, the Board of Directors appointed Alan W. Saltzman to a
vacancy on the Company's Board of Directors subject to the consummation of the
Offering. Mr. Saltzman is currently President of Billing Information Concepts,
Inc. ("BIC"). BIC has been the Company's billing clearinghouse for
approximately the last five years and is a major vendor to the Company. In the
fiscal year ended December 31, 1997, the Company paid BIC $2.7 million in the
aggregate for services provided to the Company during such year.
In December 1997, the Company paid to M/C III, L.L.C. (general partner of
Media/Communications Partners III, L.P., a stockholder of the Company) a
$75,000 fee for assisting the Company to secure the Credit Facility.
Christopher S. Gaffney and John G. Hayes, Directors of the Company, are
members of M/C III, L.L.C. See "Principal and Selling Stockholders."
52
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information as to the beneficial ownership of
the Company's Common Stock as of April 20, 1998 and as adjusted to reflect the
sale of the shares of Common Stock offered hereby of (i) each person known by
the Company to own beneficially five percent or more of the outstanding shares
of Common Stock, (ii) each Director and Named Executive Officer of the
Company, (iii) each stockholder of the Company selling Common Stock in the
Offering (the "Selling Stockholders") and (iv) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
NAME AND ADDRESS(1) THE OFFERING NUMBER OF THE OFFERING
- ------------------- ----------------------- SHARES -----------------------
NUMBER PERCENT(2)(3) OFFERED NUMBER PERCENT(2)(3)
--------- ------------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Lyle O. Keys(4)......... 3,251,993 31.9% 231,200 3,020,793 23.8%
Entities affiliated with
Media/Communications
Partners(5)............ 3,218,884 31.6 228,600 2,990,284 23.6
Media/Communications
Partners III Limited
Partnership(5)....... 3,090,129 30.0 219,500 2,870,629 22.6
M/C Investors
L.L.C.(5)............ 128,755 1.3 9,100 119,655 *
Carmelo Catalano........ 1,608,000 15.8 114,500 1,493,500 11.8
Richard J. Dewitt(6).... 581,404 5.7 41,500 539,904 4.3
Jerry E. Romney, Jr. ... 255,500 2.5 -- 255,500 2.0
Marc B. Cohen........... 87,500 * -- 87,500 *
Vicki S. Pearson........ 39,000 * -- 39,000 *
Christopher S. Gaff-
ney(5)................. 3,218,884 31.6 228,600 2,990,284 22.6
John G. Hayes(5)........ 3,218,884 31.6 228,600 2,990,284 22.6
George C. Huff, Jr.(7).. 360,000 3.5 25,600 334,400 2.6
Alan W. Saltzman........ -- * -- -- *
All directors and execu-
tive officers 8,820,877 85.8 599,900 8,220,977 64.3
as a group (11 per-
sons)..................
ADDITIONAL SELLING
STOCKHOLDERS
GFA Capital
Corporation............ 270,000 2.6 19,200 250,800 2.0
Jerry E. Romney, Sr. ... 212,046 2.1 15,100 196,946 1.6
Sirrom Investments,
Inc.(8)................ 175,677 1.7 12,500 163,176 1.3
Jerry Duling(9)......... 102,601 1.0 7,300 95,301 *
M. Sean Venezia......... 90,000 * 6,400 83,600 *
Kerry Patrick Keys
Trust.................. 100,000 1.0 7,100 92,900 *
Keys Grandchildren
Trust.................. 100,000 1.0 7,100 92,900 *
Bruce Lowthers(10)...... 29,200 * 2,100 27,100 *
IBA Trust............... 100,000 1.0 7,100 92,900 *
Steve Covington(11)..... 6,716 * 500 6,216 *
Legacy Securities
Corp. ................. 4,402 * 500 3,902 *
</TABLE>
- ---------------------
* Represents less than 1% of the outstanding shares
53
<PAGE>
(1) The address for Lyle O. Keys is c/o of the Company, 6322 South 3000 East,
Salt Lake City, Utah 84121. The address for Media/Communications Partners
is 75 State Street, Boston, Massachusetts 02109. The address for Carmelo
Catelano is c/o C.V.E., S.P.A., Via Eupili, 6, 20038 Seregno, MI, Italy.
The address for Richard J. Dewitt is c/o the Company, 242 Falcon Drive,
Forest Park, Georgia 30297.
(2) Each stockholder possesses sole voting and investment power with respect
to the shares listed, except as otherwise indicated. In accordance with
the rules of the Commission, each stockholder is deemed to beneficially
own any shares subject to stock options which are currently exercisable or
which become exercisable within 60 days after April 20, 1998. Any
reference in these footnotes to shares subject to stock options held by
the person or entity in question refers to stock options which are
currently exercisable or which become exercisable within 60 days after
April 20, 1998. The inclusion herein of shares listed as beneficially
owned does not constitute an admission of beneficial ownership.
(3) Number of shares deemed outstanding includes any shares subject to stock
options held by the person or entity in question that are currently
exercisable or exercisable within 60 days following April 1, 1998. Number
of shares deemed outstanding after this offering includes the additional
2,500,000 shares of Common Stock which are being offered by the Company
hereby.
(4) Includes 100,000 shares of Common Stock held in a trust of which Mr. Keys'
wife is the beneficiary. Mr. Keys disclaims beneficial ownership of such
shares.
(5) Includes (i) 3,090,129 shares of Common Stock held by Media/Communications
Partners III Limited Partnership ("M/C III") and (ii) 128,755 shares of
Common Stock held by M/C Investors L.L.C. ("M/C Investors"). Messrs.
Gaffney and Hayes are members of the general partner of each of M/C III
and M/C Investors. Each of Messrs. Gaffney and Hayes disclaim beneficial
ownership of shares held by M/C III and M/C Investors.
(6) Includes 59,640 shares of Common Stock held by Zions First National Bank
as escrow agent on behalf of the Company and Mr. Dewitt. Such shares are
held to secure certain indemnification obligations of Mr. Dewitt in
connection with Teltrust's acquisition of Quest.
(7) Includes 270,000 shares of Common Stock held by GFA Capital Corporation of
which Mr. Huff serves as Chairman. Mr. Huff disclaims beneficial ownership
of such shares.
(8) Includes 17,568 shares of Common Stock held by Zions First National Bank
as escrow agent on behalf of the Company and Sirrom Investments, Inc.
("Sirrom"). Such shares are held to secure certain indemnification
obligations of Sirrom in connection with Teltrust's acquisition of Quest.
(9) Includes 8,760 shares of Common Stock held by Zions First National Bank as
escrow agent on behalf of the Company and Mr. Duling. Such shares are held
to secure certain indemnification obligations of Mr. Duling in connection
with Teltrust's acquisition of Quest.
(10) Includes 2,920 shares of Common Stock held by Zions First National Bank
as escrow agent on behalf of the Company and Mr. Lowthers. Such shares
are held to secure certain indemnification obligations of Mr. Lowthers in
connection with Teltrust's acquisition of Quest.
(11) Includes 672 shares of Common Stock held by Zions First National Bank as
escrow agent on behalf of the Company and Mr. Covington. Such shares are
held to secure certain indemnification obligations of Mr. Covington in
connection with Teltrust's acquisition of Quest.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Upon completion of the Offering, the authorized capital stock of the Company
will consist of shares of Common Stock, of which 12,695,023 shares will be
issued and outstanding and 5,000,000 shares of undesignated preferred stock
issuable in one or more series by the Board of Directors ("Preferred Stock"),
of which no shares will be issued and outstanding.
COMMON STOCK. The holders of Common Stock are entitled to one vote per share
on all matters to be voted on by stockholders and are entitled to receive such
dividends, if any, as may be declared from time to time by the Board of
Directors from funds legally available therefor. Any issuance of Preferred
Stock with a dividend preference over Common Stock could adversely affect the
dividend rights of holders of Common Stock. The holders of Common Stock are
not entitled to cumulative voting rights. Therefore, the holders of a majority
of the shares voted in the election of directors can elect all of the
directors then standing for election, subject to any voting rights of the
holders of any then outstanding Preferred Stock. The holders of Common Stock
have no preemptive or other subscription rights, and there are no conversion
rights or redemption or sinking fund provisions with respect to the Common
Stock. All outstanding shares of Common Stock, including the shares offered
hereby, are, or will be upon completion of the offering, fully paid and non-
assessable.
The Company's By-laws, which will be effective upon completion of the
Offering, provide, subject to the rights of the holders of any Preferred Stock
then outstanding, that the number of directors shall be fixed by the
stockholders. The directors, other than those who may be elected by the
holders of any Preferred Stock, are divided into three classes, as nearly
equal in number as possible, with each class serving for a three-year term.
Subject to any rights of the holders of any Preferred Stock to elect
directors, and to remove any Director whom the holders of any Preferred Stock
had the right to elect, any Director of the Company may be removed from office
only with cause and by the affirmative vote of at least two-thirds of the
total votes which would be eligible to be cast by stockholders in the election
of such director.
UNDESIGNATED PREFERRED STOCK. The Board of Directors of the Company is
authorized, without further action of the stockholders, to issue up to
5,000,000 shares of Preferred Stock in one or more series and to fix the
designations, powers, preferences and the relative, participating, optional or
other special rights of the shares of each series of preferred stock and any
qualifications, limitations and restrictions thereon as set forth in the
Company's Amended and Restated Certificate of Incorporation (the
"Certificate"). Any such Preferred Stock issued by the Company may rank prior
to the Common Stock as to dividend rights, liquidation preference or both, may
have full or limited voting rights and may be convertible into shares of
Common Stock.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a significant portion of the
outstanding Common Stock.
CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AND BY-LAWS
A number of provisions of the Certificate and By-laws which will be
effective upon completion of the Offering concern matters of corporate
governance and the rights of stockholders. Certain of these provisions, as
well as the ability of the Board of Directors to issue shares of Preferred
Stock and to set the voting rights, preferences and other terms thereof, may
be deemed to have an anti-takeover effect and may discourage takeover attempts
not first approved by the Board of Directors, including takeovers which
stockholders may deem to be in their best interests. To the extent takeover
attempts are discouraged, temporary fluctuations in the market price of the
Common Stock, which may result from actual or rumored takeover attempts, may
be inhibited. These provisions, together with the classified Board of
Directors and the ability of the Board of Directors to issue Preferred Stock
without further stockholder action, also could delay or frustrate the removal
of incumbent directors or the assumption of control by stockholders, even if
such removal or assumption would be beneficial to stockholders of Company.
These provisions also could discourage or make more difficult a merger, tender
55
<PAGE>
offer or proxy contest, even if favorable to the interests of stockholders,
and could depress the market price of the Common Stock. The Board of Directors
believes that these provisions are appropriate to protect the interests of the
Company and all of its stockholders. The Board of Directors has no present
plans to adopt any other measures or devices which may be deemed to have an
"anti-takeover effect."
MEETINGS OF STOCKHOLDERS. The By-laws provide that a special meeting of
stockholders may be called only by the President or the Board of Directors
unless otherwise required by law. The By-laws provide that only those matters
set forth in the notice of a special meeting may be considered or acted upon
at such special meeting unless otherwise provided by law. In addition, the By-
laws set forth certain advance notice and informational requirements and time
limitations on any Director nomination or any new proposal which a stockholder
wishes to make at an annual meeting of stockholders.
INDEMNIFICATION AND LIMITATION OF LIABILITY. The By-laws provide that
directors and officers of the Company shall be, and in the discretion of the
Board of Directors non-officer employees may be, indemnified by the Company to
the fullest extent authorized by Delaware law, as it now exists or may in the
future be amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of the Company. The By-laws also
provide that the right of directors and officers to indemnification shall be a
contract right and shall not be exclusive of any other right now possessed or
hereafter acquired under any by-law, agreement, vote of stockholders or
otherwise. The Certificate contains a provision permitted by Delaware law that
generally eliminates the personal liability of a director for monetary damages
arising from a breach of his or her fiduciary duty, including a breach
involving negligence or gross negligence in business combinations, unless such
director has breached his or her duty of loyalty, failed to act in good faith,
engaged in intentional misconduct or a knowing violation of law, paid a
dividend or approved a stock repurchase in violation of the Delaware General
Corporation Law or obtained an improper personal benefit. This provision does
not alter a director's liability under the federal securities laws and does
not affect the availability of equitable remedies, such as an injunction or
rescission, for breach of fiduciary duty. The Company has also entered into
indemnification agreements with each of its directors reflecting the foregoing
and requiring the advancement of expenses in proceedings involving the
directors in most circumstances.
AMENDMENT OF THE CERTIFICATE. The Certificate provides that any amendment
thereof must first be approved by a majority of the Board of Directors and
(with certain exceptions) thereafter approved by a majority (or % in the case
of any proposed amendment to the provisions of the Certificate relating to the
composition of the Board or amendments of the Certificate) of the total votes
eligible to be cast by holders of voting stock with respect to such amendment.
AMENDMENT OF BY-LAWS. The Certificate provides that the By-laws may be
amended or repealed by the Board of Directors or by the stockholders. Such
action by the Board of Directors requires the affirmative vote of a majority
of the directors then in office. Such action by the stockholders requires the
affirmative vote of at least two-thirds of the total votes eligible to be cast
by holders of voting stock with respect to such amendment or repeal at an
annual meeting of stockholders or a special meeting called for such purpose
unless the Board of Directors recommends that the stockholders approve such
amendment or repeal at such meeting, in which case such amendment or repeal
shall only require the affirmative vote of a majority of the total votes
eligible to be cast by holders of voting stock with respect to such amendment
or repeal.
ABILITY TO ADOPT SHAREHOLDER RIGHTS PLAN. The Board of Directors may in the
future resolve to issue shares of Preferred Stock or rights to acquire such
shares to implement a shareholder rights plan. A shareholder rights plan
typically creates voting or other impediments or under which shares are
distributed to a third-party investor, to a group of investors or shareholders
or to an employee stock ownership plan, to discourage persons seeking to gain
control of the Company by means of a merger, tender offer, proxy contest or
otherwise if such change in control is not in the best interest of the Company
and its stockholders. The Board of Directors has no
56
<PAGE>
present intention of adopting a shareholder rights plan and is not aware of
any attempt to obtain control of the Company.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or affiliate, or associate of such
person, who is an "interested stockholder" for a period of three years from
the date that such person became an interested stockholder, unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the board of directors of the corporation
before the person becomes an interested stockholder; (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes it an interested stockholder
(excluding shares owned by persons who are both officers and directors of the
corporation, and shares held by certain employee stock ownership plans); or
(iii) on or after the date the person becomes an interested stockholder, the
business combination is approved by the corporation's board of directors and
by the holders of at least 66 2/3% of the corporation's outstanding voting
stock at an annual or special meeting, excluding shares owned by the
interested stockholder. Under Section 203, an "interested stockholder" is
defined (with certain limited exceptions) as any person that is (i) the owner
of 15% or more of the outstanding voting stock of the subject corporation or
(ii) an affiliate or associate of the subject corporation that was the owner
of 15% or more of the outstanding voting stock of the subject corporation at
any time within the three-year period immediately prior to the date on which
it is sought to be determined whether such person is an interested
stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or by-laws by action
of its stockholders to exempt itself from coverage, provided that such by-law
or charter amendment shall not become effective until 12 months after the date
it is adopted. Neither the Certificate nor the By-laws contains any such
exclusion.
TRANSFER AGENT AND REGISTRAR
The Company has selected as the transfer agent and registrar for the
Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have a total of 12,695,023
shares of Common Stock outstanding. Of the 12,695,023 outstanding shares, the
3,200,000 shares registered in the Offering will be freely tradeable without
restriction under the Securities Act (except that any shares purchased in the
Offering by "affiliates" of the Company may generally be resold only in
compliance with applicable provisions of Rule 144, as described below).
Beginning 90 days after the date of this Prospectus, an additional
shares maybe resold under Rule 144 without restriction under the Securities
Act subject to the volume and manner limitations set forth in Rule 144 and an
additional shares may be resold under Rule 144 without such
restrictions (in each case, subject to the lock-up agreements described in
"Underwriting").
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least one year (including the holding period of any prior owner except
an affiliate), including persons who may be deemed "affiliates" of the
Company, is entitled to sell within any three-month period a number of shares
that does not exceed the greater of one percent of the number of shares of
Common Stock then outstanding (approximately 126,950 shares upon completion of
the offering) or the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the filing of a Form 144 with respect to
such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements, and to the availability of current public
information about the Company. In addition, a
57
<PAGE>
person who is not deemed to have been an affiliate of the Company at the time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of
any prior owner except an affiliate), would be entitled to sell such shares
under Rule 144(k) without regard to the requirements described above. Rule 144
also provides that affiliates who are selling shares that are not Restricted
Shares must nonetheless comply with the same restrictions applicable to
Restricted Shares with the exception of the holding period requirement.
Rule 701 promulgated under the Securities Act provides that shares of Common
Stock acquired pursuant to the exercise of outstanding options or the grant of
Common Stock pursuant to written compensation plans or contracts prior to this
Offering may be resold by persons other than affiliates beginning 90 days
after the date of this Prospectus, subject only to the manner of sale
provisions of Rule 144, and by affiliates, beginning 90 days after the date of
this Prospectus, subject to all provisions of Rule 144 except its one-year
minimum holding period requirement.
Certain stockholders of the Company (who in the aggregate will hold
restricted shares of Common Stock upon completion of the Offering) have
agreed, for a period of 180 days after the date of this Prospectus (the "Lock-
up Period"), pursuant to lock-up agreements and subject to certain exceptions,
not to (i) offer for sale, sell, pledge or otherwise dispose of any shares of
Common Stock or securities convertible into or exchangeable for Common Stock
or (ii) enter into any swap or other derivatives transaction that transfers to
another, in whole or in part, any of the economic benefits or risks of
ownership of such shares of Common Stock. Such stockholders have also agreed
not to cause the Company to effect the registration of such shares of Common
Stock or securities convertible into or exchangeable for Common Stock during
the Lock-up Period. In addition, the Company has agreed that for a period of
180 days after the date of this Prospectus, subject to certain exceptions, it
will not, without the prior written consent of Lehman Brothers Inc., offer,
sell or otherwise dispose of any shares of Common Stock except for shares of
Common Stock offered hereby.
As of April 1, 1998, there were (i) 1,183,799 outstanding options to
purchase shares of Common Stock and 64,201 additional shares of Common Stock
reserved for issuance under the 1993 Stock Option Plan and (ii) no outstanding
options to purchase shares of Common Stock and 800,000 shares of Common Stock
reserved for issuance under the 1998 Stock Option Plan. The Company intends to
file a registration statement on Form S-8 under the Securities Act to register
all shares of Common Stock issuable pursuant to the 1993 Stock Option Plan and
the 1998 Stock Option Plan. The Company expects to file this registration
statement within 90 days following the date of this Prospectus, and such
registration statement will become effective upon filing. Shares covered by
this registration statement will thereupon be eligible for sale in the public
markets, subject to Rule 144 limitations applicable to affiliates and the
lock-up agreements described above.
In connection with the investment of M/C III in the Company, the Company
entered into a registration rights agreement with M/C III and M/C Investors
(collectively, "the M/C Holders"). Upon Closing of the Offering, the M/C
Holders will hold 2,990,284 shares of Common Stock (the "M/C Shares"). At such
time as the Company is eligible to file a registration statement on Form S-3,
the Company shall, except during the 180-day period following the Closing of
the Offering and subject to certain other exceptions, upon request of the M/C
Holders use its best efforts to effect a registration of the number M/C Shares
requested to be so registered by the M/C Holders. During the term of such
registration rights agreement, the Company is obligated to effect an unlimited
number of registrations to the extent such registrations may be effected on
Form S-3. If the Company for itself or any of its security holders shall at
any time after the Offering determine to register under the Securities Act any
shares of its capital stock or other securities, subject to certain
exceptions, the Company is obligated to use its best efforts to cause such
number of M/C Shares as is requested by the M/C Holders to be included in such
registration statement to the extent permissible under the Securities Act.
In connection with its acquisition of Quest, the Company entered into a
registration rights agreement with the former stockholders of Quest
(collectively, "the Quest Holders"). Upon Closing of the Offering, the Quest
Holders will hold 836,100 shares of Common Stock (the "Quest Shares"). At such
time as the Company is eligible to file a registration statement on Form S-3,
the Company shall, except during the 180-day period
58
<PAGE>
following the Closing of the Offering and subject to certain other exceptions,
upon the request of holders of more than 50% of the Quest Shares, use its best
efforts to effect a registration of all or a portion of the Quest Shares. The
Company is not obligated to effect more than one such registration during any
12-month period. If the Company for itself or any of its security holders
shall at any time after the Offering determine to register under the
Securities Act any shares of its capital stock or other securities, subject to
certain exceptions, the Company is obligated to use its best efforts to cause
such number of Quest Shares as is requested by any Quest Holder to be included
in such registration statement to the extent permissible under the Securities
Act.
Prior to this offering, there has been no public market for the Common Stock
and no prediction can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts
of such shares in the public market, or the perception that such sales could
occur, could materially and adversely affect the market price of the Common
Stock and could impair the Company's future ability to raise capital through
an offering of its equity securities.
59
<PAGE>
UNDERWRITING
The underwriters of the Offering named below (the "Underwriters"), for whom
Lehman Brothers Inc. and Wheat First Union, a division of Wheat First
Securities, Inc., are acting as representatives (the "Representatives"), have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement of which the Prospectus is a part, to purchase from the Company the
aggregate number of shares of Common Stock set forth opposite their respective
names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Lehman Brothers Inc..............................................
Wheat First Securities, Inc......................................
---
Total........................................................
===
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to pay for and accept delivery of the shares of Common Stock offered hereby
are subject to approval of certain legal matters by counsel and to certain
other conditions, as well as the requirement that, if any of the foregoing
shares of Common Stock are purchased by the Underwriters pursuant to the
Underwriting Agreement, all of the shares of Common Stock agreed to be
purchased by the Underwriters pursuant to the Underwriting Agreement (other
than those covered by the over-allotment option described below), must be so
purchased.
The Company and the Selling Stockholders have granted to the Underwriters an
option to purchase up to an additional 480,000 shares of Common Stock at the
public offering price, less the aggregate underwriting discounts and
commissions shown on the cover page of the Prospectus, solely to cover over-
allotments, if any. The option may be exercised at any time up to 30 days
after the date of the Underwriting Agreement. To the extent that the
Underwriters exercise such an option, each of the Underwriters will be
committed, subject to certain conditions, to purchase a number of option
shares proportionate to such Underwriter's initial commitment as indicated in
the preceding table.
Each of the Company and its executive officers and directors, and certain of
the Company's stockholders (including the Selling Stockholders) and option
holders, has agreed, for a period of 180 days after the date of this
Prospectus (the "Lock-up Period"), not to, directly or indirectly and subject
to certain exceptions, (i) offer for sale, sell, pledge, or otherwise dispose
of (or enter into any transaction or device that is designed to, or could be
expected to, result in the disposition by any person at any time in the future
of) any shares of Common Stock or securities convertible into or exchangeable
for Common Stock or (ii) enter into any swap or other derivatives transaction
that transfers to another, in whole or in part, any of the economic benefits
or risks of ownership of such shares of Common Stock. In addition, during the
Lock-up Period, the Company has agreed not to cause the registration of any
shares of such Common Stock or securities convertible into or exchangeable for
Common Stock.
Prior to the Offering, there has been no public market for the shares of
Common Stock. There can be no assurance that an active trading market will
develop for shares of the Common Stock or as to the price at which shares of
the Common Stock may trade in the public market from time to time subsequent
to the Offering. The initial public offering price will be negotiated between
the Company and the Representatives. Among the factors to be considered in
determining the initial public offering price of the Common Stock, in addition
to prevailing market conditions, will be the Company's historical performance,
capital structure, estimates of the business potential and earnings prospects
of the Company and its industry in general, an overall assessment of the
Company, an assessment of the Company's management and the market price of
securities of companies engaged in businesses similar to that of the Company.
The initial price per share to the public set forth on the cover page of this
Prospectus should not, however, be considered an indication of the actual
value of the Common Stock. Such price is subject to change as a result of
market conditions and other factors.
Application has been made to list the Common Stock on the Nasdaq National
Market under the symbol "TTST."
60
<PAGE>
Other than in the United States, no action has been taken in any
jurisdiction by the Company, the Selling Stockholders or the Underwriters that
would permit a public offering of the shares of Common Stock offered hereby in
any jurisdiction where action for that purpose is required. The shares of
Common Stock offered hereby may not be offered or sold, directly or
indirectly, nor may this Prospectus or any other offering material or
advertisements in connection with the offer and sale of any such shares of
Common Stock be distributed or published in any such jurisdiction, except
under circumstances that will result in compliance with the applicable rules
and regulations of such jurisdiction. Persons into whose possession this
Prospectus comes are advised to inform themselves about and to observe any
restrictions relating to the Offering and the distribution of this Prospectus.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any shares of Common Stock offered hereby in any jurisdiction in
which such an offer or a solicitation is unlawful.
If the Underwriters create a short position in the Common Stock in
connection with the Offering (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the Representatives
may reduce that short position by purchasing Common Stock in the open market.
The Representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option described herein.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security by purchasers in an offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
Purchasers of the Common Stock offered hereby may be required to pay stamp
taxes and other charges in accordance with the laws and practices of the
country of purchase in addition to the offering price set forth on the cover
page hereof.
The Representatives have informed the Company that they do not intend to
confirm sales of shares of Common Stock offered hereby to any accounts over
which they exercise discretionary authority.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Goodwin, Procter & Hoar LLP, Boston, Massachusetts.
Certain legal matters related to the Offering will be passed upon for the
Underwriters by Cahill Gordon & Reindel (a partnership including a
professional corporation), New York, New York.
EXPERTS
The consolidated financial statements and schedule of Teltrust, Inc. and
subsidiaries included in this prospectus and elsewhere in the registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
61
<PAGE>
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered by the Company has been filed with the Securities
and Exchange Commission (the "Commission"), Washington, D.C. 20549. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules filed thereto.
Statements contained in this Prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or document filed as
an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules thereto. A copy of the
Registration Statement may be inspected without charge at the Commission's
principal office in Washington, D.C., and copies of all or any part thereof
may be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, the New York Regional Office located at
Seven World Trade Center, New York, New York 10048, and the Chicago Regional
Office located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, upon payment of certain fees prescribed by the
Commission. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
Commission's World Wide Web site is http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by its independent public
accountants.
62
<PAGE>
GLOSSARY
CLEC (Competitive Local Exchange Carrier): A LEC that provides switched
local services in competition with the incumbent LEC (typically, an RBOC), as
an alternative for local transport of private line, special access and
interstate transport of switched access telecommunications services.
Common Carrier: A government-regulated, private company that furnishes the
general public with telecommunications services and facilities (such as a
telephone or telegraph company).
FCC: Federal Communications Commission.
Hub: A collection center located centrally in an area where
telecommunications traffic can be aggregated at a central point for transport
and distribution.
InterLATA Service: Telecommunications between a point located in a local
access and transport area and a point located outside such area.
IntraLATA Service: Calls are those calls that originate and terminate within
the same LATA, but are outside the local calling area.
IXC (Inter-Exchange Carriers): Usually referred to as long distance
providers. There are many facilities-based IXCs including AT&T, MCI, WorldCom
and Sprint, as well as numerous CLECs.
LATA (Local Access Transport Area): The approximately 164 geographic areas
which define the regions in which each RBOC is authorized to provide service.
LATAs roughly reflect the population density of their respective states
(California has 11 LATAs while Wyoming has only one). The RBOCs are generally
prohibited from providing long distance service between LATAs in their
territory (i.e., interLATA services).
LEC (Local Exchange Carrier): A company providing local telephone services,
including the RBOCs, GTE and more than 1,000 other independents. The term
includes incumbent LECs and CLECs.
Local Exchange Services: Generally refers to all services provided by a LEC
or CLEC including local dial tone, the provision of telephone numbers, calling
within the local exchange area and long distance access services.
Long Distance Carrier: A company providing interLATA or long distance
services between local exchanges on an intrastate or interstate basis. Long
distance carriers may also be long distance reseller companies. A long
distance carrier may offer services over its own or another carrier's
facilities. Major long distance carriers include AT&T, MCI, Sprint and
WorldCom and may also include resellers of long distance capacity.
Network: Any system designed to provide one or more access paths for
communications between users at different geographic locations. Communications
networks may be designed for voice, text, data, facsimile image and/or video.
They may feature limited access (private networks) or open access (public
networks) and will employ whatever switching and transmission technologies are
appropriate.
Paystation: A publicly accessible pay telephone.
Platform: The Harris 2020 tandem switching system, Harris Protocall
automated operator system and, at some sites, a proprietary voice call
distribution system.
PUC (Public Utility Commission): A state regulatory body, established in
most states, which regulates utilities, including telephone companies,
providing intrastate services.
63
<PAGE>
RBOC (Regional Bell Operating Company): One of the regional companies
created by the AT&T divestiture and their operating subsidiary companies. They
are Ameritech, Bell Atlantic, BellSouth, SBC Corporation (formerly
Southwestern Bell) and US WEST. The RBOCs have numerous unregulated
subsidiaries engaged in variety of communications-related and non-
communications businesses. The divestiture agreement barred RBOCs from
providing interLATA services within their service areas and from manufacturing
telecommunications equipment and certain other business activities, such as
providing long distance service, but provided mechanisms for review, waiver,
modification or removal of the prohibitions.
Redundancy: The capability of telecommunications facility to use two
separate electronic devices to transmit a telecommunications signal so that if
one device malfunctions, the signal may continue without interruption.
Reseller: A carrier that does not operate its own transmission facilities
(although it may own its own switches or other equipment) but obtains
communications services from another carrier for resale to the public for
profit.
Slamming: The practice of unlawfully switching a customer's telephone
service provider without the consent of the affected consumer.
SS7 (Signaling System 7): A sophisticated network signaling system that
utilizes out-of-band signaling where signaling information is sent over a
separate channel from the call itself. SS7 improves call processing set-up
times and frees circuits for voice, data and video transmissions.
Switch: A mechanical or electronic device that opens or closes circuits or
selects the paths or circuits to be used for the transmission of information.
Switching is a process of interconnecting different circuits to create a
temporary transmission path between users. In operation, a switch may be a
sophisticated computer that accepts instructions from a caller in the form of
a telephone number. Like an address on an envelope, the numbers tell the
switch where to route the call. The switch opens or closes circuits or selects
the paths or circuits to be used for transmission of information. Switches
allow local telecommunications service providers to connect calls directly to
their destination while providing advanced features and recording connection
information for future billing.
Telecommunications Act of 1996: Federal telecommunications legislation
passed in February 1996 which was to provide for a pro-competitive,
deregulatory national policy framework designed to accelerate rapidly private
sector deployment of advanced telecommunications and information technologies
and services in the United States by opening all telecommunications markets to
competition.
Third-Party Verification: The process by which an independent third party
verifies a consumer's decision to change his or her selected IXC, CLEC or
other service provider.
64
<PAGE>
INDEX TO FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<S> <C>
Report of independent public accountants.................................. F-2
Consolidated balance sheets as of December 31, 1996 and 1997.............. F-3
Consolidated statements of operations for the years ended December 31,
1995, 1996 and 1997...................................................... F-4
Consolidated statements of stockholders' equity (deficit) for the years
ended December 31, 1995, 1996 and 1997................................... F-5
Consolidated statements of cash flows for the years ended December 31,
1995, 1996 and 1997...................................................... F-6
Notes to consolidated financial statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Teltrust, Inc.:
We have audited the accompanying consolidated balance sheets of Teltrust,
Inc. (a Delaware corporation) and subsidiaries (collectively, the "Company")
as of December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Teltrust,
Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
March 6, 1998 (except with respect to the matters discussed in the first
paragraph of Note 1 and Note 15, as to which the date is April 22, 1998)
F-2
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1996 1997
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 1,574,511 $ 526,495
Accounts receivable:
Third party billings, net of estimated clearing
costs of $1,118,500 and $1,430,000,
respectively................................... 783,777 1,945,089
Other, net of allowance for doubtful accounts of
$1,104,100 and $1,030,600, respectively........ 5,653,213 8,115,226
Other current assets.............................. 442,584 542,800
----------- ------------
Total current assets.......................... 8,454,085 11,129,610
Restricted cash..................................... 6,900,000 --
Property and equipment, net of accumulated
depreciation and amortization...................... 4,301,951 9,847,290
Equipment held under capital lease obligations, net
of accumulated amortization........................ 2,862,149 3,470,152
Notes receivable from related parties............... 936,423 266,667
Other assets, net of accumulated amortization....... 1,212,679 1,204,677
----------- ------------
Total assets.................................. $24,667,287 $ 25,918,396
=========== ============
Current liabilities:
Current portion of notes payable.................. $ 355,452 $ 121,435
Current portion of capital lease obligations...... 627,490 1,082,979
Subordinated note payable to stockholder.......... 400,649 --
Current portion of subordinated revolving credit
agreements....................................... 48,378 --
Accounts payable.................................. 5,564,124 10,728,966
Accrued liabilities............................... 2,126,481 3,569,255
Customer deposits................................. 242,966 960,579
Accrued payroll................................... 788,025 707,010
----------- ------------
Total current liabilities..................... 10,153,565 17,170,224
Revolving line of credit............................ -- 12,100,000
Notes payable, net of current portion............... 3,049,855 523,663
Capital lease obligations, net of current portion... 1,873,097 1,783,101
Subordinated revolving credit agreements, net of
current portion.................................... 449,883 --
----------- ------------
Total liabilities............................. 15,526,400 31,576,988
----------- ------------
Commitments and contingencies (Notes 4, 5, 6, 8 and
15)
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 5,000,000 shares
authorized, 3,218,884 shares outstanding
(aggregate liquidation preference of $15,131,507
and $16,331,507, respectively)................... 14,510,951 14,510,951
Common stock, $.01 par value: 20,000,000 shares
authorized, 4,641,999 and 6,974,039 shares
outstanding, respectively........................ 46,420 69,740
Additional paid-in capital........................ 3,149,080 3,616,254
Common stock warrants............................. 425,000 --
Stockholder receivables........................... -- (275,178)
Accumulated deficit............................... (8,990,564) (23,580,359)
----------- ------------
Total stockholders' equity (deficit).......... 9,140,887 (5,658,592)
----------- ------------
Total liabilities and stockholders' equity
(deficit).................................... $24,667,287 $ 25,918,396
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING REVENUES:
Call processing services............ $29,289,773 $33,884,925 $ 46,221,645
Calling card services............... 4,571,623 7,216,500 10,782,439
----------- ----------- ------------
Total operating revenues.......... 33,861,396 41,101,425 57,004,084
Costs of operating revenues........... 23,485,855 29,300,800 45,472,816
----------- ----------- ------------
Gross profit........................ 10,375,541 11,800,625 11,531,268
----------- ----------- ------------
OPERATING EXPENSES:
Selling, general and
administrative..................... 12,647,572 12,147,893 21,721,240
Depreciation and amortization....... 1,353,665 1,467,161 1,990,555
----------- ----------- ------------
Total operating expenses.......... 14,001,237 13,615,054 23,711,795
----------- ----------- ------------
Operating loss........................ (3,625,696) (1,814,429) (12,180,527)
----------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest income..................... 26,276 187,597 351,263
Other income........................ 38,952 7,590 54,102
Interest expense.................... (694,393) (928,027) (1,442,377)
----------- ----------- ------------
Total other expense, net.......... (629,165) (732,840) (1,037,012)
----------- ----------- ------------
Loss from continuing operations before
benefit from (provision for) income
taxes................................ (4,254,861) (2,547,269) (13,217,539)
Benefit from (provision for) income
taxes.............................. 783,382 20,419 (5,218)
----------- ----------- ------------
Loss from continuing operations....... (3,471,479) (2,526,850) (13,222,757)
DISCONTINUED OPERATIONS:
Operating income, less applicable
income taxes of $233,599........... 392,671 -- --
Gain from disposal, less applicable
income taxes of $587,688........... 987,882 -- --
----------- ----------- ------------
Net loss.............................. $(2,090,926) $(2,526,850) $(13,222,757)
=========== =========== ============
BASIC AND DILUTED LOSS PER COMMON
SHARE (NOTE 2):
Loss from continuing operations..... $ (0.80) $ (0.57) $ (2.47)
Discontinued operations............. 0.32 -- --
----------- ----------- ------------
Net loss............................ $ (0.48) $ (0.57) $ (2.47)
=========== =========== ============
Weighted average common shares
outstanding.......................... 4,339,117 4,641,999 5,843,313
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL COMMON
------------------ --------------------- PAID-IN STOCK STOCKHOLDER ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS RECEIVABLES DEFICIT TOTAL
--------- ------- --------- ----------- ---------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1994......... 3,578,999 $35,790 -- $ -- $1,033,710 $ -- $ -- $ (4,372,788) $(3,303,288)
Conversion of
subordinated
notes payable to
stockholders into
1,063,000 shares
of common stock
at $2.00 per
share............ 1,063,000 10,630 2,115,370 2,126,000
Issuance of
warrants to
senior debt
holders.......... 125,000 125,000
Net loss.......... (2,090,926) (2,090,926)
--------- ------- --------- ----------- ---------- -------- --------- ------------ -----------
Balance, December
31, 1995......... 4,641,999 46,420 -- -- 3,149,080 125,000 -- (6,463,714) (3,143,214)
--------- ------- --------- ----------- ---------- -------- --------- ------------ -----------
Issuance of
preferred shares
at $4.66 per
share, net of
offering costs of
$489,049......... 3,218,884 14,510,951 14,510,951
Warrants issued in
connection with
subordinated
revolving credit
agreements....... 50,000 50,000
Warrants issued in
connection with
subordinated
notes payable to
stockholders..... 100,000 100,000
Issuance of
warrants to
senior debt
holders.......... 150,000 150,000
Net loss.......... (2,526,850) (2,526,850)
--------- ------- --------- ----------- ---------- -------- --------- ------------ -----------
Balance, December
31, 1996......... 4,641,999 46,420 3,218,884 14,510,951 3,149,080 425,000 -- (8,990,564) 9,140,887
--------- ------- --------- ----------- ---------- -------- --------- ------------ -----------
Repurchase and
retirement of
536,481 shares of
common stock at
$4.55 per share.. (536,481) (5,365) (1,067,597) (1,367,038) (2,440,000)
Exercise of
warrants by
stockholders at
$0.167 per
share............ 2,000,520 20,005 413,421 (100,000) 333,426
Issuance of common
stock warrants to
senior debts
holders.......... 28,649 28,649
Exercise of
warrants by
subordinated debt
holders at $1.00
per share........ 500,000 5,000 545,000 (50,000) 500,000
Exercise of
warrants by
senior debt
holders at $0.01
per share........ 180,084 1,801 303,051 (303,649) 1,203
Exercise of stock
options at a
weighted average
price of $1.46
per share........ 187,917 1,879 273,299 (275,178)
Net loss.......... (13,222,757) (13,222,757)
--------- ------- --------- ----------- ---------- -------- --------- ------------ -----------
Balance, December
31, 1997......... 6,974,039 $69,740 3,218,884 $14,510,951 $3,616,254 $ -- $(275,178) $(23,580,359) $(5,658,592)
========= ======= ========= =========== ========== ======== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................. $(2,090,926) $(2,526,850) $(13,222,757)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization......... 1,353,665 1,467,161 1,990,555
Provision for doubtful accounts
receivable........................... 531,010 785,764 3,649,974
Loss on writedown of investment in
joint venture........................ -- -- 831,991
Gain on disposal of discontinued
operations........................... (1,575,570) -- --
Noncash interest expense.............. 248,231 365,989 478,441
Changes in assets and liabilities:
Decrease (increase) in:
Third party billings receivable...... 439,140 433,915 (1,161,312)
Other accounts receivable, net....... (1,670,203) (3,257,930) (5,460,935)
Other current assets................. (76,970) (259,337) (100,216)
Notes receivable from related
parties............................. (575,512) (595,311) 18,710
Other assets......................... (355,719) (95,934) (1,008,588)
Increase (decrease) in:
Accounts payable..................... (2,061,343) 3,858 5,164,842
Accrued liabilities.................. (116,619) 154,225 1,442,774
Customer deposits.................... 242,763 203 717,613
Accrued payroll...................... 410,467 174,654 (81,015)
----------- ----------- ------------
Net cash used in operating activities.. (5,297,586) (3,349,593) (6,739,923)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.... (1,136,940) (1,706,551) (7,163,897)
Proceeds from disposal of discontinued
operations........................... 3,664,889 -- --
(Increase) decrease in restricted
cash................................. -- (4,000,000) 4,000,000
----------- ----------- ------------
Net cash provided by (used in)
investing activities.................. 2,527,949 (5,706,551) (3,163,897)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of:
Subordinated notes payable to
stockholders......................... 1,200,000 500,000 --
Revolving line of credit.............. -- -- 12,100,000
Notes payable......................... 3,695,363 1,500,000 101,623
Principal payments on:
Notes payable......................... (1,556,190) (1,356,162) (3,109,498)
Capital lease obligations............. (353,746) (296,666) (614,507)
Subordinated revolving credit
agreements........................... -- -- (538,886)
Subordinated notes payable to
stockholders......................... -- (1,769,967) (338,700)
Payments made to repurchase common
stock................................ -- -- (2,440,000)
Proceeds from the exercise of
warrants............................. -- -- 795,772
Net proceeds from the sale of
preferred stock...................... -- 14,510,951 --
(Increase) decrease in restricted
cash................................. -- (2,900,000) 2,900,000
----------- ----------- ------------
Net cash provided by financing
activities............................ 2,985,427 10,188,156 8,855,804
----------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents...................... 215,790 1,132,012 (1,048,016)
Cash and cash equivalents at beginning
of the year........................... 226,709 442,499 1,574,511
----------- ----------- ------------
Cash and cash equivalents at end of the
year.................................. $ 442,499 $ 1,574,511 $ 526,495
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest.............................. $ 446,162 $ 562,038 $ 993,079
Income taxes.......................... -- 35,100 --
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred
during the year for the acquisition
of equipment......................... 513,383 1,818,930 980,000
Issuance of 1,063,000 shares of common
stock to stockholders in exchange for
reduction in subordinated notes
payable.............................. 2,126,000 -- --
Issuance of warrants to purchase
500,000 shares of common stock....... -- 50,000 --
Issuance of warrants to purchase
2,000,520 shares of common stock..... -- 100,000 --
Issuance of warrants to purchase
64,889, 69,227 and 45,968 shares of
common stock, respectively........... 125,000 150,000 28,649
Exercise of options in exchange for
notes receivable from stockholders... -- -- 275,178
Exercise of 404,992 common stock
warrants in exchange for reduction in
subordinated notes payable to
stockholder.......................... -- -- 67,500
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 NATURE OF OPERATIONS AND REORGANIZATION
Teltrust, Inc. (formerly known as TTST Holdings, Inc.) was incorporated in
Delaware on April 8, 1998 to acquire all of the outstanding capital stock of
Teltrust Holdings, Inc., a Utah corporation (formerly known as Teltrust,
Inc.), through a corporate reorganization under the laws of Delaware and Utah.
This corporate reorganization was completed on April 22, 1998 (see Note 15).
The capital accounts presented in the accompanying consolidated balance sheets
reflect the authorized common and preferred stock of Teltrust, Inc., organized
on April 8, 1998. Teltrust and its subsidiaries (collectively referred to as
"the Company") provide a broad range of enhanced call processing and calling
card services to the domestic telecommunications industry. The Company
provides a broad range of enhanced call processing services, including call
completion, national directory assistance and third party verification
services, in addition to calling card services. Services are delivered through
the use of state-of-the-art technology, switch-based call processing platforms
and more than 1,000 employees. Telecommunications service providers contract
with the Company to provide enhanced call-processing services to their end
user business and consumer customers. The Company's customers include
interexchange carriers ("IXCs"), regional Bell operating companies ("RBOCs"),
other local exchange carriers ("LECs") and competitive local exchange carriers
("CLECs"), wireless providers, pay telephone and hospitality service
providers, calling card service providers, and international
telecommunications carriers. Customers access the Company's telecommunications
platforms and services through a multi-state leased line network served by
fourteen tandem and operator switches in eleven locations in Salt Lake City,
Atlanta, Los Angeles, Miami and New York City.
During 1994, the Company launched new strategies and products designed to
position itself as a premier provider of enhanced call processing services to
take advantage of emerging markets in telecommunications. The continued
increase in telecommunications competition, fostered by the Telecommunications
Act of 1996 and subsequent entry of new providers created additional
opportunity for the Company to penetrate newly established markets with its
products. The Company further expanded its calling card services through the
acquisition of Quest Group International, Inc. and its affiliates
(collectively, "Quest") in December 1997 (see Note 3).
The Company's sales have been, and the Company expects that its sales will
continue to be, somewhat seasonal, due to the nature of call traffic from
independent and LEC-owned pay telephones and the use of prepaid and other
calling cards. Traditional agent-assisted long distance services produce peak
revenues during the summer months, coincident with domestic travel and
vacation patterns. To a lesser degree, national directory assistance, prepaid
and other calling cards and third-party verification services are also
affected by seasonal demand fluctuations with demand peaking in the spring and
summer months.
DISCONTINUED OPERATIONS
Effective November 1, 1995, the Company entered into an agreement with
Cherokee Communications, Inc. for the sale of substantially all of the assets
of Teltrust Phones, Inc., a wholly-owned subsidiary of Teltrust, for
$3,664,889 in cash. Additionally, the Company is bound by a covenant not to
compete by operating or managing pay telephones for five years subsequent to
the effective date of the sale. A gain on the disposal of the subsidiary's
operations of $1,575,570 (before related income taxes of $587,688) has been
reflected in the accompanying 1995 consolidated statement of operations.
Revenue from discontinued operations was $3,275,781 for the period from
January 1, 1995 through October 31, 1995. Operating income and gain from
disposal of discontinued operations have been presented as separate captions
in the 1995 statement of operations.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Teltrust and its wholly owned subsidiaries Teltrust Communication Services,
Inc. ("TCS"), Teltrust Phones, Inc. ("Phones", now inactive), Teltrust
Teleservices, Inc. ("Teleservices"), Quest Group International, Inc. and Quest
Real Estate, Inc. All significant intercompany transactions and accounts have
been eliminated in consolidation.
F-7
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with maturities of three months or less to
be cash equivalents.
RESTRICTED CASH
As of December 31, 1996, $6,900,000 of the Company's cash and cash
equivalents were restricted to repayment of an approximately $400,000
subordinated note payable to a stockholder, $2,500,000 to repurchase common
stock and $4,000,000 for capital expenditures. No such restriction existed as
of December 31, 1997.
REVENUE RECOGNITION
The Company's business is primarily transaction based, and accordingly,
revenues are recognized as services are performed.
CALL PROCESSING SERVICES
Depending upon the nature of the relationship with its customer, the Company
may recognize revenue on a "wholesale basis" or a "retail basis". Wholesale
revenues consist of relationships where the Company provides a service to
another entity servicing the end-user. In a wholesale-type relationship, the
Company does not assume the credit risk from the end-user. Retail revenues
consist of relationships where the Company assumes ownership of the entire
call transaction and recognizes the gross call billing to the end-user as
revenue. In a retail-type relationship, the Company does assume the credit
risk related to the end-user. The following describes the nature of the
services and revenue earning process for each of the Company's call processing
services.
. Call Completion Services--These services consist of automated or live
agent assisted calling card calling, collect calling and third-party
billed calling. The Company earns revenues from its call completion
services on a per-completed call, pre-call attempt or per-minute-of-use-
basis. These services are performed on both a wholesale and retail
basis.
. National Directory Assistance--These services consist of national
directory assistance covering the 50 United States, the District of
Columbia, Puerto Rico and the United States Virgin Islands. The Company
generally earns revenues from this service on a wholesale, per-inquiry
basis.
. Third-Party Verification Services--Third-party verification is an FCC
requirement designed to protect consumers from unauthorized switching of
an end-user's IXC, LEC or public utility provider without first
obtaining the consent of the end-user. In providing this service, the
Company acts as an independent third-party to verify an end-user's order
to change its IXC, LEC or public utility provider. The Company generally
earns fees from its third-party verification operations on a wholesale,
per-call or hourly basis.
CALLING CARD SERVICES
The Company's calling card services are provided through two applications:
wholesale applications and co-branded retail applications. In wholesale
service applications, customers purchase network and platform services from
the Company on a per-minute-of-use basis. Revenue is recognized as services
are provided. In co-branded retail service applications, customers purchase
calling cards from the Company at a discount from the retail value. The
Company receives cash upon the sale of prepaid calling cards, net of the
discount given to the co-branded services retail customer. The Company
recognizes revenue as the calling card is utilized by the end-user. Cash
received is recorded as unearned revenue in the accompanying consolidated
balance sheets.
F-8
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book value of the Company's financial instruments approximates fair
value. The estimated fair values have been determined using appropriate market
information and valuation methodologies.
THIRD-PARTY BILLINGS RECEIVABLE
The Company bills the majority of its accounts receivable under an agreement
with a third-party billing provider. This agreement allows the Company to
submit call detail records to the third-party billing provider, which in turn
forwards these records to LECs to be billed. The third-party billing provider
collects the funds from the LEC and then remits the funds, net of clearing
costs, to the Company. Because this collection process can take up to 90 days
to complete, the Company participates in an advance funding program offered by
the third-party billing provider whereby certain call records are purchased
for 80 percent of their value within five days of presentment. The remaining
20 percent of the value of the call records is remitted to the Company, net of
interest and clearing costs, as the third-party billing provider collects the
funds from the LECs. The allowance for clearing costs includes the Company's
estimate of uncollectible calls at December 31, 1996 and 1997. The Company's
customers are responsible for any amounts that ultimately are not collectible;
however, the Company is subject to the credit risks associated with collecting
these amounts from its customers. As of December 31, 1996 and 1997, the
Company has established reserves (estimated clearing costs) which management
believes are sufficient for potential charge backs.
As a component of this agreement, the Company is charged interest on the 80
percent of the call record value which is advanced to the Company at the prime
lending rate as quoted in the Wall Street Journal (8.5 percent at December 31,
1997) plus two percent. The Company, in turn, charges its customers for
interest on these amounts at the same rate.
The Financial Accounting Standards Board ("FASB") issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" in June 1996. This statement provides
accounting and reporting standards for, among other things, the transfer and
servicing of financial assets, such as factoring receivables with recourse.
The statement is effective for transfers and servicing of financial assets
occurring after December 31, 1996 and requires prospective application. In
December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of SFAS No. 125." SFAS No. 127 amended the effective
date for certain provisions of SFAS No. 125 to December 31, 1997. The adoption
of these statements did not have a material impact on the financial position
or results of operations of the Company.
As of December 31, 1996 and 1997, third-party billings receivables include
approximately $775,000 and $724,000, respectively, of gross billings for which
advance funding has not been received.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
related assets. Upon sale or other disposition of property and equipment, the
cost and related accumulated depreciation or amortization is removed from the
accounts and any gain or loss is included in the determination of net income
or loss.
Expenditures for maintenance and repairs are charged to expense as incurred.
Direct installation costs and major improvements are capitalized.
F-9
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and equipment as of December 31, 1996 and 1997, are summarized as
follows:
<TABLE>
<CAPTION>
USEFUL LIVES 1996 1997
------------ ----------- ----------
<S> <C> <C> <C>
Switch equipment......................... 10 years $ 2,187,641 $4,366,383
Computer equipment....................... 5 years 1,795,014 3,476,272
Software................................. 3 years 462,771 1,961,577
Operator stations........................ 5 years 813,041 1,517,875
Leasehold improvements................... 7 years 908,763 1,385,524
Office furniture and equipment........... 7 years 592,525 1,002,522
Building................................. 30 years 428,433 428,433
Other.................................... 3 to 7 years 266,804 521,408
Land..................................... 95,330 95,330
----------- ----------
Total property and equipment........... 7,550,322 14,755,324
Less accumulated depreciation and amorti-
zation.................................. (3,248,371) (4,908,034)
----------- ----------
Property and equipment, net of accumu-
lated depreciation and amortization... $ 4,301,951 $9,847,290
=========== ==========
</TABLE>
EQUIPMENT HELD UNDER CAPITAL LEASE OBLIGATIONS
Equipment held under capital lease obligations as of December 31, 1996 and
1997, is summarized as follows:
<TABLE>
<CAPTION>
USEFUL LIVES 1996 1997
------------ ---------- -----------
<S> <C> <C> <C>
Switch equipment.......................... 10 years $3,632,955 $ 4,617,612
Computer equipment........................ 5 years 72,817 68,161
---------- -----------
Total equipment held under capital
lease obligations.................... 3,705,772 4,685,773
Less accumulated amortization............. (843,623) (1,215,621)
---------- -----------
Equipment held under capital lease
obligations, net of accumulated
amortization......................... $2,862,149 $ 3,470,152
========== ===========
</TABLE>
OTHER ASSETS
Other assets as of December 31, 1996 and 1997, are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Loan origination fees................................... $ 248,164 $ 503,865
Deposits................................................ 188,023 272,482
Notes receivable........................................ 255,996 443,693
Investment in joint venture............................. 564,499 --
Other................................................... 170,716 --
---------- ----------
Total other assets.................................... 1,427,398 1,220,040
Less accumulated amortization........................... (214,719) (15,363)
---------- ----------
Other assets, net of accumulated amortization......... $1,212,679 $1,204,677
========== ==========
</TABLE>
Loan origination fees are amortized over the five-year life of the debt
agreement.
F-10
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ACCRUED LIABILITIES
Accrued liabilities as of December 31, 1996 and 1997, are summarized as
follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Accrued expenses....................................... $ 690,987 $1,136,099
Unearned revenue....................................... 412,292 512,292
Accrued legal fees..................................... 60,000 481,833
Accrued vacation....................................... 208,821 330,183
Other.................................................. 754,381 1,108,848
---------- ----------
$2,126,481 $3,569,255
========== ==========
</TABLE>
INCOME TAXES
The Company recognizes liabilities or assets for the deferred tax
consequences of all temporary differences between the tax bases of assets or
liabilities and their reported amounts in the financial statements. These
temporary differences will result in taxable or deductible amounts in future
years when the reported amounts of the assets or liabilities are recovered or
settled. The deferred tax assets are reviewed for recoverability and valuation
allowances are provided as necessary.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments
for an Enterprise and Related Information". The statement establishes new
standards for public companies to report information about operating segments,
products and services, geographic areas and major customers. This statement is
effective for periods beginning after December 15, 1997. The Company
anticipates it will have two reporting segments; namely, call processing
services and calling card services.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-up
Activities." SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred and is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company currently expenses
such costs and therefore, the implementation of this pronouncement is not
expected to have any impact on the Company's financial position or results of
operations.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. The use of estimates and assumptions may 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.
The Company manages its credit, theft and fraud risks through its internal
controls, monitoring and blocking systems. The Company also maintains reserves
which it deems adequate for such risks. However, past experience in estimating
and establishing reserves and the Company's historical losses may not
necessarily be accurate indications of the future. The Company believes that
its risk management and bad debt reserve practices are adequate; however the
actual losses resulting from unauthorized or returned transactions or thefts
of services could be different from those estimates.
NET LOSS PER COMMON SHARE
In accordance with SFAS No. 128, "Earnings per Share," basic net income per
common share ("Basic EPS") excludes the effects of all common stock
equivalents and convertible securities and is computed by
F-11
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
dividing net income by the weighted-average number of common shares
outstanding during the year. Diluted net income per common share ("Diluted
EPS") reflects the potential dilution that could occur if common stock
equivalents and convertible securities were exercised or converted into common
stock. The computation of Diluted EPS does not assume exercise or conversion
of securities that would have an anti-dilutive effect on net income (loss) per
common share. The Company has incurred net losses for all years presented and
therefore, all common stock equivalents were excluded from the calculation of
diluted loss per common share for the years ended December 31, 1995, 1996 and
1997 because they would have been anti-dilutive, thereby decreasing the net
loss per common share.
At December 31, 1995, 1996 and 1997, there were outstanding options to
purchase 589,000, 873,648 and 1,183,799 shares, respectively, of common stock.
In accordance with SFAS No. 128, in determining the net loss attributable to
common stockholders, the Company has increased the net loss by undeclared
dividends on preferred stock of $131,507 and $1,200,000 for the years ended
December 31, 1996 and 1997, respectively. There were no undeclared preferred
stock dividends for the year ended December 31, 1995. The calculation of basic
and dilutive net loss per common share is as follows for 1995, 1996 and 1997:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
1995 1996 1997
--------------------------------- --------------------------------- ----------------------------------
PER- PER- PER-
LOSS SHARES SHARE LOSS SHARES SHARE LOSS SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------ ------------ ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loss from
continuing
operations..... $(3,471,479) $(2,526,850) $(13,222,757)
Add: undeclared
preferred stock
dividends...... -- (131,507) (1,200,000)
----------- ----------- ------------
BASIC AND
DILUTED
Loss from
continuing
operations
attributable to
common
stockholders... (3,471,479) 4,339,117 $(0.80) (2,658,357) 4,641,999 $(0.57) (14,422,757) 5,843,313 $(2.47)
Income from
discontinued
operations..... 1,380,553 4,339,117 0.32 -- -- -- -- -- --
----------- --------- ------ ----------- --------- ------ ------------ --------- ------
Net loss
attributable to
common
stockholders... $(2,090,926) 4,339,117 $(0.48) $(2,658,357) 4,641,999 $(0.57) $(14,422,757) 5,843,313 $(2.47)
=========== ========= ====== =========== ========= ====== ============ ========= ======
</TABLE>
SIGNIFICANT CUSTOMERS
Three contracts with two independent affiliates of one RBOC accounted for
approximately 2.7%, 11.9% and 1.6% of the Company's 1997 consolidated
revenues. There were no other customers that accounted for more than 10% of
the Company's consolidated revenues during 1995, 1996 and 1997. The Company's
five largest customers accounted for 20.4%, 27.3% and 39.7% of total operating
revenues for the years ended December 31, 1995, 1996 and 1997, respectively.
The Company expects that revenues attributable to a relatively small number of
customers will continue to represent a significant percentage of its total
revenues for the foreseeable future. The terms of the contracts with its most
significant customers have terms varying from one to three years. Although the
Company believes that it has good relationships with its customers, there can
be no assurance that the Company's customers, including its significant
customers, will continue to use the Company's services in amounts greater than
or similar to previous years, or at all. The loss or significant reduction of
revenues from its significant customers could have a material adverse effect
on the Company's results of operations and financial condition.
At December 31, 1997, the customers with the four highest accounts
receivable balances totaled $6,857,289, or 55%, of gross accounts receivable.
At December 31, 1997, the outstanding accounts receivable balance from one
customer was $3,975,649, or 31%, of gross accounts receivable. If any one or a
group of these customers' receivable balances should be uncollectible, it
would have a material adverse effect on the Company's results of operations
and financial condition.
F-12
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ADVERTISING
In accordance with Statement of Position 93-7, "Reporting on Advertising
Costs," costs for advertising are expensed as incurred within the fiscal year.
If it is determined that the advertising costs will provide a future economic
benefit, the costs are capitalized and amortized over the period of benefit,
not to exceed one year. For the years ended December 31, 1995, 1996 and 1997,
advertising expenses were $578,434, $1,051,480 and $1,025,838, respectively.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for impairment of long-lived assets in accordance with
SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 requires that
long-lived assets be reviewed for impairment when events or changes in
circumstances indicate that the book value of an asset may not be recoverable.
The Company evaluates, at each balance sheet date, whether events and
circumstances have occurred that indicate possible impairment. In accordance
with SFAS No. 121, the Company uses an estimate of future undiscounted net
cash flows of the related asset over the remaining life in measuring whether
assets are recoverable. As of December 31, 1997, the Company has determined
that none of its long-lived assets have been impaired.
NOTE 3 MERGER
On December 31, 1997, the Company merged with Quest Group International,
Inc. and Quest Real Estate, Inc. (collectively, "Quest") in a stock-for-stock
transaction that resulted in Quest becoming a wholly owned subsidiary of
Teltrust, Inc. Under the terms of the agreement, Quest stockholders received
1.6516 shares of Teltrust common stock for each Quest share. Accordingly, the
Company issued 900,000 shares of common stock for all outstanding shares of
Quest common stock.
The merger qualified as a tax-free reorganization and was accounted for as a
pooling-of-interests. Accordingly, the Company's financial statements have
been restated to include the accounts and operations of Quest for all periods
presented as though the two companies had always been a combined entity.
Consolidated and separate results of Teltrust, Inc. and Quest during the
periods preceding the merger were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Teltrust, Inc........................... $ 28,128 $ 34,551 $ 52,410
Quest................................... 5,733 6,720 4,594
Elimination of intercompany
transactions........................... -- (170) --
---------- ---------- -----------
Consolidated.......................... $ 33,861 $ 41,101 $ 57,004
========== ========== ===========
NET LOSS:
Teltrust, Inc........................... $ (161) $ (975) $ (10,394)
Quest................................... (1,930) (1,552) (2,829)
---------- ---------- -----------
Consolidated.......................... $ (2,091) $ (2,527) $ (13,223)
========== ========== ===========
</TABLE>
No adjustments were necessary to the consolidated financial results
presented above to conform the accounting policies of the two companies, other
than certain revenue and expense reclassifications.
In connection with the merger, at any time after 180 days following the
Company's registered initial public offering of equity securities, upon
written request, the holders of more than fifty percent of the registrable
securities issued pursuant to the merger may demand a registration statement
to be filed for which the Company would bear the cost of filing such
registration statement (except the stockholders' underwriting discounts,
commissions and legal fees).
F-13
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4 REVOLVING LINE OF CREDIT
In November 1997, the Company entered into a five-year Reducing Revolving
Credit Facility ("Credit Facility") with a bank in the amount of $15,000,000
(see Note 15). Up to the full amount of the Credit Facility may be borrowed,
repaid and reborrowed subject to quarterly reductions in the commitment amount
beginning on March 31, 1999, as follows:
<TABLE>
<CAPTION>
QUARTERLY QUARTERLY
REDUCTION REDUCTION
PERCENTAGE AMOUNT
QUARTERLY BEGINNING MARCH 31, ---------- ----------
<S> <C> <C>
1999................................................ 3.000% $ 450,000
2000................................................ 5.625 843,750
2001................................................ 9.000 1,350,000
2002................................................ 9.833 1,474,950
</TABLE>
The Credit Facility's final maturity is September 30, 2002 and provides for
either Base Rate or LIBOR Rate advances at the Company's discretion. Base Rate
advances are at the bank's base rate plus 1.5% ("margin") and LIBOR Rate
advances are at the LIBOR rate plus 2.75% ("margin"). Beginning after March
31, 1998, the margin for the Credit Facility will be determined based upon the
ratio of total funded debt (the current outstanding balance of the Credit
Facility) to EBITDA (earnings before interest, taxes, depreciation and
amortization) (the "Ratio"). As the Ratio improves, the margin added to the
Base rate and the LIBOR rate declines. Among others, the financial covenants
include a requirement for a maximum ratio of 3.75 to 1.00 during 1998, 2.50 to
1.00 during 1999 and 1.50 to 1.00 thereafter.
The Credit Facility is secured by a first priority perfected security
interest in all assets of the Company, including a pledge of all capital stock
of its subsidiaries. The Company pays maintenance fees of $25,000 per quarter
to continue the Credit Facility. Additionally, the Credit Facility contains
financial covenant requirements such as a maximum leverage ratio; minimum
interest, debt and fixed charge service coverage ratios; limitations on
additional debt; minimum EBITDA of $7,000,000 in 1998; and limits on capital
expenditures of $8,250,000 in 1998 and $5,000,000 in 1999 and subsequent
years.
As of December 31, 1997, advances under the Credit Facility totaled
$12,100,000. These were LIBOR advances with an effective interest rate of 8.8
percent.
NOTE 5 NOTES PAYABLE
NOTES PAYABLE
As of December 31, 1996 and 1997, notes payable consisted of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
Note payable to a bank, interest at the bank's prime
rate (8.5 percent at December 31, 1997) plus 2.5
percent, secured by real estate, due in equal monthly
installments of $4,912 through August 2018............. $ 486,845 $ 480,142
Note payable to a bank, interest at 6.7 percent, secured
by equipment, due in equal monthly installments of
$8,351 through November 1998........................... -- 96,652
Note payable to a bank, interest at 8.25 percent,
secured by real estate, due in equal monthly
installments of $589 through July 2010................. 55,143 52,592
Notes payable to a venture capital firm, paid in full in
December 1997.......................................... 2,750,000 --
Other................................................... 113,319 15,712
---------- ---------
Total notes payable.................................... 3,405,307 645,098
Less current portion.................................... (355,452) (121,435)
---------- ---------
Notes payable, net of current portion.................. $3,049,855 $ 523,663
========== =========
</TABLE>
F-14
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future maturities of long term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1998............................................................ $121,435
1999............................................................ 10,281
2000............................................................ 11,378
2001............................................................ 12,594
2002............................................................ 13,943
Thereafter...................................................... 475,467
--------
Total......................................................... $645,098
========
</TABLE>
SUBORDINATED REVOLVING CREDIT AGREEMENTS
As of December 31, 1996 and 1997, subordinated revolving credit agreements
consisted of the following:
<TABLE>
<CAPTION>
1996 1997
-------- -----
<S> <C> <C>
Subordinated revolving credit agreement with an independent
investor,
interest at 12 percent......................................... $399,136 $ --
Subordinated revolving credit agreement with an independent
investor,
interest at 12 percent......................................... 99,125 --
-------- -----
Total subordinated revolving credit agreements.............. 498,261 --
Less current portion............................................ (48,378) --
-------- -----
Subordinated revolving credit agreements, net of current
portion.................................................... $449,883 $ --
======== =====
</TABLE>
In conjunction with these revolving credit agreements, the Company issued
warrants to purchase 400,000 and 100,000 shares of the Company's common stock
(one warrant for each $1.00 loaned), respectively. These warrants were
exercisable based upon a graduating exercise price and were exercised in
September 1997 at $1.00 per share. In connection with their issuance, the
Company valued these warrants at $50,000. The debt was originally recorded at
$450,000 and the principal balance was accreted through additional interest
expense up to the amount due when it was repaid.
NOTE 6 LEASE OBLIGATIONS
OPERATING LEASES
The Company leases office space and certain telecommunications equipment
under non-cancelable operating lease agreements. Rent expense under these
leases for the years ended December 31, 1995, 1996 and 1997 was $631,575,
$789,813 and $1,359,432, respectively.
F-15
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments by year under these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1998......................................................... $1,747,014
1999......................................................... 1,239,123
2000......................................................... 1,162,841
2001......................................................... 1,136,098
2002......................................................... 586,450
Thereafter................................................... 2,053,156
----------
Total future minimum lease payments........................ $7,924,682
==========
</TABLE>
CAPITAL LEASES
The Company leases various computer and telecommunications equipment under
capital lease agreements. The following is a schedule by year of future
minimum lease payments under capital lease obligations together with the
present value of the future net minimum lease payments as of December 31,
1997:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1998........................................................ $ 1,296,343
1999........................................................ 1,132,315
2000........................................................ 674,097
2001........................................................ 145,289
-----------
Total future minimum lease payments....................... 3,248,044
Less amount representing interest........................... (381,964)
-----------
Present value of net minimum lease payments............... 2,866,080
Less current portion........................................ (1,082,979)
-----------
Capital lease obligations, net of current portion......... $ 1,783,101
===========
</TABLE>
NOTE 7 INCOME TAXES
The components of the benefit for federal and state income taxes are as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal............................... $1,229,849 $ 938,547 $ 3,784,552
State................................. 188,185 144,519 576,232
---------- ----------- -----------
1,418,034 1,083,066 4,360,784
---------- ----------- -----------
Deferred:
Federal............................... 109,206 (80,635) 829,157
State................................. 17,666 (13,044) 134,129
Change in valuation allowance......... (761,524) (968,968) (5,329,288)
---------- ----------- -----------
(634,652) (1,062,647) (4,366,002)
---------- ----------- -----------
Benefit from (provision for) income
taxes on income from continuing
operations............................. $ 783,382 $ 20,419 $ (5,218)
========== =========== ===========
</TABLE>
F-16
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In applying the provisions of SFAS No. 109, "Accounting for Income Taxes",
the Company has determined that a valuation allowance should be provided
against all of its net deferred tax assets in the accompanying consolidated
balance sheets as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward....... $ 1,423,495 $ 2,486,142 $ 6,852,144
Allowance for doubtful accounts and
valuation allowances................. 288,711 375,107 994,453
Unearned revenue...................... 30,791 162,855 202,355
Accrued liabilities................... 199,543 174,932 519,966
Other................................. 158,650 100,511 90,826
----------- ----------- -----------
2,101,190 3,299,547 8,659,744
Valuation allowance................... (1,912,877) (2,881,845) (8,211,133)
----------- ----------- -----------
Deferred tax assets, net of valuation
allowance.............................. 188,313 417,702 448,611
Deferred tax liabilities:
Excess tax depreciation over book..... (188,313) (417,702) (448,611)
----------- ----------- -----------
Net deferred tax assets................. $ -- $ -- $ --
=========== =========== ===========
</TABLE>
The Company's effective income tax rate on income from continuing operations
was different from the statutory federal income tax rate for the following
reasons:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER
31,
-------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate........................ 35.0% 35.0% 35.0%
State income tax, net of federal benefit............... 4.5 4.5 4.5
Non-deductible items................................... (1.9) (1.1) (0.7)
Change in valuation allowance............................ (19.2) (37.6) (38.8)
----- ----- -----
Effective income tax rate on income from continuing oper-
ations.................................................. 18.4% 0.8% -- %
===== ===== =====
</TABLE>
As a result of incurring taxable losses, the Company had no regular federal
income tax provision in 1995, 1996 and 1997. However, the Company is subject
to approximately $37,905, $6,577 and $5,218 of federal alternative minimum tax
and state income tax for the years ended December 31, 1995, 1996 and 1997,
respectively.
For tax reporting purposes, the Company has consolidated net operating loss
carryforwards of approximately $17,347,000 at December 31, 1997 available to
offset future taxable income. Approximately $5,010,000 of the consolidated net
operating loss carryforwards can only be used by Quest, as those net operating
losses were generated by Quest prior to its merger with Teltrust. The Tax
Reform Act of 1986 contains provisions which limit net operating loss
carryforwards available based upon certain changes in ownership. In January
1997, changes in the ownership of Teltrust resulted in limitations on all pre-
existing net operating loss carryforwards of Teltrust. As a result, at
December 31, 1997, management estimates that $4,447,000 of the Company's net
operating loss carryforwards are limited to utilization of approximately
$1,692,000 per year. In December 1997, changes in the ownership of Quest
resulted in limitations on all pre-existing net operating loss carryforwards
of Quest. As a result, at December 31, 1997, management estimates that all of
the Quest net operating loss carryforwards are limited to utilization of
approximately $250,000 per year. If the annual limited amount is unutilized in
any particular year, it remains available on a cumulative basis through the
expiration date (15 years from the net operating loss inception date).
F-17
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following summarizes the tax net operating loss carryforwards and their
respective expiration dates as of December 31, 1997:
<TABLE>
<S> <C>
2004........................................................ $ 275,000
2005........................................................ 819,000
2006........................................................ 1,146,000
2009........................................................ 664,000
2010........................................................ 1,700,000
2011........................................................ 2,690,000
2012........................................................ 10,053,000
-----------
Total net operating loss carryforwards.................. $17,347,000
===========
</TABLE>
NOTE 8 COMMITMENTS AND CONTINGENCIES AND FINANCING NEEDS
CLAIMS AND LEGAL ACTIONS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters will not have a
material adverse effect on the Company's financial position or results of
operations. However, due to the inherent uncertainty of litigation, there can
be no assurance that new developments or the resolution of any particular
claim or proceeding would not have an adverse effect on the Company's results
of operations for the period in which such new developments or resolution
occurred.
EMPLOYMENT AGREEMENTS
The Company has entered into noncompetition agreements with each of its
executive officers and other key employees which provide that, during the six-
month period following any such employee's termination of employment, the
employee shall refrain from engaging in any activities competitive with the
Company. The Company has the right to extend the initial six-month period for
up to five additional six-month periods. The Company, in turn, is obligated to
pay to such employee an amount equal to 100% of such employee's highest base
salary during the ninety-day period prior to his or her termination of
employment during each six-month period during which such employee's
noncompetition agreement is in effect.
MINIMUM USAGE CHARGES
The Company is obligated to pay approximately $3,000,000 during 1998 for
minimum usage (network) charges under agreements with certain providers of
network services. As of December 31, 1997, the Company had not entered into
any commitments beyond December 31, 1998 and believes that its existing
commitment will be used through the normal course of business in 1998 (See
Note 15).
FINANCING NEEDS
Primarily as a result of expenses associated with the expansion of its
business and certain infrastructure and capital equipment upgrades, the
Company has incurred significant net losses and negative cash flows from
operating activities during the years ended December 31, 1995, 1996 and 1997.
In addition, as of December 31, 1997, the Company has negative working capital
and a stockholders' deficit of $6,040,614 and $5,658,592, respectively. The
Company expects to incur significant expenditures in the future in connection
with the development and expansion of its call centers, network, services and
customer base. The ability of the Company to pursue its strategy and make
these expenditures is dependent, in part, upon the Company raising substantial
additional financing. There can be no assurance that the Company will achieve
or sustain profitability or generate positive cash flows in the future.
However, management believes that the availability under the Company's
revolving credit agreement and other available sources of financing will be
sufficient to fund the Company's working capital needs and required capital
expenditures through at least December 31, 1998.
F-18
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9 CAPITAL STOCK AND EQUITY TRANSACTIONS
SERIES A CONVERTIBLE PREFERRED STOCK
The Company's Series A Convertible Preferred Stock consists of 3,218,884
preferred shares and were issued on November 21, 1996 in exchange for
$15,000,000 of cash (before offering costs of $489,049). The holders of Series
A Convertible Preferred Stock, in preference to the holders of the Company's
common shares, are entitled to receive cumulative dividends at the rate of 8
percent per annum if, as and when declared by the Company's board of
directors. Undeclared or unpaid dividends are added to the liquidation
preference of the Series A Convertible Preferred Stock. In addition, the
holders of Series A Convertible Preferred Stock vote together with the shares
of the Company's common stock in the same manner as the Company's common
stock. Holders of Series A Convertible Preferred Stock are entitled, at their
option, to convert preferred shares (but not undeclared or unpaid dividends)
to common shares a conversion price of $4.66 per share. All of the Series A
Preferred Stock will convert to Common Stock in connection with the proposed
initial public offering discussed in Note 15.
The affirmative vote of a majority of the then outstanding shares of Series
A Convertible Preferred Stock is required to affect any of the following
actions on behalf of the Company and its subsidiaries:
. Increasing the number of outstanding common or preferred shares.
. Increasing the Company's indebtedness beyond $3,000,000 in aggregate.
. Amending the Company's articles of incorporation and bylaws.
. Purchasing or selling of material assets.
. Merging, consolidating, liquidating, dissolving or winding up of
business activities.
. Initiating new business activities outside the telecommunications
sector.
. Executing any material contract or agreement which is outside of the
ordinary course of business.
. Hiring or changing compensation, other than normal base salary
adjustments to reflect cost-of-living increases, related to senior
management personnel.
The holders of Series A Convertible Preferred Stock have certain
registration rights which allow them to demand a registration statement to be
filed for which the Company would bear the cost of filing (except for
underwriters' discounts, commissions and legal counsel for selling
stockholders). Holders of Series A Convertible Preferred Stock may also
"piggyback' registration rights on registrations filed by the Company.
The Company is required to keep available out of its authorized but unissued
shares of common stock such number of shares of common stock as are issuable
upon the conversion of all outstanding Series A Convertible Preferred Stock.
As of December 31, 1997, the Company has reserved 3,218,884 shares for such
purpose.
COMMON STOCK WARRANTS
During 1992, the Company issued warrants to purchase 2,000,520 shares of
common stock. The warrants were issued to stockholders in connection with the
issuance of subordinated notes payable from the Company. Each warrant was
exercisable at $0.167 per share, which was the estimated fair market value on
the date of grant. The Company valued these warrants at $100,000. The related
subordinated notes payable were recorded net of this amount and the principal
balance was accreted through additional interest expense to the amount due
when the debt was repaid. The warrants provided the stockholders with the
option to pay for the common stock with cash or by reducing the amount of
their subordinated notes by the equivalent amount. On March 31, 1997, all of
these warrants were exercised.
F-19
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1995, 1996 and 1997 the Company issued warrants to purchase 64,889,
69,227 and 45,968 shares of common stock, respectively. In connection with the
issuance of these warrants, the Company valued these warrants at $125,000,
$150,000 and $28,649, respectively. The warrants were issued to a venture
capital firm that entered into notes payable agreements with the Company (see
Note 5). The related notes payable were recorded net of this amount and the
principal balance was accreted through additional interest expense to the
amount due when the debt was repaid.
During 1996, the Company issued warrants to purchase 400,000 and 100,000
shares of common stock. The warrants were issued to independent investors that
entered into subordinated revolving credit agreements with the Company (see
Note 5). In connection with their issuance, the Company valued these warrants
at $50,000. These warrants were exercised in 1997.
COMMON STOCK OPTIONS
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plan (as described below).
Accordingly, no compensation costs have been recognized for options granted
under its stock option plan to employees and directors. Had compensation costs
for the Company's stock-based compensation plan been determined based on the
fair value of the option at the grant dates for awards under the plan
consistent with statement of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), the Company's net loss would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
NET LOSS:
As reported...................... $(2,090,926) $(2,526,850) $(13,222,757)
Pro forma........................ $(2,143,053) $(2,684,200) $(13,563,795)
BASIC AND DILUTED NET LOSS PER
COMMON SHARE OUTSTANDING:
As reported...................... $ (0.48) $ (0.57) $ (2.47)
Pro forma........................ $ (0.49) $ (0.60) $ (2.53)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, and due to the nature and timing of
option grants, the resulting pro forma compensation costs may not be
indicative of future years.
The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1995, 1996 and 1997, in calculating
compensation costs:
. Risk-free interest rate of 6.10 percent, 6.95 percent and 6.30 percent
for 1995, 1996 and 1997, respectively.
. Expected life of seven years for 1995, 1996 and 1997.
. No dividends and a volatility factor of zero.
Effective September 27, 1994, the Company's stockholders approved the 1993
Employee Stock Option Plan (the "1993 Plan") by unanimous written consent. The
purpose of the 1993 Plan is to enable the Company to attract and retain
experienced and able officers, directors and other key employees. The 1993
Plan is administered by a committee, consisting of at least three members of
the board of directors (the "Committee"). Subject to the terms of the 1993
Plan, the Committee determines the persons who are to receive options, the
number of shares subject to each option and the terms and conditions of each
option. The Committee has the authority to construe and interpret any
provisions of the 1993 Plan or any options granted thereunder.
F-20
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In November 1996, an amendment to the 1993 Plan was adopted by the Company,
which increased the maximum number of shares of common stock that may be
issued pursuant to the 1993 Plan from 600,000 to 1,100,000. In December, an
amendment to the 1993 Plan was adopted by the Company, which increased the
maximum number of shares of common stock that may be issued pursuant to the
1993 Plan from 1,100,000 to 1,400,000.
The 1993 Plan permits the granting of options that are intended to qualify
either as Incentive Stock Options ("ISO's") or Non-qualified Stock Options
("NQSO's"). The option exercise price for each ISO must be no less that 100
percent of the "fair market value' (as defined in the 1993 Plan) of a share of
common stock at the time such option is granted. Except in the case of a 10
percent or greater stockholder, in which case the exercise price must be no
less than 110 percent of fair market value. The Committee determines the
exercise price for each NQSO option at the time of grant. Both types of
options are exercisable for the period defined by the Committee on the date of
grant. However, no stock option will be exercisable before six months have
elapsed from the date it is granted and no incentive stock option shall be
exercisable after ten years from the date of grant.
The following summarizes the stock option activity for the years ended
December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE FAIR MARKET
NUMBER OF PRICE PER VALUE OF OPTIONS
EXPIRATION DATE OPTIONS SHARE GRANTED
----------------- --------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at December
31, 1994............... 248,000 $0.60
Granted............... April 15, 2005 341,000 2.00 $0.76
---------
Outstanding at December
31, 1995............... 589,000 1.41
Granted............... November 21, 2006 310,148 5.75 0.72
Forfeited............. (25,500) 0.74
---------
Outstanding at December
31, 1996............... 873,648 2.97
Granted............... Various, 2007 655,068 6.63 1.59
Exercised............. (187,917) 1.46
Forfeited............. (157,000) 2.85
---------
Outstanding at December
31, 1997............... 1,183,799 $5.24
=========
</TABLE>
The options granted during the years ended December 31, 1995, 1996 and 1997
vest at a rate of 20 percent per year and are fully exercisable five years
after the date of grant. As of December 31, 1997, options for the purchase of
148,397 shares of common stock were exercisable at a weighted average exercise
price of $2.53 per share. These options have a weighted average remaining
contractual life of 8.4 years. Of the options outstanding at December 31,
1997, 589,000 have a weighted average exercise price of $1.41 per share and
594,799 have a weighted average exercise price of $6.33 per share.
NOTE 10 REGULATORY MATTERS
FEDERAL REGULATION OF LONG DISTANCE AND CALL PROCESSING SERVICES
The Company, as a provider of call processing and calling card services, is
subject to substantial federal regulation. Under the Telephone Operator
Consumer Services Improvement Act of 1990 and implementing rules promulgated
by the FCC thereunder, interstate call processing services providers are
required to file "informational' tariffs, in order to ensure that their
aggregator customers unblock access to other providers of call processing
services, and to identify their services prior to the initiation of charges,
through both an audible
F-21
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
"brand' and the posting of consumer information near pay telephones and other
aggregator telephones. In addition, long distance companies are required to
obtain authority under Section 214 of the Communications Act of 1934 (as
amended) prior to providing international service and to file tariffs setting
forth their international rates and charges with the FCC.
Providers of interstate long distance, operator services and calling card
services are considered nondominant interstate service providers by the FCC
and, as such, have for many years been subject to an FCC policy, known as
"forbearance," pursuant to which rates and charges for such services are not
reviewed or affirmatively regulated by the FCC and, except for the requirement
to file informational tariffs for call processing services, tariff filings
were optional. However, a Supreme Court decision in 1994 reinstated the
requirement that all carriers file tariffs for all interstate communications
services. Under the Telecommunications Act of 1996, the FCC has proposed
extending the forbearance doctrine by requiring mandatory detariffing of all
interstate, nondominant interexchange services. Under this proposal, which has
been stayed pending legal challenges, long distance services--including
traditional 1+ long distance services, travel and calling card services and
prepaid calling card services and call processing services available to
presubscribed customers--would be provided as a non-tariff offerings. Call
processing services provided at aggregator locations, such as hotels,
hospitals, prisons, public and private pay telephones, etc., would not be
detariffed.
The FCC's forbearance doctrine continues its traditional policy favoring
competition in the marketplace as the principal means of ensuring just and
reasonable interstate rates for telephone end-users. It nonetheless requires
that long distance companies implement methods, other than tariffs, for
setting rates, terms and other conditions of their relationship with end-
users. The FCC suggests that a legal relationship, known as an "implied-in-
fact' contract, may be established when the caller provides billing or payment
information and completes use of the telecommunications service.
BILLED PARTY PREFERENCE
Since 1992, the FCC has been considering proposals for adoption of a billed
party preference system for interstate 0 + operator-assisted calls. A billed
party preference system is an access plan pursuant to which 0 + calls from
aggregator locations, including call processing services and calls placed with
calling cards, would be routed to the carrier chosen by the billed party,
rather than the presubscribed provider of call processing services, thus
eliminating the need for the caller to input an access code to "dial around'
the presubscribed carrier.
In June 1994, the FCC had proposed that a billed party preference system
should apply to all interstate operator assisted 0 + calls. This proposal
conclusion was widely criticized by various IXCs, RBOCs, LECS, call processing
services providers and others as excessively costly and not in the public
interest. Trade associations representing both pay telephone providers and
competitive long distance companies had submitted alternative proposals for
rate "ceilings' on interstate call processing services as an alternative to a
billed party preference system. These rate ceiling proposals, with
modification, were tentatively endorsed by the FCC in a proposal to establish
benchmarks for call processing services rates at the average charges of AT&T,
MCI and Sprint, the three largest providers of interstate call processing
services. The FCC, in a June 1996 Notice of Proposed Rulemaking, proposed to
require call processing services providers that charge rates above the
benchmark to disclose the applicable charges to consumers orally before
completing a call. Although the FCC did not formally withdraw its earlier
proposal for implementation of a billed party preference system, it noted the
cost and widespread opposition to the billed party preference plan and sought
comment on the efficacy of rate benchmarks as an alternative to a billed party
preference system.
In May 1997, the FCC adopted changes to its system of interstate access
charges to make them compatible with the pro-competitive, deregulatory
framework established by the Telecommunications Act of 1996. The FCC's access
reform order adopts various reforms to the existing rate structure for
interstate access that are
F-22
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
designed to move access charges, over time, to more economically efficient
levels and rate structures. The FCC's access reform order also imposes the
phase-in of replacing usage-based carrier common line charges with a
line-based flat fee to be assesssed upon all telecommunications carriers
beginning on January 1, 1998. In addition, the FCC's access order requires
LECs to reduce their access revenue requirements by reducing interconnection
access charges to telecommunications carriers.
In 1998, the FCC took action on the billed party preference issue. In its
order, the FCC addressed what it views as widespread consumer dissatisfaction
concerning high charges by many IXCs and call processing services providers
for calls from public phones and other aggregator locations such as pay
telephones, hospitals, hospitality locations and educational institutions.
Rather than implement its billed party preference system or any of the other
alternatives proposed by participants in the telecommunications industry, the
FCC has ordered all call processing services providers and IXCs providing call
processing services to orally disclose to "away from home callers' how to
obtain the total cost of a 0 + interstate domestic call, before the call is
connected. The FCC required that such consumer disclosure must be done without
the consumer having to dial a separate telephone number or hang up and dial a
separate telephone number and must be accomplished by dialing no more than two
keys. The FCC mandated that the rate notification apply to all domestic 0 +
interstate calls. While the Company is unable to predict whether this
regulation will have a material adverse effect on the Company, it is a far
more favorable proposal to the Company than the original billed party
preference system proposal and other alternatives considered by the Company.
FEDERAL REGULATION OF PREPAID CALLING CARD SERVICES
As noted above, prepaid calling card services are considered interstate
services, subject to the FCC's "forbearance' doctrine and mandatory
detariffing. Currently, providers of these services are required to file
tariffs with the FCC disclosing the rates, terms and condition of their
services. The FCC has proposed to abolish this tariff requirement, but its
order has been stayed pending current review.
PAYPHONE COMPENSATION
The Telecommunications Act of 1996 mandated that the FCC promulgate rules to
establish a per call compensation plan to insure that all pay telephone
providers are fairly compensated for each completed intrastate and interstate
pay telephone initiated call, including calls for which pay telephone
providers had not heretofore received compensation. The FCC has established a
two year "default' compensation rate, effective October 7, 1997, of $0.284 per
pay telephone originated toll free or access code call. At the end of the two
year interim period, the per call pay telephone-compensation rate will be the
deregulated market-based local coin rate less $0.066. This amount is payable
by all IXCs and may be passed through to nonfacilities based resellers. The
revised FCC rules continue to be subject to regulatory and legal challenges.
While prepaid calling cards are one of the types of so-called "dial-around'
calling for which compensation to pay telephone service providers is due under
the Telecommunications Act of 1996, the FCC has not fully addressed the unique
technical and competitive impact of per-call pay telephone compensation on
prepaid card services. Comments submitted by the International Telecard
Association, a prepaid card trade group, urged the FCC to limit pay telephone
compensation to calls completed to the end-user (i.e., the called party),
rather than calls that only reach the calling card "platform' switch via an
"800' toll-free access number. In a November 1996 order, the FCC accepted the
International Telecard Association's position and, in addition, ruled that pay
telephone compensation is to be implemented on a "carrier pays' basis, without
deciding how, if they choose to do so, facilities-based carriers may recover
such charges from their reseller customers.
STATE REGULATORY ISSUES
Long distance, call processing services and prepaid and calling card
services are also regulated at the state level through state PUCs. Such
regulation typically includes certification and/or registration requirements,
F-23
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
authorizations for changes in corporate control, filing and approval of
tariffs for in-state calls, and special consumer protection rules applicable
to call processing services and calling card services. Certification can
generally be conditioned, modified, canceled, terminated or revoked by state
regulatory agencies for failure to comply with state law and/or the rules,
regulations and policies of the state regulatory authorities. Penalties, fines
and other sanctions, such as refund of monies collected from residents of a
state, may be imposed for violations such as overcharging, billing errors, or
noncompliance with certain requirements of intrastate services. In extreme
cases, PUCs have the authority to revoke a carrier's right to offer in-state
services within a state.
In connection with the Company's provision of intrastate call processing
services and calling and prepaid calling card services, the Company's
subsidiary, Teltrust Communication Services, Inc., must maintain certificates
of public convenience and necessity from state regulatory authorities and is
generally required to file tariffs with such authorities. In connection with
the Company's prepaid calling card services, the Company's subsidiary, Quest
International, Inc., must maintain certificates of public convenience and
necessity from state regulatory authorities and is generally required to file
tariffs with such authorities.
INTERNATIONAL REGULATORY ISSUES
International common carriers, such as the Company and its regulated
subsidiaries, are required to obtain authority under Section 214 of the
Communications Act of 1934 (as amended) and file a tariff containing the
rates, terms and conditions applicable to their services prior to initiating
their international value-added telecommunications services. The Company has
obtained all required authorizations from the FCC to use, on a facilities and
resale basis, various transmission media for the provision of international
switched services and international private line services.
NOTE 11 INVESTMENTS IN JOINT VENTURES
FYI NATIONAL DIRECTORY ASSISTANCE
In 1994, the Company entered into a joint venture general partnership
agreement with Metromail, Inc. to jointly market its directory assistance
service under the name of FYI National Directory Assistance ("NDA"). Each
party owned 50 percent of the joint venture. During 1995, the Company
contributed $25,000 as its initial investment in NDA. Metromail, Inc.'s
contribution to NDA was in the form of operator stations, software and the
directory data base. The Company accounted for this joint venture under the
equity method of accounting.
On July 1, 1997, Teltrust and Metromail entered into a three-year Reseller
Agreement (the "Agreement") for the resale of national directory assistance
data from Metromail to Teltrust, thereby terminating the joint venture. The
Agreement includes minimum volume commitments aggregating 67,500,000 data
queries during the term of the Agreement in exchange for "most favored
customer' per data query pricing.
DOT.ONE (FORMERLY TELTRUST DATA SERVICES, LLC D.B.A., TELTRUST.COM)
In October 1994, the Company entered into a joint venture with Premier
Messaging Integrators, Inc. to jointly market its experience and expertise in
workgroup and messaging solutions to the greater Novell market place. The
joint venture was operated as a limited liability company under the laws of
the State of Utah. The Company's initial capital contribution was $100,000 for
its common ownership interest. The Company accounted for this joint venture
under the equity method of accounting.
The Company advanced additional funds to dot.One in the form of loans in the
amount of $200,994, $574,016 and $581,576 during the years ended December 31,
1994, 1995 and 1996, respectively. These loans were generally interest bearing
and provided for repayment as cash (if any) became available from the profits
of dot.One.
F-24
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Dot.One's operating agreement provided for the conversion of outstanding
loans, except for the original $100,000 start-up loan, into shares of capital
stock of dot.One. The exercise of this conversion option was at the sole
discretion of the Company. As of August 31, 1997, no outstanding debt of
dot.One had been converted to shares of capital stock.
Effective August 31, 1997, the Company exchanged its common stock
investment, loans and accounts receivable for a preferred stock investment,
subordinated interest bearing loan (at 12 percent) and accounts receivable. As
of August 31, 1997, the Company commenced accounting for its investment in
dot.One under the cost method.
During 1997, the Company determined that the realizability of its investment
($831,991 at December 31, 1997), the collectibility of its outstanding loans
($651,052 at December 31, 1997) and the collectibility of its outstanding
accounts receivable ($448,274 at December 31, 1997) were doubtful.
Accordingly, the Company established reserves during 1997 totaling $1,931,317
reflecting the write-down of its investment, subordinated loans and accounts
receivable related to dot.One. During the years ended December 31, 1995, 1996
and 1997, the Company billed dot.One approximately $775,000, $886,000 and
$774,000, respectively, for network services.
NOTE 12 RELATED-PARTY TRANSACTIONS
During the years ended December 31, 1995, 1996 and 1997, the Company paid
approximately $60,000, $79,000 and $96,000, respectively, of insurance
premiums to an insurance company for which a former member of the board of
directors of the Company was an agent for the insurance company. The Company
believes these services were obtained at prices no less favorable than could
have been obtained from an independent party.
At December 31, 1996 and 1997, the Company's notes receivable from related
parties on the consolidated balance sheet includes notes receivable from a
stockholder and officer of the Company. These notes bear interest at rates
ranging from 7 to 10 percent and mature at various times through December
1998.
At December 31, 1996, the Company owed $251,434 to a related party. These
net payable amounts are the result of both receivable and payable transactions
arising from the day-to-day activities of the Company's NDA joint venture.
(see Note 11)
During 1997, and in connection with the exercise of options to purchase
common stock, the Company loaned $145,200 to its CEO and President and $80,400
to its Vice Chairman. The notes receivable bear interest at prime (8.5 percent
at December 31, 1997) and are secured by the underlying common stock and other
personal assets of the officers. The notes receivable mature during 1999. The
notes receivable have been included in stockholder receivables, as an offset
to stockholders' equity, in the accompanying 1997 consolidated balance sheet.
In December 1997, the Company paid to M/C III, L.L.C. a $75,000 fee for its
assistance in helping the Company to obtain its revolving line of credit. Two
members of the Company's board of directors are members of M/C III, L.L.C. M/C
III, L.L.C. is the general partner of Media/Communications Partners III,
Limited Partnership, a stockholder of the Company. The Company believes this
service was obtained at a price no less favorable than could have been
obtained from an independent party.
NOTE 13 EMPLOYEE BENEFIT PLAN
During 1997, the Company established a contributory 401(k) savings and
profit sharing plan covering all eligible full-time employees. The Company's
contribution amount is determined at the discretion of the board of directors.
During the year ended December 31, 1997, the Company made no contributions to
the plan.
F-25
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14 SEGMENT INFORMATION
The following summarizes the Company's operations and identifiable assets as
of and for the years ended December 31, 1995, 1996 and 1997 relating to its
call processing and calling card segments:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING REVENUES:
Calling processing services............. $ 29,290 $ 33,885 $ 46,222
Calling card services................... 4,571 7,216 10,782
---------- ---------- ----------
Total operating revenues.............. 33,861 41,101 57,004
LOSS FROM CONTINUING OPERATIONS BEFORE
BENEFIT FROM (PROVISION FOR) INCOME
TAXES:
Call processing services................ (2,689) (1,774) (10,153)
Calling card services................... (1,566) (773) (3,065)
---------- ---------- ----------
Total................................. (4,255) (2,547) (13,218)
DEPRECIATION AND AMORTIZATION:
Calling processing services............. 1,274 1,219 1,812
Calling card services................... 80 248 179
---------- ---------- ----------
Total................................. 1,354 1,467 1,991
PURCHASES OF PROPERTY AND EQUIPMENT:
Calling processing services............. 930 1,435 6,337
Calling card services................... 207 272 827
---------- ---------- ----------
Total................................. 1,137 1,707 7,164
IDENTIFIABLE ASSETS AT YEAR END:
Call processing services................ 9,210 21,789 23,056
Call card services...................... 2,378 2,878 2,862
---------- ---------- ----------
Total................................. 11,588 24,667 25,918
</TABLE>
NOTE 15 SUBSEQUENT EVENTS
CORPORATE REORGANIZATION
In connection with the corporate reorganization completed on April 22, 1998
(see Note 1), the Board of Directors authorized the assumption of the Teltrust
Holdings, Inc. 1993 Employee Stock Option Plan by Teltrust, Inc. All option
agreements were amended such that shares of Teltrust, Inc. common stock are to
be substituted for shares of common stock of Teltrust Holdings, Inc. to be
issued upon the proper exercise of the outstanding options. In addition, the
Board of Directors authorized the Company's registration rights agreements
with certain stockholders to be amended to reflect the reorganization. The
Board of Directors approved the Company becoming a guarantor of Teltrust
Holdings, Inc.'s obligations under the revolving line of credit. The common
stock of Teltrust Holdings, Inc. has been added as collateral to the Company's
revolving line of credit.
AMENDMENT OF REVOLVING LINE OF CREDIT
The Company entered into an Amended and Restated Revolving Credit Note and
the First Amendment to the Credit Agreement (the "Amended Agreement")
effective April 10, 1998. In connection with the Amended
F-26
<PAGE>
TELTRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Agreement, the revolving line of credit was increased to $20,000,000. In
addition, the Amended Agreement requires the Company to deliver to the bank by
May 31, 1998 collateral assignments of policies insuring the lives of the
Company's CEO and President and Vice Chairman in the amount of not less than
$3,000,000 for the CEO and President and $2,000,000 for the Vice Chairman. The
Amended Agreement requires the Company to deliver, by December 31, 1998, a
written notice of the Company's actions taken to assure that its computer-
based systems are able to effectively process data, including dates, on and
after January 1, 2000.
OTHER MATTERS
On April 9, 1998, the Board of Directors of the Company approved the
following:
. An initial public offering of the Company's common stock for up to
$90,000,000 in aggregate gross proceeds to be allocated between the Company
and certain selling stockholders.
. Adoption of the 1998 Teltrust, Inc. Stock Option and Grant Plan (the "1998
Plan") with 800,000 shares of common stock reserved for issuance
thereunder. The Compensation Committee of the Board of Directors will
administer the 1998 Plan. The shares issuable under the 1998 Plan, as well
as shares issuable under the 1993 Plan, are to be registered under the
Securities Act of 1933 subsequent to the Company's initial public offering
of common stock.
. Subject to the completion of the Company's initial public offering, the
Board of Directors approved the appointment of the President of Billing
Information Concepts, Inc. ("BIC") as a director of the Company. BIC has
been the Company's third-party billing provider for approximately the last
five years and is a major vendor to the Company. During the years ended
December 31, 1995, 1996 and 1997, the Company paid BIC approximately
$2,916,000, $2,379,000 and $2,245,000, respectively, for services provided
to the Company.
Effective March 27, 1998, the Company entered into an agreement to purchase
network services. The agreement requires the Company to purchase minimum
services of $500,000 per month over a two-year period for an aggregate minimum
commitment of $24,000,000. The Company believes that this commitment will be
fulfilled through the normal course of business during the commitment period.
F-27
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY THE SHARES BY ANYONE TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAW-
FUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPEC-
TUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CRE-
ATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COM-
PANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSE-
QUENT TO THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Summary Financial and Operating Data..................................... 6
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Cash and Capitalization.................................................. 19
Dilution................................................................. 20
Selected Financial and Operating Information............................. 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 29
Management............................................................... 46
Certain Relationships and Related Transactions........................... 52
Principal and Selling Stockholders....................................... 53
Description of Capital Stock............................................. 55
Shares Eligible for Future Sale.......................................... 57
Underwriting............................................................. 60
Legal Matters............................................................ 61
Experts.................................................................. 61
Additional Information................................................... 62
Glossary................................................................. 63
Index to Financial Statements............................................ F-1
</TABLE>
-----------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY RE-
QUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,200,000 SHARES
TELTRUST, INC.
COMMON STOCK
-----------------
PROSPECTUS
, 1998
-----------------
LEHMAN BROTHERS
WHEAT FIRST UNION
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
The following table sets forth the estimated expenses payable by the Company
in connection with this offering (excluding underwriting discounts and
commissions):
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
----------------- --------
<S> <C>
SEC Registration Fee............................................. $ 18,455
NASD Filing Fee.................................................. 7,695
Nasdaq Listing Fee............................................... *
Accounting Fees and Expenses..................................... *
Legal Fees and Expenses.......................................... *
Printing Expenses................................................ *
Blue Sky Qualification Fees and Expenses......................... *
Transfer Agent's Fee............................................. *
Director and Officer Insurance Premiums.......................... *
Miscellaneous.................................................... *
--------
Total.......................................................... $900,000
========
</TABLE>
- ---------------------
(1) The amounts set forth above, except for the SEC, NASD and Nasdaq fees, are
in each case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the General Corporation Law of the State
of Delaware, Article VII of the Company's Certificate, provides that no
Director of the Company shall be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a Director,
except for liability (i) for any breach of the Director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
in respect of certain unlawful dividend payments or stock redemptions or
repurchases, or (iv) for any transaction from which the Director derived an
improper personal benefit. In addition, the Certificate provides that if the
Delaware General Corporation Law is amended to authorize the further
elimination or limitation of the liability of Directors, then the liability of
a Director of the Company shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
Reference is made to Article V of the Amended and Restated By-laws of the
Company which provides for indemnification by the Company of its directors and
officers under certain circumstances against expenses (including attorneys'
fees, judgments, fines and amounts paid in settlement) actually and reasonably
incurred in connection with the defense or settlement of any threatened,
pending or completed legal proceeding in which any such person is involved by
reason of the fact that such person is or was a director or officer of the
Company if such person acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to criminal actions or proceedings, if such person
had no reasonable cause to believe that his or her conduct was unlawful.
Reference is made to the form of Underwriters Agreement (to be attached as
Exhibit 1 to this Registration Statement) which provides for indemnification
by the Underwriters of the directors and officers of the Company signing the
Registration Statement and certain controlling persons of the Company against
certain liabilities, including those arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company has issued unregistered securities
to a limited number of persons, as described below. No underwriters or
underwriting discounts or commissions were involved. There was no public
offering in any such transaction, and the Company believes that each
transaction, unless otherwise noted,
II-1
<PAGE>
was exempt from registration requirements of the Securities Act of 1933 as
amended (the "Securities Act"), by reason of Section 4(2) thereof, based on
the private nature of the transactions and the financial sophistication of the
purchasers, all of whom had access to complete information concerning the
Company and acquired the securities for investment and not with a view to the
distribution thereof.
On April 14, 1995, Lyle O. Keys and Carmelo Catalano purchased an aggregate
of 1,063,000 shares of Common Stock at a purchase price of $2,126,000.
On November 21, 1996, Media/Communications Partners III Limited Partnership
and M/C Investors L.L.C. purchased an aggregate of 3,218,884 shares of Series
A Preferred Stock at an aggregate purchase price of $14,510,951 (net of
issuance costs of $489,049).
On March 31, 1997, Lyle O. Keys, Carmelo Catalano and Jerry E. Romney, Sr.
acquired 1,570,974, 405,000 and 24,546 shares of Common Stock, respectively,
upon the exercise of warrants for an aggregate purchase price of $333,426.
On October 3, 1997, GFA Capital Corporation acquired 400,000 shares of
Common Stock upon the exercise of warrants for an exercise price of $400,000.
On October 3, 1997, NuCom Company, LLC acquired 100,000 shares of Common
Stock upon the exercise of warrants for an exercise price of $100,000.
On December 31, 1997, the Company issued 900,000 shares of Common Stock to
the stockholders of Quest International Group, Inc. and its affiliates
("Quest") in connection with the Company's acquisition of all of the
outstanding capital stock of Quest.
Between April 15, 1995 and April 20, 1998, the Company issued options to
purchase 1,308,216 shares of Common Stock to employees of the Company pursuant
to the Company's 1993 Stock Option Plan and the Quest Stock Option Plan.
During such period, 190,017 shares of Common Stock were issued to option
holders upon exercise of options granted pursuant to the 1993 Stock Option
Plan and the Quest Stock Option Plan. The Company believes that the
transactions described in this paragraph are exempt from the registration
requirements of the Securities Act by reason of Rule 701 promulgated
thereunder because the issuance of the options described was pursuant to a
written compensatory benefit plan of the Company, a copy of which was given to
each participant in the plan, and the aggregate offering price did not exceed
the limit prescribed by Rule 701.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*1 Form of Underwriting Agreement among the Underwriters named therein
and Teltrust, Inc.
3.1 Certificate of Incorporation of Teltrust, Inc.
*3.2 Form of Amended and Restated Certificate of Incorporation of Teltrust,
Inc.
*3.3 Amended and Restated By-laws of Teltrust, Inc.
*5.1 Opinion of Goodwin, Procter & Hoar LLP as to the legality of the
shares of the Common Stock of Teltrust, Inc.
10.1 Teltrust, Inc. 1993 Employee Stock Option Plan
*10.2 Teltrust, Inc. 1998 Stock Option and Grant Plan
10.3 Lease of Real Property located at 6350 South 3000 East, Salt Lake
City, Utah between Holladay Building L.L.C. and Teltrust, Inc. dated
March 24, 1997, as subsequently amended
10.4 Lease of Real Property located at 5520 West Harold Gatty Drive, Salt
Lake City, Utah between Big N Investment Co., L.L.C. and Teltrust,
Inc. dated May 1, 1994, as subsequently amended
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.5 Lease of Real Property located at 375 O South State Street, Clearfield,
Utah between The Kier Corporation and Teltrust, Inc. dated February 26,
1997, as subsequently amended
10.6 Lease of Real Property located at 401 North Eddie Rickenbacker Drive,
Salt Lake City, Utah between PWK Investment, LLC and Teltrust, Inc.
dated August 8, 1997
*10.7 Operator and Network Services Agreement between Teltrust Communications
Services, Inc. and BellSouth Long Distance, Inc. dated November 21,
1996, as subsequently amended
*10.8 InterLATA Operator and Network Services Agreement between Teltrust
Communications Services, Inc. and BellSouth Public Communications, Inc.
dated February 24, 1997, as amended
*10.9 Calling Platform and Network Agency Agreement between Teltrust
Communications Services, Inc. and BellSouth Long Distance, Inc. dated
October 15, 1997
*10.10 Services Agreement between Quest Group International, Inc. and
Ameritech Communications, Inc. dated September 30, 1997, as
subsequently amended
*10.11 Agreement for Services between Ameritech Services, Inc. and Teltrust
Communications Services, Inc. dated February 5, 1998
*10.12 Credit Agreement between Teltrust, Inc., Fleet National Bank and
Certain Other Parties dated as of November 7, 1997
10.13 Registration Rights Agreement between Teltrust, Inc. and Holders of
Series A Convertible Preferred Stock of Teltrust, Inc. dated November
22, 1996
10.14 Registration Rights Agreement between Teltrust, Inc. and Certain
Holders of Common Stock of Teltrust, Inc. dated December 31, 1997
21.1 Subsidiaries of the Company
*23.1 Consent of Goodwin, Procter & Hoar LLP (included in their opinion filed
as Exhibit 5 hereto)
23.2 Consent of Arthur Andersen LLP
24 Power of Attorney (included on signature page of Registration Statement
as filed)
27 Financial Data Schedule
99.1 Consent of Alan W. Saltzman
</TABLE>
- ---------------------
* To be filed by amendment.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
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 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)
II-3
<PAGE>
is asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) 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 relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN SALT LAKE CITY, UTAH ON THE 29TH
DAY OF APRIL, 1998.
Teltrust, Inc.
/s/ Marc B. Cohen
By:__________________________________
MARC B. COHEN
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
directors of Teltrust, Inc. hereby severally constitute Marc B. Cohen and
Martin J. Huebschman and each of them singly, our true and lawful attorneys
with full power to them, and each of them singly, to sign for us and in our
names in the capacities indicated below, the Registration Statement filed
herewith and any and all amendments (including any post-effective amendments)
to said Registration Statement (or any other registration statement for the
same offering that is to be effective upon filing pursuant to Rule 462(b)
under the Securities Act of 1933), and generally to do all such things in our
names and in our capacities as officers and directors to enable Teltrust, Inc.
to comply with the provisions of the Securities Act, and all requirements of
the Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys, or any of them, to
said Registration Statement and any and all amendments (including any post-
effective amendments) thereto (or any other registration statement for the
same offering that is to be effective upon filing pursuant to Rule 462(b)
under the Securities Act).
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<S> <C>
SIGNATURE TITLE
DATE
/s/ Marc B. Cohen Director, Chief April 29,
- ------------------------------------- Executive Officer and 1998
MARC B. COHEN President (Principal
Executive Officer)
/s/ Martin J. Huebschman Vice President- April 29,
- ------------------------------------- Finance, Chief 1998
MARTIN J. HUEBSCHMAN Financial Officer and
Secretary (Principal
Financial and
Accounting Officer)
/s/ Lyle O. Keys Director, Chairman of April 29,
- ------------------------------------- the Board of 1998
LYLE O. KEYS Directors
/s/ Jerry E. Romney, Jr. Director, Vice April 29,
- ------------------------------------- Chairman of the Board 1998
JERRY E. ROMNEY, JR. of Directors
/s/ Carmelo Catalano Director April 29,
- ------------------------------------- 1998
CARMELO CATALANO
/s/ Christoper S. Gaffney Director April 29,
- ------------------------------------- 1998
CHRISTOPHER S. GAFFNEY
/s/ John G. Hayes Director April 29,
- ------------------------------------- 1998
JOHN G. HAYES
Director
- -------------------------------------
GEORGE C. HUFF, JR.
</TABLE>
II-5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Teltrust, Inc. and subsidiaries
included in this registration statement and have issued our report thereon
dated March 6, 1998 (except with respect to the matters discussed in the first
paragraph of Note 1 and Note 15, as to which the date is April 22, 1998). Our
audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Schedule II is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This Schedule has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
March 6, 1998
S-1
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-------------------
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- ----------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
DECEMBER 31, 1995:
Allowance for doubtful
accounts............... $ 534,880 $ 531,010 $-- $ 239,979 $ 825,911
========== ========== ==== ========== ==========
Allowance for clearing
costs.................. $1,576,157 $1,002,890 $-- $1,009,887 $1,569,250
========== ========== ==== ========== ==========
FOR THE YEAR ENDED
DECEMBER 31, 1996:
Allowance for doubtful
accounts............... $ 825,911 $ 785,764 $-- $ 507,537 $1,104,138
========== ========== ==== ========== ==========
Allowance for clearing
costs.................. $1,569,250 $1,800,278 $-- $2,251,017 $1,118,511
========== ========== ==== ========== ==========
FOR THE YEAR ENDED
DECEMBER 31, 1997:
Allowance for doubtful
accounts............... $1,104,138 $3,649,974 $-- $3,723,539 $1,030,573
========== ========== ==== ========== ==========
Allowance for clearing
costs.................. $1,118,511 $3,102,598 $-- $2,791,135 $1,429,974
========== ========== ==== ========== ==========
Allowance against
investments in
unconsolidated joint
venture................ $ -- $ 831,991 $-- $ -- $ 831,991
========== ========== ==== ========== ==========
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------------
<C> <S>
*1 Form of Underwriting Agreement among the Underwriters named
therein and Teltrust, Inc.
3.1 Certificate of Incorporation of Teltrust, Inc.
*3.2 Form of Amended and Restated Certificate of Incorporation of
Teltrust, Inc.
*3.3 Amended and Restated By-laws of Teltrust, Inc.
*5.1 Opinion of Goodwin, Procter & Hoar LLP as to the legality of the
shares of the Common Stock of Teltrust, Inc.
10.1 Teltrust, Inc. 1993 Employee Stock Option Plan
*10.2 Teltrust, Inc. 1998 Stock Option and Grant Plan
10.3 Lease of Real Property located at 6350 South 3000 East, Salt Lake
City, Utah between Holladay Building L.L.C. and Teltrust, Inc.
dated March 24, 1997, as subsequently amended
10.4 Lease of Real Property located at 5520 West Harold Gatty Drive,
Salt Lake City, Utah between Big N Investment Co., L.L.C. and
Teltrust, Inc. dated May 1, 1994, as subsequently amended
10.5 Lease of Real Property located at 375O South State Street,
Clearfield, Utah between The Kier Corporation and Teltrust, Inc.
dated February 26, 1997, as subsequently amended
10.6 Lease of Real Property located at 401 North Eddie Rickenbacker
Drive, Salt Lake City, Utah between PWK Investment, LLC and
Teltrust, Inc. dated August 8, 1997
*10.7 Operator and Network Services Agreement between Teltrust
Communications Services, Inc. and BellSouth Long Distance, Inc.
dated November 21, 1996, as subsequently amended
*10.8 InterLATA Operator and Network Services Agreement between Teltrust
Communications Services, Inc. and BellSouth Public Communications,
Inc. dated February 24, 1997, as amended
*10.9 Calling Platform and Network Agency Agreement between Teltrust
Communications Services, Inc. and BellSouth Long Distance, Inc.
dated October 15, 1997
*10.10 Services Agreement between Quest Group International, Inc. and
Ameritech Communications, Inc. dated September 30, 1997, as
subsequently amended
*10.11 Agreement for Services between Ameritech Services, Inc. and
Teltrust Communications Services, Inc. dated February 5, 1998
*10.12 Credit Agreement between Teltrust, Inc., Fleet National Bank and
Certain Other Parties dated as of November 7, 1997
10.13 Registration Rights Agreement between Teltrust, Inc. and Holders
of Series A Convertible Preferred Stock of Teltrust, Inc. dated
November 22, 1996
10.14 Registration Rights Agreement between Teltrust, Inc. and Certain
Holders of Common Stock of Teltrust, Inc. dated October 1, 1997
21.1 Subsidiaries of the Company
*23.1 Consent of Goodwin, Procter & Hoar LLP (included in their opinion
filed as Exhibit 5 hereto)
23.2 Consent of Arthur Andersen LLP
24 Power of Attorney (included on signature page of Registration
Statement as filed)
27 Financial Data Schedule
99.1 Consent of Alan W. Saltzman
</TABLE>
- ---------------------
*To be filed by amendment.
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
TTST HOLDINGS, INC.
ARTICLE I
NAME
----
1. The name of the corporation is TTST Holdings, Inc.
ARTICLE II
REGISTERED OFFICE
-----------------
2. The address of its registered office in the State of Delaware is 1209
Orange Street in the City of Wilmington, County of New Castle. The name of its
registered agent at such address is The Corporation Trust Company.
ARTICLE III
PURPOSES
--------
3. The nature of the business to be conducted or promoted is to engage in
any lawful act or activity for which corporations may be organized under the
General Corporation Law of Delaware (the "DGCL").
ARTICLE IV
CAPITAL STOCK
-------------
The total number of shares of capital stock which the Corporation shall
have authority to issue is twenty-five million (25,000,000) of which five
million (5,000,000) shall be shares of preferred stock, par value $.01 per
share, designated as Preferred Stock (hereinafter called "Preferred Stock"), and
twenty million (20,000,000) shall be shares of common stock, par value $.01 per
share, designated as Common Stock (hereinafter called "Common Stock").
The powers, preferences, qualifications, restrictions, limitations and
relative rights of each class of shares (to the extent established hereby), and
the express grant of authority to the Board of Directors to amend this
Certificate of Incorporation to divide the Preferred Stock into series, to
establish and modify the preferences, limitations and relative rights of each
series of Preferred Stock, and to otherwise impact the capitalization of the
Corporation, subject to certain limitations and procedures and as permitted by
the DGCL, as the same may be hereafter amended, are as follows:
<PAGE>
A. PREFERRED STOCK
---------------
1. Number; Series. The Preferred Stock shall be issued in one or more
--------------
series. The first series shall consist of 3,218,884 shares and is designated
"Series A Convertible Preferred Stock." The remaining shares of Preferred Stock
may be issued from time to time in one or more series, with each such series to
have such designation, preferences, limitations and relative rights, as shall be
stated and expressed in an amendment to this Certificate of Incorporation
providing for the issue of such series. The Board of Directors of the
Corporation is hereby expressly vested with authority to amend this Certificate
of Incorporation, without shareholder action or approval (other than as provided
in Section B.3 of this Article IV), to: (i) create one or more series of
Preferred Stock, fix the number of shares of each such series (within the total
number of authorized shares of Preferred Stock available for designation as a
part of such series), and designate and determine, in whole or part, the
preferences, limitations, and relative rights of each series of Preferred Stock;
(ii) alter or revoke the preferences, limitations and relative rights granted
to or imposed upon any wholly unissued series of Preferred Stock; or (iii)
increase or decrease the number of shares constituting any series of Preferred
Stock (the number of shares of which was originally fixed by the Board of
Directors) either before or after the issuance of shares of the series, provided
that the number may not be decreased below the number of shares of such series
then outstanding, or increased above the total number of authorized shares of
the Preferred Stock available for designation as a part of such series. The
authority of the Board of Directors with respect to each such series shall
include, but not be limited to, the determination or fixing of the following:
(a) The distinctive designation and number of shares comprising such
series, which number may (except where otherwise provided by the Board of
Directors in creating such series) be increased or decreased (but not below
the number of shares then outstanding) from time to time by like action of
the Board of Directors;
(b) The dividend rate of such series, the conditions and times upon
which such dividends shall be payable, the relation which such dividends
shall bear to the dividends payable on any other class or classes of stock
or series thereof, or on the other series of the same class, and whether
dividends shall be cumulative or noncumulative;
(c) The conditions upon which the shares of such series shall be
subject to redemption by the Corporation and the times, prices and other
terms and provisions upon which the shares of the series may be redeemed;
(d) Whether or not the shares of the series shall be subject to the
operation of retirement or sinking fund provisions to be applied to the
purchase or redemption of such shares and, if such retirement or sinking
fund be established, the annual amount thereof and the terms and provisions
relative to the operation thereof;
2
<PAGE>
(e) Whether or not the shares of the series shall be convertible into
or exchangeable for shares of any other class or classes, with or without
par value, or of any other series of the same class and, if provision is
made for conversion or exchange, the times, prices, rates, adjustments, and
other terms and conditions of such conversion or exchange;
(f) Whether or not the shares of the series shall have voting rights,
in addition to the voting rights provided by law, and, if so, the terms of
such voting rights;
(g) The rights of the shares of the series in the event of voluntary
or involuntary liquidation, dissolution, or upon distribution of assets of
the Corporation;
(h) Any other powers, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof, of the shares of such series, as the Board of
Directors may deem advisable and as shall not be inconsistent with the
provisions of this Certificate of Incorporation.
2. Preemptive Rights. Except as may be provided in this Certificate of
-----------------
Incorporation or an amendment hereto providing for the issue of any series of
Preferred Stock, or except as may be provided by contract, no holder of shares
of the Preferred Stock of the Corporation shall, as such holder, be entitled as
of right to subscribe for, purchase or receive any part of any new or additional
issue of stock of any class, whether now or hereafter authorized, or of bonds,
debentures or other securities convertible into or exchangeable for stock, but
all such additional shares of stock of any class, or bonds, debentures or other
securities convertible into or exchangeable for stock, may be issued and
disposed of by the Board of Directors on such terms and for such consideration,
so far as may be permitted by law, and to such persons, as the Board of
Directors in its absolute discretion may deem advisable.
B. SERIES A CONVERTIBLE PREFERRED STOCK
1. Dividends.
---------
(a) The holders of shares of Series A Convertible Preferred Stock, in
preference to the holders of the Junior Securities, shall be entitled to receive
if, as and when declared by the Board of Directors or upon the liquidation,
dissolution or winding up of the Corporation, and not otherwise, out of funds
legally available for such purpose, cumulative dividends as provided in this
Section 1. Dividends on each share of Series A Convertible Preferred Stock
shall accrue at the rate of 8% per annum of the sum of (i) the Liquidation Value
and (ii) all accumulated and unpaid dividends thereon from the date of issuance.
Such dividends will be calculated and compounded annually on December 31 of each
year (each a "dividend date") in respect of the prior twelve month period (the
initial such calculation to be made at the same rate for the number of days
elapsed from the date of issue of the Series A Convertible Preferred Stock to
and including the 31st day of December, 1996). Such dividends shall commence to
accrue on each share of Series A Convertible Preferred Stock from the date of
issuance thereof whether or not declared
3
<PAGE>
by the Board of Directors, and whether or not there are profits, surplus or
other funds of the Corporation legally available for the payment of dividends,
and shall continue to accrue thereon until the date the Liquidation Value of
such share (plus all accrued and unpaid dividends thereon) is paid or such share
is converted as set forth in Section 4. The amount of dividends accrued on the
Series A Convertible Preferred Stock pursuant to this Section in connection with
the sale, redemption or repurchase of any Series A Convertible Preferred Stock
between any two dividend dates shall equal the product of (a) the sum of (i) the
Liquidation Value plus (ii) all accumulated and unpaid dividends thereon as of
the immediately preceding dividend date, multiplied by (b) the product of (i) 8%
multiplied by (ii) a fraction, the numerator of which is the actual number of
days elapsed in the then current annual period and the denominator of which is
the total number of days comprising such annual period.
(b) If at any time the Corporation pays less than the total amount of
dividends then accrued with respect to the Series A Convertible Preferred Stock,
such payment shall be distributed ratably among the holders of Series A
Convertible Preferred Stock based upon the aggregate accrued but unpaid
dividends on the Series A Convertible Preferred Stock held by each holder.
(c) Without the consent of the holders of a majority of the issued and
outstanding Series A Convertible Preferred Stock, the Corporation shall not
declare, pay, or set apart for payment any dividends or make any other
distribution on any Junior Securities (other than stock dividends and
distributions in the nature of a stock split or the like), if there shall then
be outstanding any Series A Convertible Preferred Stock unless all dividends
theretofore accrued on the Series A Convertible Preferred Stock in accordance
with Section 1(a) shall have been declared by the Board of Directors and paid.
The holders of Series A Convertible Preferred Stock shall be entitled to
participate in all dividends and other distributions (other than stock dividends
and distributions in the nature of a stock split or the like and distributions
made upon the liquidation, dissolution and winding up of the Corporation's
affairs in addition to the amounts to which the holders of Series A Convertible
Preferred Stock are entitled in accordance with Section 2 hereof) that are
declared and paid on Common Stock in compliance with the provisions of this
Section 1(c) on the same basis as if all of the Series A Convertible Preferred
Stock had been converted into Common Stock in accordance with Section 4 hereof.
(d) Without the consent of the holders of a majority of the issued and
outstanding Series A Convertible Preferred Stock, the Corporation shall not
redeem any Junior Securities and will not permit any Subsidiary or other
affiliate to redeem, purchase or otherwise acquire for value, or set apart for
any sinking or other analogous fund for the redemption or purchase of, any
Junior Securities if there shall then be outstanding any Series A Convertible
Preferred Stock.
2. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, either voluntarily or involuntarily, each holder of
Series A Convertible Preferred Stock shall be entitled, after provision for the
payment of the Corporation's debts and other
4
<PAGE>
liabilities, to be paid in cash, before any distribution is made on any Junior
Securities, the aggregate Liquidation Value of all shares of Series A
Convertible Preferred Stock held by such holder plus an amount equal to the sum
of all accrued and unpaid dividends thereon, whether or not declared to the date
of such payment. If, upon any such liquidation, dissolution or other winding up
of the affairs of the Corporation, the net assets of the Corporation
distributable among the holders of all outstanding Series A Convertible
Preferred Stock shall be insufficient to permit the payment in full to such
holders of the preferential amounts to which they are entitled under this
Certificate of Incorporation, then the entire net assets of the Corporation
remaining after provision for the payment of the Corporation's debts and other
liabilities shall be distributed among the holders of the Series A Convertible
Preferred Stock ratably in proportion to the full amounts to which they would
otherwise be respectively entitled. Holders of Series A Convertible Preferred
Stock shall not be entitled to any additional distribution in the event of any
liquidation, dissolution or winding up of the affairs of the Corporation in
excess of the preferential amount referred to above in this Section 2(a).
(b) The consolidation or merger of the Corporation into or with any other
entity or entities which results in the exchange of outstanding shares of the
Corporation for cash, securities or other consideration issued or paid or caused
to be issued or paid by any such entity or affiliate thereof (other than a
merger to reincorporate the Corporation in a different jurisdiction), and the
sale, lease, abandonment, transfer or other disposition of all or substantially
all its assets, shall be deemed to be a liquidation, dissolution or winding up
of the Corporation within the meaning of the provisions of this Section 2.
3. Voting.
------
(a) Except as otherwise required by law or as set forth herein and subject
to the rights of any class or series of Preferred Stock which may from time to
time come into existence hereafter, the shares of the Series A Convertible
Preferred Stock shall vote together with the shares of the Corporation's Common
Stock at any annual or special meeting of shareholders of the Corporation, or
may act by written consent in the same manner as the Corporation's Common Stock,
upon the following basis: Each holder of shares of Series A Convertible
Preferred Stock shall be entitled to such number of votes for the Series A
Convertible Preferred Stock held by it or him on the record date fixed for such
meeting, or on the effective date of such written consent, as shall be equal to
the whole number of shares of the Corporation's Common Stock into which its or
his shares of Series A Convertible Preferred Stock are convertible, in
accordance with the terms of Section 4 hereof, immediately after the close of
business on the record date fixed for such meeting or the effective date of such
written consent.
(b) The holders of shares of Series A Convertible Preferred Stock shall
also have the following voting rights:
(i) The affirmative vote of the holders of a majority of the then
outstanding shares of Series A Convertible Preferred Stock, consenting or
voting separately as a
5
<PAGE>
single class, as the case may be, in person or by proxy, at an annual or
special meeting of stockholders called for the purpose, shall be necessary
to do any of the following:
(A) authorize, or increase, or permit any Subsidiary to
authorize or increase, the authorized number of shares of, or issue or
permit any Subsidiary to issue any class or series of the
Corporation's or any Subsidiary's capital stock or options, warrants
or other rights to acquire any such capital stock other than shares
issuable upon the exercise of Outstanding Options and shares issuable
upon the exercise of Options and Convertible Securities that have been
approved pursuant to the provisions of this Section 3(b)(i)(A);
(B) authorize the Corporation to, or permit any Subsidiary to,
incur indebtedness for borrowed money, including, without limitation,
indebtedness under capital leases or the like, if after giving effect
to such incurrence the principal amount of Corporation's and the
Subsidiaries' total indebtedness for borrowed money would exceed
$3,000,000 in the aggregate;
(C) amend, repeal or change, directly or indirectly, any of the
provisions of the Amended and Restated Certificate of Incorporation or
the Amended and Restated Bylaws of the Corporation in any manner that
would alter or change the powers, preferences or special rights of the
shares of Series A Convertible Preferred Stock;
(D) authorize or effect, or permit any Subsidiary to authorize
or effect, the sale of any material assets or business units of the
Corporation or any Subsidiary;
(E) authorize or effect, or permit any Subsidiary to authorize
or effect, the merger or consolidation of the Corporation or any
Subsidiary with any other Person;
(F) authorize or effect, or permit any Subsidiary to authorize
or effect, the liquidation (whether complete or partial), dissolution
or winding up of the Corporation or any Subsidiary;
(G) amend the Amended and Restated Bylaws of the Corporation to
change the authorized number of directors;
(H) authorize or effect, or permit any Subsidiary to authorize
or effect, the acquisition of any material assets or any business unit
by the Corporation or any Subsidiary;
6
<PAGE>
(I) authorize or effect, or permit any Subsidiary to authorize
or effect, the initiation of any new business activities by the
Corporation or any Subsidiary outside the telecommunications sector;
(J) authorize or effect, or permit any Subsidiary to authorize
or effect, the execution of any contract or agreement by the
Corporation or any Subsidiary which is outside the ordinary course of
business and which could have a material adverse effect upon the
Corporation or such Subsidiary;
(K) authorize or effect the hiring of any senior management
personnel; or
(L) authorize or effect any change in compensation (other than
normal base salary adjustments to reflect cost-of-living increases)
for senior management personnel, or amend, or waive any provision of
any agreement between or among the Corporation, the Subsidiaries and
any of such Persons.
(ii) The rights of holders of shares of Series A Convertible Preferred
Stock to vote or take any other actions as provided in this Section 3 may
be exercised at any annual meeting of stockholders, at a special meeting of
stockholders held for such purpose or by written consent. At each meeting
of stockholders at which the holders of shares of Series A Convertible
Preferred Stock shall have the right, voting separately as a single class,
to take any action as provided in this Section 3, the presence in person or
by proxy of the holders of record of a majority of the total number of
shares of Series A Convertible Preferred Stock then outstanding and
entitled to vote on the matter shall be necessary and sufficient to
constitute a quorum. At any such meeting or at any adjournment thereof, in
the absence of a quorum of the holders of shares of Series A Convertible
Preferred Stock, a majority of the holders of such shares present in person
or by proxy shall have the power to adjourn the meeting as to the actions
to be taken by the holders of shares of Series A Convertible Preferred
Stock from time to time and place to place without notice other than
announcement at the meeting until a quorum shall be present.
4. Conversion Rights.
-----------------
(a) Conversion Procedure.
--------------------
(i) At any time and from time to time, any holder of Series A
Convertible Preferred Stock shall have the right, at its option, to convert
all or any portion of each share of Series A Convertible Preferred Stock
(including any fraction of a share) held by such holder into such number of
shares of fully paid and nonassessable Common Stock computed by dividing
$4.66 by the Conversion Price in effect at the time of such conversion.
7
<PAGE>
(ii) Each conversion of Series A Convertible Preferred Stock shall be
deemed to have been effected as of the close of business on the date on
which the certificate or certificates representing the Series A Convertible
Preferred Stock to be converted have been surrendered at the principal
office of the Corporation or at such other place as may be designated by
the Corporation. At such time as any such conversion has been effected, the
rights of the holder of such Series A Convertible Preferred Stock being
converted as such holder shall cease (including the right to receive any
accrued and unpaid dividends on such Series A Convertible Preferred Stock),
and the Person or Persons in whose name or names any certificate or
certificates for shares of Common Stock are to be issued upon such
conversion shall be deemed to have become the holder or holders of record
of the shares of Common Stock represented thereby.
(iii) Notwithstanding any other provision hereof, if a conversion of
Series A Convertible Preferred Stock is to be made in connection with a
Public Offering, such conversion may, at the election of the holder of
Series A Convertible Preferred Stock, be conditioned upon the consummation
of the Public Offering, in which case such conversion shall not be deemed
to be effective until the consummation of the Public Offering.
(iv) As soon as possible after a conversion has been effected (but in
any event within five business days in the case of subparagraph (v) below),
the Corporation shall deliver the following to the converting holder:
(y) a certificate or certificates representing, in the
aggregate, the number of shares of Common Stock issuable by reason of
such conversion, in the same name or names as the certificates
representing the converted shares and in such denomination or
denominations as the converting holder has specified and a check for
cash with respect to any fractional interest in a share of Common
Stock as provided in clause (viii) of this Section 4(a); and
(z) a certificate representing any shares which were represented
by the certificate or certificates delivered to the Corporation in
connection with such conversion but which were not converted.
(v) The issuance of certificates for shares of Common Stock
conversion of Series A Convertible Preferred Stock shall be made without
charge to the holders of such Series A Convertible Preferred Stock for any
issuance tax in respect thereof or other cost incurred by the Corporation
in connection with such conversion and the related issuance of shares of
Common Stock. Upon conversion of any shares of Series A Convertible
Preferred Stock, the Corporation shall take all such actions as are
necessary in order to insure that the Common Stock usable with respect to
such conversion shall be validly issued, fully paid and nonassessable.
8
<PAGE>
(vi) The Corporation shall not close its books against the transfer
of Series A Convertible Preferred Stock or of Common Stock issued or
issuable upon conversion of Series A Convertible Preferred Stock in any
manner which interferes with the timely conversion of Series A Convertible
Preferred Stock. The Corporation shall assist and cooperate with any holder
of shares of Series A Convertible Preferred Stock required to make any
governmental filings or obtain any governmental approval prior to or in
connection with any conversion of shares of Series A Convertible Preferred
Stock hereunder (including, without limitation, making any filings required
to be made by the Corporation).
(vii) The Corporation shall at all times reserve and keep available
out of its authorized but unissued shares of Common Stock, solely for the
purpose of issuance upon the conversion of the Series A Convertible
Preferred Stock, such number of shares of Common Stock as are issuable upon
the conversion of all outstanding Series A Convertible Preferred Stock. All
shares of Common Stock which are so issuable shall, when issued, be duly
and validly issued, fully paid and nonassessable and free from all taxes,
liens and charges. The Corporation shall take all such actions as may be
necessary to assure that all such shares of Common Stock may be so issued
without violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of
Common Stock may be listed (except for official notice of issuance which
shall be immediately delivered by the Corporation upon each such issuance).
(viii) No fractional shares of Common Stock or script shall be issued
upon conversion of shares of the Series A Convertible Preferred Stock. If
more than one share of Series A Convertible Preferred Stock shall be
surrendered for conversion at any one time by the same holder, the number
of full shares of Common Stock issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of Series A
Convertible Preferred Stock so surrendered. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon conversion of
any shares of Series A Convertible Preferred Stock, the Corporation shall
pay a cash adjustment in respect of such fractional interest equal to the
fair market value of such fractional interest as determined by the
Corporation's Board of Directors.
(b) Conversion Price. The initial conversion price shall be $4.66, which
----------------
may be adjusted from time to time hereafter (the "Conversion Price") . If and
whenever on or after the original date of issuance of the Series A Convertible
Preferred Stock the Corporation issues or sells, or in accordance with Section
4(c) is deemed to have issued or sold, any shares of its Common Stock or other
capital stock, options, warrants or other securities convertible into Common
Stock for a consideration per share less than the Conversion Price in effect
immediately prior to the time of such issue or sale, then forthwith upon such
issue or sale, the Conversion Price shall be reduced to an amount determined by
dividing (a) the sum of (1) the product derived by multiplying the Conversion
Price in effect immediately prior to such issue or sale times the number of
shares of Common Stock Deemed Outstanding immediately prior to such issue or
sale, plus (2) the consideration, if any, received (or deemed received pursuant
to Section 4(c) below)
9
<PAGE>
by the Corporation upon such issue or sale, by (b) the number of shares of
Common Stock Deemed Outstanding immediately after such issue or sale.
(c) Effect on Conversion Price of Certain Events. For purposes of
--------------------------------------------
determining the adjusted Conversion Price under this Section 4, the following
shall be applicable:
(i) Issuance of Rights or Options. If the Corporation in any manner
-----------------------------
grants any warrants or options or other rights to subscribe for or to
purchase either (x) Common Stock or (y) any stock or other securities
convertible into or exchangeable for Common Stock (such warrants, rights or
options being herein called "Options" and such convertible or exchangeable
stock or securities being herein called "Convertible Securities"), whether
or not such Options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the price per share
for which Common Stock is issuable upon the exercise of such Options or
upon conversion or exchange of such Convertible Securities is less than the
Conversion Price in effect immediately prior to the time of the granting of
such Options, then the total maximum number of shares of Common Stock
issuable upon the exercise of such Options or upon conversion or exchange
of the total maximum amount of such Convertible Securities shall be deemed
to be outstanding and to have been issued and sold by the Corporation at
the time of the granting of such Options for such price per share. For
purposes of this paragraph, the "price per share for which Common Stock is
issuable" shall be determined by dividing (a) the total amount, if any,
received or receivable by the Corporation as consideration for the granting
of such Options, plus the minimum aggregate amount of additional
consideration payable to the Corporation upon exercise of all such Options,
plus in the case of such Options which relate to Convertible Securities,
the minimum aggregate amount of additional consideration, if any, payable
to the Corporation upon the issuance or sale of such Convertible Securities
and the conversion or exchange thereof (such amount is the consideration
"deemed received" for purposes of Section 4(b) above), by (b) the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such Options. No further
adjustment of the Conversion Price shall be made when Convertible
Securities are actually issued upon the exercise of such Options or when
Common Stock is actually issued upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Corporation in any
----------------------------------
manner issues or sells any Convertible Securities, whether or not the
rights to exchange or convert any such Convertible Securities are
immediately exercisable, and the price per share for which Common Stock is
issuable upon such conversion or exchange is less than the Conversion Price
in effect immediately prior to the time of such issue or sale, then the
maximum number of shares of Common Stock issuable upon conversion or
exchange of such Convertible Securities shall be deemed to be outstanding
and to have been issued and sold by the Corporation at the time of the
issuance or sale of such Convertible Securities for such price per share.
For the purposes of this paragraph, the "price per share for which
10
<PAGE>
Common Stock is issuable" shall be determined by dividing (a) the total
amount received or receivable by the Corporation as consideration for the
issue or sale of such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, payable to the Corporation upon
the conversion or exchange thereof, by (b) the total maximum number of
shares of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities. No further adjustment of the Conversion Price shall
be made when Common Stock is actually issued upon the conversion or
exchange of such Convertible Securities, and if any such issue or sale of
such Convertible Securities is made upon exercise of any Options for which
adjustments of the Conversion Price had been or are to be made pursuant to
other provisions of this Section 4, no further adjustment of the Conversion
Price shall be made by reason of such issue or sale.
(iii) Change in Option Price or Conversion Rate. If the purchase
-----------------------------------------
price provided for in any Options, the additional consideration, if any,
payable upon the conversion or exchange of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into or
exchangeable for Common Stock change at any time, the Conversion Price in
effect at the time of such change shall be readjusted to the Conversion
Price which would have been in effect at such time had such Options or
Convertible Securities then outstanding provided for such changed purchase
price, additional consideration or changed conversion rate, as the case may
be, at the time initially granted, issued or sold; but only if as a result
of such adjustment the Conversion Price then in effect hereunder is thereby
reduced; and on the termination date of any such Option or any such right
to convert or exchange such Convertible Securities, the Conversion Price
then in effect hereunder shall forthwith be increased to the Conversion
Price which would have been in effect at the time of such termination had
such Option or Convertible Securities, to the extent outstanding
immediately prior to such termination, never been issued.
(iv) Exception for Outstanding Options. The adjustments provided for
---------------------------------
under this Section 4 for adjusting the Conversion Price shall not be
applied with respect to the Outstanding Options or any shares of Common
Stock issued upon the exercise of any of the Outstanding Options.
(d) Subdivision or Combination of Common Stock. If the Corporation at any
------------------------------------------
time subdivides (by stock split, stock dividend, recapitalization or otherwise)
its outstanding shares of Common Stock into a greater number of shares, the
Conversion Price in effect immediately prior to such subdivision shall be
proportionately reduced, and, conversely, in case the outstanding shares of
Common Stock shall be combined (by reverse stock split or otherwise) into a
smaller number of shares, the Conversion Price in effect immediately prior to
such combination shall be proportionately increased.
(e) Certain Events. If an event not specifically enumerated in this
--------------
Section 4 occurs which has substantially the same economic effect on the Series
A Convertible Preferred Stock as those specifically enumerated shall occur, then
this Section 4 shall be construed liberally, mutatis mutandis, in order to give
----------------
the Series A Convertible Preferred Stock the benefit of the protections
11
<PAGE>
provided under this Section 4. The Corporation's Board of Directors shall make
an appropriate adjustment in the Conversion Price so as to protect the rights of
the holders of Series A Convertible Preferred Stock; provided that no such
--------
adjustment shall increase the Conversion Price as otherwise determined pursuant
to this Section 4 or decrease the number of shares of Common Stock issuable upon
conversion of each share of Series A Convertible Preferred Stock.
(f) Notices.
-------
(i) Immediately upon any adjustment of the Conversion Price, the
Corporation shall give written notice thereof to all holders of Series A
Convertible Preferred Stock, setting forth in reasonable detail and
certifying the calculation of such adjustment.
(ii) The Corporation shall give written notice to all holders of
Series A Convertible Preferred Stock at least twenty (20) days prior to the
date on which the Corporation closes its books or takes a record (a) with
respect to any dividend or distribution upon Common Stock, (b) with respect
to any pro rata subscription offer to holders of Common Stock or (c) for
determining rights to vote with respect to any dissolution or liquidation.
(g) Mandatory Conversion. Each share of Series A Convertible Preferred
--------------------
Stock shall automatically be converted into fully paid and nonassessable shares
of Common Stock of the Corporation on the basis set forth in this Section 4
immediately upon the closing of a sale, pursuant to an effective registration
statement under the Securities Act of 1933, as amended, of shares of the
Corporation's Common Stock in a firmly underwritten registered initial public
offering in which the following two conditions shall be met:
(i) Aggregate gross proceeds to the Corporation (before underwriting
discounts and commissions) of at least $25,000,000; and
(ii) An offering price per share to the public equal to or greater
than 300% of the then Liquidation Value (as adjusted for stock
splits, stock dividends and combinations) of the Series A
Convertible Preferred Stock.
Holders of shares of Series A Convertible Preferred Stock so converted may
deliver to the Corporation at its principal office (or such other office or
agency of the Corporation as the Corporation may designate by notice in writing
to such holders) during its usual business hours, the certificate or
certificates for the shares so converted. As promptly as practicable
thereafter, the Corporation shall issue and deliver to such holder a certificate
or certificates for the number of whole shares of Common Stock to which such
holder is entitled, together with any cash dividends and payment in lieu of
fractional shares to which such holder may be entitled pursuant to this Section
4. Until such time as a holder of shares of Series A Convertible Preferred
Stock shall surrender its certificate or certificates therefor as provided
above, such certificates shall be deemed to represent the shares of Common Stock
to which such holder shall be entitled upon the surrender thereof.
12
<PAGE>
5. Identical Rights. Each share of the Series A Convertible Preferred
----------------
Stock shall have the same relative rights and preferences as, and shall be
identical in all respects with, all other shares of the Series A Convertible
Preferred Stock.
6. Certificates. So long as any shares of the Series A Convertible
------------
Preferred Stock are outstanding, there shall be set forth on the face or back of
each stock certificate issued by the Corporation a statement that the
Corporation shall furnish without charge to each shareholder who so requests, a
full statement of the designation and relative rights, preferences and
limitations of each class of stock or series thereof that the Corporation is
authorized to issue and of the authority of the Board of Directors to designate
and fix the relative rights, preferences and limitations of each series.
7. Board Composition.
-----------------
Notwithstanding anything to the contrary set forth in the Certificate of
Incorporation, the Corporation's Board of Directors shall consist of seven
individuals so long as there remains outstanding 25% or more of the Series A
Convertible Preferred Stock outstanding as of November 22, 1996 unless the
holders of a majority of the issued and outstanding Series A Convertible
Preferred Stock (voting separately as a class) and the holders of a majority of
the issued and outstanding Common Stock (voting separately as a class) shall
otherwise consent. The holders of Series A Convertible Preferred Stock, voting
as a separate group for such purpose, shall be entitled to elect two directors,
and the holders of Common Stock, voting as a separate group for such purpose,
shall be entitled to elect five directors.
8. Definitions.
-----------
"Certificate of Incorporation" means this Certificate of Incorporation
of the Corporation, as hereafter amended in compliance with the provisions
hereof.
"Common Stock" means the Corporation's Common Stock, $0.01 par value
per share.
"Common Stock Deemed Outstanding" means, at any given time, the number
of shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock issuable upon conversion of the Series A Convertible
Preferred Stock, plus the number of shares of Common Stock issuable upon the
exercise of outstanding Options and the conversion of Convertible Securities,
whether or not such Options are exercisable or such Convertible Securities are
convertible into Common Stock at such time.
"Conversion Price" shall have the meaning set forth in Section 4(b)
hereof.
"Convertible Securities" shall have the meaning set forth in Section
4(c)(i) hereof.
13
<PAGE>
"Junior Securities" means any of the Corporation's Common Stock and
all other equity securities of the Corporation other than the Preferred Stock
and any other shares of the Corporation's capital stock approved for issuance
(i) by a vote of the Board and (ii) in accordance with Section 3(b)(i) hereof.
"Liquidation Value" of any share of Series A Convertible Preferred
Stock shall be $4.66.
"Options" shall have the meaning set forth in Section 4(c)(i) hereof.
"Outstanding Options" means:
(i) the options to purchase up to 843,500 shares of Common
Stock issued under the Teltrust, Inc. 1993 Employee Stock Option Plan
outstanding as of November 22, 1996,
(ii) options to purchase up to 100,000 shares of Common Stock
that may be issued under the Teltrust, Inc. 1993 Employee Stock Option Plan
after November 22, 1996 in compliance with Section 3(b)(i)(A) hereof and which
are specifically designated by the Board of Directors to be "Outstanding
Options" under this definition of Outstanding Options; and
(iii) warrants to purchase up to 2,500,520 shares of Common Stock
outstanding as of November 22, 1996.
"Person" means an individual, partnership, corporation, association,
trust, joint venture, unincorporated organization and any government,
governmental department or agency or political subdivision thereof.
"Preferred Stock" means the Corporation's preferred stock, without par
value, including, without limitation, the Series A Convertible Preferred Stock.
"Public Offering" means any offering by the Corporation of its equity
securities to the public pursuant to an effective registration statement under
the Securities Act of 1933 or any comparable statement under any similar federal
statute then in force, other than an offering of shares being issued as
consideration in a business acquisition or combination or an offering in
connection with an employee benefit plan.
"Series A Convertible Preferred Stock" means the Corporation's Series
A Convertible Preferred Stock, without par value, as in effect on the date
hereof.
"Subsidiary" means, with respect to any Person, any corporation,
partnership, association or other business entity of which (i) if a corporation,
a majority of the total voting power of shares of stock entitled (without regard
to the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled, directly
14
<PAGE>
or indirectly, by that Person or one or more of the other Subsidiaries of that
Person or a combination thereof, or (ii) if a partnership, association or other
business entity, a majority of the partnership or other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that person or a combination thereof.
For purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a partnership, association or other business entity if
such Person or Persons shall be allocated a majority of partnership, association
or other business entity gains or losses or shall be or control the managing
general partner of such partnership, association or other business entity.
9. Severability of Provisions. If any right, preference or limitation of
--------------------------
the Series A Convertible Preferred Stock set forth in this Section B of this
Article IV (as the same may be amended from time to time) is invalid, unlawful
or incapable of being enforced by reason of any rule, law or public policy, all
other rights preferences and limitations set forth in this Section B of this
Article IV (as so amended) which can be given effect without implicating the
invalid, unlawful or unenforceable right preference or limitation shall,
nevertheless, remain in full force and effect, and no right, preference or
limitation herein set forth shall be deemed dependent upon any other right,
preference or limitation unless so expressed herein.
C. COMMON STOCK
1. Dividends. Subject to the rights as may be conferred upon any shares
---------
of Preferred Stock, and subject to any other provisions of this Certificate of
Incorporation, holders of Common Stock shall be entitled to receive such
dividends and other distributions in cash, stock or property of the Corporation
as may be declared thereon by the Board of Directors from time to time out of
assets or funds of the Corporation legally available therefor; provided,
--------
however, that no dividends shall be made with respect to the Common Stock until
- -------
any preferential dividends required to be paid or set apart for any shares of
Preferred Stock have been paid.
2. Liquidation; Dissolution. In the event of any liquidation,
------------------------
dissolution or winding up of the affairs of the Corporation, whether voluntary
or involuntary, after payment or provision for payment of the debts and other
liabilities of the Corporation and after payment or provision for payment to the
holders of each series of Preferred Stock of all amounts required in accordance
with the provisions of this Certificate of Incorporation, the remaining assets
and funds of the Corporation shall be divided among and paid to the holders of
Common Stock.
3. Voting.
------
(a) At every meeting of the shareholders, every holder of Common
Stock shall be entitled to one (1) vote in person or by proxy for each
share of such Stock standing in his name on the stock transfer records of
the Corporation.
(b) No shareholder shall have the right to cumulate votes in the
election of directors.
15
<PAGE>
4. Preemptive Rights. Except as otherwise provided by contract, no
-----------------
holder of shares of Common Stock of the Corporation shall, as such holder, be
entitled as of right to subscribe for, purchase or receive any part of any new
or additional issue of stock of any class, whether now or hereafter authorized,
or of bonds, debentures or other securities convertible into or exchangeable for
stock, but all such additional shares of stock of any class, or bonds,
debentures or other securities convertible into or exchangeable for stock, may
be issued and disposed of by the Board of Directors on such terms and for such
consideration, so far as may be permitted by law, and to such persons, as the
Board of Directors in its absolute discretion may deem advisable.
ARTICLE V
INCORPORATOR AND DIRECTORS
--------------------------
1. Incorporator. The name and mailing address of the incorporator is as
------------
follows:
NAME MAILING ADDRESS
---- ---------------
William David Todd c/o Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
2. Directors.
---------
(a) The name and mailing address of the person who is to serve as a
Director until the first annual meeting of the stockholders or until a successor
is elected and qualified, is as follows:
NAME MAILING ADDRESS
---- ---------------
Marc B. Cohen c/o Teltrust, Inc.
6322 South 3000 East
Salt Lake City, UT 84121
(b) The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors except as otherwise provided
herein or required by law.
(c) Election of Directors need not be by written ballot unless the By-laws
of the Corporation shall so provide.
ARTICLE VI
INDEMNIFICATION OF OFFICERS AND DIRECTORS
-----------------------------------------
The Corporation shall indemnify any person who 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, employee
16
<PAGE>
benefit plan or other enterprise to the fullest extent permitted by the DGCL, as
the same may hereafter be amended, or as otherwise permitted by law.
ARTICLE VII
LIMITATION OF LIABILITY
-----------------------
A Director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL or (iv) for any
transaction from which the Director derived an improper personal benefit. If
the DGCL is amended after the effective date of this Certificate of
Incorporation to authorize corporate action further eliminating or limiting the
personal liability of Directors, then the liability of a Director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the DGCL, as so amended.
Any repeal or modification of this Article VII by either of (i) the
stockholders of the Corporation or (ii) an amendment to the DGCL, shall not
adversely affect any right or protection existing at the time of such repeal or
modification with respect to any acts or omissions occurring before such repeal
or modification of a person serving as a Director at the time of such repeal or
modification.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
------------------------
1. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to adopt, amend or
repeal the by-laws of the corporation.
2. The corporation is to have perpetual existence.
3. The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
4. Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of section 279 of
17
<PAGE>
Title 8 of the Delaware Code order a meeting of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this corporation as consequence of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this corporation, as the case
may be, and also on this corporation.
5. Any action required or permitted by law to be taken at any annual or
special meeting of stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent or consents in writing, setting forth
the action so taken, shall be signed by the holders of all of the outstanding
shares of stock entitled to vote on the matter outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon.
18
<PAGE>
THE UNDERSIGNED incorporator, for the purpose of forming a corporation
pursuant to the General Corporation Law of the State of Delaware, does hereby
make this certificate, hereby declaring and certifying that it is his free act
and deed and the facts herein stated are true, and accordingly he has hereunto
set his hand this 8th day of April, 1998.
/s/ William David Todd
-----------------------------
William David Todd
19
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
TTST HOLDINGS, INC.
Pursuant to Section 242 of the
General Corporation Law of the State of Delaware
------------------------------------------------
TTST Holdings, Inc. (hereinafter called the "Corporation"), a corporation
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware, does hereby certify as follows:
At a meeting of the Board of Directors of the Corporation, a resolution was
duly adopted, pursuant to Sections 141 and 242 of the General Corporation Law of
the State of Delaware, setting forth an amendment to the Certificate of
Incorporation of the Corporation and declaring said amendment to be advisable.
The stockholders of the Corporation duly approved said proposed amendment by
written consent in accordance with Sections 228 and 242 of the General
Corporation Law of the State of Delaware. The resolution setting forth the
amendment is as follows:
RESOLVED, that the Certificate of Incorporation of TTST Holdings, Inc. be
amended by changing the Article I thereof so that, as amended said Article
shall be read as follows:
"The name of the corporation is Teltrust, Inc."
This Certificate of Amendment shall be effective upon the filing of this
Certificate of Amendment with the Secretary of State of the State of Delaware.
IN WITNESS WHEREOF, said TTST Holdings, Inc. has caused this Certificate to
be signed by Steven E. Swenson, its authorized officer, this 21st day of April
1998.
TTST HOLDINGS, INC.
By: /s/ Steven E. Swenson
-----------------------------------
Name: Steven E. Swenson
Title: Vice President and Assistant
Secretary
20
<PAGE>
Exhibit 10.1
TELTRUST, INC.
1993 EMPLOYEE STOCK OPTION PLAN
Adopted, November 22, 1993
- ----------------------------------------------------------------------TELTRUST
<PAGE>
TABLE OF CONTENTS
I. THE PLAN ..............................................................1
1.1 Purpose ....................................................1
1.2 Administration and Authorization; Power and Procedure ......1
1.3 Participation ..............................................2
1.4 Shares Available for Options ...............................2
1.5 Grant of Options ...........................................2
1.6 Term of Options ............................................2
1.7 Restrictions or Limitations on Exercise of Options .........2
1.8 Acceptance of Notes to Finance Exercise ....................3
1.9 No Transferability .........................................4
II. EMPLOYEE OPTIONS ......................................................4
2.1 Grants .....................................................4
2.2 Option Price ...............................................4
2.3 Limitations on Grant and Terms of Incentive Stock Options ..4
2.4 Limits on l0% Holders ......................................5
2.5 Options Repricing/Cancellation and Regrant/Waiver
of Restrictions ............................................5
2.6 Company's Right to Repurchase Common Stock Issued under
the Plan ...................................................5
III. OTHER PROVISIONS ......................................................6
3.1 Rights of Eligible Employees, Participants and
Beneficiaries ..............................................6
3.2 Adjustments; Acceleration ..................................6
3.3 Effect of Termination of Employment ........................7
3.4 Compliance with Laws .......................................7
3.5 Tax Withholding ............................................7
3.6 Plan Amendment Termination and Suspension ..................7
3.7 Privileges of Stock Ownership ..............................8
3.8 Effective Date of the Plan .................................8
3.9 Term of the Plan ...........................................8
3.10 Governing Law; Construction; Severability ..................8
3.11 Captions ...................................................8
3.12 Effect of Change of Subsidiary Status ......................8
3.13 Non-Exclusivity of Plan ....................................9
IV. DEFINITIONS ...........................................................9
4.1 Definitions ................................................9
<PAGE>
TELTRUST, INC.
1993 EMPLOYEE STOCK OPTION PLAN
I. THE PLAN
1.1 Purpose
The purpose of this Plan is to promote the success of the Company by
providing an additional means through the grant of stock options to attract,
motivate, retain and reward key employees, including officers, whether or not
directors, of the Company with incentives for high levels of individual
performance in order to promote improved financial performance of the Company.
"Corporation" means Teltrust, Inc., a Utah corporation, and "Company" means the
Corporation and its Subsidiaries collectively. These terms and other capitalized
terms are defined in Article IV.
1.2 Administration and Authorization; Power and Procedure
(a) Committee. This Plan shall be administered by, and all Options to
Eligible Employees shall be authorized by, the Committee. Action of the
Committee with respect to the administration of this Plan shall be taken
pursuant to a majority vote or by written consent of its members.
(b) Plan Options; Interpretation; Powers of Committee. Subject to the
express provisions of this Plan, the Committee shall have the authority to:
(i) determine from among those persons eligible, the
particular Eligible Employees who will receive any Options;
(ii) grant Options to Eligible Employees, determine the price
at which the Options may be exercised and the amount of securities to
be subject to such Options, and determine the other specific terms
and conditions of such Options consistent with the express limits of
this Plan, and establish the installments (if any) in which such
Options shall become exercisable, or determine that no delayed
exercisability is required, and establish the events of termination
of such Options;
(iii) approve the forms of Option Agreements (which need not be
identical either as to type of option or as among Participants);
(iv) construe and interpret this Plan and any agreements
defining the rights and obligations of the Company and employee
Participants under this Plan, further define the terms used in this
Plan, and prescribe, amend and rescind rules and regulations relating
to the administration of this Plan;
(v) cancel, modify, or waive the Company's rights with
respect to, or modify, discontinue, suspend, or terminate any or all
outstanding Options held by Eligible Employees, subject to any
required consent under Section 3.6;
(vi) accelerate or extend the exercisability or extend the
term of any or all such outstanding Options within the maximum ten-
year term of Options under Section 1.6; and
(vii) make all other determinations and take such other action
as contemplated by this Plan or as may be necessary or advisable for
the administration of this Plan and the effectuation of its purposes.
(c) Binding Determinations. Any action taken by, or inaction of, the
Corporation, any Subsidiary, the Board or the Committee relating or pursuant to
this Plan shall be within the absolute discretion of that entity or body and
shall be conclusive and binding upon all persons. No member of the Board or
Committee, or officer of the Corporation or any Subsidiary, shall be liable for
any such action or inaction of the entity or body, of another person or, except
in circumstances involving bad faith, of himself or herself.) Subject
- ------------------------------------------------------------------------
1
<PAGE>
only to compliance with the express provisions hereof, the Board and Committee
may act in their absolute discretion in matters within their authority related
to this Plan.
(d) Reliance on Experts. In making any determination or in taking or
not taking any action under this Plan, the Committee or the Board, as the case
may be, may obtain and may rely upon the advice of experts, including
professional advisors to the Corporation. No director, officer or agent of the
Company shall be liable for any such action or determination taken or made or
omitted in good faith.
(e) Delegation. The Committee may delegate ministerial, non-
discretionary functions to individuals who are officers or employees of the
Company.
1.3 Participation
Options may be granted by the Committee only to those persons that
the Committee determines to be Eligible Employees. An Eligible Employee who has
been granted an Option may, if otherwise eligible, be granted additional Options
if the Committee shall so determine.
1.4 Shares Available for Options
Subject to the provisions of Section 3.2 herein, the capital stock
that may be delivered under this Plan shall be shares of the Corporation's
authorized by unissued Common Stock and any shares of its Common Stock held as
treasury shares. The shares may be delivered for any lawful consideration.
(a) Number of Shares. The maximum number of shares of Common Stock
that may be issued pursuant to Options granted to Eligible Employees under this
Plan is six hundred thousand (600,000) shares, subject to adjustments
------------------------------
contemplated by Section 3.2 herein.
(b) Calculation of Available Shares and Replenishment. Shares subject
to outstanding Options that are derivative securities (as defined in Rule
16a-l(c) under the Exchange Act) shall be reserved for issuance. If any Option
shall expire or be canceled or terminated without having been exercised in
full, the unpurchased Shares subject thereto shall again be available for the
purposes of the Plan, subject to any applicable limitations under Rule 16b-3. If
the Corporation withholds shares of Common Stock pursuant to Section 3.5 herein
the number of shares that would have been deliverable with respect to an Option
but that are withheld pursuant to the provisions of Section 3.5 may in effect
not be issued, but the aggregate number of shares issuable with respect to the
applicable Option and under the Plan shall be reduced by the number of shares
withheld and such shares shall not be available for additional Options under
this Plan 1.5 Grant of options
Subject to the express provisions of this Plan, the Committee shall
determine the number of shares of Common Stock subject to each Option and the
exercise price thereof. Each Option shall be evidenced by an Option Agreement
signed by the Corporation and, if required by the Committee, by the Participant.
1.6 Term of Options
Each Option and all executory rights or obligations under the related
Option Agreement shall expire on such date as shall be determined by the
Committee but not later than ten (10) years after the Grant date.
1.7 Restrictions or Limitations on Exercise of options
(a) Provisions for Exercise. No Option shall be exercisable until at
least six months after the later of 1) the initial Grant Date or 2) stockholder
approval of the plan under which the Option is issued, and once exercisable an
Option shall remain exercisable until the expiration or earlier termination of
the Option, unless the Committee otherwise provides.
2
<PAGE>
(b) Procedure. Any exercisable Option shall be deemed to be exercised
when the Chief Financial Officer of the Corporation receives written notice of
such exercise from the Participant, together with the required payment made in
accordance with Section 2.2(b).
(c) Fractional Shares/Minimum Issue. Fractional share interests shall
be disregarded, but may be accumulated. The Committee, however, may determine in
the case of Eligible Employees that cash, other securities or other property
will be paid or transferred in lieu of any fractional share interests. No fewer
than 100 shares may be purchased on exercise of any Option at one time unless
the number purchased is the total number at the time available for purchase
under the Option.
(d) Securities Laws Restriction on Option Exercise. Notwithstanding
any contrary provisions of this Plan, any Option granted under the Plan may not
be exercised by any Eligible Employee unless the shares to be acquired by the
Eligible Employee pursuant to the Plan have been registered under the Securities
Act, the securities laws of Utah, and any other applicable securities laws of
any other state, or the Corporation receives an opinion of counsel (which may be
counsel for the Corporation) reasonably acceptable to the Corporation stating
that the exercise of the Option and the issuance of shares pursuant to the
exercise is exempt from such registration requirements. The Eligible Employee
shall represent that unless and until the shares have been registered under the
Securities Act and applicable state securities laws: (1) the Eligible Employee
will be acquiring the shares upon exercise for investment purposes only and
without the intent of making any sale or disposition thereof, (2) the Eligible
Employee has been advised and understands that the shares underlying the Options
have not been registered for sale pursuant to federal and state securities laws
and are "restricted securities" under such laws, and (3) the Eligible Employee
acknowledges that the shares will be subject to stop transfer instructions and
bear a legend in substantially the following form in addition to any other
legend set forth in the Plan:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES
LAWS AND MAY NOT BE OFFERED, SOLD, OR TRANSFERRED IN THE ABSENCE OF
REGISTRATION OR THE AVAILABILITY OF AN EXEMPTION FROM SUCH REGISTRATION.
NO OFFER, SALE OR TRANSFER MAY TAKE PLACE WITHOUT PRIOR WRITTEN APPROVAL
OF THE COMPANY BEING AFFIXED HERETO. IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT SUCH APPROVAL SHALL BE GRANTED ONLY IF THE COMPANY
HAS RECEIVED AN OPINION OF SHAREHOLDER'S COUNSEL, AT SHAREHOLDER'S
EXPENSE, SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT SUCH SHARES MAY
BE LAWFULLY TRANSFERRED PURSUANT TO AN EXEMPTION FROM REGISTRATION.
1.8 Acceptance of Notes to Finance Exercise
The Corporation may, with the Committee's approval, accept one or
more notes from any Eligible Employee in connection with the exercise or receipt
of any outstanding Option, provided that any such note shall be subject to the
following terms and conditions:
(a) The principal of the note shall not exceed the amount required to
be paid to the Corporation upon the exercise or receipt of one or more Options
under the Plan and the note shall be delivered directly to the Corporation in
consideration of such exercise or receipt
(b) The initial term of the note shall be determined by the
Committee; provided that the term of the note, including extensions, shall not
exceed a period of five years.
(c) The note shall provide for full recourse to the Employee
Participant and shall bear interest at a rate determined by the Committee but
not less than the applicable imputed interest rate specified by the Code.
(d) if the employment of the Employee Participant terminates, the
unpaid principal balance of the note shall become due and payable on the 10th
business day after such termination; provided, however, that if a sale of such
shares would cause such Employee Participant to incur liability under Section
l6(b) of the Exchange Act, the unpaid balance shall become due and payable on
the 10th business day after the first day on which a sale of such shares could
have been made without incurring such liability assuming for these purposes that
there are no other transactions by the Employee Participant subsequent to such
termination.
3
<PAGE>
(e) If required by the Committee or by applicable law, the note shall
be secured by the shares financed thereby in compliance with applicable law.
(f) The terms, repayment provisions, and collateral release
provisions of the note and the pledge securing the note shall conform with
applicable rules and regulations of the Federal Reserve Board as then in effect.
1.9 No Transferability
Options may be exercised only by, and shares issuable pursuant to an
Option shall be issued only to (or registered only in the name of), the
Participant or, if the Participant has died, the Participant's Beneficiary or,
if the Participant has suffered a Disability, the Participant's Personal
Representative, if any, or if there is none, the Participant, or (to the extent
permitted by applicable law and Rule 16b-3) to a third party pursuant to such
conditions and procedures as the Committee may establish. Other than by will or
the laws of descent and distribution or pursuant to a QDRO or other exception to
transfer restrictions under Rule 16b-3 (except to the extent not permitted in
the case of an Incentive Stock Option), no right or benefit under this Plan or
any Option, shall be transferable by the Participant or shall be subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance or charge (other than to the Corporation) and any such attempted
action shall be void. The Corporation shall disregard any attempt at transfer,
assignment or other alienation prohibited by the preceding sentences and shall
deliver such shares of Common Stock in accordance with the provisions of this
Plan. The designation of a Beneficiary hereunder shall not constitute a transfer
for these purposes.
II. EMPLOYEE OPTIONS
2.1 Grants
One or more Options may be granted under this Article to any Eligible
Employee. Each Option granted may be either an Option intended to be an
Incentive Stock Option, or an Option not so intended, and such intent shall be
indicated in the applicable Option Agreement
2.2 Option Price
(a) Pricing Limits. The purchase price per share of the Common Stock
covered by each Option shall be determined by the Committee at the time the
Option is granted, but in the case of Incentive Stock Options shall not be less
than 100% (110% in the case of a Participant who owns or is deemed to own under
Section 424(d) of the Code more than 10% of the total combined voting power of
all classes of stock of the Corporation) of the Fair Market Value of the Common
Stock on the Grant Date.
(b) Payment Provisions. The purchase price of any shares purchased on
exercise of an Option granted under this Article shall be paid in full at the
time of each purchase in one or a combination of the following methods: (i) in
cash or by electronic fluids transfer; (ii) by check payable to the order of the
Corporation; (iii) if authorized by the Committee or specified in the applicable
Option Agreement, by a promissory note of the Participant consistent with the
requirements of Section 1.8; (iv) by notice and third party payment in such
manner as may be authorized by the Committee; or (v) by the delivery of shares
of Common Stock of the Corporation already owned by the Participant, provided,
however, that the Committee may in its absolute discretion limit the
Participant's ability to exercise an Option by delivering such shares. Shares of
Common Stock used to satisfy the exercise price of an Option shall be valued at
their Fair Market Value on the date of exercise.
2.3 Limitations on Grant and Terms of Incentive stock Options
(a) $100,000 Limit. To the extent that the aggregate "fair market
value" of stock with respect to which incentive stock options first become
exercisable by a Participant in any calendar year exceeds $100,000, taking into
account both Common Stock subject to Incentive Stock Options under this Plan and
stock subject to incentive stock options under all other plans of the Company,
such options shall be treated as nonqualified stock options. For this purpose,
the "fair market value" of the stock subject to options shall be determined as
of the date the options were optioned. In reducing the number of options treated
as incentive stock options to meet the
4
<PAGE>
$100,000 limit, the most recently granted options shall be reduced first. To the
extent a reduction of simultaneously granted options is necessary to meet the
$100,000 limit, the Committee may, in the manner and to the extent permitted by
law, designate which shares of Common Stock are to be treated as shares acquired
pursuant to the exercise of an Incentive Stock Option:
(b) Option Period. Each Incentive Stock Option and all rights there
under shall expire no later than ten years after the Grant Date.
(c) Other Code Limits. There shall be imposed in any Option Agreement
relating to Incentive Stock Options such terms and conditions as from time to
time are required in order that the Option be an "incentive stock option" as
that term is defined in Section 422 of the Code.
2.4 Limits on 10% Holders
No Incentive Stock Option may be granted to any person who, at the
time the Option is granted, owns (or is deemed to own under Section 424(d) of
the Code) shares of outstanding Common Stock possessing more than 10% of the
total combined voting power of all classes of stock of the Corporation, unless
the exercise price of such Option is at least 110% of the Fair Market Value' of
the stock subject to the Option and such Option by its terms is not exercisable
after the expiration of five years from the date such Option is granted.
2.5 Option Repricing/Cancellation and Regrant/Waiver of Restrictions
Subject to Section 1.4 and Section 3.6 herein and the specific
limitations on Options contained in this Plan, the Committee from time to time
may authorize, generally or in specific cases only, for the benefit of any
Eligible Employee, any adjustment in the exercise price, the number of shares
subject to or the term of, an Option granted under this Article by cancellation
of an outstanding Option and a subsequent regranting of an Option, by amendment,
by substitution of an outstanding Option, by waiver or by other legally valid
means. Such amendment or other action may result among other changes in an
exercise price which is higher or lower than the exercise or purchase price of
the original or prior Option, provide for a greater or lesser number of shares
subject to the Option, or provide for a longer or shorter vesting or exercise
period.
2.6 Company's Right to Repurchase Common stock Issued under the Plan
(a) Repurchase Right. The Company shall have the right to repurchase
for cash all shares of Common Stock acquired by an Eligible Employee under the
Plan upon the Eligible Employee's termination of employment with the Company
(regardless of reason) for a purchase price per share equal to the price paid
for the shares by the Eligible Employee together with interest thereon at the
rate of ten percent (10%) per annum. This right to repurchase shall
automatically terminate and be of no further force or effect upon the earlier of
(i) thirty (30) days after the termination of employment of the Eligible
Employee, (ii) the registration of the Corporation's Common Stock under Section
12(g) of the Exchange Act, or (iii) the trading of the Corporation's Common
Stock on a recognized trading market such as NASDAQ or a national or regional
stock exchange.
(b) Repurchase Legend. The face of certificates of Common Stock
issued to an Eligible Employee upon exercise of any Option shall bear a legend
in conspicuous capital letters in substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AND A REPURCHASE OPTION HELD BY THE ISSUER OR
ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE ANY THE OPTION
AGREEMENT. COPIES OF THESE DOCUMENTS ARE AVAILABLE AT THE PRINCIPAL
OFFICE OF THE ISSUER IN SALT LAKE CITY, UTAH. SAID TRANSFER
RESTRICTIONS AND REPURCHASE OPTION ARE BINDING UPON TRANSFEREES OF
THESE SHARES.
5
<PAGE>
III. OTHER PROVISIONS
3.1 Rights of Eligible Employees, Participants and Beneficiaries
(a) Employment Status. Status as an Eligible Employee shall not be
construed as a commitment that any Option will be granted under this Plan to an
Eligible Employee or to Eligible Employees generally.
(b) No Employment Contract. Nothing contained in this Plan (or in any
other documents related to this Plan or to any Option) shall confer upon any
Eligible Employee or other Participant any right to continue in the employ or
other service of the Company or constitute any contract or agreement of
employment or other service, nor shall interfere in any way with the right of
the Company to change such person's compensation or other benefits or to
terminate the employment of such person, with or without cause, but nothing
contained in this Plan or any document related hereto shall adversely affect any
independent contractual right of such person without his or her consent thereto.
(c) Plan Not Funded. No Participant, Beneficiary or other person
shall have any right, title or interest in any fund or in any specific asset
(including shares of Common Stock, except as expressly otherwise provided) of
the Company by reason of any Option hereunder. Neither the provisions of this
Plan (or of any related documents), nor the creation or adoption of this Plan,
nor any action taken pursuant to the provisions of this Plan shall create, or be
construed to create, a trust of any kind or a fiduciary relationship between the
Company and any Participant, Beneficiary or other person.
3.2 Adjustments; Acceleration
(a) Adjustments. If there shall occur any recapitalization, stock
split (including a stock split in the form of a stock dividend), reverse stock
split, reorganization, merger, combination, consolidation, split-up, spin-off
combination, repurchase, or exchange of Common Stock or other securities of the
Corporation, or there shall occur any other like corporate transaction or event
in respect of the Common Stock, then the Committee shall, in such manner and to
such extent (if any) as it deems appropriate and equitable (1) proportionately
adjust any or all of (a) the number and type of shares of Common Stock (or other
securities) which thereafter may be made the subject of Options (including the
specific maximum and numbers of shares set forth elsewhere in this Plan), (1))
the number, amount and type of shares of Common Stock (or other securities or
property) subject to any or all outstanding Options, (c) the grant, purchase, or
exercise price of any or all outstanding Options, (d) the securities issuable
upon exercise of any outstanding Options, or (2) in the case of an extraordinary
dividend or other distribution, merger, reorganization, consolidation,
combination, sale of assets, split-up, exchange, or spin-off, make provision for
a cash payment or for the substitution or exchange of any or all outstanding
Options or the securities deliverable to the holder of any or all outstanding
Options based upon the distribution or consideration payable to holders of the
Common Stock of the Corporation upon or in respect of such event; provided,
however, in each case, that with respect to Incentive Stock Options, no such
adjustment shall be made which would cause the Plan to violate Section 424(a) of
the Code or any successor provisions thereto.
(b) Acceleration of Options Upon Change in Control. As to any
Eligible Employee Participant, unless prior to a Change in Control Event the
Committee determines that, upon its occurrence, there shall be no acceleration
of benefits under Options or determines that only certain or limited benefits
under Options shall be accelerated and the extent to which they shall be
accelerated, and/or establishes a different time in respect of such Event for
such acceleration, then upon the occurrence of a Change in Control Event each
Option shall become immediately exercisable. The Committee may override the
limitations on acceleration in this Section 3.2(b) by express provision in the
Option Agreement and may accord any Eligible Employee a right to refuse any
acceleration, whether pursuant to the Option Agreement or otherwise, in such
circumstances as the Committee may approve. Any acceleration of Options shall
comply with applicable regulatory requirements, including, without limitation,
Section 422 of the Code.
(c) Possible Early Termination of Accelerated Options. If any Option
or other right to acquire Common Stock under this Plan has been fully
accelerated as permitted by Section 3.2(b) but is not exercised prior to (i) a
dissolution of the Corporation, or (ii) a reorganization event described in
Section 3.2(a) that the Corporation does not survive, or (iii), the consummation
of reorganization event described in Section 3.2(a) that results in a Change of
Control approved by the Board, and no provision has been made for the survival,
substitution, exchange or other settlement of such Option or right, such Option
or right shall thereupon terminate.
6
<PAGE>
3.3 Effect of Termination of Employment
The Committee shall establish in respect of each Option granted to an
Eligible Employee the effect of a termination of employment on the rights and
benefits thereunder and in so doing may make distinctions based upon the cause
of termination.
3.4 Compliance with Laws
This Plan, the granting and vesting of Options under this Plan and
the issuance and delivery of shares of Common Stock under this Plan or under
Options granted hereunder are subject to compliance with all applicable federal
and state laws, rules and regulations (including, but not limited to, state and
federal securities laws and federal margin requirements) and to such approvals
by any listing, regulatory or governmental authority as may, in the opinion of
counsel for the Corporation, be necessary or advisable in connection therewith.
Any securities delivered under this Plan shall be subject to such restrictions,
and the person acquiring such securities shall, if requested by the Corporation,
provide such assurances and representations to the Corporation as the
Corporation may deem necessary or desirable to assure compliance with all
applicable legal requirements.
3.5 Tax Withholding
(a) Cash or Shares. Upon any exercise or vesting of any Option or
upon the disposition of shares of Common Stock acquired pursuant to the exercise
of an Incentive Stock Option prior to satisfaction of the holding period
requirements of Section 422 of the Code, the Company shall have the right at its
option to (i) require the Participant (or Personal Representative or
Beneficiary, as the case may be) to pay or provide for payment of the amount of
any taxes which the Company may be required to withhold with respect to such
transaction or (ii) deduct from any amount payable in cash the amount of any
taxes which the Company may be required to withhold with respect to such cash
amount. In any case where a tax is required to be withheld in connection with
the delivery of shares of Common Stock under this Plan, the Committee may grant
(either at the time the Option is granted or thereafter) to the Participant the
right to elect, pursuant to such rules and subject to such conditions as the
Committee may establish, to have the Corporation reduce the number of shares to
be delivered by (or otherwise reacquire) the appropriate number of shares valued
at their then Fair Market Value, to satisfying such withholding obligation.
(b) Tax Loans. The Committee may, in its discretion, authorize a loan
to an Eligible Employee in the amount of any taxes which the Company may be
required to withhold with respect to shares of Common Stock received (or
disposed of, as the case may be) pursuant to a transaction described in
subsection (a) above. Such a loan shall be for a term, at a rate of interest and
pursuant to such other terms and conditions as the Committee, under applicable
law, may establish and such loan need not comply with the provisions of Section
1.8.
3.6 Plan Amendment, Termination and Suspension
(a) Board Authorization. The Board may, at any time, terminate or,
from time to time, amend, modify or suspend this Plan, in whole or in part. No
Options may be granted during any suspension of this Plan or after termination
of this Plan, but the Committee shall retain jurisdiction as to Options then
outstanding in accordance with the terms of this Plan.
(b) Stockholder Approval. If any amendment would (i) materially
increase the benefits accruing to Participants under this Plan, (ii) materially
increase the aggregate number of securities that may be issued under this Plan,
or (iii) materially modify the requirements as to eligibility for participation
in this Plan, then to the extent then required by Rule 16b-3 to secure benefits
thereunder or to avoid liability under Section 16 of the Exchange Act (and Rules
thereunder) or required under Section 425 of the Code or any other applicable
law, or deemed necessary or advisable by the Board, such amendment shall be
subject to stockholder approval.
(c) Amendments to Options. Without limiting any other express
authority of the Committee under but subject to the express limits of this Plan,
the Committee by agreement or resolution may waive conditions of or limitation
on Options to Eligible Employees that the Committee in the prior exercise of its
discretion has imposed, without the consent of a Participant, and may make other
changes to the terms and
7
<PAGE>
conditions of Options that do not affect in any manner materially adverse to
the Employee Participant, his or her rights and benefits under an Option.
(d) Limitations on Amendment to Plan and Options. No amendment,
suspension or termination of the Plan or change of or affecting any outstanding
Option shall, without written consent of the Participant, affect in any manner
materially adverse to the Participant any rights or benefits of the Participant
or obligations of the Corporation under any Option granted under this Plan prior
to the effective date of such change. Changes contemplated by Section 3.2 shall
not be deemed to constitute changes or amendments for purposes of this Section.
3.7 Privileges of Stock Ownership
Except as otherwise expressly authorized by the Committee or this
Plan, a Participant shall not be entitled to any privilege of stock ownership as
to any shares of Common Stock not actually delivered to and held of record by
him or her. No adjustment will be made for dividends or other rights as a
stockholder for which a record date is prior to such date of delivery.
3.8 Effective Date of the Plan
This Plan shall be effective when approved by the Teltrust, Inc.
shareholders.
3.9 Term of the Plan
No Option shall be granted more than five years after the effective
date of this Plan (the "termination date"). Unless otherwise expressly provided
in this Plan or in an applicable Option Agreement, any Option theretofore
granted may extend beyond such date, and all authority of the Committee with
respect to Options hereunder shall continue during any suspension of this Plan
and in respect of outstanding Options on such termination date.
3.10 Governing Law; Construction; Severability
(a) Choice of Law. This Plan, the Options, all documents evidencing
Options and all other related documents shall be governed by, and construed in
accordance with the laws of the State of Utah.
(b) Severability. If any provision shall be held by a court of
competent jurisdiction to be invalid and unenforceable, the remaining
provisions of this Plan shall continue in effect.
(c) Plan Construction. It is the intent of the Corporation that this
Plan and Options hereunder satisfy and be interpreted in a manner that, in the
case of Participants who are or may be subject to Section 16 of the Exchange
Act, satisfy the applicable requirements of Rule 16b-3 so that such persons will
be entitled to the benefits of Rule 16b-3 or other exemptive rules under Section
16 of the Exchange Act and will not be subjected to avoidable liability
thereunder. If any provision of this Plan or of any Option would otherwise
frustrate or conflict with the intent expressed above, that provision to the
extent possible shall be interpreted and deemed amended so as to avoid such
conflict, but to the extent of any remaining irreconcilable conflict with such
intent as to such persons in the circumstances, such provision shall be deemed
void.
3.11 Captions
Captions and headings are given to the sections and subsections of
this Plan solely as a convenience to facilitate reference. Such headings shall
not be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision thereof.
3.12 Effect of Change of Subsidiary Status
For purposes of this Plan and any Option hereunder, if an entity
ceases to be a Subsidiary a termination of employment shall be deemed to have
occurred with respect to each employee of such Subsidiary who does not continue
as an employee of another entity within the Company.
8
<PAGE>
3.13 Non-Exclusivity of Plan
Nothing in this Plan shall limit or be deemed to limit the authority
of the Board or the Committee to grant options or authorize any other
compensation, with or without reference to the Common Stock, under any other
plan or authority.
IV. DEFINITIONS
4.1 Definitions
(a) "Beneficiary" shall mean the person, persons, trust or trusts
entitled by will or the laws of descent and distribution to receive the benefits
specified in the Option Agreement and under this Plan in the event of a
Participant's death, and shall mean the Participant's personal representative,
executor or administrator if no other Beneficiary is identified and able to act
under the circumstances.
(b) "Board" shall mean the Board of Directors of the Corporation.
(c) "Change in Control Event" shall mean any of the following:
(i) Approval by the stockholders of the Corporation of the
dissolution or liquidation of the Corporation;
(ii) Approval by the stockholders of the Corporation of an
agreement to merge or consolidate, or otherwise reorganize, with or
into one or more entities that are not Subsidiaries, as a result of
which less than 50% of the outstanding voting securities of the
surviving or resulting entity immediately after the reorganization
are, or will be, owned by stockholders of the Corporation immediately
before such reorganization (assuming for purposes of such
determination that there is no change in the record ownership of the
Corporation's securities from the record date for such approval until
such reorganization and that such record owners hold no securities of
the other parties to such reorganization);
(iii) Approval by the stockholders of the Corporation of the
sale of substantially all of the Corporation's business and/or assets
to a person or entity which is not a Subsidiary;
(iv) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) (other than a person having such ownership
at the time of adoption of this Plan) becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation representing more than
50% of the combined voting power of the Corporation's then
outstanding securities entitled to then vote generally in the
election of directors of the Corporation; or
(v) During any period not longer than two consecutive years,
individuals who at the beginning of such period constituted the Board
cease to constitute at least a majority thereof, unless the election,
or the nomination for election by the Corporation's stockholders, of
each new Board member was approved by a vote of at least
three-fourths of the Board members then still in office who were
Board members at the beginning of such period (including for these
purposes, new members whose election or nomination was so approved).
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(e) "Commission" shall mean the Securities and Exchange Commission.
(f) "Committee" shall mean a committee appointed by the Board to
administer this Plan, which committee shall be comprised only of three or more
directors or such greater number of directors as may be required under
applicable law, each of whom, during such time as one or more Participants may
be subject to Section 16 of the Exchange Act, shall be Disinterested.
9
<PAGE>
(g) "Common Stock" shall mean the Common Stock of the Corporation and
such other securities or property as may become subject to Options, pursuant to
an adjustment made under Section 3.2 of this Plan.
(h) "Company" shall mean, collectively, the Corporation and its
Subsidiaries.
(i) "Corporation" shall mean Teltrust, Inc., a Utah corporation, and
its successors.
(j) "Disinterested" shall mean disinterested within the meaning of
any applicable regulatory requirements, including Rule 16b-3.
(k) "Eligible Employee" shall mean an officer (whether or not a
director) or key executive, administrative, managerial, production, marketing or
sales employee of the Company.
(l) "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
(m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(n) "Fair Market Value" shall mean (i) if the stock is listed or
admitted to trade on a national securities exchange, the closing sales price of
the stock on the Composite Tape, as published in the Western Edition of The Wall
Street Journal, of the principal national securities exchange on which the stock
is so listed or admitted to trade, on such date, or, if there is no trading of
the stock on such date, then the closing price of the stock as quoted on such
Composite Tape on the next preceding date on which there was trading in such
shares; (ii) if the stock is not listed or admitted to trade on a national
securities exchange, the last sales price for the stock on such date, as
furnished by the National Association of Securities Dealers, Inc. ("NASD")
through the NASDAQ National Market Reporting System or a similar organization if
the NASD is no longer reporting such information; (iii) if the stock is not
listed or admitted to trade on a national securities exchange and is not
reported on the National Market Reporting System, the mean between the bid and
asked price for the stock on such date, as furnished by the NASD or a similar
organization; or (iv) if the stock is not listed or admitted to trade on a
national securities exchange, is not reported on the National Market Reporting
System and if bid and asked prices for the Stock are not furnished by the NASD
or a similar organization, the value as established by the Committee at such
time for purposes of this Plan.
(o) "Grant Date" shall mean the date upon which the Committee took
the action granting an Option or such later date as the Committee designates as
the Grant Date at the time of the Option is granted or, in the case of Options
under Article V, the applicable dates set forth therein.
(p) "Incentive Stock Option" shall mean an Option which is designated
as an incentive stock option within the meaning of Section 422A of the Code, the
award of which contains such provisions as are necessary to comply with that
section.
(q) "Nonqualified Stock Option" shall mean an Option that is
designated as a Nonqualified Stock Option and shall include any Option intended
as an Incentive Stock Option that fails to meet the applicable legal
requirements thereof. Any Option granted hereunder that is not designated as an
Incentive Stock Option shall be deemed to be designated a Nonqualified Stock
Option under this Plan and not an incentive stock option under the Code.
(r) "Option" shall mean an option to purchase Common Stock under this
Plan. The Committee shall designate any Option granted to an Eligible Employee
as a Nonqualified Stock Option or an Incentive Stock Option.
(s) "Option Agreement" shall mean any writing setting forth the terms
of an Option that has been authorized by the Committee.
(t) "Option Period" shall mean the period beginning on the Grant Date
and ending on the expiration date of such Option.
(u) "Participant" shall mean an Eligible Employee who has been
granted an Option under this Plan.
10
<PAGE>
(v) "Personal Representative" shall mean the person or persons who,
upon the disability or incompetence of a Participant, shall have acquired on
behalf of the Participant, by legal proceeding or otherwise, the power to
exercise the rights or receive benefits under this Plan and who shall have
become the legal representative of the Participant.
(w) "Plan" shall mean this 1993 Stock Option Plan.
(x) "QDRO" shall mean a qualified domestic relations order as
defined in Section 4l4(p) of the Code or Title I, Section 206(d)(3) of ERISA
(to the same extent as if this Plan were subject thereto), or the applicable
rules thereunder.
(y) "Retirement" shall mean retirement with the consent of the
Company.
(z) "Rule 16b-3" shall mean Rule 16b-3 as promulgated by the
Commission pursuant to the Exchange Act.
(aa) "Securities Act" shall mean the Securities Act of 1933, as
amended from time to time.
(bb) "Subsidiary" shall mean any corporation or other entity a
majority of whose outstanding voting stock or voting power is beneficially owned
directly or indirectly by the Corporation.
(cc) "Total Disability" shall mean a permanent and total disability
within the meaning of Section 22(e)(3) of the Code and such other disabilities,
infirmities, afflictions or conditions as the Committee by rule may include.
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<PAGE>
AMENDMENT TO
1993 EMPLOYEE STOCK OPTION PLAN
THIS AMENDMENT shall modify that 1993 Employee Stock Option Plan (the
"1993 Plan") adopted by the Company on November 22, 1993. Section 1.4(a) of the
shall be modified as follows:
Section 1.4 (a). Number of Shares. The maximum number of shares of
Common Stock that may be issued pursuant to Options granted to Eligible
Employees under this Plan is One Million One Hundred Thousand
(1,100,000) shares, subject to adjustment contemplated by Section 3.2
herein.
Adopted this 20th day of November, 1996.
TELTRUST, INC.
/s/ Steven E. Swenson
------------------------------------
By Steven E. Swenson
Vice President & General Counsel
Assistant Secretary
<PAGE>
AMENDMENT TO
1993 EMPLOYEE STOCK OPTION PLAN
WHEREAS: Management of the Company believes that it is necessary to
increase the number of shares of Common Stock available under the 1993 Employee
Stock Option Plan from 1,100,000 to 1,400,000 in order to reward current
employees and attract and retain future senior level managers of the Company.
NOW, THEREFORE, BE IT RESOLVED: That, subject to shareholder approval, the
number of shares of Common Stock available for distribution to employees under
the 1993 Employee Stock Option Plan is hereby increased from 1,100,000 to
1,400,000.
Adopted the 15th day of December, 1997.
TELTRUST, INC.
/s/ Steven E. Swenson
-------------------------------------
By: Steven E. Swenson
Vice President & General Counsel
Assistant Secretary
<PAGE>
Exhibit 10.3
LEASE AGREEMENT
---------------
THIS LEASE, made and entered into by and between Icon Health & Fitness,
Inc., a Delaware Corporation, hereinafter referred to as "Landlord", and
Teltrust, Inc., hereinafter referred to as "Tenant".
WITNESSETH:
-----------
ARTICLE I
FUNDAMENTAL LEASE PROVISIONS
----------------------------
Commencement Date: March 24th, 1997
Landlord: Icon Health & Fitness, Inc.
Tenant: Teltrust, Inc.
Location of Premises: Section 2E and 2C and certain First Floor Areas
6350 South 3000 East
Salt Lake City, Utah
See Exhibit "A"
Initial Lease Term: 5 years See Article IV
Option to Renew Lease: (one) 5 year term See Article IV
Minimum Annual Rental: $565,546.44 (32,484 square feet
x $17.41/sq. foot)
See Article V
Tenant's Share of Basic
and Direct Expenses: 26.05% See Article VI
Tenant's Share of Common Insurance
Coverage: 26.05% See Article VI
<PAGE>
2
Address for Notices:
LANDLORD: TENANT:
- --------- -------
Icon Health & Fitness, Inc. Teltrust, Inc.
1500 South 1000 West ATTN: Corporate Counsel
Logan, Utah 84321 221 North Charles Lindbergh Drive
ATTN: Brad H. Bearnson Salt Lake City, Utah 84111
References in this Article I to other articles and paragraphs thereof are
for convenience and designate some of the other articles, sections and
paragraphs thereof where references to the particular lease provisions appear.
Each reference in this Lease to any of the lease provisions contained in this
Article I shall be construed to incorporate all of the terms provided under each
such lease provision and the balance of the Lease.
ARTICLE II
EXHIBITS
--------
2.01 Exhibits. The following drawings and special provisions are attached
--------
hereto as exhibits and are made a part of this Lease:
Exhibit "A" - Site Plan and Legal Description
Exhibit "B" - Floor Plans
Exhibit "C" - Tenant's Certificate of Acceptance and Estoppel Certificate
ARTICLE III
PREMISES
--------
3.01 Premises. In consideration of the rents, covenants and agreements
--------
contained herein, Landlord leases to Tenant, and Tenant leases from Landlord a
space in a Building located at 6350 South 3000 East, Salt Lake City, Utah,
together with 200 parking spaces in the adjacent parking lot. The space in the
Building which is the leased portion of the property is referred to herein as
the "Premises" and shall contain approximately 32,484 square feet, located on
floor level 2, Sections 2E and 2C and the 1st floor show room of the building as
cross hatched on EXHIBIT "B". The location, dimensions and approximate area
thereof are delineated in red on Exhibit "B", which is a Floor Plan of the
property. The foregoing notwithstanding, the Landlord expressly reserves any and
all easements across the Premises for access and utility lines which may be
necessary to the operation, maintenance or construction on the portions of the
property other than the Premises; provided such easement shall not unreasonably
disturb the Tenant's use of the Premises. The Landlord has also reserved certain
rights of access to the Premises as set forth in
<PAGE>
3
Section 11.05 which are not limited by the foregoing language. The term
"Building" shall refer to the entire building known as the HealthRider Building
located at 6322 South 3000 East, Salt Lake City, Utah 84121. The term "Real
Property" or "Property" or "Land" shall refer to the Building and real property
described on Exhibit "A", the entire site, together with any and all
appurtenances, rights, privileges and easements pertaining thereto including but
not limited to the elevators, stairways, corridors, entranceways, rest rooms,
walkways, roadways, driveways, loading docks, cafeteria, fitness area, parking
facilities and other similar or related facilities as may exist in and about the
Building and Land (collectively "Common Areas").
ARTICLE IV
TERM & OPTION
-------------
4.01 Commencement and Ending Date of Term. The initial term of this Lease
------------------------------------
shall be for five (5) years ("Term"). The commencement of the initial Term of
this Lease shall begin upon the first to occur of the following dates:
A. The date on which Tenant occupies the Premises and commences to install
Tenant's fixtures and improvements; or
B. The 24th of March, 1997.
The date which is applicable under the foregoing part of this Section 4.01
is hereinafter referred to as the "Commencement Date". The Term of this Lease
shall end at 6:00 p.m. on the last day of the 5th year following the Term
Commencement Date, subject to paragraph 4.02.
4.02 Option. Tenant shall have the option, exercised by no less than one
------
hundred eighty (180) days prior written notice delivered to Landlord prior to
the expiration of the Term of this Lease, to renew this Lease for one additional
five (5) year period ("Renewal Term"), under the same terms and conditions
excepting the length of term and subject to rent adjustment as negotiated and
mutually agreed upon by Landlord and Tenant, prior to the date of notice
provided above, i.e., one hundred eighty (180) days prior to the expiration of
the term.
4.03 Tenant's Certificate. Tenant shall at Landlord's request made not
--------------------
more frequently than once each year and at Landlord's lender's request, execute
and deliver to Landlord a written declaration that shall be known hereafter as
Exhibit "C", which shall: (1) ratify this Lease; (2) express the Commencement
Date and termination date hereof; (3) certify that this Lease is in full force
and effect and has not been assigned, modified, supplemented or amended (except
by such writings as shall be stated); (4) state that all conditions under this
Lease to be performed by Landlord have been satisfied; (5) state that there are
no defenses or offsets against the enforcement of this Lease by the Landlord, or
stating those claimed by Tenant; (6) state the amount of advance rental if any,
(or none if such is the case) paid by Tenant; (7) state the date to which rental
has been paid;
<PAGE>
4
(8) state the amount of security deposited with Landlord; and (9) state such
other information as Landlord may reasonably request. Landlord's mortgage
lenders and/or purchasers shall be entitled to rely upon such declaration, and
Tenant will provide updated executed Certificates of Acceptance and Estoppel
Certificates as reasonably requested by Landlord throughout the Term and Renewal
Term, if exercised, of the Lease.
4.04 Effect of Failure to Provide Certificate. Tenant's failure to
----------------------------------------
furnish any Estoppel Certificate within twenty (20) days after request therefor
shall be deemed a default hereunder and moreover, it shall be conclusively
presumed that: (a) this Lease is in full force and effect without modification
in accordance with the terms set forth in the request; (b) that there are no
breaches or defaults on the part of the Landlord; and (c) no more than one (1)
month's rent has been paid in advance. Tenant shall be entitled to a ten (10)
day cure period, after written notice by Landlord, prior to being considered in
default under Section 4.04.
4.05 Option For Additional Space. Provided this Lease is in full force
---------------------------
and effect with no delinquencies or defalcations of any kind hereon, by the
Tenant, Tenant shall have and is hereby granted the first right to lease any
space which becomes available in the Building. Landlord shall endeavor to have
all future leases have no less than a 6-month notice of intent to vacate. Upon
Landlord's receipt of notice of intent to vacate or other notice that a lease
will terminate, Landlord shall within 15 days give written notice of the same to
Tenant. In the event Tenant elects to lease the additional space, it shall be on
the same square footage price as provided herein on the Premises plus any
percentage adjustment for Additional Rent. Notice exercising such option or
options shall be given to Landlord in writing not later than fifteen (15) days
after receipt of Landlord's notice of the availability of additional space.
ARTICLE V
RENT
----
5.01 Monthly Rent. Tenant agrees to pay to Landlord at such place as
------------
Landlord may designate, without prior demand therefor and without any deduction
or setoff whatsoever, and as fixed minimum monthly rent, the sum of Forty-seven
Thousand One Hundred Twenty-eight and 87/100 Dollars ($47,128.87) in advance on
the 1st day of each calendar month during the Term and Renewal Term of the
Lease. The Landlord hereby waives rent for a period of forty-five (45) calendar
days after the Term Commencement Date. In the event the Commencement Date occurs
on a day other than the first day of the month, then rent shall be paid on the
Commencement Date for the initial fractional month prorated on a per diem basis
and the lease Term shall begin on the 1st day of the month following. Possession
will not be granted until the first fractional month or full month rent,
whichever the case may be, has been paid to and received by Landlord. Rent
during the Term shall be adjusted as follows:
<PAGE>
5
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
MONTHLY COMPUTATION OF
YEAR DATE BASE RENT MONTHLY BASE RENT
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 Months 1-12 $47,128.87 $14.75 sq. ft. 118% for Common Area
=$17.41 Total
2 Months 13-24 $47,128.87 $14.75 sq. ft x 118% for Common Area
=$17.41 Total
3 Months 25-36 $47,128.87 $14.75 sq. ft 118% for Common Area
=$17.41 Total
4 Months 37-48 $48,999.95 $14.75 sq. ft 1.04%= $15.34 x 118%
for Common Area = $18.10 Total
5 Months 49-60 $50,469.95 $15.34 sq. ft x 1.03% = $15.80 x 118%
for Common Area = $18.644 Total
</TABLE>
If the option for the Renewal Term is exercised, rent each year for the
renewal term will be as negotiated between the parties in paragraph 4.02.
5.02 Rent Adjustments. The monthly rent described in Section 5.01 shall be
----------------
increased for each year (during the Term hereof, including the Renewal Term),
effective the 1st day of the month following the completion of the third year
hereunder, as provided in Section 5.01.
5.03 Build Out Allowance. Landlord hereby grants Tenant a $2.00 per
-------------------
square foot "build out" allowance, useable by Tenant at any time during the
Lease Term and provided Landlord's prior written approval is obtained as
provided in Article XI, which approval cannot be unreasonably withheld. Any
unused portion of this allowance may at Tenant's discretion, be credited to the
Tenant in the form of rental abatement.
5.04 Security Deposit.
----------------
A. Amount. The Tenant will either (i) deposit the sum of $188,515.48
------
(four months' rent) with Zions First National Bank in an interest bearing
account in the name of Olson & Hoggan Trust Account or (ii) cause to be issued
an irrevocable, demand letter of credit in such amount and in form and substance
acceptable to Landlord for the benefit, use and payment to, if required, the
Landlord as a security deposit for the Subject Property which will be held by
Olson & Hoggan at Zions First National Bank according to this Section 5.04. The
security deposit provided for in the preceding sentence will be increased, in
the event Tenant leases additional space within the Building, to equal the sum
of four (4) month's rents for all space leased by Tenant within the Building.
B. Non-Payment. The above deposit shall be held as above provided as
-----------
security for the faithful performance by the Tenant, of all of the terms,
conditions and covenants of this Agreement, which are to be kept and performed
by the Tenant during the Term and Renewal Term hereof. If at
<PAGE>
6
any time during the term of this Agreement, any of the lease payments herein
reserved shall be overdue and unpaid, or any other sum payable by Tenant to
Landlord hereunder shall be overdue and unpaid, then Landlord may, at its
option (but Landlord shall not be required to), appropriate and apply any
portion of said deposit, or in the case of a letter of credit draw upon that
letter of credit. to the payment of any such overdue lease payments or other
sums.
C. Other Default. In the event of the failure by Tenant to keep and
-------------
perform any of the terms, covenants and conditions of this Agreement to be kept
and performed by Tenant, then Landlord, at its option, may appropriate and apply
the entire deposit, or so much thereof as may be necessary, to compensate
Landlord for loss or damage sustained or suffered by Landlord, due to such
breach on the part of Tenant. Should the entire deposit, or any portion thereof,
be appropriated and applied by Landlord for the payment of overdue lease
payments or other sums due and payable to Landlord, by Tenant hereunder, then
Tenant shall, upon the written demand of Landlord, forthwith remit to Landlord a
sufficient amount, in cash, to restore said security to the original sum
deposited, and Tenant's failure to do so within ten (10) days after receipt of
such demand shall constitute a breach of this Agreement. Should Tenant properly
comply with all of said terms, covenants and conditions, and properly comply
with all of the lease payments herein provided for, as they fall due, and all
other sums payable by Tenant to Landlord hereunder, the said deposit or the
remaining portion thereof shall be returned in full to Tenant at the end of this
Agreement, or upon the earlier termination of this Agreement.
D. Disposition Upon Sale. Landlord may deliver the funds deposited
---------------------
hereunder by Tenant to the purchaser of Landlord's interest in the Subject
Property, in the event that such interest be sold, and thereupon Landlord shall
be discharged from any further liability with respect to such deposit.
E. Reduction of Security Deposit. In the event Tenant completes two (2)
-----------------------------
consecutive quarters in which Tenant verifies to Landlord, through the delivery
of Tenant's quarterly financial statements, prepared in accordance with
generally accepted accounting principles, along with Tenant's certification
thereof, that Tenant has earnings reflecting an annualized income of not less
than $600,000 (before taxes), the security deposit reflected in subparagraph
5.04.A., above, shall be reduced to an amount equal to one (1) month's rent.
Thereafter and in the event Tenant's annualized income, based upon two (2)
consecutive fiscal quarters' performance, appears that Tenant's annualized
income (before taxes) is less than $600,000, the security deposit provided for
under this Section 5.04 shall be again increased to the amount specified in
subsection 5.04.A., above. Tenant shall deliver to Landlord quarterly financial
statements, accompanied by Tenant's certification thereof to the effect that
said financial statements are true, correct and complete, for each of Tenant's
fiscal quarters during the term hereof, beginning with the reduction of the
security deposit as provided in the first sentence of this subsection 5.04.E.
<PAGE>
7
ARTICLE VI
ADDITIONAL RENT
---------------
6.01 Additional Rent. Subject to paragraph 6.04, the rent specified
---------------
shall be absolutely net to Landlord throughout the Term and Renewal Term of this
Lease, and all costs, expenses and obligations of every kind relating to the
Premises, the Building, and Property, on a pro rata or percentage basis and as
more particularly defined hereafter, including all common areas and parking
which may arise or become due during the Term and Renewal Term shall be paid by
Tenant, and that Landlord shall be indemnified by Tenant against such costs,
expenses and obligations. Tenant shall pay as additional rent, without demand
therefore and without setoff or deduction, the expenses and charges set out in
Sections 6.02 through 6.04 below. When used in this Lease, the term
"Proportionate Share" of Tenant shall mean and shall be 26.05%, (which is also
the percentage the Tenant agrees to pay on all common area and insurance charges
and expenses and taxes as well) of the total expense or charge in question.
6.02 Definitions. For purposes of this Article VI and the Lease in
-----------
general, the following words and phrases shall have the meanings set forth
below:
A. "Basic Costs" shall mean all actual costs and expenses incurred by
Landlord in connection with the ownership, operation, management and maintenance
of the Building and Property and related improvements located thereon (the
"Improvements"), including, but not limited to, all expenses incurred by
Landlord as a result of Landlord's compliance with any and all of its
obligations under this Lease. In explanation of the foregoing, and not in
limitation thereof, Basic Costs shall include: all utilities (calculated based
upon Tenant's twenty-four (24) hours per day/seven (7) days per week occupancy,
as agreed by Landlord and Tenant, or if no agreement, as determined by an
independent expert selected by Landlord), heating, air conditioning,
ventilation, water, gas, sewer, electricity, real and personal property taxes
and assessments (whether general or special, known or unknown, foreseen or
unforeseen) and any tax or assessment levied or charged in lieu thereof, whether
assessed against Landlord and/or Tenant and whether collected from Landlord
and/or Tenant; snow removal, trash removal, cost of equipment or devices used to
conserve or monitor energy consumption, supplies, insurance, license, repair and
replacement of the building's on-site back up generator, regular maintenance of
HVAC equipment and systems, permit and inspection fees, cost of services of
independent contractors, costs of compensation (including employment taxes and
fringe benefits) of all persons who perform regular and recurring duties
connected with day-to-day operation, maintenance, repair, and replacement of the
Building, its equipment and the adjacent walk, and landscaped area (including,
but not limited to janitorial. gardening, security, parking, elevator, painting,
plumbing, electrical, mechanical, carpentry, window washing, structural and roof
repairs and reserves, signing and advertising), and rental expense or a
reasonable allowance for depreciation of personal property used in the
maintenance, operation and repair of the Building and Common areas. Basic Costs
shall not include those costs identified in Article 6.04, nor "Direct Costs" as
defined in Article 6.02(B).
<PAGE>
8
B. "Direct Costs" shall mean all actual costs and expense incurred by
Landlord in connection with the operation, management, maintenance, replacement,
and repair of tenants' Premises, including but not limited to janitorial
services, maintenance, repairs, supplies, capital improvements (except as
provided in paragraphs 6.03B(j) and 6.03B(k)).
C. "Estimated Costs" shall mean the estimated amount of Tenant's Direct
Costs and Basic Costs, excluding the costs of electricity provided to Tenant's
Premises, if separately metered.
6.03 Report of Basic Costs and Statement of Estimated Cost.
-----------------------------------------------------
A. After the expiration of each calendar year occurring during the term
of this Lease, Landlord shall furnish Tenant a written statement of Tenant's
Share of Basic Costs and Tenant's Direct Costs occurring during the previous
calendar year. The written statement shall specify the amount by which Tenant's
Direct Costs and Basic Costs exceed or are less than the amounts paid by Tenant
during the previous calendar year pursuant to Section 6.04(A) below.
B. At the same time specified in paragraph 6.03(A) above, Landlord shall
furnish Tenant a written statement of the Costs. Direct Costs and Basic Costs
chargeable to Tenant shall exclude the following costs and expenses:
(a) Leasing commissions, lease takeover obligations, and other
inducements, costs, disbursements and expenses incurred in connection with
leasing or subleasing space in the Building;
(b) Payments of principal, interest and other costs relating to mortgages
or deeds of trust or any other debt for borrowed money;
(c) Advertising and marketing costs and expenses.
(d) Rent and other payments pursuant to any ground or underlying leases;
(e) Depreciation, except as expressly provided herein, and amortization;
(f) Legal fees, costs and disbursements based upon, or resulting from
Landlord's negligence or other tortious conduct, or relating to the defense of
Landlord's title to or interest in the Property or Building;
(g) Costs incurred to test, survey, cleanup, contain, abate, remove or
otherwise remedy Hazardous Substances (as hereinafter defined) or asbestos
containing materials, provided Tenant has not permitted or caused the same to be
placed on or released in the Property;
(h) Costs incurred by Landlord to the extent that Landlord is reimbursed
by governmental agencies or entities;
<PAGE>
9
(i) Landlord's general corporate overhead and administrative expenses,
wages, salaries and fees of officers, including accounting fees;
(j) Capital improvements solely for the benefit of other Tenants;
(k) The cost of capital improvements for the period (useful life)
exceeding the Term and Renewal Term; and
(1) Services related to the management of the Property (Tenant's portion
is not to exceed the product of .03 multiplied by the .2605 multiplied by annual
gross rents).
6.04 Payment of Additional Rent. Tenant shall pay as additional rent
--------------------------
("Additional Rent") Tenant's Direct Costs and Tenant's Basic Costs. The
Additional Rent shall be paid as follows:
A. With each monthly payment of Basic Annual Rent due pursuant to
Section 3.1 above, Tenant shall pay to Landlord, without offset or deduction,
one-twelth (1/12th) of the Estimated Costs as defined in Section 6.02 C.
B. Within thirty (30) days after delivery of the written statement
referred to in Section 6.03 A above, Tenant shall pay to Landlord the amount by
which Tenant's Direct Costs and Basic Costs, as specified in such written
statements, exceed the aggregate of Estimated Costs actually paid by Tenant for
the year at issue. Tenant shall have the right to audit Landlord's books upon
sixty (60) days notice. Tenant shall pay costs associated with the audit unless
Tenant finds that Landlord has inflated expenses by more than three percent
(3%), in which case, Landlord will pay audit charges. Payments by Tenant shall
be made pursuant to this Section 6.04B notwithstanding that a statement pursuant
to Section 6.03 A is furnished to Tenant after the expiration of the Term or
Renewal Term of this Lease. Any overpayment by Tenant shall be promptly refunded
to Tenant.
C. If the annual statement of costs indicates that the Estimated Costs
paid by Tenant pursuant to subparagraph (B) above for any year exceed Tenant's
actual Direct Costs and Basic Costs for the same year, Landlord, at its
election, shall either (i) promptly pay the amount of such excess to Tenant, or
(ii) apply such excess against the next installment of Basic Annual Rental or
Additional Rent due hereunder. Notice of such intent shall be delivered to
Tenant not less than 15 days prior to the next installment of basic annual or
Additional Rent.
6.05 Resolution of Disagreement. Every statement given by Landlord
--------------------------
pursuant to Section 6.03 shall be conclusive and binding upon Tenant unless
within forty-five (45) days after the receipt of such statement Tenant shall
notify Landlord that it disputes the correctness thereof, specifying the
particular respects in which the statement is claimed to be incorrect. If such
dispute shall not have been settled by agreement, the parties hereto shall
submit the dispute to mediation within one hundred twenty (120) days after
Tenant's receipt of statement. Pending the determination of such dispute by
agreement or mediation as aforesaid, Tenant shall, within one hundred twenty
<PAGE>
10
(120) days after receipt statement, and such payment shall be without prejudice
to Tenant's position. Mediation shall be conducted in Salt Lake City in
accordance with the Commercial Mediation Rules of the American Arbitration
Association. If the dispute shall be determined in Tenant's favor, Landlord
shall forthwith pay Tenant the amount of Tenant's overpayment of rents resulting
from compliance with Landlord's statement, including interest on disputed
amounts at eighteen percent (18%) per annum. Landlord agrees to grant Tenant
reasonable access to Landlord's books and records for the purpose of verifying
operating expenses, and costs incurred by Landlord.
6.06 Limitations. Nothing contained in this Part VI shall be construed at
-----------
any time so as to reduce the monthly installments of Basic Annual Rent payable
hereunder below the amount set forth in Section 5.01 of this Lease.
ARTICLE VII
7.01 Past Due Sums: Penalty. If Tenant fails to pay, when the same is due
----------------------
and payable, or within ten (10) days thereafter, any Basic Rent, Additional
Rent, or other sum required to be paid by it hereunder, such unpaid amounts
shall bear interest from the due date thereof to the date of payment at eighteen
percent (18%) per annum. In addition thereto, Tenant shall pay a sum of five
percent (5%) of such unpaid amounts as a service fee. Notwithstanding the
foregoing, however, Landlord's right concerning such interest and service fee
shall be limited by the maximum amount which may properly be charged by Landlord
for such purposes under applicable law.
ARTICLE VIII
USE
---
8.01 Use of Premises. The Premises shall be used and occupied by Tenant
---------------
for general office, telecommunication or call center purposes only and for no
other purpose whatsoever without the prior written consent of Landlord, which
consent cannot be unreasonably withheld.
8.02 Quiet Enjoyment. Landlord covenants and agrees that Tenant, so long
---------------
as it shall not be in default hereunder beyond any applicable grace period,
shall and may, at all times during the term, peaceably and quietly have, hold,
occupy and enjoy the Premises pursuant to the terms of this Lease.
8.03 Prohibition of Certain Activities or Uses. The Tenant shall not do or
-----------------------------------------
permit anything to be done in or about, or bring or keep anything in the
Premises which is prohibited by this Lease or will, in any way or to any extent:
<PAGE>
11
A. Adversely affect any fire, liability or other insurance policy
carried with respect to the Building, the Improvements or any of the contents of
the Building (except with Landlord's express written permission, which will not
be unreasonably withheld, but which may be contingent upon Tenant's agreement to
bear any additional costs, expenses or liability for risk that may be involved).
B. Conflict with or violate any law, statute, ordinance, rule,
regulation or requirement of any governmental unit, agency or authority (whether
existing or enacted as promulgated in the future, known or unknown, foreseen or
unforeseen).
C. Adversely overload the floors or otherwise damage the structural
soundness of the Premises or Building, or any part thereof (except with
Landlord's express written permission, which will not be unreasonably withheld,
but which may be contingent upon Tenant's agreement to bear any additional
costs, expense or liability for risk that may be involved).
8.04 Affirmative Obligations with Respect to Use.
-------------------------------------------
A. Tenant will keep the Premises and every part thereof in a clean,
neat, and orderly condition, free of objectionable noise, odors, or nuisances,
will in all respects and at all times fully comply with all health and policy
regulations, and will not suffer, permit, or commit any waste.
B. As to the Premises only, at all times during the Term or Renewal Term
hereof, Tenant shall, at Tenant's sole cost and expense, provided the premises
are currently in compliance with all ADA rules and regulations, comply with all
statutes, ordinances, laws, orders, rules, regulations and requirements of all
applicable federal, state, county, municipal and other agencies or authorities,
now in effect or which may hereafter become effective, which shall impose any
duty upon Landlord or Tenant with respect to the use, occupation or alterations
of the Premises (including, without limitation, all applicable requirements of
the Americans with Disabilities Act of 1990 and all other applicable laws
relating to people with disabilities, and all rules and regulations which may be
promulgated thereunder from time to time and whether relating to barrier
removal, providing auxiliary aids and services or otherwise) and upon request of
Landlord shall deliver evidence thereof to Landlord.
8.05 Suitability. Tenant acknowledges that except as expressly set forth
-----------
in this Lease, neither Landlord nor any other person has made any representation
or warranty with respect to the Premises or any other portion of the Building,
and that no representation has been made or relied on with respect to the
suitability of the Premises or any other portion of the Building or Improvements
for the conduct of Tenant's business. The Premises, Building and Improvements
(and each and every part thereof) shall be deemed to be in satisfactory
condition by Tenant's taking possession thereof.
8.06 Taxes. Tenant shall pay all taxes, assessments, charges, and fees
-----
which during the Term and Renewal Term, if any, hereof may be imposed, assessed
or levied by any governmental
<PAGE>
12
or public authority against or upon Tenant's use of the Premises or any personal
property or fixtures kept or installed therein by Tenant.
ARTICLE IX
UTILITIES AND SERVICES
----------------------
9.01 Tenant's Obligations. Tenant shall arrange for and shall pay the
--------------------
entire cost and expense, for installation and operation, of all telephone
stations, equipment and use charges, light bulbs in the Premises and all other
materials and services not expressly required to be provided and paid for by
Landlord hereunder.
9.02 Additional Limitations. If and where heat generating machines or
----------------------
devices are used (other than equipment/devices used in areas as and where
originally intended and designed) in the Premises which affect the temperature
otherwise maintained by the air conditioning system, Landlord reserves the right
with Tenant's concurrence to install additional or supplementary air
conditioning units for the Premises, and the entire costs of installing,
operating, maintaining and repairing the same shall be paid by Tenant to
Landlord promptly after demand by Landlord.
9.03 Limitation on Landlord's Liability. Landlord shall not be liable for
----------------------------------
and Tenant shall not be entitled to terminate this Lease or to effectuate any
abatement or reduction of rent by reason of (i) Landlord's failure to provide or
furnish or (ii) the interruption of any utilities or services if such failure
was not the direct result of Landlord's negligent acts or omissions. In no event
shall Landlord be liable for loss or injury to persons or property, however,
arising or occurring in connection with or attributable to any failure to
furnish such utilities or services even if within the control of Landlord,
provided such loss or injury to persons or property is not due to the fault or
negligence of Landlord.
9.04 "As Is" Regarding Certain Utilities. Landlord has advised Tenant that
----------------------------------
certain telephone switching equipment, computer equipment and systems and
utilities require joint use and access and cannot in some cases be separately
metered. Landlord reserves those easements reasonably necessary to provide the
services and facilities as provided in this Lease and in leases to other
Tenants. Such areas containing telephone switching equipment, computer equipment
and systems and utilities (with the exception of telephone switch equipment,
computer equipment and systems and utilities installed and maintained by Tenant
at its own expense) are considered common areas for purposes of computing
proportionate expenses, and may be reasonably adjusted based upon estimated use
by each Tenant.
9.05 Services. Landlord shall provide the following services: (i) hot and
--------
cold water and lavatory supplies; (ii) automatically operated elevator service;
(iii) janitorial services Monday through Friday of each week, except on
Holidays; and (iv) heat and air-conditioning in season, 24 hours per day, 365
days per year, subject to reasonable maintenance and repair as needed. All of
the
<PAGE>
13
foregoing are to be provided so as to provide a reasonably habitable and
suitable working environment for Tenant. Tenant shall have the option of
securing its own janitorial services, at its sole expense, so long as such
services are performed in accordance with the same care and diligence otherwise
required by Landlord.
ARTICLE X
SIGNS
-----
10.01 Signs. Any exterior signage and interior signage to be visible from
-----
tile exterior installed by Tenant shall first be approved by Landlord, which
approval shall not be unreasonably withheld. Tenant shall submit to the Landlord
drawings of all proposed signs indicating the size, type (electric, neon,
painted, etc.), coloring and location, and shall not install any sign unless and
until the sign is approved by the Landlord and, where necessary, by any
governmental entity having jurisdiction. Approval of the design, function or
location of any sign which is required to be obtained from a governmental agency
shall be obtained at the sole cost and expense of Tenant. Any and all signs
shall be installed by Tenant in a manner which is in keeping with tile
architectural, aesthetic design and layout of the Building. Tenant may install
monument signage at tile front of the Property in compliance with this
paragraphs and with Landlord's approval. All installation work and cost of signs
shall be paid for by the Tenant. For all purposes under this Agreement, the
terms "sign" or "signs" include any lettering, symbol, logo, trademark, poster,
decoration, advertising matter, awning, marquee, canopy, or similar item used to
attract attention placed upon tile outside of the building in which the Premises
are located, on the glass of windows, tile outside of doors, awnings, canopies,
or any similar item which may otherwise be visible from tile outside of tile
Building in which the Premises are located.
ARTICLE XI
MAINTENANCE AND REPAIRS: ALTERATIONS: ACCESS.
--------------------------------------------
11.01 Maintenance and Repairs by Landlord. Landlord shall maintain in good
-----------------------------------
order, condition and repair the structural components of the Premises, including
without limitation roof, exterior walls and foundations, as well as all repairs
covered under construction warranties provided, if any. Except for the generator
and IWAC such maintenance and repairs shall be chargeable to Tenant's
proportionate share as Basic Costs and Additional Rent. If Landlord is required
to make structural repairs by reason of Tenant's negligent act or omissions,
Tenant shall pay Landlord's costs for making such repairs.
11.02 Maintenance and Repairs by Tenant. Tenant, at Tenant's sole cost and
---------------------------------
expense and without prior demand being made, shall maintain the Premises in good
order, condition and repair. Tenant shall maintain all equipment and fixtures
installed by Tenant. If repainting or
<PAGE>
14
recarpeting is required and authorized by Landlord, the cost for such are the
sole obligation of Tenant and shall be paid for by Tenant following the
performance of said work and a presentation of an invoice for payment which
invoices shall be paid by Tenant as and when due.
11.03 Alterations. Tenant shall not make or cause to be made any
-----------
alterations, additions or improvements or install or cause to be installed any
fixtures, signs, floor coverings, interior or exterior lighting, plumbing
fixtures, or shades or awnings, or make any other changes to the Premises
without first obtaining Landlord's written approval, which approval shall not be
unreasonably withheld. Tenant shall present to the Landlord plans and
specifications for such work at the time approval is sought. In the event
Landlord consents to the making of any alterations, additions, or improvements
to the Premises by Tenant, the same shall be made by Tenant at Tenant's sole
cost and expense. All such work with respect to any alterations, additions, and
changes shall be done in a good and workmanlike manner and diligently prosecuted
to completion. Any such alternations, additions, or changes shall be performed
and done strictly in accordance with all laws and ordinances relating thereto.
In performing the work or any such alterations, additions, or changes, Tenant
shall have the same performed in such a manner as not to obstruct access to any
portion of the Building. Any alterations, additions, or improvements to or of
the Premises, including, but not limited to, wallcovering, paneling, and built-
in cabinet work, but excepting movable furniture and equipment, shall at once
become a part of the realty and shall be surrendered with the Premises unless
Landlord otherwise elects at the end of the term hereof. No change or alteration
shall weaken, either temporarily or permanently, the structure of the Building
nor when completed, shall be of such character as to (1) affect adversely the
value of the Premises or Land; (2) reduce the cubic content of the Building; or
(3) diminish the general utility of the Premises.
11.04 Changes to Property. Landlord hereby reserves the right at any time
-------------------
to make changes, alterations or additions, including the building and leasing of
additional space, in or on the Building or anywhere on the Land shown on Exhibit
"A" except in the actual space constituting the Premises. Tenant shall not, in
such event, claim or be allowed any damages or right to terminate this Lease for
injury or inconvenience occasioned thereby, provided Tenant's use of the
Premises and Common Areas is not interfered with in an unreasonable manner.
11.05 Landlord's Access to Premises. Landlord shall have the right to
-----------------------------
place, maintain, and repair all utility equipment of any kind in, upon, and
under the Premises as may be necessary for the servicing of the Premises and
other portions of the Building. 'Landlord shall upon providing reasonable and
adequate notice to Tenant, also have the right to enter the Premises at all
times to inspect or to exhibit the same to prospective purchasers, mortgagees,
tenants, and lessees, and to make necessary repairs, additions, alterations or
improvements. During the six (6) months prior to expiration of this Lease or of
any Renewal Term, Landlord may place upon the Premises "For Lease" or "For Sale"
signs which Tenant shall permit to remain thereon.
11.06 No Maintenance by Landlord. Landlord shall have no maintenance
--------------------------
obligation and shall incur no costs, whatsoever, with respect to the Premises
and areas designated for maintenance by Tenant.
<PAGE>
15
11.07 Landlord's Right to Cure. If Tenant refuses or neglects to repair or
------------------------
maintain property as required hereunder to the reasonable satisfaction of
Landlord as soon as reasonably possible after written demand, Landlord may make
such repairs without liability on its part to Tenant for any loss or damage that
may accrue to Tenant's business by reason thereof, and upon completion thereof,
Tenant shall pay Landlord's costs for making such repairs plus fifteen percent
(15%) for overhead, immediately upon presentation of a bill therefor. Failure of
Tenant to pay such amount immediately shall constitute a default by Tenant
hereunder.
ARTICLE XII
MECHANIC'S LIEN
---------------
12.01 Mechanic's Lien. Tenant shall not allow any mechanic's or other lien
---------------
to be filed against the Premises. Should any mechanic's or other lien be filed
against the Premises or any part thereof by reason of Tenant's acts or omissions
or because of a claim against Tenant, Tenant shall cause the same to be canceled
and discharged of record by bond or otherwise within thirty (30) days after
notice by Landlord.
ARTICLE XIII
ASSIGNMENT AND SUBLETTING
-------------------------
13.01 No Assignment or Subletting by Tenant. Tenant may not assign or in
-------------------------------------
any manner transfer this Lease or any interest, nor sublet nor re-let the
Premises or any part or parts, nor permit occupancy by anyone with, through or
under it, without the prior written consent of Landlord, which consent shall not
be unreasonably withheld. Consent by Landlord to one or more assignments or to
one or more subletting or re-lettings shall not operate as a waiver of
Landlord's right to refuse its consent to any subsequent assignment or
subletting or re-letting, nor release Tenant from any of its obligations nor be
construed as a waiver of any of the Landlord's rights or remedies hereunder. Any
assignment or subletting which in the Landlord's reasonable discretion shall
limit or reduce the price of space or hinder in any way the ability to lease
other space in the Building shall be adequate cause to refuse consent to the
assignment or subletting. Such prohibition against assigning or subletting shall
include any assignment or subletting by operation of law, any corporate
restructuring or reorganization. Any transfer of this Lease from the Tenant by
merger, consolidation, transfer of assets, or liquidation of this Lease from the
Tenant by merger, consolidation, transfer of assets, or liquidation shall
constitute an assignment for purposes of this Lease. In the event that Tenant
hereunder is a corporation, the transfer, assignment, or hypothecation of any
stock or interest in such corporation, in the aggregate in excess of forty-nine
percent (49%) shall be deemed an assignment within the meaning of this Section.
It is contemplated that Landlord will consent to an assignment by Tenant to
wholly owned or controlled subsidiaries or affiliates. Any assignment will also
be subject to approval of Landlord's lenders, if and when required. It is
contemplated that transfers of
<PAGE>
16
ownership of stock in Tenant that do not affect Tenant's credit or otherwise
negatively impact Tenant's ability to comply with Lease, will be approved by
Landlord. The above prohibition of assignment will not apply in the case of a
registered offering of shares by Tenant or the public trading of registered
shares subsequent to an initial offering.
13.02 Consent Required. Any assignment or subletting without Landlord's
----------------
consent shall be void, and shall constitute a default hereunder which, at the
option of Landlord, shall result in the termination of this Lease or exercise of
Landlord's other remedies hereunder. Landlord's consent cannot be unreasonably
withheld.
13.03 Landlord's Right in Event of Assignment. If this Lease is assigned
---------------------------------------
or if the Premises or any portion thereof are sublet or occupied by any person
other than the Tenant, Landlord may collect rent and other charges from such
assignee or other party, and apply the amount collected to the rent and other
charges reserved hereunder, but such collection shall not constitute consent or
waiver of the necessity of consent to such assignment, subleasing, or other
transfer, nor shall such collection constitute the recognition of such assignee,
sublessee, or other party as the Tenant hereunder or a release of Tenant from
the further performance of all of the covenants and obligations, including
obligation to pay rent, of Tenant herein contained. In the event that Landlord
shall consent to a sublease or assignment hereunder, Tenant shall pay to
Landlord reasonable fees, not to exceed $1,000.00, incurred in connection with
processing of documents necessary to the giving of such consent.
13.04 Assignment by Landlord. Landlord may assign or pledge its interest
----------------------
in this Lease without limitation, provided any such assignment or pledge shall
not release Landlord from any of its duties, responsibilities or obligations
herein.
ARTICLE XIV
COMMON AREAS
------------
14.01 Common Areas. Landlord reserves the right to change the entrances,
------------
exits, traffic lanes, and the boundaries and locations of such parking area or
areas within the Property so long as such changes do not unreasonably interfere
with Tenant's use of the Premises.
A. The Landlord shall keep automobile parking and Common Areas for which it
is responsible in a neat, clean and orderly condition, properly lighted and
landscaped, and shall repair any damage to the facilities, but all expenses in
connection with said automobile parking and common areas for which it is
responsible shall be charged and pro-rated in the manner set forth. The "Common
Area operating cost" means the total cost and expense incurred in operating and
maintaining the Common Areas for which it is responsible (whether or not such
cost or expense is considered a capital charge), specifically including, without
limitation, the costs and expenses for: supplies, utilities for lighting and
cleaning the Common Areas, and enclosed Common Areas of the
<PAGE>
17
Building, providing a fire protection water loop and watering vegetation;
personal property taxes and assessments on the Common Area and equipment; real
property taxes and assessments on the Land and Improvements comprising the
Common Areas (to the extent not included in Article VI); premiums for fire and
extended coverage, vandalism and malicious mischief, boiler and plate-glass
insurance on Common Area improvements and for Landlord's public liability
insurance covering Landlord's activities on the Common Areas; maintenance,
repair and replacement of Common Area pavement, asphalt, sidewalks, walls,
fences, curbs and bumpers, Building and directional signs, fire protection
systems and alarms and electrical, mechanical and communication equipment;
repair, maintenance, and cleaning of Common Areas of Building structural
components or related facilities, including without limitation, drainage
systems, building exteriors, permanent art objects, light poles, fountains, and
benches; periodic painting, cleaning and repair of skylights and roofing; rental
payments for any supplemental parking areas; gardening and the maintenance and
replacement of landscaping and irrigation systems; striping and line painting,
sweeping, sanitary and flood control; removal of snow, ice, trash, rubbish,
garbage, and other refuse; cleaning, repair and replacement of lighting fixtures
including bulbs and ballasts, depreciation on, or rentals for, machinery and
equipment used in such maintenance; the cost of security guards, if such are
provided; the cost of personnel (including salaries, uniforms, workmen's
compensation insurance, group insurance, fidelity bonds and other fringe
benefits) to implement such services, to direct parking, and to police the
Common Areas and Building; repair of all utility lines; fees for required
licenses and permits relating to the operation of parking areas. Landlord may
cause any or all of the Common Area maintenance to be provided by a janitorial
or landscaping service or other independent contractor(s). Landlord shall incur
no expense in connection with areas for which Tenant is responsible for
operation and maintenance and this paragraph refers to all other common areas,
but in the event Landlord should incur any expense in connection with any area
for which Tenant is responsible to operate and maintain, such expense shall be
solely charged to Tenant. Expenses incurred for the benefit of all common areas
shall be charged and paid as provided in paragraph 6.02 C. Repairs, maintenance
and replacement of heating, ventilating and cooling (HVAC) are not Direct Costs
to be apportioned as Additional Rent payable by Tenant.
B. Tenant's proportionate share of all common area expenses shall be
26.05%.
C. Tenant, for the use and benefit of Tenant, its agents, employees,
customers, licensees and subtenants, shall have the non-exclusive right in
common with Landlord, and other present and future owners, tenants and their
agents, employees, customers, licensees and subtenants, to use said common and
parking areas at no additional charge during the entire Term and Renewal Term of
this Lease, or any extension, for ingress and egress, roadway, sidewalk and
automobile parking.
D. The Tenant, in the use of said common and parking areas, agrees to
comply with such reasonable rules and regulations as the Landlord may adopt from
time to time for the orderly and proper operation of said common and parking
areas. Such rules will be administered equitably among all tenants within the
Premises and may include but not be limited to the following:
<PAGE>
18
(1) The restricting of employee parking to a reasonably limited,
designated area or areas, provided not less than 200 spaces are available
to Tenant; or
(2) The regulation of the removal, storage and disposal of Tenant's
refuse and other rubbish at the sole cost and expense of Tenant.
ARTICLE XV
INDEMNITY
---------
15.01 Except if and to the extent that such party is released from
liability to the other party hereto pursuant to the provisions of subparagraph
(C) below:
A. Landlord does hereby assume liability for, and does hereby agree to
indemnify, protect, defend, save and hold harmless Tenant, its officers,
directors, agents and employees, from and against any and all liabilities,
obligations, claims, actions, demands, fines, suits, judgments, penalties,
damages and losses (including all of the costs, fees and expenses connected
therewith or incident thereto) for death of or injury to any person whomsoever
(including loss of use thereof) arising out of the breach of any of the terms,
conditions or provisions of this Lease by, and /or the negligent or willful act
or omission of Landlord, its officers, partners, employees, agents or
contractors; and
B. Tenant does hereby assume liability for, and does hereby agree to
indemnify, protect, defend, save and hold harmless Landlord, its officers,
directors, agents and employees, from and against any and all liabilities,
obligations, claims, actions, demands, fines, suits, judgments, penalties,
damages and losses (including all of the costs, fees and expenses connected
therewith or incident thereto) for death of or injury to any person whomsoever
and for loss of, damage to, or destruction of any property whatsoever (including
loss of use thereof) arising out of the breach of any of the terms, conditions
or provisions of this Lease by, and/or the negligent or willful act or omission
of Tenant, its officers, employees, agents or contractors as they relate to
Tenant's use and/or occupancy of the Premises.
C. Neither Landlord nor Tenant shall be liable to the other or to any
insurance company insuring the other party (by way of subrogation or otherwise)
for any loss or damage to any structure, building, or other tangible property,
or any resulting loss of income, even though such damage or loss might have been
occasioned by the negligence of Landlord or Tenant or any of their agents or
employees, if any such loss or damage is covered by insurance benefiting the
party suffering such loss or damage or was required of such party to be covered
by insurance pursuant to this Lease.
<PAGE>
19
ARTICLE XVI
INSURANCE
---------
16.01 Common Area Fire. Casualty and General Liability Insurance. Landlord
----------------------------------------------------------
shall procure and Tenant shall pay its Proportionate Share of the cost of
insurance insuring the Landlord against loss or damage to the Building and
Property by reason of fire and other casualties with a qualified insurance
company or companies qualified in an amount and of such coverage as are
satisfactory to and approved by Landlord but in no event shall the amount of
such insurance be less than the cost of totally replacing the Building and other
Improvements (exclusive of the cost of excavations, footings below floor level
and foundations) against: (a) a loss or damage by fire; (b) all peril
customarily covered under extended coverage endorsements; (c) vandalism and
malicious mischief; (d) all risk coverage for physical damage to the Building;
and (e) insurance coverage for the Building against damage shall be obtained by
the Landlord and included in the Tenant's proportional share of the insurance
coverage requirement. Landlord (and, at Landlord's option, the lender interested
under any mortgage or similar instrument then encumbering the Land) shall be
named as an insured on each such policy. The proceeds of such insurance in case
of loss or damage shall be paid to Landlord to be applied on account of the
obligation of Landlord to repair and/or rebuild the Building and/or Premises
pursuant to Article XVII. Any proceeds not required for such purpose shall be
the sole property of Landlord.
Landlord shall procure and Tenant shall pay its Proportionate Share of the
cost of insurance for all Common Areas insuring the Landlord against General
Liability in such sums and coverages as Landlord deems reasonable.
16.02 Liability Insurance on Tenant's Premises. Tenant agrees to secure
----------------------------------------
and keep in force from and after the date Landlord shall deliver possession of
the Premises to Tenant and throughout the Term and Renewal Term, if any, at
Tenant's own cost and expense, Comprehensive General Liability Insurance on an
occurrence basis with a minimum limit of liability in an amount of One million
and 00/100 Dollars ($1,000,000.00). [This insurance coverage shall include water
damage and sprinkler leakage legal liability; contractual liability endorsement
covering the matters set forth in Section 16.04; Broad Form insurance on all
HVAC equipment, boilers and other pressure vessels or systems, whether fired, or
unfired, installed by or primarily for the benefit of Tenant in. adjoining,
above or beneath the Premises. This insurance shall also include plate glass
insurance covering all plate glass in the Premises, but Tenant shall have the
option either to insure the risk or self-insure.
16.03 Insurance. In addition to the insurance required to be carried
---------
pursuant to Article XVI of the Lease, Landlord and Tenant shall each, at its
sole cost, obtain and maintain in effect as long as this Lease remains in
effect, insurance policies providing at least the following coverage:
A. Worker's compensation and similar insurance offering statutory
coverage and containing statutory limits and employer's liability insurance in
form and amount deemed reasonable
<PAGE>
20
by Landlord (with respect to Landlord's insurance) and Tenant (with respect to
Tenant's insurance) in the exercise of prudent business judgment.
B. Such policies referenced in this Article XVI above will be
maintained in companies having a "General Policy holders Rating" of at least "A"
as set forth in the most current issue of "Best's Insurance Guide", and will be
written as primary policy coverage and not contributing with, or in excess of,
any coverage which the other party shall carry. Each party shall have the right
to provide the coverage required herein under blanket policies provided that the
coverage afforded shall not be diminished by reason thereof.
C. Each party shall supply to the other on an annual basis or more
frequently if reasonably requested, a copy of each insurance policy required to
be obtained pursuant to the terms of this Lease.
16.04 Provisions to be Contained in Policies. All insurance provided for
--------------------------------------
in this Lease shall be effected under enforceable policies issued by insurers
approved by Landlord and a copy of the policy or a certificate of insurance
shall be delivered to the Landlord within fifteen (15) days after the date of
commencement of the Term of this Lease. The policy or policies shall provide by
its terms that it is noncancellable except on thirty (30) days prior written
notice to Landlord. At least thirty (30) days prior to the expiration date of
any policy, the original renewal policy for such insurance shall be delivered by
the Tenant to the Landlord. Within thirty (30) days after the premium on any
policy shall fall due and payable, the Landlord shall be furnished with
satisfactory evidence of its payment. All policies shall name Landlord, any
person, firms, or corporation designated by Landlord, and Tenant as insured. All
such policies shall contain a provision that Landlord, although named as an
insured, shall nevertheless be entitled to recover under said policies for any
loss occasioned to it, its servants, agents, and employees by reason of the
negligence of Tenant. All such insurance shall specifically insure the
performance by Tenant of the indemnity agreement as to liability contained in
Article XV. All such insurance shall provide that the coverage afforded shall
not be affected by the performance of any work in or about the Premises.
16.05 Subrogation. Tenant and Landlord each waive its right of subrogation
-----------
against each other for any reason whatsoever, and any insurance policies herein
required to be procured by Tenant or Landlord shall contain an express waiver of
any right of subrogation by the insurer against Landlord or Tenant, whichever
the case may be.
16.06 Lenders. Any mortgage lender interested in any part of the Land and
-------
Building may, at Landlord's option, be afforded coverage under any policy
required to be secured by Landlord or Tenant hereunder, by use of a mortgagee's
endorsement to the policy concerned.
16.07 Blanket Policy. If the Tenant provides any insurance required by
------- ------
this Lease in the form of a blanket policy, the Tenant shall furnish
satisfactory proof that such blanket policy complies in all respects with the
provisions of this Lease, and that the coverage thereunder is at least equal to
the coverage which would be provided under a separate policy covering only the
Premises.
<PAGE>
21
ARTICLE XVII
DESTRUCTION
-----------
17.01 Destruction.
-----------
A. Landlord's Options. If the Premises shall be partially damaged by
------------------
fire or any other casualty insured under Landlord's insurance policy, Landlord
shall, upon receipt of the insurance proceeds, repair the Premises and until
repair is complete the minimum rent shall be abated proportionately as to that
portion of the Premises rendered untenantable. Notwithstanding the foregoing,
if: (a) the Premises by reason of such occurrence are rendered wholly
untenantable, or (b) the Premises should be damaged as a result of a risk which
is not covered by Landlord's insurance, or (c) the Premises should be damaged in
whole or in part during the last two (2) years of the Term or of any Renewal
Term, or (d) the Premises or the Building of which it is a part, whether the
Premises are damaged or not, should be damaged to the extent of fifty percent
(50%) or more of the then-monetary value, then and in any such events, Landlord
may either elect to repair the damage or may cancel this Lease by notice of
cancellation within sixty (60) days after such event and thereupon this Lease
shall expire, and Tenant shall vacate and surrender the Premises to Landlord.
Tenant's liability for rent upon the termination of this Lease shall cease as of
the day following Landlord's giving notice of cancellation. In the event
Landlord elects to repair any damage, any abatement of rent shall end five (5)
days after notice by Landlord to Tenant that the Premises have been repaired.
Unless this Lease is terminated by Landlord or by Tenant, as permitted herein,
Tenant shall repair and re-fixture the interior of the Premises in a manner and
in at least a condition equal to that existing prior to the destruction or
casualty and the proceeds of all insurance carried by Tenant on its property and
fixtures shall be held in trust by Tenant for the purpose of said repair and
replacement.
B. Tenant's Options. In the event that the Premises are damaged for any
----------------
reason whatsoever, other than Tenant's fault or negligence, and Tenant is
substantially unable to carry on its normal business operations for a period of
thirty (30) days or more, Tenant shall have the right to terminate this Lease by
giving written notice of such termination to Landlord no later than forty-five
(45) days after the occurrence of such damage. Upon such termination, Tenant's
obligations hereunder and each of them, including the obligation to pay rent of
any kind or nature, shall cease as of the day the Premises were so damaged.
During any period that Tenant is substantially unable to conduct its normal
business operations because of such casualty damage, rent of any kind or nature
due hereunder shall be abated for such portion of the Premises which Tenant
cannot reasonably occupy and use.
In the event the Premises are partially damaged by fire or other casualty
and Tenant is able to carry on its normal business operations, Tenant shall pay
rent for only such portion of the Premises which Tenant may reasonably occupy or
use during the time required to make repairs. All repairs necessary to restore
the Premises to its original condition shall be commenced within sixty
<PAGE>
22
(60) days after the occurrence of such damage. If Tenant cancels the Lease
pursuant to this paragraph B, Tenant shall vacate and surrender the Premises to
Landlord.
ARTICLE XVIII
CONDEMNATION
------------
18.01 Partial Condemnation or Eminent Domain. If a part of the Premises or
--------------------------------------
the Building is condemned or acquired in lieu of condemnation for any public or
quasi-public use or purpose, by right of eminent domain or otherwise, and Tenant
is substantially unable to carry on its normal business operations for a period
of thirty (30) days or more, Tenant shall have the right to terminate this Lease
by giving written notice of such termination to Landlord no later than forty-
five (45) days after the occurrence of such condemnation. Upon such termination,
Tenant's obligations hereunder and each of them, including the obligation to pay
rent of any nature, shall cease as of the day Tenant vacates the Premises.
During any period that Tenant is unable to conduct its normal business
operations because of such condemnation, rent of any kind or nature due
hereunder shall be abated for such portion of the Premises which Tenant cannot
reasonably occupy and use. Tenant may make a separate claim against the
condemning authority for an award for the value of any of Tenant's tangible
personal property and trade fixtures, for moving and relocation expenses and for
such business damages and/or consequential damages as may be allowed by law.
In the event the Premises are partially condemned and Tenant shall
determine that it is able to carry on its normal business operations, Tenant
shall pay rent for only such portion of the Premises which Tenant may reasonably
occupy and use during the time after such partial condemnation. Any repairs
necessary to restore the Premises to a tenantable condition after a partial
condemnation shall be undertaken by Landlord in a reasonable and prompt manner.
18.02 Total Condemnation. In the event the entire Building be acquired
------------------
under the power of eminent domain proceedings during the Term or Renewal Term
including any renewal period or in the event of a partial acquisition whereby
the portion of said Building remaining after such acquisition shall not be
suitable or adequate for the uses and purposes for which the Premises then are
being utilized by Tenant, then and in any such event, this Lease Agreement shall
be terminated upon the date the entire Building or portion is acquired, and no
further rent shall be due the Landlord from the Tenant. Upon such termination
each party shall be entitled to any award of condemnation depending upon their
proportionate interest in the entire Property as their interests appear in this
Lease. The Landlord shall be entitled to the distributive part of the award that
represents its ownership of the Building and the Land and the Tenant, providing
Tenant is not in default of any of the terms of this lease, shall be entitled to
its share of any award representing the value of its leasehold interest in the
Premises to be taken or condemned (and the value of any fixtures or equipment
owned by the Tenant and which have not become the properly of Landlord by virtue
of this Lease and located on the Premises, or the part taken or condemned, to
the extent that any such fixtures are taken or condemned).
<PAGE>
23
18.03 Landlord's Option to Terminate. Notwithstanding anything to the
------------------------------
contrary, if more than fifty percent (50%) of the total floor area of the
building in which the Premises are located shall be taken as aforesaid, Landlord
may, by written notice to Tenant, terminate this Lease. If this Lease is
terminated as provided in this Section, rent shall be paid up to the day that
possession is so taken by public authority and Landlord shall make an equitable
refund of any rent paid by Tenant for periods subsequent to such termination
date.
ARTICLE XIX
EVENTS OF DEFAULT: REMEDIES
---------------------------
19.01 Default by Tenant. Upon the occurrence of any of the following
-----------------
events Landlord shall have the remedies set forth in Section 19.02.
A. Tenant fails to pay any rental or any other sum due hereunder within
ten (10) days after Tenant receives written notice of an amount due for rental
or otherwise.
B. Tenant fails to perform any other term, condition, or covenant to be
performed by it pursuant to this Lease within thirty (30) days after the written
notice of such default shall have been given to Tenant by Landlord. The thirty
(30) and ten (10) day rights to cure provided in Section 23.01 shall not be in
addition to but the same (concurrent) period as provided in this paragraph.
C. Tenant or its agent shall falsify any information required to be
furnished to Landlord.
D. Tenant shall become bankrupt or insolvent or file any debtor
proceedings or have taken against such party in any court pursuant to state or
federal statute, a petition in bankruptcy or insolvency, reorganization, or
appointment of a receiver or trustee; and such proceeding shall not be
dismissed, discontinued or vacated within thirty (30) days from the filing or
appointment.
E. The doing, or permitting to be done, by Tenant of any act which creates
a mechanic's lien or claim against the Land or Building of which the Premises
are a part if not released or otherwise provided for by indemnification
satisfactory to Landlord within thirty (30) days thereafter.
19.02 Remedies. Upon the occurrence of the events set forth in Section
--------
19.01, Landlord shall have the option to take any or all of the following
actions, without further notice of demand of any kind to Tenant or any other
person:
A. Immediately re-enter and remove all persons and property from the
Premises, storing said property in a public place, warehouse, or elsewhere at
the cost of, and for the account of, Tenant, all without service of notice or
resort to legal process and without being deemed guilty of or liable in
trespass. No such re-entry or taking possession of the Premises by Landlord
shall be construed as an election on its part to terminate this Lease unless a
written notice of such intention is given by
<PAGE>
24
Landlord to Tenant. No such action by Landlord shall be considered or construed
to be a forcible entry.
B. Collect by suit or otherwise each installment of rent or other sum as
it becomes due hereunder, or enforce, by suit or otherwise, any other term or
provision on the part of Tenant required to be kept or performed.
C. Terminate this Lease by written notice to Tenant. In the event of such
termination, Tenant agrees to immediately surrender possession of the Premises.
Should Landlord terminate this Lease, it may recover from Tenant all reasonable
damages it may incur by reason of Tenant's breach, including the reasonable cost
of recovering the Premises, reasonable attorney's fees, and the worth at the
time of such termination of the excess, if any, of the amount of rent and
charges equivalent to rent reserved in this Lease for the remainder of the
stated term over the then-reasonable rental value of the Premises for the
remainder of the stated term, all of which amounts shall be immediately due and
payable from Tenant to Landlord, excluding any unexercised Renewal Term. In
determining the rent which would be payable by Tenant subsequent to default, the
rent for each year of the unexpired Term shall be equal to the average minimum
rent and additional rents paid by Tenant from the Commencement Date to the time
of default, or during the preceding full calendar year, whichever period is
shorter.
D. Should Landlord re-enter, as provided above, or should it take
possession pursuant to legal proceedings or pursuant to any notice provided for
by law, and whether or not it terminates this Lease, it may make such reasonable
alterations and repairs as may be necessary in order to relet the Premises, and
relet the same or any part for such term or terms (which may be for a term
extending beyond the term of this Lease) and at such reasonable rental or
rentals and upon such other terms and conditions as Landlord in its sole
discretion may deem advisable. Upon each such reletting all rentals received by
the Landlord from such reletting shall be applied, first, to the payment of any
indebtedness other than rent due hereunder from Tenant to Landlord; second, to
the payment of any costs and expenses of such reletting, including reasonable
brokerage fees and reasonable attorney's fees and reasonable costs of any
alterations and repairs; third, to the payment of rent due and unpaid, and the
residue, if any, shall be held by Landlord and applied in payment of future rent
as the same may become due and payable. If such rentals received from such
reletting during any month be less than that to be paid during such month by
Tenant, Tenant shall pay any such deficiency to Landlord. Such deficiency shall
be calculated and paid monthly. No such reentry and reletting of the Premises by
Landlord shall be construed as an election on its part to terminate this Lease
unless a written notice of such intention be given to Tenant pursuant to
subparagraph C. above. Notwithstanding any such reletting without termination,
Landlord may at any time thereafter elect to terminate this Lease for such
previous breach. The remedies given to Landlord in this Section 19.02 shall be
in addition and supplemental to all other rights or remedies which Landlord may
have under laws then in force.
<PAGE>
25
ARTICLE XX
BANKRUPTCY OR INSOLVENCY
------------------------
20.01 Liquidation. In the event that Tenant shall become a debtor under
-----------
Chapter 7 of the Federal Bankruptcy Code, 11 U.C.S. (S)(S)101 et seq. (the
-- ---
"Bankruptcy Code"), and Tenant's trustee or Tenant shall elect to assume this
Lease for the purpose of assigning the same or otherwise, such election and
assignment may be made only if the provisions of this Article XX are satisfied.
If Tenant or Tenant's trustee shall fail to elect to assume this Lease within 60
days after the filing of such petition or such additional time as provided by
the court within such 60-day period, this Lease shall be deemed to have been
rejected. Immediately thereupon Landlord shall be entitled to possession of the
Premises without further obligation to Tenants or Tenant's trustee and this
Lease shall terminate, but Landlord's right to be compensated for damages in any
such proceeding shall survive.
20.02 Reorganization. In the event that a petition for reorganization or
--------------
adjustment of debts is filed concerning Tenant under Chapter 11 of the
Bankruptcy Code, or a proceeding is filed under Chapter 7 of the Bankruptcy Code
and is transferred to Chapter 11, Tenant's trustee or Tenant, as debtor-in-
possession, must elect to assume this Lease within 120 days from the date of the
filing of the petition under Chapter 11 or Tenant's trustee or the debtor-in-
possession shall be deemed to have rejected this Lease. In the event that
Tenant, Tenant's trustee or the debtor-in-possession has failed to perform all
of Tenant's obligations under this Lease within the time periods (excluding
grace periods) required for such performance, no election by Tenant's trustee or
the debtor-in-possession to assume this Lease, whether under Chapter 7 or
Chapter 11, shall be effective unless each of the following conditions has been
satisfied:
A. Tenant's trustee or the debtor-in-possession has cured all defaults
under the Lease, or has provided Landlord with Assurance (as defined below) that
it will cure, (1) all defaults susceptible of being cured by the payment of
money within ten (10) days from the date of such assumption and (2) all other
defaults under this Lease which are susceptible of being cured by the
performance of any act promptly after the date of such assumption.
B. Tenant's trustee or the debtor-in-possession has compensated, or has
provided Landlord with Assurance that within ten (10) days from the date of such
assumption it will compensate Landlord for any actual pecuniary loss incurred by
Landlord arising from the default of Tenant, Tenant's trustee, or the debtor-in-
possession indicated in any statement of actual pecuniary loss sent by Landlord
to Tenant's trustee or the debtor-in-possession.
C. Tenant's trustee or the debtor-in-possession has provided Landlord with
Assurance of the future performance of such of the obligations under this Lease
of Tenant, Tenant's trustee or the debtor-in-possession, and if Tenant's trustee
or the debtor-in-possession has provided such Assurance. Tenant's trustee or the
debtor-in-possession shall also (1) deposit with Landlord, as security for the
timely payment of rent hereunder, an amount equal to three (3) months' Rent as
<PAGE>
26
contained herein and (2) pay in advance to Landlord on the date any rent is due
and payable, one-twelfth (1/12th) of Tenant's annual obligations for Additional
Rent pursuant to this Lease. The obligations imposed upon Tenant's trustee or
the debtor-in-possession shall continue with respect to Tenant or any assignee
of this Lease after the completion of bankruptcy proceedings.
D. Such assumption will not breach or cause a default under any provision
of any other lease, mortgage, financing agreement or other agreement by which
Landlord is bound relating to the Building.
For purposes of this Article XX, Landlord and Tenant acknowledge that
"Assurance" shall mean no less than Tenant's trustee or the debtor-in-possession
has and will continue to have sufficient unencumbered assets after the payment
of all secured obligations and administrative expenses to assure Landlord that
sufficient funds will be available to fulfill the obligations of Tenant under
this Lease and there shall have been deposited with Landlord, or the sufficient
cash payable to Landlord, and/or Tenant's trustee or the debtor-in-possession,
acceptable as to the value and kind to Landlord, to secure to Landlord the
obligation of Tenant, Tenant's trustee or the debtor-in-possession to cure the
defaults under this Lease, monetary and/or non-monetary, within the time periods
set forth above.
20.03 Subsequent Liquidation or Petition. In the event that this Lease is
----------------------------------
assumed in accordance with Section 20.02 and thereafter Tenant is liquidated or
files a subsequent petition for reorganization or adjustment of debts under
Chapter 11 of the Bankruptcy Code, Landlord may, at its option, terminate this
Lease and all rights of Tenant hereunder, by giving Tenant notice of its
election so to terminate within thirty (30) days after the occurrence of either
of such events.
20.04 Assignment.
----------
A. If Tenant's trustee or the debtor-in-possession has assumed the Lease
pursuant to the terms and provisions of Section 20.01 or 20.02 for the purpose
of assigning (or elects to assign) this Lease to an assignee, this Lease may be
so assigned only if the proposed assignee has provided adequate assurance of
future performance of all of the terms, covenants and conditions of this Lease
to be performed by Tenant. As used herein, "adequate assurance of future
performance" shall mean that no less than each of the following conditions shall
have been satisfied.
(1) The proposed assignee has furnished Landlord with either (a) a
current financial statement audited by a certified public accountant
indicating a net worth and working capital in amounts which Landlord
reasonably determines to be sufficient to assure the future performance by
such assignee of Tenant's obligations under this Lease or (b) a guaranty,
or guaranties, in form and substance satisfactory to Landlord from one or
more persons with a net worth and working capital in amounts which
Landlord reasonably determines to be sufficient to assure the future
performance of Tenant's obligations under this Lease.
<PAGE>
27
(2) Landlord has obtained from others required under any lease,
mortgage, financing arrangement or other agreement by which Landlord is
bound all consents or waivers necessary to permit Landlord to consent to
such assignment.
(3) The proposed assignment will not release or impair any guaranty
of the obligations of Tenant (including the proposed assignee) under this
Lease.
B. Any and all monies or other considerations payable or otherwise to be
delivered in connection with the assignment referred to in subparagraph A., next
above, shall be paid or delivered to Landlord, shall be and remain the exclusive
property of Landlord and shall not constitute property of Tenant or of the
estate of Tenant within the meaning of the Bankruptcy Code. 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 for the
benefit of Landlord and be promptly paid to or turned over to Landlord.
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 arising under this Lease on and after the
date of such assignment. Any such assignee shall upon demand execute and deliver
to Landlord an instrument confirming such assumption.
20.05 Reasonable Charges. When, pursuant to the Bankruptcy Code, Tenant's
------------------
trustee or the debtor-in-possession shall be obliged to pay reasonable use and
occupancy charges for the use of the Premises, such charges shall not be less
than the Rent, Additional Rent, and other sums payable by Tenant under this
Lease.
20.06 Consent. Neither in whole nor any portion of Tenant's interest in
-------
this Lease or its estate in the Premises shall pass to any trustee, receiver,
assignee for the benefit of creditors, or any other person or entity, or
otherwise by operation of law under the laws of any state having jurisdiction of
the person or property of the Tenant unless Landlord shall have consented to
such transfer in writing. No acceptance by Landlord of Rent or any other
payments from any such trustee, receiver, assignee, person or other entity shall
be deemed to constitute such consent by Landlord, nor shall it be deemed a
waiver of Landlord's right to terminate this Lease for any transfer of Tenant's
interest under this Lease without such consent.
ARTICLE XXI
FINANCING
---------
21.01 Subordination. Upon request of Landlord, Tenant will subordinate its
-------------
rights to the lien of any mortgage or mortgages, or lien or other security
interest resulting from any other method of financing or refinancing, now or
hereafter in force against the Land and/or Building of which the Premises are a
part or against any building hereafter placed upon the land of which the
Premises are
<PAGE>
28
a part and to all advances made or thereafter to be made upon the security. The
provisions of this Section notwithstanding, so long as Tenant is not in default,
this Lease shall remain in full force and effect for the full Term and Renewal
Term and shall not be terminated as a result of any foreclosure or sale or
transfer in lieu of such proceedings pursuant to a mortgage or other instrument
to which Tenant has subordinated its right.
21.02 Amendment. Tenant agrees that from time to time it shall, if so
---------
requested by Landlord and if doing so will not substantially and adversely
affect Tenant's economic interests under this Lease, join with Landlord in
amending the terms of this Lease so as to meet the reasonable needs or
requirements of any lender which is considering furnishing or which has
furnished any of the financing for the Land and/or Building.
ARTICLE XXII
ATTORNMENT
----------
22.01 Attornment. In the event of the sale or assignment of Landlord's
----------
interest in the Building of which the Premises are a part, or in the event of
any proceedings brought for the foreclosure of; or in the event of exercise of
the power of sale under, any mortgage or other security instrument made by
Landlord covering the Premises, Tenant shall attorn to the assignee or purchaser
and recognize such purchaser as Landlord under this Lease.
ARTICLE XXIII
RIGHT TO CURE
-------------
23.01 Tenant's Right to Cure. No default on the part of Tenant shall exist
----------------------
under this Lease unless and until (i) Tenant shall fail to cure the same within
ten (10) days after written notice to do so from Landlord in the event the
default relates to the non-payment of rentals, or (ii) Tenant shall fail to
commence to cure a nonpayment default in good faith' within thirty (30) days
after a written notice from Landlord to do so and to promptly prosecute the same
to completion in the event the default relates to matters other than the non-
payment of rentals. If Tenant should breach this Lease or be in non-compliance
and not cure this Lease within the time limits subscribed, then Landlord shall
have the rights as described herein.
23.02 Landlord's Right to Cure. In the event of breach, default, or
------------------------
noncompliance hereunder by Landlord, Tenant shall, before exercising any right
or remedy available to it, give Landlord written notice of the claimed breach,
default, or noncompliance. If prior to its giving such notice Tenant has been
notified in writing (by way of Notice of Assignment of Rents and Leases,
<PAGE>
29
or otherwise) of the address of a lender which has furnished any of the
financing referred to in Article XXI hereof, concurrently with giving the
aforesaid notice to Landlord, Tenant shall, by registered mail, transmit a copy
thereof to such lender. For the thirty (30) days following the giving of the
notice(s) required by the foregoing portion of this paragraph (or such longer
period of time as may be reasonably required to cure a matter which, due to its
nature, cannot reasonably be rectified within thirty (30) days, Landlord shall
have the right to cure the breach, default, or noncompliance involved. If
Landlord has failed to cure a default within said period, any such lender shall
have an additional thirty (30) days within which to cure the same or, if such
default cannot be cured within that period, such additional time as may be
necessary if within such thirty (30) day period lender has commenced and is
diligently pursing the actions or remedies necessary to cure the breach,
default, or noncompliance involved (including, but not omitted to, commencement
and prosecution of proceedings to foreclose or otherwise exercise its rights
under its mortgage or other security instrument, if necessary to effect such
cure), in which event this Lease shall not be terminated by Tenant so long as
such actions or remedies are being diligently pursued by said lender and
provided the breach, default or noncompliance does not unreasonably interfere
with Tenant's use of the Premises.
ARTICLE XXIV
SURRENDER OF PREMISES
---------------------
24.01 Surrender of Premises. At the expiration of this Lease, Tenant shall
---------------------
surrender the Premises in the same condition as they were in upon delivery of
possession under this Lease, reasonable wear and tear excepted, and shall
deliver all keys to Landlord. Before surrendering the Premises, Tenant shall
remove all of its personal property and trade fixtures and such alterations or
additions to the Premises made by Tenant as may be specified for removal by
Landlord, and shall repair any damage caused by such property or the removal.
Unless Landlord has expressly reserved its rights to require removal of any
alteration or addition made by Tenant when the alteration or addition was
approved by Landlord, then Tenant need not remove the alteration or addition
upon surrender of the Premises. If Tenant fails to remove its personal property
and fixtures within ten (10) days from the expiration of this Lease, the same
shall be deemed abandoned and shall become the property of Landlord, or at
Landlord's option, the same may be removed and disposed of at Tenant's expense.
ARTICLE XXV
HOLDING OVER
------------
25.01 Holding Over. If (without execution of a new lease or written
------------
extension) Tenant should remain in possession of the Premises after the
expiration of the Term or Renewal Term, it shall be deemed to be occupying the
Premises as a Tenant from month to month. It shall pay as
<PAGE>
30
monthly rental, therefore, the amounts provided in Sections V and VI and
otherwise hereof on a monthly basis and be subject to all the other conditions
and obligations of this Lease insofar as they be applicable to a month to month
tenancy.
ARTICLE XXVI
ATTORNEY'S FEES
---------------
26.01 Attorney's Fees. In the event that at any time during the term of
---------------
this Lease either Landlord or the Tenant institutes any action or proceeding
against the other relating to the provisions of this Lease or any default, then
the unsuccessful party in such action or proceeding agrees to reimburse the
successful party for the reasonable expenses of such action, including
reasonable attorney's fees, incurred by the successful party.
ARTICLE XXVII
27.01 Hazardous Substances.
--------------------
A. Landlord represents that to the best of its knowledge, any use,
storage, treatment or transportation of "Hazardous Substances" (as hereinafter
defined) which has occurred in, on or about the Land, Building or Premises prior
to the date of this Lease has been in compliance with all "Environmental Laws"
(as hereinafter defined). Landlord additionally represents that to the best of
its knowledge the Land, Building and Premises are free of Hazardous Substances
as of the date of this Lease.
B. Landlord shall indemnify and hold harmless Tenant from any and all
claims, damages, fines, judgments, penalties, costs, expenses or liabilities
(including, without limitation, any and all sums paid for settlement of claims,
attorneys' fees, consultant and expert fees) arising during or after the Term or
Renewal Term from or in connection with the use, storage, generation or disposal
of Hazardous Substances in, on or about the Land, Building of Premises by
Landlord, Landlord's agents, employees, contractors or invitees.
C. Tenant shall not cause or permit any Hazardous' Substances to be used,
stored, generated or disposed of in, on or about the Land, Building or Premises
by Tenant, its agents, employees, contractors or invitees, except for such
Hazardous Substances as are normally utilized in an office setting, such as
office and janitorial supplies. Any such Hazardous Substances permitted on the
Premises as hereinabove provided, and all containers therefor, shall be used,
kept, stored and disposed of in a manner that complies with all Environmental
Laws. Tenant shall indemnify and hold harmless Landlord from any and all claims,
damage, fines, judgments, penalties, costs, expenses or liabilities (including,
without limitation, any and all sums paid for settlement of claims, attorneys'
fees, consultant and expert fees) arising during or after the Term or Renewal
Term, if any, from or in connection with the use, storage, generation or
disposal of hazardous substances in, on
<PAGE>
31
or about the land, building and Premises by Tenant, Tenant's agents, employees,
contractors or invitees.
D. Notwithstanding anything to the contrary stated hereinabove, the
indemnifications contained in subparagraphs (B) and (C) above shall not include
any consequential damages (e.g. loss of rent, use and profits) incurred by
either Landlord or Tenant, but shall expressly include, without limitation, any
and all costs incurred due to any investigation of the site or any cleanup,
removal or restoration mandated by or pursuant to any Environmental Laws. The
indemnifications contained herein shall survive any expiration or termination of
the Term or Renewal Term, if any.
E. As used herein, "Hazardous Substances" means any substance which is
toxic, ignitable, reactive, or corrosive or which is regulated by "Environmental
Laws". The term "Environmental Laws" means federal, state and local laws and
regulations, judgments, orders and permits governing safety and health and the
protection of the environment, including without limitation the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601 et seq.,
as amended (CERCLA), the Resource Conservation and Recovery Act, as amended 42
U.S.C. 6901 et seq., the Clean Water Act, 33 U.,S.C. 1251 et seq., the Clean Air
-- ----
Act, 42 U.S.C. 7401 et seq., the Toxic Substance Control Act, 15 U.S.C. 2601 et
-- ---- --
seq., and the Safe Drinking Water Act, 42 U.S.C. 300f through 300j. "Hazardous
- ----
Substances" includes any and all materials or substances which are defined as
"hazardous waste", "extremely hazardous waste" or a "hazardous substance"
pursuant to state, federal or local governmental law. "Hazardous Substances"
also includes asbestos, polychlorinated biphenyl ("PCBs") and petroleum
products.
ARTICLE XXVIII
NET LEASE
---------
28.01 Net Lease. This Lease shall be deemed and construed to be an
---------
absolutely net Lease, and in no circumstances and under no conditions, whether
now existing or hereafter arising, or whether within or beyond the present
contemplation of the parties, shall the Landlord be required to make any payment
of any kind whatsoever or be under any obligation or liability hereunder, except
as herein expressly set forth.
ARTICLE XIX
MISCELLANEOUS PROVISIONS
------------------------
29.01 No Partnership. Neither party by this Lease, in any way or for any
--------------
purpose, becomes a partner or joint venturer of the other in the conduct of its
business or otherwise.
29.02 Force Majeure. A party shall be excused for the period of any delay
-------------
in the performance of any obligations hereunder when prevented from so doing by
cause or causes beyond
<PAGE>
32
the party's control, including labor disputes, civil commotion, war,
governmental regulations or controls, fire or other casualty, weather, inability
to obtain any material or services, or acts of God.
29.03 No Waiver. Failure of Landlord to insist upon the strict performance
---------
of any provision or to exercise any option hereunder shall not be construed as a
waiver for the future of any such provision or option. The receipt by Landlord
of rent with knowledge of the breach of any provision of this Lease shall not be
deemed a waiver of such breach. No provision of this Lease shall be deemed to
have been waived unless such waiver be in writing signed by Landlord.
29.04 Notices. Any notice, demand, request, or other instrument which may
-------
be or is required to be given under this Lease shall be delivered in person or
sent by United States certified mail, postage prepaid, and shall be addressed
to:
LANDLORD: TENANT:
- --------- -------
Icon Health & Fitness Teltrust, Inc.
Brad H. Bearnson ATTN: Corporate Counsel
1500 South 1000 West 221 North Charles Lindbergh Drive
Logan, Utah 84321 Salt Lake city, Utah 84111
(Either party may designate such other address as shall be given by written
notice.)
29.05 Recording. Tenant shall not record this Lease; however, Tenant may
---------
record a memorandum of this Lease. Landlord, at its option and at any time, may
file this Lease or "short form" Lease for record with the Recorder of the County
in which the Building is located.
29.06 Partial Invalidity. If any provision of this Lease or the
------------------
application to any person or circumstances shall to any extent be invalid, the
remainder of this Lease or the application of such provision to persons or
circumstances other than those as to which it is held invalid shall not be
affected and each provision of this Lease shall be valid and enforced to the
fullest extent permitted by law.
29.07 Brokers. Except for Mohr Partners, Inc. which has served exclusively
-------
as the Tenant's agent and shall be paid a consulting fee as described below,
each party represents and warrants to the other party that it has incurred no
other claims for brokerage consulting fees or finder's fees in connection with
this Lease and agrees to indemnify the other party against and to hold the other
party harmless from all liabilities arising from any such claims, including
reasonable attorney's fees.
With regards to this Lease and any expansions of additional space for the
original Term, the Landlord shall pay to Mohr Partners, Inc. a consulting fee
equal to three percent (3%) of the net rentals (based upon $14.75 per square
foot rental for months 1-36, a four percent (4%) increase thereon for months 37-
48 and an additional three percent (3%) increase for months 49-60) to be
received by the Landlord. One-half of said consulting fee shall be paid upon the
Landlord's receipt of rent with the remaining half to be paid within thirty (30)
days of the Landlord's receipt of rent.
<PAGE>
33
With regards to option period provided in this Lease, the Landlord shall pay a
consulting fee equal to one-half (1/2) of the above stated amount, payable
within thirty (30) days of the beginning of such option period.
29.08 Provisions Binding. Etc. Except as otherwise provided, all
-----------------------
provisions herein shall be binding upon and shall inure to the benefit of the
parties, their legal representatives, heirs, successors, and assigns. Each
provision to be performed by Tenant shall be construed to be both a covenant and
a condition. In the event of any sale or assignment (except for purposes of
security or collateral) by Landlord of the Building or Land, the Premises, or
this Lease, Landlord shall, from and after the Commencement Date (irrespective
of when such sale or assignment occurs), be entirely relieved of all of its
obligations, and all of such obligations shall, as of the time of such sale or
assignment or on the Commencement Date, whichever is later, automatically pass
to Landlord's successor in interest.
29.09 Entire Agreement. Etc. This Lease and the Exhibits attached, set
---------------------
forth the entire agreement between the parties. All Exhibits mentioned in this
Lease are incorporated by reference. Any prior conversations or writings are
merged herein and extinguished. No subsequent amendment to this Lease shall be
binding upon Landlord or Tenant unless reduced to writing and signed. Submission
of this Lease for examination does not constitute an option for the Premises and
becomes effective as a lease only upon execution and delivery thereof by
Landlord to Tenant.
29.10 Captions. The captions, as used in this 'Lease, are used for
--------
convenience and reference purposes only and in no way define, limit or describe
the scope or intent of this Lease or in no way affect this Lease.
29.11 Time. Time is and shall be of the essence of each term, provision,
----
covenant and condition of this Lease.
29.12 Governing Law. The interpretation of this Lease shall be governed by
-------------
the laws of the State of Utah. Tenant hereby expressly and irrevocably agrees
that Landlord may bring any action or claim to enforce the provisions of this
Lease in the State of Utah, County of Salt Lake, and the Tenant irrevocably
consents to personal jurisdiction in the State of Utah for the purposes of any
such action or claim. Tenant further irrevocably consents to service of process
in accordance with the provisions of the laws of the State of Utah. Nothing
herein shall be deemed to preclude or prevent Landlord from bringing any action
or claim to enforce the provisions of this Lease in any other jurisdiction.
ARTICLE XXX
AUTHORITY OF SIGNATORIES
------------------------
30.01 Authority of Signatories. Each person executing this Lease
------------------------
individually and personally represents and warrants that he or she is duly
authorized to execute and deliver the same
<PAGE>
34
on behalf of the entity for which he or she is signing (whether it be a
corporation, general or limited partnership, or otherwise), and that this Lease
is binding upon said entity in accordance with its terms.
DATED this __ day of _______, 1997.
ICON HEALTH & FITNESS, INC.
By /s/ Lynn Brenchley
-------------------------------------------
Its Vice President
----------------------------------------
(LANDLORD)
DATED this 20th day of March, 1997.
TELTRUST, INC.
By /s/ Lyle O. Keys
-------------------------------------------
Its Chairman
----------------------------------------
(TENANT)
<PAGE>
SUMMARY OF COMMON AREA RATIOS
----------------------------
1. COMMON AREA MAINTENANCE PERCENTAGE
a. Number of leased feet / TelTrust: 32,484
b. Number of total leasable feet /
HealthRider building: 104,565
c. Ratio of C.A.M. / TelTrust: 31%
As per existing agreement: 26.05%
2. COMMON AREA BURDEN
a. HealthRider building total: 24,775
b. Total leasable feet /
HealthRider building: 104,565
c. Ratio of Common Area Burden: 24%
As per lease: 18%
<PAGE>
[FLOOR PLAN APPEARS HERE]
<PAGE>
[FLOOR PLAN APPEARS HERE]
<PAGE>
[FLOOR PLAN APPEARS HERE]
<PAGE>
[FLOOR PLAN APPEARS HERE]
<PAGE>
[FLOOR PLAN APPEARS HERE]
<PAGE>
FIRST AMENDMENT TO LEASE
THIS AMENDMENT TO LEASE (the "Amendment") is made and entered into this 7th
day of November, 1997, by and between ICON HEALTH & FITNESS, INC., a Delaware
corporation ("ICON") and TELTRUST, INC., ("Teltrust").
WITNESSETH:
WHEREAS, under date of March 24, 1997, Teltrust entered into a Lease
Agreement, covering the real property described therein (hereinafter the
"Property"); and
WHEREAS, Teltrust has requested ICON to sign certain lending documents in
favor of Fleet National Bank ("Bank") in connection with a loan from Bank to
Teltrust.
NOW THEREFORE, in consideration of the mutual promises and covenants set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are acknowledged, ICON and Teltrust hereby agree as
follows:
1. Paragraphs 5.04A. and 5.04B. of said Lease are stricken and amended
to read as follows:
A. Amount. Within five (5) days of Tenant's execution of this
------
Amendment the Tenant will (i) pay the sum of $50,000.00 to ICON; and
(ii) cause to be issued an irrevocable, demand letter of credit in the
sum of $150,000.00 in form and substance acceptable to Landlord for
the benefit, use and payment to, if required, the Landlord as a
security deposit for the Subject Property which will be held by Olson
& Hoggan, P.C. according to this Section 5.04. The security deposit
provided for in the preceding sentence will be increased in the event
Tenant leases additional space within the Building, to equal the sum
of four (4) month's rents for all space leased by Tenant within the
Building.
B. Non-Payment. The above deposit shall be held as above provided as
-----------
security for the faithful performance by the Tenant, of all of the
terms, conditions and covenants of this Agreement, and of that
Sublease Agreement for office, business equipment and furnishings
between ICON and Teltrust which are to be kept and performed by the
Tenant during the Term and Renewal Term hereof and pursuant to the
Sublease Agreement.
3. In the event of any inconsistency between the term of this Amendment
and the terms of the Lease, the terms of this Amendment shall control. Except as
modified by this Amendment, the Lease shall continue in full force and effect.
<PAGE>
2
4. Teltrust acknowledges that the Lease, as amended hereby is in full
force and effect and that there are no defaults of ICON pursuant to the Lease.
IN WITNESS WHEREOF, the parties have signed this Amendment as of the date
first set forth above.
"ICON"
ICON HEALTH & FITNESS, INC., a
Delaware corporation
By /s/ Lynn Brenchley Vice President
--------------------------------------
Authorized Agent
"TELTRUST"
Teltrust, Inc.
By [SIGNATURE ILLEGIBLE]
--------------------------------------
Authorized Agent
<PAGE>
HOLLADAY BUILDING L.L.C.
FIRST AMENDMENT TO LEASE AGREEMENT
THIS AMENDMENT TO LEASE AGREEMENT is made and entered into as of the _____
day of March, 1998, by and between HOLLADAY BUILDING L.L.C. ("Lessor") and
TELTRUST, INC. ("Lessee").
R E C I T A L S:
A. Icon Health & Fitness, Inc. ("Icon"), as lessor, and Lessee previously
entered into a Lease Agreement dated March 24, 1997 ("the Lease") for premises
in the building presently known as the HealthRider Building, which is located at
6322 South 3000 East, Salt Lake County, Utah ("the Building").
B. Lessor purchased the Building from Icon, and Icon assigned all of its
rights, title and interest under the Lease to Lessor.
C. Lessee desires to terminate its possession of certain space on the
first floor of the Building and to acquire additional space in the Building.
D. The parties have agreed to modify other portions of the Lease as set
forth hereinafter.
NOW, THEREFORE, in consideration of their mutual promises and covenants set
forth hereinafter, the parties agree as follows:
1. TERMINATION OF OCCUPANCY OF FIRST FLOOR SPACE. On or before March 15,
1998 Lessee shall terminate its occupancy of all space that it occupies on the
first floor of the Building, which consists of 1,093 rentable square feet.
Lessee's monthly lease payments under the Lease shall be reduced by $1,343.48
per month as of the date Lessee terminates its possession of the first floor
space. Lessor shall give Lessee a credit against the next month's rent for the
reduced rent on the vacated space.
2. LEASE OF NEW PREMISES. Lessor hereby leases to Lessee and Lessee rents
from Lessor certain space designated as suites L1E, L3C, BIW and L1C, consisting
of approximately 32,654 rentable square feet, as specified on Schedule A
attached hereto and included herein by this reference ("the New Premises").
3. COMMISSIONS AND FEES. Lessee shall be solely responsible for paying any
brokerage commissions or consulting fees with respect to the lease of the New
Premises, including any consulting fees owed to Mohr Partners, Inc..
4. TERM OF LEASE FOR NEW PREMISES. The term of the Lease for the New
Premises shall commence on March 15, 1998 and shall terminate on March 31, 2004.
<PAGE>
5. RENT FOR NEW PREMISES. Lessee shall pay Lessor as rent for the use of
the New Premises $14.75 per rentable square foot per annum. Such rent shall be
payable monthly in advance on or before the first day of each month. As it
applies to the New Premises, the Lease shall be a triple net lease; and Lessee
shall be obligated to pay its share of operating expenses for the Building,
which Lessor estimates will be $5.00 per square foot of rentable space. (See
Schedule B attached hereto and included herein by this reference). The estimated
monthly payment for operating expenses shall be $13,605.83 per month. Should
Lessee occupy a portion but less than all of the New Premises prior to May 1,
1998, rent and Lessee's share of operating expenses for the New Premises shall
be prorated. Should Lessee occupy any portion of the New Premises on any day
other than the first day of the month, rent and Lessee's share of operating
expenses shall be prorated. Commencing May 1, 1998 and continuing through April
30, 1999, the rent for the New Premises shall be $40,137.21 per month. On May 1,
1999 and on the corresponding date of each year thereafter through March 31,
2004, rent for the New Premises shall increase by 2.5% over the monthly rent
paid during the preceding year.
6. RENT FOR KITCHEN/DINING AREA. Lessee shall pay rent for its
proportionate share of the Kitchen/Dining Area. The parties acknowledge that as
of the date of this Amendment, Lessee's proportionate share of the
Kitchen/Dining Area is 1,914 square feet and that such number is included in the
net rentable square footage specified in paragraph 2 above. Lessee's
proportionate share of such Area is determined by multiplying the total area of
the Kitchen/Dining Area by a fraction, the numerator of which is the gross
rentable square footage of the New Premises and the denominator of which is the
gross rentable square footage of the Building. Lessee's share of the
Kitchen/Dining Area shall be subject to adjustment due to increases or decreases
in the gross rentable square footage of the Building. In the event there is a
change in the gross rentable square footage of the Building at any time,
Lessee's share of the rent shall be prorated as of the date of such change.
7. RENEWAL OPTIONS. Lessee shall have the option to extend the lease on
the New Premises for two (2) terms of five (5) years each, provided Lessee is
not in default of any provision of the Lease or this Amendment at the time such
option is exercised. The rent at the commencement of each extension term shall
be five percent (5%) below the then current market rate; provided, however, on
May 1st of the second, third, fourth and fifth years of each option term the
rent shall increase by 2.5% over the monthly rate paid during the preceding
year. In the event Lessee desires to exercise its option to extend the term of
the Lease on the New Premises, Lessee shall give Lessor written notice not less
than 180 days prior to the expiration of the current term of the Lease. Lessee
shall be solely responsible for the payment of any brokerage commissions or
consulting fees with respect to such extensions, including but not limited to
any consulting fees owed to Mohr Partners, Inc.
8. SIGNING BONUS. Upon execution of this Amendment, Lessor shall credit
Lessee with the sum of Three Hundred Twenty-Five Thousand Dollars ($325,000.00).
Lessee may use such
2
<PAGE>
credit against rent, tenant improvements and/or brokerage commissions or
consulting fees owed by Lessee.
9. PLANS AND SPECIFICATIONS. Lessee shall be solely responsible for paying
for plans and specifications with respect to the New Premises.
10. SECURITY DEPOSIT. lessee shall not be required to pay a security
deposit with respect to its lease of the New Premises. Lessor shall cooperate
with Lessee to obtain the return of the security deposit in the amount of
$188,515.48 currently being held in escrow at Zions First National Bank ("the
Bank"). The parties acknowledge that Lessee shall be responsible for preparing
the necessary documents to obtain the release of the security deposit from the
Bank; and upon completion of such documents, Lessor agrees to sign the same.
11. ADDITIONAL PARKING. Lessor shall provide Lessee with 140 parking spaces
in addition to those provided under the Lease. Lessee may rent on a month to
month basis up to four (4) additional underground parking stalls at a cost of
$40 per stall per month (the monthly charge being subject to increase from time
to time).
12. LESSOR'S AGENT. Lessor hereby represents to Lessee that Lessor's agent
with respect to any and all matters regarding the Lease, this Amendment, the
Building and the New Premises is Beckstrand & Associates L.L.C. Lessee shall
direct any and all notices or other correspondence under the Lease or this
Amendment to Beckstrand & Associates L.L.C. at the address to which Lessee makes
its rent payments.
13. LEASE PROVISIONS. The terms and conditions of the Lease are
incorporated herein and made a part hereof. Except as expressly amended herein,
the terms and conditions of the Lease shall remain in full force and effect. In
the event of any inconsistency between the provisions of this Amendment and the
Lease, the provisions of this Amendment shall control.
14. OPTION FOR ADDITIONAL SPACE. Provided this Lease is in full force and
effect with no delinquencies or defalcations of any kind by Lessee hereunder,
Lessee shall have and is hereby granted an option to lease all or any portion of
the space in any addition to the Building. Rent for the space shall be the
current market rate for similar space in similar buildings. Prior to listing
space in an addition to the Building with a broker, Lessor shall give Lessee
written notice that such space will be available and the rate or rates for such
space. Lessee shall have a period of thirty (30) days after receiving written
notice from Lessor within which to exercise its option to rent the space in the
addition to the Building. If Lessee exercises its option to rent all or any
portion of the space in the addition, Lessee shall give Lessor written notice of
its exercise, specifying the amount of space that Lessee desires to lease.
Thereafter, the parties shall enter into a lease for such space for a term of
not less than ten (10) years on the same general covenants and conditions as set
forth in the Lease and this Amendment. If Lessee does not exercise its option to
lease any of the space in the addition, Lessee's option shall terminate, and
Lessor may lease the space in the addition to one or more tenants on such terms
and conditions as Lessor determines.
3
<PAGE>
15. LEASEHOLD DEED OF TRUST. Lessor hereby acknowledges that Lessee
previously conveyed to Fleet National Bank ("Fleet"), a secured lender of
Lessee, in trust, with power of sale, its entire right, title and interest now
owned or hereafter acquired in and to the Lease and the leasehold estate
pursuant to that certain Leasehold Deed of Trust dated November 7, 1997 ("the
Leasehold Deed of Trust") to secure certain indebtedness of Lessee to Fleet.
Landlord hereby consents to the Leasehold Deed of Trust and consents to and
approves of the execution and delivery by Lessee of any amendments of or
modifications to such Leasehold Deed of Trust to reflect the modification to the
Lease made by this Agreement, including the change in the premises to be
occupied by Lessee. Lessor agrees to execute a Landlord Consent in substantially
the form attached hereto as Exhibit C and consents to the filing of an amended
Memorandum of Lease and an amendment to the Leasehold Deed of Trust to reflect
the modified terms of the Lease. Lender also agrees to execute, and to use its
good faith efforts to cause any mortgagee to execute, a Subordination, Non-
disturbance and Attornment Agreement in substantially the form attached hereto
as Exhibit D and to use its good faith efforts to obtain the consent of any
mortgagee of the premises to the Leasehold Deed of Trust.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the day
and year first above written.
LESSOR:
HOLLADAY BUILDING L.L.C.
By /s/ Richard N. Beckstrand
--------------------------------------
Richard N. Beckstrand, Manager
LESSEE:
TELTRUST, INC.
By /s/ Lyle O. Keys, Chairman
--------------------------------------
4
<PAGE>
SCHEDULE A
TELTRUST, INC.
SQUARE FOOTAGE SUMMARY
(All square footage amounts are subject to remeasurement.)
<TABLE>
<CAPTION>
- --------------------------------------------------------
SPACE RENTABLE
LEVEL DESCRIPTION SQ. FT.
- --------------------------------------------------------
<S> <C> <C>
BIW Facilities Offices 1,466
LIE Icon Health & Fitness 23,129
L1C Dining Area Build Out 1,863
L3C Executive Offices 5,375
------
TOTAL OFFICE SQ. FT.: 31,833
LESS FIRST FLOOR AREA: (1,093)
------
TOTAL FOR THE NEW PREMISES: 30,740
Proportionate Share of the Following:
L1C Kitchen & Dining Area (42%) 1,914
TOTAL RENTABLE SQUARE FEET: 32,654
* Percentage of Total Building Calculation
Current Rentable Sq. Ft. 32,484
Additional Office Rentable Sq. Ft. 30,740
-------
63,224
Total Building Sq. Ft. 150,233
TELTRUST, Inc. Prop. Share: 42%
</TABLE>
<PAGE>
SCHEDULE B
HEALTHRIDER BUILDING EXPENSE SUMMARY
1998 ESTIMATE
<TABLE>
<CAPTION>
----------------------
HealthRider
Annual Ann.Cost
cost Per Sq.Ft.
----------------------
<S> <C> <C>
OPERATING EXPENSES
------------------
REPAIRS
Electrical Repairs 9,500.00 0.06
Elevator Contracts 7,500.00 0.05
Elevator Phones 2,500.00 0.02
Floors 5,000.00 0.03
HVAC 9,000.00 0.06
Inspections 5,000.00 0.03
Miscellaneous 15,000.00 0.10
Painting 2,000.00 0.01
Parking Lot Maintenance 1,500.00 0.01
Plumbing Repairs 1,500.00 0.01
Roof Repairs 1,000.00 0.01
---------------------
$ 59,500.00 $ 0.40
MAINTENANCE
Janitorial Services 100,000.00 0.67
Janitorial Supplies 17,000.00 0.11
Landscape 10,000.00 0.07
Snow Removal 4,500.00 0.03
Window Cleaning 7,000.00 0.05
---------------------
$138,500.00 $ 0.92
UTILITIES
Sewer & Water 25,000.00 0.17
Natural Gas 20,000.00 0.13
Electricity 160,000.00 1.07
---------------------
$205,000.00 $ 1.37
OTHER SERVICES
Garbage Removal 5,000.00 0.03
Keys 1,000.00 0.01
Other Services 8,500.00 0.06
Signs 1,000.00 0.01
---------------------
$ 15,500.00 $ 0.10
TOTAL OPERATING EXPENSES: $418,500.00 $ 2.79
ADMINISTRATIVE EXPENSES
-----------------------
INSURANCE 24,000.00 0.16
MISC. & ADMIN. (3%) 90,000.00 0.60
PROPERTY TAXES 215,000.00 1.43
---------------------
$329,000.00 $ 2.19
TOTAL EXPENSES: $747,500.00 $ 4.98
---------------------
</TABLE>
<PAGE>
Exhibit C
FLEET NATIONAL BANK
One Federal Street
Mail Drop MA OF DO3D
Boston, Massachusetts 02110
Attn: Stephen J. Healey
Gentlemen:
Reference is hereby made to the following:
A. Teltrust, Inc., as tenant (the "Tenant") and the undersigned, as
landlord (the "landlord") entered into a lease dated March 24,1997) (as it
may be hereafter amended, modified or supplemented, the "Lease", for
premises situated at 6350 South 3000 East, Salt Lake City, State of Utah,
as more particularly described in the Lease (the "Premises"); and
B. We are informed that Tenant, and certain related corporations,
are the Borrower or one of the Guarantors under the terms of a Credit
Agreement, dated on or about the date hereof (as amended from time to time,
the "Credit Agreement") pursuant to which Fleet National Bank (the
"Lender") and the lenders listed in Schedule 2. 1 to the Credit Agreement
agreed to make certain Revolving Credit Loans and other extensions of
credit to the Borrower, as defined in the Credit Agreement (the "Loan").
We are also informed that it is a condition precedent to the Lender's
obligation to make the Loan that Landlord execute and deliver this letter to
Lender.
Accordingly, in order to induce Lender to make the Loan and in
consideration therefore, and in consideration of the mutual covenants set forth
herein. Lender and Land1ord agree as follows;
<PAGE>
November 7, 1997
Page 2
1. Landlord hereby consents to and approves of the execution and delivery
by Tenant of a Mortgage (the "Mortgage") to Lender, pursuant to which Tenant
will grant a mortgage lien on all of its right, title and interest in and to the
Lease and the leasehold estate in the Premises, assign all leases, subleases,
rents and profits and grant other security interests in the Premises, in favor
of Lender as security for the payment or performance of all or the indebtedness,
liabilities and obligations, whether now existing or hereafter arising, of
Tenant to Lender.
2. The Landlord agrees that upon the occurrence of a default under the
Lease, Landlord will send to Lender a copy or any written notice of such default
at the same time such notice ("Default Notice") is sent to Tenant. Landlord
shall give such Default Notice to Lender at the address set forth above, or to
such other address as Lender shall designate to Landlord in writing. Notices
given Lender shall be deemed received by Lender on the same terms and conditions
as deemed to be received by Tenant as provided in the Lease.
3. The Landlord agrees that Landlord will accept the cure of a default
whether provided by Lender or by Tenant as specified in a Default Notice.
4. The Landlord acknowledges that this letter serves as a notification of
the Lender's interest in the Premises as prescribed by the Lease.
Notwithstanding any prohibition or condition on such assignments in the Lease,
and provided that Lender obtains Landlord's prior written consent, which consent
shall not be unreasonably withheld, Landlord agrees that the Lease may be
assigned in connection with the foreclosure of the Mortgage, or any action in
lieu of foreclosure of the Mortgage, and may be assigned by Lender following
such foreclosure of the Mortgage of the Lease or by assignment in lieu of
foreclosure.
5. Landlord agrees that at Lender's request Landlord will, if necessary,
and provided Landlord determines in its sole discretion that it is in Landlord's
best interest to do so, at the sole cost and expense of Lender, cooperate in the
prosecution of the proceedings to evict Tenant if Tenant is in default. Landlord
shall be paid by Lender, in advance, for any reasonable costs and fees Landlord
reasonably anticipates incurring in such proceedings and providing such
cooperation.
6. The Landlord represents to Lender that:
(a) As of the date of this Agreement, Tenant has paid all rent,
additional rent, and other charges and amounts due to Landlord under the Lease
or with respect to the Premises;
(b) Except for the rents due for the month of November 1997 which are
now due and owing, no default has occurred under the terms of the Lease of which
Landlord has
<PAGE>
November 7, 1997
Page 3
knowledge and no event has occurred or failed to occur of which Landlord has
knowledge which, with the giving of notice, the passage to time, or both, would
constitute a default or event of default with respect to the Lease; and
(c) Except for the First Amendment to Lease of even date hereof (of
which a copy is attached) the Lease has not been amended, modified, terminated
or revoked, is in full force and effect, and is binding and enforceable against
Landlord, and against Tenant in accordance with its terms.
7. This Agreement may not be modified, waived or amended in any respect,
except in writing, signed by Landlord and Lender, shall be binding upon and
shall inure to the benefit of the parties hereto and their respective heirs,
legal representatives, estates, successors and assigns, and shall be governed by
and construed in accordance with the laws of the State of Utah.
8. Landlord acknowledges and agrees that the lien and security interest of
the Lender on any equipment owned by Tenant located on the Premises shall be
superior to any lien, right, title, claim or interest that Landlords may now or
hereafter have therein. Landlord further covenants and agrees that in the event
the Lender exercises its right to take possession of or remove said equipment
from the Premises, Landlord will not hinder or interfere therewith, and Landlord
consents to the taking of possession and removal of such equipment. Should any
of the collateral constitute "fixtures," as defined in Utah Code Ann. (S)(S)
70A-9-313. Lender agrees that it shall repair, or reimburse Landlords for the
cost of repair of, any damage to the Premises caused by the removal of any
fixtures (but Lender shall not be liable for any diminution in value of the real
estate caused by the absence of the fixtures removed or by any necessity of
replacing them).
9. Landlord hereby consents to the filing of a notice or memorandum of
lease with respect to the Lease and the Mortgage with the Salt Lake County
Recorders Office.
Very truly yours,
By [SIGNATURE APPEARS HERE]
----------------------------------
Its [ILLEGIBLE]
---------------------------------
Date 11-7-97
--------------------------------
<PAGE>
Exhibit D
SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT
-------------------------------------------------------
THIS AGREEMENT, is made this_____day of _________________, 1997 by and
among ________________________________, With an address of
__________________________________________________________ (the "Tenant"),
______________________________, with an address of
_______________________________________________________ (the "Landlord") and
______________________________________, a ______________________ bank, with a
principal office at_________________________________________________________
(the "Mortgagee").
PRELIMINARY STATEMENT
---------------------
A. Tenant has entered into a lease with Landlord dated ___________ (the
"Lease") of premises described therein (the "Premises") consisting of an
approximately _________ square foot portion of the building located at
______________________________________________. The premises are located on a
parcel of land which is more fully described in Exhibit A attached hereto
---------
(together with the buildings and improvements thereon, called the "Property").
--------
B. Mortgagee is the holder of a certain mortgage dated ________________
from the Landlord to Mortgagee encumbering the Property (the "Mortgage"). The
term "Mortgage" includes any renewal, modification, consolidation or extension
of the same, including increases thereof and supplements thereto. The Mortgage
and all documents executed in connection therewith or secured thereby are
called the "Loan Documents."
C. The parties desire to establish certain rights of quiet and peaceful
possession for the benefit of Tenant under the Lease and to define the terms,
covenants and conditions precedent for such additional rights.
NOW, THEREFORE, in consideration of the foregoing arid other valuable
consideration, the receipt and sufficiency of which is acknowledged, the parties
covenant and agree as follows:
1. The Lease is and shall remain subject and subordinate to the lien of
the Mortgage.
2. In the event of foreclosure of the Mortgage or a deed in lieu of
foreclosure or exercise of Mortgagee's rights or remedies under the Mortgage, or
the Loan Documents, Tenant shall not be made a party in any action or proceeding
to remove or evict Tenant and Mortgagee shall not disturb Tenant's possession
under the Lease during the term provided therein, including any extensions and
renewals of the Lease now provided therein, and the Lease and the rights of
Tenant thereunder shall continue as a direct Lease between
<PAGE>
Mortgagee, as landlord, and Tenant, as tenant and shall not be terminated or
disturbed if and so long as Tenant is not in default under the Lease of such a
nature as would permit the Landlord to terminate the Lease after the expiration
of any applicable grace period, provided that:
(a) Mortgagee shall not be bound by any payment made by Tenant to
Landlord more than thirty (30) clays prior to the due date thereof unless such
prepayment was required pursuant to the terms of the Lease;
(b) Mortgagee shall not be bound by any amendment or modification of
the Lease affecting the term or the rent made without the written consent of
Mortgagee, which consent shall not be unreasonably withheld or delayed; and
(c) Tenant shall not have any right to recover from Mortgagee or set
off against payments otherwise owed under the Lease (1) any damage then accrued
as the result of any past act, omission or default of Landlord or any prior
landlord under the Lease, except to the extent such right of offset or defense
is specifically set forth in the Lease or unless Mortgagee was previously
notified of the act or event giving rise to such offset or defense, or (2) any
security deposit unless actually received by Mortgagee.
3. In the event of foreclosure of the Mortgage or a deed in lieu of
foreclosure, Tenant shall attorn to Mortgagee and accept Mortgagee as the
landlord under the Lease, and Mortgagee shall have all of the rights and
remedies of the Landlord under the Lease, and Mortgagee or any person
claiming thereunder shall be bound to Tenant under all of the terms, covenants
and conditions of the Lease for the balance of the term thereof remaining and
any extensions or renewals thereof.
4. The foregoing provisions shall be self-operative. Nevertheless,
Mortgagee and Tenant agree, upon request, in the event of foreclosure of the
Mortgage or a deed in lieu thereof, to execute an instrument mutually
satisfactory to Mortgagee and Tenant in recordable form confirming the foregoing
provisions.
5. Tenant acknowledges and agrees that this Agreement satisfies any
condition or requirement in the Lease relating to the granting of a non-
disturbance agreement with respect to this particular holder of the Mortgage on
the Property.
6. Upon notice from Mortgagee in form reasonably satisfactory to Tenant
that (a) the Mortgagee has exercised its rights under the Loan Documents, which
may include but not necessarily be limited to (i) declaring a default under the
Loan Documents that has not been cured within the applicable grace or cure
periods, (ii) foreclosure of the Mortgage, (iii) acceptance of a deed from the
Landlord in lieu of foreclosure, or (iv) any one or more of the foregoing or
other rights exercised under the Loan Documents which may or may not involve
-2-
<PAGE>
the Mortgagee's actual possession of the Property, and (b) the Mortgagee demands
that Tenant pay its rent to Mortgagee, then Tenant shall thereafter pay all rent
and other moneys payable to Landlord under the Lease or at the direction of
Mortgagee until otherwise notified in writing by Mortgagee. Landlord
unconditionally authorizes and directs Tenant to make rental payments directly
to Mortgagee following receipt of such notice and further agrees that Tenant may
rely upon such notice without any obligation to further inquire as to whether or
not any default exists under the Mortgage or Loan Documents and that Landlord
shall have no right or claim against Tenant for or by reason of any payments of
rent or other charges made by Tenant to Mortgagee following receipt of such
notice. Landlord, its successors and assigns hereby agree to indemnify and
hold harmless Tenant against any expense, claims, losses or damages incurred
by Tenant resulting from or arising out of claims by Landlord, its successors or
assigns that such rental payments should not have been, or cannot be, made to
Mortgagee.
7. Tenant agrees to give Mortgagee prompt notice of any notice of default
sent to Landlord with respect to the Lease. Tenant agrees that in the event of
any act or omission by Landlord which would give Tenant the right, either
immediately or after any lapse of time, to terminate the Lease or to set off
against or reduce the rent payable thereunder or to claim a partial or total
eviction, Mortgagee shall have the same opportunity to cure such default
available to Landlord under the Lease except Tenant shall have the right to
terminate the Lease without giving Mortgagee notice or the opportunity to cure.
8. Any notice under this Agreement shall be in writing and shall be sent
by certified or registered mail, return receipt requested or by Federal Express
or similar overnight courier to the following address:
If to Mortgagee: ______________________________
______________________________
______________________________
If to Tenant: ______________________________
______________________________
______________________________
If to Landlord: ______________________________
______________________________
______________________________
Or, in any case, to such substitute address or addresses (up to a maximum
of two for any party) as any party may specify by notice to the other parties.
-3-
<PAGE>
9. The terms "Mortgagee," "Landlord" and "Tenant" shall be construed to
include the heirs, executors, administrators, successors and assigns of the
respective parties hereto, including, in the case of Mortgagee anyone who
succeeds to title to the Property after foreclosure or a deed in lieu thereof,
and this Agreement shall inure to their benefit and be binding on them.
10. No modification, amendment, waiver or release of any provision of this
Agreement or of any right, obligation, claim or cause of action arising
hereunder shall be valid or effective unless in writing and signed by the party
against whom the same is sought to be asserted.
11. In the event that any provision or provisions of this Agreement shall
for any reason be invalid, illegal or unenforceable by the final ruling of a
court of competent jurisdiction, the remaining provisions of this Agreement
shall not be affected thereby, and in the place of such invalid, illegal or
unenforceable provision there shall be substituted a like, but valid legal and
enforceable provision which most nearly accomplishes the original intention of
the parties, as evidenced by this Agreement.
-4-
<PAGE>
EXECUTED as a sealed instrument as of the day and year first above written.
TENANT: ________________________________
By:_____________________________
its____________, hereunto duly authorized
MORTGAGEE: ________________________________
By:_____________________________
its____________, hereunto duly authorized
LANDLORD: ________________________________
By:_____________________________
its____________, hereunto duly authorized
-5-
<PAGE>
STATE OF _________________
County of __________________ _____________ 1997
Then personally appeared the above named ______________________, the
____________________ of ____________________________ and acknowledged the
foregoing instrument to be the free act and deed of _________________________
before me.
_____________________________
Notary Public
My Commission Expires:
STATE OF _________________
County of __________________ _____________ 1997
Then personally appeared the above named ______________________, a
___________________ of ___________________________________ and acknowledged the
foregoing instrument to be the free act and deed of ___________________________,
before me
_____________________________
Notary Public
My Commission Expires:
STATE OF _________________
County of __________________ _____________ 1997
Then personally appeared the above named ______________________, the
___________________ of ___________________________________ and acknowledged the
foregoing instrument to be the free act and deed of ___________________________,
before me
_____________________________
Notary Public
My Commission Expires:
-6-
<PAGE>
EXHIBIT A
---------
Property Description
--------------------
-7-
<PAGE>
[FLOOR PLAN APPEARS HERE]
<PAGE>
[FLOOR PLAN APPEARS HERE]
<PAGE>
[FLOOR PLAN APPEARS HERE]
<PAGE>
[FLOOR PLAN APPEARS HERE]
<PAGE>
Exhibit 10.4
INDUSTRIAL LEASE AGREEMENT
THIS LEASE is made and entered as of this 1st day of May, 1994, by and between
Rockwell International Corp., a Delaware corporation (hereinafter "Landlord"),
and Teltrust, Inc., a Utah corporation (hereinafter "Tenant").
For and in consideration of the rental and of the covenants and agreements
hereinafter set forth to be kept and performed by the Tenant, Landlord hereby
leases to Tenant and Tenant hereby leases from Landlord the Premises herein
described for the term, at the rental and subject to and upon all of the terms,
covenants and agreements hereinafter set forth.
1. PREMISES
A. Description. Landlord hereby leases to Tenant and Tenant hereby
rents from Landlord those certain Premises, crosshatched on Exhibit A,
located in the City of Salt Lake, County of Salt Lake, Utah, commonly
known as 5520 West Harold Gatty Drive and described as approximately
30,000 sq. ft. of office space and 360 parking stalls.
B. Work of Improvement. Tenant to supply additional improvements at
Tenant's cost. Such improvements to be approved by Landlord. Such
approval not to be unreasonably withheld.
C. Additional Parking. In the event that Tenant needs additional
parking, in excess of the 360 spaces initially provided as part of the
Premises, then Landlord shall make reasonable efforts to provide
additional paved parking stalls to Tenant, so long as Landlord can do
so without, in its judgement, impairing the use and utility to Landlord
of the remainder of the building and land of which the Premises are a
part. In such event Landlord and Tenant shall agree upon a reasonable
increase in the rent, in an amount sufficient to permit Landlord to
recover, over the remainder of the Lease term, all of its costs and
expenses incurred in providing such additional parking
2. TERM
A. Term. The term of this Lease shall be for two years commencing May
1, 1994 and ending on November 30, 1996, unless sooner terminated
pursuant to this lease. Occupancy of the Premises shall be made
available to Tenant upon execution of this Lease by both parties.
Additionally, Landlord shall have the right to cancel this Lease upon
120 days written notice to Tenant. In the event that Landlord conveys
the Premises to Nicholas & Co. or another third party, Landlord's right
to
<PAGE>
cancel this Lease, as provided in the immediately foregoing sentence,
shall terminate.
B. Delay in Commencement. Tenant agrees that in the event of the
inability of Landlord to deliver possession of the Premises to Tenant
on the commencement date set forth in Section 2A, such inability will
not affect the validity of this Lease or the obligations of Tenant
hereunder, but in such case Tenant shall not be obligated to pay rent
or other monetary sums until possession of the Premises is tendered to
Tenant. Nevertheless, if the delay in delivery of possession exceeds
thirty (30) days, then the expiration date of the term of the Lease
shall be extended by the period of time computed from the scheduled
commencement date to the date possession is tendered, or the Tenant may
cancel the lease at Tenant's option.
3. RENT
Concurrent with the execution hereof, Tenant shall pay to Landlord the sum of
Four Thousand Six Hundred Eighty-Seven and 50/100 Dollars ($4,687.50), as rent
for the month of May, 1994. Beginning June 1, 1994, Tenant shall pay to Landlord
as rent for the Premises in advance on the first day of each calendar month of
the term of this Lease without deduction, offset, prior notice or demand, in
lawful money of the United States, the sum of Eighteen Thousand Seven Hundred
Fifty and No/100 Dollars ($18,750.00) per month.
4. SECURITY DEPOSIT
Concurrently with Tenant's execution of this Lease, Tenant shall deposit with
Landlord the sum of Eighteen Thousand Seven Hundred Fifty and No/100 Dollars
($18,750.00). Said sum shall be held by Landlord as a security deposit for the
faithful performance by Tenant of all of the terms, covenants, and conditions of
this Lease to be kept and performed by Tenant during the term hereof. If Tenant
defaults with respect to any provisions of this Lease, including but not limited
to the provisions relating to the payment of rent and any of the monetary sums
due herewith, Landlord may (but shall not be required to) use, apply or retain
all or any part of this security deposit for the payment of any other amount
which Landlord may spend or become obligated to spend by reason of Tenant's
default or to compensate Landlord for any other loss or damage which Landlord
may suffer by reason of Tenant's default. If any portion of said deposit is so
used or applied, Tenant shall, within ten (10) days after written demand
thereof, deposit cash with Landlord in an amount sufficient to restore the
security deposit to its original amount; Tenant's failure to do so shall be a
material breach of this Lease. Landlord shall not be required to keep this
security deposit separate from its general funds, and Tenant shall not be
entitled to interest on such deposit. If Tenant shall fully and faithfully
perform every provision of this Lease to be performed by it, the security
deposit or any balance thereof shall be returned to tenant (or, at
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Landlord's option, to the last assignee of Tenant's interests hereunder) at the
expiration of the Lease term and after Tenant has vacated the Premises. In the
event of termination of Landlord's interest in this Lease, Landlord shall
transfer said deposit to Landlord's successor in interest, whereupon Tenant
agrees to release Landlord from all liability for the return of such deposit or
the accounting therefor.
5. TAXATION AND COMMON AREA MAINTENANCE CHARGES
A. Payment of Realty Property Taxes. Tenant shall pay his proportionate
share of Real Property Taxes and common area maintenance charges
(including but not limited to assessments against the property for
common expenses of the Salt Lake International Center, reasonable and
necessary expenses incurred by Landlord for the operation, cleaning,
maintenance, repair, insurance, and management of the building and
grounds), including utility charges where not separately metered, and
the repair, operation, and maintenance of land common area. Such
payment shall be made by the Tenant to the Landlord on a monthly basis.
At year end, the actual taxes levied against property and common area
charges incurred during that year shall be determined by Landlord, and
any adjustment in such estimate shall be made, with additional payments
by or refunds to Tenant as appropriate.
B. Proration; Joint Assessment. In the event any such real property
taxes paid by Tenant cover any period of time prior to commencement or
after the expiration of the term of this Lease, Tenant's share of such
taxes shall be equitably prorated to cover only the period of time
within the fiscal tax year during which this Lease is in effect, and
Landlord shall reimburse Tenant to the extent required. With respect to
any assessments which may be levied against or upon the Premises, or
under which the laws then in force may be evidenced by improvement or
other bonds or may be paid in annual installments, only the amount of
such annual installment (with appropriate proration for any partial
year) and interest due thereon shall be included within the computation
of the annual taxes and assessments levied against the Premises. In the
event the Premises are not separately assessed, Tenant's liability
shall be an equitable proportion of the real property taxes for all of
the land and improvements included within the tax parcel assessed, such
proportion to be determined by Landlord form the respective valuations
assigned in the Assessor's worksheets or such other information as may
be reasonably available to Landlord, with Landlord's reasonable
determination thereof in good faith to be conclusive.
C. Definition of "Real Property Tax". As used in this Lease, the term
"real property tax" shall include any form of assessment, levy or tax
(other than inheritance, estate, net income or franchise taxes),
imposed by any authority having the direct or indirect power to tax,
including any city, county, state or federal government or any school,
agricultural, lighting, drainage or other improvement district thereof,
whether such tax is (a) upon or with respect to the possession,
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leasing, operation, management, maintenance, alteration, repair, use
or occupancy by Tenant of the Premises or any portion thereof; or (b)
upon or measured by the value of Tenant's personal property, equipment
or fixtures located in the Premises; or (c) upon this transaction or
any document to which Tenant is a part creating or transferring an
interest or an estate in the Premises; or (d) whether or not now
customary or within the contemplation of the parties.
D. Personal Property Taxes.
i. Tenant shall pay prior to delinquency all taxes assessed
against and levied upon trade fixtures, furnishings, equipment
and all other personal property of Tenant contained in the
Premises or elsewhere. When possible, Tenant shall cause said
trade fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real
property of Landlord.
ii. If any of Tenant's personal property shall be assessed
with Landlord's real property, Tenant shall pay Landlord the
taxes attributable to Tenant within ten (10) days after
receipt of a written statement setting forth the taxes
applicable to Tenant's property.
6. USE
A. Use. The Premises shall be used and occupied by Tenant for only the
following purposes and for no other purposes whatsoever without
obtaining the prior written consent of Landlord: Telemarketing and
related uses.
B. Suitability. If the Premises are completed as of the date of
execution hereof, Tenant, by execution of this Lease, shall be deemed
to have accepted the Premises in the condition existing as of the date
of execution and in any event this Lease shall be subject to all
applicable zoning ordinances and to any municipal, county and state
laws and regulations governing and regulating the use of the Premises.
Tenant acknowledges that neither Landlord nor Landlord's agent has made
any representation or warranty as to the suitability of the Premises
for the conduct of Tenant's business.
C. Uses Prohibited
i. Tenant shall not do or permit anything to be done in or
about the Premises which will increase the existing rate of
insurance upon the Premises (unless Tenant shall pay any
increased premium as a result of such use or acts) or cause
the cancellation of any insurance policy covering said
Premises or any building of which the Premises may be a part,
nor shall Tenant sell or permit
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to be kept, used or sold in or about said Premises any
articles which may be prohibited by a standard form policy of
fire insurance.
ii. Tenant shall not do or permit anything to be done in or
about the Premises which will in any way obstruct or interfere
with the rights of other tenants or occupants of any building
of which the Premises may be a part or injure or annoy them or
use or allow the Premises to be used for any unlawful or
objectionable purpose, nor shall Tenant cause, maintain or
permit any nuisance in, on or about the Premises. Tenant shall
not commit or suffer to be committed any waste in or upon the
Premises.
iii. Tenant shall not use the Premises or permit anything to
be done in or about the Premises which will in anyway conflict
with any law, statute, zoning restriction, ordinance or
governmental rule or regulation or requirements or duly
constituted public authorities now in force or which may
hereafter be enacted or promulgated. Tenant shall at its sole
cost and expense promptly comply with all laws, statutes,
ordinances and governmental rules, regulations or requirements
now in force or which may hereafter be in force and with the
requirements of any board of fire underwriters or other
similar body now or hereafter constituted relating to or
affecting the condition, use or occupancy of the Premises. The
judgment of any court of competent jurisdiction or the
admission of Tenant in any action against Tenant, whether
Landlord be a party thereto or not, that Tenant has violated
any law, statute, ordinance or governmental rule, regulation
or requirement, shall be conclusive of that fact as between
Landlord and Tenant.
7. UTILITIES
Tenant shall pay prior to delinquency for all water, gas, heat, light,
power, telephone, sewage, air conditioning and ventilating, scavenger,
janitorial, landscaping and all other materials and utilities supplied to the
Premises. If any such services are not separately metered to Tenant, Tenant
shall pay a reasonable proportion of all charges which are jointly metered, the
determination to be made by Landlord, and payment to be made by Tenant within
ten (10) days of receipt of a statement for such charges.
8. MAINTENANCE AND REPAIRS, ALTERATIONS AND ADDITIONS
A. Landlord's Obligations. Subject to the provisions of Section 13 and
except for damage caused by any negligent or intentional act or
omission of Tenant and Tenant's agents, employees or invitee, Landlord,
at Landlord's expense, shall keep in good order, condition and repair
the sidewalks, landscaping, driveways, parking lots, fences, and
foundations, exterior walls and the exterior roof of the Premises.
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Landlord shall not, however, be obligated to paint such exterior, nor shall
Landlord be required to maintain the interior surface of exterior walls,
windows, doors or plate glass. Landlord shall have no obligation to make repairs
under this Paragraph 8A until a reasonable time after receipt of written notice
of the need for such repairs.
B. Tenant's Obligations.
i. Subject to the provisions of Sections 13 and 8A, Tenant at
Tenant's expense, shall keep in good order, condition and
repair the Premises and every part thereof, regardless of
whether the damaged portion of the Premises or the means of
repairing the same are accessible to Tenant, including without
limitation thereto, all plumbing, heating, air conditioning,
ventilating, electrical and lighting facilities and equipment
within the Premises and signs located in the areas which are
adjacent to and included with the Premises.
ii. Upon the expiration or earlier termination of this Lease,
Tenant shall surrender the Premises in the same condition as
received, broom clean, ordinary wear and tear and damage by
fire, earthquake, act of God or the elements alone excepted.
Tenant at its sole cost and expense, agrees to repair any
damage to the Premises caused by or in connection with the
removal of any articles or personal property, business or
trade fixtures, machinery, equipment, cabinetwork, furniture,
movable partition, or permanent improvements or additions,
including without limitation thereto, repairing the floor,
patching and painting the walls where required by Landlord to
Landlord's reasonable satisfaction.
C. Landlord's Rights. In the event Tenant fails to perform
Tenant's obligations under this Section 8, Landlord shall give Tenant
notice to do such acts as are reasonably required to so maintain the
Premises; if Tenant shall fail to commence such work and diligently
prosecute it to completion, then Landlord shall have the right but not
the obligation to do such acts and expend such funds at the expense of
Tenant as are reasonably required to perform such work. Any amount so
expended by Landlord shall be paid by Tenant promptly after demand with
interest at ten percent (10%) per annum from the date of such work.
Landlord shall have no liability to Tenant for any damage,
inconvenience or interference with the use of the Premises by Tenant as
a result of performing any such work.
D. Alterations and Additions.
i. Tenant shall not, without Landlord's prior written consent,
make any alterations, additions, improvements or utility
installations in, on or about the Premises, except for non-
structural alterations not exceeding $2,500 in cost. As used
in this Section 8D, the term "utility installations" shall
include ducting, power panels, fluorescent fixtures, space
heaters, conduit and wiring.
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As a condition to giving such consent, Landlord may require
that Tenant agree to remove any such alterations, additions,
improvements or utility installations at the expiration of the
term and to restore the Premises to their prior condition.
ii. Unless Landlord requires their removal as set forth in
Paragraph 8D, and except for those items and improvements
listed on Exhibit B, all alterations, additions, improvements
and utility installations which may be made on the Premises,
shall at the expiration of earlier termination of the Lease
become the property of Landlord and remain upon and be
surrendered with the Premises. Notwithstanding the provisions
of the immediately preceding sentence, personal property,
business and trade fixtures, cabinetwork, furniture, movable
partitions, machinery and equipment, other than that which is
affixed to the Premises so that it cannot be removed without
material damage to the Premises, and all of the items listed
on Exhibit B, shall remain the property of Tenant and may be
removed by Tenant subject to the provisions of Paragraph 8B,
at any time during the term of this Lease when Tenant is not
in default.
9. ENTRY BY LANDLORD
Landlord and Landlord's agents shall have the right at reasonable times to enter
the Premises to inspect the same or to maintain or repair, make alterations or
additions to the Premises or any portion thereof or to show the Premises to
prospective purchasers, tenants or lender. Landlord may, at any time, place on
or about the Premises any ordinary "For Sale or For Lease" signs. Tenant hereby
waives any claim for abatement of rent or for damages for any injury or
inconvenience to or interference with Tenant's business, any loss of occupancy
or quiet enjoyment of the Premises, and any other loss occasioned thereby.
10. LIENS
Tenant shall keep the Premises and any building of which the Premises are a part
free from any liens arising out of work performed, materials furnished or
obligations incurred by Tenant and shall indemnify, hold harmless and defend
Landlord from any liens and encumbrances arising out of any work performed or
materials furnished by or at the direction of Tenant. In the event that Tenant
shall not, within twenty (20) days following the imposition of any such lien,
cause such lien to be released of record by payment of posting of a proper bond,
Landlord shall have, in addition to all other remedies provided herein and by
law, the right but not the obligation, to cause the same to be released by such
means as it shall deem proper, including payment of the claim giving rise to
such lien. All such sums paid by Landlord and all expenses incurred by it in
connection therewith including attorney's fees and costs shall be payable to
Landlord by Tenant on demand with interest at the rate of
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ten percent (10%) per annum. Landlord shall have the right at all times to post
and keep posted on the Premises any notices permitted or required by law, or
which Landlord shall deem proper, for the protection of Landlord and the
Premises, and any other party having an interest therein, from mechanics' and
materialmen's liens, and Tenant shall give to Landlord at least ten (10)
business days prior written notice of the expected date of commencement of any
work relating to alterations or additions to the Premises.
11. INDEMNITY
A. Indemnification by Tenant. Tenant shall indemnify and hold Landlord
harmless from and against any and all claims of liability for any
injury or damage to any person or property arising from Tenant's use of
the Premises, or from the conduct of Tenant's business or from any
activity, work or thing done, permitted or suffered by Tenant in or
about the Premises or elsewhere. Tenant shall further indemnify and
hold Landlord harmless from and against any and all claims arising from
any breach or default in the performance of any obligation on Tenant's
part to be performed under this Lease, or arising from any negligence
of Tenant or Tenant's agents, contractors or employees, and from and
against all costs, attorney's fees, expenses and liabilities incurred
in the defense of any such claim or any action or proceeding brought
thereon. In the event any action or proceeding is brought against
Landlord by reason of any such claim, Tenant upon notice from Landlord
shall defend same at Tenant's expense by counsel satisfactory to
Landlord.
B. Indemnification by Landlord. Landlord shall indemnify and hold
Tenant harmless from and against any and all claims arising from any
breach or default in the performance of any obligation on Landlord's
part to be performed under this Lease, or arising from any negligence
of Landlord or Landlord's agents, contractors or employees, and from
and against all costs, attorney's fees, expenses and liabilities
incurred in the defense of any such claim or any action or proceeding
brought thereon. In the event any action or proceeding is brought
against Tenant by reason of any such claim, Landlord upon notice from
Tenant shall defend same at Landlord's expense by counsel satisfactory
to Tenant.
C. Exemption of Landlord from Liability. Landlord shall not be liable
for injury to Tenant, its employees, invitees, customers, agents or
contractors or any other person in or about the Premises, caused by or
resulting from fire, steam, electricity, gas, water or rain, which may
leak or flow from or into any part of the Premises, or from the
breakage, leakage, obstruction or other defects of the pipes,
sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures of the same, whether the said damage or injury results from
conditions arising upon the Premises or upon other portions of the
building of which the Premises are a part, or from other sources or
places and regardless of whether the cause of such damage or injury or
the means of repairing the same is inaccessible to Tenant. Landlord
shall
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not be liable for any damages arising from any act or neglect of any
other tenant, if any, of the building in which the Premises are
located.
12. INSURANCE
A. Liability Insurance. Tenant shall, at Tenant's expense, procure and
maintain at all times during the term of this Lease a policy of
comprehensive public liability insurance insuring Landlord and Tenant
against any liability arising out of the ownership, use, occupancy, or
maintenance of the Premises and appurtenant areas. Such insurance shall
at all times be in an amount of not less than $1 million for injury to
or death of any one person in any one accident or occurrence and in
amount of not less than $3 million for liability for property damage.
The limits of such insurance shall not limit the liability of Tenant.
If the Premises are part of a larger property, said insurance shall
have a Landlord's Protective Liability endorsement attached hereto. All
insurance required hereunder shall be with companies rated A+ or
better in "Best's Insurance Guide". Tenant shall deliver to Landlord
certificates of insurance evidencing the existence and amounts of such
insurance with loss payable clauses satisfactory to Landlord, provided
that in the event Tenant fails to procure and maintain such insurance,
Landlord may (but shall not be required to) procure same at Tenant's
expense after ten (10) days prior written notice. No such policy shall
be cancelable or subject to reduction of coverage or other modification
except after thirty (30) days prior written notice to Landlord by the
insurer. All such policies shall be written as primary policies, not
contributing with and not in excess of coverage which the Landlord may
carry. Tenant shall, within twenty (20) days prior to the expiration of
such policies, furnish Landlord with renewals or binders or Landlord
may order such insurance and charge the cost to Tenant, which amount
shall be payable by Tenant upon demand. Tenant shall have the right to
provide such insurance coverage pursuant to blanket policies obtained
by Tenant provided such blanket policies expressly afford coverage to
the Premises and to Tenant as required by this Lease.
B. Property Insurance. Landlord shall, at Landlord's expense, procure
and maintain at all times during the term of this Lease a policy or
policies of insurance covering loss or damage to the Premises in the
amount of the full replacement value thereof (exclusive of Tenant's
trade fixtures and equipment), providing protection against all perils
included within the classification of fire, extended coverage,
vandalism, malicious mischief, sprinkler leakage and special extended
peril (all risk). Tenant shall pay such annual insurance premiums to
Landlord within fifteen (15) days after receipt by Tenant of copy of
the premium statement or other reasonably satisfactory evidence of the
amount due, which shall include the method of calculation of Tenant's
share thereof if the insurance covers other improvements than the
Premises. Such insurance shall provide for payment of loss thereunder
to Landlord or the holder of a first mortgage or deed of trust on the
Premises.
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C. Waiver of Subrogation. Landlord and Tenant each hereby waive any and
all rights of recovery against the other or against the officers,
employees, agents and representatives of the other, on account of loss
or damage occasioned to such waiving party of its property or the
property of others under its control caused by fire or any of the
extended coverage risks described above to the extent that such loss or
damage is insured against under any insurance policy in force at the
time of such loss or damage. The insuring party shall, upon obtaining
the policies of insurance required under this Lease, give notice to the
insurance carrier or carriers that the foregoing mutual waiver of
subrogation is contained in this Lease.
13. DAMAGE OR DESTRUCTION
A. Partial Damage - Insured. In the event improvements on the Premises
are damaged by any casualty which is covered under an insurance policy
required to be maintained pursuant to Section 12B, then Landlord shall
repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect.
B. Partial Damage - Uninsured. In the event the improvements on the
Premises are damaged, except by a negligent or willful act or omission
of Tenant, by any casualty not covered under an insurance policy
required to be maintained pursuant to Section 12B, then Landlord may,
at Landlord's option, either (a) repair such damage as soon as
reasonably possible at Landlord's expense, in which event this Lease
shall continue in full force and effect, or (b) give written notice to
Tenant within thirty (30) days after the date of occurrence of such
damage of Landlord's intention to cancel and terminate this Lease as of
the date of the occurrence of the damage. In the event Landlord elects
to terminate this Lease pursuant to this Section 13B, Tenant shall have
the right within ten (10) days after receipt of the required notice to
notify Landlord in writing of Tenant's intention to repair such damage
at Tenant's expense, without reimbursement from Landlord, in which
event this Lease shall continue in full force and effect, and Tenant
shall proceed to make such repairs as soon as reasonably possible. If
Tenant does not give such notice within the ten (10) day period, this
Lease shall be canceled and terminated as of the date of the occurrence
of such damage.
C. Total Destruction. If the Premises are totally destroyed during the
term of this Lease from any cause whether or not covered by the
insurance required under Section 12B (including any destruction
required by any authorized public authority), this Lease shall
automatically terminate as of the date of such total destruction.
D. Damage Near End of The Term. If the Premises are partially destroyed
or damaged during the last six (6) months of the term of this Lease,
Landlord may at Landlord's option cancel and terminate this Lease as of
the date of occurrence of such
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damage by giving written notice to Tenant of Landlord's election to do
so within thirty (30) days after the date of such damage.
E. Landlord's Obligations. The Landlord shall not be required to repair
any injury or damage by fire or other cause, or to make any restoration
or replacement of any panelings, decorations, office fixtures,
partitions, railings, ceilings, floor covering, equipment, machinery or
fixtures or any other improvements or property installed in the
Premises by Tenant or at the direct or indirect expense of Tenant.
Tenant shall be required to restore or replace same in the event of
damage.
F. Abatement of Rent; Tenant's Remedies.
i. If the Premises are partially destroyed or damaged and Landlord
or Tenant repairs them pursuant to this Lease, the rent payable
hereunder for the period during which such damage and repair
continues shall be abated in proportion to the extent to which
Tenant's use of the Premises is impaired. Except for abatement
of rent, if any, Tenant shall have no claim against Landlord for
any damage suffered by reason of any such damage, destruction,
repair or restoration.
ii. If Landlord shall be obligated to repair or restore the Premises
under this Section 13 and shall not commence such repair or
restoration within ninety (90) days after such obligation shall
accrue, Tenant at Tenant's option may cancel and terminate this
Lease by written notice to Landlord at any time prior to the
commencement of such repair or restoration. In such event this
Lease shall terminate as of the date of such notice.
G. Termination - Advance Payments. Upon termination of this Lease
pursuant to Section 13, an equitable adjustment shall be made
concerning advance rent and any advance payments made by Tenant to
Landlord. Landlord shall, in addition, return to Tenant so much of
Tenant's security deposit as has not theretofore been applied by
Landlord.
14. CONDEMNATION
If the Premises or any portion thereof are taken under the power of eminent
domain, or sold by Landlord under the threat of the exercise of said power (all
of which is herein referred to as "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever occurs first. If more than ten percent (10%) of the floor
area of any buildings on the Premises, or more than twenty-five percent (25%) of
the land area of the Premises not covered with buildings, is taken by
condemnation, either Landlord or Tenant may terminate this Lease, as of the date
the condemning authority takes possession, by notice in writing of such election
within twenty
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(20) days after Landlord shall have notified Tenant of the taking, or in the
absence of such notice then within twenty (20) days after the condemning
authority shall have taken possession.
If this Lease is not terminated by either Landlord or Tenant then it shall
remain in full force and effect as to the portion of the Premises remaining,
provided the rent shall be reduced in the proportion that the floor area of the
buildings taken within the Premises bears to the total floor area of all
buildings located on the Premises. In the event this Lease is not so terminated
then Landlord agrees, at Landlord's sole cost, to restore the Premises to a
complete unit of like quality and character as existed prior to the condemnation
as soon as reasonably possible. All awards for the taking of any part of the
Premises or any payment made under the threat of the exercise of power of
eminent domain shall be the property of Landlord, whether made as compensation
for diminution of value of a leasehold or for the taking of the fee or as
severance damages; provided, however, that Tenant shall be entitled to any award
for loss of or damage to Tenant's trade fixtures and removable personal
property. In the event that this lease is not terminated by reason of such
condemnation, Landlord shall, to the extent of severance damages received by
Landlord in connection with such condemnation, repair any damage to the Premises
caused by such condemnation except to the extent that Tenant has been reimbursed
therefor by the condemning authority. Tenant shall pay any amount in excess of
such severance damages required to complete such repair.
15. ASSIGNMENT & SUBLETTING
A. Landlord's Consent Required. Tenant shall not assign, transfer,
mortgage, pledge, hypothecate or encumber this Lease or any interest
therein, and shall not sublet the Premises or any part thereof, without
the prior written consent to Landlord and any attempt to do so without
such consent being first had and obtained shall be wholly void and
shall constitute a breach of this Lease.
B. Reasonable Consent. If Tenant complies with the following
conditions, Landlord shall not unreasonably withhold its consent to the
subletting of the Premises or any portion thereof. Tenant shall submit
in writing to Landlord: (a) the name and legal composition of the
proposed subtenant; (b) the nature of the proposed subtenant's business
to be carried on in the Premises; (c) the terms and provisions of the
proposed sublease; (d) such reasonable financial information as
Landlord may request concerning the proposed subtenant.
C. No Release of Tenant. No consent by Landlord to any assignment or
subletting by Tenant shall relieve Tenant of any obligation to be
performed by the Tenant under this Lease, whether occurring before or
after such consent, assignment or subletting. The consent by Landlord
to any assignment or subletting shall not relieve Tenant from the
obligation to obtain Landlord's express written consent to any other
assignment or subletting. The acceptance of rent by Landlord from any
other
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person shall not be deemed to be a waiver by Landlord of any provision
of this Lease or to be a consent to any assignment, subletting or other
transfer. Consent to one assignment, subletting or other transfer shall
not be deemed to constitute consent to any subsequent assignment,
subletting or other transfer.
D. Attorney's Fees. In the event Landlord shall consent to a sublease
or assignment under this Section 15, Tenant shall pay Landlord's
reasonable attorney's fees not to exceed $500.00 incurred in connection
with giving such consent.
16. SUBORDINATION
A. Subordination. This Lease, at Landlord's option, shall be subject
and subordinate to all ground or underlying leases which now exist or
may hereafter by executed affecting the Premises or the land upon which
the Premises are situated or both, and the lien of any mortgages or
deeds of trust in any amount or amounts whatsoever now or hereafter
placed on or against the land or improvements or either thereof, of
which the Premises are a part, or on or against Landlord's interest or
estate therein, or on or against any ground or underlying Lease without
the necessity of the execution and delivery of any further instruments
on the part of the Tenant to effectuate such subordination.
Alternatively, any mortgagee, trustee or ground lessor may elect to
have this Lease prior to the lien of its mortgage, deed of trust or
ground lease, whether this Lease is dated prior or subsequent to the
date of said mortgage, deed of trust or ground lease or the date of the
recording thereof.
B. Subordination Agreements. Tenant covenants and agrees to execute and
deliver upon demand without charge therefore, such further instruments
evidencing such subordination of the Lease to such ground or underlying
leases and to the lien of any such mortgages or deeds of trust as may
be required by Landlord. Tenant hereby appoints Landlord as Tenant's
attorney-in-fact, irrevocably, to execute and deliver any such
agreements, instruments, releases or other documents.
C. Quiet Enjoyment. Landlord covenants and agrees with Tenant that upon
Tenant paying rent and other monetary sums due under the Lease and
performing its covenants and conditions, Tenant shall and may peaceably
and quietly have, hold and enjoy the Premises for the term of the
Lease, described above.
D. Attornment. In the event any proceedings are brought for default
under any ground or underlying lease or in the event of foreclosure or
the exercise of the power of sale under any mortgage or deed of trust
made by the Landlord covering the Premises, the Tenant shall attorn to
the purchaser upon any such foreclosure or sale and recognize such
purchaser as the Landlord under this Lease; provided said purchaser
expressly agrees in writing to be bound by the terms of the Lease.
13
<PAGE>
17. DEFAULT; REMEDIES
A. Default. The occurrence of any of the following shall constitute a
material default and breach of this Lease by Tenant:
i. Any failure by Tenant to pay the rent or any other monetary
sums required to be paid hereunder (where such failure continues for
thirty (30) days after written notice thereof by Landlord to
Tenant);
ii. The abandonment or vacation of the Premises by Tenant;
iii. A failure by Tenant to observe and perform any other provision
of this Lease to be observed or performed by Tenant, where such
failure continues for thirty (30) days after written notice thereof
by Landlord to Tenant; provided, however, that if the nature of such
default is such that the same cannot reasonably be cured within such
thirty (30) day period, Tenant shall not be deemed to be in default
if Tenant shall within such period commence such cure and thereafter
diligently prosecute the same to completion;
iv. The making by Tenant of any general assignment or general
arrangement for the benefit of creditors; the filing by or against
Tenant of a petition to have Tenant adjudged a bankrupt or of a
petition for reorganization or arrangement under any law relating to
bankruptcy (unless, in the case of a petition filed against Tenant,
the same is dismissed within sixty (60) days); the appointment of a
trustee or receiver to take possession of substantially all of
Tenant's assets located at the Premises or of Tenant's interest in
this Lease, where possession is not restored to Tenant within thirty
(30) days; or the attachment, execution or other judicial seizure of
substantially all of Tenant's assets located at the Premises or of
Tenant's interest in this Lease, where such seizure is not
discharged within thirty (30) days.
B. Remedies. In the event of any such material default or breach by
Tenant, Landlord may at any time thereafter, with or without notice and
demand and without limiting Landlord in the exercise of any right or
remedy at law or in equity which Landlord may have by reason of such
default or breach:
i. Maintain this Lease in full force and effect and recover the
rent and other monetary charges as they become due, without
terminating Tenant's right to possession, irrespective of whether
Tenant shall have abandoned the Premises. In the event Landlord
elects to not terminate the Lease, Landlord shall have the right to
attempt to re-let the Premises at such rent and upon such conditions
and for such a term, and to do all acts necessary to maintain or
preserve the Premises as Landlord deems reasonable and necessary
without being deemed to have elected to terminate the Lease
including removal of all
14
<PAGE>
persons and property from the Premises; such property may be
removed and stored in a public warehouse or elsewhere at the cost
of and for the account of Tenant. Notwithstanding that Landlord
fails to elect to terminate the Lease initially, Landlord at any
time during the term of this Lease may elect to terminate this
Lease by virtue of such previous default of Tenant.
ii. Terminate Tenant's right to possession by any lawful means, in
which case this Lease shall terminate and Tenant shall immediately
surrender possession of the Premises to Landlord. In such event,
Landlord shall be entitled to recover from Tenant all damages
incurred by Landlord by reason of Tenant's default, including
without limitation thereto, the following: (i) the worth at the
time of award of any unpaid rent which had been earned at the time
of such termination; plus (ii) 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 that is proved could have been reasonably
avoided; plus (iii) 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 is
proved could be reasonably avoided; plus (iv) any other amount
necessary to compensate Landlord for all the detriment proximately
caused by Tenant's failure to perform its obligations under this
Lease or which in the ordinary course of things would be likely to
result therefrom; plus (v) at Landlord's election, such other
amounts in addition to or in lieu of the foregoing as may be
permitted from time to time by applicable state law. Upon any such
reentry Landlord shall have the right to make any reasonable
repairs, alterations or modifications to the Premises, which
Landlord in its sole discretion deems reasonable and necessary. As
used in subparagraph (i) above, the "worth at the time of award"
is computed by allowing interest at the rate of ten percent (10%)
per annum from the date of default. As used in subparagraphs (ii)
and (iii) the "worth at the time of award" is computed by
discounting such amount at the discount rate of the U.S. Federal
Reserve Bank at the time of award plus one percent (1%). The term
"rent", as used in this Section 17, shall be deemed to be and to
mean the rent to be paid pursuant to Section 3 and all other
monetary sums required to be paid by Tenant pursuant to the terms
of this Lease.
C. Late Charges. Tenant hereby acknowledges that late payment by Tenant
to Landlord or rent and other sums due hereunder will cause Landlord to
incur costs not contemplated by this Lease, the exact amount of which
will be extremely difficult to ascertain. Such costs include, but are
not limited to, processing and accounting charges, and late charges
which may be imposed on Landlord by the terms of any mortgage or trust
deed covering the Premises. Accordingly, if any installment of rent or
any other sum due from Tenant shall not be received by Landlord or
Landlord's designee within ten (10) days after such amount shall be
due, Tenant shall pay to
15
<PAGE>
Landlord a late charge equal to ten percent (10%) of such overdue
amount. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Landlord will incur by reason
of late payment by Tenant. Acceptance of such late charge by Landlord
shall in no event constitute a waiver of Tenant's default with respect
to such overdue amount, nor prevent Landlord from exercising any of the
other rights and remedies granted hereunder.
D. Default by Landlord. Landlord shall not be in default unless
Landlord fails to perform obligations required of Landlord within a
reasonable time, but in no event later than thirty (30) days after
written notice by Tenant to Landlord and to the holder of any first
mortgage or deed of trust covering the Premises whose name and address
shall have theretofore been furnished to Tenant in writing, specifying
wherein Landlord has failed to perform such obligation; provided,
however, that if the nature of Landlord's obligation is such that more
than thirty (30) days are required for performance, then Landlord shall
not be in default if Landlord commences performance within such
thirty-day period and thereafter diligently prosecutes the same to
completion.
18. MISCELLANEOUS
A. Estoppel Certificate.
i. Tenant shall at any time upon not less than ten (10)
days' prior written notice from Landlord execute, acknowledge
and deliver to Landlord a statement in writing (i) certifying
that this Lease is unmodified and in full force and effect
(or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force
and effect) and the date to which the rent and other charges
are paid in advance, if any, and (ii) acknowledging that there
are not, to Tenant's knowledge, any uncured defaults on the
part of Landlord hereunder, or specifying such defaults if any
are claimed. Any such statement may be conclusively relied
upon by a prospective purchaser or encumbrancer of the
Premises.
ii. Tenant's failure to deliver such statement within such
time shall be conclusive upon Tenant (i) that this Lease is in
full force and effect, without modification except as may be
represented by Landlord, (ii) that there are no uncured
defaults in Landlord's performance and (iii) that not more
than one month's rent has been paid in advance.
iii. If Landlord desires to finance or refinance said
Premises, or any part thereof, Tenant hereby agrees to deliver
to any lender designated by Landlord such financial statements
of Tenant as may be reasonably required by such lender. Such
statements shall include the past three years' financial
statements
16
<PAGE>
of Tenant. All such financial statements shall be received by
Landlord in confidence and shall be used only for the purposes
herein set forth.
B. Transfer of Landlord's Interest. In the event of a sale or
conveyance by Landlord of Landlord's interest in the Premises other
than a transfer for security purposes only, Landlord shall be relieved
from and after the date specified in such notice of transfer of all
obligations and liabilities accruing thereafter on the part of the
Landlord, provided that any funds in the hands of Landlord at the time
of transfer in which Tenant has an interest, shall be delivered to the
successor of Landlord. This Lease shall not be affected by any such
sale and Tenant agrees to attorn to the purchaser or assignee provided
all Landlord's obligations hereunder are assumed in writing by the
transferee.
C. Captions; Attachments; Defined Terms.
i. The captions of the paragraphs of this Lease are for
convenience only and shall not be deemed to be relevant in
resolving any question of interpretation or construction of any
section of this Lease.
ii. Exhibits attached hereto, and addendum and schedules initialed
by the parties, are deemed by attachment to constitute part of
this Lease and are incorporated herein.
iii. The words "Landlord" and "Tenant", as used herein, shall
include the plural as well as the singular. Words used in neuter
gender include the masculine and feminine and words in the
masculine or feminine gender include the neuter. If there be more
than one Landlord or Tenant, the obligations hereunder imposed
upon Landlord or Tenant shall be joint and several. If the Tenants
are husband and wife, the obligations shall extend individually to
their sole and separate property as we as to their community
property. The term "Landlord" shall mean only the owner or owners
at the time in question of the fee title or a tenant's interest in
a ground lease of the Premises. The obligations contained in this
Lease to be performed by Landlord shall be binding on Landlord's
successors and assigns only during their respective periods of
ownership.
D. Entire Agreement. This instrument along with any exhibits and
attachments hereto constitutes the entire agreement between Landlord
and Tenant relative to the Premises and this Agreement and the exhibits
and attachments may be altered, amended or revoked only by an
instrument in writing signed by both Landlord and Tenant. Landlord and
Tenant agree hereby that all prior or contemporaneous oral agreements
between and among themselves and their agents or representatives
relative to the leasing of the Premises are merged in or revoked by
this Agreement.
17
<PAGE>
E. Severability. If any term or provision of this Lease shall, to any
extent, be determined by a court of competent jurisdiction to be
invalid or unenforceable, the remainder of this Lease shall not be
affected thereby, and each term and provision of this Lease shall be
valid and be enforceable to the fullest extent permitted by law.
F. Costs of Suit.
i. If Tenant or Landlord shall bring any action for any relief
against the other, declaratory or otherwise, arising out of this
Lease, including any suit by Landlord for the recovery of rent or
possession of the Premises, the losing party shall pay the
successful party a reasonable sum for attorneys' fees which shall
be deemed to have accrued on the commencement of such action and
shall be paid whether or not such action is prosecuted to
judgment.
ii. Should Landlord, without fault on Landlord's part, be made a
party to any litigation instituted by any third party against
Tenant, or for the foreclosure of any lien for labor or material
furnished to or for Tenant, or otherwise arising out of or
resulting from any act or transaction of Tenant, Tenant covenants
to save and hold Landlord harmless from any judgment rendered
against Landlord or the Premises or any part thereof, and all
costs and expenses, including reasonable attorneys' fees, incurred
by Landlord in or in connection with such litigation.
iii. Should Tenant, without fault on Tenant's part, be made a
party to any litigation instituted by any third party against
Landlord, or for the foreclosure of any lien for labor or material
furnished to or for Landlord, or otherwise arising out of or
resulting from any act or transaction of Landlord, Landlord
covenants to save and hold Tenant harmless from any judgment
rendered against Tenant or the Premises or any part thereof, and
all costs and expenses, including reasonable attorneys' fees,
incurred by Tenant in or in connection with such litigation.
G. Time; Joint and Several Liability. Time is of the essence of this
Lease and each and every provision hereof, except as to the conditions
relating to the delivery of possession of the Premises to Tenant. All
the terms, covenants and conditions contained in this Lease to be
performed by either party, if such party shall consist of more than one
person or organization, shall be deemed to be joint and several, and
all rights and remedies of the parties shall be cumulative and
non-exclusive of any other remedy at law or in equity.
H. Binding Effect; Choice of Law. The parties hereto agree that all the
provisions hereof are to be construed as both covenants and conditions
as though the words importing such covenants and conditions were used
in each separate paragraph hereof; subject to any provisions hereof
restricting assignment or subletting by Tenant
18
<PAGE>
and subject to Section 19B, all of the provisions hereof shall bind and
inure to the benefit of the parties hereto and their respective heirs,
legal representatives, successors and assigns. This Lease shall be
governed by the laws of the State of Utah.
I. Waiver. No covenant, term or condition or the breach thereof shall
be deemed waived, except by written consent of the part against whom
the waiver is claimed, and any waiver or the breach of any covenant,
term or condition shall not be deemed to be a waiver of any proceeding
or succeeding breach of the same or any other covenant, term or
condition. Acceptance by Landlord of any performance by Tenant after
the time the same shall have become due shall not constitute a waiver
by Landlord of the breach or default of any covenant, term or condition
unless otherwise expressly agreed to by Landlord in writing.
J. Surrender of Premises. The voluntary or other surrender of this
Lease by Tenant, or a mutual cancellation thereof, shall not work a
merger, and shall, at the option of the Landlord, terminate all or any
existing subleases or subtenancies.
K. Holding Over. If Tenant remains in possession of all or any part of
the Premises after the expiration of the term hereof, with or without
the express or implied consent of Landlord, such tenancy shall be from
month to month only, and not a renewal hereof or an extension for any
further term, and in such case, rent and other monetary sums due
hereunder shall be payable in an amount equal to 150% of the rent
charged immediately prior to expiration, and such month to month
tenancy shall be subject to every other term, covenant and agreement
contained herein.
L. Signs and Auction. Tenant shall not place any sign upon the Premises
or conduct any auction thereon without Landlord's prior written
consent.
M. Reasonable Consent. Except as limited elsewhere in this Lease,
wherever in this Lease Landlord or Tenant is required to give its
consent or approval to any action on the part of the other, such
consent or approval shall not be unreasonably withheld. In the event of
failure to give any such consent, the other party shall be entitled to
specific performance at law and shall have such other remedies as are
reserved to it under this Lease, but in no event shall Landlord or
Tenant be responsible in monetary damages for failure to give consent
unless said failure is withheld maliciously or in bad faith.
N. Interest on Past Due Obligations. Except as expressly herein
provided, any amount due to Landlord not paid when due shall bear
interest at twelve percent (12%) per annum from the due date. Payment
of such interest shall not excuse or cure any default by Tenant under
this Lease.
19
<PAGE>
O. Recording. Tenant shall not record this Lease without Landlord's
prior written consent, and such recordation shall, at the option of
Landlord constitute a non-curable default of Tenant hereunder. Either
party shall, upon request of the other, execute, acknowledge and
deliver to the other a "short form" memorandum of this Lease for
recording purposes.
P. Notices. All notices or demands of any kind required or desired to
be given by Landlord or Tenant hereunder shall be in writing and shall
be deemed delivered forty-eight (48) hours after depositing the notice
or demand in the United States mail, certified or registered, postage
prepaid, addressed to the Landlord or Tenant respectively at the
addressed set forth after their signatures at the end of this Lease.
Q. Corporate Authority. If Tenant is a corporation, each individual
executing this Lease on behalf of said corporation represents and
warrants that he is duly authorized to execute and deliver this Lease
on behalf of said corporation in accordance with a duly adopted
resolution of the Board of Directors of said corporation or in
accordance with the Bylaws of said corporation, and that this Lease is
binding upon said corporation in accordance with its terms. If Tenant
is a corporation, Tenant shall, within thirty (30) days after execution
of this Lease, deliver to Landlord a certified copy of a resolution of
the Board of Directors of said corporation authorizing or ratifying the
execution of this Lease.
19. HAZARDOUS MATERIALS
A. Lessor's Prior Consent. Notwithstanding anything contained in this
Lease to the contrary, Tenant shall not cause or permit any Hazardous
Materials (as defined in Section 19B below) to be brought upon, kept,
stored, discharged, released or used in, under or about the Premises by
Tenant, its agents, employees, contractors, subcontractors, licensees
or invitees, without the prior written consent of Landlord.
B. Compliance with Hazardous Materials Laws. Tenant shall at all times
in all respects comply will all federal, state and local laws,
ordinances and regulations relating to or involving the use,
generation, manufacture, storage, discharge, release, disposal or
transportation of any materials, substances or wastes which are
considered to be or may be hazardous to human health or safety or to
the environment due to their radioactivity, ignitability,
corrositivity, reactivity, carcinogenicity, infectiousness or other
harmful properties and which are defined as or included within the
definition of "hazardous materials," "toxic substances" or "chemical
known to cause cancer or reproductive toxicity" under any Hazardous
Materials Laws (collectively, "Hazardous Materials"). All laws,
ordinances and regulations relating to industrial hygiene,
environmental protection, or the use, analysis, generation,
manufacture, storage, discharge, release, disposal or transportation of
Hazardous Materials are collectively referred to herein as "Hazardous
Materials Laws".
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<PAGE>
Tenant shall handle, treat, deal with and manage any and all Hazardous
Materials in, on, under or about the Premises in total conformity with
all applicable Hazardous Materials Laws and prudent industry practices
regarding management of such Hazardous Materials. Upon expiration or
earlier termination of this Lease, Tenant shall, at Tenant's sole cost
and expense, cause all Hazardous Materials brought or allowed on the
Premises during the lease term to be removed from the Premises and
transported for use, storage or disposal in accordance and in
compliance with all applicable Hazardous Materials Laws. Tenant shall
not take any remedial action in response to the presence of any
Hazardous Materials in or about the Premises or enter into any
settlement agreement, consent decree or other compromise in respect to
any claims relating to any Hazardous Materials in any way connected
with the Premises, without first notifying Landlord of Tenant's
intention to do so affording Lessor ample opportunity to appear,
intervene or otherwise appropriately assert and protect Landlord's
interests with respect hereto.
C. Notices. Tenant shall immediately notify Landlord in writing of: (i)
any enforcement, cleanup, removal or other governmental or regulatory
action threatened, instituted, or completed pursuant to any Hazardous
Materials Laws; (ii) any claim made or threatened by any person against
Tenant or the Premises relating to damage, contribution, cost recovery
compensation, loss or injury resulting from or claimed to result from
any Hazardous Materials; and (iii) any reports made to any
environmental agency arising out of or in connection with any Hazardous
Materials on or removed from the Premises, including any complaints,
notices, warnings, or asserted violations in connection therewith.
Tenant shall also supply to Landlord as promptly as possible, and in no
event later than five (5) business days after Tenant first receives or
sends the same, copies of all claims, reports, complaints, notices,
warnings or asserted violations relating in any way to the Premises of
Tenant's use thereof. Tenant shall maintain copies of hazardous waste
manifests reflecting the legal and proper disposal of all Hazardous
Materials removed from the Premises and supply Landlord with copies of
same on request.
D. Indemnification. Tenant shall indemnify, defend and hold Landlord
harmless from any and all damages, losses, expenses, liabilities,
obligations, costs, etc., arising out of the handling or release of
Hazardous Materials on the Premises, or the violation of any Hazardous
Materials Laws by Tenant or any party subject to its control. Landlord
shall indemnify, defend and hold Tenant harmless from any and all
damages, losses, expenses, liabilities, obligations, costs, etc.,
arising out of the handling or release of Hazardous Materials on the
Premises or the violation of any Hazardous Materials Laws by Landlord
or any party subject to its control (other than Tenant and any parties
subject to Tenant's control). The foregoing indemnities shall survive
the expiration or earlier termination of this Lease.
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In Witness Whereof, the Landlord and Tenant have excluded this Lease the date
and year first above written.
Landlord: Tenant:
ROCKWELL INTERNATIONAL CORP., TELTRUST, INC.,
a Delaware corporation a Utah corporation
By: /s/ Charles B. Winn By: [SIGNATURE APPEARS HERE]
------------------------- ----------------------------
Its: CHARLES B. WINN Its: VICE PRESIDENT FINANCE
------------------------- ----------------------------
DIRECTOR-REAL ESTATE ADMINISTRATION-CFO
Address: Address:
2201 Seal Beach Boulevard 221 North Charles Lindbergh Drive
-------------------------------
Seal Beach, California 90740 Salt Lake City, UT 84116
-------------------------------
This Lease has been prepared for submission to your attorney who will review the
document and assist you to determine whether your legal rights are adequately
protected. Consolidated Realty Group is not authorized to give legal to tax
advice; no representation or recommendation is made by Consolidated Realty Group
or its agents or employees to the legal sufficiency, legal effect or tax
consequences of this document or any transaction relating thereto. These are
questions for your attorney with whom you should consult before signing this
document.
22
<PAGE>
EXHIBIT A
TOTAL BUILDING
FLOOR PLAN
CROSS HATCHED AREA SHOWS 30,000 S.F. OFFICE AREA
[FLOOR PLAN APPEARS HERE]
<PAGE>
TENANT ESTOPPEL CERTIFICATE
To: Big-N Investment Co., L.L.C. ("Buyer")
P.O. Box 45005
Salt Lake City, Utah 84145-5005
Re: Property: Rockwell International Facility at 5520 Harold Gatty Road,
Salt Lake City, Utah
Lease Dated: May 1, 1994
Landlord: Rockwell International Corp.
From: Teltrust,Inc. ("Tenant")
The undersigned Tenant is the lessee of approximately 30,000 square feet
of office space (the "Premises") located in the Property under the terms of a
lease (the "Lease") with Rockwell International Corp. ("Landlord"). Buyer is
about to purchase the Property. At Buyer's request, and knowing that Buyer will
rely upon the accuracy of the information contained herein in connection with
the purchase of the Property, the undersigned Tenant certifies to Buyer as
follows:
1. The Lease is dated May 1, 1994.
2. The commencement date of the Lease was May 1, 1994, and the
expiration date of the Lease term is November 30, 1996.
3. Rent:
3.1 The fixed monthly rental payable under the Lease is
$18,750.00 and has been paid through Sept. 1, 1994.
3.2 All additional rent (including, as applicable, common area
expenses, taxes, utilities, insurance, etc.) payable under the terms of
the Lease has been paid through Sept. 1, 1994, and the Tenant is not
presently contesting any amount or Tenant's share thereof.
3.3 Tenant has paid all other taxes, charges, maintenance,
insurance, utilities and other costs or expenses payable by Tenant under
the terms and provisions of the Lease and no amounts remain unpaid as of
the date hereof.
<PAGE>
4. The amount of security deposit being held by Landlord is
$18,750.00. No interest is or will in the future become due or payable in
connection with the security deposit.
5. The Lease is in full force and effect, and is binding and
enforceable against Tenant in accordance with its terms.
6. The Lease constitutes the entire agreement between Landlord and
Tenant with respect to the Premises and the Lease has not been amended,
modified, supplemented, renewed or otherwise changed in any way, and there
are no agreements or obligations between Tenant and Landlord, either oral
or written, to so amend, renew, supplement, change or modify the terms or
provisions of the Lease.
7. The Tenant has accepted the Premises and is in full and complete
possession thereof.
8. The Tenant has not assigned, sublet, or encumbered its interest
in the Lease.
9. Tenant has performed no alterations or works of improvement upon
the Premises for which any contractor, workman or supplier is still unpaid
or for which any mechanic or materialman may be entitled to file a lien
against the Premises or the Property.
10. Tenant claims no offsets, rebates, concessions, abatements,
"free rent" or defenses to the enforcement of the agreements, terms,
covenants or conditions of the Lease. No rent under the Lease has been paid
other than as is currently due, and there exists no credits or allowances
to which Tenant is entitled.
11. To the best of knowledge of Tenant, neither the Landlord nor the
Tenant is in default in the performance or observance of any of its
obligations under the Lease, and no event has occurred and no conditions
exist that, with the giving of notice or the passage of time, or both,
would constitute a default under the terms of the Lease.
12. Tenant has no option to renew the Lease, or to lease any other
space in, or to purchase all or part of, the Property, except as set forth
in the Lease.
13. No action or proceeding instituted by Tenant against Landlord is
pending in any court.
14. Tenant agrees to recognize Buyer as the Landlord under the Lease
from and after the conveyance of the Property to Buyer.
15. Tenant has received no notice of prior sale, transfer,
assignment, hypothecation or pledge of the Lease or of the rents provided
therein.
2
<PAGE>
16. Tenant agrees that this Certificate shall be binding upon the
Tenant and its successors and assigns, and shall inure to Buyer's benefit.
Very truly yours,
TELTRUST, INC., a Utah corporation
By /s/ Steven Swenson
------------------------------
General Counsel
------------------------------
(Type Name and Title)
3
<PAGE>
FIRST AMENDMENT TO LEASE AGREEMENT
----------------------------------
THIS FIRST AMENDMENT TO LEASE AGREEMENT (this "Amendment") is entered into
as of the Dec. 1, 1996 by and between BIG N INVESTMENT CO., L.L.C, a Utah
----------------
limited liability company ("Landlord"), and TELETRUST, INC., a Utah corporation
("Tenant"); collectively referred to as the "Parties" and individually, a
"Party".
RECITALS
--------
WHEREAS, Tenant and Rockwell International Corp., successor in interest to
Landlord are parties to that certain Industrial Lease Agreement dated May 1,
1994 (the "Lease") concerning premises located at 5520 West Harold Gatty Drive,
Salt Lake County, Utah (the "Premises"); and
WHEREAS, the Parties desire to amend the Lease to extend the term of the
Lease, grant Tenant one (1) additional option term and make further
modifications to the Amended Lease as set forth herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties agree as follows:
1. TERM. Section 2.A. of the Lease is hereby amended to extend the term
----
for an additional one year period so that the term now expires on November 30,
1997 and to grant to Tenant an option to extend the term for an additional one
year period. Tenant shall exercise such option not latter than one hundred
twenty (120) days prior to November 30, 1997, and if exercised, the term, as
extended by the option, shall expire on November 30, 1998.
2. RENT. The amount of Rent set forth in Section 3 of the Lease is
----
hereby amended to be as follows:
a. The rent for the period from November 30, 1996 through November 30,
1997 shall be Nineteen Thousand Eight Hundred Seventy-Five Dollars
($19,875.00) per month.
b. The rent for the period from November 30,1997 through November
30, 1998 shall be Twenty-One-Thousand Sixty-Eight Dollars ($21,068.00)
per month.
3. LATE CHARGES. Section 17.C of the Lease is hereby amended to delete the
------------
phrase "ten percent (10%) of such overdue amount" and to substitute in place
thereof the phrase "five percent (5%) of such overdue amount".
4. PARKING. Tenant acknowledges that Landlord has retained for its own use a
-------
total of thirty-five (35) parking spaces on the land upon which the Premises are
located.
<PAGE>
5. MISCELLANEOUS. This Amendment, and the amendments to the Lease as set
-------------
forth herein, shall become effective as of the date first set forth above.
Except as expressly amended herein, the Lease shall remain in full force and
effect. In the event of any discrepancy between the Amended Lease and this
Amendment, the terms of this Amendment shall
govern. Capitalized terms herein but not otherwise defined shall have the
meanings given such terms in the Lease.
IN WITNESS WHEREOF, this Amendment has been executed as of the date first
above written.
BIG N INVESTMENT CO., L.L.C.,
a Utah limited liability company
By:[signature appears here]
-----------------------------
Name:
Title:PARTNER
"LANDLORD"
TELETRUST,INC.,
a Utah corporation
By:/s/MARK B. COHEN
----------------------------
Name:MARK B. COHEN
Title:EXEC V.P./CFO.
"TENANT"
2
<PAGE>
FIRST AMENDMENT TO LEASE AGREEMENT
----------------------------------
THIS FIRST AMENDMENT TO LEASE AGREEMENT (this "Amendment") is entered into
as of the Dec. 1, 1996 by and between BIG N INVESTMENT CO., L.L.C, a Utah
----------------
limited liability company ("Landlord"), and TELETRUST, INC., a Utah corporation
("Tenant"); collectively referred to as the "Parties" and individually, a
"Party".
RECITALS
--------
WHEREAS, Tenant and Rockwell International Corp., successor in interest to
Landlord are parties to that certain Industrial Lease Agreement dated May 1,
1994 (the "Lease") concerning premises located at 5520 West Harold Gatty Drive,
Salt Lake County, Utah (the "Premises"); and
WHEREAS, the Parties desire to amend the Lease to extend the term of the
Lease, grant Tenant one (1) additional option term and make further
modifications to the Amended Lease as set forth herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties agree as follows:
1. TERM. Section 2.A. of the Lease is hereby amended to extend the term
----
for an additional one year period so that the term now expires on November 30,
1997 and to grant to Tenant an option to extend the term for an additional one
year period. Tenant shall exercise such option not latter than one hundred
twenty (120) days prior to November 30, 1997, and if exercised, the term, as
extended by the option, shall expire on November 30, 1998.
2. RENT. The amount of Rent set forth in Section 3 of the Lease is
----
hereby amended to be as follows:
a. The rent for the period from November 30, 1996 through November 30,
1997 shall be Nineteen Thousand Eight Hundred Seventy-Five Dollars
($19,875.00) per month.
b. The rent for the period from November 30,1997 through November
30, 1998 shall be Twenty-One-Thousand Sixty-Eight Dollars ($21,068.00)
per month.
3. LATE CHARGES. Section 17.C of the Lease is hereby amended to delete the
------------
phrase "ten percent (10%) of such overdue amount" and to substitute in place
thereof the phrase "five percent (5%) of such overdue amount".
4. PARKING. Tenant acknowledges that Landlord has retained for its own use a
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total of thirty-five (35) parking spaces on the land upon which the Premises are
located.
<PAGE>
5. MISCELLANEOUS. This Amendment, and the amendments to the Lease as set
-------------
forth herein, shall become effective as of the date first set forth above.
Except as expressly amended herein, the Lease shall remain in full force and
effect. In the event of any discrepancy between the Amended Lease and this
Amendment, the terms of this Amendment shall
govern. Capitalized terms herein but not otherwise defined shall have the
meanings given such terms in the Lease.
IN WITNESS WHEREOF, this Amendment has been executed as of the date first
above written.
BIG N INVESTMENT CO., L.L.C.,
a Utah limited liability company
By:[signature appears here]
-----------------------------
Name:
Title:PARTNER
"LANDLORD"
TELETRUST,INC.,
a Utah corporation
By:/s/MARK B. COHEN
----------------------------
Name:MARK B. COHEN
Title:EXEC V.P./CFO.
"TENANT"
2
<PAGE>
Exhibit 10.5
LEASE AGREEMENT
---------------
TABLE OF CONTENTS
-----------------
ARTICLE 1. DATE OF LEASE AND PARTIES .............................. 1
ARTICLE 2. DESCRIPTION OF LEASED PREMISES AND EXHIBIT "A" ......... 1
ARTICLE 3. LEASE AGREEMENT TERM, COMMENCEMENT AND TERMINATION
DATES .................................................. 2
ARTICLE 4. CONSTRUCTION AND IMPROVEMENTS ON PREMISES .............. 2
ARTICLE 5. BASE RENT AND INSTALLMENTS, DUE DATE, SECURITY
DEPOSIT, LATE PAYMENT, PLACE OF PAYMENT ................ 3
ARTICLE 6. USE OF THE PREMISES, CONDUCT OF BUSINESS, LESSEE AND
LESSOR MAINTENANCE REQUIREMENTS, CARE BY LESSEE. ....... 5
ARTICLE 7. CONTROL OF COMMON AREA, AND PAYMENT OF PREMISE
UTILITIES, COMMON AREA PARKING ......................... 8
ARTICLE 8. SIGNS, AWNINGS, AND LIMITATIONS ........................ 9
ARTICLE 9. PLACE AND MANNER OF NOTICE, LESSOR'S WRITTEN CONSENT.... 9
ARTICLE 10. INSURANCE, LESSOR'S INSURANCE, LESSEE'S INSURANCE,
INSURANCE REQUIREMENTS, LIABILITY INSURANCE, MUTUAL
WAIVER ................................................ 10
ARTICLE 11. CONDEMNATION AND DESTRUCTION, REPAIR AND RENT. ........ 12
ARTICLE 12. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS .............. 14
ARTICLE 13. ASSIGNMENT, SUBLETTING, ACCESS, SUBORDINATION ......... 14
ARTICLE 14. LEASE DEFAULT EVENTS AND REMEDIES, LIENS, CUMULATIVE
COSTS, DEFAULT NOTICE, PARTIAL PAYMENT, ATTORNEYS
FEES .................................................. 15
ARTICLE 15. RENEWAL, HOLDOVER, TENANCY, RENT AND FIRST RIGHT OF
REFUSAL ............................................... 18
ARTICLE 16. LESSOR'S TITLE ........................................ 19
ARTICLE 17. MISCELLANEOUS PROVISIONS
17.0 RELATIONSHIP OF PARTIES ................. 19
17.1 LANGUAGE CONSTRUCTION ................... 20
17.2 PARTIES BOUND BY LEASE AGREEMENT ........ 20
17.3 ENTIRE AGREEMENT, TIME IS OF THE
ESSENCE ................................. 20
17.4 GOVERNMENTAL ORDERS ..................... 20
17.5 DELIVERY OF KEYS ........................ 20
17.6 CONTINUOUS OPERATION .................... 21
17.7 SAVINGS CLAUSE, VALIDITY ................ 21
<PAGE>
17.8 FORCE OF DELAY IN PERFORMANCE ........... 21
17.9 NO OPTION ............................... 21
17.10 COOPERATION WITH THIRD PARTIES .......... 21
17.11 SUPPLEMENTS TO THE LEASE ................ 21
17.12 MEDIATION ............................... 22
ARTICLE 18. PROPERTY TAXES ........................................ 22
ARTICLE 19. PARKING ............................................... 22
ARTICLE 20. ENTIRE AGREEMENT ...................................... 23
LESSOR AND LESSEE SIGNATURES, AGREEMENT DATE........... 23
<PAGE>
Exhibit 10.5
LEASE AGREEMENT
----- ---------
ARTICLE ONE
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DATE OF LEASE AND PARTIES
---- -- ----- --- -------
1.0 WITNESSETH, THIS LEASE AGREEMENT made and entered in to this 26th
day of February, 1997, by and between The Kier Corporation, owner, hereinafter
referred to as the "LESSOR", and Teltrust Inc., hereinafter referred to as
-------------
"LESSEE".
ARTICLE TWO
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DESCRIPTION OF LEASE PREMISES
----------- -- ----- --------
2.0 PREMISES: In consideration of the covenants, agreements and the
stipulations of both parties herein contained, Lessor does hereby demise and
lease to the Lessee, for the uses and purposes set forth in Article Six, and
Lessee does lease and take from Lessor the following described premises,
hereinafter referred to as "PREMISES" now or hereafter to be erected in the
LAKESIDE SQUARE SHOPPING CENTER hereinafter referred to as "Center" in the City
- -------------------------------
of CLEARFIELD, DAVIS County, UTAH (STATE); a retail space measuring
---------- ----- ----
approximately 16.644 square feet, located on the main level of the building
------ ----
located at 3750 South State Street (ADDRESS) CLEARFIELD (CITY), UTAH (STATE).
----------------------- ---------- ----
The Lessee shall have 60 days to verify the size of the Premises.
2.1 EXHIBIT "A": The floor plan of the Leased Premises is as per
Exhibit "A" attached hereto and made a part hereof.
Lessee warrants by his signature hereto that he has inspected the
attached Exhibit "A", and that he accepts the Premises in their existing
condition, with those changes made as per the attached plan, said plan being
Exhibit "A".
2.2 RESERVATIONS: Lessor does reserve the right to existing easements,
and to grant future easements for the public utilities. The square footage
measurement stated above shall be used by both parties for all computations and
assessments based on square footage contemplated by this Lease Agreement.
1
<PAGE>
ARTICLE THREE
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LEASE TERM
----------
3.0 TERM: The Term of this Lease shall be Ten (10) years Lessee's
--------
obligation to pay the rental payments hereunder, and the Term of this Lease
shall commence upon June 1, 1997. This Lease Agreement shall terminate at
------------
midnight, May 31, 2007.
------------
ARTICLE FOUR
------------
CONSTRUCTION AND IMPROVEMENTS ON LEASE PREMISES
-----------------------------------------------
4.0 LESSEE'S OBLIGATION: Lessee agrees to indemnify Lessor and hold
harmless Lessor against any loss, liability, or damage resulting from any work,
installation of personal property, or fixtures done by Lessee provided any such
loss, liability or damage was not caused by Lessor's own faults, negligence or
willful misconduct. Lessee shall comply with all of the requirements and
conditions of this entire Lease as they pertain to all changes and improvements.
The Leased Premises shall be constructed according to the plans attached hereto
and labeled Exhibit "A". Said construction shall be at the cost of the Lessor
unless otherwise indicated, however the Lessee shall pay the amount of $57,000
as it's portion of the construction cost to the Lessor. Said amount shall be
paid upon lease execution and 1/2 upon completion or move-in, whichever occurs
first. The $57,000 payment represents a portion of the cost of constructing,
supervising and finishing the interior office walls and related: electrical
switches, outlets, doors, HVAC and fire protection overhead sprinklers. The
Lessor shall provide an allowance for floor covering in the amount of $8.00 per
yard of material cost and standard installation cost where floor covering is to
be installed. The Lessee shall be responsible for the material cost above $8.00
per yard and any specialty installation cost. Said floor covering cost shall be
in addition to the $57,000 cost above and shall be paid upon completion of the
Premises. All costs associated with the following items shall be the sole cost
and responsibility of the Lessee: Back-up power generator, related equipment
including all installation, maintenance costs and concrete pad; All Switch Room
fire protection equipment and HVAC equipment of every type, including
installation and maintenance; telephone equipment, lines and all installation
costs; power poles; reception desks; work stations; shelves; specialty lighting
and any other installation whether permanent or temporary which is not included
as a part of the construction plans labeled as Exhibit "A". Said items shall be
considered trade fixture fixtures with the exception of specialty lighting.
Under no
2
<PAGE>
circumstance shall the commencement date of this lease be delayed by any item
which is the sole cost or responsibility of the Lessee. The lease shall be
contingent upon receiving approval from the City of Clearfield, Building
Inspection and Fire Department for construction of the Premises. The Premises
shall be available for occupancy 90 days after the Lessee has signed the final
construction plans and completed all material and color selections.
ARTICLE FIVE
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BASE RENT AND INSTALLMENTS
---- ---- --- ------------
5.0 BASE RENT AND MONTHLY INSTALLMENTS: Lessee shall pay the Lessor
that amount in monthly installments of eight thousand five hundred ninety-nine
---------------------------------------
and 40/100 ($8,599.40) each and every month of the first year of the term. The
- ----------------------
first monthly installment shall be due with the execution of this lease
agreement. The base rent shall increase 3% each and every year of the lease
term starting with the first anniversary date and each year thereafter.
5.1 THE MONTHLY RENTAL INSTALLMENTS, are due on the First (1st) day of
each month and shall cover the month from the first day to the last day. The
Lessee shall have a Five (5) day grace period up to and including the 5th day of
the month, in which to make payment to the Lessor. In the event of a late
payment (after the 5th day of the month), Lessee agrees to pay the interest/late
fee as set forth in Article 5.5 of this Lease Agreement.
5.2 SIGN MAINTENANCE: Provided there is space available, if Lessee
elects to utilize the marquee sign on State Street there will be a one time
charge for Young Electric Sign Company to make up and install the sign insert
-----
for the Lessee. Because of continuous changes in cost the Lessee shall negotiate
the cost and shall make the one time payment directly to the sign company. The
Lessee shall have a right to utilize the next available space on said marquee
behind Ogden's Carpet and Half-Time Sports. The Lessee shall be permitted to
have it's own signage above the entry to the Leased Premises, which sign shall
be consistent with the standard signage at the building. The Lessee shall also
be permitted to install a monument sign in front of the main entry of the
Premises along State Street, contingent upon obtaining approval from the City of
Clearfield and with design approval from the Lessor.
5.3 SECURITY DEPOSIT: Lessee shall pay the Lessor $8,599.40 as a
---------
security deposit to secure the faithful performance by the Lessee of all of the
covenants, conditions, and agreements set forth in this Lease to be performed by
it.
3
<PAGE>
The Lessor may at his discretion retain all or a portion of the
security deposit as liquidated damages for Lessee's failure to comply with any
such terms, but such retention shall not be deemed to waive any rights Lessor
has for collection of rents or payments for damages occasioned by Lessee or this
Lease. Lessor shall never be required, but may elect, to apply the Security
Deposit against rents due during the term of this Lease, and the security
deposit shall not be termed as rent by the Lessee unless the Lessor elects to
apply the deposit as such, in which case the Lessor shall notify the Lessee in
writing of his intention to apply the Security Deposit to the rental amount.
In the case of a sale of the property and transfer of the Lease and
Security Deposit by the Lessor, the Lessor is relieved of his liabilities under
the Lease and any liability for return of the Security Deposit provided that any
buyer assumes all of the Lessor's responsibilities and obligations pursuant to
the terms and conditions of this lease agreement. The Lessor may intermingle the
Security Deposit with other bank accounts. If Lessee is not found to be in
default after the first five (5) years of the lease, Lessor shall refund deposit
in full.
5.4 ADDITIONAL RENT: Lessee agrees to pay the Lessor, along with the
monthly rental payment, the amount of $2,219.40 monthly. This amount shall be
---------
designated as "Common Area Maintenance Charge" to pay for the Lessee's share of
maintenance, and other such exterior upkeep expenses for the "Common Area" of
the Center. Without limitation of the generality of the foregoing, but only to
the extent provided by Lessor, such expenses shall include parking lot sweeping,
parking lot lighting, maintenance, snow and ice removal, and exterior
maintenance to the common area. Lessee agrees that the Lessor shall not be
liable for the failure to provide or the partial supplying only of any of these
services provided that such failure be beyond the reasonable control of the
Lessor. Lessee's obligation to pay the additional maintenance charge shall start
at the beginning of the Lease Term, and be payable throughout the term. This
additional rent shall be adjusted each year, however, this charge shall not
increase more than 4% on any annual adjustment. This additional rent shall not
be considered, included with, or part of the basic rent for any purpose, but
shall be paid under the same terms and conditions as the basic rent. The Lessee
shall have the right to audit such expenses within 2 years of the year end date
of the year to be audited. Any audit shall be at the sole cost of the Lessee
4
<PAGE>
unless such audit reveals a greater than 7% overcharge: the Lessor shall then
be responsible for the reasonable audit cost not to exceed $1000
5.5 LATE PAYMENT INTEREST: If Lessee shall fail to pay, when the same
is due and payable, any basic rent, common area maintenance fee, or fees as
required by this Lease Agreement, such unpaid amounts shall bear interest from
the due date thereof to the date of payment at an annual rate of 18% interest on
the unpaid balance. In the event this past due amount remains unpaid for a
period of Ten (10) days after written Notice of Default from Lessor the account
shall be turned over to the Lessor's attorneys for collection. Lessee further
agrees to pay in full any reasonable legal or other expenses incurred by the
Lessor in his efforts to collect any past due amounts, or to remedy any lease
defaults, whether or not the matter is resolved in court.
5.6 PLACE OF RENT PAYMENT, NO SET OFF, PARTIAL PAYMENT: All rents
payable under the terms of this Lease shall be payable at the office of the
Lessor located at 3710 Quincy Avenue, Ogden, Utah 84403. Lessee agrees to pay
all rents assessed by Lessor as agreed herein on the date that they are due,
without deduction or set-off for any alleged counterclaim against Lessor.
Lessor's acceptance of a partial rent payment due hereunder shall not be deemed
payment of the full rental due, not withstanding any waivers or disclaimers by
Lessee to the contrary. Money shall be allocated within the rent account for
Lessee according to Lessor's accounting preference.
ARTICLE SIX
-----------
USE OF PREMISES, CONDUCT OF BUSINESS, LESSEE & LESSOR MAINTENANCE.
------------------------------------------------------------------
6.0 USE OF PREMISES; LIMITATION, RISK: Lessee shall use the Premises
during the full term of this Lease solely for the purpose of conducting the
business of a telecommunications call center/general office. Lessee covenants
-----------------------------------------------
that during the entire term of this Lease it shall operate continuously in the
premises the business above stated and will not use or permit the use of the
premises for any other purpose unless prior written consent is given by the
Lessor, which consent shall not unreasonably withheld. All uses not specifically
and/or exclusively granted herein are reserved to the Lessor and other Lessees
in the Center. Lessee agrees that the premises shall not be used for any
unlawful or immoral purposes, for living quarters, or for "Quitting Business
Sales" and Lessee shall not permit any disorderly conduct or
5
<PAGE>
nuisance. All property kept, stored, or maintained within the premises by Lessee
shall be at the Lessee's sole risk.
6.1 STANDARD OF OPERATION, BUSINESS HOURS: Lessee agrees that Lessee
shall at all times during the term of this Lease, operate and maintain the
premises under Lessee's trade name or related affiliate as set forth in Section
1.0 with due diligence and efficiency. The Lessee shall have access to the
Premises 24 hours per day, Sundays and holidays included.
6.2 CARE BY LESSEE: Lessee agrees that during the entire term of this
Lease, Lessee shall have full responsibility for maintaining and protecting the
premises and property thereon, and Lessee also agrees to diligently enforce the
following provisions:
(a) Unsightly objects shall not be placed against windows or glass
partitions, and Lessee shall remove any such objects deemed by
the Lessor to be subject to this provision .
(b) No trash shall be burned in the shopping center, and all garbage
shall be neatly placed in the trash dumpsters. Lessee shall be
responsible for their own trash removal, and for their own
dumpsters.
(c) Gates, doors, blinds, shades, or any other items installed by the
Lessee shall be installed only with prior written consent of the
Lessor, which consent shall not unreasonably withheld.
(d) Lessee shall be responsible for replacement of any broken glass
or windows on the leased premises.
(e) Lessee shall maintain entrances clear of any obstacles that might
encumber the free use thereof;
(f) Lessee shall not use the premises in any manner that will
increase risks covered by insurance on the premises and result in
an increase in the rate of insurance or cancellation of any
insurance policy, even if such use may be in the furtherance of
Lessee's business purposes. Lessee shall not keep, use or sell
anything prohibited by any policy of fire insurance covering the
premises and shall comply with all requirements of the insurers
applicable to the premises necessary to keep in force the fire
and liability insurance. Lessor and/or Lessor's insurance carries
shall notify the Lessee in writing of any use of the premises by
Lessee which to their knowledge might cause an increase in the
premium or cancellation of the policy as soon as such items are
known by the Lessor or Lessor's Insurance carrier.
(g) Lessee shall not permit, commit, or suffer any waste or
destructive damage to the premises, subject to normal wear and
tear.
(h) Lessee shall not install any electrical equipment that might
overload electrical circuits.
(i) Lessee agrees that Lessor shall have all the default remedies in
this Lease for breach of any promises in this Article, and may
compel the Lessee to specifically perform any of these promises.
(j) Lessee shall comply with all laws ordinances of public
authority.
6
<PAGE>
(k) All unloading, loading, and garbage and refuse removal shall be
made in an orderly and clean manner.
(1) No animals shall be kept on the premises for any reasons.
(m) Lessee shall not permit the premises to be used for any purpose
which would overload the floors of the premises.
(n) Lessee shall not permit the manufacture or sale of any alcoholic
beverages.
(o) Such other rules as the Lessor shall from time to time set forth
to provide for the common safety, health, and prosperity of all
Lessees within the center.
(p) Lessee further agrees to keep the sidewalks in front of and
around the premises free from ice and snow and free from all
litter, dirt, debris, and obstructions and to keep the premises
clean and sanitary.
(q) Lessee agrees to informally notify the Lessor in the event of any
vandalism that occurs within the Leased Premises and Lessee also
agrees to notify the local Police Department immediately of the
same.
6.3 MAINTENANCE: Lessor shall cause the Common Area to be kept clean,
accessible, lighted, orderly, and in good repair. In no event shall Lessor be
liable for interruption or failure in the service of any utilities to the
premises with the exception of negligence or willful misconduct. Lessor shall
cause to be maintained and kept in good repair the roof, HVAC system, exterior
surfaces of the building and exterior doors, provided however, that the costs of
any such repairs as a result of the negligence or willful acts of Lessee, his
customers, licensees, agents, servants, or employees shall be borne by Lessee.
The Lessor shall be responsible for all structural components and/or failure of
the Center.
Lessee shall keep plumbing and electrical systems in operation. Lessee,
at its sole cost and expense, whether same shall be property of the Lessor or
the Lessee, shall promptly repair and at all times maintain in good condition
the premises including store fixtures or equipment, electrical fixtures,
electrical installation, plumbing repairs, door locks, all hardware, all
interior painting and decorations of every kind, all door and window screens,
all broken or damaged glass, and such repairs and replacements shall be made in
a first class manner.
If Lessor reasonably deems any repairs necessary within the premises it
may demand that the Lessee make some forthwith. Should the Lessee refuse to
commence said repairs and complete the same with reasonable dispatch, Lessor may
make or cause said repairs to be made at the cost of the Lessee. Lessee agrees
that he will forthwith on demand, pay to the Lessor the cost thereof with
interest at the highest maximum rate allowed by law, and if he shall default in
such payments
7
<PAGE>
the Lessor shall have the remedies provided in the Lease Agreement. The Lessor
shall provide the Lessee a 24 hour informal notice of any entry required to
perform routine repairs with emergencies excepted.
ARTICLE SEVEN
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CONTROL OF COMMON AREA, UTILITIES
------- -- ------ ----- ---------
7.0 COMMON AREA DEFINED: The "common area" of the center is that
portion designated by the Lessor from time to time for the common benefit of all
Lessees, including, among other facilities, sidewalks, landscaping, curbs,
hallways, delivery passages, enclosed and open areas, lighting facilities,
parking lots and the like. Lessor reserves the right to change from time to time
the dimensions and location of any common area, to construct and let additional
premises within the center, make other improvements in the center, and to
dedicate portions of the common area and other portions of the center, except
the leased premises, for street, park, utility and other public purposes.
7.1 USE OF COMMON AREA PARKING: Lessee and its employees, customers,
sub-lessees, concessionaires, and licensees shall have the non-exclusive right
to use the common area as constituted from time to time, such use to be in
common with the Lessor, other Lessees of the Center, and other persons entitled
to use the same; a subject to such reasonable rules and regulations governing
use as Lessor may prescribe. Lessee shall not take any action which would
interfere with the rights of other persons to use the common area. Lessor may
temporarily close any part of the common area for such periods of time as may be
necessary to prevent the public from obtaining prescriptive rights, or to make
repairs or alterations. The Lessor shall notify the Lessee should any major
closure have an adverse effect on Lessee's customers or employees. Lessor
reserves the right to erect all signs within or upon the common area, or to
approve in writing those signs offered by the Lessee. Lessee shall not solicit
business upon or within the common area except as approved by the Lessor.
Lessee agrees that at no time will Lessee, his employees, licensees,
concessionaires, etc., use the Centers common area parking for advertising by
the use of handbills, circulars, or advertisements placed on automobiles that
are parked in the common area parking lot.
Lessor may designate specific areas within and without the common area
in which
8
<PAGE>
automobiles used by Lessee, its employees, sublessees, concessionaires, and
licensees shall be parked. Lessee shall upon request furnish to Lessor a
complete list of the license numbers of all automobiles belonging to those
parties listed above. Lessee shall upon request instruct its employees, sub-
lessees, concessionaires, etc., to park in designated areas of the parking lot
in order to allow commercial customers the most convenient parking areas.
7.2 UTILITIES: Lessor shall construct utility mains, conduits and other
facilities to the premises. Lessee shall have the utilities put into his name
------
within two (2) days prior to the commencement of this lease agreement, and
Lessee shall be responsible and shall pay for all utility services to the
- ------
premises.
ARTICLE EIGHT
-------------
SIGNS, AWNINGS AND LIMITATIONS
------------------------------
8.0 SIGNS, AWNINGS AND LIMITATIONS: Lessee agrees not to install
exterior signs or interior window signs, or window coverings, without the prior
written consent of the Lessor, which consent shall not be unreasonably withheld,
and any necessary permits secured from municipal authorities for construction
and maintenance of any signs. Any signs installed by the Lessee shall be
maintained by the Lessee and the Lessee shall remove any such signs prior the
termination of its lease agreement. Exterior and interior signs shall be subject
to the absolute control of the Lessor. Lessor reserves the right to remove any
signs first complained of to the Lessee, or in order to paint the building or
make repairs, and to cause any objectionable interior sign to be removed. Lessor
warrants that signage removed for purpose of repair or exterior painting shall
not be removed longer than a thirty (30) day period.
ARTICLE NINE
------------
NOTICES
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9.0 PLACE AND MANNER OF NOTICE: Whenever any notices are required or
permitted hereunder, such notices shall be in writing or acknowledged in
writing, and deemed to be delivered when deposited in the United States Mail,
postage prepaid, registered of certified mail, and addressed to the parties at
the respective addresses set forth below, or at such other addresses as they
have therefore specified by written notice delivered in accordance herewith.
personal delivery to the Lessor or the Lessee at the address shown below or to
their agents at these addresses, or any notice herein shall be deemed equivalent
to the mailing of any notice or
9
<PAGE>
document.
<TABLE>
<CAPTION>
LESSOR LESSEE WITH COPY TO:
- ------ ------ -------------
<S> <C> <C>
The Kier Corporation Teltrust, Inc Teltrust, Inc. Corporate Offices
3710 Quincy Avenue 3790 South State Street 221 N. Charles Lindbergh Drive
Ogden, UT 84403 Clearfield, UT 84015 Attn: Corporate Counsel
Salt Lake City, UT 84116
</TABLE>
9.1 LESSOR'S WRITTEN CONSENT: Whenever written consent from the Lessor
is required under the terms of this Lease, the only written consent that shall
be acceptable shall be writing bearing the signature of Lessor, or the Lessor's
assigns.
ARTICLE TEN
-----------
INSURANCE
---------
10.0 LESSOR'S INSURANCE: By or before the commencement date of the
Lease term, Lessor shall obtain fire insurance for the leased premises. Lessor
shall have the right to insure and maintain the insurance coverage as set forth
herein under blanket insurance policies covering other properties owned, leased
or operated by the Lessor. Lessee shall pay to Lessor on a monthly basis their
pro-rated portion of premium for the above described insurance with each monthly
Lease payment. Current monthly payment shall be $277.40 and is subject to change
-------
annually based on total premium costs.
10.1 LESSEE'S INSURANCE REQUIREMENT: Lessee agrees to secure and keep
in force from and after the date of commencement of the Lease Agreement and
throughout the lease term, at Lessee's own cost and expense, the general
comprehensive liability insurance on a current basis in the amounts of One
---
Million Dollars ($1,000,000.00) (See article 10.2 for requirements) to cover
- -------------------------------
the demised premises.
Lessee further agrees to provide its own insurance on all property
owned by Lessee and Lessee further agrees not to make any claims against the
Lessor for any loss of personal property damaged or destroyed due to fire or
other types of loss.
10.2 INSURANCE REQUIREMENTS, LIABILITY INSURANCE: All policies of
insurance procured by Lessee shall be insured by insurance companies within a
general policy holders rating of not less than "A" or its equivalent and a
financial rating of "AAA" or its equivalent as rated in the most current
available "Best's insurance reports and licensed to do business in the State of
Utah, and authorized to issue such policy or policies. All policies of
10
<PAGE>
insurance procured by Lessee shall be written as primary policies and not as
secondary coverage. All liability insurance procured by Lessee, including those
pursuant to paragraph 11.2 hereof, shall be issued in the names and for the
benefit of the Lessor, Lessee, and at the Lessor's request its Mortgagees, as
their respective interests may appear, and shall contain the endorsement that
the Lessor; although named as an additionally insured, nevertheless, shall be
entitled to recover under said policies for any loss or damage occasioned to it,
its servants, agents, and employees by reason of the negligence of the Lessee.
Insurance procured by Lessee shall contain endorsements providing as follows:
(a) That such insurance may not be materially changed, amended, or
canceled with respect to the Lessor' except after thirty (30)
days prior written notice from the insurance company to the
Lessor, sent by registered mail;
(b) That Lessee be solely responsible for the payment of all
premiums under such policy and that Lessor shall have no
obligation for the payment thereof, however, the Lessor shall be
named as an additionally insured.
Lessees original policy or policies, or fully executed certificates of insurance
and a copy of the policy shall be delivered to the Lessor on or before Lessee
takes possession of the premises and upon renewals of such policies not less
than twenty (20) days prior to the expiration of the term of any such coverage.
The minimum limits of any insurance carried by Lessee shall not limit Lessee's
liability under Article Ten (10) hereof. Lessee shall not stock, use or sell or
permit or suffer to be stocked, used or sold any article, nor do anything in or
about the premises which may be prohibited be or violate the rules or
regulations of the fire insurance, or which will increase any insurance rates
and premiums of the building in which the premises are located on for any
improvement therein without specific waiver and agreement by Lessor and Lessor's
insurers.
If any insurance carried by Lessor shall be canceled by the insurance
carrier as a result of any aforementioned acts or omissions of Lessee or anyone
claiming by, through or under Lessee, or if rates payable by Lessor are
increased because of such acts, Lessee agrees to reimburse, indemnify and hold
Lessor free and harmless of damages, costs and expenses, including reasonable
attorney's fees, which Lessor may elect to be reason thereof.
10.3 MUTUAL WAIVER OF SUBROGATION. Whenever (a) any loss, costs damage
or expense resulting from fire, explosion or any other casualty or occurrence is
incurred by either party of this Lease, in connection with the premises or the
building in which the premises are
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located, and (b) such parties are covered in whole or in part by insurance with
respect to such loss, damage or expense then the party so insured hereby
releases the other party from any liability it may have on account of such loss,
costs, damages or expense to the extent of any amount recovered by reason of
such insurance and waives any right of subrogation which might otherwise exist
in or accrue to any person on account thereof.
ARTICLE ELEVEN
--------------
CONDEMNATION AND DESTRUCTION
----------------------------
11.0 CONDEMNATION: In the event that all or substantially all of the
premises and/or the center shall be taken or condemned for public use, this
Lease shall continue, and all rents shall be payable until the date of vesting
of title in the public authority. The Lessor may convey the center and the
premises to the governmental agency if the agency has made a determination to
condemn, under terms to be determined and decided by the Lessor. In any
condemnation proceeding the Lessee shall have no claim against the Lessor. In
the event of a partial condemnation of the leased premises, the Lease shall
terminate only as to the part of the Premises taken; provided that the
percentage of the premises taken is such that Lessee is able to continue its
regular business operations, rent should abate proportionately therefrom, and
Lessor shall make suitable restoration of the Premises to permit the Lessee to
continue the term of the Lease. In the event that the Lessee is unable to
conduct business because the condemnation of the leased premises is too great,
the rental payments shall be discontinued until such time as the Premises have
been repaired to the point where Lessee is able to again conduct business, at
this time the rental payments shall begin again and continue on to the
termination date of this Lease Agreement.
11.1 DESTRUCTION AND REPAIR: Lessee shall give prompt notice to Lessor
in case of any fire or other damage to the Premises or the Center. If the
Premises shall be partially damaged by fire, or other casualty insured under the
Lessor's insurance policies, then upon Lessor's receipt of the insurance
proceeds Lessor shall, except as otherwise provided herein, promptly repair and
restore the Premises (exclusive of Lessee's lighting and trade fixtures,
furniture, furnishings, personal property, decorations, signs, and contents)
substantially to the condition thereof immediately prior to such damage or
destruction, limited however, to the extent of the insurance proceeds actually
received by Lessor therefore, and further limited to payment
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<PAGE>
of any deductible amounts required from Lessee. Such repair and restoration
shall be completed within one hundred twenty (120) days after receipt by Lessor
of the insurance proceeds, or Lessee may terminate its continued occupation of
the Premises. In the event the Premises shall be damaged to the extent for more
than 50% of the cost of replacement, or the building of which the Premises are a
part is damaged to the extent of 50% or more of the cost of replacement, Lessor
may elect either to repair or rebuild the Premises or the building or to
terminate this Lease upon giving notice of such election in writing to the
Lessee within Thirty (30) days after the happening of the event causing the
damage. If the Lessor fails to notify the Lessee that he will not repair, Lessor
shall be deemed to have elected to repair. Unless this Lease is terminated by
Lessor as aforesaid, this Lease shall remain in full force and effect and the
parties waive the provisions of any law to the contrary and Lessee shall repair,
restore, and replace Lessee's trade and lighting fixtures, decorations, signs
and contents in the Premises in the manner and to at lease a condition equal to
that existing prior to their damage or destruction and the proceeds of all
insurance carried by the Lessee on said property be held by Lessee for the
purpose of such repair, restoration, or replacement.
11.2 RENT AND CONTINUATION OF BUSINESS DURING REPAIR: If by reason of
any damage the Premises are rendered wholly untenable, all rents shall be fully
abated after Lessor has declared this Lease to be terminated. If the Premises
are only partially damaged, basic rent shall be abated proportionately as to the
portion of the Premises rendered untenable and all other rents shall continue as
provided in this Lease. Lessee shall continue the operation of Lessee's business
in the Premises, or any part thereof not so damaged, if Lessee should be unable
to continue business because the area of damage is too great, then rental
payments shall be withheld until such time as repairs are made and Lessee is
notified to again take possession of the Premises. Such notification to Lessee
shall be done in writing by the Lessor. If the Leased Premises cannot be
occupied for the intended use and business cannot be conducted due to partial
damage to the Leased Premises, the rents shall fully abate until Lessee is
notified by the Lessor to again take possession of the Premises. Lessee shall
not be entitled to and hereby waives all claims against Lessor for any
compensation or damage to and hereby waives all claims against Lessor for any
compensation or damage for loss of use of the whole or any part of the Premises
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and/or any inconvenience or annoyance occasioned by damage, destruction, repair,
or restoration. The provisions of any doctrine or law under which the Lease may
be terminated upon the occurrence of partial damage or destruction are hereby
expressly waived by the Lessee, but Lessor shall have the right to declare the
Lease terminated in the event of partial destruction to the Premises. Lessee
agrees to maintain the Premises for the purposes set forth in paragraph 6.0
insofar as is possible, and to restore Premises so as to substantially conform
with Exhibit "A" to the extent insurance (Article 10) does not cover
reconstruction.
ARTICLE TWELVE
--------------
ALTERATIONS, ADDITIONS AND IMPROVEMENTS
---------------------------------------
12.0 CONSTRUCTION APPROVAL FROM LESSOR, BOND, OWNERSHIP: Except for
the covenants expressly agreed to in Exhibit "A" herein, Lessee shall not make
any alterations, additions or improvements to the Premises which were furnished
by the Lessor pursuant to EXHIBIT A or any future EXHIBIT to this lease, without
the prior written consent of the Lessor; Such approval shall not be unreasonably
withheld. Additionally, should the proposed alterations be of less than $10,000
in value, the Lessor must respond to the Lessee's request for consent within 7
days or will have waived it's right to approve or disapprove. In no event shall
any such alterations, additions, or improvements weaken the structure of, or
impair the building or the Premises. Any alterations, addition, or improvement
made to the Premises shall be done in accordance with the applicable city and
county laws and ordinances, and building and zoning rules and regulations.
Lessee hereby expressly assumes full responsibility for all damages and injuries
which may result to any person or property by reason of or resulting from
alterations, additions, or improvements made by Lessee to the Premises, and
shall hold Lessor harmless with respect thereof. Lessee agrees to keep the
Premises and improvements free of liens. Unless otherwise specifically agreed to
in writing, all of Lessee's alterations, additions, and improvements, except
trade fixtures, shall become the property of the Lessor when made. Trade
fixtures shall include without limitation, all furniture of every type,
telephone equipment, and back-up power generator and related equipment.
12.1 LESSOR'S RESERVATIONS: Lessor reserves unlimited right to
construct additional structures within the Center, make alterations, change
store fronts, and to install wiring, ducting and piping. However, the amount of
parking as described in Section 19.0, shall not be
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reduced as a result of any construction or alterations. Lessor must approve all
air conditioning and heating equipment to be installed in, on, or of the
Premises. Lessee agrees that any additions, alterations, improvements, repairs,
remodeling, or changing of the Leased Premises must be first approved in writing
by the Lessor.
ARTICLE THIRTEEN
----------------
ASSIGNMENT, SUBLETTING, ACCESS, SUBORDINATION
---------------------------------------------
13.0 CONSENT REQUIRED, LESSEE LIABLE: Lessee may not assign this Lease
and/or sublet the Premises other than to an affiliate, subsidiary, related or
parent company with the same use, or any part thereof, without in each instance
obtaining prior written consent from the Lessor, such permission shall not be
unreasonably withheld. Lessor may withhold his consent for assigning or
subletting to any sub-lessee or assignee which would be in violation of; the
restrictive covenants, exclusions, or other tenant Lease Agreements of the
Center, and the requirements heretofore agreed to with Lessee. Consent by the
Lessor to any assignment or subleasing shall not constitute waiver of the
necessity for such consent to any subsequent assignment or subletting.
This prohibition against any assigning or subletting shall be construed
to include a prohibition against any assignment or subletting by operation of
law. If this Lease is assigned, or if the Premises or any part thereof or area
within be sublet or occupied by any person other than Lessee, Lessor may, if
Lessor elects, collect rent from the assignee, sublessee, or occupant and apply
the net amount collected to the rent herein reserved, but no such assignment,
subletting, occupancy or collection shall be deemed a waiver of this covenant,
or a release of Lessee from the further performance by Lessee of any covenants
or conditions herein contained. The Tenant will be released from the obligations
of this lease if the Sublessee has a net worth equal to or greater than the
Lessee, provided there is an adequate corporate guaranty for the performance of
the terms and conditions of this lease.
ARTICLE FOURTEEN
----------------
DEFAULT EVENTS AND REMEDIES
---------------------------
14.0 LESSEE EVENTS OF DEFAULT AND LESSOR REMEDIES; LIEN: Lessor may
terminate the Lease and Term demised or terminate Lessee's right to possession
in the event Lessee makes assignment for the benefit of creditors; or writ of
execution or judgement is levied
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and not released in ten (10) days against days against leasehold estate or
Lessee's property; or if Lessee fails to pay any installment of any rents or any
other charge provided herein, or any portion thereof when the same shall be due
and payable and the same shall remain unpaid for a period of fifteen (15) days
after written notice from Lessor; or Lessee shall have failed to comply with any
other provisions of this Lease and shall not cure such failure within fifteen
(15) days after Lessor, by written notice, has informed Lessee of such
noncompliance (in case of a default which cannot, with diligence, be cured
within a period of Seven (7) days) Lessee shall have such additional time as
Lessor in writing shall extend to cure the same as may reasonably be necessary,
provided Lessee proceeds promptly and with due diligence to cure such default
after receiving said notice; or Lessee or its guarantor, if any, shall file in
any court a petition in bankruptcy or insolvency or for reorganization within
the meaning of Chapter X of the bankruptcy act or for arrangements within the
meaning of Chapter XI of said bankruptcy act, as amended, or for the appointment
of a Receiver of Trustee of all or a portion of Lessee's property; or an
involuntary petition if bankruptcy shall be filed against Lessee's property; or
an involuntary petition in bankruptcy shall be filed against Lessee or his
guarantor, if any, but Lessee may be reinstated if he is not otherwise in
default and such petition shall be vacated or withdrawn within ninety (90) days
after the date of filing thereof; or Lessee or its guarantor, if any, shall be
adjudicated a bankrupt or Lessee shall for reasons other than those
specifically permitted in this Lease, must cease to conduct his normal business
operations in the Premises or shall vacate or abandon the Premises and leave the
same vacated or abandoned for a period of three (3) days; or Lessee shall do or
permit to be done anything which creates a lien upon the Premises, provided,
however, that Lessee may contest the validity of such lien without being in
default hereunder by posting a bond equal to one and one-half (1 1/2) times the
amount of said lien.
Upon any of the foregoing events Lessor may elect either;
(1) to cancel or terminate this Lease, or,
(2) to terminate Lessee's right to possession only without
terminating Lease, or,
(3) pursue any other remedy available by law or in equity.
In the event of election under (2) above to terminate Lessee's right to
possession only, Lessor may, at Lessor's option, enter into the Premises and
take and hold possession thereof without such entry into possession terminating
this Lease or releasing Lessee and holder in part from Lessee's
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obligation to pay the rent hereunder for the full Term of this Lease. Upon such
re-entry, Lessor may remove all persons and property from the Premises and such
property may be removed and stored in a public warehouse or elsewhere at the
cost of and for the account of Lessee, all without service of notice or resort
to legal process or without being guilty of trespass, or becoming liable for any
loss or damage which may be occasioned thereby. Upon and after entry into
possession without termination of the Lease, Lessor shall use his best efforts
to relet the Premises, or any part thereof, for the account of the Lessee, to
any qualified parties.
In the event that Lessor shall relet the Premises after retaking
possession of said Premises, the Lessor shall at his own discretion decide and
determine the rent terms and parties associated with such re-letting. In the
consideration collected by Lessor upon any such reletting for Lessee's account,
and after deducting all expenses incident thereto, including reasonable
brokerage fees, reasonable attorney's fees and court costs, shall not be
sufficient to pay monthly the full amount of the rents provided in this Lease,
Lessee shall pay Lessor the amount of each monthly deficiency upon demand. In
the event that Lessor shall have terminated Lessee's right to possession only,
Lessor shall have the right to cancel and terminate this Lease by serving five
(5) days written notice to Lessee of such further election and to pursue any
remedy at law or equity that may be available to the Lessor. Lessee specifically
agrees to be liable for all back rents and all future rents, including
additional rents, for the entire term of this Lease. A receiver may not operate
the Lessee's business or conduct sales on the Premises.
14.1 DEFAULT REMEDIES, CUMULATIVE COSTS: All remedies expressed in
Article 14 and all other Articles of this Lease are cumulative, and a failure to
exercise one remedy or the exercise of one remedy shall not foreclose the
exercise of any other remedy. In the event it becomes necessary to begin to
enforce or encourage performance under this contract by involving an attorney,
the defaulting party shall be liable for all costs incurred, including
reasonable attorneys fees.
14.2 LESSOR DEFAULT, NOTICE: Lessor shall in no event be charged with
default in the performance of any of its obligations hereunder unless and until
Lessor shall have failed to perform such obligations within thirty (30) days,
(or such additional time as is required to correct any such default) after
written notice by Lessee to Lessor properly specifying wherein Lessor has
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failed to perform any such obligation.
14.3 WAIVERS AND ACCEPTANCE OF PART PAYMENT BY EITHER PARTY: No waiver
by Lessor or Lessee of a breach of any agreement, obligation or condition of
this Lease shall be construed to be a waiver of any future breach of the same or
other covenants herein. No receipt of money by either party from the other,
after notice of default, after termination of this Lease, after commencement of
any suit, after final judgement, or after repossession of the Premises shall
reinstate, continue or extend the term of this Lease or effect any notice demand
or suit.
ARTICLE FIFTEEN
---------------
RENEWAL, HOLDOVER, TENANCY, RENT, AND FIRST RIGHT OF REFUSAL
------------------------------------------------------------
15.0 RENEWAL: Provided the Lessee is not in default and notifies Lessor
within six (6) months of the conclusion of the Term of this Lease, Lessee shall
have the option to renew this Lease for two separate five (5) year terms under
--------------------------------
the same conditions expressed herein except that the basic and additional rents
for the renewal term shall be renegotiated with the Lessor. Should the Lessor
and Lessee fail to reach agreement on the basic and additional rents for any
such renewal term within four (4) months of expiration, a mutually agreed upon
Appraiser shall be employed with the cost to be split 50/50 to perform an
appraisal to determine the rents. Should the Lessor and Lessee fail to agree on
the appraised rents, a second mutually agreed upon Appraiser shall be employed
with the cost to be split 50/50 to perform a second appraisal. The rents shall
then be determined as the blended rate between the first and second appraisal.
Should the appraised base rental rate be 125% of the previous year's rate or
greater, the Lessee shall have the right to cancel the renewal notice with 60
days written notice to the Lessor. If renewal term rents have not been agreed
upon within thirty (30) days of the latter of the termination date of the Term
or the completion of the appraisal, Lessor may proceed with any actions it deems
pertinent to procure another Lessee for the Premises, and Lessor may elect
and/or pursue all of the remedies available to him by law, equity, or under this
Lease to evict the Lessee. After the expiration of the Term, if Lessee remains
in possession, Lessee shall be deemed to be a Lessee at will subject to all
covenants and & conditions of this lease, and rent shall accrue at 125% of the
previous year's rate. The Lessee shall have a on-going seven day first right of
refusal to lease any adjacent area in the
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building, should the existing occupant of any adjacent area vacate. The Lessee
shall exercise it's right to lease said area by notifying the Lessor in writing
within seven (7) days of receipt of Lessor's "Notice of Availability" of such
area(s). The terms and conditions of such expansion shall be consistent with the
terms and conditions of the initial lease should such expansion occur within
five (5) years of the initial commencement date. Thereafter, the terms and
conditions shall be consistent with the terms and conditions, including
concessions being offered in the market at that time.
15.1 SURRENDER AT END OF TERM; HOLDOVER BY LESSEE: Lessee shall be
obligated to surrender the Premises at or before the conclusion of the Term of
this Lease. Premises shall be returned in a condition equal to or better than
those existing at the time the Term commenced, reasonable wear and tear
excepted. Lessee shall make all repairs occasioned by removal of Lessee's trade
fixtures, provided that Lessor has specifically waived continued ownership of
same as is provided in Article 12.
ARTICLE SIXTEEN
---------------
LESSOR'S TITLE
--------------
16.0 TITLE: Lessor covenants that it has full right to perform and
execute this Lease and that Lessor will put Lessee into complete and exclusive
possession of the Premises. Lessor further covenants that Lessee, upon paying
the rents herein and performing the covenants and agreements hereof, shall
peaceably and quietly have, hold and enjoy the Premises and all rights,
easements, appurtenances, and privileges thereunto belonging or in any
appertaining, during the Term hereof. Anything herein to the contrary
notwithstanding, Less6r shall not be liable for any breach of the covenant of
quiet enjoyment or any other breaches occurring after Lessor shall have
transferred ownership of the Premises, provided that Lessor's grantee shall
affirmatively assume Lessor's obligation under this covenant of quiet enjoyment,
as well as all other covenants to be performed by Lessor pursuant to the
provisions of this Lease.
ARTICLE SEVENTEEN
-----------------
MISCELLANEOUS PROVISIONS
------------------------
17.0 RELATIONSHIP OF PARTIES: Nothing herein contained shall be deemed
or construed by the parties hereto, or by any third party, as creating the
relationship of principal
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and agent, partnership or joint venture between the parties hereto, it being
understood and agreed that neither the method of computation of rents, or any
other provisions contained herein, nor any acts of the parties hereto shall be
deemed to create any relationship between the parties other than the
relationship of Lessor and Lessee or Landlord and Tenant.
17.1 LANGUAGE CONSTRUCTION: The necessary grammatical changes required
to make provisions of this Lease apply in the plural sense, or to corporations,
associations, partnerships, individuals, males, or females shall in all
instances be assumed as though fully expressed. The relationship between Lessor
and Lessee created hereunder shall be that of Lessor and Lessee, and or,
Landlord and Tenant. The captions used in this Lease are for convenience only
and do not in any way limit or amplify the terms and provisions hereof.
17.2 PARTIES BOUND BY LEASE: It is agreed that this Lease and each and
all of the covenants and obligations hereof shall be binding upon and inure to
the benefit of, as the case may be, the parties hereto, their respective heirs,
executors, administrators, successors and assigns, subject to all agreements and
restrictions herein contained with respect to assignment or other transfer of
Lessor's or Lessee's interest herein.
17.3 ENTIRE AGREEMENT, TIME IS OF THE ESSENCE: This Lease contains the
entire agreement between the parties, and no agreement shall be effective to
change, modify, or terminate this Lease in whole or in part unless such
agreement is in writing and duly signed by the parties against whom enforcement
of such change, modification, or termination is sought, as provided herein. Such
an agreement must also be notarized by a Notary Public. The Parties agree that
time is of the essence of this Agreement.
17.4 GOVERNMENTAL ORDERS: It is agreed that Lessor or Lessee may
terminate this Lease if compliance with governmental orders would require an
expenditure by either party in excess of one (1) year's basic rent as adjusted.
17.5 DELIVERY OF KEYS: It is agreed that Lessor shall have keys to the
Premises at all times to facilitate Lessor's entry for purposes contemplated by
this Lease, and that Lessor shall hold such keys free from any claim except for
any willful misconduct by the Lessor. Should Lessee at any time change the locks
to the Premises, Lessee agrees to immediately deliver a copy of the keys to the
Lessor at the Lessor's aforesaid address.
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Delivery of any keys to the Lessor or Lessor's agent or employee prior to the
end of the term of this Lease, whether such keys are provided or were initially
provided by Lessor or Lessee, will not effect the terms of this Lease.
17.6 CONTINUOUS OPERATION: It is the essence of this Lease that Lessee
shall continuously and uninterruptedly during the Term of this Lease occupy and
use the Premises for the purpose hereinabove specified, except when the Premises
are completely untenable by reason of unavoidable casualty to the Premises.
17.7 SAVINGS CLAUSE: Invalidity or unenforceability of any provision of
this Lease shall not affect or impair the validity of any other provision. The
law of the State of Utah shall govern the interpretation, validity, performance,
and enforcement of this Lease.
17.8 FORCE OF DELAY IN PERFORMANCE: In the event that lessor shall be
delayed or hindered in or prevented from the performance of any act required
hereunder by reason of strike, inability to procure materials, failure of power,
restrictive governmental laws or regulations, riots, insurrection, war, or other
reasons of like nature not the fault of the party delayed in performing work or
doing acts required under the terms of this Lease, including work stoppages by
virtue of labor disputes, performance of such acts shall be excused for the
period of the delay and the period for the performance of any such act shall be
extended for a period equivalent to the period of such delay. The provisions of
this paragraph shall not operate to excuse the Lessee from prompt payment of
rent, or any payments or obligations required by this Lease.
17.9 NO OPTION: The submission of this Lease for examination does not
constitute a reservation of or option for the Premises or any other premises
within the Center, and this Lease becomes effective as a Lease only upon
execution and delivery thereof by both Lessor and Lessee.
17.10 COOPERATION WITH THIRD PARTIES: Recognizing that both parties may
find it necessary to establish to third parties the then current status of
performance hereunder, either party, upon the written request of the other made
from time to time, will promptly furnish a written statement on the status of
any matter pertaining to this Lease Agreement.
17.11 SUPPLEMENTS TO LEASE: It is agreed that supplements or exhibits to
this
21
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Lease, written agreements, and notifications contemplated under this Lease,
subsequent agreements signed by both parties, judgements, settlements, or any
other documents signed or entered into with or without consideration shall not
prevail over the written terms of this Lease, but that such documents shall only
be entitled to equal weight with this Lease in resolving any dispute.
17.12 MEDIATION: In the event of a dispute over the interpretation of
any paragraph of this Lease, or the conditions and terms of performance of any
of the covenants agreed to herein, and without waiver of any party's right to
consider the other to be in default hereunder, either party may request of the
other, without commitment or obligation that the parties or their
representatives shall mutually select a mediator to join with them in discussion
of the dispute, and shall make a good faith effort to adhere to the counsel of
the mediator for the balance of the term hereunder. Such effort to avoid wasting
time, money, litigation and feelings shall not be legally binding, nor result in
the waiving of any other options available to either party under the terms and
conditions of this Lease. Any such mediation shall be conducted in Salt Lake
City, Utah and be subject to the rules of the American Arbitration Association.
ARTICLE EIGHTEEN
----------------
PROPERTY TAXES
--------------
18.0 TAXES: The Property taxes for the premises shall be paid by the
Lessee to the Lessor. The Lessor shall then pay the taxes to the County
Treasurers Office when due. The Lessee shall pay the Lessor the current
pro-rated tax amount in monthly payments along with base rent at an amount
equal to $277.40 monthly. This amount subject to change based on annual tax
assessment. Lessor will provide Lessee calculations thirty (30) day prior to
change in amounts. Lessor agrees to indemnify and hold Lessee harmless from any
adjustment on property tax liability claims or damages which result from
Lessors failure to pay all property taxes.
ARTICLE NINETEEN
----------------
PARKING
-------
19.0 PARKING: The Lessor shall provide the Lessee with parking for it's
employees and customers of 200 parking spaces on a non-exclusive basis. Said
spaces are highlighted
22
<PAGE>
on the attached plan labeled EXHIBIT A which is subject to reasonable changes in
the future with proper notice from the Lessor to the Lessee. The Lessor reserves
the right to dedicate "Customer Parking" for other businesses and exempt such
areas from said 200 spaces. The Lessee agrees to direct it's employees to park
in said 200 spaces. The Lessor agrees to notify Lessee if it's employees are not
parking in such areas. The Lessee agrees to make all reasonable efforts to
insure that it's employees do not park in areas designated as "Customer
Parking". Said efforts shall include supervision and if necessary, security
guard service. Any towing costs shall be the responsibility of the vehicle
owner.
ARTICLE TWENTY
--------------
ENTIRE AGREEMENT
----------------
20.0 ENTIRE AGREEMENT: This Lease Agreement sets forth all of the
promises, inducements, agreements, conditions, and understandings between the
Lessor and the Lessee relative to the demised premises and there are no
promises, agreements, conditions, or understandings, either oral or written,
expressed or implied, between them other than those that are herein set forth,
except as otherwise provided, no subsequent alterations, amendments, changes or
additions to this Lease shall be binding upon the Lessor and/or Lessee unless
reduced to writing and signed by them and attached hereto along with a date of
attachment, and commencement.
THIS LEASE AGREEMENT IS DATED THIS 26th day of February, 1997.
---- -------- --
LESSOR'S ACCEPTANCE OF LEASE:
/s/ Stanley E. Stradley
The Kier Corporation -----------------------------------
3710 Quincy Avenue Stanley E. Stradley, Vice President
Ogden, Utah 84403
LESSEE'S ACCEPTANCE OF LEASE:
Teltrust, Inc. By /s/ Lyle O. Keys
3790 South State Street ---------------------------------
Clearfield, UT 84015
It's Chairman
-------------------------------
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FIRST ADDENDUM TO LEASE AGREEMENT
This shall serve as the First Addendum to that certain Lease Agreement
by and between Teltrust, Inc. ("Lessee") and The Kier Corporation ("Lessor")
signed February 26, 1997. This First Addendum is dated this 6th day of May 1997
and shall be made an integral part of the Lease Agreement of the Parties.
Accordingly, in consideration of the mutual covenants herein and other good and
valuable consideration, receipt of which is hereby acknowledged, the Parties
hereto agree as follows:
1. Section 3.0 Lease Term shall be amended and modified to read as follows:
The term of this Lease shall be ten (10) years. Lesses's obligation to
pay the rental payments hereunder, and the Term of this Lease shall
commence upon July 1, 1997. This Lease Agreement shall terminate at
midnight, June 30, 2007.
2. 6.0 Use of Premises; Limitation, Risk shall be amended and modified to
read as follows:
Lessee shall use the Premises during the full term of this Lease solely
for the purpose of conducting the business of a telecommunications call
center and for general office use. Specifically, Teltrust, as a
regulated common carrier, shall utilize the premises to provide the
following telecommunications related services: operator and directory
assistance services for other telecommunications companies; refund and
repair services for independent pay telephone companies; independent
third-party verification services for long distance companies. Teltrust
shall not utilize the premises to perform services, either on behalf of
itself (including any of its subsidiaries or affiliated companies) or
any third-party, which involve the use of telemarketing agents placing
outbound calls in an attempt to provide goods or services (i.e. making
outbound sales calls) to a customer in exchange for consideration.
Lessee covenants that during the entire term of this Lease it shall
operate continuously in the premises the business above stated and will
not use or permit the use of the premises for any other purpose unless
prior written consent is given by the Lessor, which consent shall not be
unreasonably withheld. All uses not specifically and/or exclusively
granted herein are reserved to the Lessor and other Lessees in the
Center. Lessee agrees that the premises shall not be used for any
unlawful or immoral purposes, for living quarters, or for "Quitting
Business Sales" and Lessee shall not permit any disorderly conduct or
nuisance. All property kept, stored, or maintained within the premises
by Lessee shall be at the Lessee's sole risk.
6.0.1 Covenant Not To Employ Former Employees of TPUSA,
INC. d/b/a Teleperformance: Lessee hereby agrees that it shall not
knowingly hire any employees who have previously been employed by TPUSA,
INC. within the prior three (3) months. Lessee shall use its best
efforts to implement hiring procedures designed to assure that no former
employees of Teleperformance (i.e. persons employed by TPUSA, INC.
within the previous three months) are hired by Lessee at the Premises.
This limitation shall not limit Teltrust from hiring Teleperformance
employees at facilities other than the Premises.
6.0.2 Limitation of Liability and Indemnification:
Lessee shall not be liable to Lessor for any damages suffered by Lessor
as a result of Lessor's present or any future dispute with TPUSA, INC.
Lessor shall at all times indemnify, defend and hold Lessee harmless
from any and all claims, judgments, damages, penalties, fines, costs,
liabilities or losses (including without limitation damages resulting
from delays, damages arising from claims brought against Lessee by
TPUSA, INC., and
<PAGE>
attorneys' fees) and any other expenses, of any nature whatsoever
suffered or incurred by Lessee with respect to Lessor's present or any
future dispute with TPUSA, INC.
This First Addendum is accepted and agreed to by the undersigned on the
date first written above.
THE KIER CORPORATION TELTRUST, INC.
/s/ Jim Kier /s/ Steven E. Swenson
- ----------------------------- ---------------------------------------
By: Jim Kier By: Steven E. Swenson
- ----------------------------- ---------------------------------------
Title: President Title: Vice President & General Counsel
<PAGE>
AFTER RECORDING RETURN TO:
Washington Mutual Bank (fsb)
1201 Third Avenue, WMT0710
1191 Second Avenue, SAS090
Seattle, Washington 98101
Attention:
----------------------
SUBORDINATION, ATTORNMENT, AND NONDISTURBANCE
AGREEMENT
THIS AGREEMENT is made this 16th day of September, between WASHINGTON
MUTUAL BANK (fsb), (a Washington corporation/federal savings bank) ("Lender"),
THE KIER CORPORATION, a UTAH CORPORATION ("Owner"), and Teltrust, Inc., a UTAH
CORPORATION ("Tenant").
Owner is the land lord and Tenant is the tenant under that certain lease
dated February 26, 1997 (the "Lease"). The Lease demises portions (the "Leased
Premises") of the improvements located on certain real property in Davis County,
Utah, more particularly described in such Lease and on Exhibit A attached hereto
(the land and improvements are collectively referred to as the "Property").
Owner has obtained a commitment from Lender for financing for the Property
(the "Loan") to be evidenced by a promissory note (the "Note") in favor of
Lender, payment of which is to be secured by, among other things, a deed of
trust, security agreements, assignments of leases and rents and fixture filing
(the "Deed of Trust") on the Property, (and an assignment of leases and rents
made by Owner as assignor in favor of Lender as assignee (the "Assignment of
Rents", and collectively with the Deed of Trust, the "Security Documents").
In order to induce Lender to make the Loan to Owner, and in order to
establish certain safeguards and priorities with respect to their respective
rights in connection with the Leased Premises, Lender has requested that Owner
obtain certain warranties and agreements from Tenant as hereinafter set forth.
In consideration of the mutual benefits accruing to each, the receipt
and sufficiency of which is hereby acknowledged, the parties agree as
follows:
1. Restriction Against Modification. The Lease shall not be
--------------------------------
modified, amended, terminated, or superseded, nor shall the Leased Premises be
sublet by Tenant, nor shall Tenant assign its rights under the Lease to a third
party, without the express prior written approval of Lender, which approval
shall not be unreasonably withheld.
2. Acknowledgment of Collateral Assignment. Tenant acknowledges that
---------------------------------------
the Lease will be collaterally assigned to Lender as security for the Loan and
that the terms of the collateral assignment will prohibit the collection of
rent more than one month in advance or the collection of a security deposit
exceeding two months rent. Upon written request by Lender accompanied by
Lender's written certification that an event of default has occurred under the
Note, or Security Documents, Tenant will commence paying
-1-
<PAGE>
the rental and other amounts due and owing to Owner under the Lease directly
to Lender, and such payment to Lender shall constitute a full and complete
discharge of the obligations of Tenant to Owner under the Lease to the extent
of the amount(s) so paid.
3. Notice and Opportunity to Cure Defaults. Tenant agrees to notify
---------------------------------------
Lender of any breach or default by Owner under the Lease and offer Lender the
opportunity to cure such breach or default; and not to pursue any action or
exercise any legal right or remedy that Tenant may have to terminate the Lease
because of such breach of default for a period of thirty (30) days following
the later of: (I) expiration of the grace period, if any which Owner is given
to cure such default pursuant to the Lease or under applicable law; and (II) the
date upon which notice of such default was actually received by Lender. Tenant
further agrees that it will not exercise any right or remedy which it may have
to terminate the Lease because a breach or default which Lender had failed to
cure or cause to be cured within the aforementioned thirty (30) day period if
tile breach or default is one that can be cured, but cannot with due diligence
by cured prior to the expiration of said thirty (30) day period, if Lender gives
notice of its intent to cure or cause such breach or default to be cured prior
to the expiration of said thirty (30) day period, and thereafter proceeds
promptly with and prosecutes with all due diligence the curing of such breach
or default.
Nothing contained herein shall be construed as obligating Lender
to cure any breach or default or perform any obligation of Owner under the
Lease
Notices which Lender is entitled to receive pursuit to this
Section 3 shall be delivered personally or by reputable overnight courier
service such as Federal Express to the address set forth below (or to such other
address or addresses as Lender may from time to time designate in writing):
Washington Mutual Bank (fsb)
1201 Third Avenue, WMT0710
1191 Second Avenue, SAS090
Seattle, Washington 98101
Attention:
-------------------
4. Subordination. The Lease is and at all times shall continue
--------------
to be subject and subordinate to the Note and the lien of the Deed of Trust and
to all advances made or to be made thereunder, and to any renewals,
extensions, modifications, or replacements thereof.
Specifically, and without limiting the generality of the foregoing,
Tenant agrees that with respect to: (I) any damage to or destruction of the
Property or any portion thereof by hazards insured against and for which
compensation is paid; payable or recoverable; or (II) any taking of the Property
or any portion thereof by partial or total condemnation (or a transfer in
lieu thereof); or (III) damages awarded for change of grade or loss of any use
or enjoyment of the Property or any portion thereof, Tenant's claims thereto
shall be subordinate to those of Lender under the Deed of Trust notwithstanding
the covenants of Lender under Section 8 below.
Tenant shall not subordinate the Lease to any lien., claim, mortgage,
deed of trust, or other encumbrance or any kind, except as provided in this
Section 4, and any such other subordination shall be deemed a default under
the Lease and this Agreement.
-2-
<PAGE>
Until such time the Loan has been repaid in full and the Deed of Trust
fully reconveyed of record, any provisions of the Lease which purport to make
the Lease automatically subordinate to any other existing or future mortgage,
ground lease, deed of trust, or other encumbrance of any kind shall be of no
force or effect, and the Lease shall be deemed to have amended to delete such
provisions.
5. Attornment. In the event of a foreclosure or sale of the
----------
Property pursuant to the trustee's power of sale, the Lease shall be recognized
as a direct lease from Lender, the purchaser at tile sheriff's or trustee's
sale, or any subsequent owner (collectively referred to as "Purchaser"), except
Purchaser shall not be liable for any previous act or omission of Owner under
the Lease; (II) subject to any offset which shall therefore have accrued to
Tenant against Owner; (III) subject to any obligation with respect to any
security deposit or prepaid rental for greater than one month under the Lease
unless such security deposit or prepaid rental has been physically delivered to
Purchaser; or (IV) bound by any previous modification of the Lease unless such
modification shall have been expressly approved in writing by Lender.
The provisions of the immediately preceding paragraph shall be
equally applicable if Lender elects to accept from Owner a deed in lieu of
foreclosure.
6. Nondisturbance. So long as no default exists, nor any event
--------------
has continued to exist for such period of time (after notice, if any, required
by the Lease) as would entitle Owner under the Lease to terminate the Lease or
would cause, without any further action of Owner, the termination of the
Lease or would entitle Owner to dispossess Tenant thereunder, the Lease shall
not be terminated, nor shall Tenant's use, possession, or enjoyment of the
Leased Premises be interfered with, nor shall tile leasehold estate granted by
the Lease be affected in any foreclosure, or in any action or proceeding
instituted under or in connection with the Deed of Trust.
7. Hazardous Substances. Tenant represents, warrants, covenants
--------------------
and agrees that any use or occupancy of the Property by Tenant is presently and
shall throughout the term of the Lease be in compliance with all state, federal
and local laws and regulations governing or in any way relating to the
generation, handling, treatment, storage, use, dumping, discharge or disposal of
any "Hazardous Substance" (as hereinafter defined); and that Tenant has not at
any time engaged in or permitted any material dumping, discharge or disposal of
such Hazardous Substances, at, on, in, above, under or about the Property.
Tenant agrees to indemnify, protect, defend and hold Lender harmless from any
claims, actions, proceedings, judgments, damages, penalties, fines, costs,
liabilities, losses and expenses of any kind that arise from any
misrepresentation or breach by Tenant of the representations, liabilities,
covenants and agreement contained in this Section 8. For purposes of this
Agreement, "Hazardous Substances" means any hazardous or toxic substances,
materials or wastes listed in tile United States Department of Transportation
Hazardous Materials Table (49 CFR 172.101) or by the Environmental Protection
Agency as hazardous substances (40 CFR Part 302) and amendments thereto, or now
or in the future defined in or regulated under any applicable local, state or
federal law, rule, regulation or ordinance.
8. Further Documents. Owner and Tenant shall execute and deliver
-----------------
to Lender or to any party to whom Tenant hereby agrees to attorn, in form and
substance satisfactory to Lender or such other party, such other instruments or
assurances as Lender or such other party shall request in order to more fully
carry out the intents and purposes of this Agreement.
-3-
<PAGE>
9. Binding Effect. This Agreement shall inure to the benefit of
--------------
and be binding upon the parties hereto, their successors and assigns, and the
holder from time to time of the Note.
10. Modification. This Agreement may not be modified other than by
-------------
an agreement in writing, signed by the parties hereto or their respective
successors in interest.
11. Entire Agreement. This Agreement constitutes the entire
-----------------
agreement of the parties with respect to the subordination of the Lease to
the lien of the Deed of Trust. By its acceptance of Tenant's signature on
this Agreement, Lender has not agreed to any conditions to Tenant's agreement to
subordinate the Lease to a future mortgage or deed of trust which are contained
in the Lease itself and are not restated in this Agreement, including, but not
limited to, provisions which purport to obligate Lender for items with respect
to which Lender has been relieved of responsibility for pursuant to Section 5,
or provisions which purport to require Lender, as a condition to Tenant's
subordination, to make condemnation and insurance proceeds available to Owner
or Tenant and/or to apply such proceeds toward the cost of restoring or
repairing the Property.
12. Effect on Lease. Except as herein modified, all of the terms
----------------
and provisions of the Lease shall remain in full force and effect. In the event
of a conflict between the Lease and his Agreement, the terms and provisions of
this Agreement shall control.
13. Governing Law. This Agreement shall be governed by and
--------------
controlled in accordance with the laws of the state of Washington.
-4-
<PAGE>
DATED as of the day and year first above written.
LENDER: WASHINGTON MUTUAL BANK (fsb),
(a Washington corporation/a federal savings
bank)
By /s/ Kathy K. Hale
-----------------------------------------
-------------------------------------------
Its Vice President
----------------------------------------
Owner: The Kier Corporation
By /s/ [ILLEGIBLE SIGNATURE]
-----------------------------------------
-------------------------------------------
Its Vice President
----------------------------------------
Tenant: Teltrust, Inc.
By /s/ Steven E. Swanson
-----------------------------------------
Its Vice President & General Counsel
----------------------------------------
By
-----------------------------------------
Its
----------------------------------------
-5-
<PAGE>
STATE OF UTAH
)ss.
COUNTY OF SALT LAKE
I certify that I know or have satisfied evidence that Kathy K. Hale
is the person who appeared before me. and said person acknowledged the said
person signed this instrument. On oath stated that said person was authorized to
execute the instrument and acknowledged it as the Vice President of WASHINGTON
MUTUAL BANK (fsb) a (corporation/federal savings bank) to be the free and vol-
untary act of such (corporation/federal savings bank) for the uses and purposes
mentioned in the instrument.
Dated this 18th day of September, 1997
/s/ Pamela J. Mietchen
--------------------------------
(Signature of Notary)
Pamela J. Mietchen
---------------------------------
(Legibly Print or Stamp Name of Notary)
Notary public in and for the state of Utah, residing at
Salt Lake City.
My appointment expires March 22, 2001
***INSERT APPROPRIATE ACKNOWLEDGMENT FORM FOR OWNER***
<PAGE>
STATE OF UTAH
COUNTY OF WEBER
On the 11th day of September, 1997, personally appeared before me
Steven E. Swanson
the signer(s) of the foregoing instrument; who duly acknowledged to me that
they executed the same
/s/ [ILLEGIBLE SIGNATURE]
---------------------------------------
Notary Public
<PAGE>
Deed of Trust
EXHIBIT A
The land is located in the county of Davis, state of Utah, and is
described as follows:
BEGINNING AT A POINT SOUTH 0*08' WEST 560.7 FEET ALONG THE WEST LINE OF A STREET
AND SOUTH 89*51'30" WEST 648.15 FEET FROM THE NORTHEAST CORNER OF THE SOUTHWEST
QUARTER OF SECTION 1, TOWNSHIP 4 NORTH, RANGE 2 WEST, SALT LAKE BASE AND
MERIDIAN, IN THE CITY OF CLEARFIELD, AND RUNNING THENCE SOUTH 41*05'44" EAST
362.86 FEET; THENCE SOUTH 0*08' WEST 88.85 FEET; THENCE NORTH 89*51'30" EAST
80.0 FEET; THENCE SOUTH 0*08' WEST 100.0 FEET TO A POINT 254.2 FEET NORTH
0*08'30" EAST FROM THE NORTH LINE OF A STREET; THENCE SOUTH 89*51'30" WEST
140.0 FEET PARALLEL TO SAID STREET; THENCE SOUTH 0*08' WEST 254.2 FEET TO SAID
NORTH LINE; THENCE SOUTH 89*51'30" WEST ALONG SAID NORTH LINE 191.5 FEET;
THENCE NORTH 126.5 FEET; THENCE WEST 7.0 FEET; THENCE SOUTH 89*05'36" WEST
242.78 FEET, MORE OR LESS, 10 THE EAST LINE OF STATE HIGHWAY; THENCE NORTH
42*02'30" WEST 89.52 FEET ALONG SAID EAST LINE; THENCE NORTHWESTERLY 442.80
FEET ALONG SAID HIGHWAY ALONG THE ARC OF A 5680.01 FOOT RADIUS CURVE TO THE
RIGHT; (CENTRAL ANGLE EQUALS 4*28'00" AND LONG CHORD BEARS NORTH 39*48'30"
WEST 442.69 FEET); THENCE NORTH 37*34'30" WEST 150.15 FEET; THENCE NORTH
52*30' EAST 110.73 FEET; THENCE NORTH 89*51'30" EAST 850.0 FEET, MORE OR LESS,
TO THE POINT OF BEGINNING.
TOGETHER WITH A RIGHT OF WAY FOR STREET PURPOSES OVER AND ACROSS THE FOLLOWING:
BEGINNING ON THE WEST LINE OF A STREET AT A POINT SOUTH 0*08' WEST 1023.6 FEET
FROM THE CENTER OF SAID SECTION 1, AND RUNNING THENCE SOUTH 89*51'30" WEST
469.0 FEET; THENCE SOUTH 0*08' WEST 254.3 FEET TO THE NORTH LINE OF SAID 450
SOUTH FEET; THENCE NORTH 89*51'30" EAST 60.0 FEET ALONG SAID STREET; THENCE
NORTH 89*51'30" EAST 409.0 FEET TO THE WEST LINE OF SAID STREET; THENCE NORTH
0*08' EAST 60.0 FEET TO THE POINT OF BEGINNING.
18
<PAGE>
Exhibit 10.6
LEASE AGREEMENT
THIS LEASE AGREEMENT, is made and entered into this 8th day of August,
1997, by and between PWK INVESTMENT, LLC, a Utah limited liability company, as
Lessor, and TELTRUST, INC., a Utah corporation, as Lessee.
ARTICLE 1. PREMISES. Lessor is the owner, or shall become the owner, of
--------
real property situated at 401 North Eddie Rickenbacker Drive, Salt Lake City,
Salt Lake County, Utah 84116, and certain personal property located therein,
which real and personal property are described in Exhibits "A" and "B" attached
hereto. The real property described in Exhibit "A," the buildings and
improvements located thereon, and the personal property described in Exhibit
"B," are hereinafter referred to as the "Leased Property." "Leased Property"
shall also include all other buildings and improvements, and modifications and
additions thereto, hereafter located on the real property, to the extent such
improvements constitute the property of Lessor hereunder, and replacements of
the personal property.
Lessor hereby leases to Lessee and Lessee hereby leases from Lessor the
Leased Property, which includes a building containing a total of approximately
26,266 square feet of floor space. The parties agree that this Lease is subject
to the effect of any covenants, conditions, restrictions, easements, mortgages
or deeds of trust, ground leases, rights of way and any other matters or
documents of record; the effect of any zoning laws of the city, county and state
where the Leased Property is situated, and general and special taxes not
delinquent. Lessee agrees that Lessee, and all persons in possession or holding
under Lessee, will conform to and will not violate the terms of any covenants,
conditions or restrictions of record which may now or hereafter encumber the
Leased Property (the "Restrictions"); and this Lease is subordinate to the
Restrictions and any amendments or modifications thereto.
ARTICLE 2. PURPOSE. The Leased Property is to be used only for office
-------
and call center purposes, and for no other purpose without the prior written
consent of Lessor, which consent shall not be unreasonably withheld.
ARTICLE 3. TERM; OPTION. The term of this Lease shall be for a period
------------
of ten (10) consecutive full Lease Years, as the term Lease Year is hereinafter
defined, plus the fractional Lease Month, if any, from the "Commencement Date"
(as defined below) to the beginning of the first Lease Year ("Initial Term"),
plus any option periods exercised as provided below. The term "Lease Year" means
a period of twelve (12) full consecutive calendar months, beginning on the first
day of the calendar month coinciding with or immediately following the
Commencement Date.
Provided that Lessee is not in default of any of the terms, covenants
and conditions of this Lease at the time the option provided herein is required
to be exercised; then Lessee shall have the right to extend the term of this
Lease for one (1) additional option term of five (5) years, upon the terms
herein stated.
1
<PAGE>
The option shall be exercised by Lessee giving Lessor written notice of
its intent to exercise the option at least 180 days prior to the expiration of
the Initial Term. If Lessee fails timely to exercise the option to extend, the
option shall be null and void and of no further force or effect. The option term
shall be governed by the same terms, covenants and conditions as the Initial
Term, with the exception of the length of the term, as referenced above, and the
rent. The minimum monthly rent during the option period shall be as set forth in
Article 5 below.
ARTICLE 4. COMMENCEMENT DATE; LESSOR'S PURCHASE. The
------------------------------------
"Commencement Date" shall be the date Lessor delivers possession of the Leased
Property to Tenant. Lessor shall notify Tenant in writing at least fifteen (15)
days prior to the Commencement Date that the Leased Property is ready for
Lessee's work or occupancy. The effectiveness of this Lease is expressly
conditioned upon the closing of Lessor's purchase of the Leased Property on or
before September 15, 1997. Should Lessor fail to close the purchase of the
Leased Property on or before said date, or within such additional time as may be
agreed by Lessor and Lessee, then this Lease shall become null and void.
ARTICLE 5. RENT. Lessee shall pay to Lessor, as Minimum Rent for the
----
Leased Property during the term of this Lease, according to the schedule set
forth in Exhibit "C." Rent shall be paid in advance on or before the third day
of each calendar month during the term hereof. Minimum Rent for any partial
month shall be prorated on a per diem basis.
Minimum Rent shall be abated for the first fourteen (14) months of the
Initial Term. Lessee shall, however, be obligated to pay Additional Rent and to
observe and perform all other covenants and conditions of this Lease during the
period Minimum Rent is abated.
Rent shall be paid to Lessor without deduction or offset, in lawful
money of the United States of America and shall be paid to Lessor at 4449 South
Adonis Drive, Salt Lake City, Utah 84124, or to such other place as Lessor may
from time to time designate by written notice to Lessee. Any installment of
rent, other sum or any portion of such installment or other sum required under
this Lease to be paid by Lessee which has not been paid within eight (8) days
after the due date thereof (withstanding postal delays) shall, whether or not
demand therefor is made or notice of default is given, bear interest at the rate
of one and one half percent (1-1/2%) per month from the due date thereof until
paid in full. In addition thereto, Lessor may charge a sum equal to five percent
(5%) of each unpaid amount as a service fee to compensate Lessor for the
additional time and expense necessitated in the handling of delinquent payments.
ARTICLE 6. NET LEASE; ADDITIONAL RENT. Except as expressly provided in
--------------------------
this Lease, it is the intent of both parties that the Minimum Rent specified
herein shall be absolutely net to Lessor throughout each Lease Year of the term
of this Lease, and that all costs, expenses, and obligations of every kind
relating to the Leased Property, or the repair, replacement or maintenance of
the Leased Property, which may arise or become due during
2
<PAGE>
the term hereof shall be paid by Lessee and that Lessor shall be indemnified by
Lessee against such costs, expenses, and obligations, except to the extent such
costs, expenses and obligations arise from Lessor's own fault or negligent
conduct. In addition to the other covenants and obligations set forth in this
Lease, Lessee specifically agrees to pay to Lessor, as Additional Rent, the
expenses and charges set forth below:
(i) If the Leased Property is included in any P.U.D.,
condominium, or other form of development in which the owner
of the Leased Property is liable, under the Restrictions or
otherwise, for the payment of any taxes, costs, fees,
assessments, or similar expenses, then Lessee shall pay all
such costs and expenses.
(ii) Lessee shall pay any and all Taxes (as defined below)
levied against the Leased Property for any period occurring
during the term of this Lease.
(iii) Lessee shall pay the premiums for insurance required by
Article 16.
"Taxes" shall mean and include all general and special taxes,
assessments, duties and levies, charged and levied upon or assessed by any
governmental authority against the Leased Property or any portion thereof, or
any leasehold improvements, fixtures, installations, additions, and equipment
whether owned by Lessor or Lessee. Taxes shall also include the reasonable cost
to Lessor in contesting the amount, validity, or the applicability of any Taxes
mentioned in this Article. Further included in the definition of Taxes herein
shall be general and special assessments, fees of every kind and nature,
commercial rental tax, levy, penalty or tax (other than inheritance or estate
taxes) imposed by any authority having the direct or indirect power to tax, as
against any legal or equitable interest of Lessor in the Leased Property or on
the act of entering into this Lease or as against Lessor's right to rent or
other income therefrom, or as against Lessor's business of leasing the Leased
Property, any tax, fee, or charge with respect to the possession, leasing,
transfer of interest, operation, management, maintenance, alteration, repair,
use, or occupancy by Lessee of the Leased Property, or any tax imposed in
substitution, partially or totally, for any tax previously included within the
definition of Taxes herein, or any additional tax, the nature of which may or
may not have been previously included within the definition of Taxes. Further,
if at any time during the term of this Lease the method of taxation or
assessment of real estate or the income therefrom prevailing at the time of
execution hereof shall be, or has been altered so as to cause the whole or any
part of the Taxes now or hereafter levied, assessed or imposed on real estate to
be levied, assessed or imposed upon Lessor, wholly or partially, as a capital
levy, business tax, permit or other charge, or on or measured by the rents
received therefrom, then such new or altered Taxes, regardless of their nature,
which are attributable to the Leased Property shall be deemed to be included
within the term "Taxes'.' for purposes of this Article 6, whether in
substitution for, or in addition to any other Taxes, save and except that such
shall not be deemed to include any enhancement of said tax attributable to other
income of Lessor. With respect to any general or special assessments which may
be levied upon or against the Leased
3
<PAGE>
Property, or which may be evidenced by improvement or other bonds, or may be
paid in annual or semi-annual installments, only the amount of such installment,
pro rated for any partial year, and statutory interest, shall be included within
the computation of Taxes for which Lessee is responsible hereunder.
During the term hereof Lessee shall pay prior to delinquency all taxes
assessed against and levied upon fixtures, furnishings, equipment and all other
personal property of Lessee and when possible Lessee shall cause said fixtures,
furnishings and equipment to be assessed and billed separately from the property
of Lessor. If any of Lessee's personal property shall be assessed with the
Leased Property, Lessee shall pay to Lessor or directly to the taxing authority,
the Taxes attributable to Lessee's personal property.
Lessor shall estimate the Taxes, insurance, assessments, and common
area (and similar charges) required to be paid by Lessee hereunder for the
current calendar year (or other convenient period established by Lessor) or
portion thereof, and Lessee shall pay to Lessor at the same time each payment of
Minimum Rent is due, the amount of the estimate divided by the total number of
months included in the period covered by the estimate. Within three months after
the end of each calendar year (or other period), Lessor shall render a statement
to Lessee showing the difference between the Lessee's obligations for such
amounts and the amounts collected by Lessor from Lessee. Lessee shall pay any
shortage to Lessor within thirty (30) days after the date of such statement.
Correspondingly, Lessee shall receive a credit in the amount of any overpayment,
which credit may be applied by Lessee to subsequent payments due under this
Section, as long as Lessee is not in default for failure to pay under this
Lease. Lessee may audit Lessor's estimates and the expenses paid by Lessor, at
Lessee's expense. If the audit reveals that the amounts charged to Lessee for
actual expenses (as opposed to estimated expenses) exceeded actual expenses by
more than five percent (5%), then Lessor shall reimburse Lessee for the cost of
the audit. If the Lessee has overpaid such expenses at the end of the term of
the Lease, Lessor shall reimburse Lessee the amount of such overpayment.
Lessee shall cause all bills, statements and other documents related to
Taxes, insurance, assessments, and common area (and similar charges) to be sent
directly to Lessor. The size of the monthly payments required by this Section to
be made by Lessee shall be adjusted from time to time as may be necessary in
light of the total taxes, assessments and insurance premiums to which such
payments are related.
ARTICLE 7. USE OF LEASED PROPERTY. Lessee shall not use the Leased
----------------------
Property or allow the Leased Property to be used for any improper, immoral, or
unlawful purpose, nor shall Lessee cause, maintain or permit any nuisance in, on
or about the Leased Property. Lessee shall not damage or deface or otherwise
commit or suffer to be committed any waste in, of or upon the Leased Property.
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ARTICLE 8. COMPLIANCE WITH LAW. Lessee shall not use the Leased
-------------------
Property or permit anything to be done in or about the Leased Property which
will in any way conflict with any law, statute, ordinance or government rule or
regulation now in force or which may hereafter be enacted or promulgated. Lessee
shall at its sole cost and expense promptly comply with all laws, statutes,
ordinances and governmental rules, regulations or requirements now in force or
which may hereafter be in force and with the requirements of any board of fire
underwriters or other similar body now or hereafter constituted related to or
affecting the condition, use or occupancy of the Leased Property, including
making such repairs, replacements, additions, or modifications to the Leased
Property as may be required (whether or not such are in the nature of capital
improvements). The judgment of any court of competent jurisdiction or the
admission of Lessee in an action against Lessee, whether Lessor be a party
thereto or not, that Lessee has violated any such law, statute, ordinance or
governmental rule, regulation or requirement, shall be conclusive of that fact
as between Lessor and Lessee.
Lessee accepts the Leased Property subject to all applicable zoning,
municipal, county and state laws, ordinances, rules, regulations, orders,
restrictions of record, and requirements in effect during the term or any part
of the term hereof regulating the Leased Property.
For purposes hereof, "Hazardous Materials" shall mean any and all
flammable explosives, radioactive material, hazardous waste, toxic substance or
related material, including but not limited to, those materials and substances
defined as "hazardous substances", "hazardous materials", "hazardous wastes" or
"toxic substances" in the Environmental Laws. For purposes hereof,
"Environmental Laws" shall mean all local, state and federal laws, statues,
rules and regulations, in force from time to time during the term of this Lease,
pertaining to Hazardous Materials and other environmental matters, including but
not limited to, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, 42 U.S.C. Section 9601 et seq.; the Hazardous Materials
Transportation Act, 39 U.S.C. Section 1801, et seq.; the Solid Waste Disposal
Act, as amended by the Resource Conservation and Recovery Act, 42 U.S.C. Section
6901 et seq.; the Federal Clean Water Act 33 U.S.C. Section 1251 et seq.; the
Clean Air Act 42 U.S.C. Section 7401 et seq.; the Porter-Cologne Water Quality
Act, including all amendments thereto, replacements thereof, and regulations
adopted and publications promulgated pursuant thereto.
Lessee agrees that, during the term of this Lease, Lessee shall not be
in violation of any federal, state or local law, ordinance or regulation then
applicable to the Leased Property and relating to industrial hygiene, soil,
water, or environmental conditions on, under or about the Leased Property
including, but not limited to, the Environmental Laws. Lessee further agrees
that during the term of this Lease, there shall be no use, presence, disposal,
storage, generation, release, or threatened release of Hazardous Materials on,
from or under the Leased Property. Lessee agrees to indemnify, defend, protect
and hold harmless Lessor, its directors, officers, employees, partners, and
agents from and against any and all losses, claims, demands, actions, damages
(whether direct or consequential), penalties, liabilities, costs and
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<PAGE>
expenses, including all reasonable attorney's fees and legal expenses, arising
out of any violation or alleged violation of any of the laws or regulations
referred to in this Article, or breach of any of the provisions of this Article.
Lessor warrants that, as of the Commencement Date, the real property
shall be free of Hazardous Materials, and Lessor agrees to indemnify and defend
Lessee against any losses, claims, and damages with respect to any violation of
this covenant.
The provisions of this Article shall survive the termination or
expiration of this Lease.
ARTICLE 9. INITIAL TENANT IMPROVEMENTS; ALTERATIONS. Lessee
----------------------------------------
shall make the tenant improvements described in Exhibit "D" hereto and within
the time specified therein. Such tenant improvements shall be at Lessee's sole
cost and expense.
Except as stated herein, Lessee shall not make or permit to be made any
other alterations, additions or improvements to or of the Leased Property or any
part thereof without the written consent of Lessor, which consent shall not be
unreasonably withheld, and any alterations, additions or improvements to, or on
the Leased Property, except movable furniture and trade fixtures, shall at once
become a part of the realty and belong to Lessor. Lessor's prior consent shall
not be required for minor alterations, additions or improvements that do not
affect the structure or roof of the buildings and that cost less than
$10,000.00. Lessee shall submit working drawings for any such alterations,
additions or improvements to Lessor for Lessor's prior written approval. In the
event Lessor consents to the making of any alterations, additions or
improvements to the Leased Property by Lessee, the same shall be made by Lessee
at Lessee's sole cost and expense and such work shall be performed in a
workmanlike manner.
Lessee shall keep the Leased Property free from any liens arising out
of any work performed, materials furnished, or obligations incurred by Lessee.
In the event a mechanic's or other lien is filed against the Leased Property as
a result of a claim arising through the Lessee, Lessee shall, upon request by
Lessor, furnish to Lessor a surety bond satisfactory to Lessor in an amount
equal to at least one hundred fifty percent (150%) of the amount of the
contested lien, claim or demand, indemnifying Lessor against liability for the
same. Lessor may require Lessee to pay Lessor's reasonable attorneys' fees and
costs in participating in any action to foreclose such lien if Lessor shall
decide it is to its best interest to do so.
Lessee shall return the Leased Property to Lessor at the expiration or
earlier termination of this Lease in good and sanitary order, condition and
repair, free of rubble and debris, broom clean, reasonable wear and tear
excepted. Any deferred maintenance or other conditions other than normal wear
and tear shall be remedied at Lessee's sole cost and expense. All damage to the
Leased Property caused by the removal of trade fixtures and other personal
property that Lessee is permitted to remove under the terms of this Lease and/or
such restoration shall be repaired by Lessee at its sole cost and expense prior
to termination.
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Lessee shall have the right to remove its personal property, including,
Lessee's switches, emergency power systems and generators, and
telecommunications equipment (but not including replacements of the personal
property being leased hereunder).
ARTICLE 10. REPAIRS; MAINTENANCE; REPLACEMENT. Lessor shall be
---------------------------------
responsible for the repair and maintenance of the roofs of buildings (both
structure and membrane or covering) located on the Leased Property.
Lessee shall, at all times during the term hereof and at Lessee's sole
cost and expense, keep, maintain and repair the remainder of the Leased Property
in good, working, and sanitary order and condition, including, without
limitation, replacement of all broken or damaged glass, replacement of light
globes or tubes and doors, window casements, heating and air conditioning
systems, plumbing, pipes, electrical wiring conduit, interior partitions,
fixtures, leasehold improvements and alterations, walls (both exterior and
interior), and all structural components, floor slab and subgrade and
foundations and footings, pavement, sidewalks, walls, fences, curbs, bumpers,
landscaping, irrigations systems, striping and line painting, sweeping, removal
of snow, ice, trash, garbage and other refuse. Lessee shall pay all fees,
required licenses and permits relating to the Leased Property.
Lessor warrants that the HVAC system shall be in good working order on
the Commencement Date. On the Commencement Date, Lessor, Lessee, and an HVAC
professional mutually agreeable to the parties shall jointly inspect the HVAC
system, any deficiencies in the HVAC system then existing shall be noted in
writing, and Lessor shall cause any such deficiencies to be corrected promptly.
Except for such deficiencies noted in writing, the Lessee shall be deemed to
have accepted the HVAC system in good working order on the Commencement Date.
Except as stated in this Lease, Lessee accepts the Leased Property in
its "as-is" condition. Lessee agrees on the last day of the term or sooner
termination of this Lease to surrender the Leased Property in good and sanitary
order, condition and repair, and in compliance with Lessee's obligations to
repair, replace and maintain the Leased Property as set forth in this Lease.
Except as stated in this Lease, Lessee's obligations to repair and
maintain the Leased Property during the term hereof, and its obligations
respecting the condition of the Leased Property from time to time during the
term hereof and at the time the Leased Property are surrendered to Lessor, are
absolute and unconditional, and Lessee agrees that Lessor shall have no
obligation to repair, replace, or maintain the Leased Property regardless of the
existence of latent defects or circumstances now existing or hereafter arising.
ARTICLE 11. WASTE AND NUISANCE. (a) Lessee covenants that it:
------------------
(i) will keep the Leased Property and every part thereof in a clean, reasonably
neat and orderly condition; (ii) will in all respects and at all times
fully comply with all health and policy regulations; (iii)
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shall not overload the floors or permit or allow any waste, abuse, deterioration
or destructive use of the Leased Property to occur.
(b) Lessee further covenants that it will (i) not cause or permit any
Hazardous Materials to be brought upon or used in or about the Leased Property;
(ii) immediately notify Lessor of any environmental concern raised by a private
party or governmental agency as it relates to the Leased Property; and (iii)
immediately notify Lessor of any Hazardous Material spill. In the event of a
violation hereof, Lessee shall immediately proceed, at Lessee's expense, to
remedy same. Failure of Lessee to commence clean up activities within five (5)
days after receipt of notice to so do shall be a default under this Lease.
Lessor shall, thereafter, have the right, but not the obligation, to remedy any
environmental violation upon the Leased Property and Lessee shall promptly
reimburse Lessor for all costs relating thereto. Lessor further retains the
right, in its sole, but reasonable discretion, to conduct any environmental
tests on the Leased Property should Lessor suspect a violation to exist upon the
Leased Property. Lessee shall and does agree to indemnify and hold Lessor
harmless from and against any and all damages, costs, expenses and liability
whatsoever, including, without limitation, attorneys' fees that Lessor may incur
because of Lessee's violation of, or the resulting enforcement of, any
Environmental Laws, which covenant shall survive the expiration or earlier
termination of this Lease.
ARTICLE 12. ABANDONMENT. Lessee shall not, except in case of default by
-----------
Lessor, abandon the Leased Property at any time prior to the expiration or
earlier termination of the term hereof. In the event Lessee shall abandon or
surrender the Leased Property or be dispossessed by process of law or otherwise,
any personal property belonging to Lessee and left on the Leased Property beyond
thirty (30) days shall be deemed to have been abandoned.
ARTICLE 13. ASSIGNMENT AND SUBLETTING. Lessee shall not assign this Lease
-------------------------
or sublet the Leased Property or any part thereof to occupy or use the Leased
Property or any portion thereof without the prior written consent of Lessor,
which consent shall not be unreasonably withheld. Acceptance of rent by Lessor
of Lessee or Assignee shall not be deemed approval or acceptance of assignment
or subletting. Lessee shall remain liable for all terms and conditions of this
Lease at all times notwithstanding assignment or subletting; provided, however,
in the event of an assignment of the lease to an assignee that has a stated net
worth equal to or greater than Fifty Million Dollars ($50,000,000.00), as
established by current audited financial statements of such assignee, prepared
in accordance with generally accepted accounting principles, then Lessee shall
be released from liability hereunder from and after the effective date of such
assignment. In the event Lessor grants permission in writing for Lessee to
sublet or assign, Lessee shall pay to Lessor its reasonable costs and attorney's
fees incurred in reviewing the Lessee's request (not to exceed $300.00). Any
assignment or subletting by Lessee without Lessor's consent shall be a default
by Lessee hereunder. Lessee may assign, transfer or sublet the Leased Property
to an affiliate, subsidiary or parent company
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<PAGE>
of Lessee without the consent of Lessor; provided, however, that Lessee shall
remain fully liable hereunder.
ARTICLE 14. PARKING AND LANDSCAPING. Lessee shall, at its sole cost,
-----------------------
maintain in good condition and repair all of the pavement, parking, striping and
line painting, exterior lights, irrigation systems, shrubs, grass and landscaped
areas on the Leased Property, and shall repair, maintain and/or replace the
pavement, parking area and landscaping as may be reasonably necessary to keep it
in good condition and repair, regardless of whether the nature of such repairs
may be in the nature of capital expenditures.
ARTICLE 15. INDEMNIFICATION OF LESSOR. Lessee releases Lessor, and its
-------------------------
authorized representatives, from any claims for damage to any person, to the
Leased Property, or to the fixtures, personal property, Lessee's improvements
and alterations of either Lessor or Lessee, in or on the Leased Property,
including loss of income, that are caused by or result from risks insured or
required under the terms of this Lease to be insured against.
Except as otherwise provided herein, Lessee, as a material part of the
consideration to be rendered to Lessor, shall indemnify, defend, protect and
hold harmless Lessor against all actions, claims, demands, damages, liabilities,
losses, penalties, or expenses of any kind which may be brought or imposed upon
Lessor or which Lessor may pay or incur by reason of injury to person or
property, from whatever cause, all or in any way connected with the condition or
use of the Leased Property on or after the Commencement Date, or the
improvements or personal property therein or thereon, including without
limitation any liability or injury to the person or property of Lessee, its
agents, officers, employees or invitees. Lessee agrees to indemnify, defend and
protect Lessor and hold it harmless from any and all liability, loss, cost or
obligation on account of, or arising out of, any such injury or loss however
occurring, including breach of the provisions of this Lease, and for any
conditions or occurrences arising prior to the date hereof. Nothing contained
herein shall obligate Lessee to indemnify Lessor against Lessor's active
negligence or willful acts, for which Lessor shall indemnify Lessee.
In the event any action, suit or proceeding is brought against Lessor
by reason of such occurrence or condition, Lessee, upon Lessor's request will at
Lessee's expense resist and defend such action, suit or proceeding, or cause the
same to be resisted and defended by counsel designated either by Lessee or by
the insurer whose policy covers the occurrence and in either case approved by
Lessor. The obligations of Lessee under this Article arising by reason of any
occurrence taking place during the Lease term shall survive any termination of
this Lease.
Lessee, as a material part of the consideration to be rendered to
Lessor, hereby waives all claims against Lessor for damages to goods, wares,
merchandise and loss of business in, upon or about the Leased Property and for
injury to Lessee, its agents, employees, invitees or third persons in or about
the Leased Property from any cause arising at any time, including
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breach of the provisions of this Lease and the negligence of the parties hereto,
unless caused by the gross negligence or willful acts of Lessor.
Wherever in this Article the term Lessor or Lessee is used and such
party is to receive the benefit of a provision contained in this Article, such
term shall refer not only to that party but also to its officers, directors,
employees, partners and agents.
ARTICLE 16. INSURANCE. (a) Lessor, at the expense of Lessee as provided
---------
herein, shall secure comprehensive general liability insurance on the Leased
Property on an occurrence basis with a minimum limit of liability in an amount
of One Million Dollars ($1,000,000.00) per occurrence, Two Million Dollars
($2,000,000.00) aggregate, or such other limits as Lessor may reasonably
determine. Lessor (and, at Lessor's option, the lender interested under any
mortgage or similar instrument then affecting the Leased Property) shall be
solely responsible for determining the amount of insurance and the specific
endorsements to be maintained.
The foregoing requirement shall be satisfied, and Lessor shall not
purchase a separate liability policy, if and only for those time periods that
Lessee furnishes a prepaid insurance policy having coverage and limits equal to
or in excess of the above-specified policy, as such limits may be adjusted by
Lessor from time to time, and Lessee furnishes evidence of such to Lessor. Any
such policy shall not be cancelable except upon thirty (30) days' prior written
notice to Lessor. Lessor and any lender on the Leased Property shall be named
therein as additional insureds.
(b) Lessor, at the expense of Lessee as provided herein, shall
procure insurance coverage insuring Lessor against loss of, or damage to, all
buildings and structures on the Leased Property by reason of fire or any other
casualties. Such insurance shall be underwritten by a responsible insurance
company qualified to do business in the State where the Leased Property is
located, shall be in the face amount equal to the full replacement cost of all
buildings and structures on the Leased Property, and may include coverage for
loss of rents. Such insurance may cover loss or damage by fire, windstorm, hail,
acts of God, explosion, riot attending a strike, civil commotion, aircraft,
vehicles, smoke, and earthquake. Lessor (and, at Lessor's option, the lender
interested under any mortgage or similar instrument then affecting the Leased
Property) shall be solely responsible for determining the amount of fire and
extended coverage insurance and the specific endorsements to be maintained.
Lessor may also maintain boiler insurance on all heating boilers within the
Leased Property in such amounts as it determines. Lessor shall be named as an
insured on each such policy. The proceeds of such insurance in case of loss or
damage shall be paid to Lessor to be applied on account of the obligation of
Lessor to repair and/or rebuild the Premises as provided herein. Any proceeds
not required for such purpose shall be the sole property of Landlord. In any
event, Tenant shall have no interest in or claim to any such proceeds.
(c) Lessee agrees during the entire term hereof, to keep in
full force and effect a policy of comprehensive general liability insurance with
respect to the Leased Property, the
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business operated by Lessee, and any subtenants, concessionaires, or licensees
of Lessee in the Leased Property, with minimum limits of not less than
$1,000,000 per occurrence, $2,000,000 in the aggregate. The policy shall name
Lessor, any person, firms, or corporations designated by Lessor, and Lessee as
insureds.
At all times during the term hereof, Lessee shall keep in force at its
sole cost and expense, fire and extended coverage insurance, and against
sprinkler leakage or malfunction and water damage and against vandalism and
malicious mischief, on Lessee's trade fixtures, furnishings, equipment and other
personal property located or brought upon the Leased Property in full
replacement value thereof. Lessee shall also obtain broad form boiler and
machinery insurance on all air-conditioning equipment, boilers and other
pressure vessels or systems, whether fired or unfired, which are installed by
Lessee or which serve the Leased Property, except to the extent such items are
covered under insurance secured by Lessor. Such boiler and machinery insurance
shall cover the replacement value of such items. During the Lease term, the
proceeds from any such policy or policies of insurance shall be used for the
repair or replacement of the property so insured.
The foregoing insurance required to be procured by Lessee shall be
issued by an insurance company approved by Lessor and a copy of the policy or a
certificate of insurance shall be delivered to Lessor.
(d) Each party shall cause each insurance policy obtained by
it to provide that the insurance company waives all rights of recovery by way of
subrogation against either party in connection with any damage covered by such
policy. Neither party shall be liable to the other for any damage caused by fire
or any other risks insured against under any property insurance policy carried
under the terms of this Lease.
(e) Any mortgage lender interested in any part of the Leased
Property may, at Lessor's option, be afforded coverage under any policy required
to be secured by Lessee hereunder, by use of a mortgagee's endorsement to the
policy concerned.
(f) No use shall be made or permitted to be made on the Leased
Property, nor acts done, which will increase the existing rate of insurance upon
the Leased Property or cause the cancellation of any insurance policy or any
part thereof as a result of such use or acts, nor shall Lessee sell, or permit
to be kept, used or sold, in or about the Leased Property, any article which
may be prohibited by the standard form of fire insurance policies. Lessee shall,
at its sole cost and expense, comply with any and all requirements pertaining to
the Leased Property, of any insurance organization or company, necessary for the
maintenance of reasonable property damage and public liability insurance,
covering the Leased Property.
ARTICLE 17. UTILITIES; JANITORIAL SERVICE. (a) Lessee shall be solely
-----------------------------
responsible for, and shall promptly pay before delinquency, all charges for use
or consumption
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of heat, sewer, water, gas, electricity, telephone or any other utility services
supplied to Lessee or to the Leased Property during the term hereof.
(b) Unless caused by Lessor's negligence or willful act,
Lessor shall not be liable in the event of any interruption in the supply of any
utility service to the Leased Property. Lessee agrees that it will not install
any equipment which will exceed or overload the capacity of any utility
facilities and that if any equipment installed by Lessee shall require
additional utility facilities, the same shall be installed at Lessee's expense
in accordance with plans and specifications first approved in writing by Lessor.
(c) Lessee shall provide at its sole expense regular
janitorial service for the Leased Property. In addition, Lessee shall provide an
adequate sized dumpster for the storage of refuse. Lessee shall arrange for the
removal of such refuse and periodic cleaning of such dumpster and the areas
immediately adjacent thereto.
ARTICLE 18. ENTRY AND INSPECTION. Lessee shall permit Lessor and its
--------------------
agents to enter into and upon the Leased Property at all reasonable times and
upon twenty-four (24) hours advance notice for the purpose of inspecting the
same. During the six (6) months preceding the expiration of the term of this
Lease, Lessor may place usual and ordinary signs on the Leased Property
advertising the availability of the property for sale or lease. Lessor or its
agents may, during normal business hours, enter upon said Leased Property and
exhibit same to prospective lessees.
ARTICLE 19. DEFAULT. In the event of any failure of Lessee to pay any
-------
rental or other sum due hereunder within eight (8) days after the same shall be
due, or any failure to perform any other of the terms, conditions or covenants
of this Lease to be observed or performed by Lessee for more than thirty (30)
days after written notice of such default shall have been given to Lessee (or,
if such failure cannot reasonably be cured within such thirty (30) days, if
Lessee fails to commence the cure within thirty (30) days or thereafter fails to
diligently prosecute such cure to completion), or if Lessee or any guarantor of
the Lease shall become bankrupt or insolvent or file any debtor proceedings or
take or have taken against Lessee or any guarantor of this Lease in any court
pursuant to any statute either of the United States or of any state a petition
in bankruptcy or insolvency or for reorganization or for the appointment of a
receiver or trustee of all or a portion of Lessee's or any such guarantor's
property, or if Lessee or any such guarantor makes an assignment for the benefit
of creditors or petitions for or enters into an arrangement, or if Lessee shall
abandon said Leased Property or suffer this Lease to be taken under any writ of
execution, Lessor, besides other rights or remedies it may have, shall have the
immediate right of re-entry and may remove all persons and property from the
Leased Property and such property may be removed and stored in a public
warehouse or elsewhere at the cost of and for the account of Lessee, all without
service of notice or resort to legal process and without being deemed guilty of
trespass or becoming liable, absent Lessor's negligence or willful misconduct,
for any loss or damage which may be occasioned thereby.
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Should Lessor elect to re-enter, as herein provided, or should it take
possession pursuant to legal proceedings or pursuant to any notice provided for
by law, it may either terminate this Lease or it may from time to time without
terminating this Lease, make such alterations and repairs as may be necessary in
order to relet the Leased Property and relet said Leased Property or any part
thereof for such term or terms (which may be for a term extending beyond the
term of this Lease) and at such rental or rentals and upon such other terms and
conditions as Lessor in its sole discretion may deem advisable, upon such
reletting, all rentals received by Lessor from such reletting shall be applied,
first, to the payment of any indebtedness other than rent due hereunder from
Lessee to Lessor, second, to the payment of any costs and expenses of such
alterations, repairs, and reletting (including commissions), third, to the
payment of rent due and unpaid hereunder, and the residue, if any, shall be held
by Lessor and applied toward payment of future rent as the same may become due
and payable hereunder. No such re-entry or taking possession of the Leased
Property by Lessor shall be construed as an election on its part to terminate
this Lease unless a written notice of such intention be given to Lessee or
unless the termination thereof be decreed by a court of competent jurisdiction.
Notwithstanding any such reletting without termination, in addition to any other
remedies it may have, it may recover from Lessee all damages it may incur by
reason of such breach, including the worth at the time of such termination of
the excess, if any, of the present value of the rent and charges equivalent to
rent reserved in this Lease for the remainder of the stated term (using a
discount rate of 10.0%) over the present value of the then reasonable rental
value of the Leased Property for the remainder of the stated term (using a
discount rate of 10.0%), all of which amounts shall be immediately due and
payable from Lessee to Lessor. To give effect to the remedies provided herein,
Lessee expressly waives the benefit of any statutory or common law that limits
or delays the Lessor's ability to recover damages for future rents and agrees
that such rents may be accelerated for purposes of determining Lessee's
liability and Lessor's damages.
The remedies given to Lessor in this section shall be in addition and
supplemental to all other rights or remedies which Lessor may have under the
laws then in force.
ARTICLE 20. DESTRUCTION. (a) If any building or structure on the Leased
-----------
Property shall be damaged or destroyed by fire or other casualty or cause,
Lessor shall repair such building or structure to a condition which is
substantially similar to the condition in existence prior to such casualty.
(b) Notwithstanding the foregoing, however, if the building or
structure on the Leased Property is damaged to the extent of thirty-three and
one-third percent (33-1/3%) or more of its then replacement value, or if the
repair of the Leased Property would require more than one hundred twenty (120)
days, either party may terminate this Lease upon written notice given to the
other within thirty (30) days following such casualty or loss. If Lessee
determines, in its reasonable judgment, that its business on the Leased Property
cannot be carried on notwithstanding the repair or replacement of the Leased
Property, then Lessee shall
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have the right to terminate this Lease upon written notice given to Lessor
within thirty (30) days following such casualty or loss.
(c) Unless this Lease is terminated, Lessee shall, at its
expense, repair the fixtures and improvements installed by it within the Leased
Property and repair or replace any of Lessee's furniture, equipment or other
personal property damaged by such casualty or event.
(d) If any building or structure on the Leased Property shall
be damaged or destroyed by fire or other casualty or cause, Minimum Rent shall
abate proportionately as to the portion of the Leased Property rendered
untenantable; but only upon the condition that insurance covers Lessor's loss of
rents for such period.
ARTICLE 21. EMINENT DOMAIN. If all or more than 33-1/3% of the Leased
--------------
Property shall be taken or appropriated by any public or quasi-public authority
under the power of eminent domain, or transfer in lieu thereof, either party
hereto shall have the right, at its option, to terminate this Lease as of the
date title vests in the condemning entity. Lessor shall be entitled to any
award, or other payment made in connection with such condemnation. Lessee,
however, shall have the right to pursue a claim in any condemnation proceeding
against the condemning authority (but not against Lessor) for compensation for
any resulting damages to Lessee's business, trade fixtures and personal property
(but not for any diminution or loss of Lessee's leasehold estate). If a part of
the Leased Property shall be so taken or appropriated and this Lease is not
thereafter terminated, the rental thereafter to be paid shall be reduced in the
proportion that the area of the Leased Property so taken bears to the entire
Leased Property. Notwithstanding the foregoing, however, before Lessee may
terminate this Lease by reason of a taking or appropriation as described above,
such taking or appropriation shall be of such an extent and nature as to
substantially handicap, impede or impair Lessee's use of the Leased Property for
a period in excess of ninety (90) days.
ARTICLE 22. MORTGAGE REQUIREMENTS. This Lease and all rights of Lessee
---------------------
under this Lease are hereby subordinate hereunder to any lien of any mortgage or
mortgages or lien or other security interest resulting from any other method of
financing or refinancing, now or hereafter in force against the Leased Property.
The provisions of this Article notwithstanding, so long as Lessee is not in
default hereunder, this Lease shall remain in full force and effect for the full
term hereof and shall not be terminated as a result of any foreclosure or sale
or transfer in lieu of such proceedings pursuant to a mortgage or other
instrument to which Lessee has subordinated its rights pursuant hereto.
In the event of the sale or assignment of Lessor's interest in the
Leased Property, or in the event of any proceeding brought for the foreclosure
of, or in the event of exercise of the power of sale under any mortgage or other
security instrument made by Lessor covering the Leased Property, Lessee shall
attorn to the assignee or purchaser and recognize such purchaser as Lessor under
this Lease.
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Lessee agrees to give any mortgagees (as defined below), by registered
mail, a copy of any notice of default served by Lessee upon Lessor, provided
that prior to such notice, Lessee has been notified, in writing (by way of a
Notice of Assignment of Rents and Leases or otherwise) of the addresses of any
such mortgagees. Lessee further agrees that if Lessor shall have failed to cure
such default within the time set forth in this Lease, then any such mortgagees
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, any such mortgagee 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. "Mortgagee" shall mean the holder of any mortgage, the beneficiary
under any deed of trust or the holder of any other security interest which
encumbers the Leased Property.
ARTICLE 23. RULES REGULATIONS AND RESTRICTIVE COVENANTS.
--------------------------------------------
Lessee shall faithfully observe and comply with any rules, regulations and/or
restrictive covenants applicable to the Leased Property.
ARTICLE 24. HOLDING OVER. If Lessee holds possession of the Leased
------------
Property after the term of this Lease with Lessor's consent, and Lessor accepts
rent in the amounts hereinafter provided, Lessee shall become a lessee from
month-to-month upon terms equal to the then existing terms hereunder, except
that the Minimum Rent shall be the then existing Minimum Rent then payable
hereunder at the end of the term (on a monthly basis) multiplied by one hundred
twenty-five percent (125%). Minimum Rent and Additional Rent shall be paid in
advance on or before the third day of each month and Lessee shall continue in
possession until such tenancy shall be terminated by Lessor or until Lessee
shall have given to Lessor a written notice at least thirty (30) days prior to
the date of termination of such tenancy of its intention to terminate such
tenancy.
ARTICLE 25. NOTICES. All notices and demands which may or are required
-------
to be given by either party to the other hereunder shall be sent by overnight
courier or United States certified or registered mail, postage prepaid,
addressed to:
LESSOR LESSEE
Warren P. King Teltrust, Inc.
4449 South Adonis Drive Attn: Vice President and General Counsel
Salt Lake City, UT 84124 221 N. Charles Lindbergh Drive
Salt Lake City, UT 84116
Tel: 801-972-8160 Tel: 801-535-2000
Fax: 801-973-8687 Fax: 801-535-2080
15
<PAGE>
ARTICLE 26. LESSOR'S RIGHT TO CURE DEFAULTS. All covenants and
-------------------------------
agreements to be performed by Lessee under any of the terms of this Lease shall
be at its sole cost and expense and, except as otherwise specifically provided
herein, without any abatement of rent. If Lessee shall fail to pay any sum of
money, other than rent, required to be paid by it hereunder or shall fail to
perform any other act on its part to be performed hereunder, shall fail to cure
any such default within the applicable cure period, and such failure shall
continue for five (5) days after Lessee has received notice thereof by Lessor,
Lessor may, but shall not be obligated to do so, and without waiving any rights
of Lessor or releasing Lessee from any obligations of Lessee hereunder, make
such payment or perform such other act. All sums to be paid by Lessor and all
necessary incidental costs together with interest thereon at the rate of one and
one-half percent (1-1/2%) per month from the date of such payment by Lessor in
connection with the performance of any such act by Lessor shall be considered
additional rent hereunder and, except as otherwise in this Lease expressly
provided, shall be payable to Lessor on demand or, at the option of Lessor, in
such installments as Lessor may elect and may be added to any rent then due or
thereafter becoming due under this Lease.
ARTICLE 27. FORCE MAJEURE. Lessor shall not be responsible or liable
-------------
for any delay in the observance or performance of any term or condition of this
Lease to be observed or performed by Lessor to the extent such delay results
from action of governmental authorities, civil commotions, strikes, fires, acts
of God, whether or not similar to the matters herein specifically enumerated and
any such delay shall extend by like time any period of performance by Lessor and
shall not be deemed a breach of or failure to perform this Lease or any
provision hereof.
ARTICLE 28. TRANSFER OF LESSOR'S INTEREST. In the event Lessor
-----------------------------
transfers its interest in the Leased Property (other than a transfer for
security purposes), Lessor shall be relieved of all obligations accruing
hereunder after the effective date of such transfer, provided that such
obligations have been expressly assumed in writing by the transferee.
ARTICLE 29. QUIET ENJOYMENT. Lessor covenants that so long as Lessee
---------------
performs all of its obligations hereunder it shall peacefully and quietly have,
hold and enjoy the Leased Property for the term hereof.
ARTICLE 30. SIGNS. Lessee shall have the right to use the monument sign
-----
located on the Leased Property. Lessee shall comply with all applicable
governmental regulations and other restrictions in the placement of signs or
advertisements on or in the Leased Property. The cost of installation and
regular maintenance of any signs shall be at the sole expense of Lessee. At the
termination of this Lease, or any extensions thereof, Lessee shall remove such
signs as are requested to be removed by Lessor, and alt damage caused by such
removal shall be repaired at Lessee's expense.
ARTICLE 31. SURRENDER OF LEASE. The voluntary or other surrender of
------------------
this Lease by Lessee, or a mutual cancellation thereof, shall not work as a
merger, and shall, at the
16
<PAGE>
option of Lessor, terminate all or any existing subleases or subtenancies, or
may, at the option of Lessor, operate as an assignment to it of any or all such
subleases or subtenancies.
ARTICLE 32. LESSOR'S EXCULPATION. Anything in this Lease to the
--------------------
contrary notwithstanding, Lessee agrees that it shall look solely to the estate
and property of Lessor in the Leased Property for the collection of any judgment
(or other judicial process) requiring the payment of money by Lessor in the
event of any default or breach by Lessor with respect to any of the terms,
covenants, and conditions of this Lease to be observed and/or performed by
Lessor, and no other assets of Lessor shall be subject to levy, execution, or
other procedures for the satisfaction of Lessee's remedies.
ARTICLE 33. ATTORNEYS' FEES. In any action or proceeding brought by
---------------
either party to enforce or interpret this Lease or any provision hereof, the
prevailing party shall be entitled to recover its reasonable attorney fees and
costs incurred therein. Further, Lessee hereby agrees to pay, as additional
rent, all reasonable attorney's fees and disbursements, and all other court
costs or expenses of legal proceedings or other legal services which Lessor may
incur or pay out by reason of, or in connection with:
(a) any appearance by Lessor (or any officer, partner, or
employee of Lessor) as a witness or otherwise in any action or proceeding
whatsoever involving or affecting Lessee or this Lease (provided, however, that
this clause shall not apply to actions between Lessor and Lessee, which are
governed by the first sentence of this Article);
(b) subject to the provisions of Article 13 above, any
assignment, sublease, or leasehold mortgage proposed or granted by Lessee
(whether or not permitted under this Lease), and all negotiations with respect
thereto; and
(c) any alteration of the Leased Property by Lessee or at the
request of Lessee, and all negotiations with respect thereto.
Lessee's obligations under this Article shall survive the expiration or
any other termination of this Lease. This Article is intended to supplement (and
not to limit) other provisions of this Lease pertaining to indemnities and/or
attorney's fees.
Should it be necessary for Lessor to employ legal counsel to enforce
any of the provisions of this Lease, Lessee agrees to pay, as additional rent,
all reasonable attorney's fees and court costs reasonably incurred thereby,
whether or not Lessor commences any legal action or proceeding.
ARTICLE 34. ESTOPPEL CERTIFICATES AND FINANCING. Lessee agrees at any
-----------------------------------
time and from time to time upon not less than ten (10) days prior request by
Lessor, to execute, acknowledge and deliver to Lessor a written certificate in
recordable form certifying (if true), as of the date of such certificate: (1)
the beginning and termination dates hereof; (2)
17
<PAGE>
that this Lease is in full force and effect and has not been assigned, modified,
supplemented or amended (except by such writings as shall be stated); (3)
stating that all conditions under this Lease to be performed by either party
have been satisfied (or stating which conditions remain unsatisfied); (4)
stating that there are no defenses or offsets against the enforcement of this
Lease by the Lessor, or stating those claimed by Lessee; (5) verifying the
amount of advance rental, if any paid by Lessee; (6) stating the date to which
rental has been paid; and (7) setting forth such other factual information
pertaining to the terms of the Lease as Lessor may reasonably request. Lessor,
Lessor's mortgage lenders and any purchasers of all or a portion of the Leased
Property shall be entitled to rely upon such certificate. Should Lessee fail
timely to comply with this Article, Lessor shall have the right to execute such
certificate as attorney in fact for Lessee and such certificate and the
representations contained therein shall be fully binding on Lessee as though
duly executed by Lessee.
ARTICLE 35. SUCCESSORS AND ASSIGNS. The covenants and conditions herein
----------------------
contained shall, subject to the provisions as to assignment, apply to and bind
the heirs successors, executors, administrators and assigns of all of the
parties hereto.
ARTICLE 36. TIME. Time is of the essence of this Lease with respect to
----
each and every Article, Section and Subsection hereof.
ARTICLE 37. MISCELLANEOUS. Subject to any limitations on assignment set
-------------
forth herein, all of the terms and provisions of this Lease shall inure to the
benefit of and be binding upon the successors and assigns of each of the parties
hereto.
The waiver by Lessor of any term, covenant or condition herein
contained shall not be deemed to be a waiver of the same or any other term,
covenant or condition or any subsequent breach of the same of any other term,
covenant or condition herein contained. The subsequent acceptance of rent
hereunder by Lessor shall not constitute a waiver of any preceding breach by
Lessee of any term, covenant or condition of this Lease, other than the failure
of Lessee to pay the particular rent so accepted, regardless of Lessor's
knowledge of such preceding breach at the time of acceptance of such rent.
This Lease shall be governed by and construed in accordance with law of
Utah.
The invalidity or enforceability of any provision hereof shall not
affect or impair any other provision hereof.
The term "Lessor" as used herein shall include the agents, officers and
employees thereof. If there is more than one Lessee, the obligations of Lessee
hereunder shall be joint and several.
Paragraph headings in this Lease are for convenience only and shall not
define or limit the scope or intent of any provision hereof.
18
<PAGE>
Lessee shall not record this Lease or a Memorandum thereof without the
written consent of Lessor. Lessor may file this Lease for record with the
Recorder of the County in which the Leased Property is located.
Any consent required or permitted herein of Lessor or Lessee, as the
case may be, shall not be unreasonably withheld or delayed.
ARTICLE 38. ENTIRE AGREEMENT. This Lease and the Exhibits and addenda
----------------
if any, attached hereto constitute the entire agreement between the parties. All
Exhibits and addenda mentioned in this Lease are incorporated herein by
reference. No subsequent amendment to this Lease shall be binding upon Lessor or
Lessee unless reduced to writing and signed by the party to be charged
therewith. Submission of this Lease for examination does not constitute an
option for the Leased Property and becomes effective as a Lease only upon
execution and delivery thereof by Lessor to Lessee. If any provision contained
in an Exhibit or addendum is inconsistent with a provision in the body of this
Lease, the provision contained in said Exhibit addendum shall control. It is
hereby agreed that this Lease contains no restrictive covenants binding on other
lessees or exclusive use provisions in favor of Lessee. There are no
representations or promises by either party to the other except as are
specifically set forth herein. This Lease supersedes and revokes all previous
conversations, negotiations, arrangements, letters of intent, writings,
brochures, understandings, and information conveyed, whether oral or in writing,
between the parties hereto or their respective representatives or any agents of
any of them.
ARTICLE 39. AUTHORITY OF SIGNATORIES. Each person executing this Lease
------------------------
individually and personally represents and warrants that he is duly authorized
to execute and deliver the same on behalf of the entity for which he is signing
(whether it be a corporation, general or limited partnership or otherwise) and
that this Lease is binding upon said entity in accordance with its terms.
19
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee executed this Lease as of the
date first above written.
"LESSOR"
PWK INVESTMENT, LLC, a Utah limited
liability company
/s/Warren P. King
-------------------------------
Warren P. King, its Manager
"LESSEE"
TELTRUST, INC., a Utah corporation
By/s/ Lyle O. Keys
-----------------------------
Its CHAIRMAN
----------------
20
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION OF REAL PROPERTY
A parcel of land located in Lots 3 and 4, Plat 6 Salt Lake International
Center, an industrial subdivision located in Section 35, Township 1 North,
Range 2 West, Salt Lake Base & Meridian, and being more particularly
described as follows:
Beginning at a point which lies 2190.34 feet South and 57.85 feet West of the
Northeast corner of said Section 35, said point being on the west
right-of-way line of 5600 West Street (also known as Eddie Rickenbacker
Drive); thence following said right-of-way line South 0 degrees 02'54" West
470.04 feet to the point of tangency on a 30.00 foot radius curve to the
right (central angle 89 degrees 55'08"); thence departing from said
right-of-way line Southwesterly 47.08 feet along the arc of said curve to a
point on the North right-of-way line of Amelia Earhart Drive; thence
following said right of way line South 89 degrees 58'02" West 220.99 feet to
the point of tangency on a 600.00 foot radius curve to the right (central
angle = 44 degrees 59'44"); thence following said right-of-way Northwesterly
471.19 feet along the arc of said curve; thence North 45 degrees 02'14"
West, 118.70 feet; thence departing from said right-of-way line North 44
degrees 57'46" East, 367.12 feet to a point on a 200.00 foot radius curve to
the left (central angle = 24 degrees 51'42") radial to which bears North 24
Degrees 54'36" East; thence Southeasterly 86.78 feet along the arc of said
curve; thence South 89 degrees 57'06" East, 416.19 feet to the point of
beginning.
Excepting therefrom all oil, gas, minerals and ores situated in, upon, or
under the above described tract of land, together with all rights in
connection with or relative to the exploration, mining, removal or sale of
the same.
Street Address: 401 North Eddie Rickenbacker Drive, Salt Lake City, Utah 84116
21
<PAGE>
EXHIBIT "B"
DESCRIPTION OF PERSONAL PROPERTY
July 2, 1997
To. Sharon Maylath, Gregg Werlein, Al Pike, Steve Watkins
cc: Mark Brill, Pat King, Richard Heath
Sharon and Gentlemen: On July 2, 1997 I conducted a tour of our facility at
401 N Eddie Rickenbacker Dr. in Salt Lake City Utah with Pat King and Richard
Heath in order to determine what fixtures and equipment was in the building. The
following is a list of the items that we felt would be included in the sale. If
any of these are determined to be not included, all parties should be notified.
OUTSIDE
2, METAL PICNIC TABLES
1, CONCRETE PICNIC TABLE (no benches)
1, METAL BENCH AT EMPLOYEES ENTRANCE
CAFE
1, SCOTSMAN WATER AND ICE DISPENSER ASSET #68175
1, ICE CREAM UNIT #68171
APPROXIMATELY 50' OF STAINLESS STEEL COUNTERS SERVING AS CAFE SERVING LINE
#68166
1, REFRIGERATED DISPLAY CASE
1, STEAM TABLE
1, COFFEE DISPENSER #68170
APPROXIMATELY 20' OF STAINLESS STEEL COUNTER WITH SINK
2, MEAT SLICERS
1, 4 BURNER STOVE WITH GRIDDLE #68164
1, GAS FRYER #68173
1, 4 SLICE TOASTER
1, RANGE HOOD
ALL SCULLERY EQUIPMENT INKLING STAINLESS STEEL COUNTERS #68161, AND
RACKS #68172, TWO GARBAGE DISPOSERS, 1 DISHWASHER #68282, 1 SUPERSTRUCTURE
#68163,
POT SINK #68160
1, FREE STANDING MIXER #68278
1, 36" DESK WITH 2 CHAIRS
1, HUSSMAN REFRIGERATOR #68167
1, FREEZER #68169
1, REMOTE CONDENSER #68168
1, 6' METAL STORAGE CABINET
MISC. DISHES AND SILVERWARE AND DISH TRAYS
1, ANSUL FIRE SUPPRESSION UNIT #68156
1, WALL CLOCK
1, SALAD BAR #68158
1, CONDIMENT UNIT #68157
OFFICES
WINDOW BLINDS IN CAFE, CONFERENCE ROOM, PLANT MANAGER'S OFFICE AND GENERAL
OFFICE
22
<PAGE>
EXHIBIT "B"
DESCRIPTION OF PERSONAL PROPERTY
CLOSET SHELVING IN PROD. MGR., PLANT MGR , CONFERENCE ROOM AND ZONE SALES MGR.
OFFICES
EMERGENCY LIGHTING SYSTEM (6 CHARGING STATIONS WITH BATTERIES)
1, KEY SAFE
3, GRAY METAL STORAGE SHELF UNITS
PRODUCTION AREA
2, FREE STANDING SINKS #67711
1, FREE STANDING SINK IN MACHINE MAINTENANCE ROOM
1, COMPUTER SYSTEM FOR HVAC CONTROL
1, AIR DRYER UNIT #32059
4, WALL MOUNTED ELECTRICAL TRANSFORMERS #67908.
MECHANICAL ROOM
1, STORAGE CABINET
I, FUSE STORAGE CABINET
1, WATER TREATMENT TANK
1, BRUNER WATER SOFTENER UNITS# WET309I
1, SALT STORAGE TANK
1, AiR COMPRESSOR #67173
1, AIR COMPRESSOR #67174
1, BOILER PUMP STATION
1, BRIANT BOILER MODEL K250-S- 15-GI
AUTO SPINKLER SYSTEM
ROOF
1, MAMOTH HVAC UNIT #67904 S#21577-01-01
1, MAMOTH HVAC UNIT S# 21577-01-02
1, MAMOTH HVAC UNIT S# 21577-02-01
8, ROOF EXHAUST FANS # FAN3091, 3092, 3093,3094,3095, 3096,3097 PLUS 1 W/O A
NUMBER
LOADING DOCK
2, TRUCK LOADING LIGHTS
2, DOCK LEVELERS
1, TRUCK TRAILER LOCK SYSTEM
1, TRASH COMPACTOR SYSTEM INCLUDING BIN #67911
1, GRAY METAL SHELF UNIT (SOLVENT ROOM)
MISC
1, POWERS TEMPERATURE CONTROL UNIT #67906
1, HUMIDIFICATION UNIT, #67905
2, COAT RACKS WITH HANGERS (EMPLOYEES ENTRANCE)
1, ADT BURGLAR ALARM SYSTEM #68176. INCLUDES TWO CONTROLS AND ALL RELATED
MOTION DETECTORS
2, GRAY SHELF UNITS (JANITORS ROOM)
1, CARPET VACUUM
, FLOOR BROOMS
<PAGE>
EXHIBIT "C"
RENT SCHEDULE
Minimum Rent: Lease Year Annual Rent Monthly Rent
1-5* $236,394.00 $19,699.50
6-10 $256,093.50 $21,341.13
Option term:
11-15 $295,492.50 $24,624.38
* plus the initial partial Lease Month, if any
<PAGE>
EXHIBIT "D"
TENANT IMPROVEMENTS
1) Add 2 airlock entries, enclose electrical panels and seal dock doors.
Sheetrock, carpet and suspend ceiling in production area per attached
specifications and drawings.
2) Grade, pave and stripe north and west areas to increase total parking
to 301 spaces per attached specification and drawings. Adequate
lighting will be provided for all new parking areas.
3) Create change over ducting in production area for fail over operation
of HVAC system, including 5 ton split system and wall mounted
humidifier per attached specification and drawings.
4) Create new electrical feeds and systems to accommodate transfer switch
and generator system per attached specification and drawings.
5) Tenant, at tenant sole cost and expense, will obtain all permits and
complete all improvement in accordance with all applicable codes and
regulations.
6) All Tenant Improvement will be completed within 90 days of Lease
----
commencement date.
<PAGE>
Exhibit 10.13
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement (the "Agreement") is made and
entered into as of November 22, 1996 between Teltrust, Inc., a Utah corporation
(the "Company"), arid those entities whose names appear on the signature pages
hereof (the "Holders").
This Agreement is made in connection with the Securities Purchase
Agreement, dated the date hereof (the "Securities Purchase Agreement") between
the Company and the Holders, pursuant to which the Holders are acquiring Series
A Convertible Preferred Stock, $.01 par value per share, of the Company. The
execution of and delivery of this Agreement is a condition precedent to the
obligations of the Holders under the Securities Purchase Agreement.
The parties hereby agree as follows:
1. Certain Definitions.
-------------------
As used in this Agreement, the following terms shall have the following
respective meanings:
(a) "Business Day" means any day, other than a Saturday, Sunday or
--------------
legal holiday, on which banks in the State of New York are open for business.
(b) "Commission" means the Securities and Exchange Commission.
------------
(c) "Common Stock" means the Common Stock, par value $.01 per
--------------
share, of the Company, as constituted on the date hereof, any shares into which
such Common Stock shall have been changed, or any shares resulting from any
reclassification of such Common Stock.
(d) "Exchange Act" means the Securities Exchange Act of 1934, as
--------------
amended, or any successor statute thereto, and the rules and regulations of the
Commission promulgated thereunder, all as the same shall be in effect at the
time.
(e) "Holders" means the Holders referred to in the Preamble and any
---------
other person holding Registrable Securities to whom these registration rights
have been assigned pursuant to Section 9(f) of this Agreement.
(f) "Person" shall mean an individual, partnership, corporation,
--------
association, trust, joint venture, unincorporated organization and any
government, governmental department or agency or political subdivision thereof.
(g) "Registrable Securities" means (i) the Common Stock held by any
------------------------
Holder issued dr issuable pursuant to the conversion of the Series A Preferred
Stock; (ii) any Common Stock or
<PAGE>
other securities issued or issuable pursuant to the conversion of; or with
respect to, the Series A Preferred Stock held by any Holder upon any stock
split, stock dividend, recapitalization, or similar event; and (iii) securities
issued in replacement or exchange of any of the securities issued in clauses (i)
or (ii) above.
(h) "Registration Expenses" means all expenses incident to the
-----------------------
Company's performance of or compliance with this Agreement, including, without
limitation, all registration, filing, listing and National Association of
Securities Dealers, Inc. ("NASD") fees, all fees and expenses of complying with
securities or blue sky laws, all word processing, duplicating and printing
expenses, all messenger and delivery expenses, any transfer taxes, the fees and
expenses of the Company's legal counsel and independent public accountants,
including the expenses of any special audits or "cold comfort" letters required
by or incident to such performance and compliance, fees and disbursements of one
counsel for all of the Holders, and any fees and disbursements of underwriters
customarily paid by insurers or sellers of securities; provided, however, that
Registration Expenses shall not include underwriting discounts and commissions.
(i) "Securities Act" means the Securities Act of 1933, as amended,
----------------
or any successor statute thereto, and the rules and regulations of the
Commission promulgated thereunder, all as the same shall be in effect at the
time.
(j) "Series A Preferred Stock" means the Series A Convertible
--------------------------
Preferred Stock, no par value per share, of the Company, as constituted on the
date hereof; any shares into which such Series A Preferred Stock shall have been
changed or any shares resulting from any reclassification of such Series A
Preferred Stock.
2. Registration.
------------
(a) Requested Registration. At any time after the earlier to occur
----------------------
of (A) the fourth anniversary of the date hereof and (B) the Company's initial
public offering of equity securities, upon written request by the Holders of at
least twenty-five percent of the Registrable Securities outstanding at the time
of the request to the Company, that the Company effect the registration under
the Securities Act of all or part of the Registrable Securities (a "Requested
Registration"), the Company will use its best efforts to effect the registration
under the Securities Act of the Registrable Securities which the Company has
been so requested to register by the Holders within sixty (60) days after
receipt of such request or within thirty (30) days after receipt of such request
if the Company is qualified to file a registration statement on Commission Form
S-3 (or any successor or similar short-form registration statement
(collectively, "Commission Form S-3")); provided, however, that the Company
shall not be obligated to effect a Requested Registration, pursuant to this
subdivision (a) (X) unless either (i) the requesting Holders pay the
Registration Expenses pursuant to Section 2(d) hereof or (ii) the anticipated
aggregate offering price of the Registrable Securities to be sold is at least
$750,000, in the case of registration on Commission Form S-3, or at least
$5,000,000 in the case of other registrations or (Y) during the 180 day period
immediately following the commencement of the Company's public offering of
equity securities. The Company must effect an unlimited number of registrations
pursuant to this subdivision (a) to the extent such registrations may be
effected on Commission Form S-3, but the
-2-
<PAGE>
Company shall not be obligated to effect more than three Requested Registrations
hereunder other than on Commission Form S-3. Subject to subdivision (f), the
Company may include in such Requested Registration other securities of the
Company for sale, for the Company's account or for the account of any other
person, if and to the extent that the managing underwriter determines that the
inclusion of such additional shares will not interfere with the orderly sale of
the underwritten securities at a price range acceptable to the Holders. Upon
receipt of a written request pursuant to this subdivision (a) the Company shall
promptly give written notice of such request to all Holders, and all Holders
shall be afforded the opportunity to participate in such request as follows: The
Company will be obligated to include in the Requested Registration such number
of Registrable Securities of any Holder joining in such request as are specified
in a written request by the Holder received by the Company within 20 days after
receipt of such written notice from the Company.
(b) Incidental Registration. If the Company for itself or any of
-----------------------
its security holders shall at any time or times after the date hereof determine
to register under the Securities Act any shares of its capital stock or other
securities (other than: (i) the registration of an offer, sale or other
disposition of securities solely to employees of; or other persons providing
services to, the Company, or any subsidiary pursuant to an employee or similar
benefit plan; or (ii) relating to a merger, acquisition or other transaction of
the type described in Rule 145 under the Securities Act or a comparable or
successor rule, registered on Form S-4 or similar or successor forms), on each
such occasion the Company will notify each Holder of such determination at
least thirty (30) days prior to the filing of such registration statement, and
upon the request of any Holder given in writing within twenty (20) days after
the receipt of such notice, the Company will use its best efforts as soon as
practicable thereafter to cause any of the Registrable Shares specified by any
such Holder to be included in such registration statement to the extent such
registration is permissible under the Securities Act and subject to the
conditions of the Securities Act (an "Incidental Registration").
(c) Registration Statement Form. The Company shall, if permitted
---------------------------
by law, effect any registration requested under Section 2 by the filing of a
registration statement on Commission Form S-3 and shall use its best efforts to
take any action necessary to maintain its eligibility to utilize Commission Form
S-3 to permit resales as requested by the Holders with respect to Transactions
Involving Secondary Offerings as described in General Instruction I.B.3 of
Commission Form S-3.
(d) Expenses. The Company shall pay all Registration Expenses
--------
incurred in connection with any Incidental Registration, any Requested
Registrations that do not become effective and the first three Requested
Registrations that become effective pursuant to this Section 2. The requesting
Holders shall pay the Registration Expenses of any Requested Registrations after
the third Requested Registration.
(e) Effective Registration Statement. A Requested Registration or
--------------------------------
an Incidental Registration requested pursuant to Section 2(a) or Section 2(b),
respectively, shall not be deemed to have been effected unless it has become
effective with the Commission. Notwithstanding the
-3-
<PAGE>
foregoing, a registration statement will not be deemed to have been effected if:
(i) after it has become effective with the Commission, such registration is
interfered with by any stop order, injunction, or other order or requirement of
the Commission or other governmental agency or any court proceeding for any
reason other than a misrepresentation or omission by any Holder; or (ii) the
conditions to closing specified in the purchase agreement or underwriting
agreement entered into in connection with such registration are not satisfied,
other than solely by reason of some act or omission by any Holder.
(f) Priority in Incidental Registration. If an Incidental
-----------------------------------
Registration is an underwritten registration initiated by the Company, and the
managing underwriters shall give written advice to the Company that, in their
opinion, market conditions dictate that no more than a specified maximum number
of securities (the "Underwriter's Maximum Number") could successfully be
included in such Incidental Registration, then: (i) the Company shall be
entitled to include in such registration that number of securities which the
Company proposes to offer and sell for its own account in such registration and
which does not exceed the Underwriter's Maximum Number; and (ii) the Company
will be obligated and required to include in such registration that number of
shares of Registrable Securities which shall have been requested by the Holders
thereof having registration rights hereunder or by holders having registration
rights pursuant to another registration rights agreement with the Company to be
included in such registration and which does not exceed the difference between
the Underwriter's Maximum Number and that number of securities which the Company
is entitled to include therein pursuant to clause (i) above and such number of
shares shall be allocated pro rata between the Holders and any other such
holders on the basis of the number of shares requested to be included therein by
the Holders, on the one hand, and such other holders, on the other hand.
If less than all of the Registrable Securities requested to be included
in any such registration by the Holders can be so included due to these priority
requirements, then each requesting Holder's request shall be granted on an pro
rata basis with the other requesting Holders.
(g) Notwithstanding anything in paragraphs (a) and (b) of this
Section 2, the Company shall have the right to delay any registration of
Registrable Securities requested pursuant to paragraph (a) or (b) of this
Section 2 for up to ninety (90) days if such registration would, in the sole
reasonable judgment of the Company's Board of Directors, substantially interfere
with any material transaction being considered at the time of receipt of the
request from the Holders.
3. Registration Procedures.
-----------------------
(a) If and whenever the Company is required to use its best efforts
to effect the registration of any Registrable Securities under the Securities
Act as provided in Section 2, the Company, as expeditiously as possible and
subject to the terms and conditions of Section 2, will:
(i) prepare and file with the Commission the requisite
registration statement to effect such registration and use its best efforts to
cause such registration to become and remain effective;
-4-
<PAGE>
(ii) permit any Holder which, in the reasonable judgment of the
Holder, might be deemed to be an underwriter or a controlling person of the
Company, to participate in the preparation of such registration statement and to
require the insertion therein of material, furnished to the Company in writing,
which in the reasonable judgment of such Holder and its counsel should be
included;
(iii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such registration statement until the
earlier of such time as all of such securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof set forth in such registration statement or the expiration of 180 days
after such registration statement becomes effective;
(iv) furnish to the Holders such number of conformed copies of
such registration statement and of each such amendment and supplement thereto
(in each case including all exhibits), such number of copies of the prospectus
contained in such registration statement (including each preliminary prospectus
and any summary prospectus) and any other prospectus filed under Rule 424 under
the Securities Act, in conformity with the requirements of the Securities Act,
and such other documents, as the purchaser or any Holder of Registrable
Securities to be sold under such registration statement may reasonably request;
(v) use its best efforts to register or qualify all Registrable
Securities covered by such registration statement under such other United States
state securities or blue sky laws of such jurisdictions as any Holder of
Registrable Securities to be sold under registration statement shall reasonably
request, to keep such registration or qualification in effect for so long as
such registration remains in effect, and take any other action which may be
reasonably necessary or advisable to enable the Holder of Registrable Securities
to be sold under such registration statement to consummate the disposition in
such jurisdictions of the securities owned by such Holder, except that the
Company shall not for any such purpose be required to (a) qualify generally to
do business as a foreign corporation in any jurisdiction wherein it would not
but for the requirements of this subdivision (v) be obligated to be so
qualified, or (b) subject itself to taxation in any such jurisdiction.
(vi) use its best efforts to cause all Registrable Securities
covered by such registration statement to be registered with or approved by such
other United States state governmental agencies or authorities as may be
necessary to enable the Holder of Registrable Securities to be sold under such
registration statement to consummate the intended disposition of such
Registrable Securities;
(vii) in the event of the issuance of any stop order suspending
the effectiveness of the registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any Registrable Securities included in such
-5-
<PAGE>
registration statement for sale in any jurisdiction, the Company shall use its
best efforts promptly to obtain the withdrawal of such order;
(viii) use it best efforts to furnish to the Holders of
Registrable Securities to be sold under such registration statement (1) an
opinion, dated the effective date of the registration statement, of the
independent counsel representing the Company for the purposes of such
registration, addressed to the underwriters, if any, and to the Holders making
such request, stating that such registration statement has become effective
under the Securities Act and that (i) to the best knowledge of such counsel, no
stop order suspending the effectiveness thereof has been issued and no
proceedings for that purpose have been instituted or are pending or contemplated
under the Securities Act; (ii) the registration statement, the related
prospectus, and each amendment or supplement thereto, comply as to form in all
material respects with the requirements of the Securities Act and the applicable
rules and regulations of the Commission thereunder (except that such counsel
need express no opinion as to financial statements contained therein); (iii)
such counsel has no reason to believe that either the registration statement or
the prospectus, or any amendment or supplement thereto, contains any untrue
statement of a material fact or omits a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; (iv) the descriptions in the registration statement or the
prospectus, or any amendment or supplement thereto, of all legal and
governmental matters and contracts and other legal documents or instruments are
accurate and fairly present the information required to be shown; and (v) such
counsel does not know of any legal or governmental proceedings, pending or
contemplated, required to be described in the registration statement or
prospectus, or any amendment or supplement thereto, which are not described as
required nor of any contracts or documents or instruments of a character
required to be described in the registration statement or prospectus, or any
amendment or supplement thereto or to be filed as exhibits to the registration
statement which are not described and filed as required; and (2) a letter, dated
the effective date of the registration statement, from the independent certified
public accountants of the Company, addressed to the underwriters, if any, and to
the Holders making such request, stating that they are independent certified
public accountants within the meaning of the Securities Act and that in the
opinion of such accountants, the financial statements and other financial data
of the Company included in the registration statement or the prospectus, or any
amendment or supplement thereto, comply as to form in all material respects with
the applicable accounting requirements of the Securities Act.
Such opinion of counsel shall additionally cover such legal
matters with respect to the registration in respect of which such opinion is
being given as the Holders may reasonably request. Such letter from the
independent certified public accountants shall additionally cover such other
financial matters (including information as to the period ending not more than
five business days prior to the date of such letter) with respect to the
registration in respect of which such letter is being given as the Holders may
reasonably request.
(ix) immediately notify the Holders of Registrable Securities
included in such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, of the happening
of any event as result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of material
-6-
<PAGE>
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made, and at the request of the Holders
promptly prepare and furnish to the Holders a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such securities, such prospectus shall
not include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances under which they were made;
(x) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering the
period of at least twelve months, but not more than eighteen months, beginning
with the first full calendar month after the effective date of such registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act and Rule 158 thereunder, and not file any amendment
or supplement to such registration statement or prospectus to which any Holder
shall have reasonably objected in writing on the grounds that such amendment or
supplement does not comply in all material respects with the requirements of the
Securities Act or of the rules or regulations thereunder, having been furnished
with a copy thereof at least two business days prior to the filing thereof;
(xi) provide a transfer agent for all Registrable Securities
covered by such registration statement not later than the effective date of such
registration statement; and
(xii) use its best efforts to list all Registrable Securities
covered by such registration statement on any securities exchange on which any
of the Registrable Securities are then listed.
(b) The Company may require each Holder of Registrable Securities
to be sold under such registration statement, at the Company's expense, to
furnish the Company with such information and undertakings as it may reasonably
request regarding such Holder and the distribution of such securities as the
Company may from time to time reasonably request in writing.
(c) Each Holder, by execution of this Agreement, agrees (A) that
upon receipt of any notice of the Company of the happening of any event of the
kind described in subdivision (a)(ix) of this Section 3, such Holder will
forthwith discontinue its disposition of Registrable Securities pursuant to the
registration statement relating to such Registrable Securities until the receipt
by such Holder of the copies of the supplemented or amended prospectus
contemplated by subdivision (a)(ix) of this Section 3 and, if so directed by the
Company, will deliver to the Company all copies other than permanent file
copies, then in possession of the Holders of the prospectus relating to such
Registrable Securities current at the time of receipt of such notice and (B)
that it will immediately notify the Company, at any time when a prospectus
relating to the registration of such Registrable Securities is required to be
delivered under the Securities Act, of the happening of any event as a result of
which information previously furnished by such Holder to the Company for
inclusion in such prospectus contains an untrue statement of a material fact
-7-
<PAGE>
or omits to state any material fact required to be stated therein or necessary
to make the statements therein not misleading in the light of the circumstances
under which they were made. In the event the Company or any such Holder shall
give any such notice, the period referred to in subdivision (a)(iii) of this
Section 3 shall be extended by a number of days equal to the number of days
during the period from and including the giving of notice pursuant to
subdivision (a)(ix) of this Section 3 to and including the date when such Holder
shall have received the copies of the supplemented or amended prospectus
contemplated by subdivision (a)(ix) of this Section 3.
4. Underwritten Offerings.
----------------------
(a) Underwritten Offering. In connection with any underwritten
---------------------
offering pursuant to a registration requested under Section 2(a), the Company
will enter into an underwriting agreement with the underwriters for such
offering, such agreement to be in form and substance reasonably satisfactory to
all Holders requesting such registration and such Holders' underwriters in their
reasonable judgment and to contain such representations and warranties by the
Company and such other terms as are customarily contained in agreements of that
type, including, without limitation, indemnities to the effect and to the extent
provided in Section 6. Each such Holder shall be a party to such underwriting
agreement and may, at its or their option, require that any or all of the
representations and warranties by, and the other agreements on the part of; the
Company to and for the benefit of such underwriters shall also be made to and
for the benefit of each such Holder and that any or all of the conditions
precedent to the obligations of such underwriters under such underwriting
agreement be conditions precedent to the obligations of each such Holder. No
Holder requesting such registration shall be required to make any
representations or warranties to or agreements with the Company or the
underwriters other than representations, warranties or agreements regarding such
Holder and its intended method of distribution and any other representation
required by law.
(b) Selection of Underwriters. If a Requested Registration pursuant
-------------------------
to Section 2(a) involves an underwritten offering, then the Company shall select
the underwriter from underwriting firms of national reputation, subject to the
approval of the Holders of a majority of the Registrable Securities to be
included in such registration.
(c) Holdback Agreements. Each Holder agrees, if so reasonably
-------------------
required by the managing underwriter in a registration pursuant to Section 2,
not to effect any public sale or distribution of Registrable Securities or sales
of such Registrable Securities pursuant to Rule 144 or Rule 144A under the
Securities Act, during the seven (7) days prior to and the 180 days after any
firm commitment underwritten registration pursuant to Section 2 has become
effective (except as part of such underwritten registration) or, if the managing
underwriter advises the Company that, in its opinion, no such public sale or
distribution should be effected for a period of not more than 180 days after
such underwritten registration in order to complete the sale and distribution of
securities included in such registration and the Company gives notice to such
effect to such Holders of such advice, each Holder shall not effect any public
sale or distribution of Registrable Securities or sales of such Registrable
Securities pursuant to Rule 144 or Rule 144A under the Securities Act during
such period after such underwritten registration, except as
-8-
<PAGE>
part of such underwritten registration, whether or not such Holder participates
in such registration.
5. Preparation, Reasonable Investigation.
-------------------------------------
In connection with the preparation and filing of each registration
statement under the Securities Act, the Company will give the Holders of
Registrable Securities to be sold under such registration statement, the
underwriters, if any, and their respective counsel and accountants, drafts and
final copies of such registration statement, each prospectus included therein or
filed with the Commission and each amendment thereof or supplement thereto, at
least 5 business days prior to the filing thereof with the Commission, and will
give each of them such access to its books and records and such opportunities to
discuss the business of the Company with its officers and the independent public
accountants who have certified its financial statements as shall be necessary,
in the opinion of such Holders and such underwriters' respective counsel, to
conduct a reasonable investigation within the meaning of the Securities Act.
6. Indemnification and Contribution.
--------------------------------
(a) Indemnification by the Company. In the event of any
------------------------------
registration under the Securities Act pursuant to Section 2 of any Registrable
Securities covered by such registration, the Company will, and hereby does,
indemnify and hold harmless each Holder of Registrable Securities to be sold
under such registration statement, each such Holder's legal counsel, each other
person who participates as an underwriter in the offering or sale of such
securities (if so required by such underwriter as a condition to including the
Registrable Securities of the Holders in such registration) and each other
person, if any, who controls any such Holder or any such underwriter within the
meaning of the Securities Act (collectively, the "Indemnified Parties"), against
any losses, claims, damages or liabilities, joint or several, to which the
Holders or underwriter or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which such securities were registered under the Securities Act, any
preliminary prospectus, final prospectus or summary prospectus contained therein
or any document incorporated therein by reference, or any amendment or
supplement thereto, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or arise out of any violation by the Company of any rule
or regulation promulgated under the Securities Act or state securities law
applicable to the Company and relating to action or inaction required of the
Company in connection with any such registration, and the Company will reimburse
the Indemnified Parties for any legal or any other expenses reasonably incurred
by them in connection with investigating or defending any such loss, claim,
liability, action or proceeding; provided, however, that the Company shall not
-------- -------
be liable to any Indemnified Party in any such case to the extent that any such
loss, claim, damage, liability (or action or proceeding in respect thereof) or
expense arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement,
any such preliminary prospectus, final prospectus, summary prospectus, amendment
-9-
<PAGE>
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Indemnified Party.
(b) Indemnification by the Holders. The Company may require, as a
------------------------------
condition to including any Registrable Securities of any person or entity in any
registration statement filed pursuant to Section 2, that the Company shall have
received an undertaking reasonably satisfactory to it from such person or entity
to indemnify and hold harmless (in the same manner and to the same extent as set
forth in subdivision (a) of this Section 6) the Company, each director of the
Company, each officer of the Company and each other person, if any, who controls
the Company within the meaning of the Securities Act, with respect to any
statement or alleged statement in or omission or alleged omission from such
registration statement, any preliminary prospectus, final prospectus or summary
prospectus contained therein, or any amendment or supplement thereto, if; and
only if; such statement or alleged statement or omission or alleged omission was
made in reliance upon and in conformity with information furnished in writing to
the Company directly by such person or entity specifically for use therein;
provided, however, that the obligation of any Holder hereunder shall be limited
to an amount equal to the proceeds received by such Holder upon the sale of
Registrable Securities sold in the offering covered by such registration.
(c) Notices of Claims, etc. Promptly after receipt by an
----------------------
Indemnified Party of notice of the commencement of any action or proceeding
involving a claim referred to in the preceding subdivisions of this Section 6,
such Indemnified Party will, if a claim in respect thereof is to be made against
a party required to provide indemnification (an "Indemnifying Party"), give
written notice to the latter of the commencement of such action, provided,
--------
however, that the failure of any Indemnified Party to give notice as provided
- -------
herein shall not relieve the Indemnifying Party of its obligation under the
preceding subdivisions of this Section 6, except to the extent that the
Indemnifying Party is actually prejudiced by such failure to give notice. In
case any such action is brought against an Indemnified Party, unless in such
Indemnified Party's reasonable judgment a conflict of interest between such
Indemnified and indemnifying parties may exist in respect of such claim, the
Indemnifying Party shall be entitled to participate in and to assume the defense
thereof; jointly with any other Indemnifying Party similarly notified to the
extent that it may wish, with counsel reasonably satisfactory to such
Indemnified Party, and after notice from the Indemnifying Party to such
Indemnified Party of its election so to assume the defense thereof; the
Indemnifying Party shall not be liable to such Indemnified Party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof other than reasonable costs of investigation. No Indemnifying
Party shall consent to entry of any judgment or enter into any settlement
without the consent of the Indemnified Party which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
(d) Other Indemnification. Indemnification similar to that
---------------------
specified in the preceding subdivisions of this Section 6 (with appropriate
modifications) shall be given by the Company and each Holder of Registrable
Securities included in any registration statement with respect to
-10-
<PAGE>
any required registration or other qualification of securities under any Federal
or state law or regulation of any governmental authority, other than the
Securities Act.
(e) Indemnification Payment. The indemnification required by this
-----------------------
Section 6 shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred.
(f) Survival of Obligations. The obligations of the Company and of
-----------------------
the Holders under this Section 6 shall survive the completion of any offering of
Registrable Securities under this Agreement.
(g) Contribution. If the indemnification provided for in this
------------
Section 6 is unavailable or insufficient to hold harmless an Indemnified Party,
then each Indemnifying Party shall contribute to the amount paid or payable to
such Indemnified Party as a result of the losses, claims, damages or liabilities
referred to in this Section 6 an amount or additional amount, as the case may
be, in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party or parties on the one hand and the Indemnified Party on the
other in connection with the statements or omissions which resulted in such
losses, claims, demands or liabilities as well as any other relevant equitable
considerations. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Indemnifying Party or parties on the one hand or the
Indemnified Party on the other and the parties' relative, intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid to an Indemnified Party as a result of
the losses, claims, damages or liabilities referred to in the first sentence of
this Section 6(g) shall be deemed to include any legal or other expenses
reasonably incurred by such Indemnified Party in connection with investigating
or defending any action or claim which is the subject of this Section 6. No
person guilty of fraudulent misrepresentation within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
7. Covenants Relating to Rule 144.
------------------------------
With a view to making available the benefits of certain rules and
regulations of the Commission which may at any time permit the sale of
securities of the Company to the public without registration after such time as
a public market exists for the Common Stock of the Company, the Company agrees:
(a) to make and keep public information available, as those
terms are understood and defined in Rule 144 under the Securities Act, at all
times after the effective date of the first registration under the Securities
Act filed by the Company for an offering of its securities to the general
public;
(b) to use its best efforts to then file with the
Commission in a timely manner all reports and other documents required of the
Company under the Securities Act and the
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<PAGE>
Exchange Act, as amended (at any time after it has become subject to such
reporting requirements); and
(c) so long as a Holder owns any Registrable Securities, to
furnish to the Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of said Rule 144 (at any
time after 90 days after the effective date of the first registration statement
filed by the Company for an offering of its securities to the general public),
and of the Securities Act and the Exchange Act (at any time after it has become
subject to such reporting requirements) a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents of the
Company as a Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing a Holder to sell any such securities
without registration.
8. Other Registration Rights.
-------------------------
The Company shall not grant to any Person any registration rights more
favorable than or inconsistent with any of those contained herein, so long as
any of the registration rights under this Agreement remain in effect.
9. Miscellaneous.
-------------
(a) Specific Performance. The parties hereto acknowledge that there
--------------------
may be no adequate remedy at law if any party fails to perform any of its
obligations hereunder and that each party may be irreparably harmed by any such
failure, and accordingly agree that each party, in addition to any other remedy
to which it may be entitled at law or in equity, shall be entitled to compel
specific performance of the obligations of any other party under this Agreement
in accordance with the terms and conditions of this Agreement.
(b) Notices. All demands, requests, notices and other
-------
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if delivered personally
or sent by United States first class mail, postage prepaid, and to the parties
hereto at the following address or at such other address as any party hereto
shall hereafter specified by notice to the other party hereto:
(i) if to the Company, addressed to:
Teltrust, Inc.
221 North Charles Lindbergh Drive
Salt Lake City, UT 84116
Attention: Mr. Lyle O. Keys
with a copy to:
Richard G. Brown, Esq.
-12-
<PAGE>
Kimball Parr Waddoups Brown & Gee
Suite 1300
185 South State Street
Salt Lake City, UT 84147
(ii) if to the Holders, to their addresses set
forth on Schedule I attached hereto
with a copy to:
Stephen O. Meredith, Esq.
Edwards & Angell
101 Federal Street
Boston,MA 02110
Except as otherwise provided herein, all such demands, requests, notices and
other communications shall be deemed to have been received on the date of
personal delivery thereof or on the third business day after the mailing
thereof.
(c) Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the internal laws of The Commonwealth of
Massachusetts, without regard to conflicts of law principles thereof.
(d) Headings. The descriptive headings of the several sections and
--------
paragraphs of this Agreement are inserted for convenience only, and do not
constitute a part of this Agreement and shall not affect in any way the meaning
or interpretation of this Agreement.
(e) Entire Agreement: Amendments. This Agreement and the other
----------------------------
writings referred to herein or delivered pursuant hereto which form a part
hereof contain the entire understanding of the parties with respect to its
subject matter. This Agreement supersedes all prior agreements and
understandings between the parties with respect to its subject matter. This
Agreement may be amended and the observance of any term of this Agreement may be
waived (either generally or in a particular instance and either retroactively or
prospectively) only by a written instrument duly executed by the Company and
those Holders holding a majority of Registrable Securities. Each Holder of any
Registrable Securities at the time or thereafter outstanding shall be bound by
an amendment or waiver authorized by this Section 9(e), whether or not any such
Registrable Securities shall have been marked to indicate such consent.
(f) Assignability. This Agreement and all of the provisions hereof
-------------
will be assigned, without the consent of the Company, by any Holder to, and
shall inure to the benefit of; any purchaser, transferee or assignee of any
Registrable Security, unless the Holder specifies otherwise in connection with
particular transfers of Registrable Securities. However, the Company shall not
be required to recognize any such purchaser, transferee or assignee as a Holder
under this Agreement unless and until either (i) such person becomes the holder
of record
-13-
<PAGE>
of Registrable Securities or (ii) the Company receives written notice of such
purchase, transfer or assignment.
(g) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
TELTRUST, INC.
By: /s/ Lyle O. Keys
---------------------------------------
Lyle O. Keys, Chairman and
Chief Executive Officer
MEDIA/COMMUNICATIONS PARTNERS III
LIMITED PARTNERSHIP
By: M/C III L.L.C., its General Partner
By: /s/ John G. Hayes
------------------------------------
John G. Hayes, Manager
M/C INVESTORS L.L.C.
By: /s/ John G. Hayes
------------------------------------
John G. Hayes, Manager
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<PAGE>
Schedule 1
c/o Media/Communications Partners
75 State Street
Boston, MA 02109
Attention: John G. Hayes
-15-
<PAGE>
AMENDMENT TO EXHIBIT 10.13
AMENDMENT
TO
REGISTRATION RIGHTS AGREEMENT
AMENDMENT (the "Amendment") dated as of April 9, 1998 by and among
Teltrust, Inc., a Utah corporation (the "Company"), TTST Holdings, Inc., a
Delaware corporation ("Newco"), and the shareholders identified on Schedule A
----------
hereto (the "Shareholders").
WHEREAS the Company and Newco desire to enter into a reorganization
transaction pursuant to which the Company shall become a wholly-owned subsidiary
of Newco, all stockholders of the Company shall become stockholders of Newco and
Newco shall change its name to "Teltrust, Inc." (the "Reorganization
Transaction");
WHEREAS the Company and the Shareholders are parties to a Registration
Rights Agreement dated as of November 22, 1996 (the "Registration Rights
Agreement"); and
WHEREAS the Company, Newco and the Shareholders desire, subject to
consummation of the Reorganization Transaction, to amend the Registration Rights
Agreement to provide that all of the rights and obligations of the Company under
the Registration Rights Agreement shall become the rights and obligations of
Newco upon the terms and subject to the conditions set forth herein immediately
following consummation of the Reorganization Transaction (the "Effective Time").
NOW, THEREFORE, for good and valuable consideration, the undersigned hereby
agree as follows:
1. Capitalized terms not otherwise defined herein shall have the meaning
ascribed to such terms in the Registration Rights Agreement.
2. Each of the Company, Newco and the Shareholders hereby consents to
this Amendment as set forth herein.
3. Subject to consummation of the Reorganization Transaction, the
introductory paragraph of the Registration Rights Agreement is hereby amended,
as of the Effective Time, by deleting such paragraph in its entirety and
substituting therefor the following paragraph:
"This Registration Rights Agreement (the "Agreement") is made and
---------
entered into as of November 22, 1996 and is amended as of April 9, 1998,
by and among Teltrust, Inc., a Delaware corporation ("Company"), and those
entities whose names appear on the signature pages hereof (the "Holders")."
4. Subject to consummation of the Reorganization Transaction, Newco
hereby covenants and agrees to assume and perform from and after the Effective
Time all of the Company's duties and obligations in accordance with and pursuant
to the terms of the Registration Rights Agreement.
<PAGE>
5. From and after the Effective Time, all references in the Registration
Rights Agreement to the "Company" shall be deemed to be references to Newco, and
the Company shall have no further rights or obligations under the Registration
Rights Agreement.
6. As amended by this Amendment, the Registration Rights Agreement is in
all respects ratified and confirmed, and as so amended by this Amendment the
Registration Rights Agreement shall be read, taken and construed as one and the
same instrument.
7. This Amendment may be executed in any number of counterparts and by
the parties hereto in separate counterparts, each of which so executed shall be
deemed to be an original, but all of such counterparts shall together constitute
but one and the same instrument.
8. This Amendment shall be governed in accordance with the laws of the
State of Delaware without regard to principles of conflicts of law.
[END OF TEXT]
<PAGE>
EXECUTED as of the date first set forth above.
TELTRUST, INC.
By:/s/ Marc B. Cohen
_________________________________
Name: Marc B. Cohen
Title: President and Chief
Executive Officer
TTST HOLDINGS, INC.
By:/s/ Marc B. Cohen
_________________________________
Name: Marc B. Cohen
Title: President and Chief
Executive Officer
MEDIA/COMMUNICATIONS PARTNERS III LIMITED
PARTNERSHIP
By: M/C III L.L.C., its general partner
By:/s/ John G. Hayes
_________________________________
Name: John G. Hayes
Title: Manager
M/C INVESTORS L.L.C.
By:/s/ John G. Hayes
_________________________________
Name: John G. Hayes
Title: Manager
<PAGE>
Schedule A
----------
Shareholders
Media/Communications Partners III Limited Partnership
M/C Investors L.L.C.
<PAGE>
Exhibit 10.14
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and
---------
entered into this 1st day of October, 1997 between TELTRUST, INC., a Utah
corporation (the "Company"), and those persons whose names appear on the
signature pages hereof (the "Holders").
This Agreement is made in connection with the Merger Agreement dated
October 1, 1997 by and between the Company, Teltrust Acquisition, Inc., Quest
International, Inc. ("Quest") and the shareholders of Quest. The execution of
and delivery of this Agreement is a condition precedent to the closing of the
merger contemplated by the Merger Agreement.
The parties hereby agree as follows:
1. Certain Definitions.
-------------------
As used in this Agreement, the following terms shall have the following
respective meanings:
(a) "Business Day" means any day, other than a Saturday, Sunday or
------------
legal holiday, on which banks in the State of Utah are open for business.
(b) "Commission" means the Securities and Exchange Commission.
----------
(c) "Common Stock" means the Common Stock, $0.01 par value, of the
------------
Company, as constituted on the date hereof, any shares into which such Common
Stock shall have been changed, or any shares resulting from any reclassification
of such Common Stock.
(d) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended, or any successor statute thereto, and the rules and regulations of the
Commission promulgated thereunder, all as the same shall be in effect at the
time.
(e) "Holders" means the Holders referred to in the Preamble.
-------
(f) "Person" shall mean an individual, partnership, corporation,
------
association, trust, joint venture, unincorporated organization and any
government, governmental department or agency or political subdivision thereof.
(g) "Registrable Securities" means (i) the shares Common Stock issued
----------------------
to the Holders pursuant to the merger contemplated by the Merger Agreement; (ii)
any shares of Common Stock issued with respect to the securities referenced in
clause (i) pursuant to a stock split, stock dividend, recapitalization or
similar event and (iii) securities issued in replacement or exchange of any of
the securities described in clauses (i) and (ii). As to any particular
Registrable Securities, such securities shall cease to be Registerable
Securities, and thereafter may not be included in a Requested or Incidental
Registration, on the date on which (a) such securities are transferred by a
Holder to another Person, or (1)) such securities may be sold without
registration pursuant to the provisions of Rule 144, or any successor rule.
(h) "Registration Expenses" means all expenses incident to the
---------------------
Company's performance of or compliance with this Agreement, including, without
limitation, all registration, filing, listing and National Association of
Securities Dealers, Inc. ("NASD") fees, all fees and expenses of complying with
securities or blue sky laws, all word processing, duplicating and printing
expenses, all messenger and delivery expenses, any transfer taxes, the fees and
expenses of the Company's legal counsel and independent public accountants,
including the expenses of any special audits or "cold comfort" letters required
by or incident to such performance and compliance, and any fees and
disbursements of underwriters customarily
<PAGE>
paid by issuers or sellers of securities; provided, however that Registration
-------- -------
Expenses shall not include underwriting discounts and commissions, and special
counsel for selling Shareholders.
(i) "Securities Act" means the Securities Act of 1933, as amended, or
--------------
any successor statute thereto, and the rules and regulations of the Commission
promulgated thereunder, all as the same shall be in effect at the time.
2. Registration.
------------
(a) Requested Registration. Subject to Section 8(g), at any time after
----------------------
180 days following the Company's registered initial public offering of equity
securities, upon written request by the Holders of more than fifty percent of
the Registrable Securities outstanding at the time of the request to the Company
that the Company effect the registration under the Securities Act of all or part
of the Registrable Securities (a "Requested Registration"), the Company will use
its best efforts to effect the registration under the Securities Act of the
Registrable Securities which the Company has been so requested to register by
the Holders within sixty (60) days after receipt of such request; provided,
however, that the Company shall not be obligated to effect a Requested
Registration pursuant to this Section 2(a) (A) if such registration may not be
effected on Commission Form S-3 (or any successor or similar short-form
registration statement), or (B) during the 180 day period immediately following
the commencement of a public offering of the Company's equity securities. The
Company will not be required to effect more than one Requested Registration
under this Section 2(a) in any 12-month period. The Company may include in a
Requested Registration other securities of the Company for sale, for the
Company's account or for the account of any other person if and to the extent
the managing underwriter, if any, determines that the inclusion of such
additional shares will not interfere with the orderly sale of the underwritten
securities at a price range acceptable to the Holders. Upon receipt of a written
request pursuant to this subdivision (a) the Company shall promptly give written
notice of such request to all Holders, and all Holders shall be afforded the
opportunity to participate in such request as follows: The Company will be
obligated to include in the Requested Registration such number of Registrable
Securities of any Holder joining in such request as are specified in a written
request by the Holder received by the Company within 20 days after receipt of
such written notice from the Company.
(b) Incidental Registration. If the Company for itself or any of its
-----------------------
security holders shall at any time or times after the date hereof determine to
register under the Securities Act any shares of its capital stock or other
securities (other than: (i) the registration of an offer, sale or other
disposition of securities solely to employees of, or other persons
providing services to, the Company or any subsidiary pursuant to an employee or
similar benefit plan; or (ii) relating to a merger, acquisition or other
transaction of the type described in Rule 145 under the Securities Act or a
comparable or successor rule, registered on Form S-4 or similar or successor
forms), on each such occasion the Company will notify each Holder of such
determination at least thirty (30) days prior to the filing of such registration
statement, and upon the request of any Holder given in writing within twenty
(20) days after the receipt of such notice, the Company will use its best
efforts as soon as practicable thereafter to cause any of the Registrable
Securities specified by any such Holder to be included in such registration
statement to the extent such registration is permissible under the Securities
Act and subject to the conditions of the Securities Act (an "Incidental
Registration").
(c) S-3 Eligibility. During any period in which the Holders may request
---------------
a Requested Registration pursuant to the provisions of Section 2(a), the Company
shall use its best efforts to take any action necessary to maintain its
eligibility to utilize Form S-3 to permit resales as requested by the Holders
with respect to Transactions Involving Secondary Offerings as described in
General Instruction I.B.3 of Commission Form S-3.
(d) Expenses. The Company shall pay all Registration Expenses incurred
--------
in connection with any Requested or Incidental Registrations, including any that
do not become effective.
<PAGE>
(e) Effective Registration Statement. A Requested Registration or an
--------------------------------
Incidental Registration requested pursuant to Section 2(a) or Section 2(b),
respectively, shall not be deemed to have been effected unless it has become
effective with the Commission. Notwithstanding the foregoing, a registration
statement will not be deemed to have been effected if: (i) after it has become
effective with the Commission, such registration is interfered with by any stop
order, injunction, or other order or requirement of the Commission or other
governmental agency or any court proceeding for any reason other than a
misrepresentation or omission by any Holder; or (ii) the conditions to closing
specified in the purchase agreement or underwriting agreement entered into in
connection with such registration are not satisfied, other than solely by reason
of some act or omission by any Holder.
(f) Priority in Incidental Registration. If an Incidental Registration
-----------------------------------
is an underwritten registration initiated by the Company, and the managing
underwriters shall give written advice to the Company that, in their opinion,
market conditions dictate that no more than a specified maximum number of
securities (the "Underwriter's Maximum Number") could successfully be included
in such Incidental Registration, then: (i) the Company shall be entitled to
include in such registration that number of securities which the Company
proposes to offer and sell for its own account in such registration and which
does not exceed the Underwriter's Maximum Number; and (ii) the Company will be
obligated and required to include in such registration that number of shares of
Registrable Securities which shall have been requested by the Holders thereof
having registration rights hereunder, by holders having registration rights
pursuant to another registration rights agreement with the Company or by Lyle
Keys to be included in such registration and which does not exceed the
difference between the Underwriter's Maximum Number and that number of
securities which the Company is entitled to include therein pursuant to clause
(i) above and such number of shares shall be allocated pro rata between the
--------
Holders, any other such holders, and Lyle Keys on the basis of the number of
shares requested to be included therein by the Holders, on the one hand, and
such other holders, and Lyle Keys on the other hand.
If less than all of the Registrable Securities requested to be included in any
such registration by the Holders can be so included due to these priority
requirements, then each requesting Holder's request shall be granted on an pro
rata basis with the other requesting Holders.
(g) Notwithstanding anything in paragraphs (a) and (b) of this
Section 2, the Company shall have the right to delay any registration of
Registrable Securities requested pursuant to paragraph (a) or (b) of this
Section 2 for up to 90 days if such registration would, in the sole reasonable
judgment of the Company's Board of Directors, substantially interfere with any
material transaction being considered at the time of receipt of the request from
the Holders.
3. Registration Procedures.
-----------------------
(a) If and whenever the Company is required to use its best efforts to
effect the registration of any Registrable Securities under the Securities Act
as provided in Section 2, the Company, as expeditiously as possible and subject
to the terms and conditions of Section 2, will:
(i) prepare and file with the Commission the requisite
registration statement to effect such registration and use its best efforts to
cause such registration to become and remain effective;
(ii) with respect to a Requested Registration, permit any
Holder which, in the reasonable judgment of the Company, might be deemed to be
an underwriter or a controlling person of the Company, to participate in the
preparation of such registration statement and to require the insertion therein
of material furnished to the Company in writing, which in the reasonable
judgment of such Holder or its counsel should be included; provided, however,
the Company shall not be required to insert any material which in the reasonable
judgment of the Company's outside counsel includes an untrue statement of
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading in the light of the
circumstances under which they were made;
3
<PAGE>
(iii) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective and to comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such registration statement
until the earlier of such time as all of such securities have been disposed of
in accordance with the intended methods of disposition by the seller or sellers
thereof set forth in such registration statement or the expiration of one year
after such registration statement becomes effective;
(iv) furnish to the Holders such number of conformed copies
of such registration statement and of each such amendment and supplement thereto
(in each case including all exhibits), such number of copies of the prospectus
contained in such registration statement (including each preliminary prospectus
and any summary prospectus) and any other prospectus filed unclear Rule 424
under the Securities Act, in conformity with the requirements of the Securities
Act, and such other documents, as the purchaser or any Holder of Registrable
Securities to be sold under such registration statement may reasonably request;
(v) use its best efforts to register or qualify all
Registrable Securities covered by such registration statement under such other
United States state securities or blue sky laws of such jurisdictions as any
Holder of Registrable Securities to be sold under such registration statement
shall reasonably request, to keep such registration or qualification in effect
for so long as such registration remains in effect, and take any other action
which may be reasonably necessary or advisable to enable the Holder of
Registrable Securities to be sold under such registration statement to
consummate the disposition in such jurisdictions of the securities owned by such
Holder, except that the Company shall not for any such purpose be required to
(a) qualify generally to do business as a foreign corporation in any
jurisdiction wherein it would not but for the requirements of this subdivision
(v) be obligated to be so qualified, or (b) subject itself to taxation in any
such jurisdiction.
(vi) use its best efforts to cause all Registrable
Securities covered by such registration statement to be registered with or
approved by such other United States state governmental agencies or authorities
as may be necessary to enable the Holder of Registrable Securities to be sold
under such registration statement to consummate the intended disposition of such
Registrable Securities;
(vii) in the event of the issuance of any stop order
suspending the effectiveness of the registration statement, or of any order
suspending or preventing the use of any related prospectus or suspending the
qualification of any Registrable Securities included in such registration
statement for sale in any jurisdiction, the Company shall use its best efforts
promptly to obtain the withdrawal of such order;
(viii) if the offering is underwritten and at the request of
any seller of Registrable Securities, use its best efforts to furnish on the
date that the Registrable Securities are delivered to the underwriters for sale
pursuant to such registration: (i) an opinion dated such date of counsel
representing the Company for the purposes of such registration, addressed to the
underwriters and such selling Holder stating that such registration statement
has become effective under the Securities Act and that (A) to the best knowledge
of such counsel, no stop order suspending the effectiveness thereof has been
issued and no proceedings for that purpose have been instituted or are pending
or contemplated under the Securities Act, (B) the registration statement, the
related prospectus and each amendment or supplement thereof comply as to form in
all material respects with the requirements of the Securities Act (except that
such counsel need not express any opinion as to financial statements contained
therein), and (C) to such other effects as reasonably may be requested by
counsel for the underwriters or the selling Holder; and (ii) a letter dated such
date from the independent public accountants retained by the Company, addressed
to the underwriters and to such selling Holder, stating that they are
independent public accountants within the meaning of the Securities Act and
that, in the opinion of such accountants, the financial statements of the
Company included in the registration statement or the prospectus, or any
amendment or supplement
4
<PAGE>
thereof, comply as to form in all material respects with the applicable
accounting requirements of the Securities Act, and such letter shall
additionally cover such other financial matters (including information as to the
period ending no more than five business days prior to the date of such letter)
with respect to such registration as such underwriters reasonably may request;
(ix) immediately notify the Holders of Registrable
Securities included in such registration statement at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of the
happening of any event as result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading in the light of the
circumstances under which they were made, and at the request of the Holders
promptly prepare and furnish to the Holders a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such securities, such prospectus shall
not include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances under which they were made;
(x) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months, but not more than eighteen
months, beginning with the first full calendar month after the effective date
of such registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act and Rule 158 thereunder, and
not file any amendment or supplement to such registration statement or
prospectus to which any Holder shall have reasonably objected in writing on the
grounds that such amendment or supplement does not comply in all material
respects with the requirements of the Securities Act or of the rules or
regulations thereunder, having been furnish with a copy thereof at least two
business days prior to the filing thereof;
(xi) provide a transfer agent for all Registrable Securities
covered by such registration statement not later than the effective date of such
registration statement; and
(xi) use its best efforts to list all Registrable Securities
covered by such registration statement on any securities exchange on which any
of the Registrable Securities are then listed.
(b) The Company may require each Holder of Registrable Securities to
be sold under such registration statement, at the Company's expense, to furnish
the Company with such information and undertakings as it may reasonably request
regarding such Holder and the distribution of such securities as the Company may
from time to time reasonably request in writing.
(c) Each Holder, by execution of this Agreement, agrees (A) that upon
receipt of any notice of the Company of the happening of any event of the kind
described in subdivision (a)(ix) of this Section 3, such Holder will forthwith
discontinue its disposition of Registrable Securities pursuant to the
registration statement relating to such Registrable Securities until the receipt
by such Holder of the copies of the supplemented or amended prospectus
contemplated by subdivision (a)(ix) of this Section 3 and, if so directed by the
Company, will deliver to the Company all copies other than permanent file
copies, then in possession of the Holders of the prospectus relating to such
Registrable Securities current at the time of receipt of such notice and (B)
that it will immediately notify the Company, at any time when a prospectus
relating to the registration of such Registrable Securities is required to be
delivered under the Securities Act, of the happening of any event as a result of
which information previously furnish by such Holder to the Company for
inclusion in such prospectus contains an untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
under which they were made. In the event the Company or any such Holder shall
give any such notice, the period referred to in subdivision (a)(iii) of
5
<PAGE>
this Section 3 shall be extended by a number of days equal to the number of days
during the period from and including the giving of notice pursuant to
subdivision (a)(ix) of this Section 3 to and including the date when such Holder
shall have received the copies of the supplemented or amended prospectus
contemplated by subdivision (a)(ix) of this Section 3.
4. Underwritten Offerings.
----------------------
(a) Underwritten differing. In connection with any underwritten
----------------------
offering pursuant to a registration requested under Section 2(a), the Company
will enter into an underwriting agreement with the underwriters for such
offering, such agreement to be in form and substance reasonably satisfactory to
the Company, all Holders requesting such registration and such Holders'
underwriters in their reasonable judgment and to contain such representations
and warranties by the Company and such other terms as are customarily contained
in agreements of that type, including, without limitation, indemnities to the
effect and to the extent provided in Section 6. Each such Holder shall be a
party to such underwriting agreement and may, at its or their option, require
that any or all of the representations and warranties by, and the other
agreements on the part of, the Company to and for the benefit of such
underwriters shall also be made to and for the benefit of each such Holder and
that any or all of the conditions precedent to the obligations of such
underwriters under such underwriting agreement be conditions precedent to the
obligations of each such Holder. No Holder requesting such registration shall be
required to make any representations or warranties to or agreements with the
Company or the underwriters other than representations, warranties or agreements
regarding such Holder, its Registrable Securities, its intended method of
distribution and any other representation required by law.
(b) Selection of Underwriters. If a Requested Registration pursuant to
-------------------------
Section 2(a) involves an underwritten offering, then the Company shall select
the underwriter from underwriting firms of national reputation, subject to the
approval of the Holders of a majority of the Registrable Securities to be
included in such registration.
(c) Underwriter's Agreement. In the event of an underwritten offering
-----------------------
pursuant to which the Holders request registration under Section 2, the sellers
of Registrable Securities to be distributed by such underwriters shall, as a
condition to inclusion of their Registrable Securities in such registration, be
parties to such underwriting agreement and shall be required to make such
representations or warranties as the underwriters may reasonably request,
including representations and warranties regarding such holder, such holder's
Registrable Securities and such holder's intended method of distribution and any
other representation required by law.
(d) Holdback Agreements. Each Holder agrees, if so reasonably required
-------------------
by the managing underwriter in a registration pursuant to Section 2, not to
effect any public sale or distribution of Registrable Securities or sales of
such Registrable Securities pursuant to Rule 144 or Rule 144A under the
Securities Act, during the seven (7) days prior to and the 180 days after any
firm commitment underwritten registration pursuant to Section 2 has become
effective (except as part of such underwritten registration), or if the managing
underwriter advises the Company that, in its opinion, no such public sale or
distribution should be effected for a period of not more than 180 days after
such public underwritten registration in order to complete the sale and
distribution of securities included in such registration and the Company gives
notice to such effect to such Holders of such advice, each Holder shall not
effect any public sale or distribution of Registrable Securities or sales of
such Registrable Securities pursuant to Rule 144 or Rule 144A under the
Securities Act during such period after such underwritten registration, except
as part of such underwritten registration, whether or not such Holder
participates in such registration.
5. Preparation: Reasonable Investigation.
-------------------------------------
In connection with the preparation and filing of each registration
statement under the Securities Act, the Company will give the Holders of
Registrable Securities to be sold under such registration
6
<PAGE>
statement, the underwriters, if any, and their respective counsel and
accountants, drafts and final copies of such registration statement, each
prospectus included therein or filed with the Commission and each amendment
thereof or supplement thereto, at least 5 business days prior to the filing
thereof with the Commission, and will give each of them such access to its books
and records and such opportunities to discuss the business of the Company with
its officers and the independent public accountants who have certified its
financial statements as shall be necessary, in the opinion of such Holders and
such underwriters' respective counsel, to conduct a reasonable investigation
within the meaning of the Securities Act.
6. Indemnification and Contribution.
--------------------------------
(a) Indemnification of the Company. In the event of any registration
------------------------------
under the Securities Act pursuant to Section 2 of any Registrable Securities
covered by such registration, the Company will, and hereby does, indemnify and
hold harmless each Holder of Registrable Securities to be sold under such
registration statement, each such Holder's legal counsel, each other person who
participates as an underwriter in the offering or sale of such securities (if so
required by such underwriter as a condition to including the Registrable
Securities of the Holders in such registration) and each other person, if any,
who controls any such Holder or any such underwriter within the meaning of the
Securities Act (collectively, the "Indemnified Parties"), against any losses,
claims, damages or liabilities, joint or several, to which the Holders or
underwriter or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of
or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which such
securities were registered under the Securities Act, any preliminary prospectus,
final prospectus or summary prospectus contained therein or any document
incorporated therein by reference, or any amendment or supplement thereto, or
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
arise out of any violation by the Company of any rule or regulation promulgated
under the Securities Act or state securities law applicable to the Company and
relating to action or inaction required of the Company in connection with any
such registration, and the Company will reimburse the Indemnified Parties for
any legal or any other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, liability, action or
proceeding; provided, however, that the Company shall not be liable to any
-------- -------
Indemnified Party in any such case to the extent that any such loss, claim,
damage, liability (or action or proceeding in respect thereof) or expense arises
out of or is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in such registration statement, any such
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement in reliance upon and in conformity with written information
furnish to the Company by such Indemnified Party.
(b) Indemnification by the Holders. The Company may require, as a
------------------------------
condition to including any Registrable Securities of any person or entity in any
registration statement filed pursuant to Section 2, that the Company shall have
received an undertaking reasonably satisfactory to it from such person or entity
to indemnify and hold harmless (in the same manner and to the same extent as set
forth in subdivision (a) of this Section 6) the Company, each director of the
Company, each officer of the Company and each other person, if any, who controls
the Company within the meaning of the Securities Act, with respect to any
statement or alleged statement in or omission or alleged omission from such
registration statement, any preliminary prospectus, final prospectus or summary
prospectus contained therein, or any amendment or supplement thereto, if, and
only if, such statement or alleged statement or omission or alleged omission was
made in reliance upon and in conformity with information furnished in writing
to the Company directly by such person or entity specifically for use therein;
provided, however, that the obligation of any Holder hereunder shall be limited
to an amount equal to the proceeds received by such Holder upon the sale of
Registrable Securities sold in the offering covered by such registration;
provided further, however, that the liability of such Holder shall not be
limited in the event that any loss or claim arises from the fraudulent
misrepresentations of the Holder.
7
<PAGE>
(c) Notices of Claims. Promptly after receipt by an Indemnified Party
-----------------
of notice of the commencement of any action or proceeding involving a claim
referred to in the preceding subdivisions of this Section 6, such Indemnified
Party will, if a claim in respect thereof is to be made against a party required
to provide indemnification (an "Indemnifying Party"), give written notice to the
latter of the commencement of such action, provided, however that the failure of
any Indemnified Party to give notice as provided herein shall not relieve the
-------- ------
Indemnifying Party of its obligation under the preceding subdivisions of this
Section 6, except to the extent that the Indemnifying Party is actually
prejudiced by such failure to give notice. In case any such action is brought
against an Indemnified Party, unless in such Indemnified Party's reasonable
judgement a conflict of interest between such Indemnified and indemnifying
parties may exist in respect of such claim, the Indemnifying Party shall be
entitled to participate in and to assume the defense thereof, jointly with any
other Indemnifying Party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such Indemnified Party, and after notice from
the Indemnifying Party to such Indemnified Party of its election so to assume
the defense thereof, the Indemnifying Party shall not be liable to such
Indemnified Party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof other then reasonable costs of
investigation. No Indemnifying Party shall consent to entry of any judgment or
enter into any settlement without the consent of the Indemnified Party which
does not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation.
(d) Other Indemnification. Indemnification similar to that specified in
---------------------
the preceding subdivisions of this Section 6 (with appropriate modifications)
shall be given by the Company and each Holder of Registrable Securities included
in any registration statement with respect to any required registration or other
qualification of securities under any Federal or state law or regulation of any
governmental authority, other than the Securities Act.
(e) Indemnification Payment. The indemnification required by this
-----------------------
Section 6 shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred.
(f) Survival of Obligations. The obligations of the Company and of the
-----------------------
Holders under this Section 6 shall survive the completion of any offering of
Registrable Securities under this Agreement.
(g) Contribution. If the indemnification provided for in this Section 6
------------
is unavailable or insufficient to hold harmless an Indemnified Party, then each
Indemnifying Party shall contribute to the amount paid or payable to such
Indemnified Party as a result of the losses, claims, damages or liabilities
referred to in this Section 6 an amount or additional amount, as the case may
be, in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party or parties on the one hand and the Indemnified Party on the
other in connection with the statements or omissions which resulted in such
losses, claims, demands or liabilities as well as any other relevant equitable
considerations. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Indemnifying Party or parties on the one hand or the
Indemnified Party on the other and the parties' relative, intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid to an Indemnified Party as a result of
the losses, claims, damages or liabilities referred to in the first sentence of
this Section 6(g) shall be deemed to include any legal or other expenses
reasonably incurred by such Indemnified Party in connection with investigating
or defending any action or claim which is the subject of this Section 6. No
person guilty of fraudulent misrepresentation within the meaning of Section
11(f) of the Securities Act shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
8
<PAGE>
7. Covenants Relating to Rule 144.
------------------------------
With a view to making available the benefits of certain rules and
regulations of the Commission which may at any time permit the sale of
securities of the Company to the public without registration after such time as
a public market exists for the Common Stock of the Company' the Company agrees:
(a) to make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date of the first registration under the Securities Act filed by
the Company for an offering of its securities to the general public;
(b)to use its best efforts to then file with the Commission in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act, as amended (at any time after it has become
subject to such reporting requirements); and
(c) so long as a Holder owns any Registrable Securities, to furnish to
the Holder forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of said Rule 144 (at any time after
90 days after the effective date of the first registration statement filed by
the Company for an offering of its securities to the general public), and of the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements) a copy of the most recent annual or quarterly
report of the Company, and such other reports and documents of the Company as a
Holder may reasonably request in availing itself of any rule or regulation of
the Commission allowing a Holder to sell any such securities without
registration.
8. Miscellaneous.
-------------
(a) Specific Performance. The parties hereto acknowledge that there may
--------------------
be no adequate remedy at law if any party fails to perform any of its
obligations hereunder and that each party may be irreparably harmed by any such
failure, and accordingly agree that each party, in addition to any other remedy
to which it may be entitled at law or in equity, shall be entitled to compel
specific performance of the obligations of any other party under this Agreement
in accordance with the terms and conditions of this Agreement.
(b) Notices. All demands, requests, notices and other communications
-------
required or permitted to be given under this Agreement shall be in writing and
shall be deemed to have been duly given if delivered personally or sent by
United States first class mail, postage prepaid, and to the parties hereto at
the following address or at such other address as any party hereto shall
hereafter specify by notice to the other party hereto:
(i) if to the Company, addressed to:
Teltrust, Inc.
221 North Charles Lindbergh Drive
Salt Lake City, Utah 84116
Attn: Marc Cohen
with a copy to:
D. Matthew Dorny
Kimball, Parr, Waddoups, Brown & Gee
185 South State, Suite 1300
Salt Lake City, Utah 84111
9
<PAGE>
(ii) if to the Holders, to their addresses set forth on
Schedule 1 attached hereto. Except as otherwise provided herein, all such
demands, requests, notices and other communications shall be deemed to have been
received on the date of personal delivery thereof or on the third business day
after the mailing thereof.
(c) Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws of the State of Utah, without regard to
conflicts of law principles thereof.
(d) Headings. The descriptive headings of the several sections and
--------
paragraphs of this Agreement are inserted for convenience only, and do not
constitute a part of this Agreement and shall not affect in any way the meaning
or interpretation of this Agreement.
(e) Entire Agreement: Amendments. This Agreement and the other writings
----------------------------
referred to herein or delivered pursuant hereto which form a part hereof contain
the entire understanding of the parties with respect to its subject matter.
This Agreement supersedes all prior agreements and understandings between the
parties with respect to its subject matter and all other agreements, warrants or
other documents granting registration rights with respect to the Registrable
Securities. This Agreement may be amended and the observance of any term of this
Agreement may be waived (either generally or in a particular instance and either
retroactively or prospectively) only by a written instrument duly executed by
the Company and those Holders holding a majority of Registrable Securities. Each
Holder of any Registrable Securities at the time or thereafter outstanding shall
be bound by an amendment or waiver authorized by this Section 8(e), whether or
not any such Registrable Securities shall have been marked to indicate such
consent.
(f) Assignability. This Agreement and all of the provisions hereof may
-------------
not be assigned, without the consent of the Company, by any Holder, which
consent shall not be unreasonably withheld with respect to the transfer of all
of the Registrable Securities held by a Holder to a single person or entity.
(g) Termination. The obligations of the Company to effect a Requested
-----------
Registration for a Holder pursuant to Section 2(a) shall terminate two years
after the date of a firmly underwritten registered initial public offering of
the Company.
(h) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
TELTRUST, INC.
By: /s/ Marc B. Cohen
-----------------------------
Title: PRESIDENT/CEO
HOLDERS
/s/ Richard J. Dewitt
- --------------------------------
Richard J. Dewitt
/s/ Jerry Duling
- --------------------------------
Jerry Duling
/s/ Steve J. Covington
- --------------------------------
Steve J. Covington
/s/ Bruce F. Lowthers
- --------------------------------
Bruce F. Lowthers
SIRROM INVESTMENTS, INC.
By: /s/ John C. Harrison
-------------------------------
Its: VP
11
<PAGE>
AMENDMENT TO
EXHIBIT 10.14
AMENDMENT
TO
REGISTRATION RIGHTS AGREEMENT
AMENDMENT (the "Amendment") dated as of April 9, 1998 by and among
Teltrust, Inc., a Utah corporation (the "Company"), TTST Holdings, Inc., a
Delaware corporation ("Newco"), and the shareholders identified on Schedule A
----------
hereto (the "Shareholders").
WHEREAS the Company and Newco desire to enter into a reorganization
transaction pursuant to which the Company shall become a wholly-owned subsidiary
of Newco, all stockholders of the Company shall become stockholders of Newco and
Newco shall change its name to "Teltrust, Inc." (the "Reorganization
Transaction");
WHEREAS the Company and the Shareholders are parties to a Registration
Rights Agreement dated as of October 1, 1997 (the "Registration Rights
Agreement"); and
WHEREAS the Company, Newco and the Shareholders desire, subject to
consummation of the Reorganization Transaction, to amend the Registration Rights
Agreement to provide that all of the rights and obligations of the Company under
the Registration Rights Agreement shall become the rights and obligations of
Newco upon the terms and subject to the conditions set forth herein immediately
following consummation of the Reorganization Transaction (the "Effective Time").
NOW, THEREFORE, for good and valuable consideration, the undersigned hereby
agree as follows:
1. Capitalized terms not otherwise defined herein shall have the meaning
ascribed to such terms in the Registration Rights Agreement.
2. Each of the Company, Newco and the Shareholders hereby consents to
this Amendment as set forth herein.
3. Subject to consummation of the Reorganization Transaction, the
introductory paragraph of the Registration Rights Agreement is hereby amended,
as of the Effective Time, by deleting such paragraph in its entirety and
substituting therefor the following paragraph:
"This Registration Rights Agreement (the "Agreement") is made and
---------
entered into as of this 1st day of October, 1997 and is amended as of April
9, 1998, between Teltrust, Inc., a Delaware corporation ("Company"), and
those persons whose names appear on the signature pages hereof (the
"Holders")."
4. Subject to consummation of the Reorganization Transaction, Newco
hereby covenants and agrees to assume and perform from and after the Effective
Time all of the Company's duties and obligations in accordance with and pursuant
to the terms of the Registration Rights Agreement.
<PAGE>
5. From and after the Effective Time, all references in the Registration
Rights Agreement to the "Company" shall be deemed to be references to Newco, and
the Company shall have no further rights or obligations under the Registration
Rights Agreement.
6. As amended by this Amendment, the Registration Rights Agreement is in
all respects ratified and confirmed, and as so amended by this Amendment the
Registration Rights Agreement shall be read, taken and construed as one and the
same instrument.
7. This Amendment may be executed in any number of counterparts and by
the parties hereto in separate counterparts, each of which so executed shall be
deemed to be an original, but all of such counterparts shall together constitute
but one and the same instrument.
8. This Amendment shall be governed in accordance with the laws of the
State of Delaware without regard to principles of conflicts of law.
[END OF TEXT]
2
<PAGE>
EXECUTED as of the date first set forth above.
TELTRUST, INC.
By:/s/ Marc B. Cohen
_________________________________
Name: Marc B. Cohen
Title: President and Chief
Executive Officer
TTST HOLDINGS, INC.
By:/s/ Marc B. Cohen
_________________________________
Name: Marc B. Cohen
Title: President and Chief
Executive Officer
/s/ Richard J. Dewitt
____________________________________
Richard J. Dewitt
____________________________________
Jerry Duling
____________________________________
Steve J. Covington
____________________________________
Bruce F. Lowthers
SIRROM INVESTMENTS, INC.
PARTNERS III LIMITED
By:_________________________________
Name:
Title:
<PAGE>
Schedule A
----------
Shareholders
Richard J. Dewitt
Jerry Duling
Steve J. Covington
Bruce F. Lowthers
Sirrom Investments, Inc.
<PAGE>
EXHIBIT 21.1
List of Subsidiaries
(and their states of incorporation)
Teltrust Holdings, Inc., Utah
Teltrust Communications Services, Inc., Utah
Teltrust Teleservices, Inc., Utah
Teltrust Phones, Inc., Utah
dot.One, Inc., Utah
Quest Group International, Inc., Florida
QTI of New Hampshire, Inc., New Hampshire
Telecom Network Services, Inc., Georgia
Quest Network, Inc., Florida
Quest Correctional Communications, Inc., Florida
Quest Communications Management, Inc., Florida
Quest Telecommunications, Inc., Delaware
Quest Real Estate Properties, Inc., Georgia
<PAGE>
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the use of our
reports, and to all references to our Firm, included in this registration
statement.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
April 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1996 AND
1997 TELTRUST, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 8,474,511 526,495
<SECURITIES> 0 0
<RECEIVABLES> 8,659,590 12,520,915
<ALLOWANCES> 2,222,600 2,460,600
<INVENTORY> 0 0
<CURRENT-ASSETS> 8,454,085 11,129,610
<PP&E> 11,256,094 19,441,097
<DEPRECIATION> 4,091,994 6,123,655
<TOTAL-ASSETS> 24,667,287 25,918,396
<CURRENT-LIABILITIES> 10,153,565 17,170,224
<BONDS> 0 0
0 0
14,510,951 14,510,951
<COMMON> 46,420 69,740
<OTHER-SE> (5,416,484) (20,239,283)
<TOTAL-LIABILITY-AND-EQUITY> 24,667,287 25,918,396
<SALES> 0 0
<TOTAL-REVENUES> 41,101,425 57,004,084
<CGS> 0 0
<TOTAL-COSTS> 29,300,800 45,472,816
<OTHER-EXPENSES> 13,615,054 23,711,795
<LOSS-PROVISION> 785,764 3,649,974
<INTEREST-EXPENSE> 928,027 1,442,377
<INCOME-PRETAX> (2,547,269) (13,217,539)
<INCOME-TAX> 20,419 (5,218)
<INCOME-CONTINUING> (2,526,850) (13,222,757)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,526,850) (13,222,757)
<EPS-PRIMARY> (0.57) (2.47)
<EPS-DILUTED> (0.57) (2.47)
</TABLE>
<PAGE>
EXHIBIT 99.1
CONSENT TO SERVE AS A DIRECTOR
I hereby agree to serve as a Director of Teltrust, Inc. (the "Company")
following its initial public offering of shares of common stock. I also agree to
the inclusion of the references to me in the Company's Registration Statement on
Form S-1, as may subsequently be amended, and any prospectus included therein as
a person who has agreed to serve as a director of the Company.
April 14, 1998
/s/ Alan W. Saltzman
-------------------------
Alan W. Saltzman
